SBR BPP Textbook 2019

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Sbr-bpp-textbook
Strategic Business Reporting (SBR) (Association of Chartered Certified Accountants)
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lOMoARcPSD|6256454
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฀
฀
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Strategic฀Business฀Reporting฀
Workbook฀
For฀exams฀in฀September฀2018,฀
December฀2018,฀March฀2019฀
and฀June฀2019฀
฀
฀
฀ ฀
฀ ฀

lOMoARcPSD|6256454
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ii฀

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Contents
Contents
Page
Introduction to Strategic Business Reporting iv

Essential skills areas to be successful in Strategic Business Reporting viii
Introduction to the Supplementary Reading xv
Key to icons xvii
1 The financial reporting framework 1
2 Professional and ethical duty of the accountant 23
3 Non-current assets 45
4 Employee benefits 77
SKILLS CHECKPOINT 1: Approaching ethical issues 97
5 Provisions, contingencies and events after the reporting period 113
6 Income taxes 125
7 Financial instruments 147
8 Leases 177
9 Share-based payment 197
SKILLS CHECKPOINT 2: Resolving financial reporting issues 219
10 Basic groups 237
11 Changes in group structures: step acquisitions 263
12 Changes in group structures: disposals and group reorganisations 285
13 Non-current assets held for sale and discontinued operations 309
14 Joint arrangements and group disclosures 325
15 Foreign transactions and entities 335
16 Group statements of cash flows 355
SKILLS CHECKPOINT 3: Applying good consolidation techniques 381
17 Interpreting financial statements for different stakeholders 399
SKILLS CHECKPOINT 4: Performing financial analysis 435
18 Reporting requirements of small and medium-sized entities 451
19 The impact of changes and potential changes in accounting regulation 465
SKILLS CHECKPOINT 5: Creating effective discussion 487
Appendix 1 – Activity answers 505
Appendix 2 – Supplementary reading 571
Further question practice and solutions 783
Glossary 865
Bibliography 875
Mathematical tables 877
Index 879
iii iii

lOMoARcPSD|6256454
฀฀
Introduction฀to฀Strategic฀Business฀Reporting฀(SBR)฀
This฀Workbook฀is฀based฀on฀International฀Financial฀Reporting฀Standards฀only.฀An฀online฀supplement฀
will฀be฀available฀at฀www.bpp.com/learning-media฀for฀those฀sitting฀the฀UK฀GAAP฀variant฀of฀the฀
Strategic฀Business฀Reporting฀exam.฀The฀UK฀GAAP฀supplement฀covers฀UK฀accounting฀standards฀and฀
provides฀relevant฀illustrations฀and฀examples.฀
Overall฀aim฀of฀the฀syllabus฀
To฀discuss,฀apply฀and฀evaluate฀the฀concepts,฀principles฀and฀practices฀that฀underpin฀the฀preparation฀
and฀interpretation฀of฀corporate฀reports฀in฀various฀contexts,฀including฀the฀ethical฀assessment฀of฀
managements’฀stewardship฀and฀the฀information฀needs฀of฀a฀diverse฀group฀of฀stakeholders.฀
The฀syllabus฀
The฀broad฀syllabus฀headings฀are:฀
A฀ Fundamental฀ethical฀and฀professional฀principles฀
B฀ The฀financial฀reporting฀framework฀
C฀ Reporting฀the฀financial฀performance฀of฀a฀range฀of฀entities฀
D฀ Financial฀statements฀of฀groups฀of฀entities฀
E฀ Interpreting฀financial฀statements฀for฀different฀stakeholders฀
F฀ The฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀
Main฀capabilities฀
On฀successful฀completion฀of฀this฀exam,฀you฀should฀be฀able฀to:฀฀
A฀฀ Apply฀fundamental฀ethical฀and฀professional฀principles฀to฀ethical฀dilemmas฀and฀discuss฀
the฀consequences฀of฀unethical฀behaviour฀
B฀฀ Evaluate฀the฀appropriateness฀of฀the฀financial฀reporting฀framework฀and฀critically฀discuss฀
changes฀in฀accounting฀regulation฀
C฀฀ Apply฀professional฀judgement฀in฀the฀reporting฀of฀the฀financial฀performance฀of฀a฀range฀
of฀entities฀฀
฀ Note.฀The฀learning฀outcomes฀in฀Section฀C฀of฀the฀syllabus฀can฀apply฀to฀single฀entities,฀
groups,฀public฀sector฀entities฀and฀not-for-profit฀entities฀(where฀appropriate).฀
D฀฀ Prepare฀the฀financial฀statements฀of฀groups฀of฀entities฀
E฀฀ Interpret฀financial฀statements฀for฀different฀stakeholders฀
F฀฀ Communicate฀the฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀on฀
financial฀reporting฀
Links฀with฀other฀exams฀
Strategic฀Business฀ Advanced฀Audit฀
Reporting฀(SBR)฀ and฀Assurance฀
(AAA)฀
Financial฀
Reporting฀(FR)฀
Financial฀
Accounting฀(FA)฀
iv฀

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Introduction฀
The฀ diagram฀ shows฀ where฀ direct฀ (solid฀ line฀ arrows)฀ and฀ indirect฀ (dashed฀ line฀ arrows)฀ links฀ exist฀
between฀this฀exam฀and฀other฀exams฀preceding฀or฀following฀it.฀฀
The฀Strategic฀Business฀Reporting฀(SBR)฀syllabus฀assumes฀knowledge฀acquired฀in฀Financial฀Accounting฀
and฀Financial฀Reporting฀and฀develops฀and฀applies฀this฀further฀and฀in฀greater฀depth.฀฀
Achieving฀ACCA's฀Study฀Guide฀Learning฀Outcomes฀฀
This฀BPP฀Workbook฀covers฀all฀the฀SBR฀syllabus฀learning฀outcomes.฀The฀tables฀below฀show฀in฀which฀
chapter(s)฀each฀area฀of฀the฀syllabus฀is฀covered.฀
These฀materials฀are฀reviewed฀by฀the฀ACCA฀examining฀team.฀The฀objective฀of฀the฀review฀is฀to฀ensure฀
that฀the฀material฀properly฀covers฀the฀syllabus฀and฀study฀guide฀outcomes,฀used฀by฀the฀examining฀team฀
in฀setting฀the฀exams,฀in฀the฀appropriate฀breadth฀and฀depth.฀The฀review฀does฀not฀ensure฀that฀every฀
eventuality,฀combination฀or฀application฀of฀examinable฀topics฀is฀addressed฀by฀the฀ACCA฀Approved฀
Content.฀Nor฀does฀the฀review฀comprise฀a฀detailed฀technical฀check฀of฀the฀content฀as฀the฀Approved฀
Content฀Provider฀has฀its฀own฀quality฀assurance฀processes฀in฀place฀in฀this฀respect.฀
฀
A฀ Fundamental฀ethical฀and฀professional฀principles฀฀
A1฀ Professional฀behaviour฀and฀compliance฀with฀accounting฀standards฀ Chapter฀2฀
A2฀ Ethical฀requirements฀of฀corporate฀reporting฀and฀the฀consequences฀of฀ Chapter฀2฀

unethical฀behaviour฀
฀
B฀ The฀financial฀reporting฀framework฀
B1฀ The฀applications,฀strengths฀and฀weaknesses฀of฀an฀accounting฀ Chapter฀1฀

framework฀
C฀ Reporting฀the฀financial฀performance฀of฀a฀range฀of฀entities฀
C1฀ Revenue฀ Chapter฀1฀
C2฀ Non-current฀assets฀ Chapter฀3฀
C3฀ Financial฀instruments฀ Chapter฀7฀
C4฀ Leases฀ Chapter฀8฀
C5฀ Employee฀benefits฀฀ Chapter฀4฀
C6฀ Income฀taxes฀ Chapter฀6฀
C7฀ Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀ Chapter฀5฀
C8฀ Share-based฀payment฀ Chapter฀9฀
C9฀ Fair฀value฀measurement฀฀ Chapters฀3,฀7฀
C10฀ Reporting฀requirements฀of฀small฀and฀medium-sized฀entities฀(SMEs)฀ Chapter฀18฀
C11฀ Other฀reporting฀issues฀ Chapters฀1,฀3,฀8,฀

17฀
฀ v฀

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฀฀
D฀ Financial฀statements฀of฀groups฀of฀entities฀
D1฀ Group฀accounting฀including฀statements฀of฀cash฀flows฀ Chapters฀10,฀13–

16฀
D2฀ Associates฀and฀joint฀arrangements฀ Chapters฀10,฀14฀
D3฀ Changes฀in฀group฀structures฀ Chapters฀11,฀12฀
D4฀ Foreign฀transactions฀and฀entities฀ Chapter฀15฀
E฀ Interpreting฀financial฀statements฀for฀different฀stakeholders฀
E1฀ Analysis฀and฀interpretation฀of฀financial฀information฀and฀measurement฀ Chapter฀17฀

of฀performance฀฀
F฀ The฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀
F1฀ Discussion฀of฀solutions฀to฀current฀issues฀in฀financial฀reporting฀ Chapter฀19฀
฀
Approach฀to฀examining฀the฀syllabus฀
The฀Strategic฀Business฀Reporting฀syllabus฀is฀assessed฀by฀a฀3฀hour฀15฀minute฀paper-based฀exam.฀The฀
pass฀mark฀is฀50%.฀All฀questions฀in฀the฀exam฀are฀compulsory.฀฀
It฀ examines฀ professional฀ competences฀ within฀ the฀ business฀ reporting฀ environment.฀ You฀ will฀ be฀
examined฀ on฀ concepts,฀ theories฀ and฀ principles,฀ and฀ on฀ your฀ ability฀ to฀ question฀ and฀ comment฀ on฀
proposed฀accounting฀treatments.฀
You฀ should฀ be฀ capable฀ of฀ relating฀ professional฀ issues฀ to฀ relevant฀ concepts฀ and฀ practical฀ situations.฀
The฀ evaluation฀ of฀ alternative฀ accounting฀ practices฀ and฀ the฀ identification฀ and฀
prioritisation฀of฀issues฀will฀be฀a฀key฀element฀of฀the฀exam.฀
You฀ will฀ need฀ to฀ exercise฀ professional฀ and฀ ethical฀ judgement,฀ and฀ integrate฀ technical฀
knowledge฀when฀addressing฀business฀reporting฀issues฀in฀a฀business฀context.฀
You฀ will฀ be฀ required฀ to฀ adopt฀ either฀ a฀ stakeholder฀ or฀ an฀ external฀ focus฀ in฀ answering฀
questions฀ and฀ to฀ demonstrate฀ personal฀ skills฀ such฀ as฀ problem฀ solving,฀ dealing฀ with฀
information฀and฀decision฀making.฀You฀will฀also฀have฀to฀demonstrate฀communication฀skills฀
appropriate฀to฀the฀scenario.฀
The฀ paper฀ also฀ deals฀ with฀ specific฀ professional฀ knowledge฀ appropriate฀ to฀ the฀ preparation฀ and฀
presentation฀ of฀ consolidated฀ and฀ other฀ financial฀ statements฀ from฀ accounting฀ data,฀ to฀
conform฀with฀accounting฀standards.฀
฀ ฀
vi฀

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Introduction฀
Format฀of฀the฀exam฀ Marks฀
Section฀ Two฀compulsory฀scenario-based฀questions,฀totalling฀50฀marks฀ 50฀

A฀ Question฀1:฀฀ (incl.฀two฀
 Based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀extracts฀ professional฀
thereof฀(syllabus฀area฀D)฀ marks)฀
 Also฀likely฀to฀require฀consideration฀of฀some฀financial฀reporting฀
issues฀(syllabus฀area฀C)฀
 Numerical฀aspects฀of฀group฀accounting฀will฀be฀a฀maximum฀of฀
25฀marks
 Discussion฀and฀explanation฀of฀numerical฀aspects฀will฀be฀
required฀
Question฀2:฀
 Consideration฀of฀the฀reporting฀implications฀and฀the฀ethical฀
implications฀of฀specific฀events฀in฀a฀given฀scenario
Two฀professional฀marks฀will฀be฀awarded฀to฀the฀ethical฀issues฀question.฀
Section฀ Two฀compulsory฀25-mark฀questions฀ 50฀

B฀ Questions:฀ (incl฀2฀
 May฀be฀scenario,฀case-study,฀or฀essay฀based฀฀ professional฀
marks)฀
 Will฀contain฀both฀discursive฀and฀computational฀elements฀
 Could฀deal฀with฀any฀aspect฀of฀the฀syllabus฀฀
 Will฀always฀include฀either฀a฀full฀or฀part฀question฀that฀requires฀
the฀appraisal฀of฀financial฀and/or฀non-financial฀information฀
from฀either฀the฀preparer’s฀or฀another฀stakeholder’s฀perspective฀
Two฀professional฀marks฀will฀be฀awarded฀to฀the฀question฀that฀requires฀
analysis.฀
฀ ฀ 100฀
Current฀issues฀
The฀current฀issues฀element฀of฀the฀syllabus฀(Syllabus฀area฀F)฀may฀be฀examined฀in฀Section฀A฀or฀B฀but฀
will฀not฀be฀a฀full฀question.฀It฀is฀more฀likely฀to฀form฀part฀of฀another฀question.฀
฀ vii฀

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฀฀
Essential฀skills฀areas฀to฀be฀successful฀in฀Strategic฀
Business฀Reporting฀
We฀ think฀ there฀ are฀ three฀ areas฀ you฀ should฀ develop฀ in฀ order฀ to฀ achieve฀ exam฀ success฀ in฀ Strategic฀
Business฀Reporting:฀฀
(1)฀ Knowledge฀application฀ These฀ are฀ shown฀ in฀ the฀ diagram฀
(2)฀ Specific฀Strategic฀Business฀Reporting฀skills฀ below.฀฀
(3)฀ Exam฀success฀skills฀
฀
aging information
Man
An
sw
er
pl
t
en
manag ime
an
em
t
nin
Approaching Resolving financial Exam success skills
Good
g
ethical issues reporting issues
Specific SBR skills
Applying good
re q r p re t a t i o n
consolidation
Creating effective
m e nts
techniques
discussion
Eff d p
an
u ire
o f t i n te
e c re
Performing
ti v
e financial analysis
se w ri
c
r re
nt tin
Co
ati g
on
l
Efficient numerica
analysis
฀
Specific฀SBR฀skills฀
These฀are฀the฀skills฀specific฀to฀SBR฀that฀we฀think฀you฀need฀to฀develop฀in฀order฀to฀pass฀the฀exam.฀฀
In฀ this฀ Workbook,฀ there฀ are฀ five฀ Skills฀ Checkpoints฀ which฀ define฀ each฀ skill฀ and฀ show฀ how฀ it฀ is฀
applied฀in฀answering฀a฀question.฀A฀brief฀summary฀of฀each฀skill฀is฀given฀below.฀฀
Skill฀1:฀Approaching฀ethical฀issues฀
Question฀2฀in฀Section฀A฀of฀the฀exam฀will฀require฀you฀to฀consider฀the฀reporting฀implications฀and฀
the฀ethical฀implications฀of฀specific฀events฀in฀a฀given฀scenario.฀The฀two฀Section฀B฀questions฀could฀
deal฀with฀any฀aspect฀of฀the฀syllabus.฀Therefore,฀ethics฀could฀feature฀in฀this฀part฀of฀the฀exam฀too.฀฀
Given฀that฀ethics฀will฀feature฀in฀every฀exam,฀it฀is฀essential฀that฀you฀master฀the฀appropriate฀technique฀
for฀approaching฀ethical฀issues฀in฀order฀to฀maximise฀your฀mark.฀
BPP฀recommends฀a฀step-by-step฀technique฀for฀approaching฀questions฀on฀ethical฀issues:฀
STEP 1฀ Work฀out฀how฀many฀minutes฀you฀have฀to฀answer฀the฀question.฀
฀
STEP 2฀ ฀ Read฀the฀requirement฀and฀analyse฀it.฀
STEP 3฀ ฀ Read฀the฀scenario,฀identify฀which฀IAS฀or฀IFRS฀may฀be฀relevant,฀whether฀the฀
proposed฀accounting฀treatment฀complies฀with฀that฀IAS฀or฀IFRS,฀and฀any฀threats฀to฀
the฀fundamental฀ethical฀principles.฀
STEP 4฀ ฀ Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀requirements฀as฀headings.฀
STEP 5฀ ฀ Write฀up฀your฀answer฀using฀key฀words฀from฀the฀requirements฀as฀headings.฀
Skills฀Checkpoint฀1฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀฀
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Introduction฀
Skill฀2:฀Resolving฀financial฀reporting฀issues฀฀฀
Financial฀ reporting฀ issues฀ are฀ highly฀ likely฀ to฀ be฀ tested฀ in฀ both฀ sections฀ of฀ your฀ SBR฀ exam,฀ so฀ it฀ is฀
essential฀ that฀ you฀ master฀ the฀ skill฀ for฀ resolving฀ financial฀ reporting฀ issues฀ in฀ order฀ to฀ maximise฀ your฀
chance฀of฀passing฀the฀exam.฀
The฀basic฀approach฀BPP฀recommends฀for฀resolving฀financial฀reporting฀issues฀is฀very฀similar฀to฀the฀one฀
for฀ ethical฀ issues.฀ This฀ consistency฀ is฀ important฀ because฀ in฀ Question฀ 2฀ of฀ the฀ exam,฀ both฀ will฀ be฀
tested฀together.฀฀
฀
STEP 2฀ ฀ Read฀the฀requirement฀and฀analyse฀it,฀identifying฀sub-requirements.฀
STEP 3฀ ฀ Read฀the฀scenario,฀identifying฀relevant฀IFRSs฀and฀how฀they฀should฀be฀applied฀to฀
the฀scenario.฀
STEP 4฀ ฀ Prepare฀an฀answer฀plan฀ensuring฀that฀you฀cover฀each฀of฀the฀issues฀raised฀in฀the฀
scenario.฀
STEP 5฀ ฀ Write฀up฀your฀answer,฀using฀separate฀headings฀for฀each฀item฀in฀the฀scenario.฀
Skills฀Checkpoint฀2฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀
Skill฀3:฀Applying฀good฀consolidation฀techniques฀฀
Question฀1฀of฀Section฀A฀of฀the฀exam฀will฀be฀based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀
extracts฀ thereof.฀ Section฀ B฀ of฀ the฀ exam฀ could฀ deal฀ with฀ any฀ aspect฀ of฀ the฀ syllabus฀ so฀ it฀ is฀ also฀
possible฀that฀groups฀feature฀in฀Question฀3฀or฀4.฀
Good฀ consolidation฀ technique฀ is฀ therefore฀ essential฀ when฀ answering฀ both฀ written฀ and฀ numerical฀
aspects฀of฀group฀questions.฀฀฀
Skills฀Checkpoint฀3฀focuses฀on฀the฀more฀challenging฀technique฀for฀correcting฀errors฀in฀group฀financial฀
statements฀that฀have฀already฀been฀prepared.฀
A฀step-by-step฀technique฀for฀applying฀good฀consolidation฀techniques฀is฀outlined฀below.฀฀
฀
STEP 2฀ ฀ Read฀the฀requirement฀for฀each฀part฀of฀the฀question฀and฀analyse฀it,฀identifying฀฀
sub-requirements.฀
STEP 3฀ ฀ Read฀the฀scenario,฀identify฀exactly฀what฀information฀has฀been฀provided฀and฀what฀
you฀need฀to฀do฀with฀this฀information.฀Identify฀which฀consolidation฀
workings/adjustments฀may฀be฀required.฀
STEP 4฀ ฀ Draw฀up฀a฀group฀structure.฀Make฀notes฀in฀the฀margins฀of฀the฀question฀as฀to฀which฀
consolidation฀working,฀adjustment฀or฀correction฀to฀error฀is฀required.฀Do฀not฀
perform฀any฀detailed฀calculations฀at฀this฀stage.฀
STEP 5฀ ฀ Write฀up฀your฀answer฀using฀key฀words฀from฀the฀requirements฀as฀headings฀(if฀
preparing฀narrative).฀Perform฀calculations฀first,฀then฀explain.฀Remember฀that฀marks฀
will฀be฀available฀for฀a฀discussion฀of฀the฀principles฀underpinning฀any฀calculations.฀
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฀฀
Skill฀4:฀Performing฀financial฀analysis฀
Section฀B฀of฀the฀SBR฀exam฀will฀contain฀two฀questions,฀which฀may฀be฀scenario฀or฀case-study฀or฀essay฀
based฀and฀will฀contain฀both฀discursive฀and฀computational฀elements.฀Section฀B฀could฀deal฀with฀any฀
aspect฀of฀the฀syllabus฀but฀will฀always฀include฀either฀a฀full฀question,฀or฀part฀of฀a฀question฀that฀requires฀
appraisal฀ of฀ financial฀ or฀ non-financial฀ information฀ from฀ either฀ the฀ preparer’s฀ and/or฀ another฀
stakeholder's฀perspective.฀Two฀professional฀marks฀will฀be฀awarded฀to฀the฀question฀in฀Section฀B฀that฀
requires฀analysis.฀
Given฀ that฀ appraisal฀ of฀ financial฀ and฀ non-financial฀ information฀ will฀ feature฀ in฀ Section฀ B฀ of฀ every฀
exam,฀ it฀ is฀ essential฀ that฀ you฀ have฀ mastered฀ the฀ appropriate฀ technique฀ in฀ order฀ to฀ maximise฀ your฀
chance฀of฀passing฀the฀SBR฀exam.฀
A฀step-by-step฀technique฀for฀performing฀financial฀analysis฀is฀outlined฀below.฀฀
฀
STEP 2฀ ฀ Read฀and฀analyse฀the฀requirement.฀
STEP 3฀ ฀ Read฀and฀analyse฀the฀scenario.฀
STEP 4฀ ฀ Prepare฀an฀answer฀plan.฀
STEP 5฀ ฀ Write฀up฀your฀answer.฀
Skill฀5:฀Creating฀effective฀discussion฀฀
More฀ marks฀ in฀ your฀ SBR฀ exam฀ will฀ relate฀ to฀ written฀ answers฀ than฀ numerical฀ answers.฀ It฀ is฀ very฀
tempting฀to฀only฀practise฀numerical฀questions,฀as฀they฀are฀easy฀to฀mark฀because฀the฀answer฀is฀right฀
or฀ wrong,฀ whereas฀ written฀ questions฀ are฀ more฀ subjective฀ and฀ a฀ range฀ of฀ different฀ answers฀ will฀ be฀
given฀credit.฀Even฀when฀attempting฀written฀questions,฀it฀is฀tempting฀to฀write฀a฀brief฀answer฀plan฀and฀
then฀ look฀ at฀ the฀ answer฀ rather฀ than฀ writing฀ a฀ full฀ answer฀ to฀ plan.฀ Unless฀ you฀ practise฀ written฀
questions฀in฀full฀to฀time,฀you฀will฀never฀acquire฀the฀necessary฀skills฀to฀tackle฀discussion฀questions.฀
The฀basic฀five฀steps฀adopted฀in฀Skills฀Checkpoint฀4฀should฀also฀be฀used฀in฀discussion฀questions.฀฀
Steps฀2฀and฀4฀are฀particularly฀important฀for฀discussion฀questions.฀You฀will฀definitely฀need฀to฀spend฀a฀
third฀ of฀ your฀ time฀ reading฀ and฀ planning.฀ Generating฀ ideas฀ at฀ the฀ planning฀ stage฀ to฀ create฀ a฀
comprehensive฀answer฀plan฀will฀be฀the฀key฀to฀success฀in฀this฀style฀of฀question.฀฀
Exam฀success฀skills฀฀
Passing฀ the฀ SBR฀ exam฀ requires฀ more฀ than฀ applying฀ syllabus฀ knowledge฀ and฀ demonstrating฀ the฀
specific฀ SBR฀ skills;฀ it฀ also฀ requires฀ the฀ development฀ of฀ excellent฀ exam฀ technique฀ through฀ question฀
practice.฀฀
We฀ consider฀ the฀ following฀ six฀ skills฀ to฀ be฀ vital฀ for฀ exam฀ success.฀ The฀ Skills฀ Checkpoints฀ show฀ how฀
each฀of฀these฀skills฀can฀be฀applied฀in฀the฀exam.฀฀
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Introduction฀
Exam฀success฀skill฀1฀
Managing฀information฀
Questions฀ in฀ the฀ exam฀ will฀ present฀ you฀ with฀ a฀ lot฀ of฀ information.฀ The฀ skill฀ is฀ how฀ you฀ handle฀ this฀
information฀ to฀ make฀ the฀ best฀ use฀ of฀ your฀ time.฀ The฀ key฀ is฀ determining฀ how฀ you฀ will฀ approach฀ the฀
exam฀and฀then฀actively฀reading฀the฀questions.฀฀
Advice฀on฀developing฀Managing฀information฀฀
Approach฀
The฀exam฀is฀3฀hours฀15฀minutes฀long.฀There฀is฀no฀designated฀'reading'฀time฀at฀the฀start฀of฀the฀exam,฀
however,฀one฀approach฀that฀can฀work฀well฀is฀to฀start฀the฀exam฀by฀spending฀10–15฀minutes฀carefully฀
reading฀through฀all฀of฀the฀questions฀to฀familiarise฀yourself฀with฀the฀exam฀paper.฀฀
Once฀ you฀ feel฀ familiar฀ with฀ the฀ exam฀ paper฀ consider฀ the฀ order฀ in฀ which฀ you฀ will฀ attempt฀ the฀
questions;฀always฀attempt฀them฀in฀your฀order฀of฀preference.฀For฀example,฀you฀may฀want฀to฀leave฀to฀
last฀the฀question฀you฀consider฀to฀be฀the฀most฀difficult.฀
If฀you฀do฀take฀this฀approach,฀remember฀to฀adjust฀the฀time฀available฀for฀each฀question฀appropriately฀–฀
see฀Exam฀success฀skill฀6:฀Good฀time฀management.฀
If฀ you฀ find฀ that฀ this฀ approach฀ doesn’t฀ work฀ for฀ you,฀ don't฀ worry฀ –฀ you฀ can฀ develop฀ your฀ own฀
technique.฀฀
Active฀reading฀
You฀ must฀ take฀ an฀ active฀ approach฀ to฀ reading฀ each฀ question.฀ Focus฀ on฀ the฀ requirement฀ first,฀
underlining฀ key฀ verbs฀ such฀ as฀ 'prepare',฀ 'comment',฀ 'explain',฀ 'discuss',฀ to฀ ensure฀ you฀ answer฀ the฀
question฀ properly.฀ Then฀ read฀ the฀ rest฀ of฀ the฀ question,฀ underlining฀ and฀ annotating฀ important฀ and฀
relevant฀information,฀and฀making฀notes฀of฀any฀relevant฀technical฀information฀you฀think฀you฀will฀need.฀
Correct฀interpretation฀of฀the฀requirements฀฀฀฀
The฀ active฀ verb฀ used฀ often฀ dictates฀ the฀ approach฀ that฀ written฀ answers฀ should฀ take฀ (eg฀ 'explain',฀
'discuss',฀ 'evaluate').฀ It฀ is฀ important฀ you฀ identify฀ and฀ use฀ the฀ verb฀ to฀ define฀ your฀ approach.฀ The฀
correct฀interpretation฀of฀the฀requirements฀skill฀means฀correctly฀producing฀only฀what฀is฀being฀
asked฀for฀by฀a฀requirement.฀Anything฀not฀required฀will฀not฀earn฀marks.฀฀
Advice฀on฀developing฀correct฀interpretation฀of฀the฀requirements฀฀฀฀
This฀skill฀can฀be฀developed฀by฀analysing฀question฀requirements฀and฀applying฀this฀process:฀
Step฀1฀ Read฀the฀requirement฀
Firstly,฀read฀the฀requirement฀a฀couple฀of฀times฀slowly฀and฀carefully฀and฀highlight฀the฀
active฀ verbs.฀ Use฀ the฀ active฀ verbs฀ to฀ define฀ what฀ you฀ plan฀ to฀ do.฀ Make฀ sure฀ you฀
identify฀any฀sub-requirements.฀฀
Step฀2฀ Read฀the฀rest฀of฀the฀question฀
By฀reading฀the฀requirement฀first,฀you฀will฀have฀an฀idea฀of฀what฀you฀are฀looking฀out฀
for฀ as฀ you฀ read฀ through฀ the฀ case฀ overview฀ and฀ exhibits.฀ This฀ is฀ a฀ great฀ time฀ saver฀
and฀ means฀ you฀ don't฀ end฀ up฀ having฀ to฀ read฀ the฀ whole฀ question฀ in฀ full฀ twice.฀ You฀
should฀do฀this฀in฀an฀active฀way฀–฀see฀Exam฀success฀skill฀1:฀Managing฀Information.฀
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฀฀
Step฀3฀ Read฀the฀requirement฀again฀
Read฀the฀requirement฀again฀to฀remind฀yourself฀of฀the฀exact฀wording฀before฀starting฀
your฀ written฀ answer.฀ This฀ will฀ capture฀ any฀ misinterpretation฀ of฀ the฀ requirements฀ or฀
any฀missed฀requirements฀entirely.฀This฀should฀become฀a฀habit฀in฀your฀approach฀and,฀
with฀repeated฀practice,฀you฀will฀find฀the฀focus,฀relevance฀and฀depth฀of฀your฀answer฀
plan฀will฀improve.฀
Answer฀planning:฀Priorities,฀structure฀and฀logic฀฀฀฀
This฀ skill฀ requires฀ the฀ planning฀ of฀ the฀ key฀ aspects฀ of฀ an฀ answer฀ which฀ accurately฀ and฀ completely฀
responds฀to฀the฀requirement.฀฀฀
Advice฀on฀developing฀Answer฀planning:฀Priorities,฀structure฀and฀logic฀฀฀฀
Everyone฀will฀have฀a฀preferred฀style฀for฀an฀answer฀plan.฀For฀example,฀it฀may฀be฀a฀mind฀map,฀bullet-
pointed฀ lists฀ or฀ simply฀ annotating฀ the฀ question฀ paper.฀ Choose฀ the฀ approach฀ that฀ you฀ feel฀ most฀
comfortable฀with,฀or,฀if฀you฀are฀not฀sure,฀try฀out฀different฀approaches฀for฀different฀questions฀until฀you฀
have฀found฀your฀preferred฀style.฀฀
For฀a฀discussion฀question,฀annotating฀the฀question฀paper฀is฀likely฀to฀be฀insufficient.฀It฀would฀be฀better฀
to฀draw฀up฀a฀separate฀answer฀plan฀in฀the฀format฀of฀your฀choosing฀(eg฀a฀mind฀map฀or฀bullet-pointed฀
lists).฀ For฀ a฀ groups฀ question,฀ you฀ will฀ typically฀ spend฀ less฀ time฀ planning฀ than฀ for฀ a฀ discussion฀
question.฀ You฀ should฀ aim฀ to฀ draw฀ up฀ the฀ group฀ structure.฀ Then,฀ rather฀ than฀ drawing฀ up฀ a฀ formal฀
plan,฀ the฀ best฀ use฀ of฀ your฀ time฀ is฀ to฀ annotate฀ the฀ question฀ paper฀ margins฀ noting฀ which฀ group฀
working,฀adjustment฀or฀correction฀of฀error฀will฀be฀required.฀
Exam฀success฀skill฀4฀ ฀
Efficient฀numerical฀analysis฀฀฀฀
This฀skill฀aims฀to฀maximise฀the฀marks฀awarded฀by฀making฀clear฀to฀the฀marker฀the฀process฀of฀arriving฀
at฀your฀answer.฀This฀is฀achieved฀by฀laying฀out฀an฀answer฀such฀that,฀even฀if฀you฀make฀a฀few฀errors,฀
you฀can฀still฀score฀subsequent฀marks฀for฀follow-on฀calculations.฀It฀is฀vital฀that฀you฀do฀not฀lose฀marks฀
purely฀because฀the฀marker฀cannot฀follow฀what฀you฀have฀done.฀฀
Advice฀on฀developing฀Efficient฀numerical฀analysis฀
This฀skill฀can฀be฀developed฀by฀applying฀the฀following฀process:฀
Step฀1฀ Use฀a฀standard฀proforma฀working฀where฀relevant฀
If฀ answers฀ can฀ be฀ laid฀ out฀ in฀ a฀ standard฀ proforma฀ then฀ always฀ plan฀ to฀ do฀ so.฀ This฀
will฀help฀the฀marker฀to฀understand฀your฀working฀and฀allocate฀the฀marks฀easily.฀It฀will฀
also฀help฀you฀to฀work฀through฀the฀figures฀in฀a฀methodical฀and฀time-efficient฀way.฀
Step฀2฀ ฀ Show฀your฀workings฀
Keep฀ your฀ workings฀ as฀ clear฀ and฀ simple฀ as฀ possible฀ and฀ ensure฀ they฀ are฀ cross-
referenced฀to฀the฀main฀part฀of฀your฀answer.฀Where฀it฀helps,฀provide฀brief฀narrative฀
explanations฀to฀help฀the฀marker฀understand฀the฀steps฀in฀the฀calculation.฀This฀means฀
that฀ if฀ a฀ mistake฀ is฀ made฀ you฀ do฀ not฀ lose฀ any฀ subsequent฀ marks฀ for฀ follow-on฀
calculations.฀
Step฀3฀฀ Keep฀moving!฀
It฀ is฀ important฀ to฀ remember฀ that,฀ in฀ an฀ exam฀ situation,฀ it฀ is฀ difficult฀ to฀ get฀ every฀
number฀ 100%฀ correct.฀ The฀ key฀ is฀ therefore฀ ensuring฀ you฀ do฀ not฀ spend฀ too฀ long฀ on฀
any฀ single฀ calculation.฀ If฀ you฀ are฀ struggling฀ with฀ a฀ solution฀ then฀ make฀ a฀ sensible฀
assumption,฀state฀it฀and฀move฀on.฀฀
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Introduction฀
Effective฀writing฀and฀presentation฀฀฀฀
Written฀answers฀should฀be฀presented฀so฀that฀the฀marker฀can฀clearly฀see฀the฀points฀you฀are฀making,฀
presented฀in฀the฀format฀specified฀in฀the฀question.฀The฀skill฀is฀to฀provide฀efficient฀written฀answers฀with฀
sufficient฀breadth฀of฀points฀that฀answer฀the฀question,฀in฀the฀right฀depth,฀in฀the฀time฀available.฀
Advice฀on฀developing฀Effective฀writing฀and฀presentation฀฀฀฀
Step฀1฀ Use฀headings฀
Using฀the฀headings฀and฀sub-headings฀from฀your฀answer฀plan฀will฀give฀your฀answer฀
structure,฀order฀and฀logic.฀This฀will฀ensure฀your฀answer฀links฀back฀to฀the฀requirement฀
and฀is฀clearly฀signposted,฀making฀it฀easier฀for฀the฀marker฀to฀understand฀the฀different฀
points฀you฀are฀making.฀Underlining฀your฀headings฀will฀also฀help฀the฀marker.฀฀
Step฀2฀ ฀ Write฀your฀answer฀in฀short,฀but฀full,฀sentences฀
Use฀short,฀punchy฀sentences฀with฀the฀aim฀that฀every฀sentence฀should฀say฀something฀
different฀ and฀ generate฀ marks.฀ Write฀ in฀ full฀ sentences,฀ ensuring฀ your฀ style฀ is฀
professional.฀
Step฀3฀ ฀฀ Do฀your฀calculations฀first฀and฀explanation฀second฀฀
Questions฀often฀ask฀for฀an฀explanation฀with฀suitable฀calculations.฀The฀best฀approach฀
is฀to฀prepare฀the฀calculation฀first฀but฀present฀it฀on฀the฀bottom฀half฀of฀the฀page฀of฀your฀
answer,฀ or฀ on฀ the฀ next฀ page.฀ Then฀ add฀ the฀ explanation฀ before฀ the฀ calculation.฀
Performing฀the฀calculation฀first฀should฀enable฀you฀to฀explain฀what฀you฀have฀done.฀
Good฀time฀management฀฀฀฀
This฀skill฀means฀planning฀your฀time฀across฀all฀the฀requirements฀so฀that฀all฀tasks฀have฀been฀attempted฀
at฀the฀end฀of฀the฀3฀hours฀15฀minutes฀available฀and฀actively฀checking฀on฀time฀during฀your฀exam.฀This฀
is฀ so฀ that฀ you฀ can฀ flex฀ your฀ approach฀ and฀ prioritise฀ requirements฀ which,฀ in฀ your฀ judgement,฀ will฀
generate฀the฀maximum฀marks฀in฀the฀available฀time฀remaining.฀
Advice฀on฀developing฀Good฀time฀management฀
The฀ exam฀ is฀ 3฀ hours฀ 15฀ minutes฀ long,฀ which฀ translates฀ to฀ 1.95฀ minutes฀ per฀ mark.฀ Therefore฀ a฀฀
10-mark฀requirement฀should฀be฀allocated฀a฀maximum฀of฀20฀minutes฀to฀complete฀your฀answer฀before฀
you฀move฀on฀to฀the฀next฀task.฀At฀the฀beginning฀of฀a฀question,฀work฀out฀the฀amount฀of฀time฀you฀should฀
be฀ spending฀ on฀ each฀ requirement฀ and฀ write฀ the฀ finishing฀ time฀ next฀ to฀ each฀ requirement฀ on฀ your฀
exam฀paper.฀If฀you฀take฀the฀approach฀of฀spending฀10–15฀minutes฀reading฀and฀planning฀at฀the฀start฀
of฀the฀exam,฀adjust฀the฀time฀allocated฀to฀each฀question฀accordingly;฀eg฀if฀you฀allocate฀15฀minutes฀to฀
reading,฀then฀you฀will฀have฀3฀hours฀remaining,฀which฀is฀1.8฀minutes฀per฀mark.฀
Keep฀an฀eye฀on฀the฀clock฀
Aim฀to฀attempt฀all฀requirements,฀but฀be฀ready฀to฀be฀ruthless฀and฀move฀on฀if฀your฀answer฀is฀not฀going฀
as฀ planned.฀ The฀ challenge฀ for฀ many฀ is฀ sticking฀ to฀ planned฀ timings.฀ Be฀ aware฀ this฀ is฀ difficult฀ to฀
achieve฀in฀the฀early฀stages฀of฀your฀studies฀and฀be฀ready฀to฀let฀this฀skill฀develop฀over฀time.฀
If฀you฀find฀yourself฀running฀short฀on฀time฀and฀know฀that฀a฀full฀answer฀is฀not฀possible฀in฀the฀time฀you฀
have,฀ consider฀ recreating฀ your฀ plan฀ in฀ overview฀ form฀ and฀ then฀ add฀ key฀ terms฀ and฀ details฀ as฀ time฀
allows.฀ Remember,฀ some฀ marks฀ may฀ be฀ available,฀ for฀ example,฀ simply฀ stating฀ a฀ conclusion฀ which฀
you฀don't฀have฀time฀to฀justify฀in฀full.฀
฀ ฀
฀ xiii฀

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฀฀
Question฀practice฀฀
Question฀ practice฀ is฀ a฀ core฀ part฀ of฀ learning฀ new฀ topic฀ areas.฀ When฀ you฀ practice฀ questions,฀ you฀
should฀focus฀on฀improving฀the฀Exam฀success฀skills฀–฀personal฀to฀your฀needs฀–฀by฀obtaining฀feedback฀
or฀through฀a฀process฀of฀self-assessment.฀฀
฀
฀ ฀
xiv฀

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Introduction฀
Introduction฀to฀the฀Supplementary฀Reading฀
This฀additional฀content,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook,฀has฀been฀
selected฀to฀enhance฀your฀studies฀and฀consists฀of฀revision฀materials฀and฀revision฀activities,฀
background฀reading฀to฀aid฀your฀understanding฀of฀topics,฀and฀additional฀activities฀and฀further฀
illustrations฀of฀complex฀areas.฀A฀summary฀of฀the฀content฀is฀given฀below.฀฀
฀
Chapter฀฀ Summary฀of฀Supplementary฀Reading฀content฀
1฀ The฀financial฀  IFRS฀examinable฀documents
reporting฀  Conceptual฀Framework฀–฀importance฀of฀a฀conceptual฀framework;฀
framework฀฀ the฀IASB฀Conceptual฀Framework฀including฀fundamental/enhancing฀
qualitative฀characteristics,฀underlying฀assumptions,฀elements฀of฀the฀
financial฀statements฀and฀measurement฀bases;฀Exposure฀Draft฀
ED/2015/3฀
 IAS฀1฀Presentation฀of฀Financial฀Statements฀illustrative฀guidance฀and฀
discussion฀on฀presentation฀and฀other฀aspects฀of฀IAS฀1฀
 IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀illustrative฀
examples฀and฀activity฀
2฀ Professional฀and฀  Influences฀on฀ethics; ethical฀theory
ethical฀duty฀of฀  Social฀responsibility฀and฀businesses฀
the฀accountant฀฀  Managing฀ethics฀within฀organisations:฀compliance฀based฀and฀
integrity฀based฀
 Activity฀on฀ethical฀issues฀
3฀ Non-current฀  IAS฀16฀Property,฀Plant฀and฀Equipment revision฀activities฀
assets฀  IAS฀36฀Impairment฀revision฀activities฀
 IAS฀38฀Intangible฀Assets฀revision฀and฀activity฀
 IAS฀40฀Investment฀Property฀revision฀and฀activity฀
4฀ Employee฀  Concepts฀and฀principles฀of฀employee฀benefits฀costs฀
benefits฀  Explanation฀and฀comparison฀of฀defined฀benefit,฀defined฀
contribution฀and฀multi-employer฀benefits฀plans฀
 Illustration฀of฀how฀to฀apply฀the฀asset฀ceiling฀test฀
5฀ Provisions,฀  Provisions฀recognition฀and฀measurement฀revision฀and฀activities฀
contingencies฀  IAS฀10฀Events฀After฀the฀Reporting฀Period฀examples฀
and฀events฀after฀  Exam-standard฀activity฀
the฀reporting฀
period฀
6฀ Income฀taxes฀  Current฀tax฀revision฀activities
 Deferred฀tax:฀tax฀base฀revision฀activities฀
 Deferred฀tax฀liabilities฀revision฀including฀revalued฀assets,฀
development฀costs,฀impairment฀and฀taxable฀temporary฀differences฀
in฀business฀combinations฀
 Further฀explanation฀on:฀฀
–฀ Deferred฀tax฀assets฀฀
–฀ Recognition฀of฀deferred฀tax฀
–฀ Measurement฀of฀deferred฀tax฀฀
7฀ Financial฀  Clarification฀of฀financial฀instruments฀definitions
instruments฀  Further฀explanation฀on฀derecognition,฀classification฀and฀
measurement฀of฀financial฀assets฀and฀liabilities.฀฀
8฀ Leases฀  Lessee฀accounting, including฀lease฀identification฀examples,฀
separating฀lease฀components,฀remeasurement฀and฀sale฀and฀
leaseback฀
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Chapter Summary of Supplementary Reading content

9 Share-based  Background to IFRS 2 Share-based Payment
payment  Further detail on share-based payments amongst group entities
 Activities on vesting conditions for further practice
10 Basic groups  Revision: measuring non-controlling interest at acquisition
 Revision: BPP's standard approach to consolidation
 Fair value practice activity
11 Changes in  Investment to associate step acquisitions
group structures:
acquisitions
12 Changes in  Group profit or loss on disposal where significant influence is lost
group structures:  Deemed disposals
disposals and  Group reorganisations
group
reorganisations
13 Non-current  Discontinued operations comprehensive activity
assets held for
sale and
discontinued
operations
14 Joint  Joint arrangements – contractual arrangements
arrangements
and group
disclosures
15 Foreign  Changes in an entity’s functional currency
transactions and
entities
16 Group statements  Revision of single entity statement of cash flows
of cash flows  Foreign currency translation
 Further activity involving the disposal of a subsidiary
 Summary of disclosure requirements
17 Interpreting  Revision of ratio calculations and explanations
financial  Revision of basic and diluted earnings per share, presentation and
statements for significance
different  Problems with financial performance indicators
stakeholders  Further detail on the Global Reporting Initiative guidelines
18 Reporting  Background to the IFRS for SMEs
requirements of  Consequences of the IFRS for SMEs
small and
medium-sized
entities
19 The impact of  Practical issues regarding managing the transition to IFRS
changes and  Disclosure Initiative – amendments to IAS 1 and IAS 7
potential  Classification issues
changes in  Definition of a business and accounting for previously held interests
accounting
regulation
xvi

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Introduction฀
Key฀to฀icons฀
The฀following฀icons฀appear฀in฀this฀Workbook.฀
฀
Key฀term฀฀
Key฀terms฀are฀definitions฀of฀important฀concepts.฀฀
Key฀term฀
Illustration฀
Illustrations฀demonstrate฀how฀to฀apply฀key฀knowledge฀and฀techniques.฀
Activity฀
Activities฀give฀you฀essential฀practice฀of฀techniques฀covered฀in฀the฀chapter.฀
Supplementary฀Reading
Links฀to฀the฀Supplementary฀Reading฀are฀given฀throughout฀the฀chapter.฀฀
฀ Knowledge฀diagnostic
฀ Summary฀of฀the฀key฀learning฀points฀from฀the฀chapter.
฀ xvii฀

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฀฀
xviii฀

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฀
฀
฀
฀
฀
฀
The฀financial
reporting฀framework
฀
฀
฀
Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀
฀ Syllabus฀
reference฀no.฀
Discuss฀the฀importance฀of฀a฀conceptual฀framework฀in฀underpinning฀the฀production฀ B1(a)฀
of฀accounting฀standards.฀
Discuss฀the฀objectives฀of฀financial฀reporting,฀including฀disclosure฀of฀information,฀ B1(b)฀
that฀can฀be฀used฀to฀help฀assess฀management's฀stewardship฀of฀the฀entity's฀
resources฀and฀the฀limitations฀of฀financial฀reporting.฀
Discuss฀the฀nature฀of฀the฀qualitative฀characteristics฀of฀useful฀financial฀information.฀ B1(c)฀
Explain฀the฀roles฀of฀prudence฀and฀substance฀over฀form฀in฀financial฀reporting.฀ B1(d)฀
Discuss฀the฀high฀level฀of฀measurement฀uncertainty฀that฀can฀make฀financial฀ B1(e)฀
information฀less฀relevant.฀
Evaluate฀the฀decisions฀made฀by฀management฀on฀recognition,฀derecognition฀and฀ B1(f)฀
measurement.฀
Critically฀discuss฀and฀apply฀the฀definitions฀of฀the฀elements฀of฀financial฀statements฀ B1(g)฀
and฀the฀reporting฀of฀items฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income.฀
Discuss฀and฀apply฀the฀criteria฀that฀must฀be฀met฀before฀an฀entity฀can฀apply฀the฀ C1(a)฀
revenue฀recognition฀model.฀
Discuss฀and฀apply฀the฀five฀step฀model฀relating฀to฀revenue฀earned฀from฀a฀contract฀ C1(b)฀
with฀a฀customer.฀
Apply฀the฀criteria฀for฀recognition฀of฀contract฀costs฀as฀an฀asset.฀ C1(c)฀
Discuss฀and฀apply฀the฀recognition฀and฀measurement฀of฀revenue฀including฀ C1(d)฀
performance฀obligations฀satisfied฀over฀time,฀sale฀with฀a฀right฀of฀return,฀warranties,฀
variable฀consideration,฀principal฀versus฀agent฀considerations฀and฀non-refundable฀
upfront฀fees.฀
Outline฀the฀principles฀behind฀the฀application฀of฀accounting฀policies฀and฀ C11(c)฀
measurement฀in฀interim฀reports.฀
฀ 1฀

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฀฀
Discuss฀the฀impact฀of฀current฀issues฀in฀corporate฀reporting฀including.฀The฀ F1(c)฀
following฀examples฀are฀relevant฀to฀the฀current฀syllabus:฀฀
1.฀ The฀revision฀of฀the฀Conceptual฀Framework฀
2.฀ The฀IASB's฀Principles฀of฀Disclosure฀Initiative฀
3.฀ Materiality฀in฀the฀context฀of฀financial฀reporting฀
4.฀ Primary฀financial฀statements฀
5.฀ Management฀commentary฀
6.฀ Developments฀in฀sustainability฀reporting฀
Note.฀Only฀item฀(1)฀is฀covered฀in฀this฀chapter.฀The฀remaining฀items฀are฀covered฀
in฀Chapter฀17฀and฀Chapter฀19.฀
Exam฀context฀
This฀chapter฀begins฀with฀revision฀of฀the฀IASB's฀Conceptual฀Framework฀for฀Financial฀Reporting฀which฀
you฀saw฀in฀Financial฀Reporting.฀In฀Strategic฀Business฀Reporting฀(SBR),฀you฀are฀expected฀to฀apply฀the฀
underlying฀concepts฀in฀the฀Conceptual฀Framework฀to฀complicated฀transactions,฀as฀well฀as฀discussing฀
its฀usefulness.฀The฀IASB's฀proposed฀revisions฀to฀the฀Conceptual฀Framework฀are฀also฀examinable.฀You฀
need฀to฀be฀able฀to฀identify฀the฀effects฀of฀the฀proposed฀changes฀on฀accounting฀standards.฀฀
Linked฀ with฀ the฀ Conceptual฀ Framework฀ topics฀ are฀ related฀ issues฀ such฀ as฀ revenue฀ recognition฀ and฀
other฀ areas฀ driven฀ by฀ the฀ recognition฀ criteria฀ and฀ substance฀ over฀ form.฀ You฀ have฀ seen฀ IFRS฀ 15
Revenue฀from฀Contracts฀with฀Customers฀in฀Financial฀Reporting;฀however,฀it฀will฀be฀examined฀in฀more฀
depth฀in฀SBR.฀
Interim฀financial฀reporting฀is฀an฀area฀you฀have฀not฀seen฀before,฀although฀only฀overview฀knowledge฀is฀
expected฀to฀be฀examined฀here.฀
2฀

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1:฀The฀financial฀reporting฀framework฀
Chapter฀overview฀
฀
฀ The฀financial฀reporting฀฀
฀ framework฀
฀
฀
฀
฀ ฀ 2.฀Revenue฀
1.฀The฀accounting฀
recognition฀฀
framework฀
(IFRS฀15)฀
3.฀Interim฀financial฀
reporting฀(IAS฀34)
฀ Current฀
developments฀
฀ 3฀

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฀฀
1฀฀The฀accounting฀framework฀
1.1฀฀Fair฀presentation฀and฀compliance฀with฀IFRSs฀
'Fair฀ presentation'฀ is฀ the฀ term฀ used฀ in฀ IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements฀ equivalent฀ to฀ the฀
concept฀of฀'true฀and฀fair฀view'.฀
In฀order฀to฀achieve฀fair฀presentation,฀an฀entity฀must฀comply฀with฀(IAS฀1:฀para.฀15):฀
฀ International฀Financial฀Reporting฀Standards฀(IFRSs).฀These฀comprise฀(IAS฀1฀para.฀7):฀
–฀ International฀Financial฀Reporting฀Standards฀(IFRSs)฀
–฀ International฀Accounting฀Standards฀(IASs)฀
–฀ Interpretations฀of฀Standards;฀and฀
฀ The฀Conceptual฀Framework฀for฀Financial฀Reporting.฀
Supplementary฀reading฀
Chapter฀1฀Section฀1฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀
the฀ Workbook,฀ contains฀ a฀ full฀ reference฀ list฀ of฀ the฀ examinable฀ documents.฀ These฀ will฀ each฀ be฀
covered฀in฀turn฀through฀these฀materials.฀
1.2฀ The฀Conceptual฀Framework฀for฀Financial฀Reporting฀
This฀topic฀is฀revision.฀Chapter฀1฀Section฀2฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀
the฀digital฀edition฀of฀the฀Workbook,฀contains฀a฀full฀revision฀of฀the฀Conceptual฀Framework.฀
The฀Conceptual฀Framework฀for฀Financial฀Reporting฀is฀divided฀into฀chapters:฀
(1)฀ The฀objective฀of฀general฀purpose฀financial฀reporting฀
Objective,฀usefulness฀and฀limitations฀of฀general฀purpose฀financial฀reporting฀
'The฀objective฀of฀general฀purpose฀financial฀reporting฀is฀to฀provide฀financial฀information฀
about฀the฀reporting฀entity฀that฀is฀useful฀to฀existing฀and฀potential฀investors,฀lenders฀and฀
other฀ creditors฀ in฀ making฀ decisions฀ about฀ providing฀ resources฀ to฀ the฀ entity.฀ Those฀
decisions฀involve฀buying,฀selling฀or฀holding฀equity฀and฀debt฀instruments,฀and฀providing฀or฀
settling฀loans฀and฀other฀forms฀of฀credit.'฀(IASB฀Conceptual฀Framework฀(CF):฀para.฀OB2)฀
Information฀ about฀ a฀ reporting฀ entity's฀ economic฀ resources,฀ claims฀ against฀ the฀ entity฀ and฀
changes฀in฀resources฀and฀claims฀
Three฀aspects฀are฀relevant฀to฀the฀user฀of฀the฀financial฀statements฀here฀(CF:฀paras.฀OB17–21):฀
฀ Financial฀performance฀reflected฀by฀accrual฀accounting฀
฀ Financial฀performance฀reflected฀by฀past฀cash฀flows฀
฀ Changes฀ in฀ economic฀ resources฀ and฀ claims฀ not฀ resulting฀ from฀ financial฀
performance,฀eg฀a฀share฀issue.฀
(2)฀ The฀reporting฀entity฀
This฀section฀is฀to฀be฀added฀by฀the฀IASB฀at฀a฀later฀date.฀
฀ ฀
4฀

lOMoARcPSD|6256454
(3)฀ Qualitative฀characteristics฀of฀useful฀financial฀information฀
Fundamental฀ Enhancing฀qualitative฀ The฀cost฀constraint฀฀

qualitative฀ characteristics฀ on฀useful฀financial฀
characteristics฀ reporting฀
฀ Relevance฀ ฀ Comparability฀ ฀ Benefits฀of฀reporting฀

฀ Faithful฀representation฀ ฀ Verifiability฀ information฀should฀
justify฀the฀costs฀
(CF:฀paras.฀QC5–16)฀ ฀ Timeliness฀
(CF:฀para.฀QC35)฀
฀ Understandability฀
(CF:฀paras.฀QC19–32)฀
(4)฀ The฀ 1989฀ Framework฀ for฀ the฀ Preparation฀ and฀ Presentation฀ of฀ Financial฀
Statements:฀remaining฀text฀
These฀sections฀will฀be฀replaced฀as฀the฀IASB฀develops฀the฀new฀Conceptual฀Framework.฀
(i)฀ Underlying฀assumption฀
Financial฀statements฀are฀normally฀prepared฀on฀the฀assumption฀that฀an฀entity฀is฀a฀going฀
concern฀and฀will฀continue฀in฀operation฀for฀the฀foreseeable฀future฀(CF:฀para.฀4.1).฀฀
(ii)฀ The฀elements฀of฀financial฀statements฀
ASSET฀ INCOME฀
A฀resource฀controlled฀by฀the฀entity฀ Increases฀in฀economic฀benefits฀
as฀a฀result฀of฀past฀events฀and฀from฀ during฀the฀accounting฀period฀in฀the฀
which฀future฀economic฀benefits฀ form฀of฀inflows฀or฀enhancements฀
are฀expected฀to฀flow฀to฀the฀entity.฀ of฀assets฀or฀decreases฀of฀
liabilities฀that฀result฀in฀increases฀in฀
equity,฀other฀than฀those฀relating฀to฀
LIABILITY฀ contributions฀from฀equity฀
participants.฀
A฀present฀obligation฀of฀the฀entity฀
arising฀from฀past฀events,฀the฀
settlement฀of฀which฀is฀expected฀to฀
EXPENSE฀
result฀in฀an฀outflow฀from฀the฀entity฀
of฀resources฀embodying฀economic฀ Decreases฀in฀economic฀benefits฀
benefits.฀ during฀the฀accounting฀period฀in฀the฀
form฀of฀outflows฀or฀depletions฀of฀
assets฀or฀incurrences฀of฀
EQUITY฀
liabilities฀that฀result฀in฀decreases฀in฀
The฀residual฀interest฀in฀the฀assets฀ equity,฀other฀than฀those฀relating฀to฀
of฀the฀entity฀after฀deducting฀all฀its฀ distributions฀to฀equity฀
liabilities.฀ participants.฀
฀
฀ ฀ (CF:฀para฀4.4)฀ (CF:฀para฀4.25)฀
฀ 5฀

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฀฀
(iii)฀ Recognition฀of฀the฀elements฀of฀financial฀statements฀
An฀item฀that฀meets฀the฀definition฀of฀an฀element฀is฀recognised฀if฀(CF:฀para.฀4.38):฀
฀ It฀is฀probable฀that฀any฀future฀economic฀benefit฀associated฀with฀the฀item฀will฀
flow฀to฀or฀from฀the฀entity;฀and฀
฀ The฀item฀has฀a฀cost฀or฀value฀that฀can฀be฀measured฀with฀reliability.฀
(iv)฀ Measurement฀of฀the฀elements฀of฀financial฀statements฀
Different฀ bases฀ of฀ measurement฀ of฀ the฀ elements฀ of฀ financial฀ statements฀ can฀ be฀ used฀
including฀(CF:฀para.฀4.55):฀
฀ Historical฀cost;฀
฀ Current฀cost;฀
฀ Realisable฀(settlement)฀value;฀and฀
฀ Present฀value.฀
(v)฀ Concepts฀of฀capital฀and฀capital฀maintenance฀฀
This฀ section฀ discusses฀ alternative฀ capital฀ maintenance฀ concepts฀ and฀ determination฀ of฀
profit฀(CF:฀paras.฀4.59–4.65).฀
Tutorial฀note฀
The฀ Conceptual฀ Framework,฀ and฀ the฀ impact฀ of฀ the฀ revised฀ Conceptual฀ Framework฀ (discussed฀ in฀
Section฀1.4฀below)฀on฀existing฀IFRSs,฀is฀referred฀to฀in฀various฀chapters฀throughout฀this฀Workbook.฀฀
1.3฀ IAS฀1฀Presentation฀of฀Financial฀Statements฀฀
Supplementary฀Reading฀
the฀Workbook,฀contains฀a฀revision฀of฀the฀principles฀of฀IAS฀1.฀
1.4฀Current฀developments฀
In฀May฀2015฀the฀IASB฀issued฀an฀Exposure฀Draft฀(ED/2015/3)฀of฀the฀revised฀Conceptual฀Framework฀
for฀Financial฀Reporting฀with฀three฀objectives:฀
(a)฀ To฀fill฀gaps฀in฀the฀existing฀Conceptual฀Framework฀
(b)฀ To฀update฀existing฀guidance฀where฀appropriate฀
(c)฀ To฀clarify฀particular฀areas฀where฀more฀guidance฀would฀be฀helpful.฀
This฀follows฀a฀Discussion฀Paper฀issued฀in฀July฀2013,฀after฀the฀project฀had฀been฀put฀on฀hold฀in฀2010฀
so฀the฀IASB฀could฀deal฀with฀more฀urgent฀matters฀arising฀from฀the฀financial฀crisis.฀
The฀Exposure฀Draft฀covers฀the฀following฀areas.฀
Chapter฀ Title฀ Summary฀of฀issues฀addressed฀
1฀ The฀objective฀of฀ ฀ Originally฀issued฀in฀2010฀
general฀purpose฀ ฀ Largely฀unchanged฀–฀emphasis฀on฀need฀for฀information฀to฀
financial฀reporting฀ assess฀management's฀stewardship฀of฀the฀entity's฀resources฀so฀
new฀section฀added฀on฀efficiency฀and฀effectiveness฀of฀the฀use฀
of฀the฀entity's฀resources฀(ED/2015/3:฀paras.฀1.22–1.23)฀
2฀ Qualitative฀ ฀ Originally฀issued฀in฀2010฀
characteristics฀of฀ ฀ Largely฀unchanged,฀but฀prudence฀explicitly฀stated฀and฀
useful฀financial฀ substance฀over฀form฀added฀to฀'faithful฀representation'฀
information฀ (ED/2015/3:฀para.฀2.18)฀
6฀

lOMoARcPSD|6256454
3฀ Financial฀statements฀ ฀ Discusses฀the฀role฀of฀financial฀statements฀
and฀the฀reporting฀ ฀ Includes฀the฀going฀concern฀assumption฀
entity฀
฀ New฀definition฀of฀what฀constitutes฀a฀reporting฀entity:฀'an฀
entity฀that฀chooses,฀or฀is฀required,฀to฀prepare฀general฀
purpose฀financial฀statements'.฀฀Need฀not฀be฀a฀legal฀entity฀
(ED/2015/3:฀paras.฀3.11–3.12)฀
฀ Boundary฀of฀reporting฀entity:฀
–฀ Direct฀control:฀'unconsolidated'฀financial฀statements฀–฀
investments฀in฀subsidiaries฀reported฀as฀assets฀฀
(ED/2015/3:฀paras.฀3.19–3.20)฀
–฀ Both฀direct฀control฀and฀indirect฀control:฀'consolidated'฀
financial฀statements฀(ED/2015/3:฀para.฀3.21)฀
4฀ The฀elements฀of฀ ฀ Revised฀asset฀definition:฀'a฀present฀economic฀resource฀
financial฀ controlled฀by฀the฀entity฀as฀a฀result฀of฀past฀events'฀
statements฀ (ED/2015/3:฀para.฀4.5)฀
฀ Revised฀liability฀definition:฀'a฀present฀obligation฀of฀the฀entity฀
to฀transfer฀an฀economic฀resource฀as฀a฀result฀of฀past฀events'฀
(ED/2015/3:฀para.฀4.24)฀
฀ Economic฀resource:฀'a฀right฀that฀has฀the฀potential฀to฀produce฀
economic฀benefits'฀(ED/2015/3:฀para.฀4.6)฀
฀ Current฀definitions฀of฀income,฀expenses฀and฀equity฀retained฀
฀ Clarification:฀
–฀ More฀focus฀that฀an฀asset฀is฀a฀resource฀and฀a฀liability฀
is฀an฀obligation฀
–฀ That฀resources฀and฀obligations฀are฀not฀certain฀to฀result฀
in฀inflows฀and฀outflows฀of฀economic฀benefits,฀but฀have฀
the฀potential฀to฀do฀so฀(ED/2015/3:฀para.฀4.13)฀
฀ Consideration฀of฀role฀of฀uncertainty฀in฀definitions฀
(ED/2015/3:฀paras.฀5.15–5.16):฀
–฀ Notion฀that฀inflow/outflow฀of฀resources฀'expected'฀
removed฀
–฀ No฀probability฀threshold฀
–฀ Probability฀removed฀from฀recognition฀criteria฀
฀ Inclusion฀of฀definition฀of฀'unit฀of฀account'฀for฀measurement:฀
'the฀group฀of฀rights,฀the฀group฀of฀obligations฀or฀the฀group฀of฀
rights฀and฀obligations,฀to฀which฀recognition฀and฀
measurement฀requirements฀are฀applied',฀but฀determination฀
left฀to฀individual฀standards฀(ED/2015/3:฀para.฀4.57)฀
5฀ Recognition฀and฀ ฀ Recognise฀all฀assets฀and฀liabilities฀(and฀related฀income,฀
derecognition฀ expenses฀and฀equity)฀if฀such฀recognition฀provides฀users฀with฀
(ED/2015/3:฀para.฀5.9):฀
–฀ Relevant฀information฀about฀the฀element฀
–฀ A฀faithful฀representation฀of฀the฀element฀
–฀ Information฀that฀results฀in฀benefits฀exceeding฀the฀costs฀
of฀providing฀it฀
฀ 7฀

lOMoARcPSD|6256454
฀฀
฀ Derecognition฀(not฀covered฀by฀existing฀Conceptual฀
Framework)฀
฀ General฀approach฀(ED/2015/3:฀para.฀5.27):฀
–฀ Derecognise฀any฀assets฀or฀liabilities฀that฀have฀been฀
transferred,฀consumed,฀collected฀or฀fulfilled,฀or฀have฀
expired฀and฀recognise฀any฀resulting฀income฀or฀
expense;฀and฀
–฀ Continue฀to฀recognise฀any฀assets฀or฀liabilities฀retained฀
(the฀retained฀component),฀which฀become฀a฀separate฀
unit฀of฀account฀
If฀the฀retained฀component฀contains฀a฀disproportionate฀
exposure฀to฀economic฀benefits฀–฀three฀possibilities฀
(ED/2015/3:฀paras.฀5.31-32):฀
–฀ Derecognition฀supported฀by฀separate฀presentation฀of฀
retained฀component฀
–฀ Derecognition฀supported฀by฀explanatory฀disclosure฀of฀
retained฀component฀฀
–฀ Continue฀to฀recognise฀transferred฀component฀and฀
retained฀component฀(if฀separate฀presentation/disclosure฀
insufficient฀to฀faithfully฀represent฀the฀effect฀of฀the฀
transaction/event)฀
฀ Explicit฀linkage฀concept฀added฀(ED/2015/3:฀para.฀5.5):฀
฀ Opening฀statement฀of฀financial฀position฀(SOFP)฀฀
฀ (assets฀–฀liabilities฀=฀equity)฀
+฀ Income฀less฀expenses฀(from฀statement฀of฀financial฀
performance)฀
+฀ Contributions฀from฀holders฀of฀equity฀claims฀less฀
distributions฀to฀equity฀claims฀
=฀ Closing฀SOFP฀(assets฀–฀liabilities฀=฀equity)฀
6฀ Measurement฀ ฀ Little฀guidance฀in฀existing฀Conceptual฀Framework฀
฀ Revised฀measurement฀bases฀(ED/2015/3:฀para.฀6.4):฀
There฀are฀several฀areas฀
–฀ Historical฀cost฀฀
of฀debate฀about฀ –฀ Current฀value฀(ED/2015/3:฀para.฀6.20):฀
measurement.฀For฀
discussion฀of฀this฀please฀ (i)฀฀ Fair฀value฀(market฀participant฀perspective)฀
see฀the฀technical฀article฀
'Measurement'฀written฀ (ii)฀฀ Value฀in฀use฀for฀assets฀and฀fulfilment฀value฀for฀
by฀the฀SBR฀examining฀ liabilities฀(entity-specific)฀
team,฀available฀in฀the฀
P2฀Exam฀Resources฀ ฀ Factors฀to฀consider฀in฀selecting฀a฀measurement฀basis฀
section฀of฀the฀ACCA฀ (ED/2015/3:฀paras.฀6.48–6.65):฀
website.฀฀
–฀ Cost฀constraint฀
–฀ Relevance฀
–฀ Faithful฀representation฀
–฀ Enhancing฀qualitative฀characteristics฀
–฀ Factors฀specific฀to฀initial฀measurement฀
฀ Recognises฀that฀more฀than฀one฀measurement฀basis฀may฀
sometimes฀be฀relevant฀(ED/2015/3:฀para.฀6.74)฀
8฀

lOMoARcPSD|6256454
7฀ Presentation฀and฀ ฀ Information฀provided฀in฀the฀notes฀to฀the฀financial฀statements฀
disclosure฀ (ED/2015/3:฀para.฀7.3):฀
–฀ Information฀about฀the฀nature฀of฀both฀recognised฀and฀
unrecognised฀elements฀and฀risks฀arising฀from฀them฀
–฀ Methods,฀assumptions฀and฀judgements฀(and฀changes฀in฀
them)฀that฀affect฀amounts฀presented฀or฀disclosed฀
฀ Use฀of฀presentation฀and฀disclosure฀as฀communication฀tools฀
includes฀(ED/2015/3:฀para.฀7.8):฀
–฀ Classifying฀information฀in฀a฀structured฀manner฀
–฀ Aggregating฀information฀so฀that฀it฀is฀not฀obscured฀by฀
unnecessary฀detail฀
–฀ Using฀presentation฀and฀disclosure฀objectives฀and฀
principles฀rather฀than฀mechanistic฀rules฀
฀ Purpose฀of฀statement฀of฀profit฀or฀loss฀(P/L)฀(primary฀source฀of฀
information฀about฀performance)฀is฀to฀(ED/2015/3:฀para.฀
7.20):฀
–฀ Depict฀the฀return฀that฀an฀entity฀has฀made฀on฀its฀
economic฀resources฀during฀the฀period;฀and฀
–฀ Provide฀information฀that฀is฀helpful฀in฀assessing฀
prospects฀for฀future฀cash฀flows฀and฀in฀assessing฀
management's฀stewardship฀of฀the฀entity's฀resources.฀
The฀view฀expressed฀by฀some฀
investors/users฀of฀financial฀ ฀ New฀principles฀for฀splitting฀information฀about฀financial฀
statements฀is฀that฀the฀current฀IFRS฀ performance฀into฀P/L฀and฀other฀comprehensive฀income฀
guidance฀on฀OCI฀is฀inconsistent,฀
(OCI):฀rebuttable฀presumption฀all฀items฀of฀income฀and฀
complex฀and฀difficult฀to฀understand.฀
The฀IASB฀has฀been฀asked฀to฀define฀ expenses฀are฀reported฀in฀P/L฀(ED/2015/3:฀para.฀7.23)฀
what฀financial฀performance฀is,฀
clarify฀the฀meaning฀and฀importance฀
฀ Can฀only฀be฀rebutted฀(and฀recognised฀in฀OCI)฀if฀
of฀OCI฀and฀how฀the฀distinction฀ (ED/2015/3:฀para.฀7.24):฀
between฀P/L฀and฀OCI฀should฀be฀
made฀in฀practice.฀ –฀ The฀income฀or฀expenses฀(or฀components฀of฀them)฀relate฀
Although฀the฀ED฀does฀not฀provide฀ to฀assets฀or฀liabilities฀measured฀at฀current฀values฀and฀
definitive฀guidance฀on฀what฀should฀ are฀not฀separately฀identifiable฀components฀that฀would฀
be฀reported฀in฀OCI,฀it฀is฀a฀step฀
forward฀compared฀to฀the฀current฀ still฀arise฀if฀the฀asset/liability฀was฀measured฀at฀historical฀
Conceptual฀Framework .฀฀
1
cost฀(eg฀interest);฀and฀
–฀ Excluding฀those฀income฀or฀expenses฀(or฀components)฀
from฀P/L฀would฀enhance฀the฀relevance฀of฀the฀
information฀for฀the฀period฀
฀ Rebuttable฀presumption฀that฀income฀and฀expenses฀reported฀
in฀OCI฀will฀be฀reclassified฀to฀P/L฀in฀a฀future฀period฀
providing฀doing฀so฀would฀enhance฀the฀information฀included฀
in฀P/L฀in฀the฀future฀period฀(ED/2015/3:฀para.฀7.26)฀
8฀ Concepts฀of฀capital฀ ฀ Capital฀maintenance฀concepts฀retained฀as฀before฀
and฀capital฀
maintenance฀
฀
1
Summary฀Report฀of฀the฀Joint฀Outreach฀Investor฀Event,฀p3,฀5฀
฀
฀ 9฀

lOMoARcPSD|6256454
฀฀
Chapter฀1฀Section฀2.3฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀
of฀the฀Workbook,฀contains฀further฀detail฀on฀current฀developments.฀
2฀฀Revenue฀recognition฀(IFRS฀15)฀
2.1฀ Introduction฀
The฀ core฀ principle฀ of฀ IFRS฀ 15฀ Revenue฀ from฀ Contracts฀ with฀ Customers฀ is฀ that฀ an฀ entity฀ recognises฀
revenue฀to฀depict฀the฀transfer฀of฀promised฀goods฀or฀services฀to฀customers฀in฀an฀amount฀
that฀ reflects฀ the฀ consideration฀ to฀ which฀ the฀ entity฀ expects฀ to฀ be฀ entitled฀ in฀ exchange฀ for฀
those฀goods฀or฀services฀(IFRS฀15:฀para.฀IN7).฀
2.2฀ Key฀terms฀
There฀ are฀ a฀ number฀ of฀ key฀ terms฀ defined฀ in฀ IFRS฀ 15฀ which฀ you฀ need฀ to฀ be฀ aware฀ of.฀ It฀ is฀ not฀
necessary฀to฀read฀through฀all฀of฀these฀immediately,฀but฀you฀should฀refer฀back฀to฀them฀as฀you฀work฀
through฀this฀chapter.฀
Income:฀increases฀in฀economic฀benefits฀during฀the฀accounting฀period฀in฀the฀form฀of฀inflows฀or฀
enhancements฀of฀assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀an฀increase฀in฀equity,฀other฀than฀those฀
Key฀term฀
relating฀to฀contributions฀from฀equity฀participants.฀
Revenue:฀income฀arising฀in฀the฀course฀of฀an฀entity's฀ordinary฀activities.฀
Contract:฀an฀agreement฀between฀two฀or฀more฀parties฀that฀creates฀enforceable฀rights฀and฀
obligations.฀
Contract฀asset:฀an฀entity's฀right฀to฀consideration฀in฀exchange฀for฀goods฀or฀services฀that฀the฀entity฀
has฀transferred฀to฀a฀customer฀when฀that฀right฀is฀conditioned฀on฀something฀other฀than฀the฀passage฀of฀
time฀(for฀example฀the฀entity's฀future฀performance).฀
Receivable:฀an฀entity's฀right฀to฀consideration฀that฀is฀unconditional฀–฀ie฀only฀the฀passage฀of฀time฀is฀
required฀before฀payment฀is฀due.฀
Contract฀liability:฀an฀entity's฀obligation฀to฀transfer฀goods฀or฀services฀to฀a฀customer฀for฀which฀the฀
entity฀has฀received฀consideration฀(or฀the฀amount฀is฀due)฀from฀the฀customer.฀
Customer:฀a฀party฀that฀has฀contracted฀with฀an฀entity฀to฀obtain฀goods฀or฀services฀that฀are฀an฀output฀
of฀the฀entity's฀ordinary฀activities฀in฀exchange฀for฀consideration.฀
Performance฀obligation:฀a฀promise฀in฀a฀contract฀with฀a฀customer฀to฀transfer฀to฀the฀customer฀
either:฀฀
(a)฀฀ A฀good฀or฀service฀(or฀a฀bundle฀of฀goods฀or฀services)฀that฀is฀distinct;฀or฀
(b)฀฀ A฀series฀of฀distinct฀goods฀or฀services฀that฀are฀substantially฀the฀same฀and฀that฀have฀the฀same฀
pattern฀of฀transfer฀to฀the฀customer.฀
Stand-alone฀selling฀price:฀the฀price฀at฀which฀an฀entity฀would฀sell฀a฀promised฀good฀or฀service฀
separately฀to฀a฀customer.฀฀
Transaction฀price:฀the฀amount฀of฀consideration฀to฀which฀an฀entity฀expects฀to฀be฀entitled฀in฀
exchange฀for฀transferring฀promised฀goods฀or฀services฀to฀a฀customer,฀excluding฀amounts฀collected฀on฀
behalf฀of฀third฀parties.฀฀ ฀
฀ (IFRS฀15:฀Appendix฀A)฀
10฀

lOMoARcPSD|6256454
2.3฀ Approach฀to฀revenue฀recognition฀
IFRS฀ 15฀ requires฀ an฀ entity฀ to฀ recognise฀ revenue฀ by฀ applying฀ the฀ five฀ steps฀ below฀ (IFRS฀ 15:฀฀
para.฀IN7):฀
(1)฀ Identify฀contract฀ The฀model฀applies฀where฀a฀contract฀(an฀agreement฀between฀two฀or฀

with฀the฀ more฀parties฀that฀creates฀enforceable฀rights฀and฀obligations)฀
customer฀ exists฀(IFRS฀15:฀para.฀10)฀and฀all฀of฀the฀following฀criteria฀are฀met฀
(IFRS฀15:฀para.฀9):฀
฀ The฀parties฀have฀approved฀the฀contract฀(in฀writing,฀orally฀or฀
implied฀by฀the฀entity's฀customary฀business฀practices)฀
฀ The฀entity฀can฀identify฀each฀party's฀rights฀
฀ The฀entity฀can฀identify฀payment฀terms฀
฀ The฀contract฀has฀commercial฀substance฀(risk,฀timing฀or฀amount฀of฀
future฀cash฀flows฀expected฀to฀change฀as฀result฀of฀contract)฀
฀ It฀is฀probable฀that฀entity฀will฀collect฀the฀consideration฀(customer's฀
ability฀and฀intention฀to฀pay฀that฀amount฀of฀consideration฀when฀it฀is฀
due).฀
(2)฀ Identify฀ At฀contract฀inception,฀an฀entity฀shall฀assess฀the฀goods฀and฀services฀

performance฀ promised฀in฀a฀contract฀with฀a฀customer฀and฀shall฀identify฀as฀a฀
obligation(s)฀ performance฀obligation฀each฀promise฀to฀transfer฀to฀the฀customer฀
฀ either฀(IFRS฀15:฀para.฀22):฀
฀ A฀good฀or฀service฀(or฀a฀bundle฀of฀goods฀or฀services)฀that฀is฀
distinct฀(ie฀the฀customer฀can฀benefit฀from฀good฀or฀service฀on฀its฀
own฀or฀together฀with฀other฀readily฀available฀resources฀and฀the฀
entity's฀promise฀is฀separately฀identifiable฀from฀other฀promises฀in฀the฀
contract);฀or฀
฀ A฀series฀of฀distinct฀goods฀or฀services฀that฀are฀substantially฀
the฀same฀and฀that฀have฀the฀same฀pattern฀of฀transfer฀to฀the฀customer.฀
Note.฀If฀a฀promised฀good฀or฀service฀is฀not฀distinct,฀an฀entity฀shall฀
combine฀that฀good฀or฀service฀with฀other฀promised฀goods฀and฀services฀
until฀it฀identifies฀a฀bundle฀of฀goods฀or฀services฀that฀is฀distinct.฀(IFRS฀15:฀
para.฀30)฀
(3)฀ Determine฀ The฀amount฀to฀which฀the฀entity฀expects฀to฀be฀'entitled'฀(IFRS฀15:฀฀

transaction฀ para.฀47).฀
price฀ Includes฀variable฀consideration฀if฀highly฀probable฀that฀significant฀
reversal฀of฀cumulative฀revenue฀will฀not฀occur฀(IFRS฀15:฀para.฀56).฀฀
Measure฀variable฀consideration฀at฀(IFRS฀15:฀para.฀53):฀
฀ Probability-weighted฀expected฀value฀(eg฀if฀large฀number฀of฀
contracts฀with฀similar฀characteristics);฀or฀฀
฀ Most฀likely฀amount฀(eg฀if฀only฀two฀possible฀outcomes).฀
Discounting฀is฀not฀required฀where฀consideration฀is฀due฀in฀less฀than฀one฀
year฀(where฀discounting฀is฀applied,฀present฀interest฀separately฀from฀
revenue)฀(IFRS฀15:฀para.฀63).฀
(4)฀ Allocate฀ Multiple฀deliverables:฀transaction฀price฀allocated฀to฀each฀separate฀

transaction฀ performance฀obligation฀in฀proportion฀to฀the฀stand-alone฀selling฀
price฀to฀ price฀at฀contract฀inception฀of฀each฀performance฀obligation.฀(IFRS฀15:฀
performance฀ para.฀73–75)฀
obligations฀฀
฀ 11฀

lOMoARcPSD|6256454
฀฀
(5)฀ Recognise฀revenue฀ A฀performance฀obligation฀is฀satisfied฀when฀the฀entity฀transfers฀a฀

when฀(or฀as)฀ promised฀good฀or฀service฀(ie฀an฀asset)฀to฀a฀customer฀(IFRS฀15:฀para฀31).฀
performance฀ An฀asset฀is฀considered฀transferred฀when฀(or฀as)฀the฀customer฀obtains฀
obligation฀ control฀of฀that฀asset฀(IFRS฀15:฀para฀31).฀
satisfied฀
Control฀of฀an฀asset฀refers฀to฀the฀ability฀to฀direct฀the฀use฀of,฀and฀
obtain฀substantially฀all฀of฀the฀remaining฀benefits฀from,฀the฀asset฀
(IFRS฀15:฀para฀33).฀
฀
Illustration฀1฀
Allocating฀transaction฀price฀to฀multiple฀deliverables฀
A฀company฀sells฀a฀car฀including฀servicing฀for฀2฀years฀for฀$21,000.฀฀The฀car฀is฀sold฀without฀servicing฀
for฀$20,520฀and฀annual฀servicing฀is฀sold฀for฀$540.฀
Required฀
How฀is฀the฀transaction฀price฀split฀over฀the฀different฀performance฀obligations?฀
Ignore฀discounting.฀
Solution฀
Performance฀obligation฀ Stand-alone฀selling฀price฀ %฀of฀total฀ Revenue฀allocated฀
Car฀ $20,520฀ 95%฀ $19,950฀(21,000฀×฀95%)฀
Servicing฀($540฀×฀2)฀ ฀฀฀$1,080฀ ฀฀฀฀฀5%฀ ฀฀฀$1,050฀(21,000฀×฀5%)฀
Total฀ ฀$21,600฀ ฀100%฀ ฀$21,000฀
Activity฀1:฀Revenue฀recognition฀ ฀
Jost฀ operates฀ in฀ the฀ telecommunications฀ sector.฀ On฀ 1฀ January฀ 20X1,฀ Claire,฀ a฀ new฀ customer,฀
telephones฀ the฀ customer฀ services฀ department฀ of฀ Jost฀ to฀ enter฀ into฀ a฀ new฀ 24฀ month฀ contract฀ for฀ a฀
mobile฀phone.฀The฀terms฀and฀conditions฀are฀agreed฀by฀telephone฀(after฀a฀credit฀check฀is฀carried฀out฀
on฀ Claire)฀ and฀ a฀ written฀ copy฀ is฀ then฀ emailed฀ and฀ posted฀ to฀ Claire.฀ Under฀ the฀ contract,฀ Claire฀
receives฀a฀'free'฀handset฀at฀the฀inception฀of฀the฀plan฀(ie฀no฀upfront฀cost)฀and฀then฀pays฀a฀monthly฀fee฀
of฀ $49฀ for฀ 24฀ months฀ for฀ unlimited฀ calls,฀ texts฀ and฀ data.฀ The฀ handset฀ is฀ due฀ to฀ be฀ delivered฀ by฀
courier฀within฀24฀hours฀(by฀evening฀of฀2฀January฀20X1).฀
Jost฀also฀sells฀the฀same฀high-end฀smartphone฀handsets฀for฀$700฀each฀and฀the฀same฀monthly฀payment฀
plans฀ without฀ the฀ handset฀ for฀ $25฀ per฀ month.฀ Jost฀ does฀ not฀ offer฀ call-only฀ contracts,฀ texts-only฀
contracts฀or฀data-only฀contracts฀–฀customers฀must฀buy฀the฀three฀services฀combined.฀
Required฀
Discuss,฀with฀suitable฀calculations,฀for฀the฀year฀ended฀31฀December฀20X1,฀how฀Jost฀should฀account฀
for฀the฀revenue฀from฀the฀contract฀with฀Claire฀in฀accordance฀with฀the฀five฀steps฀of฀IFRS฀15฀Revenue฀
from฀Contracts฀with฀Customers.฀
Note.฀The฀time฀value฀of฀money฀can฀be฀ignored฀in฀any฀calculations.฀
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2.4฀ Transfer฀of฀control฀of฀a฀good฀or฀service฀
Satisfaction฀of฀a฀performance฀obligation฀over฀time฀
An฀ entity฀ transfers฀ control฀ of฀ a฀ good฀ or฀ service฀ over฀ time฀ and,฀ therefore,฀ satisfies฀ a฀ performance฀
obligation฀ and฀ recognises฀ revenue฀ over฀ time฀ if฀ one฀ of฀ the฀ following฀ criteria฀ is฀ met฀ (IFRS฀ 15:฀฀
para.฀35):฀฀
(a)฀ The฀ customer฀ simultaneously฀ receives฀ and฀ consumes฀ the฀ benefits฀ provided฀ by฀ the฀
entity's฀performance฀as฀the฀entity฀performs;฀
(b)฀ The฀entity's฀performance฀creates฀or฀enhances฀an฀asset฀(eg฀work฀in฀progress)฀that฀the฀
customer฀controls฀as฀the฀asset฀is฀created฀or฀enhanced;฀or฀
(c)฀ The฀entity's฀performance฀ does฀not฀ create฀ an฀ asset฀ with฀ an฀ alternative฀ use฀to฀the฀
entity฀and฀the฀entity฀has฀an฀enforceable฀right฀to฀payment฀for฀performance฀completed฀to฀
date.฀
For฀ each฀ performance฀ obligation฀ satisfied฀ over฀ time,฀ revenue฀ should฀ be฀ recognised฀ by฀ measuring฀
progress฀towards฀complete฀satisfaction฀of฀that฀performance฀obligation฀(IFRS฀15:฀para.฀39).฀
Satisfaction฀of฀a฀performance฀obligation฀at฀a฀point฀in฀time฀
To฀ determine฀ the฀ point฀ in฀ time฀ when฀ a฀ customer฀ obtains฀ control฀ of฀ a฀ promised฀ asset฀ and฀ an฀ entity฀
satisfies฀a฀performance฀obligation,฀the฀entity฀would฀consider฀indicators฀of฀the฀transfer฀of฀control฀that฀
include,฀but฀are฀not฀limited฀to,฀the฀following฀(IFRS฀15:฀para.฀38):฀
(a)฀ The฀entity฀has฀a฀present฀right฀to฀payment฀for฀the฀asset;฀
(b)฀ The฀customer฀has฀legal฀title฀to฀the฀asset;฀
(c)฀ The฀entity฀has฀transferred฀physical฀possession฀of฀the฀asset;฀
(d)฀ The฀customer฀has฀the฀significant฀risks฀and฀rewards฀of฀ownership฀of฀the฀asset;฀and฀
(e)฀ The฀customer฀has฀accepted฀the฀asset.฀
2.5฀ Contract฀costs฀
Costs฀of฀obtaining฀a฀contract฀฀
Incremental฀ costs฀ of฀ obtaining฀ a฀ contract฀ are฀ recognised฀ as฀ an฀ asset฀ if฀ the฀ entity฀ expects฀ to฀
recover฀them฀(IFRS฀15:฀para.฀91).฀
Costs฀to฀fulfil฀a฀contract฀
If฀ the฀ costs฀ to฀ fulfil฀ a฀ contract฀ are฀ not฀ within฀ the฀ scope฀ of฀ another฀ standard฀ (eg฀ IAS฀ 2฀ Inventories,฀
IAS฀16฀Property,฀Plant฀and฀Equipment฀or฀IAS฀38฀Intangible฀Assets),฀they฀should฀be฀recognised฀as฀an฀
asset฀only฀if฀they฀meet฀all฀of฀the฀following฀(IFRS฀15:฀para.฀95):฀
(a)฀ The฀costs฀relate฀directly฀to฀a฀contract฀or฀an฀anticipated฀contract฀that฀the฀entity฀can฀specifically฀
identify;฀
(b)฀ The฀ costs฀ generate฀ or฀ enhance฀ resources฀ of฀ the฀ entity฀ that฀ will฀ be฀ used฀ in฀ satisfying฀ (or฀ in฀
continuing฀to฀satisfy)฀performance฀obligations฀in฀the฀future;฀and฀฀
(c)฀ The฀costs฀are฀expected฀to฀be฀recovered.฀
Amortisation฀and฀impairment฀of฀costs฀recognised฀as฀an฀asset฀
The฀asset฀should฀be฀amortised฀(to฀profit฀or฀loss)฀on฀a฀systematic฀basis฀consistent฀with฀the฀pattern฀of฀
transfer฀of฀the฀goods฀or฀services฀to฀which฀the฀asset฀relates฀(IFRS฀15:฀para.฀99).฀
For฀the฀costs฀of฀obtaining฀a฀contract,฀if฀the฀amortisation฀period฀is฀estimated฀to฀be฀one฀year฀or฀less,฀
the฀ costs฀ may฀ (as฀ a฀ practical฀ expedient)฀ be฀ recognised฀ as฀ an฀ expense฀ when฀ incurred฀ (IFRS฀ 15:฀฀
para.฀94).฀
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฀฀
An฀ impairment฀ loss฀ should฀ be฀ recognised฀ in฀ profit฀ or฀ loss฀ to฀ the฀ extent฀ that฀ the฀ carrying฀ amount฀
exceeds฀(IFRS฀15:฀para.฀101):฀
(a)฀ The฀remaining฀amount฀of฀consideration฀that฀the฀entity฀expects฀to฀receive฀in฀exchange฀for฀the฀
goods฀or฀services฀to฀which฀the฀asset฀relates;฀less฀
(b)฀ The฀ costs฀ that฀ relate฀ directly฀ to฀ providing฀ those฀ goods฀ or฀ services฀ that฀ have฀ not฀ yet฀ been฀
recognised฀as฀expenses.฀
2.6฀ Presentation฀
When฀either฀party฀to฀a฀contract฀has฀performed,฀an฀entity฀shall฀present฀the฀contract฀in฀the฀statement฀of฀
financial฀position฀as฀a฀contract฀asset฀(eg฀if฀entity฀transfers฀goods฀or฀services฀before฀customer฀pays)฀
or฀as฀a฀contract฀ liability฀ (eg฀if฀customer฀pays฀before฀entity฀transfers฀goods฀or฀services)฀(IFRS฀15:฀
para.฀105).฀
Any฀ unconditional฀ rights฀ to฀ consideration฀ should฀ be฀ shown฀ separately฀ as฀ a฀ receivable฀ (IFRS฀ 15:฀
para.฀105).฀
2.7฀ Specific฀guidance฀
Type฀ Guidance฀
Sale฀with฀right฀of฀ ฀ Recognise฀all฀of฀(IFRS฀15:฀para.฀B21):฀
return฀ (a)฀ Revenue฀for฀the฀transferred฀products฀in฀the฀amount฀of฀
consideration฀to฀which฀the฀entity฀expects฀to฀be฀entitled฀(ie฀
revenue฀not฀recognised฀for฀products฀expected฀to฀be฀returned);฀
(b)฀ A฀refund฀liability;฀and฀
(c)฀ An฀asset฀(and฀corresponding฀adjustment฀to฀cost฀of฀sales)฀for฀its฀
right฀to฀recover฀products฀from฀customers฀on฀settling฀the฀refund฀
liability.฀
Warranties฀฀ ฀ If฀customer฀has฀the฀option฀to฀purchase฀a฀warranty฀separately,฀treat฀
as฀separate฀performance฀obligation฀under฀IFRS฀15฀(IFRS฀15:฀
para.฀B29).฀
฀ If฀customer฀does฀not฀have฀the฀option฀to฀purchase฀a฀warranty฀
separately,฀account฀for฀the฀warranty฀in฀accordance฀with฀IAS฀37฀
Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀(IFRS฀15:฀฀
para.฀B30).฀
฀ If฀a฀warranty฀provides฀the฀customer฀with฀a฀service฀in฀addition฀to฀the฀
assurance฀that฀the฀product฀complies฀with฀agreed-upon฀specifications,฀
the฀promised฀service฀is฀a฀performance฀obligation฀(IFRS฀15:฀฀
para.฀B32).฀
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Type฀ Guidance฀
Principal฀versus฀ ฀ If฀the฀entity฀controls฀the฀specified฀goods฀or฀service฀before฀transfer฀to฀a฀
agent฀ customer,฀it฀is฀a฀principal฀(IFRS฀15:฀para.฀B35)฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀Revenue฀=฀gross฀amount฀of฀consideration฀฀
฀ If฀the฀entity฀arranges฀for฀goods฀or฀services฀to฀be฀provided฀by฀
the฀other฀party,฀it฀is฀an฀agent฀(IFRS฀15:฀para.฀B36)฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀Revenue฀=฀fee฀or฀commission฀
฀ Indicators฀that฀an฀entity฀controls฀the฀goods฀or฀services฀before฀transfer฀and฀
therefore฀is฀a฀principal฀include฀(IFRS฀15:฀para.฀B37):฀
(a)฀ The฀entity฀is฀primarily฀responsible฀for฀fulfilling฀the฀promise฀to฀provide฀
the฀specified฀good฀or฀service;฀
(b)฀ The฀entity฀has฀inventory฀risk;฀
(c)฀ The฀entity฀has฀discretion฀in฀establishing฀the฀price฀for฀the฀specified฀
good฀or฀service.฀
Non-refundable฀ ฀ If฀it฀is฀an฀advance฀payment฀for฀future฀goods฀and฀services,฀recognise฀
upfront฀fees฀ revenue฀when฀future฀goods฀and฀services฀provided฀(IFRS฀15:฀
para.฀B49)฀
฀
the฀Workbook,฀contains฀further฀examples฀of฀the฀application฀of฀IFRS฀15.฀
3฀ IAS฀34฀Interim฀Financial฀Reporting฀
3.1฀ Interim฀financial฀report฀
Interim฀financial฀report฀(IAS฀34):฀a฀financial฀report฀containing฀either฀a฀complete฀set฀of฀
financial฀statements฀(as฀described฀in฀IAS฀1)฀or฀a฀set฀of฀condensed฀financial฀statements฀(as฀
Key฀term฀
described฀in฀IAS฀34)฀for฀an฀interim฀period.฀
The฀minimum฀components฀of฀an฀interim฀financial฀report฀prepared฀in฀accordance฀with฀IAS฀34฀are:฀
฀ A฀condensed฀statement฀of฀financial฀position;฀
฀ A฀condensed฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income;฀
฀ A฀condensed฀statement฀of฀cash฀flows;฀
฀ A฀condensed฀statement฀of฀changes฀in฀equity;฀and฀
฀ Selected฀explanatory฀notes.฀
Condensed฀financial฀statements฀must฀include฀at฀least฀each฀of฀the฀headings฀and฀subtotals฀included฀in฀
the฀ entity's฀ most฀ recent฀ annual฀ financial฀ statements฀ and฀ limited฀ explanatory฀ notes฀ required฀ by฀ the฀
standard.฀
Interim฀ reports฀ are฀ voluntary฀ as฀ far฀ as฀ IAS฀ 34฀ is฀ concerned;฀ however฀ IAS฀ 34฀ applies฀ where฀ an฀
interim฀report฀is฀described฀as฀complying฀with฀IFRSs,฀and฀publicly฀traded฀entities฀are฀encouraged฀to฀
provide฀ at฀ least฀ half฀ yearly฀ interim฀ reports.฀ Regulators฀ in฀ a฀ particular฀ regime฀ may฀ require฀ interim฀
reports฀to฀be฀published฀by฀certain฀companies,฀eg฀companies฀listed฀on฀a฀regulated฀stock฀exchange.฀
฀ 15฀

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฀฀
Reporting฀period฀and฀comparative฀figures฀
Interim฀statement฀ Current฀period฀ Comparative฀
Statement฀of฀financial฀ At฀end฀of฀current฀interim฀ At฀end฀of฀immediately฀preceding฀

position฀ period฀ financial฀year฀
Statement฀of฀profit฀or฀loss฀ Current฀interim฀period฀ Comparable฀interim฀period฀of฀

and฀other฀comprehensive฀ and฀ immediately฀preceding฀financial฀year฀
income฀ Comparable฀year-to-date฀period฀of฀
Cumulatively฀for฀current฀
financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀
Statement฀of฀changes฀in฀ Cumulatively฀for฀current฀ Comparable฀year-to-date฀period฀of฀

equity฀ financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀
Statement฀of฀cash฀flows฀ Cumulatively฀for฀current฀ Comparable฀year-to-date฀period฀of฀

financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀
Notes฀to฀the฀interim฀financial฀statements฀
Limited฀notes฀to฀the฀interim฀financial฀statements฀are฀required.฀They฀should฀include฀an฀explanation฀of฀
events฀ and฀ transactions฀ that฀ are฀ significant฀ to฀ an฀ understanding฀ of฀ the฀ changes฀ in฀
financial฀ position฀ and฀ financial฀ performance฀ since฀ the฀ end฀ of฀ the฀ last฀ annual฀ reporting฀ period,฀ eg฀
inventory฀write-downs,฀litigation฀settlements,฀etc.฀
Other฀disclosures฀are฀required฀(in฀the฀notes฀to฀the฀interim฀financial฀statements฀or฀cross-referenced฀to฀
another฀ statement฀ such฀ as฀ management฀ commentary)฀ such฀ as฀ comments฀ about฀ seasonality฀ of฀
interim฀operations,฀nature฀and฀amount฀of฀estimates฀and฀unusual฀items฀(due฀to฀their฀nature,฀size฀
or฀incidence),฀capital฀changes฀and฀limited฀segment฀data฀(for฀entities฀that฀apply฀IFRS฀8).฀
Recognition฀and฀measurement฀principles฀
Area฀ IAS฀34฀treatment฀
Accounting฀policies฀ Same฀as฀annual฀financial฀statements,฀except฀for฀accounting฀policy฀
changes฀made฀since฀the฀date฀of฀the฀most฀recent฀financial฀
statements฀
Revenues฀received฀seasonally,฀ Not฀anticipated฀or฀deferred฀if฀anticipation฀or฀deferral฀would฀not฀be฀
cyclically,฀or฀occasionally฀ appropriate฀at฀the฀year฀end฀
Costs฀incurred฀unevenly฀ Anticipated฀or฀deferred฀if,฀and฀only฀if,฀it฀is฀also฀appropriate฀to฀
anticipate฀or฀defer฀that฀type฀of฀cost฀at฀the฀year฀end฀
Estimates฀ Measurement฀principles฀must฀be฀designed฀to฀ensure฀that฀the฀
resulting฀information฀is฀reliable฀and฀that฀all฀relevant฀material฀
financial฀information฀is฀disclosed฀
Interim฀reports฀generally฀require฀greater฀use฀of฀estimation฀methods฀
than฀annual฀reports฀
฀
฀
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Ethics฀note฀
Ethics฀is฀a฀key฀aspect฀of฀the฀syllabus฀for฀this฀paper.฀Ethical฀issues฀can฀be฀examined฀in฀any฀part฀of฀the฀
paper฀and฀at฀least฀one฀question฀will฀include฀ethical฀issues฀for฀discussion.฀A฀revision฀of฀ethical฀
principles฀from฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀is฀covered฀in฀Chapter฀2฀–฀Professional฀and฀
ethical฀duty฀of฀the฀accountant.฀You฀need฀to฀be฀alert฀for฀accounting฀treatments฀that฀may฀be฀being฀used฀
to฀achieve฀a฀particular฀accounting฀effect฀(such฀as฀overstating฀revenue,฀profit฀or฀assets).฀
In฀terms฀of฀this฀topic฀area,฀some฀potential฀ethical฀issues฀that฀could฀come฀up฀include:฀
฀ Misuse฀of฀'true฀and฀fair฀override'฀when฀it฀is฀not฀appropriate฀to฀use฀it฀
฀ Application฀of฀Conceptual฀Framework฀principles฀which฀result฀in฀a฀different฀accounting฀
treatment฀to฀that฀required฀by฀an฀IFRS฀(the฀IFRS฀treatment฀always฀takes฀precedence฀where฀there฀
is฀one)฀
฀ Application฀of฀Exposure฀Draft฀principles฀before฀they฀become฀effective฀where฀they฀contradict฀
current฀rules฀(they฀can฀only฀be฀applied฀from฀a฀new/revised฀standard's฀effective฀date,฀or฀earlier฀
if฀the฀new/revised฀standard฀transition฀rules฀allow)฀
฀ Manipulation฀of฀the฀revenue฀figure฀(and฀profit)฀through฀misapplication฀of฀the฀IFRS฀15฀
principles.฀
฀
฀
฀
฀ 17฀

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฀฀
Chapter฀summary฀
฀
The฀financial฀reporting฀฀
framework฀
1.฀The฀accounting฀framework฀ 2.฀Revenue฀recognition฀(IFRS฀15)฀
IASB฀Conceptual฀Framework฀ (1)฀ Identify฀contract฀with฀customer฀
Chapter฀1:฀Objective฀of฀general฀purpose฀FR฀ ฀ Contract฀=฀an฀agreement฀that฀creates฀
฀ 'To฀ provide฀ financial฀ information฀ about฀ the฀ reporting฀ enforceable฀rights฀and฀obligations฀
entity฀ that฀ is฀ useful฀ to฀ existing฀ and฀ potential฀ (2)฀ Identify฀performance฀obligation(s)฀
investors,฀ lenders฀ and฀ other฀ creditors฀ in฀ making฀ ฀ For฀distinct฀goods฀or฀services฀(ie฀can฀benefit฀on฀
decisions฀about฀providing฀resources฀to฀the฀entity.฀฀Those฀ own฀or฀with฀other฀readily฀available฀resources)฀
decisions฀ involve฀ buying,฀ selling฀ or฀ holding฀ equity฀ (3)฀ Determine฀transaction฀price฀
and฀debt฀instruments,฀and฀providing฀or฀settling฀loans฀and฀ ฀ Amount฀to฀which฀entity฀expects฀to฀be฀entitled฀
other฀forms฀of฀credit.'฀ ฀ –฀ Discount฀to฀PV฀(not฀required฀if฀<฀1฀year)฀
Chapter฀2:฀The฀reporting฀entity฀ ฀ –฀ Include฀variable฀consideration฀if฀highly฀
฀ Not฀yet฀finalised฀by฀IASB฀ probable฀significant฀reversal฀will฀not฀arise฀
Chapter฀ 3:฀ Qualitative฀ characteristics฀ of฀ useful฀ financial฀ (probability-weighted฀expected฀value฀or฀
most฀likely฀amount)฀
information฀
฀ Fundamental:฀ (4)฀ Allocate฀transaction฀price฀to฀
– Relevance฀ performance฀obligations฀
– Faithful฀representation฀ ฀ Based฀on฀stand-alone฀selling฀prices฀
฀ Enhancing:฀ (5)฀ Recognise฀revenue฀when฀(or฀as)฀
–฀ Comparability฀ –฀ Timeliness฀ performance฀obligation฀satisfied฀
–฀ Verifiability฀ –฀ Understandability฀ ฀ When฀good/service฀transferred฀(=฀when/as฀
฀ The฀cost฀constraint฀of฀FR฀ customer฀obtains฀control)฀
Chapter฀4:฀1989฀Framework฀ ฀
฀ Underlying฀assumption฀
Satisfaction฀of฀a฀performance฀obligation฀over฀time:฀
฀ –฀ Going฀concern฀
(a)฀ The฀customer฀simultaneously฀receives฀and฀
฀ The฀elements฀of฀FS฀
consumes฀the฀benefits฀provided;฀or฀
–฀ Asset฀
(b)฀ The฀performance฀creates/enhances฀an฀asset฀
฀ 'A฀resource฀controlled฀by฀the฀entity฀as฀a฀result฀of฀
that฀the฀customer฀controls฀as฀it฀is฀
past฀events฀and฀from฀which฀future฀economic฀ created/enhanced;฀or฀
benefits฀are฀expected฀to฀flow฀to฀the฀entity'฀ (c)฀ The฀performance฀does฀not฀create฀an฀asset฀with฀
฀ –฀ Liability฀ an฀alternative฀use฀and฀the฀entity฀has฀an฀
฀ 'A฀present฀obligation฀of฀the฀entity฀arising฀from฀ enforceable฀right฀to฀payment฀for฀performance฀
past฀events,฀the฀settlement฀of฀which฀is฀expected฀to฀ completed.฀
result฀in฀an฀outflow฀from฀the฀entity฀of฀resources฀ Satisfaction฀of฀a฀performance฀obligation฀at฀a฀point฀
embodying฀economic฀benefits'฀ in฀time:฀
฀ –฀ Income฀
Indicators฀of฀transfer฀of฀control฀of฀an฀asset:฀
฀ 'Increases฀in฀economic฀benefits฀during฀the฀accounting฀
(a)฀ Entity฀has฀a฀present฀right฀to฀payment฀
period฀in฀the฀form฀of฀inflows฀or฀enhancements฀of฀
(b)฀ Customer฀has฀legal฀title฀to฀the฀asset฀
assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀
(c)฀ Entity฀has฀transferred฀physical฀possession฀
increases฀in฀equity,฀other฀than฀those฀relating฀to฀ (d)฀ Customer฀has฀the฀significant฀risks฀and฀rewards฀
contributions฀from฀equity฀participants'฀ of฀ownership฀
฀ –฀ Expense฀ (e)฀ The฀customer฀has฀accepted฀the฀asset฀
฀ 'Decreases฀in฀economic฀benefits฀during฀the฀
accounting฀period฀in฀the฀form฀of฀outflows฀or฀ ฀
depletions฀of฀assets฀or฀incurrences฀of฀liabilities฀ Incremental฀costs฀of฀obtaining฀a฀contract:฀
that฀result฀in฀decreases฀in฀equity,฀other฀than฀those฀
฀ Recognised฀as฀asset฀if฀expected฀to฀be฀
relating฀to฀distributions฀to฀equity฀participants'฀
recovered฀
฀ –฀ Equity฀
฀ 'The฀residual฀interest฀in฀the฀assets฀of฀the฀entity฀ Costs฀to฀fulfil฀a฀contract:฀
after฀deducting฀all฀its฀liabilities'฀ ฀ Recognised฀as฀an฀asset฀and฀amortised฀if฀costs:฀
฀ Recognition฀in฀FS฀ –฀ Can฀be฀specifically฀identified,฀
฀ –฀ Probable฀future฀economic฀benefits฀ –฀ Generate/enhance฀resources฀used฀to฀satisfy฀
฀ –฀ Value/cost฀measured฀reliably฀ performance฀obligation,฀and฀
–฀ Are฀expected฀to฀be฀recovered.฀
฀ Measurement฀in฀FS฀
฀ Capital/capital฀maintenance฀
18฀

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Current฀developments฀
ED/2015/3:฀Conceptual฀Framework฀for฀Financial฀ 6.฀฀ Measurement฀฀
Reporting฀(May฀2015)฀  Revised฀measurement฀bases:฀
Objectives:฀ –฀ Historical฀cost฀฀
(1)฀ To฀fill฀gaps฀in฀the฀existing฀Conceptual฀Framework฀ –฀ Current฀value:฀
(2)฀ To฀update฀existing฀guidance฀where฀appropriate฀ (i)฀฀ Fair฀value฀(market฀participant฀perspective)฀
(3)฀ To฀clarify฀particular฀areas฀where฀more฀guidance฀would฀be฀ (ii)฀ Value฀in฀use฀(assets)฀and฀fulfilment฀value฀
helpful.฀ (liabilities)฀(entity-specific)฀
The฀Exposure฀Draft฀covers฀the฀following฀main฀ Factors฀to฀consider฀in฀selecting฀a฀measurement฀
areas:฀ basis/bases:฀
1.฀฀ The฀objective฀of฀general฀purpose฀financial฀reporting ฀ Cost฀constraint฀
 Largely฀unchanged฀ ฀ Relevance฀
 New฀section฀added฀on฀information฀about฀the฀ ฀ Faithful฀representation฀
efficiency฀and฀effectiveness฀of฀the฀use฀of฀the฀entity's฀ ฀ Enhancing฀qualitative฀characteristics฀
resources฀ ฀ Factors฀specific฀to฀initial฀measurement฀
2.฀฀ Qualitative฀characteristics฀of฀useful฀financial฀information 7.฀฀ Presentation฀and฀disclosure฀
 Largely฀unchanged,฀but฀prudence฀explicitly฀stated฀  Information฀provided฀in฀the฀notes฀to฀the฀FS:฀
and฀substance฀over฀form฀added฀to฀'faithful฀
–฀ Information฀about฀the฀nature฀of฀both฀recognised฀
representation'฀
and฀unrecognised฀elements฀and฀risks฀arising฀
3.฀฀ Financial฀statements฀and฀the฀reporting฀entity฀
from฀them฀
 New฀definition฀of฀reporting฀entity:฀'an฀entity฀that฀
chooses,฀or฀is฀required,฀to฀prepare฀general฀purpose฀ –฀ Methods,฀assumptions฀and฀judgements฀(and฀
financial฀statements'.฀฀Need฀not฀be฀a฀legal฀entity฀ changes฀in฀them)฀that฀affect฀amounts฀presented฀
or฀disclosed฀
 Boundary฀of฀reporting฀entity:฀
–฀ Direct฀control:฀'unconsolidated'฀financial฀  Use฀of฀presentation฀and฀disclosure฀as฀
statements฀–฀investments฀in฀subsidiaries฀ communication฀tools฀includes:฀
reported฀as฀assets฀ –฀ Classifying฀information฀in฀a฀structured฀manner฀
–฀ Both฀direct฀control฀and฀indirect฀control:฀ –฀ Aggregating฀information฀so฀that฀it฀is฀not฀
'consolidated'฀financial฀statements฀ obscured฀by฀unnecessary฀detail฀
4.฀฀ The฀elements฀of฀financial฀statements฀ –฀ Using฀presentation฀and฀disclosure฀objectives฀
 Revised฀definitions:฀ and฀principles฀rather฀than฀mechanistic฀rules฀
–฀ Asset:฀'a฀present฀economic฀resource฀controlled฀  Purpose฀of฀P/L฀(primary฀source฀of฀information฀about฀
by฀the฀entity฀as฀a฀result฀of฀past฀events'฀ performance)฀is฀to:฀
–฀ Liability:฀'a฀present฀obligation฀of฀the฀entity฀to฀ (a)฀ Depict฀the฀return฀that฀an฀entity฀has฀made฀on฀its฀
transfer฀an฀economic฀resource฀as฀a฀result฀of฀ economic฀resources฀during฀the฀period;฀and฀
past฀events'฀
(b)฀ Provide฀information฀that฀is฀helpful฀in฀assessing฀
–฀ Economic฀resource:฀'a฀right฀that฀has฀the฀
prospects฀for฀future฀cash฀flows฀and฀in฀assessing฀
potential฀to฀produce฀economic฀benefits'฀
management's฀stewardship฀of฀the฀entity's฀
 Definition฀of฀'unit฀of฀account'฀for฀measurement฀ resources.฀
added:฀
 Rebuttable฀presumption฀all฀items฀of฀income฀and฀
–฀ 'The฀group฀of฀rights,฀the฀group฀of฀obligations฀or฀
expenses฀are฀reported฀in฀P/L฀and฀only฀rebutted฀
the฀group฀of฀rights฀and฀obligations,฀to฀which฀
(and฀recognised฀in฀OCI)฀if:฀
recognition฀and฀measurement฀requirements฀are฀
applied',฀but฀determination฀left฀to฀individual฀ (a)฀ The฀income฀or฀expenses฀(or฀components฀of฀
standards฀ them)฀relate฀to฀assets฀or฀liabilities฀measured฀at฀
current฀values฀and฀are฀not฀separately฀
5.฀฀ Recognition฀and฀derecognition฀
identifiable฀components฀that฀would฀still฀arise฀if฀
 Recognise฀all฀assets฀and฀liabilities฀(and฀related฀ the฀asset/liability฀was฀measured฀at฀historical฀
income,฀expenses฀and฀equity)฀if฀provide฀users฀with:฀ cost฀(eg฀interest);฀and฀
(a)฀ Relevant฀information฀about฀the฀element฀
(b)฀ Excluding฀those฀income฀or฀expenses฀(or฀
(b)฀ A฀faithful฀representation฀of฀the฀element฀
components)฀from฀P/L฀would฀enhance฀the฀
(c)฀ Information฀that฀results฀in฀benefits฀exceeding฀
relevance฀of฀the฀information฀for฀the฀period฀
the฀costs฀of฀providing฀it฀
 Rebuttable฀presumption฀that฀income฀and฀expenses฀
 Derecognition฀principles฀added:฀
reported฀in฀OCI฀will฀be฀reclassified฀to฀P/L฀in฀a฀
–฀ Derecognise฀assets/liabilities฀that฀have฀been฀
future฀period฀(providing฀doing฀so฀would฀enhance฀
transferred,฀consumed,฀collected฀or฀fulfilled,฀or฀
the฀information฀included฀in฀P/L)฀
have฀expired฀and฀recognise฀any฀resulting฀
income฀or฀expense,฀and฀ 8.฀฀ Concepts฀of฀capital฀and฀capital฀maintenance฀
–฀ Continue฀to฀recognise฀assets/liabilities฀  Capital฀maintenance฀concepts฀retained฀as฀before฀
retained,฀which฀become฀a฀separate฀unit฀of฀ ฀
account฀
฀ ฀
฀ 19฀

lOMoARcPSD|6256454
฀฀
3.฀ Interim฀financial฀reporting฀
(IAS฀34)฀
฀ Interim฀reports฀are฀voluntary,฀but฀must฀
฀
comply฀with฀IAS฀34฀if฀described฀as฀
฀
complying฀with฀IFRSs฀
฀
฀ Minimum฀components:฀
฀ Condensed฀SOFP,฀SPLOCI,฀
–฀
฀ SOCF,฀SOCIE฀
฀ Selected฀explanatory฀notes฀
–฀
฀ Accounting฀policies฀same฀as฀annual฀FS฀
฀
฀ Seasonal/cyclical฀revenue/costs฀only฀
฀
anticipated/deferred฀if฀also฀
฀
appropriate฀at฀year฀end฀
฀ ฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
20฀

lOMoARcPSD|6256454
Knowledge฀diagnostic฀
1.฀ The฀accounting฀framework฀
฀ The฀Conceptual฀Framework฀establishes฀the฀objectives฀and฀principles฀underlying฀financial฀
statements฀and฀underlies฀the฀development฀of฀new฀standards.฀
฀ The฀IASB฀is฀developing฀a฀new฀Conceptual฀Framework฀which฀will฀underlie฀future฀standard฀
development.฀
2.฀ Revenue฀recognition฀(IFRS฀15)฀
฀ IFRS฀15฀requires฀the฀following฀5฀steps฀to฀be฀applied:฀
฀ (i)฀ Identify฀contract฀with฀customer฀
฀ (ii)฀ Identify฀performance฀obligation(s)฀
฀ (iii)฀ Determine฀transaction฀price฀
฀ (iv)฀ Allocate฀transaction฀price฀to฀performance฀obligations฀
฀ (v)฀ Recognise฀revenue฀when฀(or฀as)฀performance฀obligation฀satisfied.฀
฀
฀
฀ 21฀

lOMoARcPSD|6256454
฀฀
Further฀study฀guidance฀
Question฀practice฀
Now฀try฀the฀question฀below฀from฀the฀Further฀question฀practice฀bank:฀
Q1฀Conceptual฀Framework฀฀
Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website฀written฀by฀members฀of฀the฀SBR฀examining฀team฀which฀are฀
relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀which฀would฀be฀useful฀to฀read:฀
Measurement฀
Revenue฀revisited฀–฀Parts฀1฀and฀2฀
What฀differentiates฀profit฀or฀loss฀from฀other฀comprehensive฀income?฀
Bin฀the฀clutter฀(Reducing฀disclosures)฀
www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles.html฀
฀
22฀

lOMoARcPSD|6256454
฀
฀
฀
฀ Professional฀and
ethical฀duty฀of฀the
฀
฀
฀
฀
฀
accountant
฀ Syllabus฀
reference฀no.฀
Appraise฀and฀discuss฀the฀ethical฀and฀professional฀issues฀in฀advising฀on฀corporate฀ A1(a)฀
reporting.฀
Assess฀the฀relevance฀and฀importance฀of฀ethical฀and฀professional฀issues฀in฀ A1(b)฀
complying฀with฀accounting฀standards.฀
Appraise฀the฀potential฀ethical฀implications฀of฀professional฀and฀managerial฀ A2(a)฀
decisions฀in฀the฀preparation฀of฀corporate฀reports.฀
Assess฀the฀consequences฀of฀not฀upholding฀ethical฀principles฀in฀the฀preparation฀of฀ A2(b)฀
corporate฀reports.฀
Identify฀related฀parties฀and฀assess฀the฀implications฀of฀related฀party฀relationships฀in฀ A2(c)฀
the฀preparation฀of฀corporate฀reports.฀
Discuss฀and฀apply฀the฀judgements฀required฀in฀selecting฀and฀applying฀accounting฀ C11(d)฀
policies,฀accounting฀for฀changes฀in฀estimates฀and฀reflecting฀corrections฀of฀prior฀
period฀errors.฀
Exam฀context฀
Ethics฀ are฀ most฀ likely฀ to฀ be฀ considered฀ in฀ the฀ context฀ of฀ the฀ accountant's฀ role฀ as฀ adviser฀ to฀ the฀
directors.฀ For฀ example,฀ you฀ could฀ be฀ asked฀ why฀ a฀ deliberate฀ misrepresentation฀ in฀ the฀ financial฀
statements฀ was฀ unethical฀ or฀ why฀ directors฀ might฀ have฀ acted฀ unethically฀ in฀ adopting฀ accounting฀
policies฀ specifically฀ to฀ boost฀ earnings.฀ Ethical฀ issues฀ will฀ be฀ tested฀ in฀ Section฀ A฀ Question฀ 2,฀ which฀
will฀ cover฀ a฀ number฀ of฀ scenarios.฀ Two฀ professional฀ marks฀ are฀ allocated฀ to฀ this฀ question.฀ However,฀
ethics฀could฀also฀feature฀in฀any฀question฀in฀the฀exam.฀฀
฀
IAS฀ 24฀ Related฀ Party฀ Disclosures฀ aims฀ to฀ improve฀ the฀ quality฀ of฀ information฀ provided฀ by฀ published฀
accounts฀and฀also฀to฀strengthen฀their฀stewardship฀roles.฀Related฀parties฀could฀also฀come฀up฀outside฀
the฀context฀of฀ethics฀as฀part฀of฀a฀Section฀B฀scenario฀question.฀
฀
IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀was฀covered฀in฀your฀earlier฀
studies.฀However,฀given฀the฀importance฀of฀ethics฀to฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀we฀
set฀it฀in฀the฀context฀of฀ethical฀dilemmas฀in฀financial฀reporting.฀฀
฀ 23฀

lOMoARcPSD|6256454
฀฀
฀
฀
฀
฀ Professional฀and฀ethical฀
฀ duty฀of฀the฀accountant฀
฀
฀ ฀
3.฀ Accounting฀
1.฀ Professional฀and฀ policies,฀estimates฀
2.฀ Related฀parties฀
ethical฀issues฀ and฀prior฀period฀
errors฀
24฀

lOMoARcPSD|6256454
2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀
1฀Professional฀and฀ethical฀issues฀
1.1฀฀What฀are฀ethics?฀
Ethics฀ are฀ a฀ code฀ of฀ moral฀ principles฀ that฀ people฀ follow฀ with฀ respect฀ to฀ what฀ is฀ right฀ or฀ wrong.฀
Ethical฀ principles฀ are฀ not฀ necessarily฀ enforced฀ by฀ law,฀ although฀ the฀ law฀ incorporates฀ moral฀
judgements.฀(Murder฀is฀wrong฀ethically,฀and฀is฀also฀punishable฀legally.)฀
1.2฀฀Ethical฀principles฀in฀corporate฀reporting฀
ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ identifies฀ the฀ fundamental฀ principles฀ most฀ relevant฀ to฀
accountants฀in฀business฀involved฀in฀corporate฀reporting฀(ACCA฀Rulebook,฀2017:฀p.278).฀
Principle฀ Explanation฀
Integrity฀ To฀be฀straightforward฀and฀honest฀in฀all฀professional฀and฀business฀relationships฀
Objectivity฀ Not฀to฀allow฀bias,฀conflict฀of฀interest฀or฀undue฀influence฀of฀others฀to฀override฀
professional฀or฀business฀judgements฀
Professional฀ To฀maintain฀professional฀knowledge฀and฀skill฀at฀the฀level฀required฀to฀ensure฀
competence฀and฀ that฀a฀client฀or฀employer฀receives฀competent฀professional฀service฀based฀on฀
due฀care฀ current฀developments฀in฀practice,฀legislation฀and฀techniques฀and฀act฀diligently฀
and฀in฀accordance฀with฀applicable฀technical฀and฀professional฀standards฀
Confidentiality฀ To฀respect฀the฀confidentiality฀of฀information฀acquired฀as฀a฀result฀of฀
professional฀and฀business฀relationships฀and,฀therefore,฀not฀disclose฀any฀
such฀information฀to฀third฀parties฀without฀proper฀and฀specific฀authority,฀unless฀
there฀is฀a฀legal฀or฀professional฀right฀or฀duty฀to฀disclose,฀nor฀use฀the฀information฀
for฀the฀personal฀advantage฀of฀the฀professional฀accountant฀or฀third฀parties฀
Professional฀ To฀comply฀with฀relevant฀laws฀and฀regulations฀and฀avoid฀any฀action฀that฀
behaviour฀ discredits฀the฀profession฀
1.3฀ Threats฀to฀the฀fundamental฀principles฀
ACCA's฀Code฀of฀Ethics฀and฀Conduct฀identifies฀the฀following฀categories฀of฀threats฀to฀the฀fundamental฀
principles฀(ACCA฀Rulebook,฀2017:฀p.280).฀
Threat฀ Explanation฀
Self-interest฀ A฀financial฀or฀other฀interest฀may฀inappropriately฀influence฀the฀accountant's฀
judgement฀or฀behaviour.฀
Self-review฀ The฀accountant฀may฀not฀appropriately฀evaluate฀the฀results฀of฀a฀previous฀judgement฀
made฀or฀activity฀or฀service฀performed฀by฀themselves฀or฀others฀within฀their฀firm.฀
Advocacy฀ A฀threat฀that฀the฀accountant฀promotes฀the฀client's฀or฀employer's฀position฀to฀the฀
point฀that฀their฀objectivity฀is฀compromised.฀
Familiarity฀ Due฀to฀a฀long฀or฀close฀relationship฀with฀a฀client฀or฀employer,฀the฀accountant฀may฀
be฀too฀sympathetic฀to฀their฀interests฀or฀too฀accepting฀of฀their฀work.฀
Intimidation฀ The฀accountant฀may฀not฀act฀objectively฀due฀to฀actual฀or฀perceived฀pressures.฀
฀ 25฀

lOMoARcPSD|6256454
฀฀
Where฀the฀above฀threats฀exist,฀appropriate฀safeguards฀must฀be฀put฀in฀place฀to฀eliminate฀or฀reduce฀
them฀to฀an฀acceptable฀level.฀Safeguards฀against฀breach฀of฀compliance฀with฀the฀ACCA฀Code฀include:฀
(a)฀ Safeguards฀created฀by฀the฀profession,฀legislation฀or฀regulation฀(eg฀corporate฀governance)฀
(b)฀ Safeguards฀within฀the฀client/the฀accountancy฀firm's฀own฀systems฀and฀procedures฀
(c)฀ Educational฀ training฀ and฀ experience฀ requirements฀ for฀ entry฀ into฀ the฀ profession,฀ together฀ with฀
continuing฀professional฀development.฀฀
1.4฀ Ethical฀considerations฀in฀financial฀reporting฀
In฀ preparing฀ financial฀ statements฀ or฀ advising฀ on฀ corporate฀ reporting,฀ a฀ variety฀ of฀ ethical฀ problems฀
may฀arise:฀
(a)฀ Professional฀ competence฀ is฀ clearly฀ a฀ key฀ issue฀ when฀ decisions฀ are฀ made฀ about฀
accounting฀ treatments฀ and฀ disclosures.฀ Company฀ directors฀ and฀ their฀ advisers฀ have฀ a฀ duty฀ to฀
keep฀up฀to฀date฀with฀developments฀in฀IFRSs฀and฀other฀relevant฀regulations.฀
Circumstances฀that฀may฀threaten฀the฀ability฀of฀accountants฀in฀these฀roles฀to฀perform฀their฀duties฀
with฀the฀appropriate฀degree฀of฀professional฀competence฀and฀due฀care฀include:฀
฀ Insufficient฀time฀
฀ Incomplete,฀restricted฀or฀inadequate฀information฀
฀ Insufficient฀experience,฀training฀or฀education฀
฀ Inadequate฀resources฀
(b)฀ Objectivity฀and฀integrity฀may฀be฀threatened฀in฀a฀number฀of฀ways:฀
฀ Financial฀interests,฀such฀as฀profit-related฀bonuses฀or฀share฀options฀
฀ Inducements฀to฀encourage฀unethical฀behaviour฀
(c)฀ ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ identifies฀ that฀ accountants฀ may฀ be฀ pressurised,฀ either฀
externally฀ or฀ by฀ the฀ possibility฀ of฀ personal฀ gain,฀ to฀ become฀ associated฀ with฀ misleading฀
information.฀ The฀ Code฀ clearly฀ states฀ that฀ members฀ should฀ not฀ be฀ associated฀ with฀ reports,฀
returns,฀communications฀or฀other฀information฀where฀they฀believe฀that฀the฀information:฀฀
฀ Contains฀a฀materially฀misleading฀statement;฀
฀ Contains฀statements฀or฀information฀furnished฀recklessly;฀
฀ Has฀been฀prepared฀with฀bias;฀or฀
฀ Omits฀or฀obscures฀information฀required฀to฀be฀included฀where฀such฀omission฀or฀obscurity฀
would฀be฀misleading.฀
IAS฀1฀and฀fair฀presentation฀
ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ forbids฀ members฀ from฀ being฀ associated฀ with฀ 'misleading'฀
information,฀but฀IAS฀1฀Presentation฀of฀Financial฀Statements฀goes฀further,฀and฀requires฀that฀an฀entity฀
must฀ 'present฀ fairly'฀ its฀ financial฀ position,฀ financial฀ performance฀ and฀ cash฀ flows.฀ 'Present฀ fairly'฀ is฀
explained฀as฀representing฀faithfully฀the฀effects฀of฀transactions.฀In฀general฀terms฀this฀will฀be฀the฀case฀if฀
IFRS฀is฀adhered฀to.฀IAS฀1฀states฀that฀departures฀from฀international฀standards฀are฀only฀allowed:฀฀
฀ In฀extremely฀rare฀cases;฀or฀
฀ Where฀ compliance฀ with฀ IFRS฀ would฀ be฀ so฀ misleading฀ as฀ to฀ conflict฀ with฀ the฀ objectives฀ of฀
financial฀ statements฀ as฀ set฀ out฀ in฀ the฀ Conceptual฀ Framework,฀ that฀ is,฀ to฀ provide฀ information฀
about฀financial฀position,฀performance฀and฀changes฀in฀financial฀position฀that฀is฀useful฀to฀a฀wide฀
range฀of฀users.฀
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IAS฀1฀expands฀on฀this฀principle฀as฀follows:฀
฀ Compliance฀with฀IFRS฀should฀be฀disclosed.฀
฀ Financial฀statements฀can฀only฀be฀described฀as฀complying฀with฀IFRS฀if฀they฀comply฀with฀all฀the฀
requirements฀of฀IFRS.฀
฀ Use฀ of฀ inappropriate฀ accounting฀ policies฀ cannot฀ be฀ rectified฀ either฀ by฀ disclosure฀ or฀
explanatory฀material.฀
'Compliance'฀ is฀ necessary,฀ but฀ not฀ sufficient฀ for฀ fair฀ presentation.฀ 'Fairness'฀ is฀ an฀ ethical฀ concept,฀
directed฀at฀giving฀the฀users฀of฀financial฀statements฀the฀opportunity฀to฀see฀the฀full฀picture฀of฀an฀entity's฀
position฀and฀performance.฀
1.5฀ Framework฀for฀decisions฀
ACCA฀ has฀ developed฀ an฀ overall฀ framework฀ to฀ help฀ its฀ members฀ make฀ ethical฀ decisions฀ in฀ a฀ wide฀
range฀of฀circumstances:฀
What฀is฀the฀real฀issue?
Are฀there฀threats฀to฀compliance฀with฀
the฀fundamental฀principles?
Non-material฀
items฀would฀not฀
be฀significant.฀
Are฀the฀threats฀clearly฀significant?฀
Are฀there฀safeguards฀that฀will฀
eliminate฀the฀threats฀or฀reduce฀them฀
to฀an฀acceptable฀level?
Can฀you฀face฀yourself฀in฀the฀mirror?฀
฀
฀
Illustration฀1฀
Ethical฀issues฀
(a)฀ ACCA's฀Code฀of฀Ethics฀and฀Conduct฀identifies฀a฀number฀of฀threats฀to฀its฀fundamental฀ethical฀
principles.฀
฀ Jake฀has฀been฀put฀under฀significant฀pressure฀by฀his฀manager฀to฀change฀the฀conclusion฀of฀a฀
report฀he฀has฀written฀which฀reflects฀badly฀on฀the฀manager's฀performance.฀
฀ Required฀
฀ Which฀ethical฀threat฀is฀Jake฀facing?฀
(b)฀ Which฀of฀the฀following฀might฀(or฀might฀be฀thought฀to)฀affect฀the฀objectivity฀of฀providers฀of฀
professional฀accounting฀services?฀
฀ 27฀

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฀฀
฀
฀ ฀
Failure฀to฀keep฀up฀to฀date฀with฀continuing฀professional฀development฀(CPD)฀ ฀
A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀ ฀
Being฀negligent฀or฀reckless฀with฀the฀accuracy฀of฀the฀information฀provided฀to฀ ฀
the฀client฀
฀
Solution฀
(a)฀ The฀answer฀is฀intimidation,฀as฀indicated฀by฀'significant฀pressure'.฀
(b)
฀ ฀
Failure฀to฀keep฀up฀to฀date฀with฀CPD฀ ฀
A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀ ฀
Being฀negligent฀or฀reckless฀with฀the฀accuracy฀of฀the฀information฀provided฀to฀ ฀
the฀client฀
฀
฀ A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀will฀affect฀objectivity.฀Failure฀to฀keep฀up฀to฀
date฀on฀continuing฀professional฀development฀is฀an฀issue฀of฀professional฀competence,฀while฀
providing฀inaccurate฀information฀reflects฀upon฀professional฀integrity.฀
1.6฀฀Exam฀scenarios฀
The฀exam฀may฀present฀you฀with฀a฀scenario,฀typically฀containing฀an฀array฀of฀detail฀much฀of฀which฀is฀
potentially฀relevant.฀The฀problem,฀however,฀will฀be฀one฀or฀other฀of฀two฀basic฀types.฀
(a)฀ A฀ manager/superior฀ has฀ requested฀ an฀ employee/subordinate฀ to฀ perform฀ an฀ action฀ which฀ is฀
not฀justified฀by฀accounting฀standards฀or฀is฀not฀morally฀acceptable.฀
For฀ example,฀ the฀ Managing฀ Director฀ (A)฀ wants฀ the฀ Financial฀ Accountant฀ (B)฀ to฀ make฀ a฀ change฀ in฀
accounting฀policy฀(C),฀where฀this฀is฀not฀justified฀by฀IAS฀8฀(D).฀
(b)฀ Alternatively,฀ the฀ problem฀ may฀ be฀ that฀ the฀ Managing฀ Director฀ has฀ already฀ performed฀ an฀
action฀ which฀ is฀ not฀ justified฀ by฀ accounting฀ standards฀ or฀ is฀ not฀ morally฀ acceptable,฀ an฀
employee฀ or฀ external฀ auditor฀ has฀ discovered฀ this฀ action฀ and฀ is฀ now฀ required฀ to฀ respond฀
appropriately฀to฀the฀issue.฀
Illustration฀2฀
Takeover฀
Your฀Finance฀Director฀has฀asked฀you฀to฀join฀a฀team฀that฀is฀planning฀a฀takeover฀of฀one฀of฀your฀
company's฀suppliers.฀An฀old฀school฀friend฀works฀as฀an฀accountant฀for฀the฀supplier.฀The฀Finance฀
Director฀knows฀this,฀and฀has฀asked฀you฀to฀try฀and฀find฀out฀'anything฀that฀might฀help฀the฀takeover฀
succeed,฀but฀it฀must฀remain฀secret'.฀
Solution฀
There฀are฀three฀issues฀here.฀฀
First,฀you฀have฀a฀conflict฀of฀interest฀as฀the฀Finance฀Director฀wants฀you฀to฀keep฀the฀takeover฀a฀secret,฀
but฀you฀probably฀feel฀that฀you฀should฀tell฀your฀friend฀what฀is฀happening฀as฀it฀may฀affect฀their฀job.฀
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Second,฀the฀Finance฀Director฀is฀asking฀you฀to฀deceive฀your฀friend.฀Deception฀is฀unprofessional฀
behaviour฀and฀is฀in฀breach฀of฀your฀ethical฀guidelines.฀The฀situation฀is฀presenting฀you฀with฀two฀
conflicting฀demands.฀It฀is฀worth฀remembering฀that฀no฀employer฀can฀ask฀you฀to฀break฀your฀ethical฀
rules.฀
Finally,฀the฀request฀to฀break฀your฀own฀ethical฀guidelines฀constitutes฀unprofessional฀behaviour฀by฀the฀
Finance฀Director.฀You฀should฀weigh฀up฀whether฀blowing฀the฀whistle฀internally฀would฀prove฀effective;฀
if฀not,฀consider฀reporting฀them฀to฀their฀relevant฀professional฀body.฀
Activity฀1:฀Ethical฀issues฀฀ ฀ ฀
Kelshall฀ is฀ a฀ public฀ limited฀ company.฀ The฀ current฀ year฀ end฀ is฀ 31฀ December฀ 20X5.฀ The฀ Finance฀
Director฀ is฀ remunerated฀ with฀ a฀ profit-related฀ bonus฀ and฀ share฀ appreciation฀ rights.฀ (Share฀
appreciation฀rights฀mean฀that฀the฀director฀will฀become฀entitled฀to฀a฀future฀cash฀payment฀based฀on฀the฀
increase฀in฀the฀entity's฀share฀price฀from฀a฀specified฀level฀over฀a฀specified฀period฀of฀time.)฀
Kelshall฀ owns฀ a฀ significant฀ number฀ of฀ owner-occupied฀ properties฀ which฀ historically฀ have฀ been฀ held฀
under฀ the฀ revaluation฀ model.฀ Recently,฀ due฀ to฀ an฀ economic฀ downturn,฀ property฀ prices฀ have฀ been฀
falling.฀The฀Finance฀Director฀is฀proposing฀to฀switch฀from฀the฀revaluation฀model฀to฀the฀cost฀model.฀
Shortly฀ before฀ the฀ year฀ end,฀ the฀ CEO฀ of฀ Kelshall,฀ who฀ holds฀ a฀ large฀ number฀ of฀ share฀ options,฀
mentioned฀to฀the฀Finance฀Director฀that฀he฀was฀hoping฀to฀retire฀within฀the฀next฀year฀and฀was฀hoping฀
to฀maximise฀Kelshall's฀share฀price฀by฀his฀retirement฀date.฀
Required฀
(a)฀ Discuss฀the฀view฀that฀the฀board฀of฀directors฀should฀be฀remunerated฀with฀profit-related฀pay฀and฀
share-based฀payment฀to฀align฀directors'฀and฀stakeholders'฀interests.฀
(b)฀ Discuss฀ whether฀ the฀ Finance฀ Director฀ of฀ Kelshall฀ would฀ be฀ acting฀ ethically฀ if฀ he฀ revised฀ the฀
accounting฀policy฀for฀its฀properties฀from฀the฀revaluation฀model฀to฀the฀cost฀model.฀
(c)฀ Discuss฀whether฀the฀CEO's฀comment฀to฀the฀Finance฀Director฀is฀ethical฀and฀what฀action,฀if฀any,฀
the฀Finance฀Director฀should฀take.฀
Mention฀the฀theories฀
1.7฀฀The฀role฀of฀moral฀philosophy฀and฀theory฀in฀ethics฀ only฀if฀relevant฀in฀the฀
context฀of฀a฀practical฀
Ethical฀theories฀ answer.฀฀฀฀
(a)฀ Do฀ethics฀change฀over฀time฀and฀place?฀
•฀ Ethical฀relativism฀=฀YES฀(ethics฀vary฀between฀different฀ages฀&฀different฀communities)฀
•฀ Ethical฀absolutism฀=฀NO฀(some฀courses฀of฀action฀are฀always฀right,฀others฀are฀always฀
wrong)฀
For฀ example,฀ a฀ total฀ ban฀ on฀ meat-eating฀ would฀ be฀ ethically฀ absolutist,฀ while฀ allowing฀ it฀ where฀ the฀
animal฀has฀been฀reared฀in฀a฀'cruelty-free'฀environment฀would฀be฀ethically฀relativist.฀
(b)฀ Lawrence฀Kohlberg's฀thought฀processes฀people฀use฀when฀making฀ethical฀decisions฀
From฀less฀'ethically฀developed'฀individuals฀to฀more฀'ethically฀developed'฀individuals:฀
(i)฀ You฀should฀act฀ethically฀because฀you'll฀be฀punished฀if฀you฀don't.฀
(ii)฀ You฀should฀act฀ethically฀because฀your฀country's฀laws฀say฀you฀should.฀
(iii)฀ You฀ should฀ act฀ ethically฀ because฀ it's฀ always฀ right฀ to฀ do฀ so,฀ no฀ matter฀ what฀ the฀
consequences฀and฀costs฀are฀to฀you฀personally.฀
(Kohlberg,฀1981)฀
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฀฀
Influences฀on฀ethics฀
(a)฀ Individual฀factors฀
฀ Age฀and฀gender฀
฀ National฀and฀cultural฀beliefs฀
฀ Education฀and฀employment฀
฀ Psychological฀factors฀
฀ How฀much฀influence฀individuals฀believe฀they฀have฀
฀ Personal฀integrity฀
฀ Moral฀imagination฀(level฀of฀awareness฀of฀variety฀of฀moral฀consequences฀of฀actions)฀
(b)฀ Situational฀factors฀
฀ Issue-related฀factors฀–฀nature฀of฀issue฀and฀how฀it฀is฀viewed฀in฀the฀organisation฀
฀ Context-related฀ factors฀ –฀ expectations฀ and฀ demands฀ that฀ will฀ be฀ placed฀ on฀ people฀
working฀in฀an฀organisation฀(eg฀systems฀of฀reward,฀authority,฀bureaucracy,฀work฀roles,฀
organisational฀culture).฀
See฀ Chapter฀ 2฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀influences฀on฀ethics.฀
Social฀responsibility฀and฀businesses฀
Some฀ argue฀ that฀ the฀ only฀ social฀ responsibility฀ of฀ a฀ business฀ is฀ to฀ maximise฀ shareholder฀ wealth฀
because:฀
฀ If฀ the฀ business฀ is฀ owned฀ by฀ the฀ shareholders฀ the฀ assets฀ of฀ the฀ company฀ are,฀ ultimately,฀ the฀
shareholders'฀property.฀It฀is฀for฀the฀shareholders฀to฀determine฀how฀their฀assets฀should฀be฀used,฀
and฀they฀would฀generally฀wish฀it฀to฀be฀used฀to฀maximise฀their฀returns.฀
฀ Maximising฀ wealth฀ is฀ the฀ best฀ way฀ that฀ society฀ can฀ benefit฀ from฀ a฀ business's฀ activities,฀ eg,฀
increasing฀tax฀revenue.฀
On฀the฀other฀hand,฀good฀corporate฀citizenship฀may฀be฀good฀for฀business฀performance฀because฀of฀
the฀attitude฀of฀other฀stakeholders:฀
฀ Customers฀may฀prefer฀to฀buy฀from฀a฀company฀that฀is฀perceived฀as฀being฀socially฀responsible.฀
฀ Employees฀may฀prefer฀to฀work฀for฀such฀a฀company.฀
฀ Investors฀may฀prefer฀such฀a฀company,฀as฀shown฀by฀the฀existence฀of฀ethical฀funds.฀
฀ Constructive฀engagement฀with฀the฀community/country฀in฀which฀a฀business฀operates฀may฀result฀
in฀it฀being฀seen฀as฀a฀good฀long-term฀investment.฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀social฀responsibility฀and฀businesses.฀
Ethics฀in฀organisations฀
Organisations฀contain฀a฀variety฀of฀ethical฀systems:฀
฀ Personal฀ethics฀(eg฀from฀upbringing,฀religious฀beliefs,฀political฀opinions,฀personality)฀
฀ Professional฀ethics฀(eg฀ACCA's฀Code฀of฀Ethics฀and฀Conduct)฀
฀ Organisational฀culture฀(eg฀'customer฀first')฀
฀ Organisation฀ systems฀ (eg฀ ethics฀ may฀ be฀ contained฀ in฀ a฀ formal฀ code฀ reinforced฀ by฀ 'values'฀
statement)฀
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Approaches฀to฀managing฀ethics฀within฀organisations฀ Compliance-based฀is฀
becoming฀more฀common.฀
(a)฀ Compliance-based฀approach฀
This฀ ensures฀ that฀ the฀ company฀ acts฀ within฀ the฀ letter฀ of฀ the฀ law฀ and฀ that฀ violations฀ are฀
prevented,฀detected฀and฀punished.฀
(b)฀ Integrity-based฀approach฀
Wider฀ remit฀ than฀ compliance฀ based฀ approach.฀ This฀ combines฀ concern฀ for฀ the฀ law฀ with฀
emphasis฀on฀managerial฀responsibility฀for฀ethical฀behaviour.฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀managing฀ethics฀within฀organisations฀and฀an฀additional฀
question฀on฀ethical฀issues.฀
2฀฀Related฀parties฀
2.1฀฀Related฀parties฀
Related฀ party฀ relationships฀ and฀ transactions฀ are฀ a฀ normal฀ feature฀ of฀ business.฀ However,฀ there฀ is฀ a฀
general฀presumption฀that฀transactions฀reflected฀in฀financial฀statements฀have฀been฀carried฀out฀on฀an฀
arm's฀length฀basis,฀unless฀disclosed฀otherwise.฀
Arm's฀ length฀ means฀ on฀ the฀ same฀ terms฀ as฀ could฀ have฀ been฀ negotiated฀ with฀ an฀ external฀ party,฀ in฀
which฀each฀side฀bargained฀knowledgeably฀and฀freely,฀unaffected฀by฀any฀relationship฀between฀them.฀฀
Even฀if฀a฀transaction฀with฀a฀related฀party฀is฀at฀market฀value,฀the฀shareholders฀need฀to฀know฀if฀it฀is฀not฀
at฀arm's฀length,฀because฀the฀relationship฀could฀influence฀future฀transactions.฀฀
Identifying฀the฀related฀party฀relationship฀will฀be฀more฀important฀in฀your฀exam฀
than฀ long฀ lists฀ of฀ disclosures,฀ so฀ there฀ is฀ no฀ shortcut฀ to฀ learning฀ the฀ definition฀
of฀related฀party.฀
฀
Related฀party฀(IAS฀24):฀a฀person฀or฀entity฀that฀is฀related฀to฀the฀entity฀that฀is฀preparing฀its฀
financial฀statements฀(the฀'reporting฀entity').฀฀
Key฀term฀
(a)฀ A฀person฀or฀a฀close฀member฀of฀that฀person's฀family฀is฀related฀to฀a฀reporting฀entity฀if฀that฀
person:฀฀
฀ (i)฀ Has฀control฀or฀joint฀control฀over฀the฀reporting฀entity;฀฀
฀ (ii)฀ Has฀significant฀influence฀over฀the฀reporting฀entity;฀or฀฀
฀ (iii)฀ Is฀a฀member฀of฀the฀key฀management฀personnel฀of฀the฀reporting฀entity฀or฀of฀a฀
parent฀of฀the฀reporting฀entity.฀฀
(b)฀ An฀entity฀is฀related฀to฀a฀reporting฀entity฀if฀any฀of฀the฀following฀conditions฀apply:฀฀
฀ (i)฀ The฀entity฀and฀the฀reporting฀entity฀are฀members฀of฀the฀same฀group฀(which฀means฀
that฀each฀parent,฀subsidiary฀and฀fellow฀subsidiary฀is฀related฀to฀the฀others).฀฀
฀ (ii)฀ One฀entity฀is฀an฀associate*฀or฀joint฀venture*฀of฀the฀other฀entity฀(or฀an฀associate฀or฀
joint฀venture฀of฀a฀member฀of฀a฀group฀of฀which฀the฀other฀entity฀is฀a฀member).฀฀
฀ (iii)฀ Both฀entities฀are฀joint฀ventures*฀of฀the฀same฀third฀party.฀฀
฀ (iv)฀ One฀entity฀is฀a฀joint฀venture*฀of฀a฀third฀entity฀and฀the฀other฀entity฀is฀an฀
associate฀of฀the฀third฀entity.฀฀
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฀฀
฀ (v)฀฀ The฀entity฀is฀a฀post-employment฀benefit฀plan฀for฀the฀benefit฀of฀employees฀of฀either฀
the฀reporting฀entity฀or฀an฀entity฀related฀to฀the฀reporting฀entity.฀
฀ (vi)฀ The฀entity฀is฀controlled฀or฀jointly฀controlled฀by฀a฀person฀identified฀in฀(a).฀฀
฀ (vii)฀ A฀person฀identified฀in฀(a)(i)฀has฀significant฀influence฀over฀the฀entity฀or฀is฀a฀member฀
of฀the฀key฀management฀personnel฀of฀the฀entity฀(or฀of฀a฀parent฀of฀the฀entity).฀฀
฀ (viii)฀ The฀entity,฀or฀any฀member฀of฀a฀group฀of฀which฀it฀is฀a฀part,฀provides฀key฀
management฀personnel฀services฀to฀the฀reporting฀entity฀or฀the฀parent฀of฀the฀
reporting฀entity.฀
฀ *including฀subsidiaries฀of฀the฀associate฀or฀joint฀venture฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(IAS฀24:฀para.฀9)฀
Close฀ members฀ of฀ the฀ family฀ of฀ a฀ person฀ are฀ defined฀ (IAS฀ 24:฀ para.฀ 9)฀ as฀ 'those฀ family฀
members฀who฀may฀be฀expected฀to฀influence,฀or฀be฀influenced฀by,฀that฀person฀in฀their฀dealings฀with฀
the฀entity฀and฀include:฀
฀ That฀person's฀children฀and฀spouse฀or฀domestic฀partner;฀
฀ Children฀of฀that฀person's฀spouse฀or฀domestic฀partner;฀and฀
฀ Dependants฀of฀that฀person฀or฀that฀person's฀spouse฀or฀domestic฀partner.'฀
In฀ considering฀ each฀ possible฀ related฀ party฀ relationship,฀ attention฀ is฀ directed฀ to฀ the฀ substance฀ of฀ the฀
relationship,฀and฀not฀merely฀the฀legal฀form.฀฀
Is฀there฀control฀or฀influence฀
in฀practice?฀
2.2฀฀Not฀related฀parties฀
The฀following฀are฀not฀related฀parties฀(IAS฀24:฀para.฀11):฀
(a)฀ Two฀ entities฀ simply฀ because฀ they฀ have฀ a฀ director฀ or฀ other฀ member฀ of฀ key฀ management฀
personnel฀in฀common,฀or฀because฀a฀member฀of฀key฀management฀personnel฀of฀one฀entity฀has฀
significant฀influence฀over฀the฀other฀entity;฀
(b)฀ Two฀venturers฀simply฀because฀they฀share฀joint฀control฀over฀a฀joint฀venture:฀
(c)฀ (i)฀ Providers฀of฀finance;฀
(ii)฀ Trade฀unions;฀
(iii)฀ Public฀utilities;฀and฀
(iv)฀ Departments฀and฀agencies฀of฀a฀government;฀฀
simply฀ by฀ virtue฀ of฀ their฀ normal฀ dealings฀ with฀ an฀ entity฀ (even฀ though฀ they฀ may฀ affect฀ the฀
freedom฀of฀action฀of฀an฀entity฀or฀participate฀in฀its฀decision-making฀process);฀and฀
(d)฀ A฀customer,฀supplier,฀franchisor,฀distributor,฀or฀general฀agent฀with฀whom฀an฀entity฀transacts฀a฀
significant฀volume฀of฀business,฀simply฀by฀virtue฀of฀the฀resulting฀economic฀dependence.฀
2.3฀฀Disclosure฀
IAS฀24฀requires฀an฀entity฀to฀disclose฀the฀following:฀
(a)฀ The฀ name฀ of฀ its฀ parent฀ and,฀ if฀ different,฀ the฀ ultimate฀ controlling฀ party฀ irrespective฀ of฀
whether฀there฀have฀been฀any฀transactions.฀
(b)฀ Total฀key฀management฀personnel฀compensation฀(broken฀down฀by฀category)฀
(c)฀ If฀the฀entity฀has฀had฀related฀party฀transactions:฀
(i)฀ Nature฀of฀the฀related฀party฀relationship฀
(ii)฀ Information฀ about฀ the฀ transactions฀ and฀ outstanding฀ balances,฀ including฀
commitments฀ and฀ bad฀ and฀ doubtful฀ debts฀ necessary฀ for฀ users฀ to฀ understand฀
the฀potential฀effect฀of฀the฀relationship฀on฀the฀financial฀statements.฀
No฀ disclosure฀ is฀ required฀ of฀ intragroup฀ related฀ party฀ transactions฀ in฀ the฀ consolidated฀ financial฀฀
statements.฀
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Items฀ of฀ a฀ similar฀ nature฀ may฀ be฀ disclosed฀ in฀ aggregate฀ except฀ where฀ separate฀ disclosure฀ is฀
necessary฀for฀understanding฀purposes.฀
2.4฀ Government-related฀entities฀
If฀the฀reporting฀entity฀is฀a฀government-related฀entity฀(ie฀a฀government฀has฀control,฀joint฀control฀
or฀ significant฀ influence฀ over฀ the฀ entity),฀ an฀ exemption฀ is฀ available฀ from฀ full฀ disclosure฀ of฀
transactions,฀ outstanding฀ balances฀ and฀ commitments฀ with฀ the฀ government฀ or฀ with฀ other฀ entities฀
related฀to฀the฀same฀government.฀
However,฀if฀the฀exemption฀is฀applied,฀disclosure฀is฀required฀of:฀
(a)฀ The฀name฀of฀the฀government฀and฀nature฀of฀the฀relationship฀
(b)฀ The฀nature฀and฀amount฀of฀each฀individually฀significant฀transaction฀(plus฀a฀qualitative฀or฀
quantitative฀ indication฀ of฀ the฀ extent฀ of฀ other฀ transactions฀ which฀ are฀ collectively,฀ but฀ not฀
individually,฀significant).฀
(IAS฀24:฀paras.฀24–26)฀
Illustration฀3฀
Related฀party฀issues฀
Fancy฀Feet฀Co฀is฀a฀UK฀company฀which฀supplies฀handmade฀leather฀shoes฀to฀a฀chain฀of฀high฀street฀
shoe฀shops.฀The฀company฀is฀also฀the฀sole฀importer฀of฀some฀famous฀high฀quality฀Greek฀stoneware฀
which฀is฀supplied฀to฀an฀upmarket฀shop฀in฀London's฀West฀End.฀
Fancy฀Feet฀Co฀was฀set฀up฀30฀years฀ago฀by฀Georgios฀Kostades.฀The฀company฀is฀owned฀and฀run฀by฀
Mr฀Kostades฀and฀his฀three฀children.฀
The฀shoes฀are฀purchased฀from฀a฀French฀company,฀the฀shares฀of฀which฀are฀owned฀by฀the฀Kostades฀
Family฀Trust฀(Monaco).฀
Required฀
Identify฀the฀financial฀accounting฀issues฀arising฀out฀of฀the฀above฀scenario.฀
Solution฀
Issues฀
(a)฀ The฀basis฀on฀which฀Fancy฀Feet฀trades฀with฀the฀Greek฀supplier฀and฀the฀French฀company฀owned฀
by฀the฀Kostades฀family฀trust.฀
(b)฀ Whether฀the฀overseas฀companies฀trade฀on฀commercial฀terms฀with฀the฀UK฀company฀or฀whether฀
the฀foreign฀entities฀control฀the฀UK฀company.฀
(c)฀ Who฀owns฀the฀Greek฀company:฀is฀this฀a฀related฀party฀under฀the฀provisions฀of฀IAS฀24?฀
(d)฀ If฀the฀nature฀of฀trade฀suggests฀a฀related฀party฀controls฀Fancy฀Feet฀Co,฀detailed฀disclosures฀will฀
be฀required฀in฀the฀accounts.฀
Activity฀2:฀Related฀parties฀(1)฀ ฀
Leoval฀is฀a฀private฀manufacturing฀company฀that฀makes฀car฀parts.฀It฀is฀90%฀owned฀by฀Cavelli,฀a฀listed฀
entity.฀Cavelli฀is฀a฀long-established฀company฀controlled฀by฀the฀Grassi฀family฀through฀an฀agreement฀
which฀pools฀their฀voting฀rights.฀
Leoval฀regularly฀provides฀parts฀at฀market฀price฀to฀another฀company฀in฀which฀Francesca฀Cincetti฀has฀
a฀ minority฀ (23%)฀ holding.฀ Francesca฀ Cincetti฀ is฀ the฀ wife฀ of฀ Roberto฀ Grassi,฀ one฀ of฀ the฀ key฀ Grassi฀
family฀shareholders฀that฀controls฀Cavelli.฀
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฀฀
Leoval฀ advances฀ interest-free฀ loans฀ to฀ its฀ employees฀ in฀ order฀ for฀ them฀ to฀ purchase฀ annual฀ season฀
tickets฀ to฀ get฀ to฀ work.฀ The฀ loan฀ repayment฀ is฀ deducted฀ in฀ 12฀ instalments฀ from฀ the฀ employees'฀
salaries.฀
Cavelli฀ charges฀ Leoval฀ an฀ annual฀ management฀ services฀ fee฀ of฀ 20%฀ of฀ profit฀ before฀ tax฀ (before฀
accounting฀for฀the฀fee).฀
30%฀of฀Leoval's฀revenue฀comes฀from฀transactions฀with฀a฀major฀car฀maker,฀Piat.฀
Leoval฀ provides฀ a฀ defined฀ benefit฀ pension฀ plan฀ for฀ its฀ employees฀ based฀ on฀ 2%฀ of฀ final฀ salary฀ for฀
each฀year฀worked.฀The฀plan฀is฀currently฀overfunded฀and฀so฀Leoval฀has฀not฀made฀any฀contributions฀
during฀the฀current฀year.฀
Required฀
Explain฀ whether฀ disclosures฀ are฀ required฀ for฀ each฀ of฀ the฀ above฀ pieces฀ of฀ information฀ by฀ IAS฀ 24฀
Related฀Party฀Disclosures.฀
Activity฀3:฀Related฀parties฀(2)฀ ฀
Discuss฀ whether฀ the฀ following฀ events฀ would฀ require฀ disclosure฀ in฀ the฀ financial฀ statements฀ of฀ the฀฀฀฀฀฀฀฀฀฀฀฀฀
RP฀Group,฀a฀public฀limited฀company,฀under฀IAS฀24฀Related฀Party฀Disclosures.฀
The฀RP฀Group,฀merchant฀bankers,฀has฀a฀number฀of฀subsidiaries,฀associates฀and฀joint฀ventures฀in฀its฀
group฀structure.฀During฀the฀financial฀year฀to฀31฀October฀20X9฀the฀following฀events฀occurred:฀
(a)฀ RP฀agreed฀to฀finance฀a฀management฀buyout฀of฀a฀group฀company,฀AB,฀a฀limited฀company.฀In฀
addition฀ to฀ providing฀ loan฀ finance,฀ RP฀ has฀ retained฀ a฀ 25%฀ equity฀ holding฀ in฀ AB฀ and฀ has฀ a฀
main฀board฀director฀on฀the฀board฀of฀AB.฀RP฀received฀management฀fees,฀interest฀payments฀and฀
dividends฀from฀AB.฀฀
(b)฀ On฀ 1฀ July฀ 20X9,฀ RP฀ sold฀ a฀ wholly฀ owned฀ subsidiary,฀ X,฀ a฀ limited฀ company,฀ to฀ Z,฀ a฀ public฀
limited฀ company.฀ During฀ the฀ year฀ RP฀ supplied฀ X฀ with฀ second-hand฀ office฀ equipment฀ and฀ X฀
leased฀its฀factory฀from฀RP.฀The฀transactions฀were฀all฀contracted฀for฀at฀market฀rates.฀ ฀
(c)฀ The฀retirement฀benefit฀scheme฀of฀the฀RP฀is฀managed฀by฀another฀merchant฀bank.฀An฀investment฀
manager฀of฀the฀RP฀retirement฀benefit฀scheme฀is฀also฀a฀non-executive฀director฀of฀the฀RP฀Group฀
and฀ received฀ an฀ annual฀ fee฀ for฀ his฀ services฀ of฀ $25,000฀ which฀ is฀ not฀ material฀ in฀ the฀ group฀
context.฀RP฀pays฀$16m฀per฀annum฀into฀the฀scheme฀and฀occasionally฀transfers฀assets฀into฀the฀
scheme.฀ In฀ 20X9,฀ property,฀ plant฀ and฀ equipment฀ of฀ $10m฀ were฀ transferred฀ into฀ the฀ scheme฀
and฀a฀recharge฀of฀administrative฀costs฀of฀$3m฀was฀made.฀
3฀฀Accounting฀policies,฀estimates฀and฀prior฀period฀errors฀
3.1฀฀Accounting฀policies฀
Accounting฀policies฀(IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors):฀the฀
specific฀principles,฀bases,฀conventions,฀rules฀and฀practices฀applied฀by฀an฀entity฀in฀preparing฀and฀
Key฀term฀
presenting฀financial฀statements฀(IAS฀8:฀para.฀5).฀
IAS฀ 8฀ requires฀ that฀ an฀ entity฀ selects฀ its฀ accounting฀ policies฀ by฀ applying฀ the฀ relevant฀ IFRS฀ (IAS฀ 8:฀
para.฀7).฀
Some฀standards฀permit฀a฀choice฀of฀accounting฀policies฀(eg฀cost฀and฀revaluation฀models).฀
In฀the฀absence฀of฀an฀IFRS฀covering฀a฀specific฀transaction,฀other฀event฀or฀condition,฀
management฀ uses฀ its฀ judgement฀ to฀ develop฀ an฀ accounting฀ policy฀ which฀ results฀ in฀
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information฀ that฀ is฀ relevant฀ to฀ the฀ economic฀ decision-making฀ needs฀ of฀ users฀ and฀
reliable,฀considering฀in฀the฀following฀order:฀
(a)฀ IFRSs฀dealing฀with฀similar฀and฀related฀issues;฀
(b)฀ The฀Conceptual฀Framework฀definitions฀of฀elements฀of฀the฀financial฀statements฀and฀recognition฀
criteria;฀and฀
(c)฀ The฀ most฀ recent฀ pronouncements฀ of฀ other฀ national฀ GAAPs฀ based฀ on฀ a฀ similar฀ conceptual฀
framework฀ and฀ accepted฀ industry฀ practice฀ (providing฀ the฀ treatment฀ does฀ not฀ conflict฀ with฀
extant฀IFRSs฀or฀the฀Conceptual฀Framework).฀
(IAS฀8:฀para.฀10)฀
A฀change฀in฀accounting฀policy฀is฀only฀permitted฀if฀the฀change฀(IAS฀18:฀para.฀14):฀
฀ Is฀required฀by฀an฀IFRS;฀or฀
฀ Results฀in฀financial฀statements฀providing฀reliable฀and฀more฀relevant฀information.฀
The฀accounting฀treatment฀for฀a฀change฀in฀accounting฀policy฀is฀(IAS฀18:฀para.฀19,฀22):฀
Prior฀period฀adjustment฀ •฀฀฀฀Adjust฀opening฀balance฀
(apply฀new฀policy฀ ฀฀฀฀฀฀of฀each฀affected฀
retrospectively฀unless฀ ฀฀฀฀฀฀component฀of฀equity
transitional฀provision฀of฀
IFRS฀specifies฀otherwise) •฀฀฀฀Restate฀comparatives
฀
3.2฀ Accounting฀estimates฀
As฀ a฀ result฀ of฀ the฀ uncertainties฀ inherent฀ in฀ business฀ activities,฀ many฀ items฀ in฀ financial฀ statements฀
cannot฀be฀measured฀with฀precision฀but฀can฀only฀be฀estimated.฀Estimation฀involves฀judgements฀based฀
on฀the฀latest฀reliable฀information.฀(IAS฀8:฀para.฀32)฀
For฀example,฀estimates฀may฀be฀required฀of฀(IAS฀8:฀para.฀32):฀
฀ Bad฀debts;฀
฀ Inventory฀obsolescence;฀
฀ The฀fair฀value฀of฀financial฀assets฀or฀financial฀liabilities;฀
฀ The฀ useful฀ lives฀ of,฀ or฀ expected฀ pattern฀ of฀ consumption฀ of฀ the฀ future฀ economic฀ benefits฀
embodied฀in,฀depreciable฀assets;฀and฀
฀ Warranty฀obligations.฀
Change฀in฀accounting฀estimate฀(IAS฀8):฀an฀adjustment฀of฀the฀carrying฀amount฀of฀an฀asset฀or฀a฀
liability,฀or฀the฀amount฀of฀periodic฀consumption฀of฀an฀asset,฀that฀results฀from฀the฀assessment฀of฀the฀
Key฀term฀
present฀status฀of,฀and฀expected฀future฀benefits฀and฀obligations฀associated฀with฀assets฀and฀liabilities.฀
฀ ฀ (IAS฀8:฀para.฀5)฀
'An฀estimate฀may฀need฀revision฀if฀changes฀occur฀in฀the฀circumstances฀on฀which฀the฀estimate฀
was฀ based฀ or฀ as฀ a฀ result฀ of฀ new฀ information฀ or฀ more฀ experience.฀ By฀ its฀ nature,฀ the฀ revision฀ of฀ an฀
estimate฀does฀not฀relate฀to฀prior฀periods฀and฀is฀not฀the฀correction฀of฀an฀error.'฀(IAS฀8:฀para.฀34)฀
The฀accounting฀treatment฀for฀a฀change฀in฀accounting฀estimate฀is฀(IAS฀8:฀para.฀36–38):฀
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฀฀
•฀฀฀฀Adjust฀in฀the฀period฀of฀
Apply฀the฀change฀ ฀฀฀฀฀฀change฀(and฀in฀future฀
prospectively ฀฀฀฀฀฀periods฀if฀the฀change฀
฀฀฀฀฀฀affects฀both)
•฀฀฀฀Restate฀comparatives
฀
3.3฀ Prior฀period฀errors฀
Prior฀period฀errors฀(IAS฀8):฀omissions฀from,฀and฀misstatements฀in,฀the฀entity's฀financial฀
statements฀for฀one฀or฀more฀prior฀periods฀arising฀from฀a฀failure฀to฀use,฀or฀misuse฀of,฀reliable฀
Key฀term฀
information฀that:฀
(a)฀ Was฀available฀when฀the฀financial฀statements฀for฀those฀periods฀were฀authorised฀for฀issue;฀and฀
(b)฀ Could฀reasonably฀be฀expected฀to฀have฀been฀obtained฀and฀taken฀into฀account฀in฀the฀
preparation฀and฀presentation฀of฀those฀financial฀statements.฀
฀(IAS฀8:฀para.฀5)฀
They฀may฀arise฀from:฀
(a)฀ Mathematical฀mistakes฀
(b)฀ Mistakes฀in฀applying฀accounting฀policies฀
(c)฀ Oversights฀
(d)฀ Misinterpretation฀of฀facts฀
(e)฀ Fraud฀
Accounting฀treatment฀
An฀ entity฀ corrects฀ material฀ prior฀ period฀ errors฀ retrospectively฀ in฀ the฀ first฀ set฀ of฀ financial฀ statements฀
authorised฀for฀issue฀after฀their฀discovery฀by:฀
(a)฀ Restating฀comparative฀amounts฀for฀each฀prior฀period฀presented฀in฀which฀the฀error฀occurred;฀
(b)฀ (If฀the฀error฀occurred฀before฀the฀earliest฀prior฀period฀presented)฀restating฀the฀opening฀balances฀
of฀assets,฀liabilities฀and฀equity฀for฀the฀earliest฀prior฀period฀presented;฀and฀
(c)฀ Including฀any฀adjustment฀to฀opening฀equity฀as฀the฀second฀line฀of฀the฀statement฀of฀changes฀in฀
equity.฀
Where฀it฀is฀impracticable฀to฀determine฀the฀period-specific฀effects฀or฀the฀cumulative฀effect฀of฀the฀error,฀
the฀entity฀corrects฀the฀error฀from฀the฀earliest฀period/date฀practicable฀(and฀discloses฀that฀fact).฀
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3.4฀฀Creative฀accounting฀
Whilst฀ still฀ following฀ international฀ financial฀ reporting฀ standards,฀ there฀ is฀ scope฀ in฀ choice฀ of฀
accounting฀ policy฀ and฀ use฀ of฀ judgement฀ in฀ accounting฀ estimates฀ to฀ select฀ the฀ accounting฀ treatment฀
that฀presents฀the฀financial฀statements฀in฀the฀best฀light฀rather฀than฀focusing฀on฀the฀most฀relevant฀and฀
reliable฀accounting฀policy฀or฀estimate.฀
฀ Timing฀of฀transactions฀may฀be฀delayed/speeded฀up฀to฀improve฀results฀
฀ Profit฀smoothing฀through฀choice฀of฀accounting฀policy฀eg฀inventory฀valuation฀
฀ Classification฀of฀items฀eg฀expenses฀versus฀non-current฀assets฀
฀ Off฀ balance฀ sheet฀ financing฀ to฀ improve฀ gearing฀ and฀ return฀ on฀ capital฀ employed฀ eg฀
operating฀lease฀
฀ Revenue฀ recognition฀ policies฀ eg฀ through฀ adopting฀ an฀ aggressive฀ accounting฀ policy฀ of฀
early฀recognition.฀
When฀the฀directors฀select฀and฀adopt฀the฀accounting฀policies฀and฀estimates฀of฀an฀entity,฀they฀need฀to฀
apply฀the฀principles฀in฀ACCA's฀Code฀of฀Ethics฀and฀Conduct.฀฀
Activity฀4:฀Revising฀accounting฀policies฀and฀estimates฀ ฀
Required฀
Which฀ of฀ the฀ following฀ could฀ be฀ considered฀ unethical฀ reasons฀ for฀ revising฀ accounting฀ policies฀ or฀
estimates?฀
Tick฀the฀options฀which฀could฀be฀perceived฀to฀be฀unethical,฀giving฀reasons฀for฀your฀choice.฀
Unethical?฀ Revision฀to฀accounting฀policy฀or฀estimate฀and฀reason฀
(Tick)฀
฀ Increasing฀the฀useful฀life฀of฀an฀asset฀because฀large฀profits฀on฀disposal฀in฀recent฀
years฀indicate฀that฀the฀previous฀estimated฀life฀was฀too฀short฀
฀ Reducing฀the฀allowance฀for฀doubtful฀debts฀from฀5%฀to฀3%฀of฀trade฀receivables฀to฀
meet฀forecast฀profit฀targets฀
฀ Not฀equity฀accounting฀for฀an฀associate฀in฀the฀current฀year฀because฀the฀Finance฀
Director฀failed฀to฀realise฀a฀relationship฀of฀significant฀influence฀in฀the฀prior฀year฀
฀ Classifying฀redeemable฀preference฀shares฀as฀equity฀to฀meet฀the฀gearing฀and฀
interest฀cover฀loan฀covenants฀
฀ Reclassifying฀an฀expense฀from฀cost฀of฀sales฀to฀administrative฀expenses฀to฀align฀
the฀entity's฀accounting฀policy฀to฀other฀entities฀operating฀in฀the฀same฀industry฀
฀
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฀฀
Ethics฀note฀
This฀chapter฀introduced฀the฀concept฀of฀ethical฀principles฀and฀illustrated฀some฀of฀the฀ethical฀dilemmas฀
you฀could฀come฀across฀in฀your฀exam฀and฀in฀practice.฀You฀are฀likely฀to฀meet฀ethics฀in฀the฀context฀of฀
manipulation฀of฀financial฀statements.฀Whereas฀in฀this฀chapter฀the฀issues฀were฀mainly฀limited฀to฀topics฀
you฀have฀covered฀in฀your฀earlier฀studies,฀you฀will฀come฀across฀ethical฀issues฀in฀connection฀with฀more฀
advanced฀topics,฀such฀as฀foreign฀subsidiaries.฀฀
The฀common฀thread฀running฀through฀each฀ethical฀dilemma฀is฀generally฀that฀someone฀with฀power,฀for฀
example฀a฀company฀director,฀wants฀you฀to฀deviate฀from฀IFRS฀in฀order฀to฀present฀the฀financial฀
statements฀in฀a฀more฀favourable฀light.฀The฀answer฀will฀always฀be฀that฀this฀should฀be฀resisted,฀but฀in฀
each฀case฀it฀must฀be฀argued฀with฀reference฀to฀the฀detail฀of฀the฀IFRS฀in฀question,฀not฀just฀in฀terms฀of฀
general฀principles.฀
฀ ฀
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฀
Professional฀and฀ethical฀
฀ duty฀of฀the฀accountant฀
฀
฀ 1.฀ Professional฀and฀
฀ 2.฀ Related฀parties฀
ethical฀issues฀ ฀
฀ Related฀parties฀ ฀ Disclosure฀
฀ Not฀related฀ (see฀next฀page)฀
parties฀
Ethical฀principles฀in฀ Complying฀with฀accounting฀ Morality฀and฀ethics฀

corporate฀reporting฀ standards฀ ฀ Ethical฀theory:฀
ACCA฀Code฀of฀Ethics฀and฀ Ethical฀problems฀on฀preparing฀FS/฀ Ethical฀relativism฀vs฀ethical฀absolutism฀
Conduct฀ advising฀on฀corporate฀reporting:฀ –฀ Ethics฀does฀vs฀does฀not฀change฀฀
฀ Objectivity฀ ฀ Duty฀of฀professional฀competence:฀ over฀time฀
–฀ Insufficient฀time฀ Kohlberg's฀ethical฀thought฀process:฀
฀ Integrity฀
(1)฀Act฀ethically฀because฀punished฀฀
฀ Professional฀ –฀ Incomplete/฀
if฀do฀not฀
competence฀and฀due฀ inadequate฀information฀ (2)฀Act฀ethically฀because฀law฀says฀so฀
care฀ –฀ Insufficient฀training/experience฀ (3)฀Act฀ethically฀because฀it฀is฀right฀to฀฀
฀ Confidentiality฀ –฀ Inadequate฀resources฀ do฀so฀
฀ Influences฀on฀ethics:฀
฀ Professional฀behaviour฀ ฀ Threats฀to฀fundamental฀principles:฀฀ ฀ –฀ Individual฀factors,฀eg฀age,฀education฀
–฀ Self-interest฀ ฀ –฀ Situational฀factors,฀eg฀entity฀culture฀
–฀ Self-review฀
–฀ Advocacy฀
Framework฀for฀  Social฀responsibility฀
–฀ Familiarity฀
decisions฀ –฀ Only฀focus฀on฀maximising฀
–฀ Intimidation฀
What฀is฀the฀real฀issue?฀ shareholder฀wealth฀for฀
฀ ฀ Prohibition฀of฀association฀with฀reports฀ both฀shareholders฀and฀
Are฀there฀threats฀to฀ that:฀ other฀stakeholders.฀
compliance฀with฀ –฀ Are฀materially฀misleading฀ –฀ Alternative฀view:฀business฀
fundamental฀principles?฀ –฀ Contain฀reckless฀information฀ performance฀can฀be฀
฀ enhanced฀by฀good฀
–฀ Are฀biased฀
Are฀the฀threats฀significant?฀ corporate฀citizenship฀
฀ –฀ Omit/obscure฀information฀ ฀ Ethical฀systems฀in฀
Are฀there฀safeguards฀that฀ ฀ organisations:฀
will฀eliminate฀them/฀ ฀ ฀ –฀ Personal฀ethics฀
reduce฀them฀to฀an฀ ฀ –฀ Professional฀ethics฀
acceptable฀level?฀ ฀ –฀ Organisational฀culture฀
฀ ฀ –฀ Organisation's฀systems฀
Can฀you฀face฀yourself฀in฀ ฀ Managing฀ethics฀in฀
the฀mirror?฀ organisations:฀
฀ ฀ –฀ Compliance-based฀
approach฀
฀ –฀ Integrity-based฀approach฀
฀ 39฀

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฀฀
2.฀฀ Related฀parties฀
฀
Related฀party฀ ฀ Disclosure฀
฀
฀ A฀person฀(or฀close฀family฀member)฀if฀that฀ ฀
฀ Reasons฀for฀disclosure,฀to฀identify:฀
฀ person:฀฀ ฀
฀ Controlling฀party฀
฀ (i)฀
฀ Has฀control฀or฀joint฀control฀(over฀the฀ ฀ ฀ ฀ Transactions฀with฀directors฀
฀ reporting฀entity);฀฀ ฀ ฀ Group฀transactions฀that฀would฀not฀otherwise฀
฀ (ii)฀ Has฀significant฀influence;฀or฀฀ ฀ occur฀
฀ (iii)฀ Is฀key฀management฀personnel฀of฀the฀ ฀ Artificially฀high/low฀prices฀
฀
entity฀or฀of฀its฀direct฀or฀indirect฀parents฀฀ ฀ 'Hidden'฀costs฀(free฀services฀provided)฀
฀ ฀
฀ An฀entity฀if:฀฀ ฀
฀ (i)฀ A฀member฀of฀the฀same฀group฀(each฀ ฀
฀ parent,฀subsidiary฀and฀fellow฀subsidiary฀is฀
฀ ฀ Name฀of฀parent฀(and฀
฀ related)฀ ultimate฀controlling฀ ฀ Key฀management฀
฀ personnel฀
฀ (ii)฀ One฀entity฀is฀an฀associate*/joint฀ party)฀(irrespective฀of฀
venture*฀of฀the฀other฀ ฀ whether฀transactions฀ compensation฀
฀
฀ have฀occurred)฀
฀ (iii)฀ Both฀entities฀are฀joint฀ventures*฀of฀the฀
same฀third฀party฀ ฀
฀
(iv)฀ One฀entity฀is฀a฀joint฀venture*฀of฀a฀third฀ ฀ ฀ For฀transactions:฀
฀
entity฀and฀the฀other฀entity฀is฀an฀ ฀
฀ ฀ –฀ Nature฀of฀relationship฀
associate฀of฀the฀third฀entity.฀
฀ (v)฀฀ It฀is฀a฀post-employment฀benefit฀plan฀ ฀ ฀ –฀ Amount฀
฀ ฀ –฀ Outstanding฀balance฀(including฀
฀ for฀employees฀of฀the฀reporting฀
฀ commitments)฀
฀ entity/related฀entity฀ ฀ –฀ Bad฀&฀doubtful฀debts฀
฀ (vi)฀ It฀is฀controlled฀or฀jointly฀controlled฀by฀ ฀
฀ ฀ Similar฀items฀may฀be฀disclosed฀in฀
฀ any฀person฀identified฀above฀฀
aggregate฀except฀where฀separate฀
฀ (vii)฀ A฀person฀with฀control/joint฀control฀has฀ ฀
disclosure฀is฀necessary฀for฀
฀ significant฀influence฀over฀or฀is฀key฀ ฀ understanding฀
management฀personnel฀of฀the฀entity฀
฀ ฀
(or฀of฀a฀parent฀of฀the฀entity)฀ ฀ No฀disclosure฀req'd฀of฀intragroup฀
฀ ฀ transactions฀in฀consolidated฀FS฀(as฀are฀
(viii)฀It฀(or฀another฀member฀of฀its฀group)฀provides฀
฀ key฀management฀personnel฀ ฀ eliminated)฀
฀ services฀to฀the฀reporting฀entity฀(or฀to฀its฀ ฀ ฀ Government฀related฀entities฀(ie฀where฀a฀
฀ parent)฀ ฀ gov't฀has฀control/joint฀control฀or฀
฀ *฀including฀subs฀of฀the฀associate/joint฀venture฀ ฀ significant฀influence),฀for฀transactions฀
฀ ฀ with฀the฀government/฀entities฀related฀to฀
same฀government,฀only฀need฀to฀
฀
disclose:฀
฀
฀ –฀ Name฀of฀government฀
฀ ฀ –฀ Nature฀of฀relationship฀
Not฀related฀parties฀
฀ ฀ –฀ Nature฀and฀amount฀of฀each฀
฀
(a)฀ Two฀entities฀simply฀because฀they฀have฀a฀ ฀ individually฀significant฀transaction฀
฀ director/key฀manager฀in฀common฀
฀
(b)฀ Two฀venturers฀simply฀because฀they฀share฀joint฀
฀ control฀over฀a฀joint฀venture;฀
฀
(c)฀ (i)฀ Providers฀of฀finance;฀
฀
฀ (ii)฀ Trade฀unions;฀
฀
฀฀ (iii)฀ Public฀utilities;฀
฀฀ (iv)฀ Government฀departments฀and฀agencies;฀
฀ simply฀by฀virtue฀of฀their฀normal฀dealings฀
with฀the฀entity.฀
฀
(d)฀
฀ A฀customer,฀supplier,฀franchisor,฀distributor฀or฀
general฀agent฀with฀whom฀an฀entity฀transacts฀a฀
฀
significant฀volume฀of฀business,฀simply฀by฀virtue฀
฀ of฀the฀resulting฀economic฀dependence฀
฀
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3.฀ Accounting฀
policies,฀estimates฀
฀ ฀
and฀prior฀period฀
errors฀
Accounting฀policies฀
Specific฀principles,฀bases,฀conventions฀
applied฀by฀an฀entity฀in฀
preparing/presenting฀financial฀
statements฀
To฀choose:฀
(1)฀Apply฀relevant฀IFRS฀(choice฀within฀
IFRS฀is฀a฀matter฀of฀accounting฀
policy)฀
(2)฀Consult฀IFRS฀dealing฀with฀similar฀
issues฀
(3)฀Conceptual฀Framework฀
(4)฀Other฀national฀GAAP฀
Change฀in฀policy:฀
Apply฀retrospectively฀unless฀
transitional฀provision฀of฀IFRS฀specifies฀
otherwise฀
Accounting฀estimates฀
Judgements฀based฀on฀latest฀reliable฀
information฀
Change฀in฀estimate฀
Apply฀prospectively฀ie฀adjust฀current฀and฀
future฀periods฀
Errors฀
Omissions฀and฀misstatements฀in฀for฀one฀or฀
more฀prior฀periods฀arising฀from฀a฀failure฀
to฀use,฀or฀misuse฀of,฀reliable฀information฀
Correct฀by฀restating฀the฀comparative฀
figures,฀or,฀if฀they฀occurred฀in฀an฀earlier฀
period,฀by฀adjusting฀opening฀reserves฀
฀
฀ 41฀

lOMoARcPSD|6256454
฀฀
1.฀ Professional฀and฀ethical฀issues฀
฀ ฀ In฀all฀areas฀of฀professional฀work,฀whether฀in฀practice฀or฀in฀business,฀ACCA฀members฀and฀
students฀must฀carry฀out฀their฀work฀with฀regard฀to฀the฀fundamental฀principles฀of฀professional฀
ethics.฀
฀ ฀ A฀person's฀moral฀standing,฀which฀can฀be฀influenced฀by฀a฀number฀of฀factors฀may฀be฀
relevant฀to฀their฀ethical฀behaviour.฀
฀ ฀ Two฀important฀ethical฀theories฀are฀ethical฀relativism฀(ethics฀change฀over฀time฀and฀place)฀
and฀ethical฀absolutism฀(some฀actions฀are฀always฀right,฀others฀always฀wrong).฀
฀฀฀ ฀ Ethical฀systems฀include:฀personal฀ethics,฀professional฀ethics฀(eg฀ACCA฀Code),฀
organisational฀culture฀and฀organisation฀systems฀
฀ ฀ The฀ACCA's฀fundamental฀ethical฀principles฀are:฀
฀ ฀ –฀ Integrity฀
฀ ฀ –฀ Objectivity฀
฀ ฀ –฀ Professional฀competence฀
฀ ฀ –฀ Confidentiality฀
฀ ฀ –฀ Professional฀behaviour฀
2.฀ Related฀parties฀
฀ ฀ Related฀parties฀
฀ ฀ –฀ IAS฀24฀identifies฀persons฀or฀entities฀as฀related฀where฀there฀is฀a฀close฀personal฀
relationship฀to฀the฀entity฀or฀a฀control,฀joint฀control฀or฀significant฀influence฀
relationship.฀
฀ ฀ –฀ In฀any฀case,฀the฀substance฀of฀the฀relationship฀is฀considered฀when฀deciding฀
whether฀parties฀are฀related.฀
฀ ฀ Not฀related฀parties฀
฀ ฀ –฀ IAS฀24฀identifies฀parties฀which฀are฀not฀related฀in฀their฀normal฀dealings฀with฀the฀
entity.฀
฀ ฀ Disclosure฀
฀ ฀ –฀ Disclosure฀is฀important฀so฀the฀user฀can฀estimate฀the฀effects฀of฀related฀party฀
transactions.฀฀IAS฀24฀requires฀disclosure฀of฀the฀entity's฀parent/ultimate฀parent,฀
benefits฀earned฀by฀key฀management฀personnel฀and฀transactions฀with฀
related฀parties.฀
฀
3.฀ Accounting฀policies,฀estimates฀and฀prior฀period฀errors฀
฀ ฀ Accounting฀policies:฀
฀ ฀ –฀ Specific฀principles,฀bases,฀conventions฀applied฀by฀an฀entity฀in฀preparing/presenting฀
financial฀statements฀
฀ ฀ –฀ Change฀in฀policy:฀apply฀retrospectively฀unless฀transitional฀provision฀of฀IFRS฀specifies฀
otherwise฀
฀ ฀ Accounting฀estimates฀
฀ ฀ –฀ Accounting฀estimates฀are฀judgements฀based฀on฀latest฀reliable฀information฀
฀ ฀ –฀ Change฀in฀accounting฀estimate:฀prospectively฀ie฀adjust฀current฀and฀future฀periods฀
42฀

lOMoARcPSD|6256454
฀ ฀ Prior฀period฀errors฀
฀ ฀ –฀ Omissions฀from,฀and฀misstatements฀in,฀the฀entity's฀financial฀statements฀for฀one฀or฀more฀
prior฀periods฀arising฀from฀a฀failure฀to฀use,฀or฀misuse฀of,฀reliable฀information฀
฀ ฀ –฀ Material฀prior฀period฀errors฀are฀corrected฀by฀restating฀the฀comparative฀figures,฀or,฀if฀
they฀occurred฀in฀an฀earlier฀period,฀by฀adjusting฀opening฀reserves฀
฀ 43฀

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฀฀
Now฀try฀the฀questions฀below฀from฀the฀Further฀question฀practice฀bank.฀฀
Q2฀Fundamental฀Principles฀
Q3฀Ace฀
The฀examining฀team฀for฀ACCA฀P2,฀the฀forerunner฀of฀SBR,฀have฀written฀an฀article฀about฀tackling฀ethics฀
questions฀in฀the฀exam,฀which฀gives฀some฀useful฀tips฀and฀examples,฀and,฀apart฀from฀references฀to฀the฀
number฀of฀marks,฀is฀still฀useful฀for฀SBR.฀
resources/p2/technical-articles/ethics.html฀
On฀the฀broader฀issue฀of฀ethical฀dilemmas,฀the฀following฀article฀gives฀some฀useful฀insights฀in฀the฀context฀of฀
digitisation:฀
www.accaglobal.com/uk/en/member/discover/cpd-articles/business-management/ethics-pathcpd.html฀
On฀related฀party฀disclosures,฀BPP฀recommends฀the฀following฀article฀in฀Accounting฀and฀Business฀
magazine.฀While฀it฀is฀written฀for฀Continuing฀Professional฀Development฀purposes,฀it฀is฀still฀useful฀for฀your฀
exam:฀
www.accaglobal.com/uk/en/member/discover/cpd-articles/corporate-reporting/holt-jul16.html฀
44฀

lOMoARcPSD|6256454
฀
Non-current฀assets
฀
฀ Syllabus฀
reference฀no.
Discuss฀and฀apply฀the฀recognition,฀derecognition฀and฀measurement฀of฀฀ C2(a)฀
non-current฀assets฀including฀impairments฀and฀revaluations.฀
Discuss฀and฀apply฀the฀accounting฀treatment฀of฀investment฀properties฀including฀ C2(c)฀
classification,฀recognition,฀measurement฀and฀change฀of฀use.฀
Discuss฀and฀apply฀the฀accounting฀treatment฀of฀intangible฀assets฀including฀the฀ C2(d)฀
criteria฀for฀recognition฀and฀measurement฀subsequent฀to฀acquisition.฀
Discuss฀and฀apply฀the฀accounting฀treatment฀for฀borrowing฀costs.฀ C2(e)฀
Discuss฀and฀apply฀the฀definitions฀of฀'fair฀value'฀measurement฀and฀'active฀ C9(a)฀
market'.฀
Discuss฀and฀apply฀the฀'fair฀value฀hierarchy'.฀ C9(b)฀
Discuss฀and฀apply฀the฀principles฀of฀highest฀and฀best฀use,฀most฀advantageous฀ C9(c)฀
and฀principal฀market.฀ ฀
Explain฀the฀circumstances฀where฀an฀entity฀may฀use฀a฀valuation฀technique.฀ C9(d)฀
Discuss฀and฀apply฀the฀accounting฀for,฀and฀disclosure฀of,฀government฀grants฀and฀ C11(a)฀
other฀forms฀of฀government฀assistance.฀
Discuss฀and฀apply฀the฀principles฀behind฀the฀initial฀recognition฀and฀subsequent฀ C11(b)฀
measurement฀of฀a฀biological฀asset฀or฀agricultural฀produce.฀
Exam฀context฀
Non-current฀assets฀could฀be฀tested฀in฀any฀part฀of฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀either฀
as฀part฀of฀a฀question฀in฀Section฀A฀or฀B,฀or฀as฀a฀whole฀question฀in฀Section฀B.฀This฀chapter฀builds฀on฀
the฀knowledge฀of฀the฀standards฀relevant฀to฀non-current฀assets฀that฀you฀have฀already฀seen฀in฀your฀
earlier฀studies.฀However,฀questions฀on฀non-current฀assets฀in฀the฀SBR฀exam฀will฀be฀much฀more฀
challenging฀than฀those฀seen฀in฀your฀earlier฀studies฀and฀you฀will฀need฀to฀think฀critically฀and฀in-depth฀
about฀the฀application฀of฀the฀standards฀to฀the฀scenario.฀฀
฀ 45฀

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฀
Non-current฀assets฀
1.฀ Property,฀plant฀ 2.฀ Impairment฀of฀ 3.฀ Fair฀value฀

and฀equipment฀ assets฀(IAS฀36)฀ measurement฀
(IAS฀16)฀ (IFRS฀13)฀
4.฀Intangible฀assets฀ 5.฀ Investment฀property฀ 6.฀ Government฀

(IAS฀38)฀ (IAS฀40)฀ grants฀(IAS฀20))฀
7.฀Borrowing฀costs฀(IAS฀23)฀ 8.฀Agriculture฀(IAS฀41)฀฀
46฀

lOMoARcPSD|6256454
3:฀Non-current฀assets฀
1฀Property,฀plant฀and฀equipment฀(IAS฀16)฀
Property,฀ plant฀ and฀ equipment฀ are฀ tangible฀ assets฀ with฀ the฀ following฀ properties฀ (IAS฀ 16:฀฀
para.฀6):฀
(a)฀ Held฀by฀an฀entity฀for฀use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services,฀for฀rental฀to฀others,฀
or฀for฀administrative฀purposes฀฀
(b)฀ Expected฀to฀be฀used฀during฀more฀than฀one฀period฀฀
1.1฀Recognition฀
As฀with฀all฀assets,฀recognition฀depends฀on฀two฀criteria฀(IAS฀16:฀para.฀7):฀
(a)฀ It฀is฀probable฀that฀future฀economic฀benefits฀associated฀with฀the฀item฀will฀flow฀to฀the฀entity฀
(b)฀ The฀cost฀of฀the฀item฀can฀be฀measured฀reliably฀
These฀recognition฀criteria฀apply฀to฀subsequent฀expenditure฀as฀well฀as฀costs฀incurred฀initially.฀
IAS฀16฀provides฀additional฀guidance฀as฀follows฀(IAS฀16:฀paras.฀12–14):฀
•฀฀ Smaller฀items฀such฀as฀tools฀may฀be฀classified฀as฀consumables฀and฀ expensed฀
For฀further฀discussion฀ rather฀ than฀ capitalised.฀ Where฀ they฀ are฀ capitalised,฀ they฀ are฀ usually฀ aggregated฀
on฀this,฀refer฀to฀ and฀treated฀as฀one.฀
ACCA's฀article฀'IAS฀16฀
and฀componentisation'.฀ •฀฀ Large฀ and฀ complex฀ assets฀ should฀ be฀ broken฀ down฀ into฀ composite฀ parts฀ and฀
See฀Further฀Study฀
Guidance฀at฀the฀end฀of฀ each฀ depreciated฀ separately,฀ if฀ the฀ parts฀ have฀ differing฀ patterns฀ of฀ benefits฀
this฀chapter.฀ and฀the฀cost฀of฀each฀is฀significant.฀Expenditure฀to฀renew฀individual฀parts฀can฀then฀
be฀capitalised.฀
edition฀ of฀ the฀ Workbook,฀ for฀ further฀ discussion฀ of฀ the฀ requirements฀ in฀ IAS฀ 16฀ relating฀ to฀
componentisation฀and฀reconditioning฀of฀assets.฀฀
1.2฀Measurement฀at฀recognition฀
Property,฀ plant฀ and฀ equipment฀ should฀ initially฀ be฀ measured฀ at฀ cost,฀ which฀ includes฀ (IAS฀ 16:฀฀
para.฀15):฀
Directly฀attributable฀costs฀
Finance฀costs:฀
Purchase฀price,฀less฀trade฀ of฀bringing฀the฀asset฀to฀
discount/rebate
+ working฀condition฀for฀
+ capitalised฀for฀
qualifying฀assets฀(IAS฀23)
intended฀use฀
Including: Including: See฀Section฀7

•฀฀฀Import฀duties •฀฀฀Employee฀benefit฀costs
•฀฀฀Non-refundable฀ •฀฀฀Site฀preparation
฀฀฀฀฀purchase฀taxes
•฀฀฀Initial฀delivery฀and฀handling฀
฀฀฀฀฀costs
•฀฀฀Installation฀and฀assembly฀
฀฀฀฀฀costs
•฀฀฀Professional฀fees
•฀฀฀Costs฀of฀testing
•฀฀฀Site฀restoration฀provision฀
฀฀฀฀฀(IAS฀37),฀where฀not฀included฀
฀฀฀฀฀in฀cost฀of฀inventories฀produced ฀
฀ 47฀

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1.3฀Measurement฀after฀recognition฀
After฀recognition,฀entities฀can฀chose฀between฀two฀models,฀the฀revaluation฀model฀and฀the฀cost฀model฀
(IAS฀16:฀paras.฀30–31):฀
Cost฀model฀ Carry฀asset฀at฀cost฀less฀depreciation฀and฀any฀accumulated฀impairment฀
losses฀
Revaluation฀model฀ Carry฀asset฀at฀revalued฀amount,฀ie฀fair฀value฀less฀subsequent฀
accumulated฀depreciation฀and฀any฀accumulated฀impairment฀losses฀
1.4฀Revaluations฀
If฀the฀revaluation฀model฀is฀applied฀(IAS฀16:฀para.฀36):฀
(a)฀฀ Revaluations฀must฀be฀carried฀out฀regularly,฀depending฀on฀volatility.฀
(b)฀ The฀asset฀should฀be฀revalued฀to฀fair฀value,฀using฀the฀fair฀value฀hierarchy฀in฀IFRS฀13.฀฀
(c)฀ If฀one฀asset฀is฀revalued,฀so฀must฀be฀the฀whole฀of฀the฀rest฀of฀the฀class฀of฀assets฀at฀the฀same฀time.฀
(d)฀ An฀ increase฀ in฀ value฀ is฀ credited฀ to฀ other฀ comprehensive฀ income฀ (OCI)฀ (and฀ the฀ revaluation฀
surplus฀in฀equity).฀
(e)฀ A฀decrease฀is฀an฀expense฀in฀profit฀or฀loss฀after฀cancelling฀a฀previous฀revaluation฀surplus.฀
1.5฀Depreciation฀
An฀item฀of฀property,฀plant฀or฀equipment฀should฀be฀depreciated฀(IAS฀16:฀para.฀42).฀
(a)฀ Depreciation฀is฀based฀on฀the฀carrying฀amount฀in฀the฀statement฀of฀financial฀position.฀It฀must฀be฀
determined฀separately฀for฀each฀significant฀part฀of฀an฀item.฀
(b)฀ Excess฀ over฀ historical฀ cost฀ depreciation฀ can฀ be฀ transferred฀ to฀ realised฀ earnings฀ through฀
reserves.฀
(c)฀ The฀ residual฀ value฀ and฀ useful฀ life฀ of฀ an฀ asset,฀ as฀ well฀ as฀ the฀ depreciation฀ method,฀ must฀ be฀
reviewed฀at฀least฀at฀each฀financial฀year฀end.฀Changes฀are฀treated฀as฀changes฀in฀accounting฀
estimates฀and฀are฀accounted฀for฀prospectively฀as฀adjustments฀to฀future฀depreciation.฀
(d)฀ Depreciation฀ of฀ an฀ item฀ does฀ not฀ cease฀ when฀ it฀ becomes฀ temporarily฀ idle฀ or฀ is฀ retired฀ from฀
active฀use฀and฀held฀for฀disposal,฀unless฀it฀is฀classified฀as฀held฀for฀sale฀under฀IFRS฀5.฀
edition฀ of฀ the฀ Workbook,฀ for฀ further฀ discussion฀ of฀ the฀ requirements฀ in฀ IAS฀ 16฀ relating฀ to฀ residual฀
value.฀฀
1.6฀Retirements฀and฀disposals฀
Gains฀or฀losses฀are฀calculated฀by฀comparing฀net฀proceeds฀with฀the฀carrying฀amount฀of฀the฀asset฀and฀
are฀recognised฀as฀income/expense฀in฀profit฀or฀loss฀(IAS฀16:฀para.฀67).฀
When฀a฀revalued฀asset฀is฀disposed฀of,฀any฀revaluation฀surplus฀may฀be฀transferred฀directly฀to฀retained฀
earnings.฀Alternatively,฀it฀may฀be฀left฀in฀equity฀under฀the฀heading฀revaluation฀surplus.฀
1.7฀Exchanges฀of฀assets฀
Exchanges฀ of฀ items฀ of฀ property,฀ plant฀ and฀ equipment,฀ regardless฀ of฀ whether฀ the฀ assets฀ are฀ similar,฀
are฀ measured฀ at฀ fair฀ value฀ (IAS฀ 16:฀ para.฀ 24),฀ unless฀ the฀ exchange฀ transaction฀ lacks฀ commercial฀
substance฀or฀the฀fair฀value฀of฀neither฀of฀the฀assets฀exchanged฀can฀be฀measured฀reliably.฀฀
48฀

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If฀the฀acquired฀item฀is฀not฀measured฀at฀fair฀value,฀its฀cost฀is฀measured฀at฀the฀carrying฀amount฀of฀the฀
asset฀given฀up.฀
edition฀of฀the฀Workbook,฀for฀revision฀activities฀to฀test฀your฀knowledge฀of฀this฀topic.฀
2฀Impairment฀of฀assets฀(IAS฀36)฀
The฀basic฀principle฀underlying฀IAS฀36฀Impairment฀of฀Assets฀is฀relatively฀straightforward.฀If฀an฀asset's฀
value฀ in฀ the฀ financial฀ statements฀ is฀ higher฀ than฀ its฀ realistic฀ value,฀ measured฀ as฀ its฀ 'recoverable฀
amount',฀the฀asset฀is฀judged฀to฀have฀suffered฀an฀impairment฀loss.฀It฀should฀therefore฀be฀reduced฀in฀
value,฀ by฀ the฀ amount฀ of฀ the฀ impairment฀ loss.฀ The฀ amount฀ of฀ the฀ impairment฀ loss฀ should฀ be฀
written฀off฀against฀profit฀immediately.฀
The฀main฀accounting฀issues฀to฀consider฀are:฀
(a)฀ How฀is฀it฀possible฀to฀identify฀when฀an฀impairment฀loss฀may฀have฀occurred?฀
(b)฀ How฀should฀the฀recoverable฀amount฀of฀the฀asset฀be฀measured?฀
(c)฀ How฀should฀an฀impairment฀loss฀be฀reported฀in฀the฀financial฀statements?฀
2.1฀Scope฀
IAS฀36฀applies฀to฀impairment฀of฀all฀assets฀other฀than฀(IAS฀36:฀para.฀2):฀
฀ Inventories฀
฀ Deferred฀tax฀assets฀
฀ Employee฀benefit฀assets฀
฀ Financial฀assets฀
฀ Investment฀property฀held฀under฀the฀fair฀value฀model฀
฀ Biological฀assets฀held฀at฀fair฀value฀less฀costs฀to฀sell฀
฀ Non-current฀assets฀held฀for฀sale฀
2.2฀Identifying฀a฀potentially฀impaired฀asset฀
The฀ entity฀ should฀ look฀ for฀ evidence฀ of฀ impairment฀ at฀ the฀ end฀ of฀ each฀ period฀ and฀ conduct฀ an฀
impairment฀ review฀ on฀ any฀ asset฀where฀ there฀ is฀ evidence฀ of฀ impairment.฀The฀following฀are฀
indicators฀of฀impairment฀(IAS฀36:฀para.฀12):฀
External Internal
(a)฀ Observable฀indications฀that฀the฀ (a)฀ Evidence฀of฀obsolescence฀or฀
asset's฀value฀has฀declined฀during฀ physical฀damage
the฀period฀significantly฀more฀than฀
(b)฀ Significant฀changes฀with฀an฀
expected฀due฀to฀the฀passage฀of฀
adverse฀effect฀on฀the฀entity*:
time฀or฀normal฀use
(i)฀ the฀asset฀becomes฀idle
(b)฀ Significant฀changes฀with฀an฀
adverse฀effect฀on฀the฀entity฀in฀the฀ (ii)฀ plans฀to฀
technological฀or฀market฀ discontinue/restructure฀the฀
environment,฀or฀in฀the฀economic฀or฀ operation฀to฀which฀the฀asset฀
legal฀environment belongs
(c)฀ Increased฀market฀interest฀rates฀or฀ (iii)฀ plans฀to฀dispose฀of฀an฀asset฀
other฀market฀rates฀of฀return฀ before฀the฀previously฀
affecting฀discount฀rates฀and฀thus฀ expected฀date
reducing฀value฀in฀use (iv)฀ reassessing฀an฀asset's฀useful฀
(d)฀ Carrying฀amount฀of฀net฀assets฀of฀ life฀as฀finite฀rather฀than฀
the฀entity฀exceeds฀market฀ indefinite
capitalisation. (c)฀ Internal฀evidence฀available฀that฀
asset฀performance฀will฀be฀worse฀
than฀expected
฀
฀ 49฀

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*Once฀the฀asset฀meets฀the฀criteria฀to฀be฀classified฀as฀'held฀for฀sale',฀it฀is฀excluded฀from฀the฀scope฀of฀
IAS฀ 36฀ and฀ accounted฀ for฀ under฀ IFRS฀ 5฀ Non-current฀ Assets฀ Held฀ for฀ Sale฀ and฀ Discontinued฀
Operations.฀
Annual฀ impairment฀ tests,฀ irrespective฀ of฀ whether฀ there฀ are฀ indications฀ of฀ impairment,฀ are฀
required฀for:฀
฀ Intangible฀assets฀with฀an฀indefinite฀useful฀life/not฀yet฀available฀for฀use฀
฀ Goodwill฀acquired฀in฀a฀business฀combination.฀
2.3฀Measuring฀the฀recoverable฀amount฀of฀the฀asset฀
Assets฀must฀be฀carried฀at฀no฀more฀than฀their฀recoverable฀amount.฀
Recoverable฀Amount
฀=฀Higher฀of
Fair฀value฀less฀costs฀
Value฀in฀Use
of฀disposal฀
(IAS฀36:฀para.฀6)฀
If฀the฀carrying฀amount฀of฀an฀asset฀is฀higher฀that฀its฀recoverable฀amount,฀the฀asset฀is฀impaired฀ and฀
should฀be฀written฀down฀to฀its฀recoverable฀amount.฀The฀difference฀between฀the฀carrying฀amount฀of฀the฀
impaired฀asset฀and฀its฀recoverable฀amount฀is฀known฀as฀an฀impairment฀loss.฀฀
Fair฀value฀less฀costs฀of฀disposal:฀the฀price฀that฀would฀be฀received฀to฀sell฀the฀asset฀in฀an฀
Key term
orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date฀(IFRS฀13฀definition฀of฀fair฀
value),฀less฀the฀direct฀incremental฀costs฀attributable฀to฀the฀disposal฀of฀the฀asset฀(IAS฀36:฀฀
para.฀6).฀฀฀
Examples฀ of฀ costs฀ of฀ disposal฀ are฀ legal฀ costs,฀ stamp฀ duty฀ and฀ similar฀ transaction฀ taxes,฀ costs฀ of฀
removing฀ the฀ asset,฀ and฀ direct฀ incremental฀ costs฀ to฀ bring฀ an฀ asset฀ into฀ condition฀ for฀ its฀ sale.฀ They฀
exclude฀finance฀costs฀and฀income฀tax฀expense.฀
Value฀in฀use฀of฀an฀asset:฀measured฀as฀the฀present฀value฀of฀estimated฀future฀cash฀flows฀(inflows฀
Key term
minus฀outflows)฀generated฀by฀the฀asset,฀including฀its฀estimated฀net฀disposal฀value฀(if฀any)฀at฀the฀end฀
of฀its฀expected฀useful฀life.฀
(IAS฀36:฀para.฀6)฀
Cash฀flow฀projections฀are฀based฀on฀the฀most฀recent฀management-approved฀budgets/forecasts.฀They฀
should฀ cover฀ a฀ maximum฀ period฀ of฀ five฀ years,฀ unless฀ a฀ longer฀ period฀ can฀ be฀ justified.฀ (IAS฀ 36:฀
paras.฀33–35).฀
The฀cash฀flows฀should฀include฀(IAS฀36:฀para.฀50):฀
(a)฀ Projections฀of฀cash฀inflows฀from฀continuing฀use฀of฀the฀asset฀
(b)฀ Projections฀of฀cash฀outflows฀necessarily฀incurred฀to฀generate฀the฀cash฀inflows฀from฀continuing฀
use฀of฀the฀asset฀
(c)฀ Net฀cash฀flows,฀if฀any,฀for฀the฀disposal฀of฀the฀asset฀at฀the฀end฀of฀its฀useful฀life฀
(d)฀ Future฀overheads฀that฀can฀be฀directly฀attributed,฀or฀allocated฀on฀a฀reasonable฀and฀consistent฀
basis฀
50฀

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The฀cash฀flows฀should฀exclude:฀
(a)฀ Cash฀outflows฀relating฀to฀obligations฀already฀recognised฀as฀liabilities฀(to฀avoid฀double฀
counting)฀(IAS฀36:฀para฀43)฀
(b)฀ The฀effects฀of฀any฀future฀restructuring฀to฀which฀the฀entity฀is฀not฀yet฀committed฀(IAS฀36:฀฀
para.฀44)฀
(c)฀ Cash฀flows฀from฀financing฀activities฀or฀income฀tax฀receipts฀and฀payments฀(IAS฀36:฀para.฀50)฀฀
Discount฀rate฀
The฀ discount฀ rate฀ (or฀ rates)฀ should฀ be฀ a฀ pre-tax฀ rate฀ (or฀ rates)฀ that฀ reflect(s)฀ current฀ market฀
assessments฀of:฀
(a)฀ The฀time฀value฀of฀money;฀and฀
(b)฀ The฀risks฀specific฀to฀the฀asset฀for฀which฀future฀cash฀flow฀estimates฀have฀not฀been฀adjusted.฀฀
(IAS฀36:฀para.฀55)฀
Illustration฀1฀
Impairment฀loss฀
A฀company฀that฀extracts฀natural฀gas฀and฀oil฀has฀a฀drilling฀platform฀in฀the฀Caspian฀Sea.฀It฀is฀required฀
by฀legislation฀of฀the฀country฀concerned฀to฀remove฀and฀dismantle฀the฀platform฀at฀the฀end฀of฀its฀useful฀
life.฀Accordingly,฀the฀company฀has฀included฀an฀amount฀in฀its฀accounts฀for฀removal฀and฀dismantling฀
costs,฀and฀is฀depreciating฀this฀amount฀over฀the฀platform's฀expected฀life.฀
The฀company฀is฀carrying฀out฀an฀exercise฀to฀establish฀whether฀there฀has฀been฀an฀impairment฀of฀the฀
platform.฀
(a)฀ Its฀carrying฀amount฀in฀the฀statement฀of฀financial฀position฀is฀$3m.฀
(b)฀ The฀company฀has฀received฀an฀offer฀of฀$2.8m฀for฀the฀platform฀from฀another฀oil฀company.฀The฀
bidder฀would฀take฀over฀the฀responsibility฀(and฀costs)฀for฀dismantling฀and฀removing฀the฀platform฀
at฀the฀end฀of฀its฀life.฀
(c)฀ The฀present฀value฀of฀the฀estimated฀cash฀flows฀from฀the฀platform's฀continued฀use฀is฀$3.3m.฀
(d)฀ The฀carrying฀amount฀in฀the฀statement฀of฀financial฀position฀for฀the฀provision฀for฀dismantling฀and฀
removal฀is฀currently฀$0.6m.฀
Required฀
What฀should฀be฀the฀value฀of฀the฀drilling฀platform฀in฀the฀statement฀of฀financial฀position,฀and฀what,฀if฀
anything,฀is฀the฀impairment฀loss?฀
Solution฀
Fair฀value฀less฀costs฀of฀disposal฀฀ =฀ $2.8m
Value฀in฀use฀฀ =฀ Present฀value฀of฀cash฀flows฀from฀use฀less฀the฀
carrying฀amount฀of฀the฀provision/liability฀=฀$3.3m฀–฀
$0.6m฀=฀$2.7m฀
Recoverable฀amount฀฀ =฀ Higher฀of฀these฀two฀amounts,฀ie฀$2.8m฀
Carrying฀value฀ =฀ $3m
Impairment฀loss฀ =฀ $0.2m
฀
The฀carrying฀amount฀should฀be฀reduced฀to฀$2.8m.฀
฀ 51฀

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Activity฀1:฀Impairment฀ ฀
Shiplake฀ is฀ preparing฀ its฀ financial฀ statements฀ for฀ the฀ year฀ ended฀ 31฀ March฀ 20X2.฀ Shiplake฀ has฀
undertaken฀an฀impairment฀review฀which฀has฀identified฀an฀issue฀with฀an฀item฀of฀earth-moving฀plant,฀
which฀is฀hired฀out฀to฀companies฀on฀short-term฀contracts.฀The฀plant's฀carrying฀amount฀is฀$400,000.฀
The฀ estimated฀ selling฀ price฀ of฀ the฀ plant฀ is฀ only฀ $250,000,฀ with฀ associated฀ selling฀ expenses฀ of฀
$5,000.฀ A฀ recent฀ review฀ of฀ its฀ value฀ in฀ use฀ based฀ on฀ forecast฀ future฀ cash฀ flows฀ was฀ estimated฀ at฀
$500,000.฀ Since฀ this฀ review฀ was฀ undertaken฀ there฀ has฀ been฀ a฀ dramatic฀ increase฀ in฀ interest฀ rates฀
that฀has฀significantly฀increased฀the฀cost฀of฀capital฀used฀by฀Shiplake฀to฀discount฀the฀future฀cash฀flows฀
of฀the฀plant.฀฀
Required฀
Explain฀the฀effect฀of฀the฀above฀information฀on฀Shiplake's฀financial฀statements฀to฀31฀March฀20X2.฀
2.4฀Cash-generating฀units฀
Where฀ it฀ is฀ not฀ possible฀ to฀ estimate฀ the฀ recoverable฀ amount฀ of฀ an฀ individual฀ asset,฀ the฀ entity฀
estimates฀the฀recoverable฀amount฀of฀the฀cash-generating฀unit฀to฀which฀it฀belongs.฀
Cash-generating฀unit฀(IAS฀36):฀the฀smallest฀identifiable฀group฀of฀assets฀that฀generates฀cash฀
Key term
inflows฀that฀are฀largely฀independent฀of฀the฀cash฀inflows฀from฀other฀assets฀or฀groups฀of฀assets฀(IAS฀36:฀
para.฀6).฀
2.5฀Allocating฀goodwill฀to฀cash-generating฀units฀฀
Goodwill฀ does฀ not฀ generate฀ independent฀ cash฀ flows฀ and฀ therefore฀ its฀ recoverable฀ amount฀ as฀ an฀
individual฀asset฀cannot฀be฀determined.฀It฀is฀therefore฀allocated฀to฀the฀cash-generating฀unit฀(CGU)฀to฀
which฀it฀belongs฀and฀the฀CGU฀tested฀for฀impairment.฀
Goodwill฀ that฀ cannot฀ be฀ allocated฀ to฀ a฀ CGU฀ on฀ a฀ non-arbitrary฀ basis฀ is฀ allocated฀ to฀ the฀ group฀ of฀
CGUs฀to฀which฀it฀relates.฀
Illustration฀2฀
Allocating฀goodwill฀to฀CGUs฀
Goodwill฀on฀ P฀ Goodwill฀on฀
acquisition฀฀ acquisition฀฀
=฀$60m฀ =฀$50m
'Group฀of฀
S1฀ S2฀ CGUs'฀
CGU1฀ CGU2฀ CGU3฀ CGU4฀ CGU5฀
฀
Carrying฀amount฀ $140m฀ $160m฀ $180m฀ $220m฀ $260m฀
Allocated฀ $17.5m฀ $20m฀ $22.5m฀

goodwill฀at฀฀
acquisition฀
52฀

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On฀acquisition฀of฀S1฀the฀goodwill฀can฀be฀allocated฀on฀a฀non-arbitrary฀basis฀to฀the฀three฀acquired฀
CGUs฀(in฀this฀case฀based฀on฀carrying฀amount฀of฀the฀acquired฀assets).฀Each฀CGU฀is฀tested฀for฀
impairment฀including฀the฀allocated฀goodwill.฀
On฀acquisition฀of฀S2,฀the฀nature฀of฀the฀CGUs฀and฀their฀risks฀is฀different฀such฀that฀the฀goodwill฀cannot฀
be฀allocated฀on฀a฀non-arbitrary฀basis.฀Instead,฀it฀is฀allocated฀to฀the฀group฀of฀CGUs฀to฀which฀it฀relates฀
and฀is฀tested฀for฀impairment฀as฀part฀of฀that฀group฀of฀CGUs฀(here,฀S2).฀
2.6฀Corporate฀assets฀
Corporate฀ assets฀ are฀ group฀ or฀ divisional฀ assets฀ such฀ as฀ a฀ head฀ office฀ building฀ or฀ a฀ research฀
centre.฀Corporate฀assets฀do฀not฀generate฀cash฀inflows฀independently฀from฀other฀assets;฀hence฀their฀
carrying฀amount฀cannot฀be฀fully฀attributed฀to฀a฀cash-generating฀unit฀under฀review.฀
Corporate฀assets฀are฀treated฀in฀a฀similar฀way฀to฀goodwill.฀
The฀CGU฀includes฀corporate฀assets฀(or฀a฀portion฀of฀them)฀that฀can฀be฀allocated฀to฀it฀on฀a฀'reasonable฀
and฀ consistent฀ basis'฀ (IAS฀ 36:฀ para.฀ 77).฀ Where฀ this฀ is฀ not฀ possible,฀ the฀ assets฀ (or฀ unallocated฀
portion)฀are฀tested฀for฀impairment฀as฀part฀of฀the฀group฀of฀CGUs฀to฀which฀they฀can฀be฀allocated฀on฀a฀
reasonable฀and฀consistent฀basis.฀
2.7฀Recognition฀of฀impairment฀losses฀in฀financial฀statements฀
An฀impairment฀loss฀should฀be฀recognised฀immediately.฀฀
The฀asset's฀carrying฀amount฀should฀be฀reduced฀to฀its฀recoverable฀amount,฀and฀for:฀
Assets฀carried฀at฀historical฀cost:฀ The฀impairment฀loss฀is฀charged฀to฀profit฀or฀loss.฀
Revalued฀assets:฀ The฀ impairment฀ loss฀ should฀ be฀ treated฀ under฀ the฀
appropriate฀rules฀of฀the฀applicable฀IFRS.฀฀
For฀ example,฀ property,฀ plant฀ and฀ equipment฀ (in฀
accordance฀ with฀ IAS฀ 16),฀ first฀ to฀ OCI฀ in฀ respect฀ of฀ any฀
revaluation฀surplus฀relating฀to฀the฀asset฀and฀then฀to฀profit฀
or฀loss.฀
2.8฀Allocation฀of฀impairment฀losses฀with฀a฀CGU฀
General฀rule฀
The฀impairment฀loss฀is฀allocated฀in฀the฀following฀order฀(IAS฀36:฀paras.฀59–63):฀
1฀Goodwill฀allocated฀to฀the฀CGU฀
2฀Other฀assets฀on฀a฀pro-rata฀basis฀based฀on฀carrying฀amount฀
The฀ carrying฀ amount฀ of฀ an฀ asset฀ cannot฀ be฀ reduced฀ below฀ the฀ higher฀ of฀ its฀ recoverable฀ amount฀ (if฀
determinable)฀and฀zero.฀
The฀amount฀of฀the฀impairment฀loss฀that฀would฀otherwise฀have฀been฀allocated฀to฀the฀asset฀is฀allocated฀
to฀the฀other฀assets฀on฀a฀pro฀rata฀basis.฀
฀ 53฀

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Allocation฀of฀loss฀with฀unallocated฀corporate฀assets฀or฀goodwill฀
Where฀not฀all฀assets฀or฀goodwill฀will฀have฀been฀allocated฀to฀an฀individual฀CGU฀then฀different฀levels฀
of฀impairment฀tests฀are฀performed฀to฀ensure฀the฀unallocated฀assets฀are฀tested.฀
(a)฀ Test฀of฀individual฀CGUs฀
Test฀the฀individual฀CGUs฀(including฀allocated฀goodwill฀and฀any฀portion฀of฀the฀carrying฀
amount฀of฀corporate฀assets฀that฀can฀be฀allocated฀on฀a฀reasonable฀and฀consistent฀basis).฀
(b)฀ Test฀of฀group฀of฀CGUs฀
Test฀the฀smallest฀group฀of฀CGUs฀that฀includes฀the฀CGU฀under฀review฀and฀to฀which฀the฀
goodwill฀can฀be฀allocated/a฀portion฀of฀the฀carrying฀amount฀of฀corporate฀assets฀can฀be฀
allocated฀on฀a฀reasonable฀and฀consistent฀basis.฀
Activity฀2:฀Impairment฀of฀CGU฀ ฀
The฀Satchell฀Group฀is฀made฀up฀of฀two฀cash-generating฀units฀(as฀a฀result฀of฀a฀combination฀of฀various฀
past฀100%฀acquisitions),฀plus฀a฀head฀office,฀which฀was฀not฀allocated฀to฀any฀given฀cash-generating฀
unit฀as฀it฀supports฀both฀divisions.฀
Due฀to฀falling฀sales฀as฀a฀result฀of฀an฀economic฀crisis,฀an฀impairment฀test฀was฀conducted฀at฀the฀year฀
end.฀The฀consolidated฀statement฀of฀financial฀position฀showed฀the฀following฀net฀assets฀at฀that฀date.฀
฀ Division฀ Division฀ Head฀ Unallocated฀ Total

A฀ B฀ office฀ goodwill฀
฀ $m $m $m $m฀ $m
Property,฀plant฀&฀equipment฀(PPE)฀ 780 620 90 –฀ 1,490
Goodwill฀ 60 30 – 10฀ 100
Net฀current฀assets฀ ฀ 180 ฀ 110 ฀ 20 ฀ ฀฀–฀ ฀ ฀฀฀310
฀ ฀1,020 ฀760 ฀110 ฀ 10฀ ฀1,900
The฀recoverable฀amounts฀(including฀net฀current฀assets)฀at฀the฀year฀end฀were฀as฀follows:฀
฀ £m฀ ฀
Division฀A฀ 1,000฀ ฀
Division฀B฀ 720฀ ฀
Group฀as฀a฀whole฀ 1,825฀ (including฀head฀office฀PPE฀at฀fair฀value฀less฀costs฀of฀disposal฀
of฀$85m)฀
The฀recoverable฀amounts฀of฀the฀two฀divisions฀were฀based฀on฀value฀in฀use.฀The฀fair฀value฀less฀costs฀of฀
disposal฀of฀any฀individual฀item฀was฀substantially฀below฀this.฀
No฀impairment฀losses฀had฀previously฀been฀necessary.฀
Required฀
Discuss,฀with฀suitable฀computations฀showing฀the฀allocation฀of฀any฀impairment฀losses,฀the฀accounting฀
treatment฀of฀the฀impairment฀test.฀Use฀the฀proforma฀below฀to฀help฀you฀with฀your฀answer.฀฀
54฀

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Solution฀
Discussion:฀
Carrying฀amounts฀after฀impairment฀test:฀
฀ Division฀ Division฀ Head฀ Unallocated฀ Total
฀ $m $m $m $m฀ $m
Property,฀plant฀&฀equipment฀ ฀
Goodwill฀ ฀
Net฀current฀assets฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀
฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀
Workings฀
1฀ Test฀of฀individual฀CGUs:฀
฀ Division฀A Division฀B
฀ $m $m
Carrying฀amount
Recoverable฀amount฀ ฀ ฀
Impairment฀loss฀ ฀ ฀
฀
Allocated฀to:฀
฀฀Goodwill฀
฀฀Other฀assets฀in฀the฀scope฀of฀IAS฀36 ฀ ฀
฀ ฀ ฀
฀ 55฀

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2฀ Test฀of฀group฀of฀CGUs:฀
฀ $m
Revised฀carrying฀amount฀
Recoverable฀amount฀ ฀
Impairment฀loss฀ ฀
Allocated฀to:฀
฀฀Unallocated฀goodwill฀
฀฀Other฀unallocated฀assets฀ ฀
฀ ฀
2.9฀Impairment฀loss฀and฀non-controlling฀interest฀
Tutorial฀note฀
This฀section฀requires฀knowledge฀of฀basic฀groups฀which฀was฀covered฀in฀your฀earlier฀studies.฀If฀you฀are฀
unsure,฀work฀through฀the฀revision฀of฀basic฀groups฀in฀Chapter฀10,฀or฀look฀back฀to฀your฀earlier฀study฀
material.฀
Where฀non-controlling฀interests฀are฀measured฀at฀the฀date฀of฀acquisition฀at฀the฀proportionate฀share฀of฀
the฀ fair฀ value฀ of฀ the฀ acquiree's฀ identifiable฀ assets฀ acquired฀ and฀ liabilities฀ assumed฀ (ie฀ not฀ at฀ fair฀
value),฀part฀of฀the฀calculation฀of฀the฀recoverable฀amount฀of฀the฀CGU฀relates฀to฀the฀unrecognised฀
non-controlling฀interest฀share฀of฀the฀goodwill.฀
For฀ the฀ purpose฀ of฀ calculating฀ an฀ impairment฀ loss,฀ the฀ carrying฀ amount฀ of฀ the฀ CGU฀ is฀ therefore฀
notionally฀adjusted฀to฀include฀the฀non-controlling฀interests฀in฀the฀goodwill฀by฀grossing฀it฀up.฀
The฀resulting฀impairment฀loss฀calculated฀is฀only฀recognised฀to฀the฀extent฀of฀the฀parent's฀share.฀
This฀ adjustment฀ is฀ not฀ required฀ where฀ non-controlling฀ interests฀ are฀ measured฀ at฀ fair฀ value฀ at฀
acquisition.฀
Illustration฀3฀
Impairment฀loss฀and฀non-controlling฀interest฀
The฀Acetone฀Company฀is฀testing฀for฀impairment฀two฀subsidiaries฀which฀have฀been฀identified฀as฀
separate฀cash-generating฀units.฀
Some฀years฀ago฀Acetone฀acquired฀80%฀of฀The฀Dushanbe฀Company฀for฀$600,000฀when฀the฀fair฀
value฀of฀Dushanbe's฀identifiable฀assets฀was฀$400,000.฀As฀Dushanbe's฀policy฀is฀to฀distribute฀all฀
profits฀by฀way฀of฀dividend,฀the฀fair฀value฀of฀its฀identifiable฀net฀assets฀remained฀at฀$400,000฀on฀
31฀December฀20X7.฀The฀impairment฀review฀indicated฀Dushanbe's฀recoverable฀amount฀at฀
31฀December฀20X7฀to฀be฀$520,000.฀
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Some฀years฀ago฀Acetone฀acquired฀85%฀of฀The฀Maclulich฀Company฀for฀$800,000฀when฀the฀fair฀
value฀of฀Maclulich's฀identifiable฀net฀assets฀was฀$700,000.฀Goodwill฀of฀$205,000฀($800,000฀–฀
($700,000฀×฀85%))฀was฀recognised.฀As฀Maclulich's฀policy฀is฀to฀distribute฀all฀profits฀by฀way฀of฀
dividend,฀the฀fair฀value฀of฀its฀identifiable฀net฀assets฀remained฀at฀$700,000฀on฀31฀December฀20X7.฀
The฀impairment฀review฀indicated฀Maclulich's฀recoverable฀amount฀at฀31฀December฀20X7฀to฀be฀
$660,000.฀
It฀is฀Acetone฀group฀policy฀to฀value฀the฀non-controlling฀interest฀using฀the฀proportion฀of฀net฀assets฀
method.฀
Required฀
Determine฀the฀following฀amounts฀in฀respect฀of฀Acetone's฀consolidated฀financial฀statements฀at฀
31฀December฀20X7฀according฀to฀IAS฀36฀Impairment฀of฀Assets.฀
(a)฀ The฀carrying฀amount฀of฀Dushanbe's฀assets฀to฀be฀compared฀with฀its฀recoverable฀amount฀for฀
impairment฀testing฀purposes฀
(b)฀ The฀carrying฀amount฀of฀goodwill฀in฀respect฀of฀Dushanbe฀after฀the฀recognition฀of฀any฀
impairment฀loss฀
(c)฀ The฀carrying฀amount฀of฀the฀non-controlling฀interest฀in฀Maclulich฀after฀recognition฀of฀any฀
impairment฀loss฀
Solution฀
(a)฀ $750,000฀
(b)฀ $96,000฀
(c)฀ $99,000฀
฀ 57฀

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Workings฀
(a)฀ ฀$฀฀฀฀฀
Carrying฀amount฀of฀Dushanbe's฀net฀assets 400,000฀
Goodwill฀recognised฀on฀acquisition ฀
$600,000฀–฀(80%฀×฀$400,000)฀ ฀280,000฀
Notional฀goodwill฀($280,000฀×฀20/80)฀ ฀฀฀70,000฀
฀ ฀750,000฀
฀
(b)฀ The฀impairment฀loss฀is฀the฀total฀$750,000฀less฀the฀recoverable฀amount฀of฀$520,000฀=฀
$230,000.฀Under฀IAS฀36฀this฀is฀firstly฀allocated฀against฀the฀$350,000฀goodwill.฀(As฀the฀
impairment฀loss฀is฀less฀than฀the฀goodwill,฀none฀is฀allocated฀against฀identifiable฀net฀assets.)฀As฀
only฀the฀goodwill฀relating฀to฀Acetone฀is฀recognised,฀only฀its฀80%฀share฀of฀the฀impairment฀loss฀
is฀recognised:฀
฀ ฀$฀฀฀฀฀
Carrying฀value฀of฀goodwill฀ ฀280,000฀
Impairment฀(80%฀×฀230,000)฀ ฀(184,000)฀
Revised฀carrying฀amount฀of฀goodwill฀ ฀฀฀฀96,000฀
฀
(c)฀
฀฀฀฀ ฀$฀฀฀฀฀
Carrying฀amount฀of฀Maclulich's฀net฀assets฀ ฀700,000฀
Recognised฀goodwill฀ ฀205,000฀
Notional฀goodwill฀(15/85฀×฀$205,000)฀ ฀฀฀฀36,176฀
฀ ฀941,176฀
Recoverable฀amount฀ ฀(660,000)฀
Impairment฀loss฀ ฀฀281,176฀
Allocated฀to:฀ ฀
Recognised฀and฀notional฀goodwill฀ ฀ 241,176 ฀
Other฀net฀assets฀ ฀40,000฀
฀
฀ Therefore฀the฀non-controlling฀interest฀is฀($700,000฀–฀$40,000)฀×฀15%฀=฀$99,000.฀฀
฀ As฀the฀non-controlling฀interests฀do฀not฀include฀goodwill,฀only฀the฀impairment฀allocated฀to฀other฀
net฀assets฀is฀included฀here.฀฀
2.10฀After฀the฀impairment฀review฀
The฀ depreciation/amortisation฀ is฀ adjusted฀ in฀ future฀ periods฀ to฀ allocate฀ the฀ asset's฀ revised฀ carrying฀
amount฀less฀its฀residual฀value฀on฀a฀systematic฀basis฀over฀its฀remaining฀useful฀life฀(IAS฀36:฀para.฀63).฀
2.11฀Reversal฀of฀past฀impairments฀
A฀reversal฀for฀a฀CGU฀is฀allocated฀to฀the฀assets฀of฀the฀CGU,฀except฀for฀goodwill,฀pro฀rata฀with฀the฀
carrying฀amounts฀of฀those฀assets.฀
However,฀the฀carrying฀amount฀of฀an฀asset฀is฀not฀increased฀above฀the฀lower฀of:฀
(a)฀ Its฀recoverable฀amount฀(if฀determinable);฀and฀
(b)฀ Its฀depreciated฀carrying฀amount฀had฀no฀impairment฀loss฀originally฀been฀recognised.฀฀
(IAS฀36:฀para.฀117)฀
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Any฀amounts฀left฀unallocated฀are฀allocated฀to฀the฀other฀assets฀(except฀goodwill)฀pro฀rata.฀
The฀ reversal฀ is฀ recognised฀ in฀ profit฀ or฀ loss,฀ except฀ where฀ reversing฀ a฀ loss฀ recognised฀ on฀ assets฀
carried฀at฀revalued฀amounts,฀which฀are฀treated฀in฀accordance฀with฀the฀applicable฀IFRS.฀
For฀ example,฀ an฀ impairment฀ loss฀ reversal฀ on฀ revalued฀ property,฀ plant฀ and฀ equipment฀ reverses฀ the฀
loss฀ recorded฀ in฀ profit฀ or฀ loss฀ and฀ any฀ remainder฀ is฀ credited฀ to฀ OCI฀ (reinstating฀ the฀ revaluation฀
surplus)฀(IAS฀36:฀para.฀120).฀
Goodwill฀
Once฀recognised,฀impairment฀losses฀on฀goodwill฀are฀not฀reversed฀(IAS฀36:฀para.฀124).฀
See฀Chapter฀3฀Section฀2฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀
edition฀of฀the฀Workbook,฀for฀more฀activities฀to฀test฀your฀knowledge฀of฀this฀topic.฀
3฀Fair฀value฀measurement฀(IFRS฀13)฀
IFRS฀13฀Fair฀Value฀Measurement฀defines฀fair฀value฀and฀sets฀out฀a฀framework฀for฀measuring฀the฀fair฀
value฀of฀assets,฀liabilities฀and฀an฀entity's฀own฀equity฀instruments฀in฀a฀single฀IFRS.฀
It฀applies฀to฀all฀IFRSs฀where฀a฀fair฀value฀measurement฀is฀required฀except฀(IFRS฀13:฀para.฀6):฀
฀ Share-based฀payment฀transactions฀(IFRS฀2)฀
฀ Leasing฀transactions฀(IFRS฀16)฀
฀ Measurements฀which฀are฀similar฀to,฀but฀not฀the฀same฀as,฀fair฀value,฀eg:฀
–฀ Net฀realisable฀value฀of฀inventories฀(IAS฀2)฀
–฀ Value฀in฀use฀(IAS฀36).฀
Fair฀value฀(IFRS฀13):฀the฀price฀that฀would฀be฀received฀to฀sell฀an฀asset฀or฀paid฀to฀transfer฀a฀
Key term
liability฀in฀an฀orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date.฀
(IFRS฀13:฀para.฀9)฀
Fair฀value฀measurements฀are฀based฀on฀an฀asset฀or฀a฀liability's฀unit฀of฀account,฀which฀is฀specified฀
by฀each฀IFRS฀where฀a฀fair฀value฀measurement฀is฀required.฀For฀most฀assets฀and฀liabilities,฀the฀unit฀of฀
account฀ is฀ the฀ individual฀ asset฀ or฀ liability,฀ but฀ in฀ some฀ instances฀ may฀ be฀ a฀ group฀ of฀ assets฀ or฀
liabilities฀(IFRS฀13:฀para.฀13).฀
Illustration฀4฀
Fair฀value฀
A฀premium฀or฀discount฀on฀a฀large฀holding฀of฀the฀same฀shares฀(because฀the฀market's฀normal฀daily฀
trading฀volume฀is฀not฀sufficient฀to฀absorb฀the฀quantity฀held฀by฀the฀entity)฀is฀not฀considered฀when฀
measuring฀fair฀value:฀the฀quoted฀price฀per฀share฀in฀an฀active฀market฀is฀used.฀
However,฀a฀control฀premium฀is฀considered฀when฀measuring฀the฀fair฀value฀of฀a฀controlling฀interest,฀
because฀the฀unit฀of฀account฀is฀the฀controlling฀interest.฀Similarly,฀any฀non-controlling฀interest฀discount฀
is฀considered฀where฀measuring฀a฀non-controlling฀interest.฀
฀ 59฀

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3.1฀Measurement฀
Fair฀ value฀ is฀ a฀ market-based฀ measure,฀ not฀ an฀ entity-specific฀ one.฀ Therefore,฀ valuation฀
techniques฀used฀to฀measure฀fair฀value฀maximise฀the฀use฀of฀relevant฀observable฀inputs฀and฀minimise฀
the฀use฀of฀unobservable฀inputs.฀
To฀ increase฀ consistency฀ and฀ compatibility฀ in฀ fair฀ value฀ measurements฀ and฀ related฀ disclosures,฀
IFRS฀13฀ establishes฀ a฀ fair฀ value฀ hierarchy฀ that฀ categorises฀ the฀ inputs฀ to฀ valuation฀
techniques฀into฀three฀levels:฀
Quoted฀prices฀(unadjusted)฀in฀active฀markets฀for฀identical฀assets฀or฀liabilities฀
Level฀1฀inputs฀฀ that฀the฀entity฀can฀access฀at฀the฀measurement฀date฀(IFRS฀13:฀para.฀76).฀
Inputs฀other฀than฀quoted฀prices฀included฀within฀Level฀1฀that฀are฀observable฀
for฀the฀asset฀or฀liability,฀either฀directly฀(ie฀prices)฀or฀indirectly฀(ie฀derived฀
Level฀2฀inputs฀ ฀ from฀prices).฀For฀example฀quoted฀prices฀for฀similar฀assets฀in฀active฀markets฀
or฀for฀identical฀or฀similar฀assets฀in฀non-active฀markets฀or฀use฀of฀quoted฀
interest฀rates฀for฀valuation฀purposes฀(IFRS฀13:฀para.฀81–82).฀
Unobservable฀inputs฀for฀the฀asset฀or฀liability,฀eg฀discounting฀estimates฀of฀
future฀cash฀flows฀(IFRS฀13:฀para.฀86).฀
Level฀3฀inputs฀ Level฀3฀inputs฀are฀only฀used฀where฀relevant฀observable฀inputs฀are฀not฀
available฀or฀where฀the฀entity฀determines฀that฀transaction฀price฀or฀quoted฀
price฀does฀not฀represent฀fair฀value.฀
฀
Active฀market:฀a฀market฀in฀which฀transactions฀for฀the฀asset฀or฀liability฀take฀place฀with฀sufficient฀
Key term
frequency฀and฀volume฀to฀provide฀pricing฀information฀on฀an฀ongoing฀basis.฀฀
(IFRS฀13:฀Appendix฀A)฀
A฀fair฀value฀measurement฀assumes฀that฀the฀transaction฀takes฀place฀either:฀
(a)฀ In฀the฀principal฀market฀for฀the฀asset฀or฀liability,฀or฀
(b)฀ In฀the฀most฀advantageous฀market฀(in฀the฀absence฀of฀a฀principal฀market).฀
The฀ most฀ advantageous฀ market฀ is฀ assessed฀ after฀ taking฀ into฀ account฀ transaction฀ costs฀ and฀
transport฀costs฀to฀the฀market.฀Fair฀value฀also฀takes฀into฀account฀transport฀costs,฀but฀excludes฀
transaction฀costs.฀
The฀fair฀value฀should฀be฀measured฀using฀the฀assumptions฀ that฀ market฀ participants฀ would฀
use฀ when฀pricing฀the฀asset฀or฀liability,฀assuming฀that฀market฀participants฀act฀in฀their฀best฀economic฀
interest.฀
Illustration฀5฀
Principal฀market฀v฀most฀advantageous฀market฀
An฀asset฀is฀sold฀in฀two฀different฀active฀markets฀at฀the฀following฀prices฀per฀item:฀
฀ European฀market฀ North฀American฀market฀
฀ $฀ $฀
Selling฀price฀ 53฀ 54฀
Transport฀costs฀to฀market฀ ฀฀(3)฀ ฀฀(6)฀
฀ 50฀ 48฀
Transaction฀costs฀ ฀฀(3)฀ ฀฀(2)฀
฀ ฀47฀ ฀46฀
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The฀principal฀market฀(the฀one฀with฀the฀greatest฀volume฀and฀level฀of฀activity)฀is฀the฀North฀American฀
market.฀The฀company฀normally฀trades฀in฀the฀European฀market,฀but฀it฀can฀access฀both฀markets.฀
The฀fair฀value฀of฀the฀asset฀is฀therefore฀$48฀per฀item,฀ie฀the฀price฀after฀taking฀into฀account฀transport฀
costs฀in฀the฀principal฀market฀for฀the฀asset.฀
If,฀however,฀neither฀market฀were฀the฀principal฀market,฀the฀fair฀value฀would฀be฀measured฀
using฀the฀price฀in฀the฀most฀advantageous฀market.฀The฀most฀advantageous฀market฀is฀the฀
European฀market฀after฀considering฀both฀transaction฀and฀transport฀costs฀($47฀in฀European฀market฀v฀
$46฀in฀the฀North฀American฀market)฀and฀so฀the฀fair฀value฀measure฀would฀be฀$50฀per฀item฀(as฀fair฀
value฀is฀measured฀before฀transaction฀costs).฀
For฀ non-financial฀ assets,฀ the฀ fair฀ value฀ measurement฀ is฀ the฀ value฀ for฀ using฀ the฀ asset฀ in฀ its฀
highest฀ and฀ best฀ use฀ (the฀ use฀ that฀ would฀ maximise฀ its฀ value)฀ or฀ by฀ selling฀ it฀ to฀ another฀ market฀
participant฀that฀would฀use฀it฀in฀its฀highest฀and฀best฀use฀(IFRS฀13:฀paras.฀27–29).฀
The฀ highest฀ and฀ best฀ use฀ of฀ a฀ non-financial฀ asset฀ takes฀ into฀ account฀ the฀ use฀ that฀ is฀ physically฀
possible,฀legally฀permissible฀and฀financially฀feasible.฀
Illustration฀6฀
Highest฀and฀best฀use฀
An฀entity฀acquires฀control฀of฀another฀entity฀which฀owns฀land.฀The฀land฀is฀currently฀used฀as฀a฀factory฀
site.฀
The฀local฀government฀zoning฀rules฀also฀now฀permit฀construction฀of฀residential฀properties฀in฀this฀area,฀
subject฀to฀planning฀permission฀being฀granted.฀Apartment฀buildings฀have฀recently฀been฀constructed฀in฀
the฀area฀with฀the฀support฀of฀the฀local฀government.฀
Market฀values฀are฀as฀follows:฀
฀ $m
Value฀in฀its฀current฀use 20
Value฀as฀a฀development฀site฀(including฀uncertainty฀ 30
over฀whether฀planning฀permission฀would฀be฀granted)฀
Demolition฀costs฀to฀convert฀the฀land฀to฀a฀vacant฀site 2
฀
฀
The฀fair฀value฀of฀the฀land฀is฀$28m฀($30m฀–฀$2m)฀as฀this฀is฀its฀highest฀and฀best฀use฀because฀market฀
participants฀would฀take฀into฀account฀the฀site's฀development฀potential฀when฀pricing฀the฀land.฀
The฀ measurement฀ of฀ the฀ fair฀ value฀ of฀ a฀ liability฀ assumes฀ that฀ the฀ liability฀ remains฀
outstanding฀and฀the฀market฀participant฀transferee฀would฀be฀required฀to฀fulfil฀the฀obligation,฀rather฀
than฀it฀being฀extinguished฀(IFRS฀13:฀para.฀34).฀The฀fair฀value฀of฀a฀liability฀also฀reflects฀the฀effect฀of฀
non-performance฀risk฀(the฀risk฀that฀an฀entity฀will฀not฀fulfil฀an฀obligation),฀which฀includes,฀but฀may฀
not฀be฀limited฀to,฀an฀entity's฀own฀credit฀risk฀(ie฀risk฀of฀non-payment)฀(IFRS฀13:฀para.฀42).฀
Illustration฀7฀
Fair฀value฀of฀a฀liability฀
Energy฀Co฀assumed฀a฀contractual฀decommissioning฀liability฀when฀it฀acquired฀a฀power฀plant฀from฀a฀
competitor.฀
The฀plant฀will฀be฀decommissioned฀in฀10฀years'฀time.฀
฀ 61฀

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Assumptions฀made฀by฀Energy฀Co฀equivalent฀to฀those฀that฀would฀be฀used฀by฀market฀participants,฀
assuming฀Energy฀Co฀was฀allowed฀to฀transfer฀the฀liability,฀are:฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀Estimated฀labour,฀material฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀and฀overhead฀cost฀ Estimated฀probability฀
฀ $6m฀ 40%฀
฀ $8m฀ 50%฀
฀ $10m฀ 10%฀
Third฀party฀contractors฀typically฀add฀a฀20%฀mark-up฀in฀the฀industry฀and฀expect฀a฀premium฀of฀5%฀of฀
the฀expected฀cash฀flows฀(after฀including฀the฀effect฀of฀inflation)฀to฀take฀into฀account฀risk฀that฀cash฀flows฀
may฀be฀more฀than฀expected.฀
Inflation฀is฀expected฀to฀be฀3%฀annually฀on฀average฀over฀the฀10฀years.฀
The฀risk-free฀interest฀rate฀for฀a฀10฀year฀maturity฀is฀4%.฀
An฀appropriate฀adjustment฀to฀the฀risk-free฀rate฀for฀Energy฀Co's฀non-performance฀risk฀is฀2%฀(giving฀an฀
entity-specific฀discount฀rate฀of฀4%฀+฀2%฀=฀6%).฀
Calculation฀of฀the฀fair฀value฀of฀the฀decommissioning฀liability:฀
฀ $m฀
Expected฀cash฀flow฀[(6฀×฀40%)฀+฀(8฀×฀50%)฀+฀(10฀× 10%)] ฀ ฀7.400฀
Third฀party฀contractor฀mark-up฀(7.4฀×฀20%)฀ ฀ 1.480฀
฀ ฀8.880฀
Inflation฀adjustment฀((8.88฀×฀1.0310)฀–฀8.88)฀ ฀ ฀3.054฀
฀ ฀11.934฀
Risk฀premium฀(11.934฀× 5%)฀ ฀ ฀0.597฀
฀ ฀12.531฀
Fair฀value฀(present฀value฀of฀expected฀cash฀flow ฀
adjusted฀for฀market฀risk฀12.531฀×฀1/1.0610)฀ ฀6.997฀
฀
฀
4฀Intangible฀assets฀(IAS฀38)฀
Intangible฀asset:฀an฀identifiable฀non-monetary฀asset฀without฀physical฀substance.฀The฀asset฀must฀
Key term
be:฀
(a)฀ Controlled฀by฀the฀entity฀as฀a฀result฀of฀events฀in฀the฀past;฀and฀
(b)฀ Something฀from฀which฀the฀entity฀expects฀future฀economic฀benefits฀to฀flow.฀฀
(IAS฀38:฀para.฀8)฀
An฀asset฀is฀identifiable฀if:฀
(a)฀ It฀is฀separable,฀or฀
(b)฀ It฀arises฀from฀contractual/legal฀rights.฀฀
For฀revision฀of฀the฀detail฀of฀the฀definition฀of฀intangible฀assets,฀refer฀to฀Chapter฀3฀Section฀3.1฀of฀the฀
Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
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As฀with฀all฀assets,฀recognition฀depends฀on฀two฀criteria฀(IAS฀38:฀para.฀18):฀
(a)฀ It฀is฀probable฀that฀future฀economic฀benefits฀that฀are฀attributable฀to฀the฀asset฀will฀flow฀to฀the฀
entity.฀
(b)฀ The฀cost฀of฀the฀asset฀can฀be฀measured฀reliably.฀
Measurement฀at฀recognition฀depends฀on฀how฀the฀intangible฀asset฀was฀acquired฀or฀generated:฀
Acquired฀as฀ Internally฀
Internally฀ generated Acquired฀by฀
Separate฀ part฀of฀a฀
generated฀ intangible government฀
acquisition business฀
goodwill asset grant
combination
Cost,฀which฀is฀ Fair฀value฀as฀per Not฀recognised Recognised฀when฀ Asset฀and฀grant฀

purchase฀price IFRS฀3฀Business 'PIRATE'฀criteria฀ at฀fair฀value,฀or
Combinations met฀(see฀Section฀ nominal฀amount฀
4.3) plus฀expenditure฀
directly฀attributable฀
to฀preparation฀for฀use
4.3฀Internally฀generated฀intangible฀assets฀
Research฀and฀development฀
To฀ assess฀ whether฀ an฀ internally฀ generated฀ intangible฀ assets฀ meets฀ the฀ criteria฀ for฀ recognition,฀ an฀
entity฀classifies฀the฀generation฀of฀the฀asset฀into฀a฀research฀ phase฀and฀a฀development฀ phase฀
(IAS฀36:฀para.฀52).฀
(a)฀ During฀the฀research฀phase,฀all฀expenditure฀is฀recognised฀as฀an฀expense.฀฀
(IAS฀36:฀para.฀54)฀
(b)฀ During฀the฀development฀phase,฀internally฀generated฀intangible฀assets฀that฀meet฀all฀of฀the฀
following฀criteria฀must฀be฀capitalised:฀
•฀ Probable฀future฀economic฀benefits
•฀ Intention฀to฀complete฀and฀use/sell฀asset
•฀ Resources฀adequate฀and฀available฀to฀complete฀and฀use/sell฀asset
•฀ Ability฀to฀use/sell฀the฀asset
•฀ Technical฀feasibility฀of฀completing฀asset฀for฀use/sale
•฀ Expenditure฀can฀be฀measured฀reliably
฀
Expenditure฀not฀meeting฀all฀six฀criteria฀is฀treated฀as฀an฀expense.฀
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The฀ costs฀ allocated฀ to฀ an฀ internally฀ generated฀ intangible฀ asset฀ should฀ be฀ only฀ costs฀ that฀ can฀ be฀
directly฀ attributed฀ or฀ allocated฀ on฀ a฀ reasonable฀ and฀ consistent฀ basis฀ to฀ creating,฀
producing฀or฀preparing฀the฀asset฀for฀its฀intended฀use.฀The฀cost฀of฀an฀internally฀generated฀
intangible฀asset฀is฀the฀sum฀of฀the฀expenditure฀incurred฀from฀the฀date฀when฀the฀intangible฀asset฀first฀
meets฀the฀recognition฀criteria.฀
Other฀internally฀generated฀intangible฀assets฀
Expenditure฀ on฀ internally฀ generated฀ brands,฀ mastheads,฀ publishing฀ titles,฀ customer฀ lists฀ and฀ items฀
similar฀ in฀ substance฀ are฀ not฀ recognised฀ as฀ intangible฀ assets.฀ These฀ all฀ fail฀ to฀ meet฀ one฀ or฀ more฀ (in฀
some฀ cases฀ all)฀ the฀ definition฀ and฀ recognition฀ criteria฀ and฀ in฀ some฀ cases฀ are฀ probably฀
indistinguishable฀from฀internally฀generated฀goodwill฀(IAS฀38:฀para.฀63).฀
Similarly,฀ start-up,฀ training,฀ advertising,฀ promotional,฀ relocation฀ and฀ reorganisation฀ costs฀ are฀ all฀
recognised฀as฀expenses.฀
After฀ recognition,฀ entities฀ can฀ choose฀ between฀ two฀ models,฀ the฀ cost฀ model฀ and฀ the฀ revaluation฀
model.฀
Cost฀model฀ Carry฀asset฀at฀cost฀less฀accumulated฀amortisation฀and฀impairment฀losses฀
(IAS฀38:฀para.฀74)฀
Revaluation฀model฀ Carry฀asset฀at฀revalued฀amount,฀fair฀value฀amount฀less฀subsequent฀
accumulated฀amortisation฀and฀impairment฀losses฀(IAS฀38:฀para.฀75)฀
If฀the฀revaluation฀model฀is฀used:฀
(a)฀฀ Fair฀value฀must฀be฀able฀to฀be฀measured฀reliably฀with฀reference฀to฀an฀active฀market.฀
(b)฀ The฀entire฀class฀of฀intangible฀assets฀of฀that฀type฀must฀be฀revalued฀at฀the฀same฀time.฀฀
(c)฀ If฀an฀intangible฀asset฀in฀a฀class฀of฀revalued฀intangible฀assets฀cannot฀be฀revalued฀because฀there฀
is฀ no฀ active฀ market฀ for฀ this฀ asset,฀ the฀ asset฀ should฀ be฀ carried฀ at฀ its฀ cost฀ less฀ any฀
accumulated฀amortisation฀and฀impairment฀losses.฀
(d)฀ Revaluations฀should฀be฀made฀with฀such฀regularity฀ that฀the฀carrying฀amount฀does฀not฀differ฀
from฀that฀which฀would฀be฀determined฀using฀fair฀value฀at฀the฀year฀end.฀
There฀will฀ not฀ usually฀ be฀ an฀ active฀ market฀ in฀ an฀ intangible฀ asset;฀ therefore฀ the฀ revaluation฀
model฀will฀usually฀not฀be฀available฀(IAS฀38:฀para.฀78).฀A฀fair฀value฀might฀be฀obtainable฀however฀for฀
assets฀such฀as฀fishing฀rights฀or฀quotas฀or฀taxi฀cab฀licences.฀
For฀revision฀of฀the฀detail฀of฀the฀accounting฀required฀under฀the฀revaluation฀model,฀refer฀to฀Chapter฀3฀
Section฀ 3.2฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀
4.5฀Amortisation฀
An฀intangible฀asset฀with฀a฀finite฀useful฀life฀should฀be฀amortised฀over฀its฀expected฀useful฀life.฀
(a)฀ The฀depreciable฀amount฀(cost/revalued฀amount฀–฀residual฀value)฀is฀allocated฀on฀a฀systematic฀
basis฀over฀the฀useful฀life.฀
(b)฀ The฀residual฀value฀is฀normally฀assumed฀to฀be฀zero.฀
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lOMoARcPSD|6256454
(c)฀ Amortisation฀begins฀when฀the฀asset฀is฀available฀ for฀ use฀(ie฀when฀it฀is฀in฀the฀location฀and฀

condition฀necessary฀for฀it฀to฀be฀capable฀of฀operating฀in฀the฀manner฀intended฀by฀management).฀
(d)฀ The฀useful฀life฀and฀amortisation฀method฀must฀be฀reviewed฀at฀least฀at฀each฀financial฀year฀
end฀and฀adjusted฀where฀necessary.฀
An฀intangible฀asset฀with฀an฀indefinite฀ useful฀ life฀should฀ not฀ be฀ amortised.฀IAS฀36฀requires฀
that฀such฀an฀asset฀is฀tested฀for฀impairment฀at฀least฀annually.฀
For฀ revision฀ of฀ the฀ detail฀ of฀ determining฀ an฀ intangible฀ asset's฀ useful฀ life฀ and฀ further฀ detail฀ on฀
acceptable฀ amortisation฀ methods,฀ refer฀ to฀ Chapter฀ 3฀ Sections฀ 3.3฀ and฀ 3.4฀ of฀ the฀ Supplementary฀
Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
Activity฀3:฀Intangible฀assets฀ ฀
Lambda฀ is฀ a฀ listed฀ entity฀ that฀ prepares฀ consolidated฀ financial฀ statements.฀ Lambda฀ measures฀ assets฀
using฀ the฀ revaluation฀ model฀ wherever฀ this฀ is฀ possible฀ under฀ IFRS.฀ During฀ its฀ financial฀ year฀ ended฀
31฀March฀20X9฀Lambda฀entered฀into฀the฀following฀transactions:฀
(a)฀ On฀ 1฀ October฀ 20X7฀ Lambda฀ began฀ a฀ project฀ to฀ investigate฀ a฀ more฀ efficient฀ production฀
process.฀Expenses฀relating฀to฀the฀project฀of฀$2m฀were฀charged฀in฀the฀statement฀of฀profit฀or฀loss฀
and฀other฀comprehensive฀income฀in฀the฀year฀ended฀31฀March฀20X8.฀Further฀costs฀of฀$1.5m฀
were฀ incurred฀ in฀ the฀ three-month฀ period฀ to฀ 30฀ June฀ 20X8.฀ On฀ that฀ date฀ it฀ became฀ apparent฀
that฀the฀project฀was฀technically฀feasible฀and฀commercially฀viable.฀Further฀expenditure฀of฀$3m฀
was฀ incurred฀ in฀ the฀ six-month฀ period฀ from฀ 1฀ July฀ 20X8฀ to฀ 31฀ December฀ 20X8.฀ The฀ new฀
process,฀which฀began฀on฀1฀January฀20X9,฀was฀expected฀to฀generate฀cost฀savings฀of฀at฀least฀
$600,000฀per฀annum฀over฀the฀10-year฀period฀commencing฀1฀January฀20X9.฀
(b)฀ On฀ 1฀ April฀ 20X8฀ Lambda฀ acquired฀ a฀ new฀ subsidiary,฀ Omicron.฀ The฀ directors฀ of฀ Lambda฀
carried฀out฀a฀fair฀value฀exercise฀as฀required฀by฀IFRS฀3฀Business฀Combinations฀and฀concluded฀
that฀ the฀ brand฀ name฀ of฀ Omicron฀ had฀ a฀ fair฀ value฀ of฀ $10m฀ and฀ would฀ be฀ likely฀ to฀ generate฀
economic฀ benefits฀ for฀ a฀ ten-year฀ period฀ from฀ 1฀ April฀ 20X8.฀ They฀ further฀ concluded฀ that฀ the฀
expertise฀of฀the฀employees฀of฀Omicron฀contributed฀$5m฀to฀the฀overall฀value฀of฀Omicron.฀The฀
estimated฀ average฀ remaining฀ service฀ lives฀ of฀ the฀ Omicron฀ employees฀ was฀ eight฀ years฀ from฀
1฀April฀20X8.฀
(c)฀ On฀1฀October฀20X8฀Lambda฀renewed฀its฀licence฀to฀extract฀minerals฀that฀are฀needed฀as฀part฀
of฀its฀production฀process.฀The฀cost฀of฀renewal฀of฀the฀licence฀was฀$200,000฀and฀the฀licence฀is฀
for฀a฀five-year฀period฀starting฀on฀1฀October฀20X8.฀There฀is฀no฀active฀market฀for฀this฀type฀of฀
licence.฀However,฀the฀directors฀of฀Lambda฀estimated฀that฀at฀31฀March฀20X9฀the฀fair฀value฀less฀
costs฀ to฀ sell฀ of฀ the฀ licence฀ was฀ $175,000.฀ They฀ further฀ estimated฀ that฀ over฀ the฀ remaining฀
54฀months฀ of฀ its฀ duration฀ the฀ licence฀ would฀ generate฀ net฀ cash฀ flows฀ for฀ Lambda฀ that฀ had฀ a฀
present฀value฀at฀31฀March฀20X9฀of฀$185,000.฀
Required฀
Explain฀how฀Lambda฀should฀treat฀the฀above฀transactions฀in฀its฀consolidated฀financial฀statements฀for฀
the฀year฀to฀31฀March฀20X9.฀(You฀are฀not฀required฀to฀discuss฀the฀goodwill฀arising฀on฀acquisition฀of฀
Omicron.)฀฀ ฀
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Activity฀4:฀Intangible฀assets฀and฀impairment฀ ฀
Kalesh฀is฀preparing฀its฀financial฀statements฀for฀the฀year฀to฀31฀March฀20X2.฀Kalesh฀is฀engaged฀in฀a฀
research฀ and฀ development฀ project฀ which฀ it฀ hopes฀ will฀ generate฀ a฀ new฀ product.฀ In฀ the฀ year฀ to฀
31฀March฀ 20X1฀ the฀ company฀ spent฀ $120,000฀ on฀ research฀ that฀ concluded฀ there฀ were฀ sufficient฀
grounds฀ to฀ carry฀ the฀ project฀ on฀ to฀ its฀ development฀ stage฀ and฀ a฀ further฀ $75,000฀ was฀ spent฀ on฀
development.฀At฀31฀March฀20X1,฀management฀had฀decided฀that฀they฀were฀not฀sufficiently฀confident฀
in฀the฀ultimate฀profitability฀of฀the฀project฀and฀wrote฀off฀all฀the฀expenditure฀to฀date฀to฀the฀statement฀of฀
profit฀or฀loss.฀In฀the฀current฀year฀further฀development฀costs฀have฀been฀incurred฀of฀$80,000฀and฀it฀is฀
estimated฀than฀an฀additional฀$10,000฀of฀development฀costs฀will฀be฀incurred฀in฀the฀future.฀Production฀
is฀expected฀to฀commence฀within฀the฀next฀few฀months.฀Unfortunately฀the฀total฀trading฀profit฀from฀sales฀
of฀the฀new฀product฀is฀not฀expected฀to฀be฀as฀good฀as฀market฀research฀data฀originally฀forecast฀and฀is฀
estimated฀at฀only฀$150,000.฀As฀the฀future฀benefits฀are฀greater฀than฀the฀remaining฀future฀costs,฀the฀
project฀will฀be฀completed฀but,฀due฀to฀the฀overall฀deficit฀expected,฀the฀directors฀have฀again฀decided฀to฀
write฀off฀all฀the฀development฀expenditure.฀
Required฀
Explain฀ how฀ Kalesh฀ should฀ treat฀ the฀ above฀ transaction฀ in฀ its฀ financial฀ statements฀ for฀ the฀ year฀ to฀
31฀March฀20X2.฀฀
5฀Investment฀property฀(IAS฀40)฀
Investment฀property฀(IAS฀40):฀property฀(land฀or฀building฀–฀or฀part฀of฀a฀building฀–฀or฀both)฀held฀
Key term
(by฀the฀owner฀or฀by฀the฀lessee฀as฀a฀right-of-use฀asset)฀to฀earn฀rentals฀or฀for฀capital฀appreciation฀
or฀both,฀rather฀than฀for:฀
(a)฀ Use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services฀or฀for฀administrative฀purposes;฀or฀
(b)฀ Sale฀in฀the฀ordinary฀course฀of฀business.฀฀ ฀
(IAS฀40:฀para.฀5)฀
The฀following฀are฀not฀investment฀property฀(IAS฀40:฀para.฀9):฀
(a)฀ Property฀ held฀ for฀ sale฀ in฀ the฀ ordinary฀ course฀ of฀ business฀ or฀ in฀ the฀ process฀ of฀ construction฀ or฀
development฀for฀such฀sale฀
(b)฀ Owner-occupied฀property,฀including฀property฀held฀for฀future฀use฀as฀owner-occupied฀property,฀
property฀ held฀ for฀ future฀ development฀ and฀ subsequent฀ use฀ as฀ owner-occupied฀ property,฀
property฀occupied฀by฀employees฀and฀owner-occupied฀property฀awaiting฀disposal฀
(c)฀ Property฀leased฀to฀another฀entity฀under฀a฀finance฀lease฀
Investment฀property฀is฀recognised฀when฀it฀is฀probable฀that฀future฀economic฀benefits฀will฀flow฀to฀the฀
entity฀and฀the฀cost฀can฀be฀measured฀reliably.฀
Investment฀ property฀ should฀ be฀ measured฀ initially฀ at฀ cost,฀ including฀ directly฀ attributable฀ expenditure฀
and฀transaction฀costs฀(IAS฀40:฀para.฀21).฀
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After฀recognition,฀entities฀can฀choose฀between฀two฀models,฀the฀fair฀value฀model฀and฀the฀cost฀model.฀
Whatever฀ policy฀ an฀ entity฀ chooses฀ should฀ be฀ applied฀ to฀ all฀ of฀ its฀ investment฀ property฀ (IAS฀ 40:฀฀
para.฀30).฀
Fair฀value฀model฀ Any฀change฀in฀fair฀value฀reported฀in฀profit฀or฀loss,฀not฀depreciated฀
Cost฀model฀ As฀cost฀model฀of฀IAS฀16฀–฀unless฀held฀for฀sale฀(IFRS฀5)฀฀or฀leased฀฀
(IFRS฀16)฀
5.4฀Transfers฀to฀or฀from฀investment฀property฀
Transfers฀ to฀ or฀ from฀ investment฀ property฀ should฀ only฀ be฀ made฀ when฀ there฀ is฀ a฀ change฀ in฀ use฀฀
(IFRS฀40:฀para.฀57).฀฀
A฀ change฀ in฀ use฀ occurs฀ when฀ the฀ property฀ meets,฀ or฀ ceases฀ to฀ meet,฀ the฀ definition฀ of฀ investment฀
property฀ and฀ there฀ is฀ evidence฀ of฀ the฀ change฀ in฀ use฀ (IAS฀ 40:฀ para.฀ 57).฀ For฀ example,฀ owner฀
occupation฀ commences฀ so฀ the฀ investment฀ property฀ will฀ be฀ treated฀ under฀ IAS฀ 16฀ as฀ an฀ owner-
occupied฀property.฀
In฀ isolation,฀ a฀ change฀ in฀ management's฀ intentions฀ for฀ the฀ use฀ of฀ a฀ property฀ does฀ not฀ provide฀
evidence฀of฀a฀change฀in฀use฀(IAS฀40:฀para.฀57).฀฀
Transfer฀from฀investment฀ Transfer฀from฀
property฀to฀owner-occupied฀ owner-occupied฀to฀
or฀inventories investment฀property
•฀฀ Cost฀for฀subsequent฀accounting฀is฀ •฀฀ Apply฀IAS฀16฀or฀IFRS฀16฀(for฀

fair฀value฀at฀date฀of฀change฀of฀ property฀held฀by฀a฀lessee฀as฀
use right-of-use฀asset)฀up฀to฀date฀of฀
change฀of฀use
•฀฀ Apply฀IAS฀16,฀IAS฀2฀or฀IFRS฀16฀
as฀appropriate฀after฀date฀of฀ •฀฀ At฀date฀of฀change,฀property฀
change฀of฀use revalued฀to฀fair฀value฀
•฀฀ At฀date฀of฀change,฀any฀difference฀
between฀the฀carrying฀amount฀
under฀IAS฀16฀or฀IFRS฀16฀and฀its฀
fair฀value฀is฀treated฀as฀a฀
revaluation฀under฀IAS฀16
฀
5.5฀Disposals฀
Any฀ gain฀ or฀ loss฀ on฀ disposal฀ of฀ investment฀ property฀ is฀ the฀ difference฀ between฀ the฀ net฀ disposal฀
proceeds฀and฀the฀carrying฀amount฀of฀the฀asset.฀It฀should฀be฀recognised฀as฀income฀or฀expense฀
in฀profit฀or฀loss฀(unless฀IFRS฀16฀requires฀otherwise฀on฀a฀sale฀and฀leaseback).฀
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Activity฀5:฀Investment฀property฀ ฀
Burdock,฀a฀public฀limited฀company,฀operates฀in฀the฀fashion฀industry฀and฀has฀a฀financial฀year฀end฀of฀
31฀May฀20X6.฀Burdock฀owns฀a฀number฀of฀prestigious฀apartments฀which฀it฀leases฀to฀famous฀persons฀
who฀ are฀ under฀ a฀ contract฀ of฀ employment฀ to฀ promote฀ its฀ fashion฀ clothing.฀ The฀ apartments฀ are฀ let฀ at฀
below฀ the฀ market฀ rate.฀ The฀ lease฀ terms฀ are฀ short฀ and฀ are฀ normally฀ for฀ six฀ months.฀ The฀ leases฀
terminate฀when฀the฀contracts฀for฀promoting฀the฀clothing฀terminate.฀Burdock฀wishes฀to฀account฀for฀the฀
apartments฀ as฀ investment฀ properties฀ with฀ the฀ difference฀ between฀ the฀ market฀ rate฀ and฀ actual฀ rental฀
charged฀to฀be฀recognised฀as฀an฀employee฀benefit฀expense.฀฀ ฀
Required฀
Discuss฀how฀the฀above฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Burdock฀for฀the฀year฀ended฀
31฀May฀20X6.฀฀
For฀ a฀ decision฀ tree฀ summarising฀ the฀ treatment฀ of฀ property฀ plus฀ an฀ additional฀ practice฀ activity฀ on฀
IAS฀40,฀see฀Chapter฀3฀Section฀4฀of฀the฀Supplementary฀Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀
the฀digital฀edition฀of฀the฀Workbook.฀
6฀Government฀grants฀(IAS฀20)฀
Tutorial฀note฀
IAS฀20฀Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀Government฀Assistance฀is฀a฀fairly฀
straightforward฀standard฀that฀you฀have฀seen฀before.฀The฀main฀points฀are฀summarised฀below.฀
(a)฀ Grants฀are฀not฀recognised฀until฀there฀is฀reasonable฀ assurance฀that฀the฀conditions฀will฀be฀

complied฀with฀and฀the฀grant฀will฀be฀received฀(IAS฀20:฀para.฀7).฀
(b)฀ Government฀grants฀are฀recognised฀in฀profit฀or฀loss฀so฀as฀to฀match฀them฀with฀the฀related฀costs฀
they฀are฀intended฀to฀compensate฀on฀a฀systematic฀basis฀(IAS฀20:฀para.฀12).฀
(c)฀ Government฀ grants฀ relating฀ to฀ assets฀ can฀ be฀ presented฀ either฀ as฀ deferred฀ income฀ or฀ by฀
deducting฀ the฀ grant฀ in฀ calculating฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ (IAS฀ 20:฀฀
para.฀25).฀
(d)฀ Grants฀ relating฀ to฀ income฀ may฀ either฀ be฀ shown฀ separately฀ or฀ as฀ part฀ of฀ 'other฀ income'฀ or฀
alternatively฀deducted฀from฀the฀related฀expense฀(IAS฀20:฀para.฀29).฀
(e)฀ A฀ government฀ grant฀ that฀ becomes฀ repayable฀ is฀ accounted฀ for฀ as฀ a฀ change฀ in฀ accounting฀
estimate฀in฀accordance฀with฀IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀
Errors฀(IAS฀20:฀para.฀32).฀
(i)฀ Repayments฀ of฀ grants฀ relating฀ to฀ income฀ are฀ applied฀ first฀ against฀ any฀ unamortised฀
deferred฀credit฀and฀then฀in฀profit฀or฀loss.฀
(ii)฀ Repayments฀of฀grants฀relating฀to฀assets฀are฀recorded฀by฀increasing฀the฀carrying฀amount฀
of฀ the฀ asset฀ or฀ reducing฀ the฀ deferred฀ income฀ balance.฀ Any฀ resultant฀ cumulative฀ extra฀
depreciation฀is฀recognised฀in฀profit฀or฀loss฀immediately.฀
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Activity฀6:฀Government฀grant฀ ฀
On฀ 1฀ June฀ 20X8฀ Epsilon฀ opened฀ a฀ new฀ factory฀ in฀ an฀ area฀ designated฀ by฀ the฀ Government฀ as฀ an฀
economic฀development฀area.฀On฀that฀day฀the฀Government฀provided฀Epsilon฀with฀a฀grant฀of฀$30m฀to฀
assist฀it฀in฀the฀development฀of฀the฀factory.฀This฀grant฀was฀in฀three฀parts:฀
(a)฀ $6m฀ of฀ the฀ grant฀ was฀ a฀ payment฀ by฀ the฀ Government฀ as฀ an฀ inducement฀ to฀ Epsilon฀ to฀ begin฀
developing฀the฀factory.฀No฀conditions฀were฀attached฀to฀this฀part฀of฀the฀grant.฀
(b)฀ $15m฀of฀the฀grant฀related฀to฀the฀construction฀of฀the฀factory฀at฀a฀cost฀of฀$60m.฀The฀land฀was฀
leased฀so฀the฀whole฀of฀the฀$60m฀is฀depreciable฀over฀the฀estimated฀40฀year฀useful฀life฀of฀the฀
factory.฀
(c)฀ The฀ remaining฀ $9m฀ was฀ received฀ subject฀ to฀ keeping฀ at฀ least฀ 200฀ employees฀ working฀ at฀ the฀
factory฀for฀a฀period฀of฀at฀least฀five฀years.฀If฀the฀number฀drops฀below฀200฀at฀any฀time฀in฀any฀
financial฀ year฀ in฀ this฀ five฀ year฀ period฀ then฀ 20%฀ of฀ the฀ grant฀ is฀ repayable฀ in฀ that฀ year.฀ From฀
1฀June฀20X8฀220฀workers฀were฀employed฀at฀the฀factory฀and฀estimates฀are฀that฀this฀number฀is฀
unlikely฀to฀fall฀below฀200฀over฀the฀relevant฀five฀year฀period.฀
Required฀
Explain฀how฀the฀grant฀of฀$30m฀should฀be฀reported฀in฀the฀financial฀statements฀of฀Epsilon฀for฀the฀year฀
ended฀ 30฀September฀ 20X8.฀ Where฀ IFRSs฀ allow฀ alternative฀ treatments฀ of฀ any฀ part฀ of฀ the฀ grant฀ you฀
should฀explain฀both฀treatments.฀
7฀Borrowing฀costs฀(IAS฀23)฀
Borrowing฀ costs฀ directly฀ attributable฀ to฀ the฀ acquisition,฀ construction฀ or฀ production฀ of฀ a฀ qualifying฀
asset฀are฀capitalised฀as฀part฀of฀the฀cost฀of฀that฀asset.฀(IAS฀23:฀para.฀26)฀
A฀ qualifying฀ asset฀ is฀ one฀ that฀ necessarily฀ takes฀ a฀ substantial฀ period฀ of฀ time฀ to฀ get฀ ready฀ for฀ its฀
intended฀use฀or฀sale.฀(IAS฀23:฀para.฀5)฀
(a)฀ Borrowing฀costs฀eligible฀for฀capitalisation:฀
(i)฀ Funds฀ borrowed฀ specifically฀ for฀ a฀ qualifying฀ asset฀ –฀ capitalise฀ actual฀
borrowing฀ costs฀ incurred฀ less฀ investment฀ income฀ on฀ temporary฀ investment฀ of฀ the฀ funds฀
(IAS฀23:฀para.฀12)฀
(ii)฀ Funds฀ borrowed฀ generally฀ –฀ weighted฀ average฀ of฀ borrowing฀ costs฀ outstanding฀
during฀the฀period฀(excluding฀borrowings฀specifically฀for฀a฀qualifying฀asset)฀multiplied฀by฀
expenditure฀ on฀ qualifying฀ asset.฀ The฀ amount฀ capitalised฀ should฀ not฀ exceed฀ total฀
borrowing฀costs฀incurred฀in฀the฀period฀(IAS฀23:฀para.฀14).฀
(b)฀ Commencement฀of฀capitalisation฀begins฀when฀(IAS฀23:฀para.฀17):฀
(i)฀ Expenditures฀for฀the฀asset฀are฀being฀incurred;฀
(ii)฀ Borrowing฀costs฀are฀being฀incurred;฀and฀
(iii)฀ Activities฀ that฀ are฀ necessary฀ to฀ prepare฀ the฀ asset฀ for฀ its฀ intended฀ use฀ or฀ sale฀ are฀ in฀
progress.฀
(c)฀ Capitalisation฀ is฀ suspended฀ during฀ extended฀ periods฀ when฀ development฀ is฀ interrupted฀฀
(IAS฀23:฀para.฀20).฀
(d)฀ Capitalisation฀ceases฀when฀substantially฀all฀the฀activities฀necessary฀to฀prepare฀the฀asset฀for฀its฀
intended฀use฀or฀sale฀are฀complete฀(IAS฀23:฀para.฀22).฀
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The฀financial฀statements฀disclose฀(IAS฀23:฀para.฀26):฀
฀ The฀amount฀of฀borrowing฀costs฀capitalised฀during฀the฀period;฀and฀
฀ The฀capitalisation฀rate฀used฀to฀determine฀the฀amount฀of฀borrowing฀costs฀eligible฀for฀
capitalisation.฀
Activity฀7:฀Borrowing฀costs฀ ฀
Zenzi฀Co฀had฀the฀following฀loans฀in฀place฀at฀the฀beginning฀and฀end฀of฀20X8.฀
฀ 1฀January 31฀December฀
฀ 20X8 20X8฀
฀ $m $m฀
10.0%฀Bank฀loan฀repayable฀20Y3฀ 120 120฀
9.5%฀Bank฀loan฀repayable฀20Y1฀ 80 80฀
On฀1฀January฀20X8,฀Zenzi฀Co฀began฀construction฀of฀a฀qualifying฀asset,฀a฀piece฀of฀machinery฀for฀a฀
hydro-electric฀ plant,฀ using฀ existing฀ borrowings.฀ Expenditure฀ drawn฀ down฀ for฀ the฀ construction฀ was:฀
$30m฀on฀1฀January฀20X8,฀$20m฀on฀1฀October฀20X8.฀
Required฀
Calculate฀the฀borrowing฀costs฀to฀be฀capitalised฀for฀the฀machinery.฀
8฀฀Agriculture฀(IAS฀41)฀
IAS฀ 41฀ Agriculture฀ covers฀ the฀ accounting฀ treatment฀ of฀ biological฀ assets฀ (except฀ bearer฀ plants)฀ and฀
agricultural฀produce฀at฀the฀point฀of฀harvest.฀After฀harvest฀IAS฀2฀Inventories฀applies฀to฀the฀agricultural฀
produce,฀as฀illustrated฀in฀the฀time฀line฀below.฀
IAS฀41฀ IAS฀2฀฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ Time฀
฀ Biological฀transformation฀
฀ Planting/฀ Harvest/฀ Sale฀

฀ birth฀ slaughter฀
Bearer฀ plants,฀ which฀ are฀ plants฀ that฀ are฀ used฀ to฀ grow฀ crops฀ but฀ are฀ not฀ themselves฀ consumed฀ (eg฀
grapevines),฀are฀excluded฀from฀the฀scope฀of฀IAS฀41.฀Instead฀they฀are฀accounted฀for฀under฀IAS฀16฀
using฀either฀the฀cost฀or฀revaluation฀model.฀
Agricultural฀produce:฀the฀harvested฀product฀of฀an฀entity's฀biological฀assets.฀
Key terms Biological฀assets:฀living฀animals฀or฀plants.฀฀
Biological฀transformation:฀the฀processes฀of฀growth,฀degeneration,฀production฀and฀procreation฀
that฀cause฀qualitative฀and฀quantitative฀changes฀in฀a฀biological฀asset.฀
฀ (IAS฀41:฀para.฀5)฀
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As฀with฀other฀non-financial฀assets฀under฀the฀Conceptual฀Framework,฀a฀biological฀asset฀or฀agricultural฀
produce฀is฀recognised฀when฀(IAS฀41:฀para.฀10):฀
(a)฀ The฀entity฀controls฀the฀asset฀as฀a฀result฀of฀past฀events;฀
(b)฀ It฀is฀probable฀that฀future฀economic฀benefits฀associated฀with฀the฀asset฀will฀flow฀to฀the฀
entity;฀and฀
(c)฀ The฀fair฀value฀or฀cost฀of฀the฀asset฀can฀be฀measured฀reliably.฀
Biological฀assets฀are฀measured฀both฀on฀initial฀recognition฀and฀at฀the฀end฀of฀each฀reporting฀period฀
at฀fair฀value฀less฀costs฀to฀sell (IAS฀41:฀para.฀12).฀
Agricultural฀produce฀at฀the฀point฀of฀harvest฀is฀also฀measured฀at฀fair฀value฀less฀costs฀to฀
sell฀(IAS฀41:฀para.฀13).฀
The฀fair฀value฀less฀costs฀to฀sell฀of฀agricultural฀produce฀harvested฀becomes฀its฀cost฀under฀IAS฀2.฀After฀
harvest,฀ the฀ agricultural฀ produce฀ is฀ measured฀ at฀ the฀ lower฀ of฀ cost฀ and฀ net฀ realisable฀ value฀ in฀
accordance฀with฀IAS฀2.฀
Changes฀in฀fair฀value฀less฀costs฀to฀sell฀are฀recognised฀in฀profit฀or฀loss฀(IAS฀41:฀para.฀26).฀
Where฀fair฀ value฀ cannot฀ be฀ measured฀ reliably,฀biological฀assets฀are฀measured฀at฀cost฀less฀

accumulated฀depreciation฀and฀impairment฀losses฀(IAS฀41:฀para.฀30).฀
Ethics฀note฀
Although฀ethics฀will฀certainly฀feature฀in฀the฀second฀question฀of฀Section฀A,฀ethical฀issues฀could฀feature฀
in฀any฀question฀in฀the฀SBR฀exam.฀Therefore฀you฀need฀to฀be฀alert฀to฀any฀threats฀to฀the฀fundamental฀
principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀question.฀
For฀example,฀pressure฀to฀achieve฀a฀particular฀profit฀figure฀could฀lead฀to฀deliberate฀attempts฀to฀
improve฀profits฀through:฀
฀ Incorrect฀capitalisation฀of฀development฀expenditure฀when฀it฀does฀not฀meet฀the฀IAS฀38฀criteria฀
in฀order฀to฀reduce฀development฀costs฀charged฀to฀profit฀or฀loss฀
฀ Incorrect฀capitalisation฀of฀more฀interest฀than฀permitted฀by฀IAS฀23฀in฀order฀to฀reduce฀finance฀
costs฀
฀ Inappropriate฀classification฀of฀property฀as฀investment฀property฀in฀order฀to฀avoid฀depreciation฀
and฀to฀recognise฀revaluation฀gains฀in฀profit฀or฀loss฀
฀ Manipulation฀of฀the฀estimation฀of฀recoverable฀amount฀to฀avoid฀impairment฀losses฀
Time฀pressure฀at฀the฀year฀end฀or฀inexperience/lack฀of฀training฀of฀the฀reporting฀accountant฀could฀lead฀
to฀errors฀when฀complex฀procedures฀are฀required,฀for฀example฀in฀testing฀CGUs฀for฀impairment,฀or฀
where฀significant฀judgement฀is฀required,฀for฀example฀in฀the฀capitalisation฀of฀intangible฀assets.฀
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1.฀ Property,฀plant฀and฀ 2.฀ Impairment฀of฀assets฀ 3. Fair฀value฀฀

equipment฀(IAS฀16)฀ (IAS฀36)฀ measurement฀
Tangible฀items฀that฀are฀held฀by฀the฀ ฀ Impairment฀indicators:฀
(IFRS฀13)฀
entity฀for฀use฀in฀the฀production฀or฀ ฀ External฀ ฀ 'The฀price฀that฀would฀be฀received฀to฀
supply฀of฀goods฀or฀services,฀for฀ –฀ Significant฀fall฀in฀market฀value฀ sell฀an฀asset฀or฀paid฀to฀transfer฀a฀
฀
rental฀to฀others,฀or฀for฀ liability฀in฀an฀orderly฀transaction฀
฀ –฀ Significant฀external฀adverse฀
administrative฀purposes฀and฀are฀ between฀market฀participants฀at฀the฀
expected฀to฀be฀used฀during฀more฀ changes฀
measurement฀date'฀
than฀one฀period฀ ฀ –฀ Increase฀in฀market฀interest฀rates฀
฀ Fair฀value฀is฀after฀transport฀costs,฀
฀ –฀ Net฀assets฀>฀market฀
Recognise฀when:฀ but฀before฀transaction฀costs฀
capitalisation฀
฀ Probable฀that฀future฀economic฀ ฀ Market-based฀measure฀(ie฀use฀
benefits฀will฀flow฀to฀the฀entity฀ ฀ Internal฀
assumptions฀market฀participants฀
฀ –฀ Obsolescence/damage฀ would฀use),฀not฀entity฀specific฀
฀ The฀cost฀of฀the฀asset฀can฀be฀
฀ –฀ Significant฀internal฀adverse฀
measured฀reliably฀ ฀ Hierarchy฀for฀inputs฀to฀valuation฀
changes฀ techniques:฀
Initial฀recognition฀at฀cost฀ ฀ –฀ Performance฀worse฀than฀
฀ (1)฀Unadjusted฀quoted฀prices฀
Components฀of฀assets฀should฀be฀ expected฀ (active฀market)฀for฀identical฀
recognised฀separately฀if฀they฀are฀ ฀ Impairment฀loss฀where:฀ items฀
expected฀to฀generate฀different฀ recoverable฀amount฀(RA)฀<฀carrying฀ ฀ (2)฀Inputs฀other฀than฀quoted฀prices฀
patterns฀of฀benefits฀ amount฀ that฀can฀be฀observed฀directly฀
Subsequent฀measurement,฀choice฀of ฀ RA฀=฀ higher฀of:฀ (prices)฀or฀indirectly฀(derived฀
from฀prices)฀
฀ FV฀less฀costs฀ ฀฀฀฀฀Value฀in฀use฀
Cost฀model:฀Cost฀less฀ ฀ ฀of฀disposal฀ CF฀฀฀฀฀฀฀฀DF฀฀฀PV฀฀ ฀ (3)฀Unobservable฀inputs฀
accumulated฀depreciation/฀ ฀ ฀ ฀ ฀ Multiple฀markets,฀use฀FV฀in:฀
impairment฀losses฀ ฀ ฀ ฀ ฀ X฀
1
/(1+r)฀ X฀
฀ (1)฀Principal฀market฀(if฀there฀is฀one)฀
Revaluation฀model:฀Revalued฀ ฀ ฀ ฀ ฀ X฀ /(1+r)2฀ X฀ 1
฀ (2)฀Most฀advantageous฀market฀(ie฀
amount฀less฀subsequent฀ ฀ ฀ ฀ ฀ etc฀ ฀ ฀฀฀฀
the฀best฀one฀after฀both฀
accumulated฀depreciation/฀ ฀ ฀ ฀ ฀ ฀ ฀ X฀
transaction฀and฀transport฀costs)฀
impairment฀losses฀(entire฀class),฀fair฀ ฀ CGUs:฀
value฀(FV)฀(using฀FV฀hierarchy฀in฀ ฀ (1)฀Test฀individual฀CGUs฀ ฀ Non-financial฀assets:฀highest฀and฀
IFRS฀13)฀ ฀ (2)฀Test฀group฀of฀CGUs฀including:฀ best฀use฀that฀is฀physically฀possible,฀
–฀ Unallocated฀goodwill฀ legally฀permissible฀and฀financially฀
Depreciate฀on฀a฀systematic฀basis฀
feasible฀
over฀the฀useful฀life฀ –฀ Unallocated฀corporate฀assets฀
฀ FV฀of฀a฀liability฀(example):฀
Review฀useful฀life/depreciation฀ ฀ ฀ Before฀ Imp฀฀฀฀After
method฀and฀residual฀value฀at฀least฀ ฀ Expected฀value฀of฀cash฀flows
฀ ฀ ฀ loss฀
each฀financial฀year฀end฀ ฀ Third-party฀contractor฀mark-up฀ X฀
Goodwill฀ X฀ (X)฀ X฀ ฀ ฀ X฀
Impairment:฀charge฀first฀to฀OCI฀ Other฀assets฀ X฀ (X)฀ X฀ ฀ Inflation฀adjustment฀ X฀
(for฀any฀revaluation฀surplus)฀then฀ ฀ ฀ X฀ (X)฀ X฀ ฀ ฀ X฀
profit฀or฀loss฀(P/L)฀ ฀ Risk฀premium฀(re฀diff฀cash฀flows)฀ X฀
Exchanges฀of฀items฀of฀PPE฀are฀ ฀ ฀ X฀
measured฀at฀fair฀value฀ ฀ Discount฀to฀PV฀ X฀
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4.฀ Intangible฀assets฀ 5.฀ Investment฀ 6. Government฀grants฀

(IAS฀38)฀ property฀(IAS฀40)฀ (IAS฀20)฀
Identifiable฀non-monetary฀assets฀ Property฀held฀to฀earn฀rentals฀or฀for฀ ฀ Recognised฀when฀'reasonably฀certain'฀
without฀physical฀substance฀ capital฀appreciation฀or฀both฀rather฀ condition฀met฀
An฀asset฀is฀identifiable฀if:฀ than฀for:฀ ฀ (NB:฀different฀to฀Conceptual฀
฀ Use฀in฀the฀production฀or฀supply฀ Framework)฀
(a)฀ It฀is฀separable,฀or฀
of฀goods฀or฀services฀or฀for฀ ฀ Grants฀re฀assets:฀
(b)฀ It฀arises฀from฀ administrative฀purposes;฀or฀ ฀ –฀ Deferred฀income,฀or฀
contractual/legal฀rights฀ –฀ Reduce฀carrying฀amount฀
฀ Sale฀in฀the฀ordinary฀course฀of฀ ฀
Recognise฀when:฀ business฀ ฀ Grants฀re฀income:฀
฀ Probable฀that฀future฀economic฀ –฀ In฀P/L฀when฀expense฀recognised฀
Recognise฀when:฀
benefits฀will฀flow฀to฀the฀entity฀ (i)฀ Other฀income,฀or฀
฀ Probable฀that฀future฀economic฀
฀ The฀cost฀of฀the฀asset฀can฀be฀ (ii)฀ Reduce฀related฀expense฀
benefits฀will฀flow฀to฀the฀entity฀
measured฀reliably฀ Annual฀impairment฀tests฀required฀for:฀
฀ The฀cost฀of฀the฀asset฀can฀be฀ ฀ Goodwill฀฀
Initial฀measurement:฀ measured฀reliably฀
฀ Intangibles฀not฀yet฀ready฀for฀use฀
Purchased:฀ Initial฀measurement:฀ ฀ Intangibles฀with฀indefinite฀useful฀life฀
฀ Cost฀(as฀IAS฀16)฀ ฀ Cost฀ Impairment฀loss:฀
Internally฀generated:฀ –฀ Purchase฀price฀ DR฀ OCI฀(&฀Revaluation฀surplus)฀(First฀if฀
฀ Capitalise฀if฀฀ –฀ Directly฀attributable฀
revalued)฀
DR฀ P/L฀
P฀robable฀future฀economic฀bens฀ expenditure฀
CR฀ Goodwill฀of฀CGU฀(First)฀
I฀ ntention฀to฀complete฀&฀ After฀recognition,฀choice฀of฀ CR฀ Other฀assets฀pro-rata฀
use/sell฀asset฀ ฀฀ Cost฀model:฀as฀IAS฀16฀unless฀ Impairment฀loss฀reversals:฀
R฀esources฀adequate฀and฀ held฀for฀sale฀(IFRS฀5)฀or฀leased฀ ฀ Permitted฀where฀RA฀increases฀
available฀to฀complete฀&฀ (IFRS฀16)฀
฀ Opposite฀double฀entry฀
use/sell฀ ฀฀ Fair฀value฀model:฀Market฀ ฀ Cannot฀reverse฀above฀lower฀of:฀
A฀bility฀to฀use/sell฀ value฀at฀year฀end,฀gain/loss฀in฀ –฀ RA฀
฀
P/L,฀not฀depreciated฀
T฀echnical฀feasibility฀ –฀ Carrying฀amount฀if฀no฀impairment฀
Impairment:฀charge฀to฀P/L฀฀ occurred฀
E฀xpenditure฀can฀be฀measured฀
reliably฀ ฀ –฀ Goodwill฀never฀reversed฀
Never฀capitalised:฀
฀ Internally฀generated฀brands,฀
mastheads,฀publishing฀titles฀&฀
customer฀lists,฀start-up฀costs,฀
training,฀advertising,฀
7.฀ Borrowing฀costs฀฀ 8.฀Agriculture฀(IAS฀41)฀
relocations/reorganisations฀ (IAS฀23)฀ Biological฀asset:฀A฀living฀animal฀or฀plant฀
After฀recognition,฀choice฀of฀ ฀ Capitalise:฀ Agricultural฀produce:฀The฀harvested฀
–฀ Cost฀model:฀as฀IAS฀16฀ –฀ Funds฀borrowed฀specifically:฀ product฀of฀the฀entity's฀biological฀assets฀
–฀ Revaluation฀model:฀ ฀actual฀borrowing฀costs฀less฀ (Bearer฀plants฀accounted฀for฀under฀IAS฀16)฀฀

revaluation฀only฀by฀ income฀on฀temporary฀investment฀ Recognise฀when:฀
reference฀to฀an฀active฀ of฀funds฀
฀ Controlled฀as฀a฀result฀of฀past฀events฀
market฀ –฀ Funds฀borrowed฀generally:฀฀
฀ Probable฀future฀economic฀benefits,฀
Amortisation:฀ ฀ weighted฀average฀borrowing฀ and฀
฀ Finite฀useful฀life:฀Systematic฀ costs฀(excl฀specific฀borrowing฀
฀ Fair฀value฀or฀cost฀can฀be฀measured฀
basis฀over฀useful฀life฀(UL)฀ costs)฀฀weighted฀average฀
reliably฀
expenditure฀
฀ Indefinite฀UL:฀at฀least฀annual฀
Measurement:฀
impairment฀tests฀ ฀ Cease฀capitalisation฀when฀ready฀for฀
intended฀use฀ Biological฀assets:฀FV฀less฀costs฀to฀sell฀
Impairment:฀charge฀first฀to฀OCI฀
(for฀any฀revaluation฀surplus)฀ ฀ Suspend฀if฀development฀interrupted฀ Agricultural฀produce:฀
then฀P/L฀฀ (for฀an฀extended฀period)฀ At฀the฀point฀of฀harvest:฀฀FV฀less฀costs฀to฀sell฀
(becomes฀IAS฀2฀cost)฀
Thereafter฀–฀as฀inventories฀฀
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1.฀ Property,฀plant฀and฀equipment฀(IAS฀16)฀
฀ Property,฀plant฀and฀equipment฀can฀be฀accounted฀for฀under฀the฀cost฀model฀(depreciated)฀or฀
revaluation฀model฀(depreciated฀revalued฀amounts,฀gains฀recognised฀in฀other฀
comprehensive฀income).฀
2.฀ Impairment฀of฀assets฀(IAS฀36)฀
฀ Impairment฀losses฀occur฀where฀the฀carrying฀amount฀of฀an฀asset฀is฀above฀its฀recoverable฀
amount.฀
฀ Impairment฀losses฀are฀charged฀first฀to฀other฀comprehensive฀income฀(re฀any฀revaluation฀
surplus฀relating฀to฀the฀asset)฀and฀then฀to฀profit฀or฀loss.฀
฀ Where฀cash฀flows฀cannot฀be฀measured฀separately,฀the฀impairment฀losses฀are฀calculated฀by฀
reference฀to฀the฀cash-generating฀unit.฀Resulting฀impairment฀losses฀are฀allocated฀first฀
against฀any฀goodwill฀and฀then฀pro-rata฀to฀other฀assets.฀
3.฀ Fair฀value฀measurement฀(IFRS฀13)฀
฀ IFRS฀13฀treats฀all฀assets,฀liabilities฀and฀an฀entity's฀own฀equity฀instruments฀in฀a฀
consistent฀way.฀A฀fair฀value฀hierarchy฀is฀used฀to฀establish฀fair฀value,฀using฀observable฀
inputs฀as฀far฀as฀possible฀as฀fair฀value฀is฀a฀market-based฀measure.฀
4.฀฀ Intangible฀assets฀(IAS฀38)฀
฀ Intangible฀assets฀can฀also฀be฀accounted฀for฀under฀the฀cost฀model฀or฀revaluation฀model,฀
but฀only฀intangibles฀with฀an฀active฀market฀can฀be฀revalued.฀
฀ Intangible฀assets฀are฀amortised฀over฀their฀useful฀lives฀(normally฀to฀a฀zero฀residual฀value)฀
unless฀they฀have฀an฀indefinite฀useful฀life฀(annual฀impairment฀tests฀required).฀
5.฀ Investment฀property฀(IAS฀40)฀
฀ Investment฀property฀can฀be฀accounted฀for฀under฀the฀cost฀model฀or฀the฀fair฀value฀model฀
(not฀depreciated,฀gains฀and฀losses฀recognised฀in฀profit฀or฀loss).฀
6.฀฀ Government฀grants฀(IAS฀20)฀
฀ Government฀grants฀are฀recognised฀when฀there฀is฀reasonable฀assurance฀that฀the฀conditions฀will฀
be฀satisfied฀and฀the฀grant฀will฀be฀received.฀Grants฀are฀normally฀presented฀as฀deferred฀income฀
and฀recognised฀in฀profit฀or฀loss฀to฀match฀against฀related฀costs.฀Grants฀relating฀to฀assets฀can฀
either฀be฀presented฀in฀deferred฀income฀or฀deducted฀from฀the฀carrying฀amount฀of฀the฀asset.฀
7.฀฀ Borrowing฀costs฀(IAS฀23)฀
฀ Borrowing฀costs฀relating฀to฀qualifying฀assets฀(those฀which฀necessarily฀take฀a฀substantial฀
period฀of฀time฀to฀be฀ready฀for฀use/sale)฀must฀be฀capitalised.฀฀This฀includes฀both฀specific฀and฀
general฀borrowings฀of฀the฀company.฀
8.฀฀ Agriculture฀(IAS฀41)฀฀
฀ Biological฀assets฀and฀agricultural฀produce฀at฀the฀point฀of฀harvest฀are฀measured฀at฀fair฀value฀
less฀costs฀to฀sell,฀with฀changes฀reported฀in฀profit฀or฀loss.฀
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Now฀try฀the฀questions฀below฀from฀the฀Further฀question฀practice฀bank:฀฀
Q4฀Camel฀Telecom฀
Q5฀Acquirer฀
There฀are฀articles฀on฀the฀ACCA฀website,฀written฀by฀the฀SBR฀examining฀team,฀which฀are฀relevant฀
to฀the฀topics฀studied฀in฀this฀Chapter฀and฀which฀are฀useful฀reading:฀
IAS฀36฀impairment฀of฀assets฀(2009)฀
IAS฀16฀property฀plant฀and฀equipment฀(2009)฀
IAS฀16฀and฀componentisation฀(2011)฀
How฀do฀changes฀to฀IAS฀16,฀38฀and฀IFRS฀11฀impact฀you?฀(2014)฀
How฀to฀measure฀fair฀value฀(2011)฀
www.accaglobal.com/uk/en/member/ab/cpd-ab.html฀
IFRS฀13฀Fair฀Value฀Measurement฀
The฀IAS฀plus฀website฀has฀a฀summary฀of฀IFRS฀13฀and฀links฀to฀guidance฀(IFRS฀in฀Focus)฀and฀a฀
podcast฀produced฀by฀Deloitte.฀฀
www.iasplus.com/en/standards/ifrs/ifrs13฀
฀ 75฀

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76฀

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฀
฀
฀
฀
Employee฀benefits
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀accounting฀treatment฀of฀short-term฀and฀long-term฀employee฀ C5(a)฀
benefits฀and฀defined฀contribution฀and฀defined฀benefit฀plans.฀
Account฀for฀gains฀and฀losses฀on฀settlements฀and฀curtailments.฀ C5(b)฀
Account฀for฀the฀'Asset฀Ceiling'฀test฀and฀the฀reporting฀of฀actuarial฀(remeasurement)฀ C5(c)฀
gains฀and฀losses.฀
฀ ฀
Exam฀context฀
Employee฀ benefits฀ include฀ short-term฀ benefits฀ such฀ as฀ salaries,฀ and฀ long-term฀ benefits฀ such฀ as฀
pensions.฀This฀topic฀is฀not฀covered฀in฀Financial฀Reporting฀and฀so฀will฀be฀new฀to฀you฀at฀this฀level.฀฀
In฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀employee฀benefits฀could฀feature฀in฀any฀section,฀and฀
may฀be฀a฀whole฀or฀part-question.฀
฀ 77฀

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฀฀
฀
฀
1. Short-term฀ 6.฀Current฀
฀ Employee฀benefits
benefits฀ developments฀
฀
฀
฀
฀ ฀
Post-employment฀
benefits฀
2.฀Defined฀contribution฀plans 3.฀Defined฀benefit฀plans฀
4.฀Settlements฀
5.฀Asset฀ceiling฀test฀
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4:฀Employee฀benefits฀
1฀Short-term฀benefits฀
1.1฀Introduction฀to฀employee฀benefits฀
Employee
Benefits
Short-term Post-employment Other฀long-term Termination

benefits benefits benefits benefits
฀
IAS฀19฀Employee฀Benefits฀covers฀four฀distinct฀types฀of฀employee฀benefit.฀However,฀only฀short-term฀
and฀post-employment฀benefits฀are฀examinable.฀
Accounting฀for฀short-term฀ employee฀ benefit฀ costs฀tends฀to฀be฀quite฀straightforward,฀because฀
they฀ are฀ simply฀ recognised฀ as฀ an฀ expense฀ in฀ the฀ employer's฀ financial฀ statements฀ of฀ the฀ current฀
period.฀Accounting฀for฀the฀cost฀of฀deferred฀employee฀benefits฀is฀much฀more฀difficult฀because฀of฀
the฀large฀amounts฀involved,฀as฀well฀as฀the฀long฀time฀scale,฀complicated฀estimates฀and฀uncertainties.฀
See฀Chapter฀4฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀background฀reading฀on฀the฀conceptual฀
nature฀ of฀ employee฀ benefit฀ costs฀ and฀ the฀ principles฀ underlining฀ the฀ accounting.฀ This฀ is฀ available฀ in฀
Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
1.2฀Short-term฀benefits฀
Employee฀benefits:฀All฀forms฀of฀consideration฀given฀by฀an฀entity฀in฀exchange฀for฀service฀
rendered฀by฀employees฀or฀for฀the฀termination฀of฀employment.฀
Key฀term฀
Short-term฀benefits:฀Employee฀benefits฀(other฀than฀termination฀benefits)฀that฀are฀expected฀to฀be฀
settled฀wholly฀before฀12฀months฀after฀the฀end฀of฀the฀annual฀reporting฀period฀in฀which฀the฀employees฀
render฀the฀related฀service.฀฀
฀ (IAS฀19:฀para.฀8)฀
Short-term฀benefits฀include฀items฀such฀as฀(IAS฀19:฀para.฀9):฀
(a)฀ Wages,฀salaries฀and฀social฀security฀contributions฀
(b)฀ Paid฀annual฀leave฀and฀paid฀sick฀leave฀
(c)฀ Profit-sharing฀and฀bonuses฀
(d)฀ Non-monetary฀ benefits฀ (eg฀ medical฀ care,฀ housing,฀ cars฀ and฀ free฀ or฀ subsidised฀ goods฀ or฀
services).฀
Short-term฀ employee฀ benefits฀ are฀ recognised฀ as฀ a฀ liability฀ and฀ an฀ expense฀ when฀ an฀ employee฀ has฀
rendered฀service฀during฀an฀accounting฀period,฀ie฀on฀an฀accruals฀basis.฀
Short-term฀benefits฀are฀not฀discounted฀to฀present฀value.฀
฀ 79฀

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฀฀
1.3฀Short-term฀paid฀absences฀ We฀are฀concerned฀with฀
payment฀by฀the฀company,฀not฀
Accumulating฀paid฀absences฀ the฀government.฀฀฀
Accumulating฀paid฀absences฀are฀those฀that฀can฀be฀carried฀forward฀for฀use฀in฀future฀periods฀if฀the฀
current฀period's฀entitlement฀is฀not฀used฀in฀full฀(eg฀holiday฀pay).฀
The฀expected฀cost฀of฀any฀unused฀entitlement฀that฀can฀be฀carried฀forward฀or฀paid฀in฀lieu฀of฀holidays฀is฀
recognised฀as฀an฀accrual฀at฀the฀year฀end.฀฀
You've฀worked฀more฀than฀you฀should฀
฀ on฀full฀pay,฀but฀next฀year฀you฀will฀
work฀less฀than฀you฀should฀on฀full฀pay.฀
Non-accumulating฀paid฀absences฀
Non-accumulating฀ absences฀ cannot฀ be฀ carried฀ forward฀ (eg฀ maternity฀ leave฀ or฀ military฀ service).฀
Therefore฀they฀are฀only฀recognised฀as฀an฀expense฀when฀the฀absence฀occurs฀(IAS฀19:฀para.฀11).฀
Activity฀1:฀Short-term฀benefits฀(1)฀ ฀ ฀
Plyman฀ Co฀ has฀ 100฀ employees.฀ Each฀ is฀ entitled฀ to฀ five฀ working฀ days'฀ of฀ paid฀ sick฀ leave฀ for฀ each฀
year,฀and฀unused฀sick฀leave฀can฀be฀carried฀forward฀for฀one฀year.฀Sick฀leave฀is฀taken฀on฀a฀LIFO฀basis฀
(ie฀first฀out฀of฀the฀current฀year's฀entitlement฀and฀then฀out฀of฀any฀balance฀brought฀forward).฀
As฀ at฀ 31฀ December฀ 20X8,฀ the฀ average฀ unused฀ entitlement฀ is฀ two฀ days฀ per฀ employee.฀ Plyman฀ Co฀
expects฀(based฀on฀past฀experience฀which฀is฀expected฀to฀continue)฀that฀92฀employees฀will฀take฀five฀
days฀or฀fewer฀sick฀leave฀in฀20X9฀and฀the฀remaining฀eight฀employees฀will฀take฀an฀average฀of฀six฀and฀
a฀half฀days฀each.฀
Required฀
State฀the฀required฀accounting฀for฀sick฀leave.฀
Activity฀2:฀Short-term฀benefits฀(2)฀ ฀ ฀
The฀salaried฀employees฀of฀an฀entity฀are฀entitled฀to฀20฀days'฀paid฀leave฀each฀year.฀The฀entitlement฀
accrues฀ evenly฀ over฀ the฀ year฀ and฀ unused฀ leave฀ may฀ be฀ carried฀ forward฀ for฀ one฀ year.฀ The฀ holiday฀
year฀ is฀ the฀ same฀ as฀ the฀ financial฀ year.฀ At฀ 31฀ December฀ 20X4,฀ the฀ entity฀ had฀ 2,200฀ salaried฀
employees฀ and฀ the฀ average฀ unused฀ holiday฀ entitlement฀ was฀ 4฀ days฀ per฀ employee.฀ Approximately฀
6%฀ of฀ employees฀ leave฀ without฀ taking฀ their฀ entitlement฀ and฀ there฀ is฀ no฀ cash฀ payment฀ when฀ an฀
employee฀leaves฀in฀respect฀of฀holiday฀entitlement.฀There฀are฀255฀working฀days฀in฀the฀year฀and฀the฀
total฀annual฀salary฀cost฀is฀$42฀million.฀No฀adjustment฀has฀been฀made฀in฀the฀financial฀statements฀for฀
the฀above฀and฀there฀was฀no฀opening฀accrual฀required฀for฀holiday฀entitlement.฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ how฀ the฀ leave฀ that฀ may฀ be฀ carried฀ forward฀ is฀ treated฀ in฀ the฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X4.฀
1.4฀Profit-sharing฀and฀bonus฀plans฀
An฀entity฀recognises฀the฀expected฀cost฀of฀profit-sharing฀and฀bonus฀payments฀when,฀and฀only฀when฀
(IAS฀19:฀para.฀19–24):฀
(a)฀ The฀entity฀has฀a฀present฀ legal฀ or฀ constructive฀ obligation฀to฀make฀such฀payments฀as฀a฀
result฀of฀past฀events;฀and฀
(b)฀ A฀reliable฀estimate฀of฀the฀obligation฀can฀be฀made.฀
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A฀ present฀ obligation฀ exists฀ when฀ and฀ only฀ when฀ the฀ entity฀ has฀ no฀ realistic฀ alternative฀ but฀ to฀ make฀
payments.฀
Illustration฀1฀
Profit-sharing฀plan฀
Mooro฀Co฀runs฀a฀profit฀sharing฀plan฀under฀which฀it฀pays฀3%฀of฀its฀net฀profit฀for฀the฀year฀to฀its฀
employees฀if฀none฀have฀left฀during฀the฀year.฀Mooro฀Co฀estimates฀that฀this฀will฀be฀reduced฀by฀staff฀
turnover฀to฀2.5%฀in฀20X9.฀
Required฀
Which฀costs฀should฀be฀recognised฀by฀Mooro฀Co฀for฀the฀profit฀share?฀
Solution฀
Mooro฀Co฀should฀recognise฀a฀liability฀and฀an฀expense฀of฀2.5%฀of฀net฀profit.฀
1.5฀Post-employment฀benefits฀
Post-employment฀ benefits฀ are฀ employee฀ benefits฀ which฀ are฀ payable฀ after฀ the฀ completion฀ of฀
employment.฀
Post-employment
benefits
Defined฀contribution฀ Defined฀benefit฀
plans plans
฀
(a)฀ Defined฀contribution฀plans฀
฀ Eg฀annual฀contribution฀=฀5%฀salary฀
฀ Future฀pension฀depends฀on฀the฀value฀of฀the฀fund฀฀ Employer฀bears฀the฀
risk;฀employee฀knows฀
(b)฀ Defined฀benefit฀plans฀ what฀their฀pension฀
will฀be.฀
Final salary
฀ Eg฀annual฀pension฀=฀ ×฀years฀worked฀
60
฀ Future฀pension฀depends฀on฀final฀salary฀and฀years฀worked฀
The฀accounting฀for฀the฀two฀different฀types฀of฀plan฀are฀very฀different.฀It฀is฀important฀that฀you฀decide฀on฀
the฀nature฀of฀the฀plan฀before฀attempting฀to฀account฀for฀it.฀
A฀ pension฀ plan฀ will฀ normally฀ be฀ held฀ in฀ a฀ form฀ of฀ trust฀ separate฀ from฀ the฀ sponsoring฀ employer.฀
Although฀ the฀ directors฀ of฀ the฀ sponsoring฀ company฀ may฀ also฀ be฀ trustees฀ of฀ the฀ pension฀ plan,฀ the฀
sponsoring฀ company฀ and฀ the฀ pension฀ plan฀ are฀ separate฀ legal฀ entities฀ that฀ are฀ accounted฀ for฀
separately.฀
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฀฀
Sponsoring
employer
Pays฀contributions
The฀pension฀scheme฀
Pension฀plan/ (or฀plan/trust)฀is฀a฀
scheme separate฀fund฀from฀
the฀company฀itself.
Pays฀pensions฀in฀
future฀in฀accordance฀
with฀the฀plan's฀rules
Pensioners
See฀ Chapter฀ 4฀ Section฀ 2฀ of฀ the฀ Supplementary฀ Reading฀ for฀ a฀ further฀ exploration฀ of฀ the฀ conceptual฀
differences฀ between฀ defined฀ contribution฀ and฀ defined฀ benefit฀ plans,฀ further฀ definitions,฀ and฀ for฀ a฀
discussion฀ of฀ multi-employer฀ plans.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀
2฀Defined฀contribution฀plans฀
Defined฀contribution฀plans:฀post-employment฀benefit฀plans฀under฀which฀an฀entity฀pays฀fixed฀
contributions฀into฀a฀separate฀entity฀(a฀fund)฀and฀will฀have฀no฀legal฀or฀constructive฀obligation฀to฀pay฀
Key฀term฀
further฀contributions฀if฀the฀fund฀does฀not฀hold฀sufficient฀assets฀to฀pay฀all฀employee฀benefits฀relating฀to฀
employee฀service฀in฀the฀current฀and฀prior฀periods.฀
(IAS฀19:฀para.฀8)฀
2.1฀Accounting฀treatment฀
The฀obligation฀for฀each฀year฀is฀shown฀as฀an฀expense฀for฀the฀period฀(disclosed฀in฀a฀note)฀and฀in฀the฀
statement฀of฀financial฀position฀to฀the฀extent฀that฀it฀has฀not฀been฀paid.฀These฀are฀easy฀to฀account฀for,฀
as฀the฀cost฀of฀the฀pension฀contribution฀is฀always฀made฀under฀the฀control฀of฀the฀sponsoring฀employer฀
(IAS฀19:฀paras.฀51–52).฀
Activity฀3:฀Defined฀contribution฀plans฀ ฀
Mouse,฀a฀public฀limited฀company,฀agrees฀to฀contribute฀5%฀of฀employees'฀total฀remuneration฀into฀a฀
post-employment฀plan฀each฀period.฀
In฀the฀year฀ended฀31฀December฀20X9,฀the฀company฀paid฀total฀salaries฀of฀$10.5฀million.฀A฀bonus฀of฀
$3฀million฀based฀on฀the฀income฀for฀the฀period฀was฀paid฀to฀the฀employees฀in฀March฀20Y0.฀
The฀company฀had฀paid฀$510,000฀into฀the฀plan฀by฀31฀December฀20X9.฀
Required฀
Calculate฀ the฀ total฀ profit฀ or฀ loss฀ expense฀ for฀ post-employment฀ benefits฀ for฀ the฀ year฀ and฀ the฀ accrual฀
which฀will฀appear฀in฀the฀statement฀of฀financial฀position฀at฀31฀December฀20X9.฀
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3฀Defined฀benefit฀plans฀
Defined฀benefit฀plans:฀post-employment฀benefit฀plans฀other฀than฀defined฀contribution฀plans.฀
Key฀term฀ (IAS฀19:฀para.฀8)฀
3.1฀Introduction฀
Typically,฀ a฀ separate฀ plan฀ is฀ established฀ into฀ which฀ the฀ company฀ makes฀ regular฀ payments,฀ as฀
advised฀by฀an฀actuary.฀This฀fund฀needs฀to฀ensure฀that฀it฀has฀enough฀assets฀to฀pay฀future฀pensions฀to฀
pensioners.฀The฀entity฀records฀the฀pension฀plan฀assets฀(at฀fair฀value)฀and฀liabilities฀(at฀present฀value)฀
in฀its฀own฀books฀as฀it฀bears฀the฀pension฀plan's฀risks฀and฀benefits,฀so฀in฀substance,฀if฀not฀in฀legal฀form,฀
it฀owns฀the฀assets฀and฀owes฀the฀liabilities.฀
3.2฀Complexity฀
Accounting฀ for฀ defined฀ benefit฀ plans฀ is฀ much฀ more฀ complex฀ than฀ for฀ defined฀ contribution฀ plans฀
because:฀
(a)฀ The฀ future฀ benefits฀ (arising฀ from฀ employee฀ service฀ in฀ the฀ current฀ or฀ prior฀ years)฀ cannot฀ be฀
measured฀exactly,฀but฀whatever฀they฀are,฀the฀employer฀will฀have฀to฀pay฀them,฀and฀the฀liability฀
should฀therefore฀be฀recognised฀now.฀To฀measure฀these฀future฀obligations,฀it฀is฀necessary฀to฀use฀
actuarial฀assumptions.฀
(b)฀ The฀obligations฀payable฀in฀future฀years฀should฀be฀valued,฀by฀discounting,฀on฀a฀present฀value฀
basis.฀This฀is฀because฀the฀obligations฀may฀be฀settled฀in฀many฀years'฀time.฀
(c)฀ If฀actuarial฀assumptions฀change,฀the฀amount฀of฀required฀contributions฀to฀the฀fund฀will฀change,฀
and฀there฀may฀be฀actuarial฀(remeasurement)฀gains฀or฀losses.฀A฀contribution฀into฀a฀fund฀in฀any฀
period฀will฀not฀equal฀the฀expense฀for฀that฀period,฀due฀to฀remeasurement฀gains฀or฀losses.฀
3.3฀Measurement฀of฀plan฀obligation฀
Projected฀unit฀credit฀method฀
IAS฀ 19฀ requires฀ the฀ use฀ of฀ the฀ projected฀ unit฀ credit฀ method฀ which฀ sees฀ each฀ period฀ of฀ service฀ as฀
giving฀rise฀to฀an฀additional฀ unit฀ of฀ benefit฀ entitlement฀and฀measures฀each฀unit฀separately฀to฀
build฀up฀the฀final฀liability฀(obligation).฀The฀accumulated฀present฀value฀of฀(discounted)฀future฀benefits฀
will฀incur฀interest฀over฀time,฀and฀an฀interest฀expense฀should฀be฀recognised.฀
These฀calculations฀are฀complex฀and฀would฀normally฀be฀carried฀out฀by฀an฀actuary.฀In฀the฀exam,฀you฀
will฀be฀given฀the฀figures.฀฀
The฀actuary฀helps฀calculate฀the฀
Actuarial฀assumptions฀ present฀value฀of฀the฀plan฀obligation.฀
Actuarial฀ assumptions฀ are฀ needed฀ to฀ estimate฀ the฀ size฀ of฀ the฀ future฀ (post-employment)฀
benefits฀ that฀ will฀ be฀ payable฀ under฀ a฀ defined฀ benefits฀ scheme.฀ The฀ main฀ categories฀ of฀ actuarial฀
assumptions฀are:฀
฀ Demographic฀ assumptions,฀ eg฀ mortality฀ rates฀ before฀ and฀ after฀ retirement,฀ the฀ rate฀ of฀
employee฀turnover,฀early฀retirement฀
฀ Financial฀assumptions,฀eg฀future฀salary฀rises฀
Actuarial฀assumptions฀made฀should฀be฀unbiased฀and฀based฀on฀market฀expectations.฀
(IAS฀19:฀paras.฀75–76)฀
Discounting฀–฀current฀service฀cost฀
The฀ benefits฀ earned฀ must฀ be฀ discounted฀ to฀ arrive฀ at฀ the฀ present฀ value฀ of฀ the฀ defined฀ benefit฀
obligation.฀The฀increase฀during฀the฀year฀in฀this฀obligation฀is฀called฀the฀current฀service฀cost฀which฀is฀
shown฀as฀an฀expense฀in฀profit฀or฀loss.฀
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฀฀
In฀effect,฀the฀current฀service฀cost฀is฀the฀increase฀in฀total฀pensions฀payable฀as฀a฀result฀of฀continuing฀to฀
employ฀your฀staff฀for฀another฀year.฀
The฀discount฀rate฀used฀is฀determined฀by฀reference฀to฀market฀yields฀at฀the฀end฀of฀the฀reporting฀
period฀on฀high฀quality฀corporate฀bonds฀(or฀government฀bonds฀for฀currencies฀for฀which฀no฀deep฀
market฀in฀high฀quality฀corporate฀bonds฀exists).฀The฀term฀of฀the฀bonds฀should฀be฀consistent฀with฀that฀of฀
the฀post-employment฀benefit฀obligations.฀
(IAS฀19:฀para.฀120)฀
Compounding฀–฀interest฀cost฀
The฀obligation฀must฀be฀compounded฀ back฀ up฀each฀year฀reflecting฀the฀fact฀that฀the฀benefits฀are฀
one฀ period฀ closer฀ to฀ settlement.฀ This฀ increase฀ in฀ the฀ obligation฀ is฀ called฀ interest฀ cost฀ and฀ is฀ also฀
shown฀as฀an฀expense฀in฀profit฀or฀loss.฀
Discount฀
Current฀ Increase฀in฀
service฀cost฀ annual฀pension฀
Service฀
performed฀ DEBIT฀฀฀฀Current฀service฀cost฀(P/L)฀ payments฀
CREDIT฀฀Present฀value฀of฀obligation฀
Year฀
Now฀ Retirement฀ Death฀
end฀
Compound:฀
DEBIT฀฀฀฀Net฀interest฀cost฀(P/L)฀
CREDIT฀฀Present฀value฀of฀obligation฀
Remeasurements฀of฀plan฀obligation฀
Remeasurement฀ gains฀ or฀ losses฀ may฀ arise฀ due฀ to฀ differences฀ between฀ the฀ year฀ end฀
actuarial฀valuation฀of฀the฀defined฀benefit฀obligation฀and฀its฀accounting฀value.฀
They฀are฀made฀up฀of฀changes฀in฀the฀present฀value฀of฀the฀obligation฀resulting฀from:฀
฀ Experience฀adjustments฀(the฀effects฀of฀differences฀between฀the฀previous฀actuarial฀assumptions฀
and฀what฀has฀actually฀occurred);฀and฀
IAS฀19฀views฀them฀a฀bit฀like฀a฀
revaluation,฀so฀they฀go฀to฀OCI.฀
฀ The฀effects฀of฀changes฀in฀actuarial฀assumptions.฀฀
Remeasurement฀ gains฀ and฀ losses฀ are฀ recognised฀ in฀ other฀ comprehensive฀ income฀ ('Items฀ that฀
will฀not฀be฀reclassified฀to฀profit฀or฀loss')฀in฀the฀period฀in฀which฀they฀occur.฀
3.4฀Measurement฀of฀plan฀assets฀
The฀ sponsoring฀ employer฀ needs฀ to฀ set฀ aside฀ investments฀ during฀ the฀ accounting฀ period฀ to฀ cover฀ the฀
pension฀liability.฀To฀meet฀the฀IAS฀19฀criteria฀(and฀protect฀the฀pensioners!)฀they฀must฀be฀held฀by฀an฀
entity฀legally฀separate฀from฀the฀reporting฀entity.฀
Plan฀assets฀are฀(IAS฀19:฀paras.฀113–115):฀
฀ Assets฀ such฀ as฀ stocks฀ and฀ shares,฀ held฀ by฀ a฀ fund฀ that฀ is฀ legally฀ separate฀ from฀ the฀ reporting฀
entity,฀which฀exists฀solely฀to฀pay฀employee฀benefits฀
฀ Insurance฀policies,฀issued฀by฀an฀insurer฀that฀is฀not฀a฀related฀party,฀the฀proceeds฀of฀which฀can฀
only฀be฀used฀to฀pay฀employee฀benefits฀
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Interest฀ income฀ is฀ applied฀ to฀ the฀ asset฀ and฀ netted฀ against฀ the฀ interest฀ cost฀ on฀ the฀ defined฀
benefit฀ obligation.฀ The฀ resulting฀ net฀ interest฀ cost฀ (or฀ income)฀ on฀ the฀ net฀ defined฀ benefit฀
liability฀(or฀asset)฀is฀recognised฀in฀profit฀ or฀ loss฀and฀represents฀the฀financing฀effect฀of฀paying฀for฀
benefits฀in฀advance฀or฀in฀arrears.฀
Difference฀between฀actual฀return฀and฀amounts฀
in฀net฀interest฀
Compound:฀ =฀remeasurement฀recognised฀in฀OCI฀
DEBIT฀ Fair฀value฀plan฀assets฀
CREDIT฀฀Net฀interest฀cost฀(or฀income)฀(P/L)฀
Increase฀in฀
Service฀ annual฀pension฀
performed฀ payments฀
Now฀ Year฀ Contributions:฀ Retirement฀ Death฀

end฀ DEBIT฀฀ Fair฀value฀plan฀assets฀
CREDIT฀฀Company฀cash฀
฀
Remeasurements฀of฀plan฀assets฀
The฀value฀of฀the฀investments฀will฀increase฀over฀time.฀This฀is฀called฀the฀return฀on฀plan฀assets฀and฀
is฀defined฀as฀interest,฀dividends฀and฀other฀income฀derived฀from฀the฀plan฀assets฀together฀with฀
realised฀and฀unrealised฀gains฀or฀losses฀on฀the฀plan฀assets,฀less฀any฀costs฀of฀managing฀plan฀
assets฀and฀tax฀payable฀by฀the฀plan฀itself.฀
The฀difference฀between฀the฀return฀ on฀ plan฀ assets฀ and฀the฀ interest฀ income฀referred฀to฀above฀
included฀ in฀ net฀ interest฀ on฀ the฀ net฀ defined฀ benefit฀ liability฀ (or฀ asset)฀ is฀ a฀ remeasurement฀ and฀ is฀
recognised฀in฀other฀comprehensive฀income฀('Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss').฀
3.5฀Past฀service฀cost฀
Past฀service฀cost฀is฀the฀increase฀or฀decrease฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation฀for฀
employee฀service฀in฀prior฀periods,฀resulting฀from:฀฀
(a)฀ A฀ plan฀ amendment฀ (the฀ introduction฀ or฀ withdrawal฀ of,฀ or฀ changes฀ to,฀ a฀ defined฀ benefit฀ Eg฀
plan);฀or฀ reducing฀
the฀number฀
(b)฀ A฀curtailment฀(a฀significant฀reduction฀by฀the฀entity฀in฀the฀number฀of฀employees฀covered฀by฀ by฀which฀
the฀years฀
the฀plan).฀ worked฀is฀
divided฀to฀
Past฀service฀cost฀is฀recognised฀as฀an฀adjustment฀to฀the฀obligation฀and฀as฀an฀expense฀(or฀income)฀at฀ increase฀
the฀earlier฀of฀the฀following฀dates:฀ pension฀
payable.฀
(a)฀ When฀the฀plan฀amendment฀or฀curtailment฀occurs;฀or฀
(b)฀ When฀ the฀ entity฀ recognises฀ related฀ restructuring฀ costs฀ (in฀ accordance฀ with฀ IAS฀ 37)฀ or฀
termination฀benefits.฀ (IAS฀19:฀para.฀99)฀
For฀example:฀
(a)฀ An฀amendment฀is฀made฀to฀the฀plan฀which฀improves฀benefits฀for฀plan฀members.฀
An฀increase฀to฀the฀obligation฀(and฀expense)฀is฀recognised฀when฀the฀amendment฀occurs:฀
DEBIT฀฀฀ Profit฀or฀loss฀ X
CREDIT฀Present฀value฀of฀defined฀benefit฀obligation฀ ฀ X฀
฀
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฀฀
(b)฀ Discontinuance฀ of฀ an฀ operation,฀ so฀ that฀ employees'฀ services฀ are฀ terminated฀ earlier฀ than฀
expected.฀
A฀reduction฀in฀the฀obligation฀(and฀income)฀is฀recognised฀at฀the฀same฀time฀as฀the฀termination฀
benefits฀are฀recognised:฀
DEBIT฀฀฀ Present฀value฀of฀defined฀benefit฀obligation X
CREDIT฀Profit฀or฀loss฀ ฀ X฀
฀
3.6฀Approach฀
The฀ suggested฀ approach฀ to฀ defined฀ benefit฀ plans฀ is฀ to฀ deal฀ with฀ the฀ change฀ in฀ the฀ obligation฀ and฀
asset฀in฀the฀following฀order,฀building฀up฀the฀disclosure฀notes.฀However,฀as฀long฀as฀all฀the฀steps฀are฀
followed฀they฀can฀be฀done฀in฀a฀different฀order.฀
Refer฀back฀
to฀this฀table฀
Step฀ Item฀ Recognition฀ when฀
doing฀
(1)฀ Record฀opening฀figures:฀ questions.฀
฀ Obligation฀ ฀
฀ Asset฀
(2)฀ Net฀interest฀cost฀
฀ Interest฀applied฀to฀b/d฀obligation฀
and฀assets฀(and฀netted฀in฀profit฀or฀
loss).฀ DEBIT฀฀ Net฀interest฀cost฀(P/L)฀(x%฀×฀b/d฀
฀ Should฀also฀reflect฀any฀changes฀in฀ ฀ obligation)฀
obligation฀during฀period,฀eg฀past฀ CREDIT฀ PV฀defined฀benefit฀obligation฀
service฀cost฀ ฀ (SOFP)฀
฀ The฀interest฀on฀assets฀is฀time฀ and฀
apportioned฀for฀contributions฀less฀ DEBIT฀ Plan฀assets฀(SOFP)฀(x%฀×฀b/d฀assets)฀
benefits฀paid฀in฀the฀period฀(if฀they฀
occur฀throughout฀the฀year฀rather฀than฀ CREDIT฀ Net฀interest฀cost฀(P/L)฀
at฀the฀start฀or฀end฀of฀the฀year).฀The฀
interest฀on฀obligations฀is฀also฀time฀
apportioned฀for฀benefits฀paid฀
(3)฀ Current฀service฀cost฀
฀ Increase฀in฀the฀present฀value฀of฀the฀ DEBIT฀ Current฀service฀cost฀(P/L)฀
obligation฀resulting฀from฀employee฀ CREDIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀
service฀in฀the฀current฀period฀
(4) Past฀service฀cost฀ Increase฀in฀obligation:฀

฀ ฀ ฀ Change฀in฀PV฀obligation฀for฀
DEBIT฀ Past฀service฀cost฀(P/L)฀
employee฀service฀in฀prior฀periods,฀ CREDIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀
resulting฀from฀a฀plan฀amendment฀or฀
curtailment฀ Decrease฀in฀obligation:฀
฀ Charged฀or฀credited฀immediately฀to฀ DEBIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀

profit฀or฀loss฀ CREDIT฀ Past฀service฀cost฀(P/L)฀
(5)฀ Contributions฀ ฀
฀ Into฀the฀plan฀by฀the฀company฀ DEBIT฀ Plan฀assets฀(SOFP)฀
฀ As฀advised฀by฀actuary฀ CREDIT฀ Company฀cash฀
(6)฀ Benefits฀ DEBIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀

฀ Actual฀pension฀payments฀made฀ CREDIT฀ Plan฀assets฀(SOFP)฀
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Step฀ Item฀ Recognition฀
(7) Remeasurements฀
฀ ฀ ฀ Arising฀from฀annual฀valuations฀of฀
obligation฀and฀assets฀
฀ On฀obligation,฀differences฀between฀
actuarial฀assumptions฀and฀actual฀ Recognise฀all฀changes฀due฀to฀remeasurements฀
experience฀during฀the฀period,฀or฀ in฀other฀comprehensive฀income฀
changes฀in฀actuarial฀assumptions฀
฀ On฀assets,฀differences฀between฀actual฀
return฀on฀plan฀assets฀and฀amounts฀
included฀in฀net฀interest฀
(8)฀ Disclose฀deficit฀or฀surplus฀in฀accordance฀
See฀Activity฀4฀
with฀the฀Standard฀
฀
Illustration฀2฀
Defined฀benefit฀plan฀
Angus฀operates฀a฀defined฀benefit฀scheme฀for฀its฀employees฀but฀has฀yet฀to฀record฀anything฀for฀the฀
current฀year฀except฀to฀expense฀the฀cash฀contributions฀which฀were฀$18฀million.฀The฀opening฀position฀
was฀a฀net฀liability฀of฀$45฀million฀which฀is฀included฀in฀the฀non-current฀liabilities฀of฀Angus฀in฀its฀draft฀
financial฀statements.฀Current฀service฀costs฀for฀the฀year฀were฀$15฀million฀and฀interest฀rates฀on฀good฀
quality฀corporate฀bonds฀fell฀from฀8%฀at฀the฀start฀of฀the฀year฀to฀6%฀by฀31฀March฀20X8.฀In฀addition,฀
a฀payment฀of฀$9฀million฀was฀made฀out฀of฀the฀cash฀of฀the฀pension฀scheme฀in฀relation฀to฀employees฀
who฀left฀the฀scheme.฀The฀reduction฀in฀the฀pension฀scheme฀liability฀as฀a฀result฀of฀the฀curtailment฀
was฀$12฀million.฀The฀actuary฀has฀assessed฀that฀the฀scheme฀is฀in฀deficit฀by฀$51฀million฀as฀at฀
31฀March฀20X8.฀
Required฀
Calculate฀the฀gain/loss฀on฀remeasurement฀of฀the฀defined฀benefit฀pension฀net฀liability฀of฀Angus฀as฀at฀
31฀March฀20X8,฀and฀state฀how฀this฀should฀be฀treated.฀
Solution฀
The฀loss฀on฀remeasurement฀is฀calculated฀as฀$8.4฀million฀(W)฀and฀should฀be฀recognised฀in฀other฀
comprehensive฀income฀for฀the฀year.฀฀
Working:฀Net฀liability฀
฀$m฀฀฀฀
Opening฀net฀liability฀ ฀45.0฀
Net฀interest฀cost฀($45m ×฀8%)฀ ฀3.6฀
Current฀service฀cost฀ ฀15.0฀
Gain฀on฀curtailment฀($12m฀–฀$9m)฀ ฀(3.0)฀
Cash฀contributions฀into฀the฀scheme฀ ฀(18.0)฀
฀ ฀42.6฀
Loss฀on฀remeasurement ()฀ ฀฀฀฀8.4฀
Closing฀net฀liability฀ ฀51.0฀
฀
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Activity฀4:฀Defined฀benefit฀plans฀ ฀ ฀
Lewis,฀a฀public฀limited฀company,฀has฀a฀defined฀benefit฀plan฀for฀its฀employees.฀The฀present฀value฀of฀
the฀future฀benefit฀obligations฀at฀1฀January฀20X7฀was฀$1,120฀million฀and฀the฀fair฀value฀of฀the฀plan฀
assets฀was฀$1,040฀million.฀
Further฀data฀concerning฀the฀year฀ended฀31฀December฀20X7฀is฀as฀follows:฀
฀ $m
Current฀service฀cost฀ 76
Benefits฀paid฀to฀former฀employees฀ 88
Contributions฀paid฀to฀plan฀ 94
฀
Present฀value฀of฀benefit฀obligations฀at฀31฀December 1,222 As฀valued฀by฀
Fair฀value฀of฀plan฀assets฀at฀31฀December฀ 1,132 professional฀actuaries฀
฀
Interest฀cost฀(gross฀yield฀on฀'blue฀chip'฀corporate฀bonds):฀5%
On฀1฀January฀20X7฀the฀plan฀was฀amended฀to฀provide฀additional฀benefits฀with฀effect฀from฀that฀date.฀
The฀ present฀ value฀ of฀ the฀ additional฀ benefits฀ at฀ 1฀ January฀ 20X7฀ was฀ calculated฀ by฀ actuaries฀ at฀
$40฀million.฀
Required฀
Prepare฀ the฀ required฀ notes฀ to฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ and฀
statement฀of฀financial฀position฀for฀the฀year฀ended฀31฀December฀20X7.฀
Assume฀the฀contributions฀and฀benefits฀were฀paid฀on฀31฀December฀20X7.฀
Solution฀
Notes฀to฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
Defined฀benefit฀expense฀recognised฀in฀profit฀or฀loss ฀
฀ $m฀฀
Current฀service฀cost฀ ฀
Past฀service฀cost฀ ฀
Net฀interest฀costs฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Other฀comprehensive฀income฀(items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss):฀
Remeasurements฀of฀defined฀benefit฀plans฀
฀ $m฀฀
Remeasurement฀gain/(loss)฀on฀defined฀benefit฀obligation ฀
Return฀on฀plan฀assets฀(excluding฀amounts฀in฀net฀interest) ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Notes฀to฀the฀statement฀of฀financial฀position฀
Net฀defined฀benefit฀liability฀recognised฀in฀the฀statement฀of฀financial฀position฀ ฀
฀ 31.12.X7฀ 31.12.X6
฀ $m฀฀ $m฀
Present฀value฀of฀defined฀benefit฀obligation ฀
Fair฀value฀of฀plan฀assets ฀฀฀฀ ฀฀฀฀฀฀฀฀
Net฀liability฀ ฀฀฀฀ ฀฀฀฀฀฀฀฀
฀
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Changes฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation ฀
฀ $m฀
Opening฀defined฀benefit฀obligation฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀defined฀benefit฀obligation฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀
฀ ฀ ฀
Changes฀in฀the฀fair฀value฀of฀plan฀assets ฀
฀ $m฀
Opening฀fair฀value฀of฀plan฀assets฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀fair฀value฀of฀plan฀assets฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Although฀questions฀frequently฀ask฀you฀to฀assume฀that฀contributions฀and฀benefits฀are฀paid฀at฀the฀year฀
end,฀this฀is฀not฀invariably฀the฀case.฀See฀Chapter฀4฀Section฀4฀of฀the฀Supplementary฀Reading฀for฀a฀
comprehensive฀example฀in฀which฀contributions฀are฀paid฀at฀the฀start฀of฀the฀period฀and฀benefits฀paid฀
in฀two฀instalments฀across฀the฀period.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
4฀ Settlements฀
A฀settlement฀is฀a฀transaction฀that฀eliminates฀all฀further฀legal฀or฀constructive฀obligations฀
for฀part฀or฀all฀of฀the฀benefits฀provided฀under฀a฀defined฀benefit฀plan฀(other฀than฀a฀payment฀of฀benefits฀
to,฀or฀on฀behalf฀of,฀employees฀that฀is฀set฀out฀in฀the฀terms฀of฀the฀plan฀and฀included฀in฀the฀actuarial฀
assumptions).฀฀
Example:฀a฀lump-sum฀cash฀payment฀made฀in฀exchange฀for฀rights฀to฀receive฀post-employment฀benefits.฀
The฀gain฀or฀loss฀on฀a฀settlement฀is฀recognised฀in฀profit฀or฀loss฀when฀the฀settlement฀occurs:฀
DEBIT฀ PV฀obligation฀(as฀advised฀by฀actuary) X
CREDIT฀ FV฀plan฀assets฀(any฀assets฀transferred)฀ X฀
CREDIT฀ Cash฀(paid฀directly฀by฀the฀entity)฀ X฀
CREDIT/DEBIT฀ Profit฀or฀loss฀(difference)฀ X฀
฀
(IAS฀19:฀para.฀99)฀
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฀฀
5฀ The฀'Asset฀Ceiling'฀test฀
Amounts฀recognised฀as฀a฀net฀pension฀asset฀in฀the฀statement฀of฀financial฀position฀must฀not฀be฀stated฀at฀
more฀than฀their฀recoverable฀amount.฀Consequently,฀IAS฀19฀(IAS฀19:฀paras.฀64฀and฀65)฀requires฀any฀
net฀pension฀asset฀to฀be฀measured฀at฀the฀lower฀of:฀
฀ Net฀reported฀asset;฀or฀
฀ The฀present฀value฀of฀any฀refunds/reduction฀of฀future฀contributions฀available฀from฀the฀pension฀
plan฀
Any฀impairment฀loss฀is฀charged฀immediately฀to฀other฀comprehensive฀income.฀
(IAS฀19:฀para.฀8)฀
See฀Chapter฀4฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀an฀illustration฀of฀the฀'Asset฀Ceiling'฀test.฀
This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
6฀Current฀developments฀and฀other฀issues฀
6.1฀General฀issues฀around฀IAS฀19฀
IAS฀ 19฀ was฀ last฀ revised฀ in฀ 2011.฀ In฀ the฀ longer฀ term,฀ the฀ IASB฀ intends฀ to฀ undertake฀ a฀ more฀
fundamental฀review฀and฀produce฀a฀revised฀standard฀to฀address฀other฀issues,฀but฀recognises฀that฀
this฀will฀take฀some฀years฀to฀complete.฀
Some฀of฀the฀key฀issues฀are:฀
(a)฀ Definitions฀of฀the฀types฀of฀plan฀
(b)฀ Interest฀rate฀used฀for฀discounting฀
(c)฀ Measurement฀of฀plan฀liabilities฀
(d)฀ Treatment฀of฀more฀unusual฀plans:฀
(i)฀ 'Hybrid'฀plans฀(part฀defined฀contribution,฀part฀defined฀benefit)฀
(ii)฀ 'Higher฀of'฀plans฀(where฀the฀employee's฀pension฀is฀defined฀benefit,฀but฀can฀be฀higher฀if฀
the฀funds฀invested฀perform฀well)฀
(iii)฀ Company฀'top-ups'฀or฀guaranteed฀returns฀on฀defined฀contribution฀plans฀
The฀ scenarios฀ in฀ (d)฀ are฀ all฀ currently฀ accounted฀ for฀ as฀ defined฀ benefit฀ plans฀ as,฀ given฀ that฀ the฀
contributions฀are฀not฀fixed,฀they฀do฀not฀meet฀the฀definition฀of฀a฀defined฀contribution฀plan.฀
However,฀it฀may฀be฀more฀appropriate฀to฀have฀a฀different฀ form฀ of฀ accounting,฀eg฀a฀separate฀
liability฀measured฀at฀fair฀value฀for฀the฀'top-up'฀in฀scenario฀(d)(iii)฀or฀to฀revise฀the฀definitions฀of฀the฀
types฀of฀plan.฀
The฀ presentation฀ and฀ recognition฀ requirements฀ of฀ IAS฀ 19฀ may฀ not฀ be฀ consistent฀ with฀ the฀
Conceptual฀ Framework.฀ For฀ example฀ the฀ interest฀ element฀ is฀ recognised฀ in฀ profit฀ or฀ loss฀ while฀ the฀
'correction'฀ (difference฀ between฀ actual฀ return฀ and฀ interest฀ applied)฀ is฀ recognised฀ in฀ other฀
comprehensive฀income.฀The฀logic฀for฀this฀split฀is฀that฀the฀interest฀element฀shows฀the฀financing฀effect฀of฀
paying฀ for฀ benefits฀ in฀ advance฀ or฀ arrears.฀ However,฀ under฀ the฀Conceptual฀ Framework,฀ there฀ is฀ no฀
conceptual฀basis฀for฀this฀split.฀฀
The฀Exposure฀Draft฀Conceptual฀Framework฀(ED/2015/3:฀paras.฀7.19–7.27)฀addresses฀this฀issue฀to฀
some฀extent฀by฀providing฀guidance฀on฀whether฀to฀present฀income฀and฀expenses฀in฀profit฀or฀loss฀or฀in฀
other฀ comprehensive฀ income.฀ The฀ ED฀ proposes฀ that฀ all฀ items฀ of฀ income฀ and฀ expense฀ should฀ be฀
shown฀ in฀ profit฀ or฀ loss฀ unless฀ relating฀ to฀ the฀ remeasurement฀ of฀ assets฀ and฀ liabilities฀ –฀ these฀ would฀
normally฀be฀shown฀in฀other฀comprehensive฀income.฀The฀ED฀is฀therefore฀consistent฀with฀the฀approach฀
already฀adopted฀in฀IAS฀19.฀
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IAS฀ 19฀ could฀ also฀ be฀ criticised฀ for฀ reporting฀ estimated฀ figures฀ in฀ profit฀ or฀ loss,฀ while฀ reporting฀ the฀
difference฀to฀arrive฀at฀the฀actual฀return฀in฀other฀comprehensive฀income.฀
IAS฀19฀uses฀the฀'projected฀unit฀credit฀method'฀for฀recognition฀of฀pension฀obligations,฀which฀means฀
that฀ future฀ anticipated฀ increases฀ in฀ salary฀ (and฀ therefore฀ future฀ pension฀ liabilities)฀ based฀ on฀ years฀
worked฀ to฀ date฀ are฀ included.฀ It฀ could฀ be฀ argued฀ that฀ this฀ approach฀ does฀ not฀ comply฀ with฀ the฀
Conceptual฀Framework฀(or฀the฀ED)฀because฀those฀increases฀have฀not฀been฀earned฀yet฀and฀therefore฀
do฀not฀relate฀to฀the฀period.฀Indeed,฀they฀may฀never฀be฀earned฀(or฀payable)฀if฀the฀employee฀does฀not฀
work฀for฀the฀same฀company฀for฀his฀or฀her฀whole฀working฀life.฀฀
6.2฀ Plan฀amendment,฀curtailment฀or฀settlement/availability฀of฀a฀
refund฀
The฀IASB฀issued฀proposed฀narrow฀scope฀amendments฀to฀IAS฀19฀in฀2015.฀The฀proposed฀amendments฀
clarify฀two฀issues฀relating฀to฀defined฀benefit฀schemes:฀
(a)฀฀ The฀current฀service฀cost฀in฀a฀period฀before฀a฀plan฀amendment,฀settlement฀of฀curtailment฀is฀not฀
affected฀by,฀or฀included฀in,฀the฀resulting฀past฀service฀cost฀or฀gain฀or฀loss฀on฀settlement.฀
(b)฀฀ When฀a฀plan฀amendment,฀settlement฀or฀curtailment฀occurs฀and฀the฀net฀defined฀benefit฀liability฀
or฀asset฀is฀remeasured:฀
(i)฀ Net฀ interest฀ for฀ the฀ remaining฀ period฀ is฀ determined฀ based฀ on฀ the฀ remeasured฀ net฀
defined฀benefit฀liability฀or฀asset฀
(ii)฀ Current฀service฀cost฀and฀interest฀for฀the฀period฀after฀the฀remeasurement฀are฀determined฀
using฀assumptions฀used฀for฀the฀remeasurement฀
(IASB,฀2015)฀
6.3฀Pension฀accounting฀and฀risk฀
IAS฀19฀requires฀risk-based฀disclosures,฀including฀detail฀on฀the฀choice฀of฀investments,฀future฀cash฀
requirements฀and฀information฀about฀risks฀to฀which฀the฀scheme฀exposes฀the฀company.฀
The฀IAS฀19฀disclosure฀requirements฀were฀generally฀seen฀as฀an฀opportunity฀for฀entities฀to฀explain฀their฀
pension฀scheme฀risks฀and,฀crucially,฀how฀such฀risks฀are฀being฀managed.฀The฀entity฀should:฀
฀ Explain฀ the฀ characteristics฀ of,฀ and฀ risks฀ associated฀ with,฀ the฀ entity's฀defined฀ benefit฀ plans,฀
focusing฀ on฀ unusual,฀ entity-specific฀ or฀ plan-specific฀ risks,฀ or฀ risks฀ that฀ arise฀ from฀ a฀
concentration฀of฀investments฀in฀one฀particular฀area;฀
฀ Identify฀ and฀ explain฀ the฀ amounts฀ in฀ the฀ entity's฀ financial฀ statements฀ arising฀ from฀ its฀ defined฀
benefit฀plans;฀and฀
฀ Explain฀ how฀ the฀ defined฀ benefit฀ plans฀ may฀ affect฀ the฀ entity's฀ future฀ cash฀ flows,฀ including฀ a฀
sensitivity฀ analysis฀ which฀ shows฀ the฀ potential฀ impact฀ of฀ changes฀ in฀ actuarial฀ assumptions.฀
Disclosure฀is฀required฀as฀to฀the฀funding฀arrangements฀and฀commitments฀from฀the฀company฀to฀
make฀contributions฀to฀the฀plan.฀
These฀ disclosures฀ provide฀ an฀ opportunity฀ for฀ the฀ entity฀ to฀ demonstrate฀ that฀ it฀ is฀ aware฀ of฀ the฀ risks฀
associated฀with฀its฀defined฀benefit฀plans฀and฀how฀it฀is฀managing฀its฀risks,฀so฀that฀users฀will฀draw฀the฀
correct฀conclusions.฀As฀with฀all฀disclosure,฀there฀needs฀to฀be฀a฀balance฀between฀providing฀enough฀
relevant฀ information฀ to฀ allow฀ users฀ to฀ understand฀ the฀ risks,฀ without฀ disclosing฀ so฀ much฀ information฀
that฀they฀cannot฀see฀what฀is฀relevant.฀
Possible฀risks฀to฀which฀a฀defined฀benefit฀pension฀plan฀exposes฀an฀entity฀include:฀
฀ Investment฀risk฀
฀ Interest฀risk฀
฀ Salary฀risk฀฀
฀ Longevity฀risk฀
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6.4฀Stakeholder฀perspectives฀
The฀ growing฀ cost฀ of฀ providing฀ defined฀ benefit฀ pension฀ plans฀ to฀ employees฀ has฀ been฀ a฀ concern฀ to฀
companies฀ for฀ a฀ number฀ of฀ years.฀ Due฀ to฀ increasing฀ life฀ expectancies฀ and฀ economic฀ conditions,฀
companies฀ report฀ increasing฀ pension฀ liabilities฀ on฀ the฀ statement฀ of฀ financial฀ positon฀ and,฀ more฀
importantly,฀ have฀ to฀ make฀ large฀ cash฀ contributions฀ in฀ order฀ to฀ fund฀ pension฀ deficits.฀ From฀ the฀
employees'฀ perspective,฀ defined฀ benefit฀ pension฀ plans฀ are฀ generally฀ preferred฀ as฀ they฀ provide฀ a฀
guaranteed฀income฀on฀retirement.฀฀
There฀have,฀however,฀been฀a฀number฀of฀cases฀in฀recent฀years฀in฀which฀the฀ability฀of฀a฀company฀to฀
continue฀ as฀ a฀ going฀ concern฀ is฀ put฀ in฀ doubt฀ as฀ a฀ result฀ of฀ its฀ pension฀ plan฀ commitments.฀ In฀ such฀
situations,฀employees฀lose฀their฀job฀security฀and,฀if฀the฀company฀is฀liquidated,฀employees฀potentially฀
do฀not฀receive฀the฀full฀amount฀of฀benefits฀due฀to฀them฀under฀the฀pension฀plan฀as฀there฀are฀insufficient฀
assets฀to฀cover฀the฀pension฀liabilities฀of฀the฀company.฀Investors฀may฀receive฀reduced฀dividends฀from฀
companies฀that฀need฀to฀use฀surplus฀cash฀to฀make฀deficit฀contributions฀and฀will฀be฀concerned฀about฀
the฀value฀of฀their฀investment฀if฀the฀company฀is฀not฀able฀to฀continue฀as฀a฀going฀concern.฀Other฀lenders฀
and฀creditors฀will฀also฀be฀concerned฀about฀whether฀the฀company฀has฀sufficient฀resources฀to฀settle฀any฀
debts฀as฀they฀fall฀due.฀฀
Most฀companies฀have฀now฀closed฀their฀defined฀benefit฀pension฀plans฀to฀new฀joiners฀in฀an฀effort฀to฀
reduce฀ pension฀ costs฀ and฀ avoid฀ increasing฀ liabilities฀ further,฀ but฀ the฀ existing฀ liabilities฀ in฀ respect฀ of฀
benefits฀already฀accrued฀will฀remain฀an฀issue฀for฀a฀number฀of฀years฀to฀come.฀
Exercise฀1:฀Pension฀disclosure฀ ฀
The฀ financial฀ statements฀ of฀ Sainsbury's฀ plc฀ include฀ disclosures฀ relating฀ to฀ its฀ defined฀ benefit฀
obligation.฀Sainsbury's฀is฀a฀listed฀company฀in฀the฀UK฀which฀has฀been฀subject฀to฀media฀attention฀in฀
respect฀of฀its฀significant฀pension฀deficit.฀฀
Take฀ a฀ look฀ at฀ the฀ pension฀ disclosure฀ in฀ Sainsbury's฀ Annual฀ Report฀ available฀ at:฀
www.about.sainsburys.co.uk/investors฀฀
Then,฀ using฀ companies฀ that฀ you฀ are฀ familiar฀ with,฀ research฀ the฀ pension฀ disclosures฀ given฀ in฀ their฀
financial฀statements.฀
Ethics฀note฀
In฀general,฀the฀ethical฀dilemmas฀that฀are฀likely฀to฀be฀tested฀in฀the฀Strategic฀Business฀Reporting฀(SBR)฀
exam฀occur฀in฀the฀context฀of฀manipulation฀of฀financial฀statements,฀with฀someone฀in฀authority,฀such฀as฀
a฀managing฀director,฀wishing฀to฀present฀the฀financial฀statements฀in฀a฀more฀favourable฀light.฀฀
The฀SBR฀exam฀will฀be฀the฀first฀time฀you฀will฀be฀tested฀on฀employee฀benefits.฀It฀could฀form฀the฀basis฀of฀
part฀of฀an฀ethical฀question.฀One฀area฀such฀a฀question฀might฀focus฀on฀could฀be฀the฀difference฀
between฀defined฀benefit฀and฀defined฀contribution฀pension฀plans.฀The฀main฀difference฀between฀the฀
two฀types฀of฀plans฀lies฀in฀who฀bears฀the฀risk:฀if฀the฀employer฀bears฀the฀risk,฀even฀in฀a฀small฀way฀by฀
guaranteeing฀or฀specifying฀the฀return,฀the฀plan฀is฀a฀defined฀benefit฀plan.฀A฀defined฀contribution฀
scheme฀must฀give฀a฀benefit฀formula฀based฀solely฀on฀the฀amount฀of฀the฀contributions,฀and฀therefore฀no฀
guarantee฀is฀offered฀by฀the฀employer.฀
A฀defined฀benefit฀scheme฀may฀be฀created฀even฀if฀there฀is฀no฀legal฀obligation,฀if฀an฀employer฀has฀a฀
practice฀of฀guaranteeing฀the฀benefits฀payable.฀฀
There฀could,฀in฀consequence,฀be฀an฀incentive฀for฀a฀company฀director฀to฀argue฀that฀a฀plan฀is฀a฀
defined฀contribution฀plan,฀especially฀where฀the฀legal฀position฀is฀in฀conflict฀with฀the฀substance.฀That฀
way,฀assets฀and฀liabilities฀are฀not฀shown฀in฀the฀statement฀of฀financial฀position,฀and฀in฀particular,฀a฀
net฀liability,฀which฀could฀affect฀loan฀covenants,฀is฀not฀shown.฀
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฀
Short-term฀benefits฀
฀ ฀ Recognised฀as฀a฀liability฀as฀employee฀
1.฀ Employee฀benefits฀ renders฀service฀(ie฀accruals฀basis)฀
(IAS฀19)฀
฀ Not฀discounted฀
฀ Accrue฀for฀short-term฀compensated฀
absences฀(eg฀holiday฀pay)฀that฀can฀
Post-employment฀
be฀carried฀forwards฀
benefits฀
2.฀ Defined฀contribution฀ 3.฀ Defined฀benefit฀plans฀

plans฀ ฀ Definition฀
฀ Definition฀ ฀ Post-employment฀plans฀other฀than฀defined฀contribution฀
฀ An฀entity฀pays฀fixed฀contributions฀ plans฀
into฀a฀separate฀entity฀(a฀fund)฀and฀ ฀ Company฀guarantees฀pension฀
will฀have฀no฀legal฀or฀constructive฀
Final฀salary
obligation฀to฀pay฀further฀ ฀ Eg฀ x฀years฀worked฀
contributions฀if฀the฀fund฀does฀not฀ 60
hold฀sufficient฀assets฀to฀pay฀all฀ ฀ Projected฀unit฀credit฀method:฀
employee฀benefits฀relating฀to฀ ฀ (1)฀Opening฀asset฀and฀obligation฀
employee฀service฀in฀the฀current฀or฀
฀ (2)฀Net฀interest฀cost:฀ Dr฀฀Net฀interest฀cost฀(P/L)฀
prior฀periods฀
฀ ฀ ฀ Cr฀฀PV฀obligation฀(x%฀x฀b/d)฀
฀ Company's฀only฀obligation฀is฀
฀ ฀ ฀ Dr฀฀Plan฀assets฀(x%฀x฀b/d)฀
agreed฀contribution,฀eg฀5%฀฀฀ ฀ ฀ ฀ Cr฀฀Net฀interest฀cost฀(P/L)฀
salary฀
฀ (3)฀Current฀service฀ Dr฀฀CSC฀(P/L)฀
฀ Accounted฀for฀on฀accruals฀basis฀ ฀ ฀ cost:฀ Cr฀฀PV฀obligation฀
฀ ฀ (4)฀Past฀service฀ Dr/Cr฀฀PSC฀(P/L)฀
฀ ฀ cost:฀ Cr/Dr฀฀PV฀obligation฀
฀ 6.฀ Current฀developments฀ ฀ ฀ (amendment/฀curtailment)฀
Outstanding฀issues:฀ ฀ (5)฀Contributions:฀ Dr฀฀Plan฀assets฀
(a)฀ Definitions฀of฀the฀types฀of฀plan฀ ฀ ฀ ฀ Cr฀฀Company฀cash฀
(b)฀ Interest฀rate฀used฀for฀discounting฀ ฀ (6)฀Benefits:฀ Dr฀฀PV฀obligation฀
(c)฀ Measurement฀of฀plan฀liabilities฀ ฀ ฀ ฀ Cr฀฀Plan฀assets฀
(d)฀ Treatment฀of฀more฀unusual฀plans:฀ ฀ (7)฀Remeasurements:฀
(i)฀ 'hybrid'฀plans฀(part฀defined฀ ฀ ฀ –฀฀฀฀recognise฀immediately฀in฀OCI฀
฀ contribution,฀part฀defined฀ ฀ (8)฀Disclosure฀฀
benefit)฀
(ii)฀ 'higher฀of'฀plans฀(where฀
pension฀is฀defined฀benefit,฀but฀ 4.฀ Settlements฀
can฀be฀higher฀if฀the฀funds฀
฀ A฀transaction฀that฀eliminates฀all฀further฀
invested฀perform฀well)฀
legal/constructive฀obligation฀for฀part/all฀benefits฀
(iii)฀company฀'top-ups'฀or฀
฀ Any฀gain/loss฀recognised฀in฀P/L฀
guaranteed฀returns฀on฀defined฀
contribution฀plans฀
(e)฀ Defined฀benefit฀schemes฀are฀ 5.฀ Asset฀ceiling฀test฀
increasingly฀costly฀and฀risky,฀and฀
Net฀asset฀measured฀at฀lower฀of:฀
many฀have฀been฀closed฀to฀new฀
entrants.฀฀ ฀ Net฀reported฀asset฀฀
฀ PV฀refunds฀available฀from฀plan/฀reductions฀in฀future฀
contributions฀
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1.฀ Short-term฀benefits฀
฀ ฀ Short-term฀benefits฀are฀accounted฀for฀on฀an฀accruals฀basis฀and฀not฀discounted.฀
฀ ฀ Post-employment฀benefits฀are฀arrangements฀that฀provide฀for฀pensions฀on฀retirement.฀
They฀can฀be฀divided฀into฀defined฀contribution฀and฀defined฀benefit฀plans.฀
2.฀ Defined฀contribution฀plans฀
฀ ฀ Also฀known฀as฀'money฀purchase'฀schemes.฀The฀employer฀accounts฀for฀the฀agreed฀cost฀to฀
the฀company฀on฀an฀accruals฀basis.฀The฀employee฀bears฀the฀risk฀of฀the฀pension's฀value.฀
3.฀ Defined฀benefit฀plans฀
฀ ฀ Also฀known฀as฀'final฀salary'฀schemes.฀The฀employer฀guarantees฀the฀employee฀an฀annual฀
pension฀based฀on฀final฀salary฀and฀number฀of฀years฀worked.฀
฀ ฀ The฀projected฀unit฀credit฀method฀is฀used฀to฀accrue฀costs.฀These฀include฀current฀
service฀cost฀and฀net฀interest฀cost฀(or฀income)฀on฀the฀net฀defined฀benefit฀liability฀(or฀
asset).฀Remeasurement฀differences฀between฀the฀year-end฀values฀of฀the฀assets฀and฀
obligation฀and฀the฀book฀amounts฀are฀recognised฀in฀other฀comprehensive฀income.฀
฀ ฀ Past฀service฀costs฀on฀plan฀amendments฀or฀curtailments฀are฀recognised฀in฀profit฀or฀
loss.฀
4.฀ Settlements฀
฀ ฀ The฀effects฀of฀settlements฀are฀recognised฀in฀profit฀or฀loss.฀
5.฀ 'Asset฀ceiling'฀test฀
฀ ฀ Defined฀benefit฀pension฀assets฀are฀limited฀to฀the฀lower฀of฀the฀net฀reported฀asset฀and฀
the฀present฀value฀of฀any฀refunds/contribution฀reductions฀available.฀
6.฀ Current฀developments฀
฀ ฀ IAS฀19฀was฀revised฀in฀2011,฀however,฀there฀are฀other฀key฀issues฀that฀still฀need฀addressing,฀
such฀as฀definitions฀and฀accounting฀for฀different฀types฀of฀plan.฀
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Q6฀Radost฀
There฀are฀articles฀on฀the฀ACCA฀website,฀written฀by฀the฀SBR฀examining฀team,฀which฀are฀relevant฀to฀the฀
topics฀studied฀in฀this฀Chapter฀and฀which฀are฀useful฀reading:฀
Pension฀posers฀(2015)฀
IAS฀19฀Employee฀Benefits฀(2010)฀
PwC฀have฀produced฀an฀informative฀guide฀to฀the฀practical฀aspects฀of฀applying฀IAS฀19.฀฀
https://inform.pwc.com/show?action=applyInformContentTerritory&id=1344034701155349&tid=1฀
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฀฀
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SKILLS฀CHECKPOINT฀1
฀ ฀
฀
Approaching฀ethical฀issues
฀
฀
฀
฀
aging information
Man
aging information
Man
An
sw
er
Approaching pl
t
en
manag ime
ethical issues Resolving
an
em
t
nin
Approaching financial Exam success skills
Good
reporting issues
g
ethical issues
uirereq rpretation
Specific SBR skills
e m e nts
Applying good
req of rprineteation
consolidation
Creating effective
m eunirts
techniques
discussion
Eff d p
of t inteect
an
e c re
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Performing
r re Co
ti v
se w ri
nt tin
Co
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l
Efficient numerica
analysis
฀
Introduction฀
Section฀A฀of฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam฀will฀consist฀of฀two฀scenario฀based฀
questions฀that฀will฀total฀50฀marks.฀The฀second฀of฀these฀questions฀will฀require฀candidates฀to฀
consider฀the฀reporting฀implications฀and฀the฀ethical฀implications฀of฀specific฀events฀in฀a฀given฀
scenario.฀
The฀two฀Section฀B฀questions฀could฀deal฀with฀any฀aspect฀of฀the฀syllabus.฀Therefore,฀ethics฀could฀
feature฀in฀this฀part฀of฀the฀exam฀too.฀฀
Given฀that฀ethics฀will฀feature฀in฀every฀exam,฀it฀is฀essential฀that฀you฀have฀mastered฀the฀
appropriate฀technique฀for฀approaching฀ethical฀issues฀in฀order฀to฀maximise฀your฀marks฀in฀the฀
exam.฀
As฀a฀reminder,฀the฀detailed฀syllabus฀learning฀outcomes฀for฀ethics฀are:฀
A฀฀฀฀Fundamental฀ethical฀and฀professional฀principles฀
1. Professional฀behaviour฀and฀compliance฀with฀accounting฀standards.฀
2. Ethical฀requirements฀of฀corporate฀reporting฀and฀the฀consequences฀of฀unethical฀behaviours.฀
฀ ฀
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฀฀
Skills฀Checkpoint฀1:฀Approaching฀ethical฀issues฀
SBR฀Skill:฀Approaching฀ethical฀issues฀
A฀step฀by฀step฀technique฀for฀approaching฀ethical฀issues฀has฀been฀outlined฀below.฀Each฀
step฀will฀be฀explained฀in฀more฀detail฀in฀the฀following฀sections฀as฀the฀question฀'Range'฀
is฀answered฀in฀stages.฀
STEP฀1:
Look฀at฀the฀mark฀allocation฀of฀the฀question฀
and฀work฀out฀how฀many฀minutes฀you฀have฀to฀
answer฀the฀question฀(based฀on฀1.95฀minutes฀
a฀mark).
STEP฀2:฀
Read฀the฀requirement฀and฀analyse฀it.฀Highlight฀
each฀sub-requirement฀separately,฀identify฀the฀verb(s)฀
and฀ask฀yourself฀what฀each฀sub-requirement฀means.฀
STEP฀3:
Read฀the฀scenario,฀asking฀yourself฀for฀each฀
paragraph฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀and฀
whether฀the฀proposed฀accounting฀treatment฀
complies฀with฀that฀IAS฀or฀IFRS.฀Identify฀which฀
fundamental฀principles฀from฀the฀ACCA฀Code฀of฀
Ethics฀and฀Conduct฀(the฀ACCA฀Code)฀are฀relevant฀
and฀whether฀there฀are฀any฀threats฀to฀these฀
principles.฀
STEP฀4:
Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀
requirements฀as฀headings.฀You฀could฀use฀a฀mind฀
map,฀a฀bullet-pointed฀list฀or฀simply฀annotate฀the฀
question.฀Try฀and฀come฀up฀with฀separate฀points฀for฀
each฀paragraph฀in฀the฀scenario.฀Make฀sure฀you฀
generate฀enough฀points฀for฀the฀marks฀available฀–
the฀ACCA฀marking฀guides฀typically฀allocate฀1฀mark฀
per฀relevant฀well-explained฀point.
STEP฀5:
Write฀up฀your฀answer฀using฀key฀words฀from฀the฀
requirements฀as฀headings.฀Create฀a฀separate฀sub-
heading฀for฀each฀key฀paragraph฀in฀the฀scenario.฀
Write฀in฀full฀sentences฀and฀clearly฀explain฀each฀
point.
฀
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Skills฀Checkpoint฀1฀
Exam฀success฀skills฀
For฀this฀question,฀we฀will฀focus฀on฀the฀following฀exam฀success฀skills฀and฀in฀particular:฀
฀ Good฀ time฀ management.฀ The฀ exam฀ will฀ be฀ time-pressured฀ and฀ you฀ will฀
need฀to฀manage฀your฀time฀carefully฀to฀ensure฀that฀you฀can฀make฀a฀good฀attempt฀
at฀ every฀ part฀ of฀ every฀ question.฀ You฀ will฀ have฀ 3฀ hours฀ and฀ 15฀ minutes฀ in฀ the฀
exam,฀which฀works฀out฀at฀1.95฀minutes฀a฀mark.฀The฀following฀question฀is฀worth฀
20฀marks฀so฀you฀should฀allow฀39฀minutes.฀You฀should฀allocate฀approximately฀a฀
quarter฀ to฀ a฀ third฀ of฀ your฀ time฀ to฀ reading฀ (first฀ the฀ requirement฀ and฀ then฀ the฀
scenario)฀ and฀ preparing฀ an฀ answer฀ plan.฀ In฀ this฀ question,฀ this฀ equates฀ to฀
approximately฀ 10฀ minutes฀ which฀ should฀ be฀ broken฀ down฀ into฀ 5฀ minutes฀ for฀
reading฀and฀5฀minutes฀for฀planning.฀The฀remaining฀29฀minutes฀should฀then฀be฀
allocated฀ to฀ writing฀ up฀ the฀ answer฀ and฀ split฀ between฀ the฀ issues฀ raised฀ by฀ the฀
different฀paragraphs฀in฀the฀question.฀
฀ Managing฀ information.฀ This฀ type฀ of฀ case฀ study฀ style฀ question฀ typically฀
contains฀four฀or฀five฀paragraphs฀of฀information฀and฀each฀paragraph฀is฀likely฀to฀
revolve฀around฀a฀different฀IAS฀or฀IFRS.฀This฀is฀a฀lot฀of฀information฀to฀absorb฀and฀
the฀ best฀ approach฀ is฀ effective฀ planning.฀ As฀ you฀ read฀ each฀ paragraph,฀ you฀
should฀think฀about฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀(there฀could฀be฀more฀than฀
one฀ relevant฀ for฀ each฀ paragraph)฀ and฀ if฀ you฀ cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀
IFRS,฀ you฀ can฀ fall฀ back฀ on฀ the฀ principles฀ of฀ the฀ Conceptual฀ Framework฀ for฀
Financial฀Reporting฀(the฀Conceptual฀Framework).฀Also฀ask฀yourself฀which฀of฀the฀
ACCA฀ Code's฀ fundamental฀ principles฀ are฀ relevant฀ and฀ whether฀ there฀ are฀ any฀
threats฀ to฀ these฀ principles฀ in฀ the฀ scenario.฀ It฀ is฀ really฀ important฀ to฀ identify฀ the฀
ethical฀ issues฀ as฀ there฀ is฀ a฀ danger฀ that฀ you฀ only฀ focus฀ on฀ the฀ accounting฀
treatment฀and฀you฀will฀not฀pass฀the฀question.฀
฀ Correct฀ interpretation฀ of฀ requirements.฀ At฀ first฀ glance,฀ it฀ looks฀ like฀ the฀
following฀ question฀ just฀ contains฀ one฀ requirement.฀ However,฀ on฀ closer฀
examination฀ you฀ will฀ discover฀ that฀ it฀ contains฀ two฀ sub-requirements.฀ Once฀ you฀
have฀ identified฀ the฀ requirements,฀ by฀ focusing฀ on฀ the฀ verb฀ and฀ each฀ sub-
requirement,฀you฀need฀to฀analyse฀them฀to฀determine฀exactly฀what฀your฀answer฀
should฀address.฀
฀ Answer฀ planning.฀Everyone฀will฀have฀a฀preferred฀style฀for฀an฀answer฀plan.฀
For฀example,฀it฀may฀be฀a฀mind฀map,฀bullet-pointed฀lists฀or฀simply฀annotating฀the฀
question฀paper.฀Choose฀the฀approach฀that฀you฀feel฀most฀comfortable฀with฀or฀if฀
you฀ are฀ not฀ sure,฀ try฀ out฀ different฀ approaches฀ for฀ different฀ questions฀ until฀ you฀
have฀found฀your฀preferred฀style.฀
฀ Effective฀ writing฀ and฀ presentation.฀ It฀ is฀ often฀ helpful฀ to฀ use฀ key฀ words฀
from฀ the฀ requirement฀ as฀ headings฀ in฀ your฀ answer.฀ You฀ may฀ also฀ wish฀ to฀ use฀
sub-headings฀in฀your฀answer฀–฀you฀could฀use฀a฀separate฀sub-heading฀for฀each฀
paragraph฀ from฀ the฀ scenario฀ in฀ the฀ question฀ which฀ contains฀ an฀ issue฀ for฀
discussion.฀Underline฀your฀headings฀and฀sub-headings฀with฀a฀ruler฀and฀write฀in฀
full฀sentences,฀ensuring฀your฀style฀is฀professional.฀Two฀professional฀marks฀will฀be฀
awarded฀to฀the฀ethical฀issues฀question฀in฀Section฀A฀of฀the฀SBR฀exam.฀The฀use฀of฀
headings,฀ sub-headings฀ and฀ full฀ sentences฀ as฀ well฀ as฀ clear฀ explanations฀ and฀
ensuring฀ that฀ all฀ sub-requirements฀ are฀ met฀ and฀ all฀ issues฀ in฀ the฀ scenario฀ are฀
addressed฀will฀help฀you฀obtain฀these฀two฀marks.฀
฀ 99฀

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฀฀
Skill฀Activity฀
STEP 1฀ Look฀ at฀ the฀ mark฀ allocation฀ of฀ the฀ following฀ question฀ and฀ work฀ out฀
฀ how฀ many฀ minutes฀ you฀ have฀ to฀ answer฀ the฀ question.฀ It฀ is฀ a฀ 20฀ mark฀
question฀and฀at฀1.95฀minutes฀a฀mark,฀it฀should฀take฀39฀minutes.฀On฀
the฀basis฀of฀spending฀approximately฀a฀third฀to฀a฀quarter฀of฀your฀time฀
reading฀ and฀ planning,฀ this฀ time฀ should฀ be฀ split฀ approximately฀ as฀
follows:฀
 Reading฀the฀question฀–฀5฀minutes฀
 Planning฀your฀answer฀–฀5฀minutes฀
 Writing฀up฀your฀answer฀–฀29฀minutes฀
Within฀each฀of฀these฀phases,฀your฀time฀should฀be฀split฀roughly฀equally฀
between฀the฀two฀sub-requirements฀(ethical฀implications฀and฀accounting฀
implications).฀
Required฀
Discuss฀ the฀ ethical฀ and฀ accounting฀ implications฀ of฀ the฀ above฀ situations฀ from฀ the฀
perspective฀of฀the฀Finance฀Director.฀ ฀(18฀marks)฀
Professional฀marks฀will฀be฀awarded฀in฀question฀2฀for฀application฀of฀ethical฀principles.฀฀
฀ (2฀marks)฀
(Total฀=฀20฀marks)฀
STEP 2฀ Read฀the฀requirement฀for฀the฀following฀question฀and฀analyse฀it.฀
฀ Highlight฀each฀sub-requirement,฀identify฀the฀verb(s)฀and฀ask฀yourself฀
what฀each฀sub-requirement฀means.฀
Verb฀–฀refer฀to฀ Sub-requirement฀1฀
Sub-requirement฀2
ACCA฀definition฀
Required฀
Discuss฀ the฀ ethical฀ and฀ accounting฀ implications฀ of฀ the฀ above฀ situations฀ from฀ the฀
perspective฀of฀the฀Finance฀Director.฀ ฀฀฀฀฀(20฀marks)฀
Note฀whose฀
฀ viewpoint฀your฀
answer฀should฀be฀
฀ from฀
฀
Your฀ verb฀ is฀ 'discuss'.฀ This฀ is฀ defined฀ by฀ the฀ ACCA฀ as฀ 'Consider฀ and฀ debate/argue฀
about฀the฀pros฀and฀cons฀of฀an฀issue.฀Examine฀in฀detail฀by฀using฀arguments฀in฀favour฀or฀
against'.฀
฀ ฀
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There฀are฀two฀sub-requirements฀to฀discuss:฀
(1)฀ The฀ethical฀implications฀
(2)฀ The฀accounting฀implications฀
In฀ this฀ context,฀ the฀ verb฀ 'discuss'฀ is฀ asking฀ you฀ to฀ examine฀ each฀ of฀ the฀ proposed฀
changes฀ in฀ accounting฀ policies฀ and฀ estimates฀ and฀ assess฀ arguments฀ in฀ favour฀ and฀
against฀adopting.฀
For฀ the฀ ethical฀ implications,฀ you฀ need฀ to฀ consider฀ the฀ fundamental฀ principles฀ of฀ the฀
ACCA฀Code฀and฀whether฀there฀are฀any฀threats฀to฀these฀principles฀in฀the฀scenario.฀
For฀ the฀ accounting฀ implications,฀ you฀ need฀ to฀ assess฀ whether฀ the฀ proposed฀ treatment฀
complies฀with฀the฀relevant฀IAS฀or฀IFRS.฀฀
STEP 3฀ Now฀read฀the฀scenario.฀฀
฀
Accounting฀implications฀
Ask฀ yourself฀ for฀ each฀ paragraph฀ which฀ IAS฀ or฀ IFRS฀ may฀ be฀ relevant฀
(remember฀ you฀ do฀ not฀ need฀ to฀ know฀ the฀ IAS฀ or฀IFRS฀ number)฀ and฀ whether฀
the฀ proposed฀ accounting฀ treatment฀ complies฀ with฀ that฀ IAS฀ or฀ IFRS.฀ If฀ you฀
cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀ IFRS,฀ then฀ refer฀ to฀ the฀ Conceptual฀
Framework฀for฀Financial฀Reporting฀(Conceptual฀Framework).฀฀
To฀ identify฀ the฀ issues,฀ you฀ might฀ want฀ to฀ consider฀ whether฀ one฀ or฀ more฀ of฀
the฀following฀are฀relevant฀in฀the฀scenario:฀
Potential฀issue฀ What฀does฀it฀mean?฀
Recognition฀ When฀should฀the฀item฀be฀recorded฀in฀the฀financial฀
statements?฀
Initial฀measurement฀ What฀amount฀should฀be฀recorded฀when฀the฀item฀is฀
first฀recognised?฀
Subsequent฀ Once฀the฀item฀has฀been฀recognised,฀how฀should฀
measurement฀ the฀amount฀change฀year฀on฀year?฀
Presentation฀ What฀heading฀should฀the฀amount฀appear฀under฀in฀
the฀statement฀of฀financial฀position฀or฀statement฀of฀
profit฀or฀loss฀and฀other฀comprehensive฀income?฀
Disclosure฀ Is฀a฀note฀to฀the฀accounts฀required฀in฀relation฀to฀the฀
transaction฀or฀balance?฀
Ethical฀implications฀
Consider฀ the฀ ACCA฀ Code.฀ The฀ fundamental฀ principle฀ of฀ professional฀
competence฀ is฀ going฀ to฀ be฀ the฀ most฀ important฀ in฀ an฀ SBR฀ question฀ because฀
an฀ACCA฀accountant฀must฀prepare฀financial฀statements฀in฀accordance฀with฀
IAS฀and฀IFRS.฀Therefore,฀if฀the฀accountant฀is฀associated฀with฀any฀accounting฀
treatment฀that฀does฀not฀comply฀with฀IAS฀or฀IFRS,฀they฀will฀be฀breaching฀the฀
principle฀ of฀ professional฀ competence.฀ Other฀ fundamental฀ principles฀ may฀
also฀ be฀ relevant฀ (objectivity,฀ integrity,฀ confidentiality,฀ professional฀
behaviour).฀Watch฀out฀for฀threats฀in฀the฀questions฀to฀any฀of฀these฀principles.฀
Reminders฀of฀these฀threats฀have฀been฀included฀below:฀
฀
฀
฀ 101฀

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฀฀
Threat Explanation
Self-interest฀ A฀financial฀or฀other฀interest฀may฀
inappropriately฀influence฀the฀accountant's฀
judgement฀or฀behaviour฀
Self-review฀ Where฀the฀accountant฀may฀not฀appropriately฀
evaluate฀the฀results฀of฀a฀previous฀judgement฀
made฀or฀activity฀or฀service฀performed฀by฀
themselves฀or฀others฀within฀their฀firm฀
Advocacy฀ Threat฀that฀the฀accountant฀promotes฀a฀client's฀
or฀employer's฀position฀to฀the฀point฀that฀their฀
objectivity฀is฀compromised฀
Familiarity฀ Due฀to฀a฀long฀or฀close฀relationship฀with฀a฀
client฀or฀employer,฀the฀accountant฀may฀be฀
too฀sympathetic฀to฀their฀interests฀or฀too฀
accepting฀of฀their฀work฀
Intimidation฀ The฀accountant฀may฀not฀act฀objectively฀due฀to฀
actual฀or฀perceived฀pressures฀฀
฀
฀ Note฀the฀company's฀main฀business฀activities฀–฀
this฀could฀be฀important฀for฀revenue฀recognition฀
฀ and฀the฀fact฀that฀it฀in฀the฀manufacturing฀
industry฀means฀that฀inventory฀and฀non-current฀
assets฀may฀be฀relevant.฀(Accounting)฀
Question฀–฀Range฀(20฀marks)฀
Range฀ is฀ a฀ privately-owned฀ furniture฀ design฀ and฀ manufacturing฀
company฀which฀prepares฀its฀accounts฀in฀accordance฀with฀International฀
Financial฀ Reporting฀ Standards.฀ Range฀ manufactures฀ and฀ The฀Managing฀
Director฀still฀owns฀
Managing฀Director฀is฀
installs฀ high฀ quality฀ office฀ furniture฀ for฀ a฀ wide฀ range฀ of฀ 100%฀of฀the฀
unlikely฀to฀be฀a฀ shares.฀There฀
qualified฀accountant฀so฀
corporate฀clients.฀The฀company฀was฀founded฀30฀years฀ago฀and฀is฀still฀ could฀be฀a฀conflict฀
unlikely฀to฀be฀familiar฀ of฀interest฀here.฀
with฀IAS/IFRS.฀
100%฀ owned฀ by฀ its฀ founder฀ who฀ is฀ also฀ the฀ Managing฀ (Ethics)฀
(Accounting฀and฀
Ethics)฀
Director฀of฀the฀company.฀
At฀ the฀ planning฀ meeting฀ for฀ the฀ next฀ accounting฀ period,฀ the฀
Bound฀by฀ACCA฀
Managing฀ Director฀ suggested฀ to฀ the฀ Finance฀ Director฀ (an฀ Code฀(Ethics)฀
IAS฀8฀Accounting฀ ACCA-qualified฀accountant)฀that฀a฀number฀of฀changes฀be฀made฀
Policies,฀Changes฀in฀
Accounting฀Estimates฀ to฀ Range's฀ accounting฀ policies฀ and฀ estimates.฀The฀proposed฀
and฀Errors฀
(Accounting)฀ changes฀are฀outlined฀below.฀
IAS฀16฀Property,฀Plant฀
and฀Equipment.฀
Range's฀ manufacturing฀ machinery฀ is฀ currently฀ being฀ depreciated฀ on฀ a฀
(Accounting)฀
Reduces฀depreciation,฀
straight฀ line฀ basis฀ over฀ 5฀ years.฀ The฀ Managing฀ Director฀ would฀ like฀ to฀
increases฀profits.฀
Does฀this฀evidence฀
(Ethics)฀
support฀the฀proposed฀ extend฀ the฀ useful฀ life฀ of฀ this฀ plant฀ to฀ 10฀ years.฀ Historically,฀
change?฀(Accounting฀
and฀Ethics)฀ profits฀ or฀ losses฀ on฀ disposal฀ of฀ machinery฀ have฀ been฀
minimal.฀
102฀

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฀ IFRS฀15฀Revenue฀from฀
Contracts฀with฀Customers฀
(Accounting)฀
฀
Range฀ has฀ two฀ main฀ revenue฀ streams.฀ Firstly,฀ the฀ company฀ earns฀
When฀is฀the฀
revenue฀ from฀ the฀ sale฀ of฀ office฀ furniture฀ to฀ corporate฀ performance฀
obligation฀satisfied?฀
clients.฀ Secondly,฀ the฀ company฀ offers฀ an฀ installation฀ service฀ in฀ (Accounting)฀
exchange฀ for฀ a฀ fee.฀ The฀ Managing฀ Director฀ would฀ like฀ to฀ revise฀ the฀
Recognise฀revenue฀ revenue฀ recognition฀ policy฀ so฀ that฀ revenue฀ is฀ recognised฀ when฀ the฀
and฀profit฀earlier.฀
(Accounting฀and฀ customer฀signs฀the฀contract฀rather฀than฀on฀delivery฀and฀over฀the฀
Ethics)฀
period฀of฀installation฀of฀the฀furniture฀respectively.฀
Finally,฀ the฀ Managing฀ Director฀ has฀ noticed฀ that฀ in฀ the฀ past฀ year,฀
Does฀this฀evidence฀
there฀ has฀ been฀ a฀ decrease฀ in฀ the฀ percentage฀ of฀ furniture฀ support฀the฀proposed฀
change?฀(Accounting฀
returned฀by฀customers฀for฀repair฀under฀warranty.฀He฀would฀ and฀Ethics)฀
IAS฀37฀Provisions,฀
Contingent฀Liabilities฀ like฀to฀reduce฀the฀provision฀for฀warranties฀in฀the฀forthcoming฀year.฀
and฀Contingent฀Assets฀
(Accounting)฀
As฀the฀Managing฀Director฀was฀leaving฀the฀meeting,฀he฀mentioned฀to฀
the฀ Finance฀ Director฀ that฀ now฀ he฀ had฀ reached฀ the฀ age฀ of฀ 65,฀ he฀
would฀like฀to฀retire฀and฀sell฀the฀business฀in฀one฀year's฀time.฀฀฀
Required฀
Incentive฀to฀change฀
accounting฀policies฀and฀
estimates฀to฀increase฀ Discuss฀the฀ethical฀and฀accounting฀implications฀of฀the฀above฀situations฀
profits฀and฀maximise฀the฀
price฀he฀could฀sell฀his฀ from฀the฀perspective฀of฀the฀Finance฀Director.฀ (18฀marks)฀
shares฀for฀on฀retirement฀
(Ethics)฀
Professional฀marks฀will฀be฀awarded฀in฀this฀question฀for฀the฀application฀
of฀ethical฀principles.฀ (2฀marks)฀
฀ ฀฀฀฀฀(Total฀=฀20฀marks)฀
฀ 103฀

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฀฀
STEP 4฀ Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀requirements฀as฀
฀ headings฀ (accounting฀ implications).฀ You฀ could฀ use฀ a฀ mind฀ map฀
similar฀ to฀ the฀ one฀ shown฀ below.฀ Alternatively฀ you฀ could฀ use฀ a฀
bullet-pointed฀list฀or฀simply฀annotate฀the฀question.฀฀
Try฀ and฀ come฀ up฀ with฀ separate฀ points฀ for฀ each฀ of฀ the฀ three฀
proposed฀ changes฀ in฀ accounting฀ policies฀ or฀ estimates฀ in฀ the฀
scenario.฀
Make฀ sure฀ you฀ generate฀ enough฀ points฀ for฀ the฀ marks฀ available฀ –฀
there฀ are฀ 18฀ marks฀ available,฀ so฀ on฀ the฀ basis฀ of฀ 1฀ mark฀ per฀
relevant฀ well-explained฀ point,฀ to฀ achieve฀ a฀ comfortable฀ pass,฀ you฀
should฀aim฀to฀generate฀14–15฀points฀for฀this฀18-mark฀question.฀
฀
฀
฀ Accounting฀
implications฀
฀
฀
฀ Change฀in฀accounting฀policy฀
or฀estimate฀
฀
฀฀ Change฀ in฀ policy:฀ when฀
฀ required฀ by฀ IFRS฀ or฀ results฀
฀ in฀ more฀ relevant/reliable฀
information฀
฀
฀ Change฀ in฀ estimate:฀ when฀
฀ change฀in฀circumstances฀or฀
฀ new฀information฀
฀
฀
฀
Extending฀useful฀life฀(UL)฀of฀ Change฀in฀revenue฀ Decreasing฀warranty฀
฀ machinery฀ recognition฀ provision฀
฀
(Change฀in฀accounting฀estimate)฀ (Change฀in฀accounting฀policy)฀ (Change฀in฀accounting฀
฀ ฀ Separate฀performance฀ estimate)฀
฀ Review฀required฀annually฀
฀ No฀evidence฀for฀increase฀
฀ obligations฀ ฀ Only฀if฀costs฀of฀repair฀
฀ Revenue฀for฀furniture฀on฀ under฀warranty฀likely฀
฀ delivery฀ to฀decrease฀
฀ Revenue฀for฀installation฀ ฀ Possible฀evidence฀as฀
as฀service฀performed฀ less฀furniture฀returned
฀ Proposed฀change฀not฀
permitted฀
104฀

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฀
Ethical฀
฀ implications฀
฀
฀
฀
FD฀=฀ACCA฀qualified฀so฀ Reject฀changes฀to฀useful฀life฀
Professional฀competence฀=฀
฀
bound฀by฀ACCA฀Code฀ of฀machinery฀and฀revenue฀
compliance฀with฀IAS/IFRS฀
recognition฀
฀
฀
฀
Threat฀to฀principles฀of฀ Proposed฀changes฀to฀UL฀of฀
If฀MD฀disagrees,฀seek฀advice฀
professional฀competence,฀ machinery฀and฀revenue฀
฀ from฀ACCA฀and/or฀legal฀
objectivity฀and฀integrity฀as฀ recognition฀would฀result฀in฀
฀ advice.฀Consider฀resigning.฀
MD฀motivated฀to฀maximise฀ non-compliance฀with฀IAS฀16฀
profit฀and฀sales฀price฀
฀ and฀IFRS฀15฀
฀
฀
STEP 5฀ Write฀ up฀ your฀ answer฀ using฀ key฀ words฀ from฀ the฀ requirements฀ as฀
฀ headings.฀Create฀a฀separate฀sub-heading฀for฀each฀key฀paragraph฀
in฀ the฀ scenario.฀ Write฀ in฀ full฀ sentences฀ and฀ clearly฀ explain฀ each฀
point,฀ ensuring฀ that฀ you฀ use฀ professional฀ language.฀ For฀ the฀
accounting฀implications,฀structure฀your฀answer฀for฀each฀of฀the฀three฀
items฀as฀follows:฀
 Rule/principle฀per฀IAS฀or฀IFRS฀(state฀briefly)฀
 Apply฀ rule/principle฀ to฀ the฀ scenario฀ (correct฀ accounting฀
treatment฀and฀why)฀
 Conclude฀
For฀the฀ethical฀implications,฀take฀the฀following฀approach:฀
 Should฀the฀FD฀accept฀the฀proposed฀change?฀Why/why฀not?฀
 Would฀ the฀ change฀ result฀ in฀ a฀ breach฀ of฀ any฀ of฀ the฀ ethical฀
principles?฀If฀so,฀which฀and฀why?฀฀
 Are฀there฀any฀additional฀threats฀to฀the฀ethical฀principles?฀
 What฀action฀should฀the฀FD฀take฀next?฀
฀ From฀the฀point฀of฀view฀of฀
the฀Finance฀Director฀as฀
this฀was฀asked฀for฀in฀the฀
Suggested฀solution฀ requirement.฀
Make฀sure฀you฀write฀in฀ As฀an฀ACCA฀qualified฀accountant,฀the฀Finance฀Director฀(FD)฀is฀bound฀
full฀sentences.฀This฀will฀
help฀you฀to฀obtain฀the฀ by฀ the฀ ACCA฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ (the฀ ACCA฀ Code).฀ This฀
two฀professional฀skills฀ With฀the฀verb฀‘discuss'฀in฀
marks.฀ means฀ adhering฀ to฀ its฀ fundamental฀ principles,฀ one฀ of฀ which฀ is฀ the฀requirement,฀it฀is฀
useful฀to฀have฀a฀short฀
professional฀ competence.฀ This฀ requires฀ the฀ FD฀ to฀ ensure฀ the฀ accounts฀ opening฀paragraph฀
explaining฀the฀basis฀of฀
comply฀ with฀ International฀ Financial฀ Reporting฀ Standards฀ (IFRS).฀ your฀discussion.฀
Therefore,฀ the฀ FD฀ should฀ only฀ accept฀ the฀ proposed฀ changes฀ if฀ they฀
comply฀with฀IFRS.฀
฀ 105฀

lOMoARcPSD|6256454
฀฀
In฀ethics฀questions,฀you฀
should฀also฀look฀out฀for฀
The฀ FD฀ should฀ also฀ be฀ aware฀ of฀ threats฀ to฀ the฀ ACCA฀ Code's฀ threats฀to฀the฀ACCA฀
Code's฀fundamental฀
fundamental฀ principles.฀ Here฀ the฀ self-interest฀ threat฀ is฀ that฀ the฀ principles฀in฀the฀scenario฀
and฀mention฀them฀in฀your฀
Managing฀ Director฀ (MD)฀ wishes฀ to฀ retire฀ and฀ sell฀ his฀ shares฀ in฀ one฀ answer.฀
year's฀ time฀ which฀ may฀ incentivise฀ him฀ to฀ increase฀ profit฀ in฀ order฀ to฀
maximise฀his฀exit฀price฀from฀the฀business.฀ Use฀key฀words฀for฀the฀
requirement฀to฀structure฀
your฀answer฀and฀help฀
Accounting฀implications฀ you฀to฀obtain฀the฀two฀
professional฀skills฀marks฀
Changes฀in฀accounting฀policies฀and฀estimates฀
Underlined฀sub-headings฀ IAS฀ 8฀ Accounting฀ Policies,฀ Changes฀ in฀ Accounting฀ Estimates฀ and฀

will฀help฀you฀structure฀
your฀answer฀and฀help฀ Errors฀only฀permits฀a฀change฀in฀accounting฀policy฀if฀the฀change:฀
you฀to฀obtain฀the฀two฀
professional฀skills฀marks.฀  Is฀required฀by฀an฀IFRS;฀and฀
 Results฀in฀information฀that฀is฀more฀relevant฀and฀reliable.฀฀
A฀change฀in฀accounting฀estimate฀is฀only฀required฀when฀changes฀occur฀ State฀relevant฀
rule/principle฀from฀
in฀the฀circumstances฀on฀which฀the฀estimate฀was฀based฀or฀as฀a฀result฀of฀ IAS฀or฀IFRS฀very฀briefly฀
(you฀do฀not฀need฀to฀
new฀information฀or฀more฀experience.฀ state฀IAS/IFRS฀number)
Changing฀an฀accounting฀policy฀or฀estimate฀purely฀to฀boost฀profits฀and฀
share฀price฀would฀contravene฀IAS฀8฀and฀be฀considered฀unethical.฀฀
Apply฀rule/principle฀
Extending฀the฀useful฀life฀of฀manufacturing฀machinery฀ to฀scenario.฀
IAS฀ 16฀ Property,฀ Plant฀ and฀ Equipment฀ requires฀ the฀ useful฀ life฀ of฀ an฀
asset฀ to฀ be฀ reviewed฀ at฀ least฀ each฀ financial฀ year฀ end,฀ and,฀ if฀
Rule/principle฀
expectations฀ differ฀ from฀ previous฀ estimates,฀ the฀ change฀ should฀ be฀
accounted฀for฀prospectively฀as฀a฀change฀in฀accounting฀estimate.฀
The฀MD฀wishes฀to฀double฀the฀useful฀life฀of฀the฀machinery.฀This฀would฀
Apply฀ reduce฀ the฀ amount฀ of฀ depreciation฀ charged฀ each฀ year฀ on฀ machinery฀
significantly,฀thereby฀increasing฀profit.฀
However,฀there฀does฀not฀appear฀to฀be฀any฀evidence฀that฀the฀useful฀life฀
of฀ machinery฀ should฀ be฀ increased฀ given฀ there฀ have฀ been฀ minimal฀
Apply฀ profits฀or฀losses฀on฀disposal฀in฀the฀past฀which฀suggests฀that฀the฀current฀
useful฀life฀of฀5฀years฀is฀appropriate.฀If฀the฀useful฀life฀of฀the฀machinery฀
were฀ underestimated฀ to฀ the฀ extent฀ the฀ MD฀ is฀ suggesting,฀ this฀ would฀
have฀resulted฀in฀substantial฀profits฀on฀disposal.฀
The฀ useful฀ life฀ of฀ the฀ machinery฀ should฀ remain฀ at฀ 5฀ years฀ in฀ the฀
Conclude฀with฀your฀
absence฀ of฀ any฀ evidence฀ to฀ suggest฀ that฀ its฀ utility฀ to฀ Range฀ will฀
opinion฀
increase฀to฀10฀years.฀
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Recognising฀revenue฀when฀the฀customer฀signs฀the฀contract฀
IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀requires฀the฀entity฀to฀
identify฀the฀performance฀obligations฀in฀a฀contract.฀
Rule/principle฀
Here,฀ there฀ appear฀ to฀ be฀ two฀ performance฀ obligations฀ in฀ a฀ typical฀
contract฀ with฀ a฀ customer.฀ Firstly,฀ the฀ promise฀ to฀ transfer฀ goods฀ in฀ the฀
form฀of฀office฀furniture,฀and฀secondly,฀the฀promise฀to฀transfer฀a฀service฀
Apply฀
in฀the฀form฀of฀installation฀of฀the฀office฀furniture.฀The฀MD's฀proposal฀to฀
revise฀ the฀ revenue฀ recognition฀ policy฀ fails฀ to฀ split฀ the฀ performance฀
obligations฀ as฀ both฀ revenue฀ streams฀ would฀ be฀ recognised฀ when฀ the฀
customer฀signs฀the฀contract.฀
Revenue฀ should฀ be฀ recognised฀ when฀ each฀ performance฀ obligation฀ is฀

satisfied.฀This฀occurs฀when฀the฀promised฀good฀or฀service฀is฀transferred฀
Rule/principle฀
to฀ a฀ customer.฀ The฀ sale฀ of฀ office฀ furniture฀ results฀ in฀ satisfaction฀ of฀ a฀
performance฀ obligation฀ at฀ a฀ point฀ in฀ time.฀ IFRS฀ 15฀ indicators฀ of฀ the฀
transfer฀ of฀ control฀ include฀ transfer฀ of฀ physical฀ possession฀ of฀ the฀ asset฀ Apply฀
and฀ the฀ customer฀ having฀ the฀ significant฀ risks฀ and฀ rewards฀ of฀
ownership.฀ In฀ the฀ case฀ of฀ Range's฀ office฀ furniture,฀ the฀ transfer฀ of฀
control฀appears฀to฀take฀place฀at฀the฀point฀of฀delivery฀of฀the฀furniture฀to฀
the฀ customer฀ rather฀ than฀ when฀ the฀ customer฀ signs฀ the฀ contract.฀
Therefore,฀ the฀ existing฀ revenue฀ recognition฀ policy฀ is฀ correct฀ and฀ the฀
MD's฀proposed฀change฀would฀contravene฀IFRS฀15.฀
opinion฀
The฀ installation฀ service฀ results฀ in฀ satisfaction฀ of฀ a฀ performance฀
obligation฀ over฀ time.฀ IFRS฀ 15฀ requires฀ revenue฀ to฀ be฀ recognised฀ by฀
Apply฀
measuring฀progress฀towards฀complete฀satisfaction฀of฀the฀performance฀
obligation.฀ Therefore฀ the฀ current฀ policy฀ of฀ recognising฀ revenue฀ over฀
the฀period฀of฀installation฀is฀correct฀and฀the฀MD's฀proposed฀change฀to฀
Conclude฀with฀your฀ recognise฀ it฀ when฀ the฀ customer฀ signs฀ the฀ contract฀ would฀ contravene฀
opinion฀
IFRS฀15฀and฀not฀be฀permitted.฀
It฀is฀worth฀noting฀that฀the฀MD's฀proposed฀changes฀would฀both฀result฀in฀
earlier฀recognition฀of฀revenue฀and฀therefore฀profit.฀
Reducing฀the฀warranty฀provision฀
Under฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets,฀
where฀ there฀ is฀ a฀ present฀ obligation,฀ probable฀ outflow฀ and฀ a฀ reliable฀ Rule/principle฀
฀ 107฀

lOMoARcPSD|6256454
฀฀
estimate,฀ a฀ provision฀ should฀ be฀ made฀ for฀ the฀ best฀ estimate฀ of฀ the฀
expenditure฀required฀to฀settle฀the฀obligation.฀฀
Here,฀there฀seems฀to฀be฀evidence฀to฀suggest฀that฀expected฀expenditure฀
has฀ fallen฀ as฀ fewer฀ customers฀ are฀ returning฀ furniture฀ under฀ warranty.฀
Therefore,฀ there฀ may฀ be฀ some฀ justification฀ in฀ reducing฀ the฀ provision฀ Apply฀
which฀would฀result฀in฀a฀decrease฀in฀expenses฀and฀increase฀in฀profit.฀
This฀ would฀ be฀ a฀ change฀ in฀ accounting฀ estimate฀ given฀ that฀ the฀
proportion฀ of฀ returns฀ and฀ likely฀ repair฀ costs฀ involve฀ management฀
opinion฀ judgement.฀As฀such,฀it฀should฀be฀accounted฀for฀prospectively.฀
Ethical฀implications฀
Issue฀(1):฀Should฀the฀FD฀
The฀ proposed฀ increase฀ of฀ the฀ machinery's฀ useful฀ life฀ appears฀ to฀ be฀
accept฀the฀proposed฀
change?฀Why/why฀
unjustified฀because฀the฀evidence฀indicates฀that฀the฀current฀useful฀life฀is฀
not?฀
still฀appropriate.฀
Issue฀(2):฀Should฀the฀FD฀
The฀ change฀ to฀ revenue฀ recognition฀ is฀ not฀ permitted฀ because฀ it฀ would฀
change?฀Why/why฀
not?฀
contravene฀IFRS฀15.฀
In฀ethics฀questions,฀you฀ There฀ are฀ possible฀ advocacy฀ and฀ intimidation฀ threats฀ here฀ if฀ the฀ FD฀
should฀also฀look฀out฀for฀
threats฀to฀the฀ACCA฀ feels฀ pressured฀ to฀ act฀ in฀ the฀ MD's฀ best฀ interests.฀ There฀ is฀ also฀ a฀
Code's฀fundamental฀
principles฀in฀the฀ familiarity฀threat฀if฀the฀FD฀were฀inclined฀to฀accept฀the฀changes฀out฀of฀
scenario฀and฀mention฀
them฀in฀your฀answer.฀ friendship.฀ Either฀ way,฀ if฀ the฀ FD฀ were฀ to฀ accept฀ the฀ change฀ to฀ the฀ Issues฀(1)(2):฀Would฀
there฀be฀a฀breach฀of฀
useful฀ life฀ of฀ the฀ machinery฀ and฀ the฀ change฀ in฀ revenue฀ recognition,฀ any฀ethical฀principles?฀
If฀so,฀which฀and฀why?฀
this฀would฀be฀a฀breach฀of฀the฀ACCA฀Code's฀fundamental฀principles฀of฀
professional฀ competence฀ (due฀ to฀ non-compliance฀ with฀ IFRS),฀
objectivity฀(giving฀in฀to฀pressure฀from฀the฀FD)฀and฀integrity฀(if฀they฀did฀
so฀knowingly,฀with฀the฀sole฀motivation฀of฀maximising฀the฀exit฀price฀for฀
the฀MD).฀
Issue฀(3):฀Should฀the฀FD฀ The฀proposed฀decrease฀in฀the฀warranty฀provision฀appears฀potentially฀
change?฀Why/why฀ justifiable฀ due฀ to฀ the฀ decrease฀ in฀ furniture฀ returned฀ under฀ warranty.฀
not?฀
However,฀ if฀ on฀ further฀ investigation฀ there฀ is฀ insufficient฀ evidence฀ to฀
Issue฀(3):฀Would฀there฀
be฀a฀breach฀of฀any฀
justify฀ the฀ decrease฀ in฀ provision฀ and฀ the฀ sole฀ motivation฀ is฀ to฀ boost฀
ethical฀principles?฀If฀so,
which฀and฀why?฀
profits฀ and฀ maximise฀ the฀ MD's฀ exit฀ price,฀ this฀ change฀ would฀ not฀ be฀
permitted.฀
Conclude฀any฀ethical฀
The฀ FD฀ should฀ explain฀ to฀ the฀ MD฀ why฀ the฀ proposed฀ changes฀ to฀ the฀
issues฀question฀with฀
advice฀on฀what฀the฀
useful฀life฀of฀the฀machinery฀and฀revenue฀recognition฀are฀not฀permitted.฀
person฀should฀do฀next.฀
If฀ the฀ MD฀ refuses฀ to฀ accept฀ this,฀ as฀ the฀ MD฀ is฀ the฀ founder,฀ sole฀
108฀

lOMoARcPSD|6256454
shareholder฀ and฀ most฀ senior฀ director,฀ external฀ advice฀ would฀ be฀

required.฀It฀would฀be฀appropriate฀to฀seek฀professional฀advice฀from฀the฀
ACCA.฀ Legal฀ advice฀ should฀ be฀ also฀ be฀ considered.฀ Finally,฀
resignation฀should฀be฀considered฀if฀the฀matters฀cannot฀be฀resolved.฀
Other฀points฀to฀note:฀
฀ This฀is฀a฀comprehensive,฀detailed฀answer.฀You฀could฀still฀have฀
scored฀a฀strong฀pass฀with฀a฀shorter฀answer฀as฀long฀as฀it฀
addressed฀all฀three฀issues฀and฀came฀to฀a฀justified฀conclusion฀for฀
each.฀
฀ Both฀sub-requirements฀(accounting฀implications฀and฀ethical฀
implications)฀have฀been฀addressed,฀each฀with฀their฀own฀heading.฀
฀ All฀three฀of฀the฀proposed฀changes฀in฀accounting฀policies฀or฀
estimates฀have฀been฀addressed,฀each฀with฀their฀own฀sub-
heading.฀
฀ The฀length฀of฀answer฀for฀each฀of฀the฀three฀changes฀is฀not฀the฀
same฀–฀there฀is฀more฀to฀say฀about฀revenue฀recognition฀as฀there฀
are฀two฀revenue฀streams฀and฀more฀detailed฀rules฀to฀apply.฀
฀ The฀answer฀correctly฀addresses฀the฀issues฀from฀the฀perspective฀of฀
the฀finance฀director.฀
฀ The฀answer฀involves฀'discussion'฀–฀for฀each฀of฀the฀three฀proposed฀
changes,฀it฀explains฀under฀what฀circumstances฀a฀change฀would฀
be฀permitted฀and฀whether฀the฀change฀is฀permissible฀in฀each฀
case.฀
฀ The฀professional฀marks฀have฀been฀obtained฀through฀answering฀
both฀sub-requirements,฀addressing฀all฀three฀of฀the฀proposed฀
changes,฀using฀headings฀and฀sub-headings฀and฀writing฀from฀the฀
perspective฀of฀the฀Finance฀Director฀in฀full฀sentences฀which฀are฀
clearly฀explained฀in฀professional฀language.฀
฀ 109฀

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฀฀
Exam฀success฀skills฀diagnostic฀
Every฀time฀you฀complete฀a฀question,฀use฀the฀diagnostic฀below฀to฀assess฀how฀effectively฀you฀
demonstrated฀ the฀ exam฀ success฀ skills฀ in฀ answering฀ the฀ question.฀ The฀ table฀ has฀ been฀
completed฀ below฀ for฀ the฀ Range฀ activity฀ to฀ give฀ you฀ an฀ idea฀ of฀ how฀ to฀ complete฀ the฀
diagnostic.฀
Exam฀success฀skills฀ Your฀reflections/observations฀
Good฀time฀ Did฀you฀spend฀approximately฀a฀quarter฀to฀a฀third฀of฀your฀
management฀ time฀reading฀and฀planning?฀
Did฀you฀allow฀yourself฀time฀to฀address฀both฀sub-
requirements฀(ethical฀and฀accounting฀implications)฀and฀all฀
three฀of฀the฀proposed฀changes฀in฀accounting฀policies฀and฀
estimates฀in฀the฀scenario?฀
Your฀writing฀time฀should฀have฀been฀split฀between฀these฀
three฀proposed฀changes฀but฀it฀does฀not฀necessarily฀have฀to฀
be฀spread฀evenly฀–฀there฀is฀more฀to฀say฀about฀some฀issues฀
(eg฀revenue)฀than฀others.฀
Managing฀information฀฀฀ Did฀you฀identify฀the฀relevant฀IAS฀or฀IFRS฀for฀each฀proposed฀
change฀in฀accounting฀policy฀or฀estimate?฀
Did฀you฀spot฀that฀the฀Finance฀Director฀is฀ACCA฀qualified฀so฀
is฀bound฀by฀the฀ACCA's฀Code฀but฀the฀Managing฀Director฀is฀
unlikely฀to฀have฀detailed฀knowledge฀of฀accounting฀
standards?฀
Did฀you฀identify฀the฀threat฀to฀the฀ACCA฀Code's฀ethical฀
principles฀in฀the฀scenario฀from฀the฀Managing฀Director฀
planning฀to฀retire฀and฀sell฀his฀shares฀in฀one฀year's฀time?฀
Correct฀interpretation฀ Did฀you฀understand฀what฀was฀meant฀by฀the฀verb฀'discuss'?฀
of฀requirements฀
Did฀ you฀ spot฀ the฀ two฀ sub-requirements฀ (ethical฀ implications฀
and฀accounting฀implications)?฀
Did฀you฀understand฀what฀each฀sub-requirement฀meant?฀
Answer฀planning฀ Did฀ you฀ draw฀ up฀ an฀ answer฀ plan฀ using฀ your฀ preferred฀
approach฀ (eg฀ mind฀ map,฀ bullet-pointed฀ list฀ or฀ annotated฀
question฀paper)?฀
Did฀ your฀ plan฀ address฀ both฀ the฀ ethical฀ and฀ accounting฀
implications?฀
Did฀your฀plan฀address฀each฀of฀the฀three฀proposed฀changes฀
to฀accounting฀policies฀and฀estimates฀in฀the฀question?฀
110฀

lOMoARcPSD|6256454
Effective฀writing฀and฀ Did฀you฀use฀underlined฀headings฀(key฀words฀from฀
presentation฀ requirements)฀and฀sub-headings฀(one฀for฀each฀proposed฀
change฀in฀accounting฀policy฀or฀estimate)?฀
Did฀you฀address฀both฀sub-requirements฀and฀all฀three฀
proposed฀changes฀in฀accounting฀policy฀or฀estimate?฀
Did฀you฀use฀full฀sentences?฀
Did฀you฀explain฀why฀the฀proposed฀accounting฀treatment฀
was฀correct฀or฀incorrect?฀
Did฀you฀explain฀why฀key฀facts฀in฀the฀scenario฀proposed฀a฀
threat฀to฀the฀ACCA฀Code's฀ethical฀principles?฀
Most฀important฀action฀points฀to฀apply฀to฀your฀next฀question฀
฀
฀
฀
฀
Summary฀
In฀ the฀ SBR฀ exam,฀ the฀ ethical฀ issues฀ will฀ typically฀ be฀ closely฀ linked฀ with฀ accounting฀
issues฀ –฀ whether฀ following฀ a฀ certain฀ accounting฀ treatment฀ would฀ have฀ any฀ ethical฀
implications.฀ Remember฀ that฀ an฀ ACCA฀ accountant฀ must฀ demonstrate฀ the฀ fundamental฀
principle฀of฀professional฀competence฀through฀financial฀statements฀that฀comply฀with฀IAS฀
and฀ IFRS.฀ Therefore,฀ the฀ first฀ step฀ in฀ question฀ is฀ to฀ consider฀ whether฀ the฀ accounting฀
treatment฀ in฀ the฀ scenario฀ complies฀ with฀ IAS฀ and฀ IFRS฀ and,฀ if฀ not,฀ identify฀ what฀ the฀
ethical฀ implications฀ may฀ be฀ by฀ identifying฀ the฀ relevant฀ ethical฀ principles฀ and฀ any฀
threats฀to฀them.฀Your฀answer฀should฀conclude฀with฀practical฀advice฀on฀next฀steps฀to฀be฀
taken฀by฀the฀individual฀concerned.฀
฀ 111฀

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฀฀
112฀

lOMoARcPSD|6256454
฀
฀
Provisions,฀contingencies
฀
฀
฀
฀
and฀events฀after฀the
฀
฀ reporting฀period
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀recognition,฀de-recognition฀and฀measurement฀of฀provisions,฀ C7(a)฀
contingent฀liabilities฀and฀contingent฀assets฀including฀environmental฀provisions฀and฀
restructuring฀provisions.฀
Discuss฀and฀apply฀the฀accounting฀for฀events฀after฀the฀reporting฀date.฀ C7(b)฀
Exam฀context฀
This฀ chapter฀ is฀ almost฀ entirely฀ revision฀ as฀ you฀ have฀ encountered฀ provisions฀ and฀ events฀ after฀ the฀
reporting฀period฀in฀Financial฀Reporting.฀However,฀both฀topics฀are฀highly฀examinable,฀and฀questions฀
are฀likely฀to฀be฀more฀technically฀challenging฀than฀those฀you฀met฀in฀Financial฀Reporting.฀
฀
In฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀both฀topics฀are฀likely฀to฀feature฀as฀parts฀of฀questions,฀
rather฀than฀as฀a฀whole฀question฀itself.฀For฀example,฀in฀Section฀A,฀you฀may฀be฀required฀to฀spot฀that฀
an฀ issue฀ has฀ occurred฀ after฀ the฀ reporting฀ date,฀ and฀ then฀ work฀ out฀ the฀ effect฀ of฀ the฀ issue฀ on฀ the฀
financial฀statements.฀฀
฀ ฀
฀ 113฀

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฀฀
฀
฀ Provisions,฀contingencies฀and฀
฀ events฀after฀the฀reporting฀period฀
฀
฀
฀
฀ ฀
1.฀ Provisions฀
(IAS฀37)฀
5.฀ Events฀after฀the฀
reporting฀period฀
(IAS฀10)฀
3.฀ Contingent฀ 4.฀ Contingent฀assets฀

liabilities฀(IAS฀37)฀ (IAS฀37)฀
2.฀ Specific฀types฀฀
of฀provision฀
Future฀operating฀ Onerous฀ Restructuring฀ Environmental฀

losses฀ contracts฀ provisions฀
114฀

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5:฀Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀
฀
1฀ Provisions฀(IAS฀37)฀
Tutorial฀note฀
You฀have฀studied฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀in฀your฀earlier฀
studies฀and฀so฀should฀be฀familiar฀with฀much฀of฀this฀section.฀However,฀the฀questions฀about฀IAS฀37฀that฀
feature฀in฀the฀SBR฀exam฀will฀be฀much฀more฀technically฀challenging,฀so฀it฀is฀important฀to฀make฀sure฀
you฀can฀discuss฀and฀apply฀the฀requirements฀of฀the฀standard฀given฀here.฀You฀also฀need฀to฀be฀able฀to฀
discuss฀the฀consistency฀of฀IAS฀37฀with฀the฀Conceptual฀Framework.฀฀
A฀provision:฀a฀liability฀of฀uncertain฀timing฀or฀amount.฀฀
A฀provision฀is฀recognised฀when฀(IAS฀37:฀para.฀14):฀
(a)฀ An฀entity฀has฀a฀present฀obligation฀(legal฀or฀constructive)฀as฀a฀result฀of฀a฀past฀event;฀
(b)฀ It฀ is฀ probable฀ that฀ an฀ outflow฀ of฀ resources฀ embodying฀ economic฀ benefits฀ will฀ be฀
required฀to฀settle฀the฀obligation;฀and฀
(c)฀ A฀reliable฀estimate฀can฀be฀made฀of฀the฀amount฀of฀the฀obligation.฀
Is฀IAS฀37฀consistent฀with฀the฀Conceptual฀Framework?฀
IAS฀37฀requires฀recognition฀of฀a฀liability฀only฀if฀it฀is฀probable฀that฀the฀obligation฀will฀result฀in฀an฀
outflow฀of฀resources฀from฀the฀entity.฀This฀is฀inconsistent฀with฀other฀standards฀such฀as฀IFRS฀3฀Business฀
Combinations฀and฀IFRS฀9฀Financial฀Instruments,฀which฀do฀not฀apply฀the฀probability฀criterion฀to฀
liabilities.฀In฀addition,฀probability฀is฀not฀part฀of฀the฀current฀Conceptual฀Framework฀definition฀of฀a฀
liability.฀Although฀Exposure฀Draft฀2015/3:฀Conceptual฀Framework฀for฀Financial฀Reporting฀changes฀
the฀definition฀of฀a฀liability,฀it฀does฀not฀refer฀to฀probability฀and฀therefore฀the฀inconsistency฀will฀remain.฀฀
The฀IASB฀has฀acknowledged฀this฀inconsistency,฀however฀as฀the฀Conceptual฀Framework฀does฀not฀
override฀the฀requirements฀of฀individual฀standards,฀the฀recognition฀requirements฀of฀IAS฀37฀will฀
remain.฀
฀
See฀Chapter฀5฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀revision฀of฀the฀detail฀of฀the฀recognition฀of฀
provisions.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
1.2฀Measurement฀฀
General฀rule฀
The฀ amount฀ recognised฀ is฀ the฀ best฀ estimate฀ of฀ the฀ expenditure฀ required฀ to฀ settle฀ the฀ present฀
obligation฀at฀the฀end฀of฀the฀reporting฀period฀(IAS฀37:฀para.฀36).฀
Allowing฀for฀uncertainties฀
(a)฀ Where฀ the฀ provision฀ being฀ measured฀ involves฀ a฀ large฀ population฀ of฀ items฀
฀฀use฀expected฀values.฀
(b)฀ Where฀a฀single฀obligation฀is฀being฀measured฀
฀ ฀฀The฀individual฀most฀likely฀outcome฀may฀be฀the฀best฀estimate.฀
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฀฀
See฀Chapter฀5฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀revision฀activities฀on฀the฀recognition฀and฀
measurement฀of฀provisions.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
Discounting฀of฀provisions฀
Where฀the฀time฀value฀of฀money฀is฀material,฀the฀provision฀is฀discounted.฀The฀discount฀rate฀should:฀
฀ Be฀a฀pre-tax฀rate฀
฀ Appropriately฀reflect฀the฀risk฀associated฀with฀the฀cash฀flows฀
The฀unwinding฀of฀the฀discount฀is฀recognised฀in฀profit฀or฀loss.฀
1.3฀Reimbursements฀
Some฀or฀all฀of฀the฀expenditure฀needed฀to฀settle฀a฀provision฀may฀be฀expected฀to฀be฀recovered฀from฀a฀
third฀ party,฀ eg฀ an฀ insurer.฀ This฀ reimbursement฀ should฀ be฀ recognised฀ only฀ when฀ it฀ is฀ virtually฀
certain฀that฀reimbursement฀will฀be฀received฀if฀the฀entity฀settles฀the฀obligation฀(IAS฀37:฀para.฀53).฀
1.4฀Recognising฀an฀asset฀when฀creating฀a฀provision฀
An฀ asset฀ can฀ only฀ be฀ recognised฀ where฀ the฀ present฀ obligation฀ recognised฀ as฀ a฀ provision฀ gives฀
access฀ to฀ future฀ economic฀ benefits฀ (eg฀ decommissioning฀ costs฀ could฀ be฀ an฀ IAS฀ 16฀ component฀ of฀
cost).฀฀
1.5฀Derecognition฀
If฀it฀is฀no฀longer฀probable฀that฀an฀outflow฀of฀resources฀embodying฀economic฀benefits฀will฀be฀required฀
to฀settle฀the฀obligation,฀the฀provision฀should฀be฀reversed฀(IAS฀37:฀para.฀59).฀
2฀Specific฀types฀of฀provision฀
2.1฀Future฀operating฀losses฀
Provisions฀ are฀ not฀ recognised฀ for฀ future฀ operating฀ losses.฀ They฀ do฀ not฀ meet฀ the฀ definition฀ of฀ a฀
liability฀and฀the฀general฀recognition฀criteria฀set฀out฀in฀the฀standard฀(IAS฀37:฀para.฀63).฀
2.2฀Onerous฀contracts฀
IAS฀37฀defines฀an฀onerous฀contract฀as฀one฀in฀which฀unavoidable฀costs฀of฀completing฀the฀contract฀
exceed฀the฀benefits฀expected฀to฀be฀received฀under฀it฀(IAS฀37:฀para.฀10).
Unavoidable฀costs฀of฀meeting฀an฀
obligation฀are฀the฀lower฀of:
Cost฀of฀fulfilling Penalties฀from฀failure฀
the฀contract to฀fulfil฀the฀contract
An฀ example฀ may฀ be฀ a฀ fixed฀ price฀ supply฀ contract฀ related฀ to฀ a฀ particular฀ product฀ that,฀ due฀ to฀
inflation,฀now฀costs฀more฀to฀manufacture฀than฀the฀fixed฀sale฀price฀agreed฀in฀the฀contract.฀฀
If฀ an฀ entity฀ has฀ a฀ contract฀ that฀ is฀ onerous,฀ the฀ present฀ obligation฀ under฀ the฀ contract฀ must฀ be฀
recognised฀and฀measured฀as฀a฀provision฀(IAS฀37:฀para.฀66).฀฀
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A฀lease฀agreement฀that฀becomes฀onerous฀is฀only฀within฀the฀scope฀of฀IAS฀37,฀and฀therefore฀results฀
in฀the฀creation฀of฀a฀provision,฀if฀simplified฀accounting฀is฀applied,฀so฀that฀no฀lease฀liability฀has฀been฀
recognised.฀This฀is฀only฀the฀case฀where฀a฀lease฀is฀short-term฀or฀for฀an฀asset฀with฀a฀low฀value.฀
2.3฀Restructuring฀
Restructuring฀is฀a฀programme฀that฀is฀planned฀and฀is฀controlled฀by฀management฀and฀materially฀
changes฀ either฀ the฀ scope฀ of฀ a฀ business฀ undertaken฀ by฀ an฀ entity,฀ or฀ the฀ manner฀ in฀ which฀ that฀
business฀is฀conducted฀(IAS฀37:฀para.฀10).฀฀
Examples฀of฀restructuring฀include฀(IAS฀37:฀para.฀70):฀
฀ The฀sale฀or฀termination฀of฀a฀line฀of฀business฀
฀ The฀closure฀of฀business฀locations฀or฀the฀relocation฀of฀business฀activities฀฀
฀ Changes฀in฀management฀structure฀
฀ Fundamental฀reorganisations฀that฀have฀a฀material฀effect฀on฀the฀nature฀and฀focus฀of฀the฀entity's฀
operations฀
One฀ of฀ the฀ main฀ purposes฀ of฀ IAS฀ 37฀ was฀ to฀ target฀ abuses฀ of฀ provisions฀ for฀ restructuring฀ by฀
introducing฀strict฀criteria฀about฀when฀such฀a฀provision฀can฀be฀made.฀
A฀provision฀for฀restructuring฀is฀recognised฀only฀when฀the฀entity฀has฀a฀constructive฀ obligation฀to฀
restructure.฀Such฀an฀obligation฀only฀arises฀where฀an฀entity:฀
(a)฀ Has฀a฀detailed฀formal฀plan฀for฀the฀restructuring;฀and฀
(b)฀ Has฀ raised฀ a฀valid฀ expectation฀ in฀ those฀ affected฀ that฀ it฀ will฀ carry฀ out฀ the฀ restructuring฀ by฀
starting฀to฀implement฀that฀plan฀or฀announcing฀its฀main฀features฀to฀those฀affected฀by฀it.฀
Where฀the฀restructuring฀involves฀the฀sale฀of฀an฀operation,฀no฀obligation฀arises฀until฀the฀entity฀has฀
entered฀into฀a฀binding฀sale฀agreement.฀
Restructuring฀costs฀฀
A฀ restructuring฀ provision฀ includes฀ only฀ the฀ direct฀ expenditures฀ arising฀ from฀ the฀ restructuring,฀
which฀are฀those฀that฀are฀both฀(IAS฀37:฀para.฀80):฀
(a)฀ Necessarily฀entailed฀by฀the฀restructuring;฀and฀
(b)฀ Not฀associated฀with฀the฀ongoing฀activities฀of฀the฀entity.฀
The฀provision฀should฀not฀include฀(IAS฀37:฀para.฀81):฀
฀ Retraining฀or฀relocating฀continuing฀staff฀
฀ Marketing฀
฀ Investment฀in฀new฀systems฀and฀distribution฀networks฀
Activity฀1:฀Restructuring฀฀ ฀ ฀
Trailer,฀ a฀ public฀ limited฀ company,฀ operates฀ in฀ the฀ manufacturing฀ sector.฀ During฀ the฀ year฀ ended฀
31฀May฀ 20X5,฀ Trailer฀ announced฀ two฀ major฀ restructuring฀ plans.฀ The฀ first฀ plan฀ is฀ to฀ reduce฀ its฀
capacity฀by฀the฀closure฀of฀some฀of฀its฀smaller฀factories,฀which฀have฀already฀been฀identified.฀This฀will฀
lead฀ to฀ the฀ redundancy฀ of฀ 500฀ employees,฀ who฀ have฀ all฀ individually฀ been฀ selected฀ and฀
communicated฀with.฀The฀costs฀of฀this฀plan฀are฀$9฀million฀in฀redundancy฀costs,฀$4฀million฀in฀retraining฀
costs฀ and฀ $5฀ million฀ in฀ lease฀ termination฀ costs.฀ The฀ second฀ plan฀ is฀ to฀ re-organise฀ the฀ finance฀ and฀
information฀technology฀department฀over฀a฀one-year฀period฀but฀it฀does฀not฀commence฀for฀two฀years.฀
The฀plan฀results฀in฀20%฀of฀finance฀staff฀losing฀their฀jobs฀during฀the฀restructuring.฀The฀costs฀of฀this฀plan฀
are฀$10฀million฀in฀redundancy฀costs,฀$6฀million฀in฀retraining฀costs฀and฀$7฀million฀in฀equipment฀lease฀
termination฀costs.฀
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Required฀
Discuss฀the฀treatment฀of฀each฀of฀the฀above฀restructuring฀plans฀in฀the฀financial฀statements฀of฀Trailer฀for฀
the฀year฀ended฀31฀May฀20X5.฀฀
Activity฀2:฀Environmental฀provisions฀ ฀ ฀
A฀company฀was฀awarded฀a฀licence฀to฀quarry฀limestone฀in฀an฀area฀of฀outstanding฀natural฀beauty.฀
As฀part฀of฀the฀agreement,฀the฀company฀was฀required฀to฀build฀access฀roads฀as฀well฀as฀the฀structures฀
necessary฀for฀the฀extraction฀process.฀The฀total฀cost฀of฀these฀was฀$50฀million.฀The฀quarry฀came฀into฀
operation฀on฀31฀December฀20X3฀and฀the฀operating฀licence฀was฀for฀20฀years฀from฀that฀date.฀Under฀
the฀ terms฀ of฀ the฀ operating฀ licence,฀ the฀ company฀ is฀ obliged฀ to฀ remove฀ the฀ access฀ roads฀ and฀
structures฀and฀ restore฀ the฀ natural฀ environmental฀ habitat฀ at฀ the฀ end฀ of฀ the฀ quarry's฀ 20-year฀ life.฀ At฀฀
31฀December฀20X3,฀the฀estimated฀cost฀of฀the฀restoration฀work฀was฀$10฀million,฀and฀this฀estimate฀did฀
not฀ change฀ by฀ 31฀ December฀ 20X4.฀ An฀ additional฀ cost฀ of฀ $500,000฀ per฀ annum฀ the฀ quarry฀ is฀
operated฀ (at฀ 31฀ December฀ 20X4฀ prices)฀ will฀ also฀ be฀ incurred฀ at฀ the฀ end฀ of฀ the฀ licence฀ period฀ to฀
clean฀ up฀ further฀ progressive฀ environmental฀ damage฀ that฀ will฀ arise฀ through฀ the฀ extraction฀ of฀ the฀
limestone.฀
An฀ appropriate฀ discount฀ rate฀ reflecting฀ market฀ assessments฀ of฀ the฀ time฀ value฀ of฀ money฀ and฀ risks฀
specific฀to฀the฀operation฀is฀8%.฀
Required฀
Explain฀the฀treatment฀of฀the฀cost฀of฀the฀assets฀and฀associated฀obligation฀relating฀to฀the฀quarry:฀
(a)฀ As฀at฀31฀December฀20X3฀
(b)฀ For฀the฀year฀ended฀31฀December฀20X4.฀
Work฀to฀the฀nearest฀$1,000.฀
3฀ Contingent฀liabilities฀(IAS฀37)฀
Contingent฀liability฀(IAS฀37)฀
Key฀term฀ A฀contingent฀liability฀is฀either:฀
(a)฀ A฀possible฀obligation฀arising฀from฀past฀events฀whose฀existence฀will฀be฀confirmed฀only฀by฀
the฀occurrence฀of฀one฀or฀more฀uncertain฀future฀events฀not฀wholly฀within฀the฀control฀of฀the฀
entity;฀or฀
(b)฀ A฀present฀obligation฀that฀arises฀from฀past฀events฀but฀is฀not฀recognised฀because:฀
฀ (i)฀ It฀is฀not฀probable฀that฀an฀outflow฀of฀economic฀benefit฀will฀be฀required฀to฀settle฀the฀
obligation;฀or฀฀
฀ (ii)฀ The฀amount฀of฀the฀obligation฀cannot฀be฀measured฀with฀sufficient฀reliability.฀
(IAS฀37:฀para.฀10)฀
Contingent฀liabilities฀should฀not฀be฀recognised฀in฀financial฀statements,฀but฀should฀be฀disclosed฀
unless฀the฀possibility฀of฀an฀outflow฀of฀economic฀benefits฀is฀remote฀(IAS฀37:฀paras.฀27–28).฀
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For฀each฀class฀of฀contingent฀liability,฀an฀entity฀must฀disclose฀the฀following฀(IAS฀37:฀para.฀86):฀
(a)฀ The฀nature฀of฀the฀contingent฀liability฀
(b)฀ An฀estimate฀of฀its฀financial฀effect฀
(c)฀ An฀indication฀of฀the฀uncertainties฀relating฀to฀the฀amount฀or฀timing฀of฀any฀outflow฀
(d)฀ The฀possibility฀of฀any฀reimbursement.฀
See฀Chapter฀5฀Section฀1.3฀of฀the฀Supplementary฀Reading฀for฀a฀decision฀tree฀summarising฀the฀
recognition฀criteria฀of฀IAS฀37฀for฀provisions฀and฀contingent฀liabilities.฀This฀is฀available฀in฀Appendix฀2฀
of฀the฀digital฀edition฀of฀the฀Workbook.฀
4฀Contingent฀assets฀(IAS฀37)฀
Contingent฀asset฀(IAS฀37):฀a฀possible฀asset฀that฀arises฀from฀past฀events฀and฀whose฀existence฀
will฀be฀confirmed฀by฀the฀occurrence฀of฀one฀or฀more฀uncertain฀future฀events฀not฀wholly฀within฀the฀
Key฀term฀
entity's฀control.฀฀
(IAS฀37:฀para.฀10)฀
A฀ contingent฀ asset฀ should฀ not฀ be฀ recognised,฀ but฀ should฀ be฀ disclosed฀ where฀ an฀ inflow฀ of฀
economic฀benefits฀is฀probable฀(IAS฀37:฀para฀34).฀
A฀ brief฀ description฀ of฀ the฀ contingent฀ asset฀ should฀ be฀ provided฀ along฀ with฀ an฀ estimate฀ of฀ its฀ likely฀
financial฀effect฀(IAS฀37:฀para.฀89).฀
5฀Events฀after฀the฀reporting฀period฀(IAS฀10)฀
Tutorial฀note฀
You฀have฀studied฀IAS฀10฀as฀part฀of฀Financial฀Reporting.฀This฀section฀contains฀a฀summary฀of฀the฀key฀
points฀of฀the฀standard,฀but,฀if฀you฀are฀unsure,฀return฀to฀your฀Financial฀Reporting฀study฀material฀and฀฀
re-read฀it.฀
Events฀ after฀ the฀ reporting฀ period฀ are฀ those฀ events,฀ both฀ favourable฀ and฀ unfavourable,฀ that฀
occur฀between฀the฀year฀end฀and฀the฀date฀on฀which฀the฀financial฀statements฀are฀authorised฀for฀issue฀
(IAS฀10:฀para.฀3).฀
Two฀types฀of฀events฀can฀be฀identified฀(IAS฀10:฀para.฀3):฀
Adjusting฀events฀ Non-adjusting฀events
Provide฀evidence฀of฀conditions฀ Indicative฀of฀conditions฀that฀
that฀existed฀at฀the฀end฀of฀the฀ arose฀after฀the฀end฀of฀the฀
reporting฀period reporting฀period
Financial฀statements฀should฀be฀ Not฀adjusted฀for฀in฀financial฀
adjusted statements,฀but฀are฀disclosed
฀
Going฀concern฀
If฀ management฀ determines฀ after฀ the฀ reporting฀ period฀ that฀ the฀ reporting฀ entity฀ will฀ be฀ liquidated฀ or฀
cease฀ trading,฀ the฀ financial฀ statements฀ are฀ adjusted฀ so฀ that฀ they฀ are฀ not฀ prepared฀ on฀ the฀ going฀
concern฀basis.฀
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฀฀
See฀Chapter฀5฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀examples฀of฀adjusting฀and฀non-adjusting฀
events.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
5.1฀ Disclosure฀
(a)฀ An฀entity฀discloses฀the฀date฀when฀the฀financial฀statements฀were฀authorised฀for฀issue฀and฀who฀
gave฀the฀authorisation฀(IAS฀10:฀para฀17).฀
(b)฀ If฀ non-adjusting฀ events฀ after฀ the฀ reporting฀ period฀ are฀ material,฀ non-disclosure฀ could฀ influence฀
the฀decisions฀of฀users฀taken฀on฀the฀basis฀of฀the฀financial฀statements.฀Accordingly,฀the฀following฀
is฀disclosed฀for฀each฀material฀category฀of฀non-adjusting฀event฀after฀the฀reporting฀period:฀
(i)฀ The฀nature฀of฀the฀event;฀and฀
(ii)฀ An฀ estimate฀ of฀ its฀ financial฀ effect,฀ or฀ statement฀ that฀ such฀ an฀ estimate฀ cannot฀ be฀
made.฀(IAS฀10:฀para฀21)฀ ฀
Activity฀3:฀IAS฀37฀and฀IAS฀10฀ ฀
Delta฀is฀an฀entity฀that฀prepares฀financial฀statements฀to฀31฀March฀each฀year.฀During฀the฀year฀ended฀
31฀March฀20X2฀the฀following฀events฀occurred:฀
(a)฀ At฀31฀March฀20X2,฀Delta฀was฀engaged฀in฀a฀legal฀dispute฀with฀a฀customer฀who฀alleged฀that฀
Delta฀had฀supplied฀faulty฀products฀that฀caused฀the฀customer฀actual฀financial฀loss.฀The฀directors฀
of฀Delta฀consider฀that฀the฀customer฀has฀a฀75%฀chance฀of฀succeeding฀in฀this฀action฀and฀that฀the฀
likely฀outcome฀should฀the฀customer฀succeed฀is฀that฀the฀customer฀would฀be฀awarded฀damages฀
of฀$1m.฀The฀directors฀of฀Delta฀further฀believe฀that฀the฀fault฀in฀the฀products฀was฀caused฀by฀the฀
supply฀ of฀ defective฀ components฀ by฀ one฀ of฀ Delta's฀ suppliers.฀ Delta฀ has฀ initiated฀ legal฀ action฀
against฀ the฀ supplier฀ and฀ considers฀ there฀ is฀ a฀ 70%฀ chance฀ Delta฀ will฀ receive฀ damages฀ of฀
$800,000฀from฀the฀supplier.฀Ignore฀discounting.฀ ฀
(b)฀ On฀ 10฀ April฀ 20X2,฀ a฀ water฀ leak฀ at฀ one฀ of฀ Delta's฀ warehouses฀ damaged฀ a฀ consignment฀ of฀
inventory.฀ This฀ inventory฀ had฀ been฀ manufactured฀ prior฀ to฀ 31฀ March฀ 20X2฀ at฀ a฀ total฀ cost฀ of฀
$800,000.฀ The฀ net฀ realisable฀ value฀ of฀ the฀ inventory฀ prior฀ to฀ the฀ damage฀ was฀ estimated฀ at฀
$960,000.฀ Because฀ of฀ the฀ damage฀ Delta฀ was฀ required฀ to฀ spend฀ a฀ further฀ $150,000฀ on฀
repairing฀ and฀ re-packaging฀ the฀ inventory.฀ The฀ inventory฀ was฀ sold฀ on฀ 15฀ May฀ 20X2฀ for฀
proceeds฀of฀$900,000.฀Any฀adjustment฀in฀respect฀of฀this฀event฀would฀be฀regarded฀by฀Delta฀
as฀material.฀
Required฀
Discuss฀how฀these฀events฀would฀be฀reported฀in฀the฀financial฀statements฀of฀Delta฀for฀the฀year฀ended฀฀
31฀March฀20X2.฀
See฀ Chapter฀ 5฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ for฀ an฀ exam฀ standard฀ question฀ involving฀
provisions฀and฀events฀after฀the฀reporting฀period.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀
of฀the฀Workbook.฀
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Ethics฀note฀
principles฀of฀the฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀question.฀
For฀example,฀pressure฀to฀achieve฀a฀particular฀profit฀figure฀could฀lead฀to฀deliberate฀attempts฀to฀
manipulate฀profits฀through฀making฀provisions฀that฀are฀not฀necessary฀in฀years฀of฀high฀profits,฀in฀order฀
to฀release฀those฀provisions฀in฀future฀periods฀when฀profits฀are฀lower.฀Although฀the฀rules฀in฀IAS฀37฀are฀
meant฀to฀prevent฀this฀situation,฀the฀Standard฀is฀not฀perfect฀and฀manipulation฀is฀possible.฀฀
Another฀example฀that฀could฀arise฀is฀pressure฀to฀obtain฀financing,฀which฀requires฀the฀presentation฀of฀a฀
healthy฀financial฀position.฀This฀could,฀for฀example,฀lead฀directors฀to฀ignore฀information฀received฀after฀
the฀reporting฀date฀that฀should฀result฀in฀a฀write฀down฀of฀receivables.฀฀฀
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฀฀
฀
Provisions,฀contingencies฀and฀
events฀after฀the฀reporting฀period฀
1.฀ Provisions฀(IAS฀37)฀ 5.฀ Events฀after฀the฀reporting฀

'A฀liability฀of฀uncertain฀timing฀or฀amount'฀
period฀(IAS฀10)฀
฀ Recognise฀liability:฀ Adjusting:฀
–฀ Present฀obligation฀(as฀a฀result฀of฀a฀past฀event)฀ ฀ Evidence฀of฀conditions฀at฀year฀end฀
(i)฀ Legal฀obligation,฀or฀ Non-adjusting:฀
(ii)฀ Constructive฀obligation฀
฀ Other฀฀disclose฀
–฀ Probable฀outflow฀of฀resources฀embodying฀economic฀
฀
benefits฀
Going฀concern฀implications฀฀adjust฀
–฀ Reliable฀estimate฀ ฀
฀ Large฀population฀฀expected฀values฀
฀ Single฀obligation฀฀most฀likely฀outcome฀
฀ Discount฀if฀material฀
3.฀ Contingent฀liabilities฀ 4.฀ Contingent฀assets฀

Possible฀obligation,฀or฀
Present฀obligation฀where:฀฀ Possible฀asset฀
฀ Outflow฀of฀resources฀not฀probable,฀or฀ ฀
฀ Cannot฀make฀reliable฀estimate.฀ ฀ ฀ Inflow฀
฀
Disclose฀(unless฀outflow฀of฀resources฀is฀remote)฀ ฀
฀ Virtually฀฀ Probable฀ Not฀
฀ certain฀ ฀ probable฀
฀ Brief฀description฀of฀nature฀
฀
฀ Estimate฀of฀financial฀effect฀฀ where฀
฀ RECOGNISE฀ DISCLOSE฀ DO฀
฀ Indication฀of฀uncertainties฀ practicable฀
฀ ฀ –฀nature฀ NOTHING฀
฀฀ Possibility฀of฀reimbursement฀
฀ ฀ –฀estimate฀
2.฀ Specific฀types฀of฀
provision฀
Future฀ Restructuring฀ Environmental฀

operating฀ Only฀provide฀if:฀ provisions฀
losses฀ ฀ Detailed฀formal฀plan;฀and฀ Make฀a฀provision฀where฀there฀฀
฀ Valid฀expectation฀raised฀by฀ is฀a฀legal฀or฀constructive฀obligation฀to฀
Do฀not฀provide฀฀
starting฀to฀implement฀฀ clean฀up/decommission฀
it฀or฀by฀announcing฀main฀features฀
฀ Provision฀is฀discounted฀to฀present฀
Includes฀only฀direct฀expenditures:฀ value฀
Onerous฀contracts฀ (a)฀ Necessarily฀entailed฀by฀the฀ ฀ DR฀฀Asset฀(depreciate฀over฀UL)฀
Provide฀for฀unavoidable฀cost:฀ restructuring;฀and฀
฀ CR฀฀Provision฀
(b)฀ Not฀associated฀with฀the฀ongoing฀ ฀
Lower฀of฀
activities฀of฀the฀entity:฀
฀ (i)฀ Retraining/relocating฀staff฀
฀ net฀cost฀ penalties฀from฀ (ii)฀ Marketing฀
฀of฀fulfilling฀ failure฀to฀ (iii)฀ Investment฀in฀new฀
฀ ฀ fulfil฀ systems/distribution฀networks฀
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฀
1.฀ Provisions฀
฀ Provisions฀are฀recognised฀when฀the฀Conceptual฀Framework฀definition฀of฀a฀liability฀and฀
recognition฀criteria฀are฀met.฀
2.฀ Specific฀types฀of฀provision฀
฀ Provisions฀are฀not฀made฀for฀future฀operating฀losses฀as฀there฀is฀no฀obligation฀to฀incur฀
them.฀
฀ Where฀a฀contract฀is฀onerous฀a฀provision฀is฀made฀for฀the฀unavoidable฀cost.฀Restructuring฀
provisions฀are฀only฀recognised฀when฀certain฀criteria฀are฀met.฀
3.฀ Contingent฀liabilities฀
฀ Contingent฀liabilities฀are฀not฀recognised฀because฀they฀are฀possible฀rather฀than฀present฀
obligations,฀the฀outflow฀is฀not฀probable฀or฀the฀liability฀cannot฀be฀reliably฀measured.฀
฀ Contingent฀liabilities฀are฀disclosed.฀
4.฀ Contingent฀assets฀
฀ Contingent฀assets฀are฀disclosed,฀but฀only฀where฀an฀inflow฀of฀economic฀benefits฀is฀probable.฀
5.฀ Events฀after฀the฀reporting฀period฀(IAS฀10)฀
฀ Adjusting฀events฀are฀adjusted฀in฀the฀financial฀statements฀as฀they฀provide฀evidence฀of฀
conditions฀existing฀at฀the฀end฀of฀the฀reporting฀period.฀
฀ Non-adjusting฀events฀are฀disclosed฀if฀material,฀as,฀while฀important,฀they฀do฀not฀affect฀the฀
financial฀statement฀figures.฀
฀
฀
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฀฀
Now฀try฀the฀following฀question฀from฀the฀Further฀question฀practice฀bank:฀
Q7฀Cleanex฀
There฀are฀articles฀on฀the฀ACCA฀website,฀which฀have฀been฀written฀by฀the฀SBR฀examining฀team,฀and฀are฀
relevant฀to฀the฀topics฀covered฀in฀this฀chapter:฀
The฀shortcomings฀of฀IAS฀37฀(2016)฀฀
฀
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฀
฀
฀
฀
Income฀taxes
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀recognition฀and฀measurement฀of฀deferred฀tax฀liabilities฀and฀ C6(a)฀
deferred฀tax฀assets.฀
Discuss฀ and฀ apply฀ the฀ recognition฀ of฀ current฀ and฀ deferred฀ tax฀ as฀ income฀ or฀ C6(b)฀
expense.฀฀
Discuss฀and฀apply฀the฀treatment฀of฀deferred฀taxation฀on฀a฀business฀combination.฀ C6(c)฀
Exam฀context฀
You฀have฀encountered฀income฀taxes฀in฀your฀earlier฀studies฀in฀Financial฀Reporting;฀however,฀in฀
Strategic฀Business฀Reporting฀(SBR),฀this฀topic฀is฀examined฀at฀a฀much฀higher฀level.฀Deferred฀tax฀is฀most฀
likely฀to฀feature฀as฀part฀of฀a฀consolidation฀question฀in฀Section฀A,฀but฀it฀could฀also฀be฀tested฀as฀a฀
whole฀question฀in฀Section฀B.฀
฀ 125฀

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฀฀
฀
฀
1.฀ Current฀tax฀ Income฀taxes฀ 6.฀Deferred฀tax:฀other฀

temporary฀differences฀
3.฀ Deferred฀tax:฀
recognition฀
2.฀ Deferred฀tax฀
principles:฀revision฀
measurement฀
presentation฀
5.฀Deferred฀tax:฀group฀
126฀

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6:฀Income฀taxes฀
1฀ Current฀tax฀
Current฀tax฀is฀the฀amount฀of฀income฀taxes฀payable฀(or฀recoverable)฀in฀respect฀of฀taxable฀profit฀(or฀
loss)฀for฀a฀period.฀ ฀
Key฀term฀
฀(IAS฀12:฀para.฀5)฀
Current฀ tax฀ unpaid฀ for฀ current฀ and฀ prior฀ periods฀ is฀ recognised฀ as฀ a฀ liability฀ (IAS฀ 12:฀ para.฀ 12).฀
Amounts฀paid฀in฀excess฀of฀amounts฀due฀are฀shown฀as฀an฀asset฀(IAS฀12:฀para.฀12).฀
The฀benefit฀relating฀to฀a฀tax฀loss฀that฀can฀be฀carried฀back฀to฀recover฀current฀tax฀of฀a฀previous฀period฀
is฀recognised฀as฀an฀asset฀(IAS฀12:฀para.฀13).฀
See฀ Chapter฀ 6฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ of฀ current฀ tax฀ and฀
activities฀ to฀ test฀ your฀ brought฀ forward฀ knowledge.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook.฀
1.1฀Disclosure฀
Tax฀ is฀ a฀ significant฀ cost฀ to฀ businesses,฀ with฀ corporation฀ tax฀ rates฀ of฀ over฀ 30%฀ of฀ profits฀ in฀ some฀
countries.฀However,฀the฀tax฀expense฀shown฀in฀the฀financial฀statements฀is฀rarely฀equal฀to฀the฀current฀tax฀
rate฀ applied฀ to฀ accounting฀ profit.฀ Investors฀ need฀ to฀ know฀ why฀ this฀ is฀ the฀ case฀ so฀ that฀ they฀ can฀
understand฀ historical฀ tax฀ cash฀ flows฀ and฀ liabilities,฀ as฀ well฀ as฀ predict฀ future฀ tax฀ cash฀ flows฀ and฀
liabilities.฀฀
IAS฀12฀therefore฀requires฀entities฀to฀explain฀the฀relationship฀between฀the฀tax฀expense฀and฀the฀tax฀that฀
would฀ be฀ expected฀ by฀ applying฀ the฀ current฀ tax฀ rate฀ to฀ accounting฀ profit.฀ This฀ explanation฀ can฀ be฀
presented฀ as฀ a฀ reconciliation฀ of฀ amounts฀ of฀ tax฀ or฀ a฀ reconciliation฀ of฀ the฀ rate฀ of฀ tax,฀ as฀ shown฀ in฀
Illustration฀1฀below.฀฀
Illustration฀1฀
Extract฀from฀Virgin฀Atlantic฀Annual฀Report฀March฀2016฀–฀note฀10:฀Tax฀
฀
(Virgin฀Atlantic฀Annual฀Report฀2016:฀p.฀65)฀
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฀฀
2฀Deferred฀tax฀principles:฀revision฀
2.1฀Basic฀principles฀฀
IAS฀12฀Income฀Taxes฀covers฀both฀current฀tax฀and฀deferred฀tax.฀฀
Current฀tax฀is฀the฀amount฀ Deferred฀tax฀is฀an฀accounting฀
actually฀payable฀to฀the฀tax฀ measure,฀used฀to฀match฀the฀tax฀
authorities฀in฀relation฀to฀the฀trading฀ effects฀of฀transactions฀with฀their฀
activities฀of฀the฀entity฀during฀the฀ accounting฀effect.
period.
฀
Issue฀
When฀a฀company฀recognises฀an฀asset฀or฀liability,฀it฀expects฀to฀recover฀or฀settle฀the฀carrying฀amount฀
of฀that฀asset฀or฀liability.฀In฀other฀words,฀it฀expects฀to฀sell฀or฀use฀up฀assets,฀and฀to฀pay฀off฀liabilities.฀
What฀happens฀if฀that฀recovery฀or฀settlement฀is฀likely฀to฀make฀future฀tax฀payments฀larger฀(or฀smaller)฀
than฀they฀would฀otherwise฀have฀been฀if฀the฀recovery฀or฀settlement฀had฀no฀tax฀consequences?฀฀
Similarly,฀ some฀ items฀ of฀ income฀ or฀ expense฀ are฀ included฀ in฀ accounting฀ profit฀ in฀ one฀ period,฀ but฀
included฀ in฀ taxable฀ profit฀ in฀ a฀ different฀ period฀ (IAS฀ 12:฀ para.฀ 17).฀ This฀ is฀ because฀ the฀ accounting฀
profit฀ is฀ determined฀ by฀ applying฀ the฀ principles฀ of฀ IFRS,฀ whereas฀ taxable฀ profit฀ is฀ determined฀ by฀
applying฀ the฀ tax฀ rules฀ established฀ by฀ the฀ tax฀ authorities.฀ Without฀ some฀ form฀ of฀ adjustment,฀ this฀
difference฀ may฀ cause฀ the฀ tax฀ charge฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income฀to฀be฀misleading.฀฀
In฀ both฀ of฀ these฀ circumstances,฀ IAS฀ 12฀ requires฀ companies฀ to฀ recognise฀ a฀ deferred฀ tax฀ liability฀ (or฀
deferred฀tax฀asset)฀(IAS฀12:฀paras.฀15฀and฀24).฀
Concepts฀underlying฀deferred฀tax฀
Conceptual฀ As฀a฀result฀of฀a฀past฀transaction฀or฀event,฀an฀entity฀has฀an฀obligation฀to฀
Framework฀–฀ pay฀tax฀or฀a฀right฀to฀future฀tax฀relief.฀Therefore,฀the฀entity฀has฀met฀the฀
definition฀of฀asset฀ Conceptual฀Framework฀definition฀of฀a฀liability฀or฀asset฀and฀so฀needs฀to฀
and฀liability฀ record฀a฀deferred฀tax฀liability฀or฀asset.฀
Conceptual฀ To฀achieve฀'matching'฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀
Framework฀–฀ comprehensive฀income,฀the฀entity฀should฀record฀tax฀in฀the฀accounts฀in฀
accruals฀concept฀ the฀same฀period฀as฀the฀item฀that฀the฀tax฀relates฀to฀is฀recorded.฀If฀the฀tax฀
is฀paid฀in฀a฀different฀period฀to฀that฀in฀which฀the฀item฀is฀accounted฀for,฀a฀
deferred฀tax฀adjustment฀is฀needed.฀
Tax฀base฀
The฀tax฀base฀of฀an฀asset฀or฀liability฀is฀the฀amount฀attributed฀to฀that฀asset฀or฀liability฀for฀tax฀purposes.฀
Tax฀ payable฀ by฀ an฀ entity฀ is฀ calculated฀ by฀ the฀ tax฀ authorities฀ using฀ a฀ tax฀ computation.฀ A฀ tax฀
computation฀ is฀ similar฀ to฀ a฀ statement฀ of฀ profit฀ or฀ loss,฀ except฀ that฀ it฀ is฀ constructed฀ using฀ tax฀ rules฀
instead฀of฀IFRS.฀Now฀imagine฀the฀tax฀authorities฀drawing฀up฀a฀statement฀of฀financial฀position฀for฀the฀
same฀entity,฀but฀using฀tax฀rules฀instead฀of฀IFRS.฀In฀these฀'tax฀accounts',฀assets฀and฀liabilities฀will฀be฀
stated฀at฀their฀carrying฀amount฀for฀tax฀purposes,฀which฀is฀their฀tax฀base.฀฀฀
Different฀tax฀jurisdictions฀may฀have฀different฀tax฀rules.฀The฀tax฀rules฀determine฀the฀tax฀base.฀฀
In฀the฀SBR฀exam,฀the฀question฀will฀state฀the฀tax฀rules฀in฀a฀jurisdiction,฀or฀the฀tax฀base฀of฀certain฀assets฀
or฀liabilities฀in฀that฀jurisdiction.฀฀
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The฀table฀below฀gives฀some฀examples฀of฀tax฀rules฀and฀the฀resulting฀tax฀base.฀฀฀
Item฀ Carrying฀amount฀ Tax฀rule฀ Tax฀base฀(amount฀in฀

in฀the฀statement฀of฀ 'tax฀accounts')฀
financial฀position฀฀ Remember฀
this฀is฀the฀
carrying฀
Tax฀written฀down฀
Item฀of฀property,฀ Carrying฀amount฀=฀ value฀in฀the฀
Attracts฀tax฀relief฀in฀the฀ value฀=฀cost฀–฀ tax฀accounts.฀
plant฀and฀ cost฀–฀accumulated฀
form฀of฀tax฀depreciation฀ accumulated฀tax฀ As฀the฀cash฀
equipment฀ depreciation฀ has฀not฀been฀
depreciation฀
received,฀the฀
Chargeable฀for฀tax฀on฀a฀ income฀is฀not฀
yet฀included฀
Included฀in฀financial฀ cash฀basis,฀ie฀when฀ Nil฀฀ in฀the฀tax฀
statements฀on฀an฀ received฀฀ accounts,฀so฀
Accrued฀income฀ the฀tax฀base฀
accruals฀basis฀ie฀when฀ Chargeable฀for฀tax฀on฀ Same฀as฀carrying฀amount฀ is฀nil.฀
receivable฀ an฀accruals฀basis,฀ie฀ in฀statement฀of฀financial฀
when฀receivable฀ position฀฀
Attracts฀tax฀relief฀on฀a฀ Nil฀฀ For฀revenue฀

Included฀in฀financial฀ cash฀basis,฀ie฀when฀ received฀in฀
Accrued฀expenses฀ statements฀on฀an฀ paid฀ advance,฀the฀

tax฀base฀of฀
and฀provisions฀ accruals฀basis฀ie฀when฀ Attracts฀tax฀relief฀on฀an฀ Same฀as฀carrying฀amount฀ the฀resulting฀
payable฀ accruals฀basis,฀ie฀when฀ in฀statement฀of฀financial฀ liability฀is฀its฀
carrying฀
payable฀ position฀ amount,฀less฀
any฀amount฀
When฀the฀cash฀is฀ of฀the฀
received,฀it฀will฀be฀ revenue฀that฀
Chargeable฀for฀tax฀on฀a฀
Income฀received฀in฀ included฀in฀the฀ will฀not฀be฀
cash฀basis,฀ie฀when฀ Nil฀ taxable฀in฀
advance฀ financial฀statements฀as฀
received฀ future฀
deferred฀income฀ie฀a฀
periods.฀
liability฀
฀
See฀ Chapter฀ 6฀ Section฀ 2.1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ on฀ tax฀ bases.฀ This฀ is฀
available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
Illustration฀2฀
Concepts฀underlying฀deferred฀tax฀
Suppose฀Barton,฀a฀supplier฀of฀gas฀and฀electricity,฀recorded฀accrued฀income฀of฀$100,000฀in฀its฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X5.฀The฀accrued฀income฀related฀to฀gas฀and฀
electricity฀supplied฀but฀not฀yet฀invoiced฀during฀December฀20X5.฀In฀January฀20X6,฀Barton฀invoiced฀its฀
customers฀and฀was฀paid฀$100,000฀in฀relation฀to฀the฀accrued฀income.฀In฀the฀jurisdiction฀in฀which฀
Barton฀operates,฀income฀is฀taxed฀on฀a฀cash฀receipts฀basis฀and฀the฀rate฀of฀tax฀is฀20%.฀฀
฀ 129฀

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฀฀
Extracts฀from฀Barton's฀tax฀computation฀and฀financial฀statements฀are฀shown฀below.฀
Tax฀computation฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Income฀ 0 100฀
Tax฀payable฀at฀20%฀ 0 (20)฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀(in฀revenue)฀ 100 0฀
Mismatch฀ Mismatch฀
Current฀tax฀(tax฀computation)฀ 0 (20)฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀(EXTRACT)
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀ 100 0฀
฀
Income฀is฀taxed฀on฀a฀cash฀receipts฀basis,฀so฀there฀is฀no฀tax฀to฀pay฀in฀20X5฀and฀$20,000฀to฀pay฀in฀
20X6.฀This฀creates฀a฀mismatch฀in฀the฀financial฀statements฀as฀the฀income฀and฀the฀related฀tax฀payable฀
are฀recorded฀in฀different฀periods.฀To฀resolve฀this฀mismatch,฀a฀deferred฀tax฀adjustment฀is฀calculated฀
and฀recorded฀in฀the฀financial฀statements,฀as฀follows.
Deferred฀tax฀calculation฀ ฀ 20X5฀ The฀tax฀base฀will฀

฀ 20X6฀
always฀be฀zero฀if฀
฀ $'000 $'000฀
the฀item฀is฀taxed฀on฀
a฀cash฀receipts฀
Carrying฀amount฀of฀accrued฀income฀ ฀100฀ ฀ 0฀
basis.฀
(statement฀of฀financial฀position)฀
Notice฀how฀the฀
Tax฀base฀of฀accrued฀income฀ ฀฀(0)฀ ฀฀฀(0)฀
actual฀tax฀payable฀
in฀20X6฀is฀equal฀to฀
Temporary฀difference฀ ฀฀100฀ the฀deferred฀tax฀ ฀฀฀0฀
calculated฀for฀
Deferred฀tax฀at฀20%฀ ฀฀฀(20)฀ 20X5.฀ ฀฀฀0฀
฀
฀
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STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(EXTRACT)฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀(in฀revenue)฀ 100 0฀
Matching฀ Matching฀
Current฀tax฀(tax฀computation)฀ 0 (20)฀
Deferred฀tax฀฀ (20) 20฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀(EXTRACT)฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀ 100 0฀
Deferred฀tax฀liability฀ (20) 0฀
฀
In฀20X5,฀the฀double฀entry฀to฀record฀the฀deferred฀tax฀is:฀
DEBIT฀deferred฀tax฀(statement฀of฀profit฀or฀loss)฀฀ ฀ ฀ $20,000฀
CREDIT฀deferred฀tax฀liability฀(statement฀of฀financial฀position)฀ ฀ ฀ $20,000฀
In฀20X6,฀the฀entry฀is฀reversed:฀฀
DEBIT฀deferred฀tax฀liability฀(statement฀of฀financial฀position)฀฀ $20,000฀
CREDIT฀deferred฀tax฀(statement฀of฀profit฀or฀loss)฀ ฀ ฀ ฀ ฀ $20,000฀
The฀end฀result฀is฀that฀the฀tax฀is฀recorded฀in฀the฀same฀period฀as฀the฀transaction฀it฀relates฀to.฀This฀is฀the฀
aim฀of฀deferred฀tax฀(the฀accruals฀concept).฀Also,฀in฀20X5,฀as฀a฀result฀of฀a฀past฀transaction฀(Barton฀
has฀earned฀$100,000฀of฀income),฀Barton฀has฀an฀obligation฀to฀pay฀tax.฀Therefore,฀the฀Conceptual฀
Framework฀definition฀of฀a฀liability฀has฀been฀met฀which฀is฀why฀a฀deferred฀tax฀liability฀must฀be฀
recognised.฀
2.2฀Calculating฀deferred฀tax฀
฀
Deferred฀tax฀calculation฀ The฀tax฀base฀will฀always฀
be฀zero฀if฀the฀item฀is฀
฀ $ taxed฀on฀a฀cash฀receipts฀
basis฀or฀tax฀relief฀is฀
Carrying฀amount฀of฀asset/liability฀(statement฀of฀financial฀position) X/(X) granted฀on฀a฀cash฀paid฀
basis.฀
If฀the฀temporary฀
Tax฀base฀฀ (X)/X
difference฀is฀positive,฀
Temporary฀difference฀ deferred฀tax฀is฀negative,฀ X/(X)
so฀a฀deferred฀tax฀liability,฀ Calculated฀as฀temporary฀
and฀vice฀versa.฀ difference฀×฀tax฀rate฀
Deferred฀tax฀(liability)/asset฀ (X)/X
฀
Deferred฀tax฀is฀the฀tax฀attributable฀to฀temporary฀differences.฀฀
Temporary฀differences:฀differences฀between฀the฀carrying฀amount฀of฀an฀asset฀or฀liability฀in฀the฀
statement฀of฀financial฀position฀(eg฀value฀from฀an฀accounting฀perspective)฀and฀its฀tax฀base฀(eg฀value฀
Key฀term฀
from฀a฀tax฀perspective).฀
฀(IAS฀12:฀para.฀5)฀
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฀฀
If฀an฀item฀is฀never฀taxable฀or฀tax฀deductible,฀its฀tax฀base฀is฀deemed฀to฀be฀its฀carrying฀amount฀so฀there฀
is฀no฀temporary฀difference฀and฀no฀related฀deferred฀tax.฀฀
There฀are฀two฀types฀of฀temporary฀difference฀(IAS฀12:฀paras.฀15,฀24).฀
฀
Taxable฀temporary฀difference฀
For฀example,฀the฀entity฀has฀
recognised฀accrued฀income,฀but฀the฀ Tax฀to฀pay฀in฀the฀future Deferred฀tax฀liability฀
accrued฀income฀is฀not฀chargeable฀for฀
tax฀until฀the฀entity฀receives฀the฀cash฀
Deductible฀temporary฀difference฀
For฀example,฀the฀entity฀has฀recorded฀a฀ Tax฀saving฀in฀the฀future
provision,฀but฀the฀provision฀does฀not฀ Deferred฀tax฀asset฀
attract฀tax฀relief฀until฀the฀entity฀actually฀
spends฀the฀cash฀฀
2.3฀Revision฀of฀temporary฀differences฀seen฀in฀Financial฀Reporting฀
The฀following฀tables฀summarise฀the฀temporary฀differences฀you฀saw฀in฀Financial฀Reporting.฀Remember฀
that฀the฀tax฀rule฀determines฀the฀tax฀base.฀In฀the฀exam,฀make฀sure฀you฀apply฀the฀tax฀rule฀given฀in฀the฀
question.฀฀฀
Property,฀plant฀and฀equipment฀
Financial฀statements฀treatment฀ The฀asset฀is฀depreciated฀over฀its฀useful฀life฀as฀per฀IAS฀16฀and฀
is฀carried฀at฀cost฀less฀accumulated฀depreciation.฀฀
Tax฀rule฀ Tax฀depreciation฀is฀granted฀on฀the฀asset.฀The฀tax฀
depreciation฀is฀accelerated฀(ie฀it฀is฀more฀rapid฀than฀
accounting฀depreciation).฀฀
Tax฀base฀ Tax฀written฀down฀value฀=฀cost฀–฀cumulative฀tax฀depreciation฀฀
Temporary฀difference฀ A฀temporary฀difference฀arises฀because฀accounting฀
depreciation฀and฀tax฀depreciation฀are฀charged฀at฀different฀
rates.฀In฀this฀example,฀the฀tax฀depreciation฀is฀at฀a฀quicker฀
rate฀than฀the฀accounting฀depreciation.฀This฀results฀in฀a฀
taxable฀temporary฀difference฀(and฀so฀a฀deferred฀tax฀liability)฀
because฀the฀carrying฀amount฀of฀the฀asset฀will฀be฀higher฀than฀
its฀tax฀written฀down฀value.฀If฀the฀tax฀depreciation฀was฀at฀a฀
slower฀rate฀than฀the฀accounting฀depreciation,฀a฀deductible฀
temporary฀difference฀arises฀and฀results฀in฀a฀deferred฀tax฀
asset฀(IAS฀12:฀para.฀17b).฀
฀
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Accrued฀income/accrued฀expense฀฀
Financial฀statements฀treatment฀ The฀accrued฀income฀or฀accrued฀expense฀is฀included฀in฀the฀
financial฀statements฀when฀the฀item฀is฀accrued.฀
Tax฀rule฀ Income฀and฀expenses฀are฀taxed฀on฀a฀cash฀receipts/cash฀
paid฀basis,฀ie฀they฀are฀chargeable฀to฀tax/attract฀tax฀relief฀
when฀they฀are฀actually฀received/paid.฀
Tax฀base฀ Nil.฀฀
Temporary฀difference฀ The฀temporary฀difference฀is฀the฀amount฀of฀the฀accrued฀
income฀or฀expense.฀฀
If฀it฀is฀accrued฀income,฀it฀will฀result฀in฀a฀deferred฀tax฀liability,฀
as฀tax฀will฀be฀paid฀in฀the฀future฀when฀the฀income฀is฀actually฀
received.฀฀
If฀it฀is฀an฀accrued฀expense,฀it฀will฀result฀in฀a฀deferred฀tax฀
asset,฀as฀the฀entity฀will฀get฀tax฀relief฀in฀the฀future฀when฀the฀
expense฀is฀actually฀paid.฀฀฀
฀
฀
Provisions฀and฀allowances฀for฀doubtful฀debts฀
Financial฀statements฀treatment฀ A฀provision฀is฀included฀in฀the฀financial฀statements฀when฀the฀
criteria฀in฀IAS฀37฀are฀met.฀
A฀doubtful฀debt฀allowance฀is฀recognised฀in฀accordance฀with฀฀
IFRS฀9.฀
Tax฀treatment฀ Expenses฀related฀to฀provisions฀attract฀tax฀relief฀on฀a฀cash฀
paid฀basis;฀ie฀they฀attract฀tax฀relief฀when฀they฀are฀actually฀
paid.฀
Expenses฀related฀to฀doubtful฀debts฀attract฀tax฀relief฀when฀the฀
debts฀become฀irrecoverable฀and฀are฀written฀off.฀฀
Tax฀base฀ Nil.฀฀
Temporary฀difference฀ The฀temporary฀difference฀is฀the฀amount฀of฀the฀provision฀or฀
allowance.฀This฀will฀result฀in฀a฀deferred฀tax฀asset฀as฀the฀entity฀
will฀get฀tax฀relief฀in฀the฀future฀when฀the฀related฀expense฀is฀
actually฀paid/debts฀become฀irrecoverable฀and฀are฀written฀off.฀
฀
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฀฀
Illustration฀3฀฀
Revision฀of฀deferred฀tax฀
The฀information฀given฀below฀has฀been฀extracted฀from฀the฀financial฀statements฀of฀Carlton฀at฀
31฀December:฀฀
฀ 20X2 20X1฀
฀ $฀ $฀
Property,฀plant฀&฀equipment฀(cost฀$100,000฀on฀1฀Jan฀20X1) ฀
฀฀–฀carrying฀amount฀ 80,000฀ 90,000฀
Accrued฀income฀฀ 25,000 –฀
Provision฀฀ (5,000) –
฀
Profit฀before฀depreciation,฀accrued฀income฀and฀provision 100,000 90,000฀
฀
฀
Carlton฀recognised฀a฀deferred฀tax฀liability฀of฀$6,000฀at฀31฀December฀20X1.฀
The฀tax฀written฀down฀value฀of฀the฀property,฀plant฀and฀equipment฀is฀as฀follows:฀
฀ 20X2 20X1฀
฀ $ $฀
Property,฀plant฀&฀equipment฀–฀tax฀written฀down฀value 49,000 70,000฀
฀
The฀provision฀is฀allowed฀for฀tax฀when฀the฀associated฀expense฀is฀paid.฀Tax฀is฀charged฀on฀the฀accrued฀
income฀when฀that฀income฀is฀received.฀The฀rate฀of฀tax฀is฀30%.฀
Calculation฀of฀deferred฀tax฀temporary฀differences฀and฀deferred฀tax฀liability฀at฀
31.12.X2฀
Item฀ Accounting฀ Tax฀base฀ Temporary฀
carrying฀amount difference฀
The฀tax฀base฀
฀ $฀฀฀฀฀ $฀฀฀฀฀ $฀฀฀฀฀ will฀always฀be฀
Property,฀plant฀&฀equipment฀(PPE)฀ ฀ 80,000 ฀ ฀ 49,000 ฀ ฀ 31,000 ฀ zero฀if฀the฀item฀
is฀taxed฀on฀a฀
Accrued฀income฀ ฀25,000฀ ฀0฀ ฀25,000฀ cash฀receipts฀
Provision฀ (5,000) 0 ฀฀฀(5,000)฀ basis.฀The฀tax฀
base฀of฀PPE฀is฀
฀ ฀ ฀ ฀ ฀฀51,000 ฀ its฀tax฀written฀
down฀value.฀
Deferred฀tax฀liability฀(net)฀at฀30%฀ ฀ ฀ (15,300)฀
฀
฀
The฀deferred฀tax฀liability฀represents฀net฀tax฀that฀will฀be฀payable฀on฀these฀items฀in฀the฀future.฀The฀
deferred฀tax฀charge฀to฀profit฀or฀loss฀for฀the฀year฀ended฀31฀December฀20X2฀is฀the฀movement฀on฀
the฀deferred฀tax฀liability:฀฀
฀ ฀ $฀฀฀฀฀฀
Deferred฀tax฀liability฀at฀31฀December฀20X1 ฀ ฀6,000฀
Charge฀to฀profit฀or฀loss฀ ฀ ฀ ฀฀฀฀9,300฀
Deferred฀tax฀liability฀at฀31฀December฀20X2 ฀ ฀฀15,300฀
฀
฀
฀ ฀
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Effect฀on฀Carlton's฀profit฀or฀loss฀in฀20X2฀
฀ ฀ $ ฀฀฀฀฀ Tax฀rate฀applied฀
Profit฀before฀adjustments฀ ฀ ฀ 100,000 ฀ to฀accounting฀
profit฀is฀
Depreciation฀ ฀ =฀$79,000฀=฀taxable฀profit.฀ ฀ ฀(10,000)฀ $110,000฀×฀
Accrued฀income/provision฀not฀
Accrued฀income฀ ฀ included฀in฀tax฀computation฀ ฀25,000฀ 30%฀=฀$33,000
until฀received/paid฀
Provision฀ ฀ ฀ ฀฀(5,000)฀
Current฀tax฀+฀
Profit฀before฀tax฀ ฀ ฀110,000฀ Deferred฀tax฀=฀
Current฀tax฀[(100,000฀– 21,000฀tax฀dep'n)฀× 30%]฀ ฀(23,700)฀ $23,700฀+฀
$9,300฀=฀
Deferred฀tax฀ ฀ ฀ ฀฀(9,300)฀ $33,000฀
Profit฀for฀the฀year฀ ฀ ฀ ฀77,000฀
฀
฀
See฀ Chapter฀ 6฀ Section฀ 2.2฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ of฀ other฀ temporary฀
differences฀covered฀in฀Financial฀Reporting฀and฀activities฀to฀test฀your฀brought฀forward฀knowledge.฀This฀
is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
3฀Deferred฀tax:฀recognition฀
Under฀ IAS฀ 12,฀ a฀ deferred฀ tax฀ liability฀ or฀ asset฀ is฀ recognised฀ for฀ all฀ taxable฀ and฀ deductible฀
temporary฀differences,฀unless฀they฀arise฀from:฀
(a)฀ The฀initial฀recognition฀of฀goodwill;฀or฀
(b)฀ The฀initial฀recognition฀of฀an฀asset฀or฀liability฀in฀a฀transaction฀which฀
(i)฀ Is฀not฀a฀business฀combination฀
(ii)฀ At฀ the฀ time฀ of฀ the฀ transaction,฀ affects฀ neither฀ accounting฀ profit฀ nor฀ taxable฀
profit.฀฀ (IAS฀12:฀paras.฀15,฀24)฀
Deferred฀tax฀assets฀are฀only฀recognised฀to฀the฀extent฀that฀it฀is฀probable฀that฀taxable฀profit฀will฀be฀
available฀against฀which฀the฀deductible฀temporary฀difference฀can฀be฀utilised฀(IAS฀12:฀para.฀24).฀
See฀ Chapter฀ 6฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ recognition฀ of฀
deferred฀ tax฀ liabilities฀ and฀ assets.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀
Deferred฀ tax฀ is฀ recognised฀ in฀ the฀ same฀ section฀ of฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀as฀the฀transaction฀was฀recognised฀(IAS฀12:฀paras.฀58,฀61a).฀฀
Recognition฀of฀deferred฀tax฀
Charlton฀revalued฀a฀property฀from฀a฀carrying฀amount฀of฀$2฀million฀to฀its฀fair฀value฀of฀$2.5฀million฀
during฀the฀reporting฀period.฀The฀property฀cost฀$2.2฀million฀and฀its฀tax฀base฀is฀$1.8฀million.฀The฀tax฀
rate฀is฀30%.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀in฀Charlton's฀financial฀statements฀at฀
the฀end฀of฀the฀reporting฀period.฀
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฀฀
Solution฀
The฀tax฀base฀is฀$1.8฀million฀and฀the฀carrying฀amount฀is฀$2.5฀million฀(being฀the฀historical฀carrying฀
amount฀of฀$2฀million฀plus฀a฀revaluation฀surplus฀of฀$500,000).฀
Therefore฀a฀taxable฀temporary฀difference฀of฀$700,000฀exists,฀giving฀rise฀to฀a฀deferred฀tax฀liability฀of฀
$210,000฀(30%฀×฀$700,000).฀
Of฀the฀taxable฀temporary฀difference:฀
฀ $200,000฀($2m฀–฀$1.8m)฀arises฀due฀to฀the฀accelerated฀tax฀depreciation฀granted฀on฀the฀asset;฀
and฀
฀ $500,000฀arises฀due฀to฀the฀revaluation.฀
Therefore฀deferred฀tax฀of฀$150,000฀(30%฀×฀$500,000)฀should฀be฀charged฀to฀other฀comprehensive฀
income,฀as฀this฀is฀where฀the฀revaluation฀gain฀is฀recognised,฀and฀the฀remainder฀should฀be฀charged฀to฀
profit฀or฀loss.฀
4฀Deferred฀tax:฀measurement฀
Deferred฀tax฀assets฀and฀liabilities฀are฀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฀
(or฀substantively฀enacted)฀by฀the฀end฀of฀the฀reporting฀period฀(IAS฀12:฀para.฀47).฀ This฀is฀
inconsistent฀
If฀tax฀rates฀change,฀the฀tax฀rate฀expected฀when฀the฀temporary฀difference฀will฀reverse฀is฀used฀ with฀IAS฀37฀
(IAS฀12:฀para.฀47).฀฀ which฀requires฀
discounting฀if฀
Deferred฀tax฀assets฀and฀liabilities฀should฀not฀be฀discounted฀because฀the฀complexities฀and฀ the฀effect฀is฀
difficulties฀involved฀will฀affect฀reliability฀(IAS฀12:฀paras.฀53,฀54).฀ material.฀฀
See฀ Chapter฀ 6฀ Section฀ 4฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ measurement฀ of฀
deferred฀tax.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
5฀Deferred฀tax:฀group฀financial฀statements฀
You฀ must฀ appreciate฀ the฀ deferred฀ tax฀ aspects฀ of฀ business฀ combinations฀ as฀ these฀ are฀ likely฀ to฀ be฀
examined฀in฀the฀SBR฀exam.฀฀
There฀are฀some฀temporary฀differences฀which฀only฀arise฀in฀a฀business฀combination.฀This฀is฀because,฀
on฀consolidation,฀adjustments฀are฀made฀to฀the฀carrying฀amounts฀of฀assets฀and฀liabilities฀that฀are฀not฀
always฀reflected฀in฀the฀tax฀base฀of฀those฀assets฀and฀liabilities.฀฀
The฀ tax฀ bases฀ of฀ assets฀ and฀ liabilities฀ in฀ the฀ consolidated฀ financial฀ statements฀ are฀ determined฀ by฀
reference฀ to฀ the฀ applicable฀ tax฀ rules.฀ Usually฀ tax฀ authorities฀ calculate฀ tax฀ on฀ the฀ profits฀ of฀ the฀
individual฀ entities,฀ so฀ the฀ relevant฀ tax฀ bases฀ to฀ use฀ will฀ be฀ those฀ of฀ the฀ individual฀ entities฀ (IAS฀ 12:฀
para.฀11).฀฀
Deferred฀tax฀calculation฀ ฀ Carrying฀amount฀in฀
consolidated฀
฀ $ statement฀of฀financial฀
position฀
Carrying฀amount฀of฀asset/liability฀฀ X/(X)฀
(consolidated฀statement฀of฀financial฀position)฀ Tax฀base฀depends฀on฀tax฀
Tax฀base฀(usually฀subsidiary's฀tax฀base)฀ ฀(X)/X฀ rules.฀Usually฀tax฀is฀
charged฀on฀individual฀
Temporary฀difference฀ ฀X/(X)฀ entity฀profits,฀not฀
group฀profits.฀฀
Deferred฀tax฀(liability)/asset฀ (X)/X
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In฀the฀SBR฀exam,฀the฀question฀will฀state฀the฀tax฀rules฀in฀a฀jurisdiction,฀or฀the฀tax฀base฀of฀certain฀assets฀
or฀liabilities฀in฀that฀jurisdiction.฀฀฀
฀
5.1฀Fair฀value฀adjustments฀on฀consolidation฀฀
IFRS฀3฀requires฀assets฀acquired฀and฀liabilities฀assumed฀on฀acquisition฀of฀a฀subsidiary฀to฀be฀brought฀
into฀ the฀ consolidated฀ financial฀ statements฀ at฀ their฀ fair฀ value฀ rather฀ than฀ their฀ carrying฀ amount.฀
However,฀ this฀ change฀ in฀ fair฀ value฀ is฀ not฀ usually฀ reflected฀ in฀ the฀ tax฀ base,฀ and฀ so฀ a฀ temporary฀
difference฀arises฀(IAS฀12:฀para.฀19).฀฀
The฀accounting฀entries฀to฀record฀the฀resulting฀deferred฀tax฀are:฀
(a)฀ Deferred฀ tax฀ liability฀ due฀ to฀ fair฀ value฀ gain:฀ reduces฀ the฀ fair฀ value฀ of฀ the฀ net฀ assets฀ of฀ the฀
subsidiary฀and฀therefore฀increases฀goodwill:฀
DEBIT฀฀฀ Goodwill฀ ฀ ฀ X฀
CREDIT฀฀ Deferred฀tax฀liability฀ ฀ X฀
(b)฀ Deferred฀ tax฀ asset฀ due฀ to฀ fair฀ value฀ loss:฀ increases฀ the฀ fair฀ value฀ of฀ the฀ net฀ assets฀ of฀ the฀
subsidiary฀and฀therefore฀reduces฀goodwill:฀
DEBIT฀฀฀ Deferred฀tax฀asset฀ ฀ X฀
CREDIT฀฀ Goodwill฀ ฀ ฀ ฀ X฀
Activity฀1:฀Fair฀value฀adjustments฀ ฀
On฀1฀April฀20X5฀Alpha฀purchased฀100%฀of฀the฀ordinary฀shares฀of฀Beta.฀The฀fair฀values฀of฀the฀assets฀
and฀liabilities฀acquired฀were฀considered฀to฀be฀equal฀to฀their฀carrying฀amounts,฀with฀the฀exception฀of฀
equipment,฀which฀had฀a฀fair฀value฀of฀$54฀million.฀The฀tax฀base฀of฀the฀equipment฀on฀1฀April฀20X5฀
was฀$50฀million.฀฀฀
The฀tax฀rate฀is฀25%฀and฀the฀fair฀value฀adjustment฀does฀not฀affect฀the฀tax฀base฀of฀the฀equipment.฀
Required฀
Discuss฀how฀the฀above฀will฀affect฀the฀accounting฀for฀deferred฀tax฀under฀IAS฀12฀Income฀Taxes in฀the฀
group฀financial฀statements฀of฀Alpha.฀฀
5.2฀Undistributed฀profits฀of฀subsidiaries,฀branches,฀associates฀and฀
joint฀ventures฀฀
A฀ subsidiary's฀ profits฀ (or฀ share฀ of฀ associate's/joint฀ venture's฀ profits)฀ are฀ recognised฀ in฀ the฀
consolidated฀ financial฀ statements.฀ If฀ they฀ are฀ not฀ taxable฀ in฀ the฀ parent's฀ tax฀ regime฀ until฀ they฀ are฀
remitted฀to฀the฀parent฀as฀dividend฀income,฀a฀temporary฀difference฀arises฀(IAS฀12:฀para.฀38).฀฀฀฀
Under฀IAS฀12,฀a฀resulting฀deferred฀tax฀liability฀is฀recognised฀unless:฀
(a)฀ The฀ parent,฀ investor฀ or฀ venturer฀ is฀ able฀ to฀ control฀ the฀ timing฀ of฀ the฀ reversal฀ of฀ the฀ temporary฀
difference฀(eg฀by฀determining฀dividend฀policy);฀and฀
(b)฀ It฀is฀probable฀that฀the฀temporary฀difference฀will฀not฀reverse฀in฀the฀foreseeable฀future.฀
(IAS฀12:฀para.฀39)
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฀฀
Undistributed฀profits฀of฀subsidiary฀
Carrol฀has฀one฀subsidiary,฀Anchor.฀The฀retained฀earnings฀of฀Anchor฀at฀acquisition฀were฀$2฀million.฀
The฀directors฀of฀Carrol฀have฀decided฀that฀over฀the฀next฀three฀years,฀they฀will฀realise฀earnings฀through฀
future฀dividend฀payments฀from฀Anchor฀amounting฀to฀$500,000฀per฀year.฀฀
Tax฀is฀payable฀on฀any฀remittance฀of฀dividends฀and฀no฀dividends฀have฀been฀declared฀for฀the฀current฀
year.฀฀
Required฀
Discuss฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀for฀the฀Carrol฀Group.฀฀
Solution฀
Deferred฀tax฀should฀be฀recognised฀on฀the฀unremitted฀earnings฀of฀subsidiaries฀unless฀the฀parent฀is฀
able฀to฀control฀the฀timing฀of฀dividend฀payments฀and฀it฀is฀unlikely฀that฀dividends฀will฀be฀paid฀for฀the฀
foreseeable฀future.฀Carrol฀controls฀the฀dividend฀policy฀of฀Anchor฀and฀this฀means฀that฀there฀would฀
normally฀be฀no฀need฀to฀recognise฀a฀deferred฀tax฀liability฀in฀respect฀of฀unremitted฀profits.฀However,฀
the฀profits฀of฀Anchor฀will฀be฀distributed฀to฀Carrol฀over฀the฀next฀few฀years฀and฀tax฀will฀be฀payable฀on฀
the฀dividends฀received.฀Therefore฀a฀deferred฀tax฀liability฀should฀be฀shown.฀
5.3฀Unrealised฀profits฀on฀intragroup฀trading฀฀
When฀a฀group฀entity฀sells฀goods฀to฀another฀group฀entity,฀the฀selling฀entity฀recognises฀the฀profit฀made฀
in฀its฀individual฀financial฀statements.฀If฀the฀related฀inventories฀are฀still฀held฀by฀the฀group฀at฀the฀year฀
end,฀ the฀ profit฀ is฀ unrealised฀ from฀ the฀ group฀ perspective฀ and฀ adjustments฀ are฀ made฀ in฀ the฀ group฀
accounts฀to฀eliminate฀it.฀The฀same฀adjustment฀is฀not฀usually฀made฀to฀the฀tax฀base฀of฀the฀inventories฀
(as฀tax฀is฀usually฀calculated฀on฀the฀individual฀entity฀profits,฀and฀not฀group฀profits)฀and฀a฀temporary฀
difference฀arises.฀฀
Unrealised฀profits฀on฀intragroup฀trading฀
P฀sells฀goods฀costing฀$150฀to฀its฀overseas฀subsidiary฀S฀for฀$200.฀At฀the฀year฀end,฀S฀still฀holds฀the฀
inventories.฀In฀the฀jurisdictions฀in฀which฀P฀and฀S฀operate,฀tax฀is฀charged฀on฀individual฀entity฀profits.฀
P's฀rate฀of฀tax฀is฀40%,฀whereas฀S's฀rate฀of฀tax฀is฀50%.฀
P฀pays฀tax฀of฀$20฀($50฀×฀40%)฀on฀the฀profit฀generated฀by฀the฀sale.฀฀
S฀is฀entitled฀to฀a฀future฀tax฀deduction฀for฀the฀$200฀paid฀for฀the฀inventories.฀The฀tax฀base฀of฀the฀
inventories฀is฀therefore฀$200฀from฀S's฀perspective.฀฀
From฀the฀perspective฀of฀the฀P฀group,฀the฀profit฀of฀$50฀generated฀by฀the฀sale฀is฀unrealised.฀In฀the฀
consolidated฀financial฀statements,฀the฀unrealised฀profit฀is฀eliminated,฀so฀the฀carrying฀amount฀of฀the฀
inventories฀from฀the฀group฀perspective฀is฀$150.฀฀
Deferred฀tax฀is฀calculated฀as:฀
฀ $฀฀฀
Carrying฀amount฀(in฀the฀group฀financial฀statements) 150฀
Tax฀base฀(cost฀of฀inventories฀to฀S)฀ (200)฀
Temporary฀difference฀(group฀unrealised฀profit) (50)฀
Deferred฀tax฀asset฀(50฀×฀50%฀(S's฀tax฀rate)) ฀25฀
฀
฀
138฀

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S's฀tax฀rate฀is฀used฀to฀calculate฀the฀deferred฀tax฀asset฀because฀S฀will฀receive฀the฀future฀tax฀deduction฀
related฀to฀the฀inventories.฀
In฀the฀consolidated฀financial฀statements฀a฀deferred฀tax฀asset฀of฀$25฀should฀be฀recognised:฀
DEBIT฀฀฀฀฀Deferred฀tax฀asset฀(in฀consolidated฀statement฀of฀financial฀position)฀ $25฀
CREDIT฀฀฀Deferred฀tax฀(in฀consolidated฀statement฀of฀profit฀or฀loss)฀฀ ฀ ฀ ฀ $25฀฀
Activity฀2:฀Unrealised฀profit฀on฀intragroup฀trading฀ ฀
Kappa฀prepares฀consolidated฀financial฀statements฀to฀30฀September฀each฀year.฀On฀1฀August฀20X3,฀
Kappa฀ sold฀ products฀ to฀ Omega,฀ a฀ wholly฀ owned฀ subsidiary,฀ for฀ $80,000.฀ The฀ goods฀ had฀ cost฀
Kappa฀$64,000.฀All฀of฀these฀goods฀remained฀in฀Omega's฀inventories฀at฀the฀year฀end.฀The฀rate฀of฀
income฀tax฀in฀the฀jurisdiction฀in฀which฀Omega฀operates฀is฀25%฀and฀tax฀is฀calculated฀on฀the฀profits฀of฀
the฀individual฀entities.฀฀
Required฀
Explain฀ the฀ deferred฀ tax฀ treatment฀ of฀ this฀ transaction฀ in฀ the฀ consolidated฀ financial฀ statements฀ of฀
Kappa฀for฀the฀year฀ended฀30฀September฀20X3.฀
6฀Deferred฀tax:฀other฀temporary฀differences฀฀
Tutorial฀note฀
The฀temporary฀differences฀discussed฀in฀this฀section฀are฀those฀that฀are฀introduced฀in฀the฀Strategic฀
Business฀Reporting฀syllabus฀and฀that฀haven't฀been฀covered฀in฀Financial฀Reporting.฀However,฀this฀is฀
not฀an฀exhaustive฀list฀of฀temporary฀differences฀that฀could฀be฀encountered฀in฀the฀Strategic฀Business฀
Reporting฀exam.฀You฀could฀be฀examined฀on฀deferred฀tax฀relating฀to฀any฀area฀of฀the฀syllabus.฀
6.1฀Gains฀or฀losses฀on฀financial฀assets฀
Gains฀ on฀ financial฀ assets฀ held฀ at฀ fair฀ value฀ are฀ either฀ recognised฀ in฀ profit฀ or฀ loss฀ or฀ in฀ other฀
comprehensive฀income฀(covered฀in฀Chapter฀7฀Financial฀instruments).฀
If฀the฀gain฀is฀not฀taxable฀until฀the฀financial฀asset฀is฀sold,฀the฀gain฀is฀ignored฀for฀tax฀purposes฀until฀the฀
sale฀and฀the฀tax฀base฀of฀the฀asset฀does฀not฀change.฀A฀taxable฀temporary฀difference฀arises฀generating฀
a฀deferred฀tax฀liability฀(IAS฀12:฀para.฀20).฀
Similarly,฀losses฀on฀financial฀assets฀that฀are฀not฀tax฀deductible฀until฀they฀are฀sold฀generate฀a฀deferred฀
tax฀asset฀(IAS฀12:฀para.฀20).฀
The฀ deferred฀ tax฀ is฀ recognised฀ in฀ the฀ same฀ section฀ of฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀as฀the฀gain/loss฀on฀the฀financial฀asset.฀
Gains฀or฀losses฀on฀financial฀assets฀
On฀1฀October฀20X2,฀Kalle฀purchased฀an฀equity฀investment฀for฀$200,000.฀Kalle฀has฀made฀the฀
irrevocable฀election฀to฀carry฀the฀investment฀at฀fair฀value฀through฀other฀comprehensive฀income.฀฀
On฀30฀September฀20X3,฀the฀fair฀value฀of฀the฀investment฀was฀$240,000.฀In฀the฀tax฀jurisdiction฀in฀
which฀Kalle฀operates,฀unrealised฀gains฀and฀losses฀arising฀on฀the฀revaluation฀of฀investments฀of฀this฀
nature฀are฀not฀taxable฀unless฀the฀investment฀is฀sold.฀The฀rate฀of฀income฀tax฀in฀the฀jurisdiction฀in฀which฀
Kalle฀operates฀is฀25%.฀฀
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฀฀
Required฀
Explain฀how฀the฀deferred฀tax฀consequences฀of฀this฀transaction฀would฀be฀reported฀in฀the฀financial฀
statements฀of฀Kalle฀for฀the฀year฀ended฀30฀September฀20X3.฀
Solution฀
Since฀the฀unrealised฀fair฀value฀gain฀on฀the฀equity฀investment฀is฀not฀taxable฀until฀the฀investment฀is฀sold,฀
the฀tax฀base฀of฀the฀investment฀is฀unchanged฀by฀the฀fair฀value฀gain฀and฀remains฀as฀$200,000.฀
The฀fair฀value฀gain฀creates฀a฀taxable฀temporary฀difference฀of฀$40,000฀(carrying฀amount฀$240,000฀
–฀tax฀base฀$200,000).฀
This฀results฀in฀a฀deferred฀tax฀liability฀of฀$10,000฀($40,000฀×฀25%).฀฀
Because฀the฀unrealised฀gain฀is฀reported฀in฀other฀comprehensive฀income,฀the฀related฀deferred฀tax฀
expense฀is฀also฀reported฀in฀other฀comprehensive฀income.฀
6.2฀Unused฀tax฀losses฀and฀unused฀tax฀credits฀฀
Tax฀losses฀and฀tax฀credits฀may฀result฀in฀a฀tax฀saving฀if฀they฀can฀be฀carried฀forward฀to฀reduce฀future฀
tax฀payments.฀
A฀deferred฀tax฀asset฀is฀recognised฀for฀the฀carry฀forward฀of฀unused฀tax฀losses฀or฀credits฀to฀the฀extent฀
that฀ it฀ is฀ probable฀ that฀ future฀ taxable฀ profit฀ will฀ be฀ available฀ against฀ which฀ the฀ unused฀ tax฀ losses฀
and฀credits฀can฀be฀used฀(IAS฀12:฀para.฀34).฀
See฀ Chapter฀ 6฀ Section฀ 3.1.1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ recognition฀ of฀
deferred฀tax฀assets฀relating฀to฀tax฀losses.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
Tax฀losses฀
Lambda,฀a฀wholly฀owned฀subsidiary฀of฀Epsilon,฀made฀a฀loss฀adjusted฀for฀tax฀purposes฀of฀$3m฀in฀the฀
year฀ended฀31฀March฀20X4.฀Lambda฀is฀unable฀to฀utilise฀this฀loss฀against฀previous฀tax฀liabilities฀and฀
local฀tax฀legislation฀does฀not฀allow฀Lambda฀to฀transfer฀the฀tax฀loss฀to฀other฀group฀companies.฀Local฀
legislation฀does฀allow฀Lambda฀to฀carry฀the฀loss฀forward฀and฀utilise฀it฀against฀its฀own฀future฀taxable฀
profits.฀The฀directors฀of฀Epsilon฀do฀not฀consider฀that฀Lambda฀will฀make฀taxable฀profits฀in฀the฀
foreseeable฀future.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀in฀the฀consolidated฀statement฀of฀financial฀position฀
of฀the฀Epsilon฀group฀at฀31฀March฀20X4.฀฀
Solution฀
The฀tax฀loss฀creates฀a฀potential฀deferred฀tax฀asset฀for฀the฀Epsilon฀group฀since฀its฀carrying฀amount฀is฀
nil฀and฀its฀tax฀base฀is฀$3m.฀
However,฀no฀deferred฀tax฀asset฀can฀be฀recognised฀because฀there฀is฀no฀prospect฀of฀being฀able฀to฀
reduce฀tax฀liabilities฀in฀the฀foreseeable฀future฀as฀no฀taxable฀profits฀are฀anticipated.฀฀
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Activity฀3:฀Tax฀losses฀ ฀
The฀ Baller฀ Group฀ incurred฀ $38m฀ of฀ tax฀ losses฀ in฀ the฀ year฀ ended฀ 31฀ December฀ 20X4.฀ Local฀ tax฀
legislation฀ allows฀ tax฀ losses฀ to฀ be฀ carried฀ forward฀ for฀ two฀ years฀ only.฀ The฀ taxable฀ profits฀ were฀
anticipated฀to฀be฀$21m฀in฀20X5฀and฀$24m฀in฀20X6.฀Uncertainty฀exists฀around฀the฀expected฀profits฀
for฀20X6฀as฀they฀are฀dependent฀on฀the฀successful฀completion฀of฀a฀service฀contract฀in฀20X5฀in฀order฀
for฀the฀contract฀to฀continue฀into฀20X6.฀It฀is฀anticipated฀that฀there฀will฀be฀no฀future฀reversals฀of฀existing฀
taxable฀temporary฀differences฀until฀after฀31฀December฀20X6.฀The฀rate฀of฀tax฀is฀20%.฀฀
Required฀
Explain฀ the฀ deferred฀ tax฀ implications฀ of฀ the฀ above฀ in฀ the฀ consolidated฀ financial฀ statements฀ of฀ the฀
Baller฀Group฀at฀31฀December฀20X4.฀
6.3฀Share-based฀payment฀฀
Deferred฀tax฀related฀to฀share-based฀payments฀is฀covered฀in฀Chapter฀9฀Share-based฀payment.฀
6.4฀Leases฀
Deferred฀tax฀related฀to฀leases฀is฀covered฀in฀Chapter฀8฀Leases.฀
Activity฀4:฀Deferred฀tax฀comprehensive฀question฀ ฀
Nyman,฀ a฀ public฀ limited฀ company,฀ has฀ three฀ 100%฀ owned฀ subsidiaries,฀ Glass,฀ Waddesdon,฀ and฀
Winsten฀SA,฀a฀foreign฀subsidiary.฀
(a)฀ The฀following฀details฀relate฀to฀Glass:฀
(i)฀ Nyman฀acquired฀its฀interest฀in฀Glass฀on฀1฀January฀20X3.฀The฀fair฀values฀of฀the฀assets฀
and฀liabilities฀acquired฀were฀considered฀to฀be฀equal฀to฀their฀carrying฀amounts,฀with฀the฀
exception฀of฀freehold฀property฀which฀had฀a฀fair฀value฀of฀$32฀million฀and฀a฀tax฀base฀of฀
$31฀million.฀The฀directors฀have฀no฀intention฀of฀selling฀the฀property.฀
(ii)฀ Glass฀has฀sold฀goods฀at฀a฀price฀of฀$6฀million฀to฀Nyman฀since฀acquisition฀and฀made฀a฀
profit฀ of฀ $2฀ million฀ on฀ the฀ transaction.฀ The฀ inventories฀ of฀ these฀ goods฀ recorded฀ in฀
Nyman's฀ statement฀ of฀ financial฀ position฀ at฀ the฀ year฀ end,฀ 30฀ September฀ 20X3,฀ was฀
$3.6฀million.฀
(b)฀ Waddesdon฀ undertakes฀ various฀ projects฀ from฀ debt฀ factoring฀ to฀ investing฀ in฀ property฀ and฀
commodities.฀ The฀ following฀ details฀ relate฀ to฀ Waddesdon฀ for฀ the฀ year฀ ended฀ 30฀September฀
20X3:฀
(i)฀ Waddesdon฀has฀a฀portfolio฀of฀readily฀marketable฀government฀securities฀which฀are฀held฀
as฀current฀assets฀for฀financial฀trading฀purposes.฀These฀investments฀are฀stated฀at฀market฀
value฀in฀the฀statement฀of฀financial฀position฀with฀any฀gain฀or฀loss฀taken฀to฀profit฀or฀loss.฀
These฀ gains฀ and฀ losses฀ are฀ taxed฀ when฀ the฀ investments฀ are฀ sold.฀ Currently฀ the฀
accumulated฀unrealised฀gains฀are฀$8฀million.฀
(ii)฀ Waddesdon฀ has฀ calculated฀ it฀ requires฀ an฀ allowance฀ for฀ credit฀ losses฀ of฀ $2฀ million฀
against฀ its฀ total฀ loan฀ portfolio.฀ Tax฀ relief฀ is฀ available฀ when฀ the฀ specific฀ loan฀ is฀ written฀
off.฀
(c)฀ Winsten฀ SA฀ has฀ unremitted฀ earnings฀ of฀ €20฀ million฀ which฀ would฀ give฀ rise฀ to฀ additional฀ tax฀
payable฀of฀$2฀million฀if฀remitted฀to฀Nyman's฀tax฀regime.฀฀Nyman฀intends฀to฀leave฀the฀earnings฀
within฀Winsten฀for฀reinvestment.฀
(d)฀ Nyman฀has฀unrelieved฀trading฀losses฀as฀at฀30฀September฀20X3฀of฀$10฀million.฀
฀ 141฀

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฀฀
Current฀ tax฀ is฀ calculated฀ based฀ on฀ the฀ individual฀ company's฀ financial฀ statements฀ (adjusted฀ for฀ tax฀
purposes)฀ in฀ the฀ tax฀ regime฀ in฀ which฀ Nyman฀ operates.฀ Assume฀ an฀ income฀ tax฀ rate฀ of฀ 30%฀ for฀
Nyman฀and฀25%฀for฀its฀subsidiaries.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀for฀the฀Nyman฀group฀of฀companies฀for฀
the฀year฀ended฀30฀September฀20X3.฀
7฀Deferred฀tax:฀presentation฀
Deferred฀tax฀assets฀and฀liabilities฀can฀only฀be฀offset฀if฀(IAS฀12:฀para.฀74):฀
(a)฀ The฀ entity฀ has฀ a฀ legally฀ enforceable฀ right฀ to฀ set฀ off฀ current฀ tax฀ assets฀ against฀
current฀tax฀liabilities;฀and฀
(b)฀ The฀ deferred฀ tax฀ assets฀ and฀ liabilities฀ relate฀ to฀ income฀ taxes฀ levied฀ by฀ the฀ same฀ taxation฀
authority.฀
Ethics฀note฀
Ethical฀issues฀could฀feature฀in฀any฀question฀in฀the฀SBR฀exam.฀You฀need฀to฀be฀alert฀to฀any฀threats฀to฀
the฀fundamental฀principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀
question.฀
Deferred฀tax฀is฀difficult฀to฀understand฀and฀therefore฀a฀threat฀arises฀if฀the฀reporting฀accountant฀is฀not฀
adequately฀trained฀or฀experienced฀in฀this฀area.฀This฀could฀result฀in฀errors฀being฀made฀in฀the฀
recognition฀or฀measurement฀of฀deferred฀tax฀assets฀or฀liabilities.฀฀
Recognising฀deferred฀tax฀assets฀for฀the฀carry฀forward฀of฀unused฀tax฀losses฀requires฀judgment฀of฀
whether฀it฀is฀probable฀that฀future฀taxable฀profit฀will฀be฀available฀for฀offset.฀As฀such,฀a฀director฀under฀
pressure฀may฀be฀tempted฀to฀say฀that฀future฀taxable฀profits฀are฀probable,฀when฀in฀fact฀they฀are฀not,฀in฀
order฀to฀recognise฀a฀deferred฀tax฀asset.฀฀฀฀
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฀
1.฀
฀ Current฀tax฀ Income฀taxes฀ 4.฀ Deferred฀tax:฀
฀฀ Tax฀charged฀by฀tax฀authority฀ measurement฀
฀฀ Unpaid฀tax฀recognised฀as฀a฀ ฀ Tax฀rates฀expected฀to฀apply฀when฀
liability฀ asset฀realised/liability฀settled,฀
฀ based฀on฀tax฀rates/laws:฀
฀ Benefits฀of฀tax฀losses฀that฀can฀be฀
฀ carried฀back฀recognised฀as฀an฀ 3.฀ Deferred฀tax:฀ –฀
฀ Enacted,฀or฀
recognition฀ –฀
฀ asset฀ ฀ Substantively฀enacted฀
 DT฀is฀recognised฀for฀all฀temporary฀ by฀end฀of฀reporting฀period฀
฀ Explanation฀required฀as฀to฀
differences,฀except:฀ ฀ Cannot฀be฀discounted฀
฀ difference฀between฀expected฀and฀
actual฀tax฀expense฀ –฀ Initial฀recognition฀of฀goodwill฀ (inconsistency฀with฀IAS฀37฀which฀
฀ –฀ Initial฀recognition฀in฀a฀transaction฀ requires฀discounting฀if฀material)฀
฀ (i)฀ Not฀a฀business฀combination,฀
฀
2.฀Deferred฀tax฀principles:฀
and฀
(ii)฀ At฀that฀time,฀does฀not฀affect฀
฀
revision ฀฀
accounting฀nor฀taxable฀profit฀ 6.฀Deferred฀tax:฀other฀
฀
A/c฀CA฀ ฀X฀  DT฀recognised฀in฀same฀section฀of฀ temporary฀differences฀
Less:฀tax฀base฀ ฀฀฀(X)฀฀฀ SPLOCI฀as฀transaction฀
฀
Taxable/(deductible)฀TD฀ ฀X/(X)฀ ฀ Development฀costs฀
฀
x฀%฀=฀(DTL)/DTA฀ (X)/X฀ ฀ –฀ DTL฀on฀A/c฀CA฀if฀fully฀tax฀
฀ ฀ Accelerated฀tax฀depreciation฀ deductible฀as฀incurred฀(tax฀
base฀=฀0)฀
฀
฀ –฀ A/c฀CA฀>฀tax฀WDV฀ 5.฀Deferred฀tax:฀group฀
฀ –฀ Tax฀base฀=฀tax฀WDV฀ ฀ Impairment฀(&฀inventory)฀losses฀
฀ ฀ –฀ =>฀DTL฀ ฀ –฀ DTA฀on฀loss฀if฀not฀tax฀
฀ ฀ Revaluations฀not฀recognised฀for฀tax฀ ฀ Fair฀value฀adjustments฀ deductible฀until฀later฀(as฀tax฀
฀ –฀ A/c฀CA฀>฀tax฀WDV฀ –฀ DTL฀on฀FV฀increases฀฀ base฀does฀not฀change)฀
฀ ฀ –฀ Tax฀base฀=฀tax฀WDV฀ (&฀higher฀goodwill)฀ ฀ Financial฀assets฀
฀ ฀ –฀ DTL฀always฀recognised฀even฀if฀no฀ ฀ –฀ DTL฀on฀gains฀not฀taxable฀until฀
–฀ DTA฀on฀FV฀decreases฀฀
intention฀to฀sell,฀as฀revalued฀amount฀ sale฀
฀ (&฀lower฀goodwill)฀
recoverable฀through฀use฀generating฀
฀ Undistributed฀profits฀of฀ ฀ –฀ DTA฀on฀losses฀not฀tax฀
฀ taxable฀income฀
subsidiary/associate/joint฀venture฀ deductible฀until฀sale฀
฀ Accrued฀income/expense฀taxed฀on฀a฀cash฀
฀ basis฀ –฀ DTL฀recognised฀unless:฀ ฀ ฀–฀ recognised฀in฀same฀section฀of฀
SPLOCI฀as฀gain/loss฀
฀ ฀ –฀ Accrual฀in฀SOFP,฀but฀no฀accrual฀for฀ (i)฀ Parent฀is฀able฀to฀control฀timing฀
tax฀ ฀ Unused฀tax฀losses/credits฀
of฀reversal,฀and฀
฀
฀ –฀ Tax฀base฀=฀0฀ ฀ –฀ DT฀asset฀only฀if฀probable฀
(ii)฀ probable฀will฀not฀reverse฀in฀
฀ ฀ Provisions฀tax฀deductible฀when฀paid฀
future฀taxable฀profit฀available฀
foreseeable฀future฀ for฀offset฀
฀ ฀ –฀ Accrual฀in฀SOFP,฀but฀no฀accrual฀for฀
฀ Unrealised฀profit฀on฀intragroup฀trading฀ ฀ Share-based฀payment฀
tax฀
฀ ฀ –฀ Tax฀base฀=฀0฀ –฀ DTA฀recognised฀at฀receiving฀ ฀ –฀ See฀SBP฀chapter฀
฀ ฀ –฀ DTA฀based฀on฀prov'n฀ company's฀tax฀rate฀
฀ Leases฀
฀ Accrued฀income/expense฀taxed฀on฀an฀ ฀ –฀ See฀Leases฀chapter฀
฀ accruals฀basis฀
฀ ฀ –฀ Tax฀base฀=฀accrual฀
฀
฀ –฀ ฀No฀DT฀effect฀
฀ Never฀taxable/฀tax฀deductible฀ 7.฀ Deferred฀tax:฀
฀ ฀ –฀ No฀DT฀effect฀
฀ presentation฀
฀ ฀ DT฀assets/liabilities฀must฀be฀
Calculation฀of฀charge/(credit)฀to฀P/L:฀ offset,฀but฀only฀if:฀
฀
DTL฀(net)฀b/d฀ ฀X฀ ฀ –฀ Legal฀right฀to฀set฀off฀current฀
฀
OCI฀(re฀rev'n฀or฀investment฀in฀equity฀instruments)฀ ฀X฀ tax฀assets/liabilities,฀and฀
฀
Goodwill฀(re฀FV฀increases)฀ ฀X฀
฀ –฀ DT฀assets/liabilities฀relate฀
฀
P/L฀charge/(credit)฀ ฀ ฀฀X/(X)฀ to฀same฀tax฀authority
฀
DTL฀(net)฀c/d฀ ฀฀฀฀X฀฀฀฀฀
฀ ฀
฀ Key฀
฀ A/c฀CA฀=฀accounting฀carrying฀amount฀
DT฀=฀deferred฀tax฀
฀ DTA฀=฀deferred฀tax฀asset฀
฀ DTL฀=฀deferred฀tax฀liability฀฀
฀ FV฀=฀fair฀value฀
OCI฀=฀other฀comprehensive฀income฀
SOFP฀=฀statement฀of฀financial฀position฀
SPLOCI฀ =฀ statement฀ of฀ profit฀ or฀ loss฀ and฀
other฀comprehensive฀income฀
฀ Tax฀WDV฀=฀tax฀written฀down฀value฀ 143฀

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฀฀
1.฀ Current฀tax฀
฀ ฀ Current฀tax฀is฀the฀tax฀charged฀by฀the฀tax฀authority.฀
฀ ฀ Unpaid฀amounts฀are฀shown฀as฀a฀liability.฀Any฀tax฀losses฀that฀can฀be฀carried฀back฀
are฀shown฀as฀an฀asset.฀
฀ ฀ An฀explanation,฀in฀the฀form฀of฀a฀reconciliation,฀is฀required฀as฀to฀the฀difference฀
between฀the฀expected฀tax฀expense฀and฀the฀actual฀tax฀expense฀for฀the฀period.฀
2.฀ Deferred฀tax฀principles:฀revision฀
฀ ฀ Deferred฀tax฀is฀the฀tax฀attributable฀to฀temporary฀differences,฀ie฀temporary฀differences฀
in฀timing฀of฀recognition฀of฀income฀and฀expense฀between฀IFRSs฀accounting฀and฀tax฀
calculations.฀
฀ ฀ They฀are฀measured฀as฀the฀difference฀between฀the฀accounting฀carrying฀amount฀of฀
an฀asset฀or฀liability฀and฀its฀tax฀base฀(ie฀tax฀value).฀
฀ ฀ Temporary฀differences฀are฀used฀to฀measure฀deferred฀tax฀from฀a฀statement฀of฀financial฀
position฀angle฀(consistent฀with฀the฀Conceptual฀Framework).฀
฀ ฀ Taxable฀temporary฀differences฀arise฀where฀the฀accounting฀carrying฀amount฀exceeds฀
the฀tax฀base.฀They฀result฀in฀deferred฀tax฀liabilities,฀representing฀the฀fact฀that฀current฀
tax฀will฀not฀be฀charged฀until฀the฀future,฀and฀so฀an฀accrual฀is฀made.฀
฀ ฀ Deductible฀temporary฀differences฀arise฀when฀the฀accounting฀carrying฀amount฀is฀less฀
than฀the฀tax฀base.฀They฀result฀in฀deferred฀tax฀assets,฀representing฀the฀fact฀that฀the฀
tax฀authorities฀will฀only฀give฀a฀tax฀deduction฀in฀the฀future฀(eg฀when฀a฀provision฀is฀paid).฀A฀
deferred฀tax฀credit฀reduces฀the฀tax฀charge฀as฀the฀item฀has฀already฀been฀deducted฀for฀
accounting฀purposes.฀
3.฀ Deferred฀tax:฀recognition฀
฀ ฀ Deferred฀tax฀is฀provided฀for฀under฀IAS฀12฀for฀all฀temporary฀differences฀(with฀limited฀
exceptions).฀
฀ ฀ Deferred฀tax฀is฀recognised฀in฀the฀same฀section฀of฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀as฀the฀related฀transaction.฀
4.฀ Deferred฀tax:฀measurement฀
฀ ฀ Deferred฀tax฀is฀measured฀at฀the฀tax฀rates฀expected฀to฀apply฀when฀the฀asset฀is฀realised฀
or฀liability฀settled฀(based฀on฀rates฀enacted/substantively฀enacted฀by฀the฀end฀of฀
the฀reporting฀period).฀
5.฀ Deferred฀tax:฀group฀financial฀statements฀
฀ ฀ In฀group฀financial฀statements,฀deferred฀tax฀may฀arise฀on฀fair฀value฀adjustments,฀
undistributed฀profits฀of฀subsidiaries฀and฀unrealised฀profits.฀
฀ A฀deferred฀tax฀asset฀is฀created฀for฀unused฀tax฀losses฀and฀credits,฀providing฀it฀is฀probable฀
that฀there฀will฀be฀future฀taxable฀profit฀against฀which฀they฀can฀be฀used.฀
6.฀ Deferred฀tax:฀other฀temporary฀differences฀
฀ ฀ Development฀costs:฀tax฀base฀is฀nil฀if฀costs฀are฀fully฀tax฀deductible฀as฀incurred฀฀ ฀
฀ ฀ Impairment฀(and฀inventory)฀losses:฀tax฀base฀does฀not฀change฀if฀loss฀not฀tax฀deductible฀until฀
sold฀฀
฀ ฀ Financial฀assets:฀if฀gains฀or฀losses฀are฀not฀taxable/deductible฀until฀the฀instrument฀is฀sold,฀a฀
temporary฀difference฀arises฀
144฀

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฀ ฀ Unused฀tax฀losses/credits:฀deferred฀tax฀asset฀is฀recognised฀only฀if฀probable฀future฀taxable฀
profit฀is฀available฀for฀offset.฀
7.฀ Deferred฀tax:฀presentation฀
฀ ฀ Deferred฀tax฀assets฀and฀liabilities฀are฀shown฀separately฀from฀each฀other฀(consistent฀
with฀the฀IAS฀1฀'no฀offset'฀principle)฀unless฀the฀entity฀has฀a฀legally฀enforceable฀right฀to฀
offset฀current฀tax฀assets฀and฀liabilities฀and฀the฀deferred฀tax฀assets฀and฀liabilities฀relate฀
to฀the฀same฀taxation฀authority.฀ ฀
฀ 145฀

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฀฀
Q8฀DT฀Group฀฀฀
฀
topics฀studied฀in฀this฀chapter฀and฀are฀useful฀reading:฀
IAS฀12฀Income฀Taxes฀(2011)฀฀
Recovery฀Position฀(2015)฀
฀
146฀

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฀
฀
฀
฀
Financial฀instruments
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀initial฀recognition฀and฀measurement฀of฀financial฀instruments.฀ C3(a)฀
Discuss฀and฀apply฀the฀subsequent฀measurement฀of฀financial฀assets฀and฀financial฀ C3(b)฀
liabilities.฀
Discuss฀and฀apply฀the฀derecognition฀of฀financial฀assets฀and฀financial฀liabilities.฀ C3(c)฀
Discuss฀and฀apply฀the฀reclassification฀of฀financial฀assets.฀ C3(d)฀
Account฀for฀derivative฀financial฀instruments,฀and฀simple฀embedded฀derivatives.฀ C3(e)฀
Outline฀and฀apply฀the฀qualifying฀criteria฀for฀hedge฀accounting฀and฀account฀for฀ C3(f)฀
fair฀value฀hedges฀and฀cash฀flow฀hedges฀including฀hedge฀effectiveness.฀
Discuss฀and฀apply฀the฀general฀approach฀to฀impairment฀of฀financial฀instruments฀ C3(g)฀
including฀the฀basis฀for฀estimating฀expected฀credit฀losses.฀
Discuss฀the฀implications฀of฀a฀significant฀increase฀in฀credit฀risk.฀ C3(h)฀
Discuss฀and฀apply฀the฀treatment฀of฀purchased฀or฀originated฀credit฀impaired฀ C3(i)฀
financial฀assets.฀
Exam฀context฀
Financial฀instruments฀is฀a฀very฀important฀topic฀for฀Strategic฀Business฀Reporting฀(SBR),฀and฀is฀likely฀to฀
be฀examined฀often฀and฀in฀depth.฀It฀is฀also฀one฀of฀the฀more฀challenging฀areas฀of฀the฀syllabus,฀so฀it฀is฀
an฀area฀to฀which฀you฀need฀to฀dedicate฀a฀fair฀amount฀of฀time.฀
฀ 147฀

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฀฀
฀
Financial฀assets Financial฀liabilities
4.฀ Derecognition฀฀
(IFRS฀9)฀
3.฀ Recognition฀฀ 9.฀ Disclosures฀฀

2.฀ Classification฀฀
(IFRS฀9)฀ (IFRS฀7)฀
(IAS฀32)฀
5.฀ Classification฀and฀
Financial฀instruments฀ measurement฀฀
1.฀ Standards฀ (IFRS฀9)฀
Initial฀ Subsequent฀
measurement฀ measurement฀
8.฀ Hedging฀
(IFRS฀9)฀฀
Financial฀
Financial฀assets฀
liabilities฀
7.฀ Impairment฀of฀
financial฀assets฀฀
(IFRS฀9)฀
6.฀ Embedded฀derivatives฀
(IFRS฀9)฀
148฀

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7:฀Financial฀instruments฀
1฀ Standards฀
The฀dynamic฀nature฀of฀international฀financial฀markets฀has฀resulted฀in฀the฀widespread฀use฀of฀a฀variety฀
of฀ financial฀ instruments.฀ Prior฀ to฀ the฀ issue฀ of฀ IAS฀ 32฀ and฀ IAS฀ 39฀ (the฀ forerunner฀ of฀ IFRS฀ 9),฀ many฀
financial฀instruments฀were฀'off฀balance฀sheet',฀being฀neither฀recognised฀nor฀disclosed฀in฀the฀financial฀
statements฀while฀still฀exposing฀the฀shareholders฀to฀significant฀risks.฀
The฀IASB฀has฀developed฀the฀following฀standards฀in฀relation฀to฀financial฀instruments:฀
Accounting฀for
financial
instruments
IAS฀32 IFRS฀9 IFRS฀7

Financial฀Instruments:฀ Financial฀Instruments Financial฀Instruments:฀
Presentation (first฀issued฀2009) Disclosures
(first฀issued฀2005) (first฀issued฀2005)฀
฀
฀
2฀ Classification฀(IAS฀32)฀
2.1฀ Definitions฀
In฀ order฀ to฀ decide฀ whether฀ a฀ transaction฀ is฀ a฀ financial฀ instrument฀ (and฀ how฀ to฀ classify฀ it฀ if฀ it฀ is฀ a฀
financial฀instrument),฀it฀is฀important฀to฀have฀a฀good฀understanding฀of฀the฀instruments฀as฀defined฀by฀
IAS฀32:฀
Financial
instruments
Financial฀assets Financial฀liabilities Equity฀instruments
Compound฀instruments
฀
฀
฀ ฀
฀ 149฀

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฀฀
(1)฀ Financial฀instrument:฀any฀contract฀that฀gives฀rise฀to฀both฀a฀financial฀asset฀of฀one฀entity฀and฀
a฀financial฀liability฀or฀equity฀instrument฀of฀another฀entity฀(IAS฀32:฀para.฀11).฀
Key฀terms฀
(2)฀ Financial฀asset฀(IAS฀32:฀para.฀11)฀
Any฀asset฀that฀is:฀
฀ (a)฀ Cash;฀
฀ (b)฀ An฀equity฀instrument฀of฀another฀entity;฀
฀ (c)฀ A฀contractual฀right:฀
฀ (i)฀ To฀receive฀cash฀or฀another฀financial฀asset฀from฀another฀entity;฀or฀
฀ (ii)฀ To฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀
conditions฀that฀are฀potentially฀favourable฀to฀the฀entity;฀or฀
฀ (d)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀the฀entity's฀own฀equity฀instruments.฀
Examples:฀ Although฀technically฀financial฀instruments,
IFRS฀9฀does฀not฀change฀the฀treatment฀of฀
฀ ฀ Trade฀receivables฀ basic฀instruments฀such฀as฀trade฀
฀ ฀ Options฀ receivables
฀ ฀ Shares฀(as฀an฀investment)฀
(3)฀ Financial฀liability฀(IAS฀32:฀para.฀11)฀฀
฀ Any฀liability฀that฀is:฀
฀ (a)฀ A฀contractual฀obligation:฀
฀ (i)฀ To฀deliver฀cash฀or฀another฀financial฀asset฀to฀another฀entity;฀or฀
฀ (ii)฀ To฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀
conditions฀that฀are฀potentially฀unfavourable฀to฀the฀entity;฀or฀
฀ (b)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀an฀entity's฀own฀equity฀instruments.฀
Examples:฀
฀ ฀ Trade฀payables฀
฀ ฀ Debenture฀loans฀(payable)฀
฀ ฀ Mandatorily฀redeemable฀preference฀shares฀
฀ ฀ Forward฀contracts฀standing฀at฀a฀loss฀
(4)฀ Equity฀instrument:฀any฀contract฀that฀evidences฀a฀residual฀interest฀in฀the฀assets฀of฀an฀entity฀
after฀deducting฀all฀of฀its฀liabilities฀(IAS฀32:฀para.฀11).฀
Examples:฀
฀ ฀ An฀entity's฀own฀ordinary฀shares฀
฀ ฀ Warrants฀
฀ ฀ Non-cumulative฀irredeemable฀preference฀shares฀
(5)฀ Derivative.฀A฀derivative฀has฀three฀characteristics฀(IFRS฀9:฀Appendix฀A):฀
฀ (a)฀ Its฀value฀changes฀in฀response฀to฀an฀underlying฀variable฀(eg฀share฀price,฀commodity฀
price,฀foreign฀exchange฀rate฀or฀interest฀rate);฀
฀ (b)฀ It฀requires฀no฀initial฀net฀investment฀or฀an฀initial฀net฀investment฀that฀is฀smaller฀than฀would฀
be฀required฀for฀other฀types฀of฀contracts฀that฀would฀be฀expected฀to฀have฀a฀similar฀
response฀to฀changes฀in฀market฀factors;฀
฀ (c)฀ It฀is฀settled฀at฀a฀future฀date.฀
Examples:฀
฀ ฀ Foreign฀currency฀forward฀contracts฀
฀ ฀ Interest฀rate฀swaps฀
฀ ฀ Options฀
150฀

lOMoARcPSD|6256454
Chapter฀7฀Section฀1฀of฀the฀Supplementary฀Reading฀contains฀further฀details฀on฀these฀definitions.฀This฀
Classification฀as฀liability฀vs฀equity฀
IAS฀32฀clarifies฀that฀an฀instrument฀is฀only฀an฀equity฀instrument฀if฀neither฀(a)฀nor฀(b)฀in฀the฀definition฀of฀
a฀financial฀liability฀are฀met.฀(IAS฀32:฀para.฀16)฀
The฀critical฀feature฀of฀a฀financial฀liability฀is฀the฀contractual฀obligation฀to฀deliver฀cash฀or฀another฀
financial฀asset.฀
ED/2015/3:฀ Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ has฀ been฀ widely฀ criticised฀ for฀ not฀
addressing฀ the฀ distinction฀ between฀ debt฀ and฀ equity,฀ which฀ is฀ considered฀ a฀ significant฀ issue฀ in฀
financial฀ reporting.฀ The฀ IASB฀ is฀ undertaking฀ a฀ separate฀ research฀ project฀ Financial฀ Instruments฀ with฀
Characteristics฀of฀Equity฀to฀consider฀the฀matter฀further.฀
฀
Illustration฀1฀(revision)฀
Many฀entities฀issue฀preference฀shares฀which฀must฀be฀redeemed฀by฀the฀issuer฀for฀a฀fixed฀(or฀
determinable)฀amount฀at฀a฀fixed฀(or฀determinable)฀future฀date.฀
In฀such฀cases,฀the฀issuer฀has฀a฀contractual฀obligation฀to฀deliver฀cash.฀Therefore,฀the฀instrument฀is฀a฀
financial฀liability฀and฀should฀be฀classified฀as฀a฀liability฀in฀the฀statement฀of฀financial฀position.฀
2.2฀Compound฀instruments฀
Where฀ a฀ financial฀ instrument฀ contains฀ some฀ characteristics฀ of฀ equity฀ and฀ some฀ of฀ financial฀ liability฀
then฀its฀separate฀components฀need฀to฀be฀classified฀separately฀(IAS฀32:฀para.฀28).฀
A฀common฀example฀is฀convertible฀debt฀(convertible฀loan฀notes).฀
Method฀for฀separating฀the฀components฀(IAS฀32:฀para.฀32):฀
(1)฀ Determine฀ the฀ carrying฀ amount฀ of฀ the฀ liability฀ component฀ (by฀ measuring฀ the฀ fair฀ value฀ of฀ a฀
similar฀liability฀that฀does฀not฀have฀an฀associated฀equity฀component);฀
(2)฀ Assign฀the฀residual฀amount฀to฀the฀equity฀component.฀
Illustration฀2฀(revision)฀
Karaiskos฀SA฀issues฀1,000฀convertible฀bonds฀on฀1฀January฀20X1฀at฀par.฀฀Each฀bond฀is฀redeemable฀
in฀three฀years'฀time฀at฀its฀par฀value฀of฀$2,000฀per฀bond.฀Alternatively,฀each฀bond฀can฀be฀converted฀
at฀the฀maturity฀date฀into฀125฀$1฀shares.฀
The฀bonds฀pay฀interest฀annually฀in฀arrears฀at฀an฀interest฀rate฀(based฀on฀nominal฀value)฀of฀6%.฀฀
The฀prevailing฀market฀interest฀rate฀for฀3-year฀bonds฀that฀have฀no฀right฀of฀conversion฀is฀9%.฀
Required฀
Show฀the฀presentation฀of฀the฀compound฀instrument฀in฀the฀financial฀statements฀at฀inception.฀
3-year฀discount฀factors:฀ ฀ Simple฀ ฀฀฀฀Cumulative฀
฀ 6%฀ 0.840฀ 2.673฀
฀ 9%฀ 0.772฀ 2.531฀
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฀฀
Solution฀
The฀convertible฀bonds฀are฀compound฀financial฀instruments฀and฀must฀be฀split฀into฀two฀components:฀
(a)฀ A฀financial฀liability฀(measured฀first),฀representing฀the฀contractual฀obligation฀to฀make฀a฀cash฀
payment฀at฀a฀future฀date;฀
(b)฀ An฀equity฀component฀(measured฀as฀a฀residual),฀representing฀what฀has฀been฀received฀by฀the฀
company฀for฀the฀option฀to฀convert฀the฀instrument฀into฀shares฀at฀a฀future฀date.฀This฀is฀sometimes฀
called฀a฀'warrant'.฀
Presentation฀
Non-current฀liabilities฀ $฀฀฀฀฀฀
Financial฀liability฀component฀of฀convertible฀bond฀(Working) 1,847,720
฀
Equity฀
Equity฀component฀of฀convertible฀bond฀(2,000,000฀– (Working)฀1,847,720)
฀
152,280 ฀
Working฀–฀value฀of฀liability฀component฀
฀ ฀ Market฀rate฀(9%)฀for฀ ฀$฀฀฀฀฀฀
equivalent฀non-convertible฀
Present฀value฀of฀principal฀payable฀at฀end฀of฀3฀years bonds฀used฀for฀discounting฀
1,544,000
(1,000฀×฀$2,000฀=฀$2m฀×฀0.772)฀ in฀both฀cases฀
303,720
Present฀value฀of฀interest฀annuity฀payable฀annually฀in฀arrears฀
for฀3฀years฀[(6%฀×฀$2m)฀×฀2.531]฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀1,847,720
฀
2.3฀Treasury฀shares฀
If฀ an฀ entity฀ reacquires฀ its฀ own฀ equity฀ instruments฀ ('treasury฀ shares'),฀ the฀ amount฀ paid฀ is฀
presented฀ as฀ a฀ deduction฀ from฀ equity฀ (IAS฀ 32:฀ para.฀ 33)฀ rather฀ than฀ as฀ an฀ asset฀ (as฀ an฀
investment฀by฀the฀entity฀in฀itself,฀by฀acquiring฀its฀own฀shares,฀cannot฀be฀shown฀as฀an฀asset).฀
No฀gain฀or฀loss฀is฀recognised฀in฀profit฀or฀loss฀on฀the฀purchase,฀sale,฀issue฀or฀cancellation฀of฀an฀entity's฀
own฀equity฀instruments฀(IAS฀32:฀para.฀33).฀Any฀premium฀or฀discount฀is฀recognised฀in฀reserves.฀
Illustration฀3฀
An฀entity฀acquired฀10,000฀of฀its฀own฀$1฀shares,฀which฀had฀previously฀been฀issued฀at฀$1.50฀each,฀
for฀$1.80฀each.฀The฀entity฀is฀undecided฀as฀to฀whether฀to฀cancel฀the฀shares฀or฀reissue฀them฀at฀a฀later฀
date.฀
Analysis฀
These฀are฀treasury฀shares฀and฀are฀presented฀as฀a฀deduction฀from฀equity:฀
Equity฀ $฀฀฀฀฀
Share฀capital฀ X฀฀฀฀฀
Share฀premium฀ X฀฀฀฀฀
Treasury฀shares฀(10,000฀×฀$1.80)฀ (18,000)฀
If฀the฀shares฀are฀subsequently฀cancelled,฀the฀$1.50฀will฀be฀debited฀to฀share฀capital฀($1)฀and฀share฀
premium฀($0.50),฀and฀the฀excess฀($0.30)฀recognised฀in฀retained฀earnings฀rather฀than฀in฀profit฀or฀
loss,฀as฀it฀is฀a฀transaction฀with฀the฀owners฀of฀the฀business฀in฀their฀capacity฀as฀owners.฀
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3฀ Recognition฀(IFRS฀9)฀
Financial฀ assets฀ and฀ liabilities฀ are฀ required฀ to฀ be฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀ position฀
when฀the฀entity฀becomes฀a฀party฀ to฀ the฀ contractual฀ provisions฀ of฀ the฀ instrument฀(IFRS฀9:฀
para.฀3.1.1).฀
Illustration฀4฀
Derivatives฀(eg฀a฀forward฀contract)฀are฀recognised฀in฀the฀financial฀statements฀at฀inception฀even฀
though฀there฀may฀have฀been฀no฀cash฀flow,฀and฀disclosures฀about฀them฀are฀made฀in฀accordance฀with฀
IFRS฀7.฀
The฀recognition฀criteria฀for฀financial฀instruments฀differ฀from฀those฀in฀the฀Conceptual฀Framework฀which฀
requires฀items฀to฀be฀recognised฀when฀there฀is฀a฀probable฀inflow฀or฀outflow฀of฀resources฀and฀the฀item฀
has฀a฀cost฀or฀value฀that฀can฀be฀measured฀reliably฀(Conceptual฀Framework:฀para.฀4.38).฀
Financial฀contracts฀vs฀executory฀contracts฀
IFRS฀ 9฀ applies฀ to฀ those฀ contracts฀ to฀ buy฀ or฀ sell฀ a฀ non-financial฀ item฀ that฀ can฀ be฀ settled฀ net฀ in฀
cash฀or฀another฀financial฀instrument,฀or฀by฀exchanging฀financial฀instruments฀as฀if฀the฀contracts฀were฀
financial฀instruments฀(IFRS฀9:฀para.฀2.4).฀These฀are฀considered฀financial฀contracts.฀
However,฀ contracts฀ that฀ were฀ entered฀ into฀ (and฀ continue฀ to฀ be฀ held)฀ for฀ the฀ entity's฀ expected฀
purchase,฀ sale฀ or฀ usage฀ requirements฀ of฀ non-financial฀ items฀ are฀ outside฀ the฀ scope฀ of฀
IFRS฀9฀(IFRS฀9:฀para.฀2.4).฀
These฀are฀ executory฀ contracts.฀Executory฀contracts฀are฀contracts฀under฀which฀neither฀party฀has฀
performed฀ any฀ of฀ its฀ obligations฀ (or฀ both฀ parties฀ have฀ partially฀ performed฀ their฀ obligations฀ to฀ an฀
equal฀extent)฀(IAS฀37:฀para.฀3).฀For฀example,฀an฀unfulfilled฀order฀for฀the฀purchase฀of฀goods,฀where฀
at฀the฀end฀of฀the฀reporting฀period,฀the฀goods฀have฀neither฀been฀delivered฀nor฀paid฀for.฀
Illustration฀5฀
A฀forward฀contract฀to฀purchase฀cocoa฀beans฀for฀use฀in฀making฀chocolate฀is฀an฀executory฀contract฀
which฀is฀outside฀the฀scope฀of฀IFRS฀9.฀
The฀purchase฀is฀not฀accounted฀for฀until฀the฀cocoa฀beans฀are฀actually฀delivered.฀
4฀ Derecognition฀(IFRS฀9)฀
Derecognition฀ is฀ the฀ removal฀ of฀ a฀ previously฀ recognised฀ financial฀ instrument฀ from฀ an฀ entity's฀
statement฀of฀financial฀position.฀฀Derecognition฀happens:฀
Financial฀assets:฀ –฀ When฀ the฀ contractual฀ rights฀ to฀ the฀ cash฀ flows฀ expire฀ (eg฀ because฀ a฀
customer฀ has฀ paid฀ their฀ debt฀ or฀ an฀ option฀ has฀ expired฀ worthless)฀
(IFRS฀9:฀para.฀3.2.3(a));฀or฀
฀ –฀ The฀ financial฀ asset฀ is฀ transferred฀ (eg฀ sold),฀ based฀ on฀ whether฀ the฀
entity฀ has฀ transferred฀ substantially฀ all฀ the฀ risks฀ and฀ rewards฀ of฀
ownership฀of฀the฀financial฀asset฀(IFRS฀9:฀para.฀3.2.3(b)).฀
Financial฀liabilities:฀ –฀ When฀ it฀ is฀ extinguished,฀ ie฀ when฀ the฀ obligation฀ is฀ discharged฀ (eg฀
paid฀off),฀cancelled฀or฀expires฀(IFRS฀9:฀para.฀3.3.1).฀
Where฀a฀part฀of฀a฀financial฀instrument฀(or฀group฀of฀similar฀financial฀instruments)฀meets฀the฀criteria฀
above,฀that฀part฀is฀derecognised฀(IFRS฀9:฀para.฀3.2.2(a)).฀
For฀ example,฀ if฀ an฀ entity฀ holds฀ a฀ bond฀ it฀ has฀ the฀ right฀ to฀ two฀ separate฀ sets฀ of฀ cash฀ inflows:฀ those฀
relating฀to฀the฀principal฀and฀those฀relating฀to฀the฀interest.฀It฀could฀sell฀the฀right฀to฀receive฀the฀interest฀
to฀another฀party฀while฀retaining฀the฀right฀to฀receive฀the฀principal.฀
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฀฀
Chapter฀7฀Section฀2฀of฀the฀Supplementary฀Reading฀contains฀further฀details฀on฀derecognition.฀This฀is฀
Activity฀1:฀Derecognition฀ ฀
Required฀
Discuss฀whether฀the฀following฀financial฀instruments฀would฀be฀derecognised.฀
(a)฀ AB฀ sells฀ an฀ investment฀ in฀ shares,฀ but฀ retains฀ a฀ call฀ option฀ to฀ repurchase฀ those฀ shares฀ at฀ any฀
time฀at฀a฀price฀equal฀to฀their฀current฀market฀value฀at฀the฀date฀of฀repurchase.฀
(b)฀ EF฀enters฀into฀a฀stocklending฀agreement฀where฀an฀investment฀is฀lent฀to฀a฀third฀party฀for฀a฀fixed฀
period฀of฀time฀for฀a฀fee.฀At฀the฀end฀of฀the฀period฀of฀time฀the฀investment฀(or฀an฀identical฀one)฀is฀
returned฀to฀EF.฀
5฀ Classification฀and฀measurement฀(IFRS฀9)฀
5.1฀Definitions฀
The฀ following฀ definitions฀ are฀ relevant฀ in฀ understanding฀ this฀ section,฀ and฀ you฀ should฀ refer฀ back฀ to฀
them฀when฀studying฀this฀material.฀฀
Amortised฀cost:฀the฀amount฀at฀which฀the฀financial฀asset฀or฀financial฀liability฀is฀measured฀at฀initial฀
recognition฀minus฀the฀principal฀repayments,฀plus฀or฀minus฀the฀cumulative฀amortisation฀using฀the฀
Key฀terms฀
effective฀interest฀method฀of฀any฀difference฀between฀that฀initial฀amount฀and฀the฀maturity฀amount฀and,฀
for฀financial฀assets,฀adjusted฀for฀any฀loss฀allowance.฀
Effective฀interest฀rate:฀the฀rate฀that฀exactly฀discounts฀estimated฀future฀cash฀payments฀or฀receipts฀
through฀the฀expected฀life฀of฀the฀financial฀asset฀or฀financial฀liability฀to฀the฀gross฀carrying฀amount฀of฀a฀
financial฀asset฀or฀to฀the฀amortised฀cost฀of฀a฀financial฀liability.฀
Held฀for฀trading:฀a฀financial฀asset฀or฀financial฀liability฀that:฀
(a)฀ Is฀acquired฀or฀incurred฀principally฀for฀the฀purpose฀of฀selling฀or฀repurchasing฀it฀in฀the฀near฀term;฀
(b)฀ On฀initial฀recognition฀is฀part฀of฀a฀portfolio฀of฀identified฀financial฀instruments฀that฀are฀managed฀
together฀and฀for฀which฀there฀is฀evidence฀of฀a฀recent฀actual฀pattern฀of฀short-term฀profit-taking;฀or฀
(c)฀ Is฀a฀derivative฀(except฀for฀a฀derivative฀that฀is฀a฀financial฀guarantee฀contract฀or฀a฀designated฀and฀
effective฀hedging฀instrument).฀
Financial฀guarantee฀contract:฀a฀contract฀that฀requires฀the฀issuer฀to฀make฀specified฀payments฀to฀
reimburse฀the฀holder฀for฀a฀loss฀it฀incurs฀because฀a฀specified฀debtor฀fails฀to฀make฀payment฀when฀due฀
in฀accordance฀with฀the฀original฀or฀modified฀terms฀of฀the฀debt฀instrument.฀฀
฀ ฀
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5.2฀Financial฀assets฀
฀ Initial฀measurement Subsequent฀
(IFRS฀9:฀para.฀5.1.1)฀ measurement฀
(IFRS฀9:฀paras.฀4.1.2–4.1.5,฀
5.7.5)฀
1฀ Investments฀in฀debt฀ ฀ ฀
instruments฀ ฀ ฀
Business฀model฀approach฀(Note฀1):฀ Fair฀value฀+฀transaction฀ Amortised฀cost฀
(a)฀Held฀to฀collect฀contractual฀cash฀ costs฀
flows;฀and฀cash฀flows฀are฀solely฀
principal฀and฀interest฀
฀ (b)฀Held฀to฀collect฀contractual฀cash฀ Fair฀value฀+฀transaction฀ Fair฀value฀through฀other฀
flows฀and฀to฀sell;฀and฀cash฀ costs฀ comprehensive฀income฀(with฀
flows฀are฀solely฀principal฀and฀ reclassification฀to฀profit฀or฀loss฀
interest฀ (P/L)฀on฀derecognition)฀
NB:฀interest฀revenue฀calculated฀
on฀amortised฀cost฀basis฀
recognised฀in฀P/L฀
2฀ Investments฀in฀equity฀ Fair฀value฀+฀transaction฀ Fair฀value฀through฀other฀
instruments฀not฀'held฀for฀ costs฀ comprehensive฀income฀(no฀
trading'฀ reclassification฀to฀P/L฀on฀
(optional฀irrevocable฀election฀on฀ derecognition)฀
initial฀recognition)฀ NB:฀dividend฀income฀
3฀ All฀other฀financial฀assets฀ Fair฀value฀(transaction฀ Fair฀value฀through฀profit฀or฀loss
(and฀any฀financial฀asset฀if฀this฀would฀ costs฀expensed฀in฀P/L)฀
eliminate฀or฀significantly฀reduce฀an฀
'accounting฀mismatch'฀(Note฀2))฀
Notes฀
1฀ The฀ business฀ model฀ approach฀ relates฀ to฀ groups฀ of฀ debt฀ instrument฀ assets฀ and฀ the฀
accounting฀treatment฀depends฀on฀the฀entity's฀intention฀for฀that฀group฀of฀assets.฀
(a)฀ If฀ the฀ intention฀ is฀ to฀ hold฀ the฀ group฀ of฀ debt฀ instruments฀ until฀ they฀ are฀ redeemed,฀ ie฀
receive฀ ('collect')฀ the฀ interest฀ and฀ capital฀ ('principal')฀ cash฀ flows,฀ then฀ changes฀ in฀ fair฀
value฀ are฀ not฀ relevant,฀ and฀ the฀ difference฀ between฀ initial฀ and฀ maturity฀ value฀ is฀
recognised฀using฀the฀amortised฀cost฀method.฀
(b)฀ If฀ the฀ intention฀ is฀ principally฀ to฀ hold฀ the฀ group฀ of฀ debt฀ instruments฀ until฀ they฀ are฀
redeemed,฀ but฀ they฀ may฀ be฀ sold฀ if฀ certain฀ criteria฀ are฀ met฀ (eg฀ to฀ meet฀ regulatory฀
solvency฀requirements),฀then฀their฀fair฀value฀is฀now฀relevant฀as฀they฀may฀be฀sold฀and฀so฀
they฀ are฀ measured฀ at฀ fair฀ value.฀ Changes฀ in฀ fair฀ value฀ are฀ recognised฀ in฀ other฀
comprehensive฀income,฀but฀interest฀is฀still฀recognised฀in฀profit฀or฀loss฀on฀the฀same฀basis฀
as฀if฀the฀intention฀was฀not฀to฀sell฀if฀certain฀criteria฀are฀met.฀
2฀ An฀'accounting฀mismatch'฀is฀a฀measurement฀or฀recognition฀inconsistency฀that฀would฀otherwise฀
arise฀ from฀ measuring฀ assets฀ or฀ liabilities฀ or฀ recognising฀ gains฀ or฀ losses฀ on฀ them฀ on฀ different฀
bases.฀Any฀financial฀asset฀can฀be฀designated฀at฀fair฀value฀through฀profit฀or฀loss฀if฀this฀would฀
eliminate฀the฀mismatch.฀
฀
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฀฀
Illustration฀6฀
Fair฀value฀of฀debt฀on฀initial฀recognition฀
A฀$5,000฀3-year฀interest-free฀loan฀is฀made฀to฀a฀director.฀If฀market฀interest฀charged฀on฀a฀similar฀loan฀
1
would฀be,฀say,฀4%,฀the฀fair฀value฀of฀the฀loan฀at฀inception฀is฀$5,000฀×฀ =฀$4,445฀and฀the฀loan฀
3
1.04
is฀recorded฀at฀that฀value.฀
฀
Illustration฀7฀
Amortised฀cost฀revision฀
A฀company฀purchases฀loan฀notes฀(nominal฀value฀$100,000)฀for฀$96,394฀on฀1฀January฀20X3,฀
incurring฀transaction฀costs฀of฀$350.฀The฀loan฀notes฀carry฀interest฀paid฀annually฀on฀31฀December฀of฀
4%฀of฀nominal฀value฀($4,000฀pa).฀The฀loan฀notes฀will฀be฀redeemed฀at฀par฀on฀31฀December฀20X5.฀
The฀effective฀interest฀rate฀is฀5.2%.฀
Required฀
Show฀the฀amortised฀cost฀of฀the฀loan฀notes฀from฀1฀January฀20X3฀to฀31฀December฀20X5฀(before฀
redemption).฀
Solution฀
฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀
1฀January฀b/d฀(96,394฀+฀350)฀ 96,744฀ 97,775฀ 98,859฀
Effective฀interest฀at฀5.2%฀of฀b/d฀(interest฀in฀P/L)฀ 5,031฀ 5,084฀ 5,141฀
'Coupon'฀interest฀received฀ ฀฀(4,000)฀ ฀฀(4,000)฀ ฀฀฀฀(4,000)฀
31฀December฀c/d฀ ฀97,775฀ ฀98,859฀ ฀100,000฀
Activity฀2:฀Measurement฀of฀financial฀assets฀ ฀ ฀
Wharton,฀ a฀ public฀ limited฀ company,฀ has฀ requested฀ your฀ advice฀ on฀ accounting฀ for฀ the฀ following฀
financial฀instrument฀transactions:฀
(a)฀ On฀1฀January฀20X1,฀Wharton฀made฀a฀$10,000฀interest-free฀loan฀to฀an฀employee฀to฀be฀paid฀
back฀on฀31฀December฀20X2.฀฀The฀market฀rate฀on฀an฀equivalent฀loan฀would฀have฀been฀5%.฀
(b)฀ Wharton฀ anticipates฀ capital฀ expenditure฀ in฀ a฀ few฀ years฀ and฀ so฀ invests฀ its฀ excess฀ cash฀ into฀
short-฀ and฀ long-term฀ financial฀ assets฀ so฀ it฀ can฀ fund฀ the฀ expenditure฀ when฀ the฀ need฀ arises.฀฀
Wharton฀will฀hold฀these฀assets฀to฀collect฀the฀contractual฀cash฀flows,฀and,฀when฀an฀opportunity฀
arises,฀the฀entity฀will฀sell฀financial฀assets฀to฀re-invest฀the฀cash฀in฀financial฀assets฀with฀a฀higher฀
return.฀ ฀ The฀ managers฀ responsible฀ for฀ this฀ portfolio฀ are฀ remunerated฀ on฀ the฀ overall฀ return฀
generated฀by฀the฀portfolio.฀฀฀
As฀part฀of฀this฀policy,฀Wharton฀purchased฀$50,000฀par฀value฀of฀loan฀notes฀at฀a฀10%฀discount฀
on฀their฀issue฀on฀1฀January฀20X1.฀The฀redemption฀date฀of฀these฀loan฀notes฀is฀31฀December฀
20X4.฀An฀interest฀coupon฀of฀3%฀of฀par฀value฀is฀paid฀annually฀on฀31฀December.฀Transaction฀
costs฀ of฀ $450฀ were฀ incurred฀ on฀ the฀ purchase.฀ The฀ annual฀ internal฀ rate฀ of฀ return฀ on฀ the฀ loan฀
notes฀is฀5.6%.฀
At฀31฀December฀20X1,฀due฀to฀a฀decrease฀in฀market฀interest฀rates,฀the฀fair฀value฀of฀these฀loan฀
notes฀increased฀to฀$51,000.฀
Required฀
Discuss,฀ with฀ suitable฀ calculations,฀ how฀ the฀ above฀ financial฀ instruments฀ should฀ be฀ accounted฀ for฀ in฀
the฀financial฀statements฀of฀Wharton฀for฀the฀year฀ended฀31฀December฀20X1.฀
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5.3฀Reclassification฀of฀financial฀assets฀
Financial฀ assets฀ are฀ reclassified฀ under฀ IFRS฀ 9฀ when,฀ and฀ only฀ when,฀ an฀ entity฀ changes฀
its฀business฀model฀for฀managing฀financial฀assets฀(IFRS฀9:฀para.฀4.4.1).฀The฀reclassification฀should฀
be฀applied฀prospectively฀from฀the฀reclassification฀date฀(IFRS฀9:฀para.฀5.6.1).฀
These฀ rules฀ only฀ apply฀ to฀ investments฀ in฀ debt฀ instruments฀ as฀ investments฀ in฀ equity฀
instruments฀ are฀ always฀ held฀ at฀ fair฀ value฀ and฀ any฀ election฀ to฀ measure฀ them฀ at฀ fair฀ value฀ through฀
other฀comprehensive฀income฀is฀an฀irrevocable฀one.฀
5.4฀ Treatment฀of฀gain฀or฀loss฀on฀derecognition฀
On฀derecognition฀of฀a฀financial฀asset฀in฀its฀entirety,฀the฀difference฀between:฀
(a)฀ The฀carrying฀amount฀(measured฀at฀the฀date฀of฀derecognition);฀and฀
(b)฀ The฀consideration฀received฀
is฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀para.฀3.2.12).฀
Applying฀this฀rule,฀in฀the฀case฀of฀investments฀in฀equity฀instruments฀not฀held฀for฀trading฀where฀
the฀irrevocable฀election฀has฀been฀made฀to฀report฀changes฀in฀fair฀value฀in฀other฀comprehensive฀
income,฀ all฀ changes฀ in฀ fair฀ value฀ up฀ to฀ the฀ point฀ of฀ derecognition฀ are฀ reported฀ in฀ other฀
Therefore,฀a฀gain฀or฀loss฀in฀profit฀or฀loss฀will฀only฀arise฀if฀the฀investments฀in฀equity฀instruments฀are฀
not฀sold฀at฀their฀fair฀value฀and฀for฀any฀transaction฀costs฀on฀derecognition.฀Gains฀or฀losses฀
previously฀ reported฀ in฀ other฀ comprehensive฀ income฀ are฀ not฀ reclassified฀ to฀ profit฀ or฀ loss฀ on฀
derecognition.฀
For฀ investments฀ in฀ debt฀ held฀ at฀ fair฀ value฀ through฀ other฀ comprehensive฀ income,฀ on฀
derecognition,฀ the฀ cumulative฀ revaluation฀ gain฀ or฀ loss฀ previously฀ recognised฀ in฀ other฀
comprehensive฀income฀is฀reclassified฀to฀profit฀or฀loss฀(IFRS฀9:฀para.฀5.7.10).฀
5.5฀ Financial฀liabilities฀
฀ ฀ Initial฀measurement฀ Subsequent฀measurement
(IFRS฀9:฀para.฀5.1.1)฀ (IFRS฀9:฀para.฀4.2.1)฀
1฀ Most฀financial฀liabilities฀ Fair฀value฀less฀ Amortised฀cost฀

(eg฀trade฀payables,฀loans,฀ transaction฀costs฀
preference฀shares฀classified฀as฀a฀
liability)฀
2฀ Financial฀liabilities฀at฀fair฀ Fair฀value฀(transaction฀ Fair฀value฀through฀profit฀or฀฀

value฀through฀profit฀or฀loss฀ costs฀expensed฀in฀P/L)฀ loss*฀
(Note฀1)฀ ฀฀฀
–฀ 'Held฀for฀trading'฀(short-term฀
profit฀making)฀
–฀ Derivatives฀that฀are฀liabilities฀
–฀ Designated฀on฀initial฀
recognition฀at฀'fair฀value฀
through฀profit฀or฀loss'฀to฀
eliminate/significantly฀reduce฀
an฀'accounting฀mismatch'฀
(Note฀2)฀
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฀฀
฀ –฀ A฀group฀of฀financial฀liabilities฀ ฀ ฀
(or฀financial฀assets฀and฀
financial฀liabilities)฀managed฀
and฀performance฀evaluated฀on฀
a฀fair฀value฀basis฀in฀
accordance฀with฀a฀
documented฀risk฀management฀
or฀investment฀strategy฀
3฀ Financial฀liabilities฀arising฀ Consideration฀received฀ Measure฀financial฀liability฀on฀

when฀transfer฀of฀financial฀ same฀basis฀as฀transferred฀asset฀
asset฀does฀not฀qualify฀for฀ (amortised฀cost฀or฀fair฀value)฀
derecognition฀฀
4฀ Financial฀guarantee฀ Fair฀value฀less฀ Higher฀of:฀

contracts฀(Note฀3)฀and฀ transaction฀costs฀ –฀ Impairment฀loss฀allowance฀
commitments฀to฀provide฀a฀
–฀ Amount฀initially฀recognised฀
loan฀at฀a฀below-market฀
less฀amounts฀amortised฀to฀
interest฀rate฀(Note฀4)฀
P/L฀(IFRS฀15)฀
*Changes฀in฀fair฀value฀due฀to฀changes฀in฀the฀liability's฀credit฀risk฀are฀recognised฀separately฀in฀other฀
comprehensive฀income฀(unless฀doing฀so฀would฀create฀or฀enlarge฀an฀'accounting฀mismatch')฀(IFRS฀9:฀
para.฀5.7.7).฀
Notes฀
1฀ Most฀financial฀liabilities฀are฀measured฀at฀amortised฀cost.฀
However,฀some฀financial฀liabilities฀are฀measured฀at฀fair฀ value฀ through฀ profit฀ or฀ loss฀ if฀
fair฀value฀information฀is฀relevant฀to฀the฀user฀of฀the฀financial฀statements.฀This฀includes฀where฀a฀
company฀is฀'trading'฀in฀financial฀liabilities,฀ie฀taking฀on฀liabilities฀hoping฀to฀settle฀them฀for฀less฀
in฀ the฀ short฀ term฀ to฀ make฀ a฀ profit,฀ and฀ derivatives฀ standing฀ at฀ a฀ loss฀ which฀ are฀ financial฀
liabilities฀rather฀than฀financial฀assets.฀
2฀ As฀ with฀ financial฀ assets,฀ financial฀ liabilities฀ can฀ be฀ designated฀ at฀ fair฀ value฀ through฀ profit฀ or฀
loss฀ if฀ doing฀ so฀ would฀ eliminate฀ an฀ 'accounting฀ mismatch',฀ ie฀ a฀ measurement฀ or฀
recognition฀ inconsistency฀ that฀ would฀ otherwise฀ arise฀ from฀ measuring฀ assets฀ or฀ liabilities฀ or฀
recognising฀gains฀or฀losses฀on฀them฀on฀different฀bases.฀
3฀ Financial฀guarantee฀contracts฀are฀a฀form฀of฀financial฀insurance.฀The฀entity฀guarantees฀it฀
will฀make฀a฀payment฀to฀another฀party฀if฀a฀specified฀debtor฀does฀not฀pay฀that฀other฀party.฀On฀
initial฀ recognition฀ the฀ fair฀ value฀ of฀ the฀ 'premiums'฀ received฀ (less฀ any฀ transaction฀ costs)฀ are฀
recognised฀as฀a฀liability.฀This฀is฀then฀amortised฀as฀income฀to฀profit฀or฀loss฀over฀the฀period฀of฀
the฀ guarantee,฀ representing฀ the฀ revenue฀ earned฀ as฀ the฀ performance฀ obligation฀ (ie฀ providing฀
the฀guarantee)฀is฀satisfied,฀thereby฀reducing฀the฀liability฀to฀zero฀over฀the฀period฀of฀cover฀if฀no฀
compensation฀ payments฀ are฀ actually฀ made.฀ However,฀ if,฀ at฀ the฀ year฀ end,฀ the฀ expected฀
impairment฀loss฀that฀would฀be฀payable฀on฀the฀guarantee฀exceeds฀the฀remaining฀liability,฀the฀
liability฀is฀increased฀to฀this฀amount.฀
4฀ Commitments฀ to฀ provide฀ a฀ loan฀ at฀ below-market฀ interest฀ rate฀ arise฀ where฀ an฀
entity฀has฀committed฀itself฀to฀make฀a฀loan฀to฀another฀party฀at฀an฀interest฀rate฀which฀is฀lower฀
than฀the฀rate฀the฀entity฀itself฀would฀pay฀to฀borrow฀the฀money.฀These฀are฀accounted฀for฀in฀the฀
same฀ way฀ as฀ financial฀ guarantee฀ contracts.฀ The฀ impairment฀ loss฀ in฀ this฀ case฀ would฀ be฀ the฀
present฀value฀of฀the฀expected฀interest฀receipts฀from฀the฀other฀party฀less฀the฀expected฀(higher)฀
interest฀payments฀the฀entity฀would฀pay.฀
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Activity฀3:฀Measurement฀of฀financial฀liabilities฀ ฀
Johnson,฀ an฀ investment฀ property฀ company,฀ adopts฀ the฀ fair฀ value฀ model฀ to฀ measure฀ its฀ investment฀
properties.฀The฀fair฀value฀of฀the฀investment฀properties฀is฀highly฀dependent฀on฀interest฀rates.฀
The฀Finance฀Director฀of฀Johnson฀has฀requested฀your฀advice฀on฀accounting฀for฀the฀following฀financial฀
instrument฀transactions฀which฀took฀place฀in฀the฀year฀ended฀31฀December฀20X1:฀
(a)฀ On฀31฀December฀20X1,฀Johnson฀took฀out฀a฀$9,000,000฀bank฀loan฀specifically฀to฀finance฀the฀
purchase฀of฀some฀new฀investment฀properties.฀Fixed฀interest฀at฀the฀market฀rate฀of฀5%฀is฀charged฀
for฀the฀10-year฀term฀of฀the฀loan.฀Transaction฀costs฀of฀$150,000฀were฀incurred.฀฀฀
(b)฀ On฀ 1฀ November฀ 20X1฀ Johnson฀ took฀ out฀ a฀ speculative฀ forward฀ contract฀ to฀ buy฀ coffee฀ beans฀
for฀ delivery฀ on฀ 30฀ April฀ 20X2฀ at฀ an฀ agreed฀ price฀of฀ $6,000฀ intending฀ to฀ settle฀ net฀ in฀ cash.฀฀
Due฀to฀a฀surge฀in฀expected฀supply,฀a฀forward฀contract฀for฀delivery฀on฀30฀April฀20X2฀would฀
have฀cost฀$5,000฀on฀31฀December฀20X1.฀
Required฀
Discuss,฀ with฀ suitable฀ calculations,฀ how฀ the฀ above฀ financial฀ instruments฀ should฀ be฀ accounted฀ for฀ in฀
the฀financial฀statements฀of฀Johnson฀for฀the฀year฀ended฀31฀December฀20X1.฀฀฀
5.6฀Offsetting฀financial฀assets฀and฀financial฀liabilities฀(IAS฀32)฀
A฀ financial฀ asset฀ and฀ a฀ financial฀ liability฀ are฀ required฀ to฀ be฀ offset฀ (ie฀ presented฀ as฀ a฀ single฀ net฀
amount)฀when฀the฀entity:฀
(a)฀ Has฀a฀legally฀enforceable฀right฀to฀set-off฀the฀recognised฀amounts,฀and฀
(b)฀ Intends฀ either฀ to฀ settle฀ on฀ a฀ net฀ basis฀ or฀ to฀ realise฀ the฀ asset฀ and฀ settle฀ the฀ liability฀
simultaneously.฀
Otherwise,฀financial฀assets฀and฀financial฀liabilities฀are฀presented฀separately.฀
In฀ this฀ way,฀ the฀ amount฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀ position฀ reflects฀ an฀ entity's฀
expected฀ cash฀ flows฀ from฀ settling฀ two฀ or฀ more฀ separate฀ financial฀ instruments,฀ providing฀ useful฀
information฀ about฀ the฀ entity's฀ ability฀ to฀ generate฀ cash,฀ claims฀ against฀ the฀ entity฀ and฀ the฀ entity's฀
liquidity฀and฀solvency.฀
Disclosure฀ of฀ the฀ gross฀ and฀ net฀ amounts฀ offset฀ is฀ required฀ by฀ IFRS฀ 7฀ as฀ well฀ as฀ information฀
about฀right฀of฀set-off฀arrangements฀and฀similar฀agreements฀(eg฀collateral฀agreements).฀
Chapter฀ 7฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ contains฀ further฀ explanation฀ and฀ practice฀ on฀
classification฀ and฀ measurement฀ of฀ financial฀ assets฀ and฀ financial฀ liabilities.฀ This฀ is฀ available฀ in฀
6฀ Embedded฀derivatives฀(IFRS฀9)฀
Some฀ contracts฀ (that฀ may฀ or฀ may฀ not฀ be฀ financial฀ instruments฀ themselves)฀ may฀ have฀ derivatives฀
embedded฀in฀them.฀Ordinarily,฀derivatives฀not฀used฀for฀hedging฀are฀treated฀as฀'held฀for฀trading'฀and฀
measured฀at฀fair฀value฀through฀profit฀or฀loss.฀
With฀ limited฀ exceptions,฀ IFRS฀ 9฀ requires฀ embedded฀ derivatives฀ that฀ would฀ meet฀ the฀ definition฀ of฀ a฀
separate฀derivative฀instrument฀to฀be฀separated฀from฀the฀host฀contract฀(and฀therefore฀be฀measured฀
at฀fair฀value฀through฀profit฀or฀loss฀like฀other฀derivatives)฀(IFRS฀9:฀paras.฀4.3.3–4.3.5).฀
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฀฀
Illustration฀8฀
An฀entity฀may฀issue฀a฀bond฀which฀is฀redeemable฀in฀five฀years'฀time฀with฀part฀of฀the฀redemption฀price฀
being฀based฀on฀the฀increase฀in฀the฀FTSE฀100฀index.฀
Bond฀ ฀ Accounted฀for฀as฀normal฀
'Host'฀contract฀
(amortised฀cost)฀
฀ ฀ ฀
Embedded฀ Option฀on฀ ฀ Treat฀as฀derivative,฀ie฀remeasured฀

derivative฀ equities฀ to฀fair฀value฀with฀changes฀
฀
However,฀IFRS฀9฀does฀not฀requires฀embedded฀derivatives฀to฀be฀separated฀from฀the฀host฀contract฀if:฀
Exception฀ Reason฀
(a)฀ The฀economic฀characteristics฀and฀risks฀of฀ Eg฀an฀oil฀contract฀between฀two฀companies฀

the฀embedded฀derivative฀are฀closely฀ reporting฀in฀€,฀but฀priced฀in฀$.฀฀฀
related฀to฀those฀of฀the฀host฀contract;฀or฀ The฀'derivative'฀element฀($฀risk)฀is฀a฀normal฀
feature฀of฀the฀contract฀(as฀oil฀is฀priced฀in฀$)฀so฀
not฀really฀derivative฀
(b)฀ The฀hybrid฀(combined)฀instrument฀is฀ Both฀parts฀would฀be฀at฀fair฀value฀through฀profit฀

measured฀at฀fair฀value฀through฀profit฀ or฀loss฀anyway,฀so฀no฀need฀to฀split฀
or฀loss;฀or฀
(c)฀ The฀host฀contract฀is฀a฀financial฀asset฀ The฀measurement฀rules฀for฀financial฀assets฀

within฀the฀scope฀of฀IFRS฀9;฀or฀ require฀the฀whole฀instrument฀to฀be฀measured฀at฀
fair฀value฀through฀profit฀or฀loss฀anyway,฀so฀no฀
need฀to฀split฀
(d)฀ The฀embedded฀derivative฀significantly฀ If฀the฀derivative฀element฀changes฀the฀cash฀flows฀

modifies฀the฀cash฀flows฀of฀the฀contract. so฀much,฀then฀the฀whole฀instrument฀should฀be฀
measured฀at฀fair฀value฀through฀profit฀or฀loss฀
due฀to฀the฀risk฀involved฀(which฀is฀the฀
measurement฀category฀that฀would฀apply฀
without฀these฀rules,฀being฀derivative)฀
฀
(IFRS฀9:฀paras.฀4.3.3–4.3.5)฀
7฀ Impairment฀of฀financial฀assets฀(IFRS฀9)฀฀
7.1฀ Scope฀
IFRS฀9's฀impairment฀rules฀apply฀to฀(IFRS฀9:฀paras.฀5.5.1–5.5.2):฀
฀ Investments฀in฀debt฀instruments฀measured฀at฀amortised฀cost฀(business฀model:฀objective฀–฀to฀
collect฀contractual฀cash฀flows฀of฀principal฀and฀interest)฀
฀ Investments฀in฀debt฀instruments฀measured฀at฀fair฀value฀through฀other฀comprehensive฀income฀
(OCI)฀(business฀model:฀objective฀–฀to฀collect฀contractual฀cash฀flows฀of฀principal฀and฀interest฀
and฀to฀sell฀financial฀assets)฀
฀ Lease฀receivables฀within฀the฀scope฀of฀IFRS฀16฀Leases฀
฀ Contract฀assets฀within฀the฀scope฀of฀IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀
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฀ Financial฀guarantee฀contracts฀(see฀Section฀5.5)฀
฀ Commitments฀to฀provide฀loans฀at฀below-market฀interest฀rate฀(see฀Section฀5.5)฀
7.2฀ Definitions฀
The฀ following฀ definitions฀ are฀ important฀ in฀ understanding฀ this฀ section,฀ and฀ you฀ should฀ refer฀ back฀ to฀
them฀when฀studying฀this฀material.฀฀
Credit฀loss:฀the฀difference฀between฀all฀contractual฀cash฀flows฀that฀are฀due฀to฀an฀entity…and฀all฀the฀
cash฀flows฀that฀the฀entity฀expects฀to฀receive,฀discounted.฀฀
Key฀terms฀
Expected฀credit฀losses:฀the฀weighted฀average฀of฀credit฀losses฀with฀the฀respective฀risks฀of฀a฀default฀
occurring฀as฀the฀weights.฀
Lifetime฀expected฀credit฀losses:฀the฀expected฀credit฀losses฀that฀result฀from฀all฀possible฀default฀
events฀over฀the฀expected฀life฀of฀a฀financial฀instrument.฀฀
Past฀due:฀a฀financial฀asset฀is฀past฀due฀when฀a฀counterparty฀has฀failed฀to฀make฀a฀payment฀when฀
that฀payment฀was฀contractually฀due.฀
12-month฀expected฀credit฀losses:฀the฀portion฀of฀the฀lifetime฀expected฀credit฀losses฀that฀
represent฀the฀expected฀credit฀losses฀that฀result฀from฀default฀events฀on฀a฀financial฀instrument฀that฀are฀
possible฀within฀the฀12฀months฀after฀the฀reporting฀date.฀
7.3฀Approach฀
IFRS฀9's฀approach฀uses฀an฀'expected฀loss'฀model฀(IFRS฀9:฀para฀5.5.1).฀
This฀ means฀ that฀ the฀ financial฀ statements฀ should฀ reflect฀ the฀ general฀ pattern฀ of฀ deterioration฀ or฀
improvement฀in฀the฀credit฀quality฀of฀financial฀assets฀from฀the฀date฀of฀initial฀recognition,฀based฀
on฀changes฀in฀expectations฀(eg฀re฀performance฀of฀the฀borrower฀or฀external฀credit฀rating),฀recognising฀
an฀ allowance฀ even฀ before฀ a฀ credit฀ loss฀ (bad/doubtful฀ debt)฀ has฀ objectively฀ arisen.฀ This฀ is฀ a฀
forward-looking฀impairment฀model.฀
Credit฀losses฀should฀be฀recognised฀in฀three฀stages฀(IFRS฀9:฀para.฀5.5.3–5.5.11):฀
฀ Stage฀1฀ ฀ Stage฀2฀ ฀ Stage฀3฀
When?฀ Initial฀recognition฀ ฀ Credit฀risk฀ ฀ Objective฀

(and฀subsequently฀ increases฀ evidence฀of฀
if฀no฀significant฀ significantly฀ impairment฀exists฀
deterioration฀in฀ (rebuttable฀ at฀the฀reporting฀
credit฀risk)฀ presumption฀if฀ date฀
>฀30฀days฀past฀
due)฀
฀ ฀ ฀
Credit฀losses฀ 12-month฀ ฀ Lifetime฀expected฀ ฀ Lifetime฀expected฀
recognised฀ expected฀credit฀ credit฀losses฀ credit฀losses฀
losses฀
฀ ฀ ฀
Calculation฀ On฀gross฀carrying฀ ฀ On฀gross฀carrying฀ ฀ On฀carrying฀
of฀effective฀ amount฀ amount฀ amount฀net฀of฀
interest฀ allowance฀for฀
credit฀losses฀(see฀
below)฀after฀date฀
evidence฀exists฀
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7.4฀Presentation฀
Credit฀losses฀are฀treated฀as฀follows:฀
Type฀of฀asset฀ Treatment฀of฀credit฀loss฀
All฀investments฀in฀debt฀ ฀ Recognised฀in฀profit฀or฀loss฀
instruments฀except฀those฀ ฀ Credit฀ losses฀ held฀ in฀ a฀ separate฀ allowance฀
measured฀at฀fair฀value฀through฀other฀ account฀offset฀against฀the฀carrying฀amount฀of฀
comprehensive฀income฀ the฀asset:฀
฀ Financial฀asset฀ X฀
฀ Allowance฀for฀credit฀losses฀ (X)฀
฀ Carrying฀amount฀(net฀of฀allowance฀for฀credit฀losses)฀฀X฀฀
Investments฀in฀debt฀instruments฀ ฀ Portion฀of฀the฀fall฀in฀fair฀value฀relating฀to฀credit฀
measured฀at฀fair฀value฀through฀ losses฀recognised฀in฀profit฀or฀loss฀
other฀comprehensive฀income฀ ฀ Remainder฀recognised฀in฀other฀comprehensive฀
income฀
฀ No฀allowance฀account฀necessary฀because฀already฀
carried฀at฀fair฀value฀(which฀is฀automatically฀reduced฀for฀
any฀fall฀in฀value,฀including฀credit฀losses)฀
(IFRS฀9:฀paras.฀5.5.8฀and฀5.5.2)฀
Stage฀1฀
The฀12-month฀expected฀credit฀losses฀are฀recognised฀at฀Stage฀1฀(ie฀on฀initial฀recognition฀of฀a฀
financial฀asset).฀
These฀are฀the฀portion฀of฀lifetime฀expected฀credit฀losses฀that฀result฀from฀default฀events฀on฀a฀
financial฀ instrument฀ that฀ are฀ possible฀ within฀ the฀ 12฀ months฀ after฀ the฀ reporting฀ date฀ (IFRS฀ 9:฀
Appendix฀A).฀They฀are฀calculated฀by฀multiplying฀the฀probability฀of฀default฀in฀the฀next฀12฀months฀by฀
the฀ present฀ value฀ of฀ the฀ lifetime฀ expected฀ credit฀ losses฀ that฀ would฀ result฀ from฀ the฀ default฀ (IFRS฀ 9:฀
para.฀B5.5.43).฀
Stage฀2฀and฀Stage฀3฀
Lifetime฀ expected฀ credit฀ losses฀ are฀ recognised฀ at฀ Stage฀ 2฀ (ie฀ when฀ credit฀ risk฀ increases฀
'significantly',฀which฀is฀assumed฀if฀more฀than฀30฀days฀past฀due).฀฀฀
These฀ are฀ the฀ expected฀ credit฀ losses฀ that฀ result฀ from฀ all฀ possible฀ default฀ events฀ over฀ the฀
expected฀life฀of฀the฀financial฀instrument฀(IFRS฀9:฀Appendix฀A).฀
The฀ credit฀ losses฀ continue฀ to฀ be฀ measured฀ on฀ the฀ same฀ basis฀ at฀ Stage฀ 3,฀ when฀ there฀ is฀ actual฀
objective฀evidence฀of฀impairment฀(eg฀default฀in฀payment,฀bankruptcy฀of฀customer฀etc).฀
Illustration฀9฀
A฀company฀has฀a฀portfolio฀of฀loan฀assets.฀All฀loan฀assets฀have฀an฀effective฀interest฀rate฀7.5%.฀The฀
portfolio฀was฀initially฀recognised฀at฀$840,000฀with฀a฀separate฀allowance฀of฀$5,000฀for฀12-month฀
expected฀credit฀losses฀(lifetime฀expected฀credit฀losses฀of฀$100,000฀at฀present฀value฀×฀5%฀chance฀of฀
default฀within฀12฀months).฀No฀repayments฀are฀due฀in฀the฀first฀year.฀
At฀the฀end฀of฀the฀first฀year,฀credit฀risk฀deteriorates฀significantly.฀The฀expectation฀of฀lifetime฀expected฀
credit฀losses฀remains฀the฀same.฀
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Required฀
Explain฀the฀accounting฀treatment฀of฀the฀portfolio฀of฀loan฀assets,฀with฀suitable฀calculations.฀
Solution฀
The฀loan฀assets฀are฀initially฀recognised฀as฀follows:฀
฀ $฀฀฀฀฀฀
Loan฀assets฀ 840,000฀
Allowance฀for฀credit฀losses฀ ฀฀฀฀(5,000)฀
Carrying฀amount฀(net฀of฀allowance฀for฀credit฀losses)฀ ฀835,000฀
Effective฀interest฀income฀of฀$63,000฀($840,000฀×฀7.5%)฀is฀recognised฀on฀the฀loan฀assets.฀Interest฀
cost฀of฀$375฀($5,000฀×฀7.5%)฀is฀recognised฀on฀the฀allowance฀for฀credit฀losses,฀increasing฀it฀to฀
$5,375.฀
As฀there฀has฀been฀a฀significant฀deterioration฀in฀credit฀risk฀(Stage฀2),฀the฀allowance฀for฀credit฀losses฀is฀
adjusted฀to฀lifetime฀expected฀credit฀losses฀(measured฀at฀the฀end฀of฀the฀first฀year)฀of฀$107,500฀
($100,000฀×฀1.075).฀
This฀requires฀a฀charge฀to฀profit฀or฀loss฀of฀$102,125฀($107,500฀–฀$5,375).฀
At฀the฀end฀of฀the฀first฀year฀the฀situation฀is฀therefore:฀
฀ $฀฀฀฀฀฀
Loan฀assets฀ 840,000฀
Allowance฀for฀credit฀losses฀ ฀(102,120)฀
Carrying฀amount฀(net฀of฀allowance฀for฀credit฀losses)฀ ฀฀737,880฀
In฀the฀second฀year,฀effective฀interest฀income฀and฀interest฀cost฀will฀be฀calculated฀on฀the฀gross฀figures฀
of฀$840,000฀and฀$102,120฀respectively,฀or฀(if฀there฀is฀objective฀evidence฀of฀actual฀impairment)฀on฀
the฀net฀figure฀of฀$737,180.฀
The฀measurement฀of฀expected฀credit฀losses฀should฀reflect฀(IFRS฀9:฀para.฀5.5.17):฀
(a)฀ An฀ unbiased฀ and฀ probability-weighted฀ amount฀ that฀ is฀ determined฀ by฀ evaluating฀ a฀
range฀of฀possible฀outcomes;฀
(b)฀ The฀time฀value฀of฀money;฀and฀
(c)฀ Reasonable฀ and฀ supportable฀ information฀ that฀ is฀ available฀ without฀ undue฀ cost฀ and฀
effort฀ at฀ the฀ reporting฀ date฀ about฀ past฀ events,฀ current฀ conditions฀ and฀ forecasts฀ of฀ future฀
economic฀conditions.฀
Impairment฀loss฀reversal฀
If฀an฀entity฀has฀measured฀the฀loss฀allowance฀at฀an฀amount฀equal฀to฀lifetime฀expected฀credit฀losses฀
in฀ the฀ previous฀ reporting฀ period,฀ but฀ determines฀ that฀ the฀ conditions฀ are฀ no฀ longer฀ met,฀ it฀
should฀revert฀to฀measuring฀the฀loss฀allowance฀at฀an฀amount฀equal฀to฀12-month฀expected฀credit฀
losses฀(IFRS฀9:฀para.฀5.5.7).฀
The฀resulting฀impairment฀gain฀is฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀para.฀5.5.8).฀
7.7฀ Trade฀receivables,฀contract฀assets฀and฀lease฀receivables฀
A฀simplified฀ approach฀is฀permitted฀for฀trade฀receivables,฀contract฀assets฀and฀lease฀receivables.฀฀
For฀ trade฀ receivables฀ or฀ contract฀ assets฀ that฀ do฀ not฀ have฀ a฀ significant฀ IFRS฀ 15฀ financing฀
element,฀ the฀ loss฀ allowance฀ is฀ measured฀ at฀ the฀ lifetime฀ expected฀ credit฀ losses,฀ from฀ initial฀
recognition฀(IFRS฀9:฀para.฀5.5.15).฀
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For฀other฀trade฀receivables฀and฀contract฀assets฀and฀for฀lease฀receivables,฀the฀entity฀can฀choose฀(as฀
a฀ separate฀ accounting฀ policy฀ for฀ trade฀ receivables,฀ contract฀ assets฀ and฀ for฀ lease฀ receivables)฀ to฀
apply฀the฀three฀ stage฀ approach฀or฀to฀recognise฀an฀allowance฀for฀ lifetime฀ expected฀ credit฀
losses฀from฀initial฀recognition฀(IFRS฀9:฀para.฀5.5.15).฀
7.8฀Purchased฀or฀originated฀credit-impaired฀financial฀assets฀
A฀ financial฀ asset฀ may฀ already฀ be฀ credit-impaired฀ when฀ it฀ is฀ purchased.฀ In฀ this฀ case฀ it฀ is฀ originally฀
recognised฀ as฀ a฀ single฀ figure฀ with฀ no฀ separate฀ allowance฀ for฀ credit฀ losses.฀ However,฀ any฀
subsequent฀ changes฀ in฀ lifetime฀ expected฀ credit฀ losses฀ are฀ recognised฀ as฀ a฀ separate฀ allowance฀
(IFRS฀9:฀para.฀5.5.13).฀
Activity฀4:฀Impairment฀of฀financial฀assets฀ ฀
On฀ 1฀ January฀ 20X5,฀ ABC฀ Bank฀ made฀ loans฀ of฀ $10฀ million฀ to฀ a฀ group฀ of฀ customers฀ with฀ similar฀
credit฀ risk.฀ Interest฀ payable฀ by฀ the฀ customers฀ on฀ these฀ loans฀ is฀ LIBOR฀ +฀ 2%,฀ reset฀ annually.฀ On฀
1฀January฀20X5,฀the฀initial฀present฀value฀of฀expected฀losses฀over฀the฀life฀of฀the฀loans฀was฀$500,000฀
(using฀a฀discount฀factor฀of฀3%).฀The฀probability฀of฀default฀over฀the฀next฀12฀months฀was฀estimated฀at฀
1฀ January฀ 20X5฀ to฀ be฀ 15%.฀ Customers฀ pay฀ instalments฀ annually฀ in฀ arrears.฀ Cash฀ of฀ $400,000฀
(including฀ interest)฀ was฀ received฀ from฀ customers฀ during฀ the฀ year฀ ended฀ 31฀ December฀ 20X5.฀ The฀
LIBOR฀rate฀for฀the฀year฀ended฀31฀December฀20X5฀was฀1.8%.฀
After฀ the฀ loans฀ were฀ advanced,฀ the฀ country฀ entered฀ into฀ an฀ economic฀ recession.฀ By฀ 31฀ December฀
20X5,฀the฀directors฀believed฀that฀there฀was฀objective฀evidence฀of฀impairment฀due฀to฀the฀late฀payment฀
of฀ some฀ of฀ the฀ customers.฀ The฀ present฀ value฀ of฀ lifetime฀ expected฀ credit฀ losses฀ was฀ revised฀ to฀
$800,000.฀
Required฀
Discuss,฀ with฀ suitable฀ calculations,฀ the฀ accounting฀ treatment฀ of฀ the฀ loans฀ for฀ the฀ year฀ ended฀
31฀December฀20X5.฀
8฀฀Hedging฀(IFRS฀9)฀
Companies฀ enter฀ into฀ hedging฀ transactions฀ in฀ order฀ to฀ reduce฀ business฀ risk.฀ Where฀ an฀ item฀ in฀ the฀
statement฀ of฀ financial฀ position฀ or฀ future฀ cash฀ flow฀ is฀ subject฀ to฀ potential฀ fluctuations฀ in฀ value฀ that฀
could฀ be฀ detrimental฀ to฀ the฀ business,฀ a฀ hedging฀ transaction฀ may฀ be฀ entered฀ into.฀ The฀ aim฀ is฀ that฀
where฀the฀item฀hedged฀makes฀a฀financial฀loss,฀the฀hedging฀instrument฀would฀make฀a฀gain฀and฀vice฀
versa,฀reducing฀overall฀risk.฀
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Illustration฀10฀
Pumpkin฀acquired฀inventories฀of฀coffee฀beans฀at฀30฀November฀20X6฀for฀their฀fair฀value฀of฀
$1.3฀million.฀It฀is฀worried฀that฀the฀fair฀value฀will฀fall฀so฀has฀entered฀into฀a฀futures฀contract฀to฀฀
sell฀the฀coffee฀for฀its฀current฀fair฀value฀in฀3฀months'฀time.฀
At฀the฀year฀ended฀31฀December฀20X6,฀the฀fair฀value฀of฀the฀coffee฀is฀$1.2฀million.฀
At฀the฀reporting฀date:฀
Inventories Futures
With฀no฀hedging With฀no฀hedging
•฀ Assuming฀net฀realisable฀value฀is฀ •฀ N/A
equal฀to฀fair฀value,฀a฀loss฀of฀
With฀hedging
$0.1m฀would฀be฀recognised฀in฀
profit฀or฀loss •฀ The฀gain฀on฀the฀futures฀contract฀
Offsets is฀$0.1m฀as฀the฀contract฀allows฀
With฀hedging
the฀holder฀to฀sell฀at฀$0.1m฀more฀
•฀ The฀loss฀on฀the฀inventories฀of฀ than฀market฀value฀($1.2m)
$0.1m฀would฀be฀recognised฀
•฀ The฀gain฀would฀be฀reported฀in฀
whether฀or฀not฀their฀fair฀value฀
profit฀or฀loss
has฀been฀hedged
•฀ The฀loss฀would฀be฀reported฀in฀
profit฀or฀loss
฀
Adopting฀ the฀ hedge฀ accounting฀ provisions฀ of฀ IFRS฀ 9฀ is฀ mandatory฀ where฀ the฀ hedging฀ relationship฀
meets฀all฀of฀the฀following฀criteria฀(IFRS฀9:฀para.฀6.4.1):฀
(a)฀ The฀ hedging฀ relationship฀ consists฀ only฀ of฀ eligible฀ hedging฀ instruments฀ and฀ eligible฀
hedged฀items;฀
(b)฀ It฀ was฀ designated฀ at฀ its฀ inception฀ as฀ a฀ hedge฀ with฀ full฀ documentation฀ of฀ how฀ this฀
hedge฀fits฀into฀the฀company's฀strategy;฀
(c)฀ The฀hedging฀relationship฀meets฀all฀of฀the฀following฀hedge฀effectiveness฀requirements:฀
(i)฀ There฀ is฀ an฀ economic฀ relationship฀ between฀ the฀ hedged฀ item฀ and฀ the฀ hedging฀
instrument;฀ ie฀ the฀ hedging฀ instrument฀ and฀ the฀ hedged฀ item฀ have฀ values฀ that฀ generally฀
move฀in฀the฀opposite฀direction฀because฀of฀the฀same฀risk,฀which฀is฀the฀hedged฀risk;฀
(ii)฀ The฀effect฀of฀credit฀risk฀does฀not฀dominate฀the฀value฀changes฀that฀result฀from฀
that฀ economic฀ relationship;฀ ie฀ the฀ gain฀ or฀ loss฀ from฀ credit฀ risk฀ does฀ not฀ frustrate฀ the฀
effect฀ of฀ changes฀ in฀ the฀ underlyings฀ on฀ the฀ value฀ of฀ the฀ hedging฀ instrument฀ or฀ the฀
hedged฀item,฀even฀if฀those฀changes฀were฀significant;฀and฀
(iii)฀ The฀hedge฀ ratio฀of฀ the฀ hedging฀ relationship฀ (quantity฀of฀hedging฀instrument฀vs฀
quantity฀of฀hedged฀item)฀is฀the฀same฀as฀that฀resulting฀from฀the฀quantity฀of฀the฀hedged฀
item฀ that฀ the฀ entity฀ actually฀ hedges฀ and฀ the฀ quantity฀ of฀ the฀ hedging฀ instrument฀ that฀
the฀entity฀actually฀uses฀to฀hedge฀that฀quantity฀of฀hedged฀item.฀
Practically฀however,฀hedge฀accounting฀is฀effectively฀optional฀in฀that฀an฀entity฀can฀choose฀whether฀
to฀set฀up฀the฀hedge฀documentation฀at฀inception฀or฀not.฀
An฀ entity฀ discontinues฀ hedge฀ accounting฀ when฀ the฀ hedging฀ relationship฀ ceases฀ to฀ meet฀ the฀
qualifying฀ criteria,฀which฀also฀arises฀when฀the฀hedging฀instrument฀expires฀or฀is฀sold,฀transferred฀
or฀exercised฀(IFRS฀9:฀para.฀6.5.6).฀
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฀฀
8.1฀Types฀of฀hedges฀
IFRS฀9฀identifies฀different฀types฀of฀hedges฀which฀determines฀their฀accounting฀treatment.฀The฀hedges฀
examinable฀are:฀
(a)฀ Fair฀value฀hedges;฀and฀
(b)฀ Cash฀flow฀hedges.฀
Fair฀value฀hedges฀
These฀hedge฀the฀change฀in฀value฀of฀a฀recognised฀asset฀or฀liability฀(or฀unrecognised฀firm฀commitment)฀
that฀could฀affect฀profit฀or฀loss฀(IFRS฀9:฀para.฀6.5.2),฀eg฀hedging฀the฀fair฀value฀of฀fixed฀rate฀loan฀notes฀
due฀to฀changes฀in฀interest฀rates.฀
All฀ gains฀ and฀ losses฀ on฀ both฀ the฀ hedged฀ item฀ and฀ hedging฀ instrument฀ are฀ recognised฀ as฀ follows฀
(IFRS฀9:฀para.฀6.5.8):฀
(a)฀ Immediately฀in฀profit฀or฀loss฀(except฀for฀hedges฀of฀investments฀in฀equity฀instruments฀held฀at฀
fair฀value฀through฀other฀comprehensive฀income).฀
(b)฀ Immediately฀ in฀ other฀ comprehensive฀ income฀ if฀ the฀ hedged฀ item฀ is฀ an฀ investment฀ in฀
an฀equity฀instrument฀held฀at฀fair฀value฀through฀other฀comprehensive฀income.฀฀
This฀ ensures฀ that฀ hedges฀ of฀ investments฀ of฀ equity฀ instruments฀ held฀ at฀ fair฀ value฀ through฀ other฀
comprehensive฀income฀can฀be฀accounted฀for฀as฀hedges.฀
In฀both฀cases,฀the฀gain฀or฀loss฀on฀the฀hedged฀item฀adjusts฀the฀carrying฀amount฀of฀the฀hedged฀item.฀
Cash฀flow฀hedges฀
These฀hedge฀the฀risk฀of฀change฀in฀value฀of฀future฀cash฀flows฀from฀a฀recognised฀asset฀or฀liability฀(or฀
highly฀probable฀forecast฀transaction)฀that฀could฀affect฀profit฀or฀loss฀(IFRS฀9:฀para.฀6.5.2),฀eg฀hedging฀
a฀ variable฀ rate฀ interest฀ income฀ stream.฀ The฀ hedging฀ instrument฀ is฀ accounted฀ for฀ as฀ follows฀ (IFRS฀9:฀
para.฀6.5.11):฀
(a)฀ The฀portion฀of฀the฀gain฀or฀loss฀on฀the฀hedging฀instrument฀that฀is฀effective฀(ie฀up฀to฀the฀value฀
of฀the฀loss฀or฀gain฀on฀cash฀flow฀hedged)฀is฀recognised฀in฀other฀ comprehensive฀ income฀
('items฀ that฀ may฀ be฀ reclassified฀ subsequently฀ to฀ profit฀ or฀ loss')฀ and฀ the฀ cash฀ flow฀ hedge฀
reserve.฀
(b)฀ Any฀excess฀is฀recognised฀immediately฀in฀profit฀or฀loss.฀
The฀amount฀that฀has฀been฀accumulated฀in฀the฀cash฀flow฀hedge฀reserve฀is฀then฀accounted฀for฀as฀
follows฀(IFRS฀9:฀para.฀6.5.11):฀
(a)฀ If฀ a฀ hedged฀ forecast฀ transaction฀ subsequently฀ results฀ in฀ the฀ recognition฀ of฀ a฀ non-financial฀
asset฀ or฀ non-financial฀ liability,฀the฀amount฀shall฀be฀removed฀ from฀ the฀ cash฀ flow฀
reserve฀and฀be฀included฀directly฀in฀the฀initial฀cost฀or฀carrying฀amount฀of฀the฀asset฀or฀
liability.฀
(b)฀ For฀ all฀ other฀ cash฀ flow฀ hedges,฀ the฀ amount฀ shall฀ be฀ reclassified฀ from฀ other฀
comprehensive฀ income฀ to฀ profit฀ or฀ loss฀ in฀ the฀ same฀ period(s)฀ that฀ the฀ hedged฀
expected฀future฀cash฀flows฀affect฀profit฀or฀loss.฀
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Illustration฀11฀
Fair฀value฀hedge฀
On฀1฀July฀20X6฀Joules฀acquired฀10,000฀ounces฀of฀a฀material฀which฀it฀held฀in฀its฀inventories.฀This฀
cost฀$220฀per฀ounce,฀so฀a฀total฀of฀$2.2฀million.฀Joules฀was฀concerned฀that฀the฀price฀of฀these฀
inventories฀would฀fall,฀so฀on฀1฀July฀20X6฀it฀sold฀10,000฀ounces฀in฀the฀futures฀market฀for฀$215฀
per฀ounce฀for฀delivery฀on฀30฀June฀20X7;฀ie฀the฀contract฀gives฀Joules฀the฀right฀(and฀obligation)฀to฀sell฀
10,000฀ounces฀at฀$215฀on฀30฀June฀20X7฀whatever฀the฀market฀price฀on฀that฀date.฀
On฀1฀July฀20X6฀the฀IFRS฀9฀conditions฀for฀hedge฀accounting฀were฀all฀met,฀and฀these฀continued฀to฀be฀
met฀throughout฀the฀hedging฀period.฀
At฀31฀December฀20X6,฀the฀end฀of฀Joules's฀reporting฀period,฀the฀fair฀value฀of฀the฀inventories฀was฀
$200฀per฀ounce฀while฀the฀futures฀price฀for฀30฀June฀20X7฀delivery฀was฀$198฀per฀ounce.฀On฀30฀June฀
20X7฀the฀trader฀sold฀the฀inventories฀and฀closed฀out฀the฀futures฀position฀at฀the฀then฀spot฀price฀of฀$190฀
per฀ounce.฀
Required฀
Explain฀the฀accounting฀treatment฀in฀respect฀of฀the฀above฀transactions.฀
Solution฀
This฀is฀a฀fair฀value฀hedge฀as฀Joules฀is฀hedging฀the฀fair฀value฀of฀its฀inventories.฀The฀IFRS฀9฀hedge฀
accounting฀criteria฀have฀been฀met,฀so฀hedge฀accounting฀was฀permitted.฀
At฀31฀December฀20X6฀
The฀decrease฀in฀the฀fair฀value฀of฀the฀inventories฀(a฀loss)฀was฀$200,000฀(10,000฀×฀($200฀–฀$220)).฀฀
The฀increase฀in฀the฀futures฀contract฀asset฀(a฀gain)฀was฀$170,000฀(10,000฀×฀($215฀–฀$198)).฀These฀
are฀offset฀in฀profit฀or฀loss:฀
฀ $ $฀
DEBIT฀฀฀Profit฀or฀loss฀ 200,000฀ ฀
CREDIT฀Inventories฀ 200,000฀
(To฀record฀the฀decrease฀in฀the฀fair฀value฀of฀the฀inventories) ฀
DEBIT฀฀฀฀Futures฀contract฀asset฀ 170,000฀ ฀
CREDIT฀ Profit฀or฀loss฀ 170,000฀
(To฀record฀the฀gain฀on฀the฀futures฀contract) ฀
฀
At฀30฀June฀20X7฀
The฀decrease฀in฀the฀fair฀value฀of฀the฀inventories฀(a฀further฀loss)฀was฀another฀$100,000฀(10,000฀×฀
($190฀–฀$200)).฀The฀increase฀in฀the฀futures฀contract฀asset฀(a฀further฀gain)฀was฀another฀$80,000฀
(10,000฀×฀($198฀–฀$190)).฀
Again,฀these฀are฀offset฀in฀profit฀or฀loss.฀The฀gain฀on฀the฀futures฀contract฀compensates฀the฀loss฀on฀the฀
inventories฀in฀profit฀or฀loss,฀mitigating฀the฀profit฀or฀loss฀effect฀of฀the฀changes฀in฀fair฀value.฀
฀ $ $฀
DEBIT฀฀฀฀Profit฀or฀loss฀ 100,000฀ ฀
CREDIT฀฀Inventories฀ ฀ 100,000
(To฀record฀the฀decrease฀in฀the฀fair฀value฀of฀the฀inventories) ฀
DEBIT฀฀฀฀Futures฀contract฀asset฀ 80,000฀
CREDIT฀฀Profit฀or฀loss฀ ฀ 80,000
(To฀record฀the฀gain฀on฀the฀futures฀contract) ฀
฀
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฀฀
The฀inventories฀are฀sold฀on฀30฀June฀20X7,฀so฀they฀are฀transferred฀to฀cost฀of฀sales฀at฀their฀carrying฀
amount฀of฀$1.9฀million฀($2.2m฀–฀$200,000฀–฀$100,000).฀฀Revenue฀of฀the฀same฀amount฀is฀
recognised฀(as฀the฀inventories฀have฀been฀remeasured฀to฀their฀fair฀value฀of฀$190฀per฀ounce,฀which฀is฀
the฀selling฀price).฀
฀ $ $฀
Profit฀or฀loss฀(cost฀of฀sales)฀ 1,900,000฀ ฀
Inventories฀(2,200,000฀–฀200,000฀–฀100,000) ฀ 1,900,000
(To฀record฀the฀inventories฀now฀sold)฀ ฀
DEBIT฀ ฀Cash฀ 1,900,000฀ ฀
CREDIT฀฀Revenue฀(10,000฀×฀190)฀ ฀ 1,900,000
(To฀record฀the฀revenue฀from฀the฀sale฀of฀inventories) ฀
฀
The฀inventories฀are฀being฀sold฀at฀$1.9฀million฀which฀is฀$300,000฀less฀than฀their฀original฀cost฀of฀
$2.2฀million฀on฀1฀July฀20X6.฀
However,฀this฀fall฀in฀value฀is฀mitigated฀by฀selling฀the฀futures฀contract฀asset฀for฀its฀fair฀value฀of฀
$250,000,฀as฀a฀third฀party฀would฀now฀be฀willing฀to฀pay฀$250,000฀for฀the฀right฀to฀sell฀10,000฀
ounces฀of฀material฀at฀the฀agreed฀futures฀contract฀price฀of฀$215฀rather฀than฀the฀market฀price฀of฀$190฀
per฀ounce.฀A฀futures฀contract฀is฀an฀exchange-traded฀contract฀so฀this฀is฀settled฀net฀in฀cash฀on฀the฀
market:฀
฀ $ $฀
DEBIT฀ ฀Cash฀ 250,000฀
CREDIT฀฀Futures฀contract฀asset฀(170,000฀+฀80,000) ฀ 250,000
(To฀record฀the฀settlement฀of฀the฀net฀balance฀due฀on฀closing฀the฀futures฀contract) ฀
฀
Consequently,฀Joules฀made฀an฀overall฀loss฀of฀only฀$50,000฀($300,000฀loss฀on฀inventories,฀net฀of฀the฀
$250,000฀gain฀on฀the฀futures฀contract).฀The฀purpose฀of฀hedging฀is฀to฀eliminate฀risk,฀but฀because฀
futures฀prices฀move฀differently฀to฀spot฀prices฀it฀cannot฀always฀be฀a฀perfect฀match,฀so฀a฀smaller฀loss฀of฀
$50,000฀did฀still฀arise.฀
Activity฀5:฀Cash฀flow฀hedge฀ ฀
OneAir฀is฀a฀successful฀international฀airline.฀A฀key฀factor฀affecting฀OneAir's฀cash฀flows฀and฀profits฀is฀
the฀price฀of฀jet฀fuel.฀
On฀1฀October฀20X1,฀OneAir฀entered฀into฀a฀forward฀contract฀to฀hedge฀its฀expected฀fuel฀requirements฀
for฀the฀second฀quarter฀of฀20X9฀for฀delivery฀of฀28m฀gallons฀of฀jet฀fuel฀on฀31฀March฀20X2฀at฀a฀price฀
of฀$2.04฀per฀gallon.฀
The฀airline฀intended฀to฀settle฀the฀contract฀net฀in฀cash฀and฀purchase฀the฀actual฀required฀quantity฀of฀jet฀
fuel฀in฀the฀open฀market฀on฀31฀March฀20X2.฀
At฀the฀company's฀year฀end฀the฀forward฀price฀for฀delivery฀on฀31฀March฀20X2฀had฀risen฀to฀$2.16฀per฀
gallon฀of฀fuel.฀
All฀necessary฀documentation฀was฀set฀up฀at฀inception฀for฀the฀contract฀to฀be฀accounted฀for฀as฀a฀hedge.฀฀
You฀should฀assume฀that฀the฀hedge฀was฀fully฀effective.฀
On฀31฀March฀the฀company฀settled฀the฀forward฀contract฀net฀in฀cash฀and฀purchased฀30m฀gallons฀of฀
jet฀fuel฀at฀the฀spot฀price฀on฀that฀day฀of฀$2.19.฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ how฀ the฀ above฀ transactions฀ would฀ be฀ accounted฀ for฀ in฀ the฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X1฀and฀on฀the฀date฀of฀settlement.฀
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9฀ Disclosures฀(IFRS฀7)฀
9.1฀Objective฀
The฀objective฀of฀IFRS฀7฀is฀to฀provide฀disclosures฀that฀enable฀users฀of฀financial฀statements฀to฀evaluate:฀
(a)฀ The฀ significance฀ of฀ financial฀ instruments฀ for฀ the฀ entity's฀ financial฀ position฀ and฀ performance;฀
and฀
(b)฀ The฀nature฀and฀extent฀of฀risks฀arising฀from฀financial฀instruments฀to฀which฀the฀entity฀is฀exposed,฀
and฀how฀the฀entity฀manages฀those฀risks฀(IFRS฀7:฀para.฀1).฀
9.2฀Key฀disclosures฀
Significance฀of฀financial฀instruments฀for฀financial฀position฀and฀performance฀
These฀include฀(IFRS฀7:฀paras.฀8–30):฀
฀ Breakdown฀of฀carrying฀amount฀by฀class฀of฀financial฀instrument฀
฀ Details฀of฀any฀financial฀assets฀reclassified฀
฀ Details฀of฀any฀financial฀assets฀and฀liabilities฀offset฀
฀ Financial฀assets฀pledged฀as฀collateral฀
฀ The฀allowance฀account฀for฀investments฀in฀debt฀measured฀at฀fair฀value฀through฀
OCI฀(as฀not฀offset฀against฀the฀carrying฀amount฀in฀the฀statement฀of฀financial฀position)฀
฀ Details฀ of฀ any฀ default฀ in฀ payment฀ of฀ principal฀ or฀ interest฀ on฀ loans฀ payable฀ during฀ the฀
period฀or฀breaches฀of฀terms฀
฀ Effect฀of฀financial฀instruments฀on฀profit฀or฀loss฀line฀items฀
฀ Summary฀of฀significant฀accounting฀policies฀regarding฀financial฀instruments฀
฀ Hedging฀ –฀ risk฀ management฀ strategy฀ and฀ numerical฀ table฀ showing฀ effect฀ on฀ financial฀
position฀and฀financial฀performance฀
฀ Methods฀used฀to฀measure฀fair฀value฀
Nature฀and฀extent฀of฀risks฀arising฀from฀financial฀instruments฀
Qualitative฀disclosures฀include฀(IFRS฀7:฀para.฀33):฀
(a)฀ Exposure฀to฀risk฀
(b)฀ Policies฀for฀risk฀management฀
Quantitative฀disclosures฀relate฀to฀(IFRS฀7:฀paras.฀34–42):฀
(a)฀ Credit฀risk฀–฀The฀risk฀that฀one฀party฀to฀a฀financial฀instrument฀will฀cause฀a฀financial฀loss฀for฀the฀
other฀party฀by฀failing฀to฀discharge฀an฀obligation.฀฀
(b)฀ Liquidity฀risk฀–฀The฀risk฀that฀an฀entity฀will฀encounter฀difficulty฀in฀meeting฀obligations฀associated฀
with฀financial฀liabilities฀that฀are฀settled฀by฀delivering฀cash฀or฀another฀financial฀asset.฀
(c)฀ Market฀ risk฀ –฀ The฀ risk฀ that฀ the฀ fair฀ value฀ or฀ future฀ cash฀ flows฀ of฀ a฀ financial฀ instrument฀ will฀
fluctuate฀ because฀ of฀ changes฀ in฀ market฀ prices.฀ Market฀ risk฀ comprises฀ three฀ types฀ of฀
risk:฀currency฀risk,฀interest฀rate฀risk฀and฀other฀price฀risk.฀
฀ ฀
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฀฀
Ethics฀note฀
Financial฀instruments฀involve฀a฀lot฀of฀complexity.฀This฀means฀that฀they฀are฀a฀higher฀risk฀area฀in฀terms฀
of฀incorrect฀accounting฀either฀due฀to฀a฀lack฀of฀competence฀or฀due฀to฀a฀lack฀of฀integrity.฀
In฀terms฀of฀this฀topic฀area,฀some฀potential฀ethical฀issues฀to฀consider฀include:฀
฀ Misclassification฀of฀financial฀assets฀and฀financial฀liabilities฀to฀achieve฀a฀desired฀accounting฀
effect฀
฀ Manipulation฀of฀profits฀using฀the฀estimations฀in฀the฀allowance฀for฀expected฀credit฀losses฀
฀ Accounting฀for฀certain฀financial฀instruments฀as฀hedges฀(and฀reducing฀losses,฀by฀offsetting฀
'hedging'฀gains฀against฀them)฀when฀they฀do฀not฀meet฀the฀criteria฀to฀be฀classified฀as฀hedging฀
instruments฀฀
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฀
฀ ฀ Financial฀assets฀
When:฀
฀ The฀contractual฀rights฀to฀cash฀flows฀
2.฀ Classification฀(IAS฀32)฀ expire;฀or฀
฀ The฀FA฀is฀transferred฀(based฀on฀ Financial฀liabilities฀
whether฀substantially฀all฀risks฀&฀
Financial฀asset฀(FA):฀ Equity฀instrument:฀ rewards฀of฀ownership฀transferred)฀ When฀obligation:฀
(a)฀ Cash฀ ฀ Any฀contract฀that฀ ฀ Is฀discharged;฀
Recognise฀in฀P/L:฀
(b)฀ Contractual฀right฀to:฀ evidences฀a฀residual฀ ฀ Cancelled;฀or฀
฀ Consideration฀received฀less฀CA฀
(i)฀Receive฀cash/FA฀ interest฀in฀the฀assets฀of฀ ฀ Expires฀
(measured฀at฀date฀of฀derecognition)฀
(ii)฀Exchange฀FA/FL฀under฀ an฀entity฀after฀deducting฀
potentially฀favourable฀ all฀its฀liabilities฀
conditions฀ ฀ Only฀equity฀if฀neither฀
(c)฀ Equity฀instrument฀of฀ (a)฀nor฀(b)฀of฀FL฀def'n฀
another฀entity฀ met฀
(d)฀ Contract฀that฀will/may฀be฀
Compound฀instrument:฀
settled฀in฀entity's฀own฀
equity฀instruments฀
฀ Separate฀debt/equity฀components:฀ 4.฀ Derecognition฀฀
PV฀principal฀(X฀x฀1/(1฀+฀r)฀n)฀ ฀ ฀X฀ (IFRS฀9)฀
PV฀interest฀flows:฀
Financial฀liability฀(FL):฀ (Nominal฀interest฀x฀1/(1฀+฀r)฀1)฀ ฀X฀
(a)฀ Contractual฀obligation฀to฀ (Nominal฀interest฀x฀1/(1฀+฀r)฀2)฀ ฀X฀
(i)฀Deliver฀cash/FA฀ (Nominal฀interest฀x฀1/(1฀+฀r)฀3)฀ ฀X฀
(ii)฀Exchange฀FA/FL฀under฀
...etc฀ ฀
3. Recognition฀(IFRS฀9)
potentially฀ ฀X฀
Debt฀component฀ ฀ ฀X฀
unfavourable฀ ฀ When฀party฀to฀contractual฀provisions฀of฀
conditions฀
Equity฀component฀ ฀ ฀X฀ instrument฀
(b)฀ Contract฀that฀will/may฀be฀ Cash฀received฀ ฀ ฀X฀ ฀ Outside฀scope:฀contracts฀to฀buy/sell฀non-
settled฀in฀entity's฀own฀ ฀ Discount฀using฀rate฀ financial฀items฀in฀accordance฀with฀entity's฀
equity฀instruments฀ for฀non-convertible฀debt฀ expected฀purchase/sale/usage฀req'ments฀
฀
5.฀ Measurement฀฀
Financial฀instruments฀ (IFRS฀9)฀
1.฀ Standards฀
IAS฀32:฀Presentation฀
IFRS฀7:฀Disclosures฀
IFRS฀9:฀Recognition฀&฀Measurement฀
฀
Financial฀assets฀ Financial฀liabilities฀
9.฀ Disclosures฀(IFRS฀7)฀ See฀next฀page฀

฀ Significance฀of฀financial฀instruments฀for฀financial฀
position฀and฀performance฀
฀ Nature฀and฀extent฀of฀risks฀arising฀from฀financial฀
instruments฀ Offsetting฀
฀ –฀ Qualitative:฀risk฀exposure฀and฀risk฀management฀
policies฀ Only฀permitted฀when฀the฀entity:฀
฀ –฀ Quantitative:฀credit฀risk,฀liquidity฀risk,฀market฀risk฀
฀ Has฀a฀legally฀enforceable฀right฀to฀set-
฀
off,฀and฀
฀
฀ Intends฀either฀to฀settle฀on฀a฀net฀basis฀
or฀to฀realise฀the฀FA฀and฀settle฀the฀FL฀
simultaneously฀
8.฀ Hedging฀
(IFRS฀9)฀
฀ See฀next฀page฀ 7.฀ Impairment฀฀ 6.฀ Embedded฀
(IFRS฀9)฀ derivatives฀
(IFRS฀9)฀
฀ See฀next฀page฀
฀ ฀ See฀next฀page฀
฀ 171฀

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฀฀
฀ ฀
5.฀ Classification฀and฀
measurement฀฀
(IFRS฀9)฀
Financial฀assets฀ Financial฀liabilities
INITIAL฀MEASUREMENT฀ INITIAL฀MEASUREMENT฀
฀ Fair฀value฀+฀transaction฀costs฀(TC)฀ ฀ Fair฀value฀–฀transactions฀cost฀(TC)฀
฀ (except฀FA฀@฀FV฀through฀P/L,฀TC฀฀P/L)฀ ฀ (except฀FL฀@฀FV฀through฀P/L,฀TC฀฀P/L)฀
SUBSEQUENT฀MEASUREMENT฀ SUBSEQUENT฀MEASUREMENT฀
(1)฀ Investments฀in฀debt฀instruments฀ (1)฀ Most฀financial฀liabilities฀
฀ Business฀model฀approach:฀ ฀ Amortised฀cost฀
–฀ held฀to฀collect฀or฀collect฀&฀sell฀cash฀
(2)฀ FL฀at฀FV฀through฀P/L฀
flows,฀and฀
฀ Held฀for฀trading฀(short-term฀profit฀making)฀
–฀ cash฀flows฀solely฀principal฀and฀interest฀
฀ Derivatives฀
฀ Held฀to฀collect฀(only)฀–฀amortised฀cost฀ Amortised฀cost฀calculation:฀
฀ Designated฀at฀FV฀through฀P/L฀to฀
฀ Held฀to฀collect฀&฀sell฀–฀FV฀through฀OCI฀ Initial฀value฀b/d฀(incl฀trans฀costs)฀ ฀X฀
eliminate/significantly฀reduce฀an฀'accounting฀
with฀interest฀in฀P/L฀(calculated฀as฀per฀ Interest฀at฀effective฀%฀x฀b/d฀ ฀X฀
mismatch'฀
amortised฀cost)฀฀ Coupon฀at฀nominal฀%฀x฀par฀value฀ ฀(X)฀ ฀ Portfolios฀managed฀and฀performance฀evaluated฀
(2)฀ Investments฀in฀equity฀instruments฀ Amortised฀cost฀c/d฀ ฀฀X฀฀ on฀a฀FV฀basis฀
not฀'held฀for฀trading'฀ ฀
(3)฀ FL฀arising฀when฀transfer฀of฀FA฀does฀not฀
฀ Fair฀value฀through฀OCI฀(optional฀ qualify฀for฀derecognition฀
irrevocable฀election)฀ ฀ FL฀=฀consideration฀received฀not฀yet฀recognised฀
฀ No฀reclassification฀on฀derecognition฀ in฀P/L฀
(3)฀ All฀other฀FA฀(or฀designated฀at฀FV฀ ฀ Measured฀on฀same฀basis฀as฀transferred฀FA฀(FV฀
through฀P/L฀to฀ or฀amortised฀cost)฀
eliminate/significantly฀reduce฀an฀ (4)฀ Financial฀guarantee฀contracts฀and฀
'accounting฀mismatch')฀ commitments฀to฀provide฀a฀loan฀at฀below฀
฀ Fair฀value฀through฀P/L฀฀ market฀interest฀rate฀
Reclassification:฀ ฀ Higher฀of:฀
฀ Permitted฀only฀for฀debt฀instruments฀where฀entity฀ –฀ IAS฀37฀valuation,฀and฀
changes฀its฀business฀model฀ –฀ Amount฀initially฀recognised฀less฀amounts฀
amortised฀to฀P/L฀
6.฀ Embedded฀
derivatives฀(IFRS฀9)฀
 Derivative฀characteristics:฀฀
–฀ Settled฀at฀a฀future฀date฀
–฀ Value฀changes฀in฀response฀to฀an฀
underlying฀variable฀
–฀ No/little฀initial฀net฀investment฀vs฀
contracts฀for฀similar฀market฀response฀
฀ Embedded฀derivative:฀an฀item฀meeting฀
definition฀of฀a฀derivative฀within฀a฀FL฀'host'฀
contract฀฀
฀ Separate฀from฀'host'฀contract฀unless:฀฀
฀ –฀ Economic฀characteristics฀and฀risks฀
closely฀related,฀or฀
฀ –฀ Combined฀instrument฀held฀at฀FVTP/L,฀or฀
฀ –฀ Host฀is฀an฀IFRS฀9฀FA,฀or฀
฀ –฀ Embedded฀derivative฀significantly฀
modifies฀cash฀flows฀
฀
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฀ ฀
7.฀ Impairment฀(IFRS฀9)฀ 8.฀ Hedging฀(IFRS฀9)฀
฀ Applies฀to฀investments฀in฀debt฀and฀other฀receivables฀(unless฀held฀at฀FV฀through฀P/L)฀ ฀ Objective-based฀(rather฀than฀quantitative)฀assessment฀
฀ No฀test฀required฀for฀FA฀at฀FV฀through฀P/L฀(as฀impairment฀automatically฀dealt฀with)฀ of฀whether฀hedge฀relationship฀exists฀
฀ Follows฀an฀'expected฀loss'฀model:฀ ฀ Accounted฀for฀as฀a฀hedge฀if฀hedging฀relationship:฀
–฀ Only฀includes฀eligible฀items,฀
฀ Stage฀1฀ ฀ Stage฀2฀ ฀ Stage฀3฀ –฀ Designated฀at฀inception,฀and฀
–฀ Is฀effective฀
When?฀ Initial฀recognition฀ ฀ Credit฀risk฀increases฀ ฀ Objective฀evidence฀of฀ ฀ (i)฀ Economic฀relationship฀between฀hedged฀item฀
(and฀subsequently฀if฀ significantly฀(rebuttable฀ impairment฀exists฀at฀ and฀hedging฀instrument฀exists฀
no฀significant฀ presumption฀if฀>฀30฀ the฀reporting฀date฀ ฀ (ii)฀ Change฀in฀FV฀due฀to฀credit฀risk฀does฀not฀
deterioration฀in฀credit฀ days฀past฀due)฀ distort฀hedge,฀and฀
risk)฀ ฀ (iii)฀ Quantity฀of฀hedging฀instrument฀vs฀quantity฀of฀
hedged฀item฀('hedge฀ratio')฀designated฀as฀
Credit฀ 12-month฀expected฀ ฀ Lifetime฀expected฀ ฀ Lifetime฀expected฀ the฀hedge฀is฀same฀as฀actually฀used฀
losses฀ credit฀losses฀(=฀%฀of฀ credit฀losses฀ credit฀losses฀
฀ Fair฀value฀hedge:฀
recognised฀ lifetime฀losses฀
–฀ Hedges฀changes฀in฀value฀of฀recognised฀
resulting฀from฀a฀
asset/liability฀
default฀within฀12฀ –฀ All฀gains/losses฀฀P/L฀(but฀฀OCI฀if฀re฀an฀
months)฀ investment฀in฀equity฀instruments฀measured฀at฀FV฀
through฀OCI)฀
Calculation฀ On฀gross฀carrying฀ ฀ On฀gross฀carrying฀ ฀ On฀carrying฀amount฀
฀ Cash฀flow฀hedge:฀
of฀effective฀ amount฀ amount฀ net฀of฀allowance฀for฀
–฀ Hedges฀changes฀in฀value฀of฀future฀cash฀flows:฀
interest฀ credit฀losses฀after฀
฀ gain/loss฀on฀effective฀portion฀฀OCI฀until฀CF฀
date฀evidence฀exists฀
occurs฀
฀ Credit฀losses฀(and฀loss฀reversals)฀recognised฀in฀P/L฀ ฀ excess฀฀P/L฀
–฀ Reclassified฀from฀OCI฀to฀P/L฀when฀cash฀flow฀
฀ For฀investments฀in฀debt฀held฀at฀FV฀through฀OCI,฀change฀in฀FV฀not฀due฀to฀credit฀losses฀still฀ occurs฀(unless฀results฀in฀recognition฀of฀non-
recognised฀in฀OCI฀ financial฀item฀฀include฀in฀initial฀CA฀instead)฀
฀ For฀investments฀in฀debt฀not฀held฀at฀FV฀through฀OCI฀a฀separate฀allowance฀account฀is฀used:฀ ฀ Hedge฀of฀net฀investment฀in฀foreign฀operation:฀
฀ Gross฀carrying฀amount฀ ฀X฀ –฀ Hedges฀changes฀in฀value฀of฀foreign฀subsidiary's฀
฀ Allowance฀for฀impairment฀losses฀ ฀(X)฀ net฀assets฀
฀ Net฀carrying฀amount฀ –฀ Accounted฀for฀similarly฀to฀CF฀hedges฀
฀฀X฀฀
฀ Single฀hedging฀disclosure฀note฀(or฀section)฀shows฀all฀
฀ Permitted฀simplified฀approaches:฀ the฀effects฀of฀hedging฀in฀one฀place฀
–฀ Trade฀receivables฀and฀contract฀assets฀(with฀no฀financing฀element):฀
฀ ฀lifetime฀expected฀credit฀losses฀on฀initial฀recognition฀
–฀ Lease฀receivables฀(and฀trade฀receivables฀and฀contract฀assets฀with฀a฀financing฀element):฀฀
฀ ฀lifetime฀expected฀credit฀losses฀on฀initial฀recognition฀or฀Stage฀3฀approach฀
฀ 173฀

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฀฀
1.฀ Standards฀
฀ Three฀standards฀are฀now฀in฀issue:฀
฀ IAS฀32฀Financial฀Instruments:฀Presentation฀
฀ IFRS฀7฀Financial฀Instruments:฀Disclosures฀
฀ IFRS฀9฀Financial฀Instruments฀
2.฀ Classification฀(IAS฀32)฀
฀ Financial฀instruments฀are฀classified฀as฀financial฀assets,฀financial฀liabilities฀or฀equity.฀
฀ Compound฀financial฀instruments฀are฀split฀into฀their฀financial฀liability฀and฀equity฀
components.฀
3.฀ Recognition฀(IFRS฀9)฀
฀ Financial฀instruments฀are฀recognised฀in฀the฀statement฀of฀financial฀position฀when฀the฀entity฀
becomes฀a฀party฀to฀the฀contractual฀provisions฀of฀the฀instrument.฀
4.฀ Derecognition฀(IFRS฀9)฀
฀ Financial฀assets฀are฀derecognised฀when฀the฀rights฀to฀the฀cash฀flow฀expire฀or฀are฀
transferred฀(considering฀the฀risks฀and฀rewards฀of฀ownership).฀
฀ Financial฀liabilities฀are฀derecognised฀when฀the฀obligation฀is฀discharged,฀cancelled฀or฀
expires.฀
5.฀ Measurement฀(IFRS฀9)฀
฀ Financial฀instruments฀are฀initially฀measured฀at฀fair฀value.฀
฀ Subsequent฀measurement฀is฀at฀amortised฀cost฀or฀fair฀value฀depending฀on฀the฀instrument's฀
classification.฀
6.฀ Embedded฀derivatives฀(IFRS฀9)฀
฀ Embedded฀derivatives฀are฀divided฀into฀their฀component฀parts฀unless฀certain฀criteria฀are฀
met.฀
7.฀ Impairment฀of฀financial฀assets฀(IFRS฀9)฀
฀ Stage฀1:฀Initial฀recognition฀–฀recognise฀allowance฀for฀12฀month฀expected฀credit฀losses฀
(EIR฀calculated฀on฀gross฀carrying฀amount)฀
฀ Stage฀2:฀Credit฀risk฀increases฀significantly฀–฀recognise฀allowance฀for฀lifetime฀credit฀
losses฀(EIR฀calculated฀on฀gross฀carrying฀amount)฀
฀ Stage฀3:฀Objective฀evidence฀of฀impairment฀exists฀–฀recognise฀allowance฀for฀lifetime฀
credit฀losses฀(EIR฀calculated฀on฀carrying฀amount฀net฀of฀allowance)฀
฀ Recognise฀credit฀losses฀in฀profit฀or฀loss.฀
8.฀ Hedging฀(IFRS฀9)฀
฀ There฀are฀two฀examinable฀types฀of฀hedge:฀
฀ ฀ Fair฀value฀hedge฀
฀ ฀ Cash฀flow฀hedge฀
฀ Each฀has฀different฀accounting฀rules.฀
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9.฀ Disclosure฀(IFRS฀7)฀
฀ Disclosures฀regarding:฀
฀ ฀ Significance฀of฀financial฀instruments฀for฀financial฀position฀and฀performance;฀and฀
฀ ฀ Nature฀and฀extent฀of฀risks฀arising฀from฀financial฀instruments฀(qualitative฀and฀quantitative฀
disclosures).฀
฀ 175฀

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฀฀
Q9฀PQR฀฀
Q10฀Sirus฀฀
There฀are฀articles฀on฀the฀ACCA฀website฀written฀by฀members฀of฀the฀SBR฀examining฀team฀that฀are฀relevant฀
to฀the฀topics฀covered฀in฀this฀chapter฀and฀would฀be฀useful฀to฀read:฀
Giving฀investors฀what฀they฀need฀(Financial฀capital)฀
The฀definition฀and฀disclosure฀of฀capital฀
When฀does฀debt฀seem฀to฀be฀equity?฀
฀
฀
176฀

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฀
฀
฀
฀
Leases
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀lessee฀accounting฀requirements฀for฀leases฀including฀the฀ C4(a)฀
identification฀of฀a฀lease฀and฀the฀measurement฀of฀the฀right-of-use฀asset฀and฀liability.฀
Discuss฀and฀apply฀the฀accounting฀for฀leases฀by฀lessors.฀ C4(b)฀
Discuss฀and฀apply฀the฀circumstances฀where฀there฀may฀be฀re-measurement฀of฀the฀ C4(c)฀
lease฀liability.฀
Discuss฀and฀apply฀the฀reasons฀behind฀the฀separation฀of฀the฀components฀of฀a฀ C4(d)฀
lease฀contract฀into฀lease฀and฀non-lease฀elements.฀
Discuss฀the฀recognition฀exemptions฀under฀the฀current฀leasing฀standard.฀ C4(e)฀
Discuss฀and฀apply฀the฀principles฀behind฀accounting฀for฀sale฀and฀leaseback฀ C4(f)฀
transactions.฀
Exam฀context฀
In฀Financial฀Reporting,฀you฀studied฀leases฀from฀the฀point฀of฀view฀of฀the฀lessee.฀The฀Strategic฀Business฀
Reporting฀(SBR)฀syllabus฀introduces฀the฀accounting฀for฀leases฀in฀the฀lessor's฀financial฀statements.฀It฀is฀
an฀area฀which฀could฀form฀a฀major฀part฀of฀a฀question฀and฀is฀likely฀to฀be฀tested฀often,฀particularly฀as฀
IFRS฀16฀is฀a฀recent฀standard.฀
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฀฀
฀
฀
4.฀ Current฀
Leases฀
developments฀
1.฀ Lessee฀accounting฀ 2.฀ Lessor฀accounting 3.฀ Sale฀and฀leaseback฀

transactions฀
Definitions฀
Finance฀leases
Operating฀leases฀
Deferred฀tax฀
implications฀
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8:฀Leases฀
1฀฀Lessee฀accounting฀
IFRS฀16฀Leases฀requires฀lessees฀and฀lessors฀to฀provide฀relevant฀information฀in฀a฀manner฀that฀faithfully฀
represents฀those฀transactions.฀฀
The฀accounting฀treatment฀in฀the฀lessee's฀books฀is฀driven฀by฀the฀Conceptual฀Framework's฀definitions฀of฀
assets฀and฀liabilities฀rather฀than฀the฀legal฀form฀of฀the฀lease.฀The฀legal฀form฀of฀a฀lease฀is฀that฀the฀title฀
to฀the฀underlying฀asset฀remains฀with฀the฀lessor฀during฀the฀period฀of฀the฀lease.฀฀
ED/2015/3฀Conceptual฀Framework฀for฀Financial฀Reporting฀proposes฀to฀change฀the฀definition฀of฀a฀
liability฀to฀place฀emphasis฀on฀an฀entity's฀obligation,฀at฀the฀reporting฀date,฀to฀transfer฀economic฀
resources.฀The฀obligation฀in฀this฀case฀arises฀from฀past฀events฀and฀is฀one฀which฀the฀entity฀has฀no฀
practical฀ability฀to฀avoid.฀The฀change฀in฀definition฀does฀not฀impact฀on฀how฀lease฀obligations฀are฀
recognised฀or฀measured.฀
Stakeholder฀perspective฀
Companies฀ generally฀ use฀ leasing฀ arrangements฀ as฀ a฀ means฀ of฀ obtaining฀ assets.฀ Consequently,฀
IFRS฀16฀requires฀the฀majority฀of฀leased฀assets฀and฀the฀associated฀obligations฀to฀be฀recognised฀in฀the฀
financial฀statements.฀This฀is฀a฀significant฀change฀from฀the฀previous฀standard,฀IAS฀17฀Leases,฀which฀
was฀criticised฀for฀allowing฀'off฀balance฀sheet'฀financing฀(see฀Section฀4฀for฀further฀detail).฀฀
While฀ IFRS฀ 16฀ has฀ benefits฀ for฀ the฀ users฀ of฀ financial฀ statements฀ in฀ terms฀ of฀ transparency฀ and฀
comparability,฀it฀has฀had฀a฀significant฀impact฀on฀the฀most฀commonly฀used฀financial฀ratios,฀such฀as:฀฀
• Gearing,฀because฀debt฀has฀increased฀
•฀ Asset฀turnover,฀because฀assets฀have฀increased฀฀฀
• Profit฀margin฀ratios,฀because฀rent฀expenses฀are฀removed฀and฀replaced฀with฀depreciation฀and฀
finance฀costs.฀฀
This฀ in฀ turn฀ affects฀ the฀ way฀ in฀ which฀ users฀ interpret฀ and฀ analyse฀ the฀ financial฀ statements.฀ For฀
example,฀ banks฀ often฀ impose฀ loan฀ covenants฀ when฀ making฀ loans฀ to฀ companies.฀ These฀ covenants฀
may฀need฀renegotiating฀if฀applying฀IFRS฀16฀causes฀a฀company's฀liabilities฀to฀increase฀significantly.฀฀
Lease:฀a฀contract,฀or฀part฀of฀a฀contract,฀that฀conveys฀the฀right฀to฀use฀an฀asset฀(the฀underlying฀
Key฀terms฀
asset)฀for฀a฀period฀of฀time฀in฀exchange฀for฀consideration.฀
A฀ lease฀ arises฀ where฀ the฀ customer฀ obtains฀ the฀ right฀ to฀ use฀ the฀ asset.฀ Where฀ it฀ is฀ the฀ supplier฀ that฀
controls฀the฀asset฀used,฀a฀service฀rather฀than฀a฀lease฀arises.฀
Identifying฀a฀lease฀
An฀entity฀must฀identify฀whether฀a฀contract฀contains฀a฀lease,฀which฀is฀the฀case฀if฀the฀contract฀conveys฀
the฀ right฀ to฀ control฀ the฀ use฀ of฀ an฀ identified฀ asset฀ for฀ a฀ period฀ of฀ time฀ in฀ exchange฀ for฀
consideration฀(IFRS฀16:฀para.฀9).฀
The฀ right฀ to฀ control฀ an฀ asset฀ arises฀ where,฀ throughout฀ the฀ period฀ of฀ use,฀ the฀ customer฀ has฀฀
(IFRS฀16:฀para.฀B9):฀
(a)฀ The฀right฀to฀obtain฀substantially฀all฀of฀the฀economic฀benefits฀from฀use฀of฀the฀identified฀
asset;฀and฀
(b)฀ The฀right฀to฀direct฀the฀use฀of฀the฀identified฀asset.฀
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฀฀
The฀identified฀ asset฀is฀typically฀explicitly฀specified฀in฀a฀contract.฀However,฀an฀asset฀can฀also฀be฀
identified฀ by฀ being฀ implicitly฀ specified฀ at฀ the฀ time฀ that฀ the฀ asset฀ is฀ made฀ available฀ for฀ use฀ by฀ the฀
customer฀(IFRS฀16:฀para.฀B13).฀
Even฀if฀an฀asset฀is฀specified,฀a฀customer฀does฀not฀have฀the฀right฀to฀use฀an฀identified฀asset฀if฀the฀
supplier฀ has฀ the฀ substantive฀ right฀ to฀ substitute฀ the฀ asset฀ throughout฀ the฀ period฀ of฀ use฀
(IFRS฀16:฀para.฀B14).฀
Where฀ a฀ contract฀ contains฀ multiple฀ components,฀ the฀ consideration฀ is฀ allocated฀ to฀ each฀ lease฀
and฀non-lease฀component฀based฀on฀relative฀stand-alone฀prices฀(the฀price฀the฀lessor฀or฀similar฀supplier฀
would฀charge฀for฀the฀component,฀or฀a฀similar฀component,฀separately)฀(IFRS฀16:฀paras.฀13-14).฀
Illustration฀1฀
Under฀a฀four฀year฀agreement฀a฀car฀seat฀wholesaler฀(CarSeat)฀buys฀its฀seats฀from฀a฀manufacturer฀
(ManuFac).฀
Under฀the฀terms฀of฀the฀agreement,฀CarSeat฀licenses฀its฀know-how฀to฀ManuFac฀royalty-free฀to฀allow฀it฀
to฀construct฀a฀machine฀capable฀of฀manufacturing฀the฀car฀seats฀to฀CarSeat's฀specifications.฀
Ownership฀of฀the฀know-how฀remains฀with฀CarSeat฀and฀the฀machine฀has฀an฀economic฀life฀of฀four฀
years.฀
CarSeat฀pays฀an฀amount฀per฀car฀seat฀produced฀to฀ManuFac;฀however,฀the฀agreement฀states฀that฀a฀
minimum฀payment฀will฀be฀guaranteed฀each฀year฀to฀allow฀ManuFac฀to฀recover฀the฀cost฀of฀its฀
investment฀in฀the฀machinery.฀฀
The฀agreement฀states฀that฀the฀machinery฀cannot฀be฀used฀to฀make฀seats฀for฀other฀customers฀of฀
ManuFac฀and฀that฀CarSeat฀can฀purchase฀the฀machinery฀at฀any฀time฀(at฀a฀price฀equivalent฀to฀the฀
minimum฀guaranteed฀payments฀not฀yet฀paid).฀
Required฀
How฀should฀CarSeat฀account฀for฀this฀arrangement?฀
Solution฀
The฀agreement฀is฀a฀contract฀containing฀a฀lease฀component฀(for฀the฀use฀of฀the฀machinery,฀the฀
'identified฀asset'฀in฀the฀contract)฀and฀a฀non-lease฀component฀(the฀purchase฀of฀inventories).฀
CarSeat฀will฀obtain฀substantially฀all฀of฀the฀economic฀benefits฀from฀the฀use฀of฀the฀machinery฀over฀the฀
period฀of฀the฀agreement฀as฀it฀will฀be฀able฀to฀sell฀on฀all฀the฀car฀seat฀output฀for฀its฀own฀cash฀flow฀
benefit,฀and฀has฀the฀right฀to฀direct฀its฀use,฀as฀it฀cannot฀be฀used฀to฀make฀seats฀for฀other฀customers.฀
The฀payments฀that฀CarSeat฀makes฀will฀need฀to฀be฀split฀into฀amounts฀covering฀the฀purchase฀of฀car฀
seat฀inventories,฀and฀amounts฀which฀represent฀lease฀payments฀for฀use฀of฀the฀machine.฀The฀allocation฀
will฀be฀based฀on฀relative฀stand-alone฀prices฀for฀hiring฀the฀machine฀and฀buying฀the฀inventories฀(or฀for฀
a฀similar฀machine฀and฀inventories).฀
฀
Chapter฀ 8฀ Sections฀ 1.1–1.2฀ of฀ the฀ Supplementary฀ Reading฀ contain฀ further฀ examples฀ of฀ identifying฀
lease฀components฀of฀a฀contract฀and฀separating฀multiple฀components฀of฀a฀contract.฀This฀is฀available฀in฀
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8:฀Leases฀
Lease฀term฀
Lease฀term:฀'the฀non-cancellable฀period฀for฀which฀a฀lessee฀has฀the฀right฀to฀use฀an฀
Key฀terms฀
underlying฀asset,฀together฀with฀both:฀
(a)฀ Periods฀covered฀by฀an฀option฀to฀extend฀the฀lease฀if฀the฀lessee฀is฀reasonably฀certain฀to฀
exercise฀that฀option;฀and฀
(b)฀ Periods฀covered฀by฀an฀option฀to฀terminate฀the฀lease฀if฀the฀lessee฀is฀reasonably฀certain฀
not฀to฀exercise฀that฀option.'฀
The฀ lease฀ term฀ is฀ relevant฀ when฀ determining฀ the฀ period฀ over฀ which฀ a฀ leased฀ asset฀ should฀ be฀
depreciated฀(see฀below).฀
Illustration฀2฀
A฀lease฀contract฀is฀for฀5฀years฀with฀lease฀payments฀of฀$10,000฀per฀annum.฀The฀lease฀contract฀
contains฀a฀clause฀which฀allows฀the฀lessee฀to฀extend฀the฀lease฀for฀a฀further฀period฀of฀3฀years฀for฀a฀
lease฀payment฀of฀$5฀per฀annum฀(as฀it฀is฀unlikely฀the฀lessor฀would฀be฀able฀to฀lease฀the฀asset฀to฀
another฀party).฀฀The฀economic฀life฀of฀the฀asset฀is฀estimated฀to฀be฀approximately฀8฀years.฀
The฀lessee฀assesses฀it฀is฀highly฀likely฀the฀lease฀extension฀would฀be฀taken.฀The฀lease฀term฀is฀therefore฀
8฀years.฀
Recognition฀
At฀the฀commencement฀date฀(the฀date฀the฀lessor฀makes฀the฀underlying฀asset฀available฀for฀use฀by฀the฀
lessee),฀the฀lessee฀recognises฀(IFRS฀16:฀para.฀22):฀
฀ A฀lease฀liability฀
฀ A฀right-of-use฀asset.฀
Lease฀liability฀
The฀lease฀liability฀is฀initially฀measured฀at฀the฀present฀ value฀ of฀ lease฀ payments฀ not฀ paid฀ at฀
the฀ commencement฀ date,฀ discounted฀ at฀ the฀ interest฀ rate฀ implicit฀ in฀ the฀ lease฀ (or฀ the฀
lessee's฀incremental฀borrowing฀rate*฀if฀not฀readily฀determinable)฀(IFRS฀16:฀para.฀26).฀
*the฀rate฀to฀borrow฀over฀a฀similar฀term,฀with฀similar฀security,฀to฀obtain฀an฀asset฀of฀similar฀value฀in฀a฀
similar฀economic฀environment฀(IFRS฀16:฀Appendix฀A)฀
The฀lease฀liability฀cash฀flows฀to฀be฀discounted฀include฀the฀following฀(IFRS฀16:฀para.฀27):฀
฀ Fixed฀payments฀
฀ Variable฀payments฀that฀depend฀on฀an฀index฀(eg฀CPI)฀or฀rate฀(eg฀market฀rent)฀
฀ Amounts฀ expected฀ to฀ be฀ payable฀ under฀ residual฀ value฀ guarantees฀ (eg฀ where฀ a฀ lessee฀
guarantees฀to฀the฀lessor฀that฀an฀asset฀will฀be฀worth฀a฀specified฀amount฀at฀the฀end฀of฀the฀lease)฀
฀ Purchase฀options฀(if฀reasonably฀certain฀to฀be฀exercised).฀
Other฀variable฀payments฀(eg฀payments฀that฀arise฀due฀to฀level฀of฀use฀of฀the฀asset)฀are฀accounted฀for฀
as฀period฀costs฀in฀profit฀or฀loss฀as฀incurred฀(IFRS฀16:฀para.฀38).฀
The฀lease฀liability฀is฀subsequently฀measured฀by฀(IFRS฀16:฀para.฀36):฀
฀ Increasing฀it฀by฀interest฀on฀the฀lease฀liability฀
฀ Reducing฀it฀by฀lease฀payments฀made.฀
฀ 181฀

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฀฀
Right-of-use฀asset฀
The฀right-of-use฀asset฀is฀initially฀measured฀at฀its฀cost฀(IFRS฀16:฀para.฀23),฀which฀includes฀(IFRS฀16:฀
para.฀24):฀
฀ The฀ amount฀ of฀ the฀ initial฀ measurement฀ of฀ the฀ lease฀ liability฀ (the฀ present฀ value฀ of฀ lease฀
payments฀not฀paid฀at฀the฀commencement฀date)฀
฀ Payments฀made฀at/before฀the฀lease฀commencement฀date฀(less฀any฀lease฀incentives฀received)฀
฀ Initial฀direct฀costs฀(eg฀legal฀costs)฀incurred฀by฀the฀lessee฀
฀ An฀estimate฀of฀dismantling฀and฀restoration฀costs฀(where฀an฀obligation฀exists).฀
The฀right-of-use฀asset฀is฀normally฀measured฀subsequently฀at฀cost฀less฀accumulated฀depreciation฀
and฀ impairment฀ losses฀ in฀ accordance฀ with฀ the฀ cost฀ model฀ of฀ IAS฀16฀ Property,฀ Plant฀ and฀
Equipment฀(IFRS฀16:฀para.฀29).฀
The฀right-of-use฀asset฀is฀depreciated฀from฀the฀commencement฀date฀to฀the฀ earlier฀ of฀the฀end฀ of฀
its฀ useful฀ life฀ or฀ end฀ of฀ the฀ lease฀ term฀ (end฀ of฀ its฀ useful฀ life฀ if฀ ownership฀ is฀ expected฀ to฀ be฀
transferred)฀(IFRS฀16:฀paras.฀31–32).฀
Alternatively฀the฀right-of-use฀asset฀is฀accounted฀for฀in฀accordance฀with:฀
(a)฀ The฀revaluation฀model฀of฀IAS฀16฀(optional฀where฀the฀right-of-use฀asset฀relates฀to฀a฀class฀
of฀property,฀plant฀and฀equipment฀measured฀under฀the฀revaluation฀model,฀and฀where฀elected,฀
must฀apply฀to฀all฀right-of-use฀assets฀relating฀to฀that฀class)฀(IFRS฀16:฀para.฀35)฀
(b)฀ The฀fair฀value฀model฀of฀IAS฀40฀Investment฀Property฀(compulsory฀if฀the฀right-of-use฀
asset฀meets฀the฀definition฀of฀investment฀property฀and฀the฀lessee฀uses฀the฀fair฀value฀model฀for฀its฀
investment฀property)฀(IFRS฀16:฀para.฀34).฀
Right-of-use฀assets฀are฀presented฀either฀as฀a฀separate฀line฀item฀in฀the฀statement฀of฀financial฀position฀or฀
by฀disclosing฀which฀line฀items฀include฀right-of-use฀assets฀(IFRS฀16:฀para.฀47).฀
Lessee฀accounting฀revision฀
A฀company฀enters฀into฀a฀4-year฀lease฀commencing฀on฀1฀January฀20X1฀(and฀intends฀to฀use฀the฀asset฀
for฀4฀years).฀The฀terms฀are฀4฀payments฀of฀$50,000,฀commencing฀on฀1฀January฀20X1,฀and฀annually฀
thereafter.฀The฀interest฀rate฀implicit฀in฀the฀lease฀is฀7.5%฀and฀the฀present฀value฀of฀lease฀payments฀not฀
paid฀at฀1฀January฀20X1฀(ie฀3฀payments฀of฀$50,000)฀discounted฀at฀that฀rate฀is฀$130,026.฀
Legal฀costs฀to฀set฀up฀the฀lease฀incurred฀by฀the฀company฀were฀$402.฀
Required฀
Show฀the฀lease฀liability฀from฀1฀January฀20X1฀to฀31฀December฀20X4฀and฀explain฀the฀treatment฀of฀the฀
right-of-use฀asset.฀
Solution฀
฀ 20X1฀ 20X2฀ 20X3฀ 20X4฀
฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀
1฀January฀b/d฀ 130,026฀ 139,778฀ 96,512฀ 50,000฀
Lease฀payments฀ ฀฀฀฀฀฀฀฀฀฀฀(0)฀ ฀฀(50,000)฀ ฀(50,000)฀ ฀(50,000)฀
฀ 130,026฀ 89,778฀ 46,512฀ 0฀
Interest฀at฀7.5%฀(interest฀in฀P/L)฀ ฀฀฀฀฀9,752฀ ฀ ฀฀฀฀6,734฀ ฀฀฀3,488฀ ฀ ฀฀฀฀฀฀฀฀฀0฀
31฀December฀c/d฀ ฀139,778฀ ฀฀฀96,512฀ ฀50,000฀ ฀฀฀฀฀฀฀฀฀฀0฀
182฀

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8:฀Leases฀
The฀right-of-use฀asset฀is฀recognised฀(at฀the฀lease฀commencement฀date,฀1฀January฀20X1)฀at:฀
฀ $฀฀฀฀฀฀
Present฀value฀of฀lease฀payments฀not฀paid฀at฀the฀commencement฀date฀ 130,026฀
Payments฀made฀at฀the฀lease฀commencement฀date฀ 50,000฀
Initial฀direct฀costs฀ ฀฀฀฀฀฀฀฀402฀
฀ ฀180,428฀
This฀is฀depreciated฀over฀4฀years฀(as฀lease฀term฀and฀useful฀life฀are฀both฀4฀years)฀at฀$45,107฀
($180,428/4฀years)฀per฀annum.฀
Optional฀recognition฀exemptions฀
IFRS฀ 16฀ provides฀ an฀ optional฀ exemption฀ from฀ the฀ full฀ requirements฀ of฀ the฀ standard฀ for฀ (IFRS฀16:฀
para.฀5):฀
฀ Short-term฀leases฀(leases฀with฀a฀lease฀term฀of฀12฀months฀or฀fewer)฀(IFRS฀16:฀Appendix฀A)฀
฀ Leases฀for฀which฀the฀underlying฀ asset฀ is฀ low฀ value฀(eg฀tablet฀and฀personal฀computers,฀
small฀items฀of฀office฀furniture฀and฀telephones)฀(IFRS฀16:฀para.฀B8).฀
If฀ the฀ entity฀ elects฀ to฀ take฀ the฀ exemption,฀ lease฀ payments฀ are฀ recognised฀ as฀ an฀ expense฀ on฀ a฀
straight-line฀ basis฀ over฀ the฀ lease฀ term฀or฀another฀systematic฀basis฀(if฀more฀representative฀of฀
the฀pattern฀of฀the฀lessee's฀benefits)฀(IFRS฀16:฀para.฀6).฀
The฀assessment฀of฀whether฀an฀underlying฀asset฀is฀of฀low฀value฀is฀performed฀on฀an฀absolute฀basis฀
based฀ on฀ the฀ value฀ if฀ the฀ asset฀ when฀ it฀ is฀ new.฀ ฀ It฀ is฀ not฀ a฀ question฀ of฀ materiality:฀ different฀ lessees฀
should฀ come฀ to฀ the฀ same฀ conclusion฀ about฀ whether฀ assets฀ are฀ low฀ value,฀ regardless฀ of฀ the฀ entity's฀
size฀(IFRS฀16:฀para.฀B4).฀
Illustration฀4฀
An฀entity฀leases฀a฀second-hand฀car฀which฀has฀a฀market฀value฀of฀$2,000.฀When฀new฀it฀would฀have฀
cost฀$15,000.฀
The฀lease฀would฀not฀qualify฀as฀a฀lease฀of฀a฀low-value฀asset฀because฀the฀car฀would฀not฀have฀been฀low฀
value฀when฀new.฀
Remeasurement฀
The฀lease฀liability฀is฀remeasured฀(if฀necessary)฀for฀any฀reassessment฀of฀amounts฀payable฀(IFRS฀16:฀
para.฀39).฀
The฀revised฀lease฀payments฀are฀discounted฀using฀the฀original฀ discount฀ interest฀rate฀where฀the฀
change฀relates฀to฀an฀expected฀payment฀on฀a฀residual฀value฀guarantee฀or฀payments฀linked฀
to฀an฀index฀or฀rate฀(and฀a฀revised฀discount฀rate฀where฀there฀is฀a฀change฀in฀lease฀term,฀
purchase฀option฀or฀payments฀linked฀to฀a฀floating฀interest฀rate)฀(IFRS฀16:฀paras.฀40–43).฀
The฀change฀in฀the฀lease฀liability฀is฀recognised฀as฀an฀adjustment฀to฀the฀right-of-use฀asset฀(or฀
in฀profit฀or฀loss฀if฀the฀right-of-use฀asset฀is฀reduced฀to฀zero)฀(IFRS฀16:฀para.฀39).฀
Chapter฀8฀Section฀1.3฀of฀the฀Supplementary฀Reading฀contains฀an฀example฀of฀remeasurement฀of฀the฀
lease฀liability.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
฀ 183฀

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฀฀
Activity฀1:฀Lessee฀accounting฀฀ ฀
Lassie฀plc฀leased฀an฀item฀of฀equipment฀on฀the฀following฀terms:฀
Commencement฀date฀ 1฀January฀20X1
Lease฀term฀ 5฀years
Annual฀lease฀payments฀(commencing฀฀ $200,000฀(rising฀annually฀by฀CPI฀as฀at฀฀
1฀January฀20X1)฀ 31฀December)฀
Interest฀rate฀implicit฀in฀the฀lease฀ 6.2%
The฀ present฀ value฀ of฀ lease฀ payments฀ not฀ paid฀ at฀ 1฀ January฀ 20X1฀ was฀ $690,000.฀ The฀ price฀ to฀
purchase฀the฀asset฀outright฀would฀have฀been฀$1,200,000.฀
Inflation฀measured฀by฀the฀Consumer฀Price฀Index฀(CPI)฀for฀the฀year฀ending฀31฀December฀20X1฀was฀
2%.฀ As฀ a฀ result฀ the฀ lease฀ payments฀ commencing฀ 1฀ January฀ 20X2฀ rose฀ to฀ $204,000.฀ The฀ present฀
value฀ of฀ lease฀ payments฀ for฀ the฀ remaining฀ 4฀ years฀ of฀ the฀ lease฀ becomes฀ approximately฀ $747,300฀
using฀the฀original฀discount฀rate฀of฀6.2%.฀
Required฀
Discuss฀ how฀ Lassie฀ plc฀ should฀ account฀ for฀ the฀ lease฀ and฀ remeasurement฀ in฀ the฀ year฀ ended฀
1.4฀Deferred฀tax฀implications฀
Issue฀
Under฀a฀lease,฀the฀lessee฀recognises฀a฀right-of-use฀asset฀and฀a฀corresponding฀lease฀liability.฀This฀net฀
figure฀represents฀the฀carrying฀amount.฀
If฀an฀entity฀is฀granted฀tax฀relief฀as฀lease฀rentals฀are฀paid,฀a฀temporary฀difference฀arises,฀as฀the฀tax฀
base฀of฀the฀lease฀is฀zero.฀
This฀ results฀ in฀ a฀ deferred฀ tax฀ asset.฀ Tax฀ deductions฀ are฀ allowed฀ on฀ the฀ lease฀ rental฀ payment฀
made,฀which,฀at฀the฀beginning฀of฀the฀lease,฀is฀lower฀than฀the฀combined฀depreciation฀expense฀and฀
finance฀cost฀recognised฀for฀accounting.฀฀Therefore,฀the฀future฀tax฀saving฀on฀the฀additional฀accounting฀
deduction฀is฀recognised฀now฀in฀order฀to฀apply฀the฀accruals฀concept.฀
Measurement฀
The฀deferred฀tax฀asset฀temporary฀difference฀is฀measured฀as:฀
Carrying฀amount:฀
฀ Right-of-use฀asset฀(carrying฀amount) X฀ Tax฀base฀is฀$0฀as฀
lease฀payments฀are฀tax฀
฀ Lease฀liability฀ (X) deductible฀when฀paid฀
฀ (X)
Tax฀base฀ 0
฀
Temporary฀difference฀ (X)
฀
Deferred฀tax฀asset฀at฀x% X
184฀

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8:฀Leases฀
Activity฀2:฀Deferred฀tax฀ ฀
On฀1฀January฀20X1,฀Heggie฀leased฀a฀machine฀under฀a฀five฀year฀lease.฀The฀useful฀life฀of฀the฀asset฀to฀
Heggie฀was฀four฀years฀and฀there฀is฀no฀residual฀value.฀
The฀ annual฀ lease฀ payments฀ are฀ $6฀ million฀ payable฀ in฀ arrears฀ each฀ year฀ on฀ 31฀ December.฀ The฀
present฀ value฀ of฀ the฀ lease฀ payments฀ was฀ $24฀ million฀ using฀ the฀ interest฀ rate฀ implicit฀ in฀ the฀ lease฀ of฀
approximately฀8%฀per฀annum.฀At฀the฀end฀of฀the฀lease฀term฀legal฀title฀remains฀with฀the฀lessor.฀฀Heggie฀
incurred฀$0.4฀million฀of฀direct฀costs฀of฀setting฀up฀the฀lease.฀
The฀directors฀have฀not฀leased฀an฀asset฀before฀and฀are฀unsure฀how฀to฀account฀for฀it฀and฀whether฀there฀
are฀any฀deferred฀tax฀implications.฀
The฀ company฀ can฀ claim฀ a฀ tax฀ deduction฀ for฀ the฀ annual฀ lease฀ payments฀ and฀ lease฀ set-up฀ costs.฀
Assume฀a฀tax฀rate฀of฀20%.฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ the฀ accounting฀ treatment฀ of฀ the฀ above฀ transaction฀ in฀ Heggie's฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X1.฀Work฀to฀the฀nearest฀$0.1฀million.฀
2฀ Lessor฀accounting฀
2.1฀Classification฀of฀leases฀for฀lessor฀accounting฀
The฀approach฀to฀lessor฀accounting฀classifies฀leases฀into฀two฀types฀(IFRS฀16:฀para.฀61):฀
฀ Finance฀ leases฀ (where฀ a฀ lease฀ receivable฀ is฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀
position);฀and฀
฀ Operating฀leases฀(which฀are฀accounted฀for฀as฀rental฀income).฀฀
Finance฀lease:฀a฀lease฀that฀transfers฀substantially฀all฀the฀risks฀and฀rewards฀incidental฀to฀
ownership฀of฀an฀underlying฀asset.฀
Key฀terms฀
Operating฀lease:฀a฀lease฀that฀does฀not฀transfer฀substantially฀all฀the฀risks฀and฀rewards฀
incidental฀to฀ownership฀of฀an฀underlying฀asset.฀
IFRS฀ 16฀ identifies฀ five฀ examples฀ of฀ situations฀ which฀ would฀ normally฀ lead฀ to฀ a฀ lease฀ being฀
classified฀as฀a฀finance฀lease฀(IFRS฀16:฀para.฀63):฀
(a)฀ The฀lease฀transfers฀ownership฀of฀the฀underlying฀asset฀to฀the฀lessee฀by฀the฀end฀of฀the฀lease฀
term.฀
(b)฀ The฀ lessee฀ has฀ the฀ option฀ to฀ purchase฀ the฀ underlying฀ asset฀ at฀ a฀ price฀ expected฀ to฀ be฀
sufficiently฀ lower฀ than฀ fair฀ value฀at฀the฀exercise฀date,฀that฀it฀is฀reasonably฀certain,฀at฀
the฀inception฀date,฀that฀the฀option฀will฀be฀exercised.฀
(c)฀ The฀lease฀term฀is฀for฀a฀major฀part฀of฀the฀economic฀life฀of฀the฀underlying฀asset฀even฀if฀title฀
is฀not฀transferred.฀
(d)฀ The฀ present฀ value฀ of฀ the฀ lease฀ payments฀ at฀ the฀ inception฀ date฀ amounts฀ to฀ at฀ least฀
substantially฀all฀of฀the฀fair฀value฀of฀the฀underlying฀asset.฀
(e)฀ The฀ underlying฀ asset฀ is฀ of฀ such฀ specialised฀ nature฀ that฀ only฀ the฀ lessee฀ can฀ use฀ it฀ without฀
major฀modifications.฀
฀ 185฀

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฀฀
Additionally฀the฀following฀situations฀which฀could฀lead฀to฀a฀lease฀being฀classified฀as฀a฀finance฀lease฀
(IFRS฀16:฀para.฀64):฀
(a)฀ Any฀losses฀on฀cancellation฀are฀borne฀by฀the฀lessee.฀
(b)฀ Gains/losses฀on฀changes฀in฀residual฀value฀accrue฀to฀the฀lessee.฀
(c)฀ The฀ lessee฀ can฀ continue฀ to฀ lease฀ for฀ a฀ secondary฀ term฀ at฀ a฀ rent฀ substantially฀ lower฀
than฀market฀rent.฀
2.2฀฀Finance฀leases฀
Recognition฀and฀measurement฀
At฀the฀commencement฀date฀(the฀date฀the฀lessor฀makes฀the฀underlying฀asset฀available฀for฀use฀by฀the฀
lessee),฀the฀lessor฀derecognises฀the฀underlying฀asset฀and฀recognises฀a฀receivable฀at฀an฀amount฀equal฀
to฀the฀net฀investment฀in฀the฀lease฀(IFRS฀16:฀para.฀67).฀
The฀net฀investment฀in฀the฀lease฀(IFRS฀16:฀Appendix฀A)฀is฀the฀sum฀of:฀
Present฀value฀of฀lease฀payments฀receivable฀by฀the฀lessor฀ ฀X฀
Present฀value฀of฀any฀unguaranteed฀residual฀value฀accruing฀to฀the฀lessor฀ ฀X฀
฀ ฀X฀
The฀unguaranteed฀ residual฀ value฀is฀that฀portion฀of฀the฀residual฀value฀of฀the฀underlying฀asset,฀
the฀realisation฀of฀which฀by฀a฀lessor฀is฀not฀assured฀or฀is฀guaranteed฀solely฀by฀a฀party฀related฀to฀the฀
lessor฀(IFRS฀16:฀Appendix฀A).฀
Tutorial฀note฀
Essentially,฀an฀unguaranteed฀residual฀value฀arises฀where฀a฀lessor฀expects฀to฀be฀able฀to฀sell฀an฀asset฀
at฀the฀end฀of฀the฀lease฀term฀for฀more฀than฀any฀minimum฀amount฀guaranteed฀by฀the฀lessee฀in฀the฀lease฀
contract.฀Amounts฀guaranteed฀by฀the฀lessee฀are฀included฀in฀the฀'present฀value฀of฀lease฀payments฀
receivable฀by฀the฀lessor'฀as฀they฀will฀always฀be฀received,฀so฀only฀the฀unguaranteed฀amount฀needs฀to฀
be฀added฀on,฀which฀accrues฀to฀the฀lessor฀because฀it฀owns฀the฀underlying฀asset.฀
Finance฀ income฀ is฀ recognised฀ over฀ the฀ lease฀ term฀ based฀ on฀ a฀ pattern฀ reflecting฀ a฀ constant฀
periodic฀rate฀of฀return฀on฀the฀lessor's฀net฀investment฀in฀the฀lease฀(IFRS฀16:฀para.฀75).฀
The฀derecognition฀and฀impairment฀requirements฀of฀IFRS฀9฀Financial฀Instruments฀are฀applied฀to฀
the฀net฀investment฀in฀the฀lease฀(IFRS฀16:฀para.฀77).฀
Illustration฀5฀
A฀lessor฀enters฀into฀a฀3฀year฀leasing฀arrangement฀commencing฀on฀1฀January฀20X3.฀Under฀the฀terms฀
of฀the฀lease,฀the฀lessee฀commits฀to฀pay฀$80,000฀per฀annum฀commencing฀on฀31฀December฀20X3.฀฀
A฀residual฀guarantee฀clause฀requires฀the฀lessee฀to฀pay฀$40,000฀(or฀$40,000฀less฀the฀asset's฀residual฀
value,฀if฀lower)฀at฀the฀end฀of฀the฀lease฀term฀if฀the฀lessor฀is฀unable฀to฀sell฀the฀asset฀for฀more฀than฀
$40,000.฀
The฀lessor฀expects฀to฀sell฀the฀asset฀based฀on฀current฀expectations฀for฀$50,000฀at฀the฀end฀of฀the฀lease.฀
The฀interest฀rate฀implicit฀in฀the฀lease฀is฀9.2%.฀The฀present฀value฀of฀lease฀payments฀receivable฀by฀the฀
lessor฀discounted฀at฀this฀rate฀is฀$232,502.฀
Required฀
Show฀the฀net฀investment฀in฀the฀lease฀from฀1฀January฀20X3฀to฀31฀December฀20X5฀and฀explain฀what฀
happens฀to฀the฀residual฀value฀guarantee฀on฀31฀December฀20X5.฀
186฀

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8:฀Leases฀
Solution฀
The฀net฀investment฀in฀the฀lease฀(lease฀receivable)฀on฀1฀January฀20X3฀is:฀
฀ ฀$฀฀฀฀฀฀
Present฀value฀of฀lease฀payments฀receivable฀by฀the฀lessor฀ ฀ 232,502 ฀
Present฀value฀of฀unguaranteed฀residual฀value฀(50,000฀–฀40,000฀=฀10,000฀×฀1/1.092 )฀ ฀฀฀฀฀7,679฀
3
฀ ฀240,181฀
The฀net฀investment฀in฀the฀lease฀(lease฀receivable)฀is฀as฀follows:฀
฀ 20X3฀ 20X4฀ 20X5฀
฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀
1฀January฀b/d฀ 240,181฀ 182,278฀ 119,048฀
Interest฀at฀9.2%฀(interest฀income฀in฀P/L)฀ ฀฀฀฀22,097฀ ฀฀฀฀16,770฀ ฀฀10,952฀
Lease฀instalments฀ ฀฀(80,000)฀ ฀฀(80,000)฀ ฀฀(80,000)฀
31฀December฀c/d฀ ฀182,278฀ ฀119,048฀ ฀฀฀50,000฀
On฀31฀December฀20X5,฀the฀remaining฀$50,000฀will฀be฀realised฀by฀selling฀the฀asset฀for฀$50,000฀or฀
above,฀or฀selling฀it฀for฀less฀than฀$50,000฀and฀claiming฀up฀to฀$40,000฀from฀the฀lessee฀under฀the฀
residual฀value฀guarantee.฀
An฀allowance฀for฀impairment฀losses฀is฀recognised฀in฀accordance฀with฀the฀IFRS฀9฀principles,฀either฀
applying฀the฀three฀stage฀approach฀or฀by฀recognising฀an฀allowance฀for฀lifetime฀expected฀credit฀losses฀
from฀initial฀recognition฀(as฀an฀accounting฀policy฀choice฀for฀lease฀receivables)฀–฀see฀Chapter฀7฀
Financial฀instruments.฀
Activity฀3:฀Lessor฀accounting฀฀ ฀
Able฀Leasing฀Co฀arranges฀financing฀arrangements฀for฀its฀customers฀for฀bespoke฀equipment฀acquired฀
from฀ manufacturers.฀ Able฀ Leasing฀ leased฀ an฀ item฀ of฀ equipment฀ to฀ a฀ customer฀ commencing฀ on฀
1฀January฀20X5.฀The฀expected฀economic฀life฀of฀the฀asset฀is฀eight฀years.฀
The฀terms฀of฀the฀lease฀were฀8฀annual฀payments฀of฀$4฀million,฀commencing฀on฀31฀December฀20X5.฀฀
The฀lessee฀guarantees฀that฀the฀residual฀value฀of฀the฀assets฀at฀the฀end฀of฀the฀lease฀will฀be฀$2฀million฀
(although฀Able฀Leasing฀expects฀to฀be฀able฀to฀sell฀it฀for฀its฀parts฀for฀$3฀million).฀The฀present฀value฀of฀
the฀lease฀payments฀including฀the฀residual฀value฀guarantee฀(discounted฀at฀the฀interest฀rate฀implicit฀in฀
the฀lease฀of฀6.2%)฀was฀$25.9฀million.฀This฀was฀equivalent฀to฀the฀purchase฀price.฀
Required฀
Discuss฀the฀accounting฀treatment฀of฀the฀above฀lease฀in฀the฀financial฀statements฀of฀Able฀Leasing฀Co฀for฀
the฀year฀ended฀31฀December฀20X5,฀including฀relevant฀calculations.฀
Work฀to฀the฀nearest฀$0.1฀million.฀
Manufacturer฀or฀dealer฀lessors฀
A฀ lessor฀ which฀ is฀ a฀ manufacturer฀ or฀ dealer฀ of฀ the฀ underlying฀ asset฀ needs฀ to฀ recognise฀ entries฀ for฀
finance฀ leases฀ in฀ a฀ similar฀ way฀ to฀ items฀ sold฀ outright฀ (as฀ well฀ as฀ the฀ lease฀ receivable)฀ (IFRS฀16:฀
para.฀71):฀
Revenue฀–฀fair฀value฀of฀underlying฀asset฀(or฀present฀value฀of฀lease฀payments฀if฀lower)฀ ฀X
Cost฀of฀sales฀–฀cost฀(or฀carrying฀amount)฀of฀the฀underlying฀asset฀less฀present฀value฀of฀฀฀฀
the฀unguaranteed฀residual฀value฀ ฀(X)
Gross฀profit฀ ฀฀฀฀X ฀
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฀
Illustration฀6฀
A฀manufacturer฀lessor฀leases฀out฀equipment฀under฀a฀10฀year฀finance฀lease.฀The฀equipment฀cost฀
$32฀million฀to฀manufacture.฀The฀normal฀selling฀price฀of฀the฀leased฀asset฀is฀$42฀million฀and฀the฀
present฀value฀of฀lease฀payments฀is฀$38฀million.฀The฀present฀value฀of฀the฀unguaranteed฀residual฀value฀
at฀the฀end฀of฀the฀lease฀is฀$2.2฀million.฀
The฀manufacturer฀recognises฀revenue฀of฀$38฀million,฀cost฀of฀sales฀of฀$29.8฀million฀($32฀million฀–฀
$2.2฀million),฀and฀therefore฀a฀gross฀profit฀of฀$8.2฀million.฀
The฀lease฀receivable฀is฀$40.2฀million฀($38฀million฀+฀$2.2฀million).฀The฀lease฀receivable฀is฀increased฀
by฀interest฀and฀reduced฀by฀lease฀instalments฀received฀(in฀the฀same฀way฀as฀for฀a฀standard฀finance฀
lease).฀
2.3฀฀Operating฀leases฀
Lease฀ payments฀ from฀ operating฀ leases฀ are฀ recognised฀ as฀ income฀ on฀ either฀ a฀ straight-line฀ basis฀
or฀ another฀ systematic฀ basis฀(if฀more฀representative฀of฀the฀pattern฀in฀which฀benefit฀from฀use฀of฀
the฀underlying฀asset฀is฀diminished)฀(IFRS฀16:฀para.฀81).฀
Any฀ initial฀ direct฀ costs฀ incurred฀ in฀ obtaining฀ the฀ lease฀ are฀ added฀ to฀ the฀ carrying฀ amount฀ of฀ the฀
underlying฀asset.฀IAS฀16฀Property,฀Plant฀and฀Equipment฀or฀IAS฀38฀Intangible฀Assets฀then฀applies฀to฀
the฀depreciation฀or฀amortisation฀of฀the฀underlying฀asset฀as฀appropriate฀(IFRS฀16:฀paras.฀83–84).฀
Illustration฀7฀
A฀lessor฀leases฀a฀property฀to฀a฀lessee฀under฀an฀operating฀lease฀for฀5฀years฀at฀an฀annual฀rate฀of฀
$100,000.฀฀However,฀the฀contract฀states฀that฀the฀first฀6฀months฀are฀'rent-free'.฀
Solution฀
The฀benefit฀received฀from฀the฀asset฀is฀earned฀over฀the฀5฀years.฀However,฀in฀the฀first฀year,฀the฀lessor฀
only฀receives฀$100,000฀×฀6/12฀=฀$50,000.฀Lease฀rentals฀of฀$450,000฀($50,000฀+฀($100,000฀×฀
4฀years))฀are฀received฀over฀the฀5฀year฀lease฀term.฀
Therefore,฀the฀lessor฀recognises฀income฀of฀$90,000฀per฀year฀($450,000/5฀years).฀
A฀receivable฀of฀$40,000฀is฀recognised฀at฀the฀end฀of฀year฀1฀($90,000฀–฀$50,000฀cash฀received).฀
3฀฀Sale฀and฀leaseback฀transactions฀
A฀sale฀and฀leaseback฀transaction฀arises฀where฀an฀entity฀(the฀seller-lessee)฀transfers฀('sells')฀an฀asset฀to฀
another฀entity฀(the฀buyer-lessor)฀and฀then฀leases฀it฀back.฀
The฀entity฀applies฀the฀requirements฀of฀IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀to฀determine฀
whether฀ in฀ substance฀ a฀ sale฀ occurs฀(ie฀whether฀a฀performance฀obligation฀is฀satisfied฀or฀not)฀
(IFRS฀16:฀para.฀99).฀
3.1฀ Transfer฀of฀the฀asset฀is฀in฀substance฀a฀sale฀
Seller-lessee฀
As฀ a฀ sale฀ has฀ occurred,฀ in฀ the฀ seller-lessee's฀ books,฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ must฀ be฀
derecognised.฀
The฀ seller-lessee฀ recognises฀ a฀ right-of-use฀ asset฀ measured฀ at฀ the฀ proportion฀ of฀ the฀ previous฀ carrying฀
amount฀that฀relates฀to฀the฀right฀of฀use฀retained฀(IFRS฀16:฀para.฀100).฀
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A฀gain/loss฀is฀recognised฀in฀the฀seller-lessee's฀financial฀statements฀in฀relation฀to฀the฀rights฀transferred฀
to฀the฀buyer-lessor฀(IFRS฀16:฀para.฀100).฀
If฀ the฀ consideration฀ received฀ for฀ the฀ sale฀ of฀ the฀ asset฀ does฀ not฀ equal฀ that฀ asset's฀ fair฀
value฀(or฀if฀lease฀payments฀are฀not฀at฀market฀rates),฀the฀sale฀proceeds฀are฀adjusted฀to฀fair฀value฀as฀
follows฀(IFRS฀16:฀para.฀101):฀
(a)฀ Below-market฀terms฀
The฀ difference฀ is฀ accounted฀ for฀ as฀ a฀ prepayment฀ of฀ lease฀ payments฀ and฀ so฀ is฀ added฀ to฀
the฀ right-of-use฀ asset฀ as฀ per฀ the฀ normal฀ IFRS฀ 16฀ treatment฀ for฀ initial฀ measurement฀ of฀ a฀
right-of-use฀asset.฀
(b)฀ Above-market฀terms฀
The฀difference฀is฀treated฀as฀additional฀financing฀provided฀by฀the฀buyer-lessor฀to฀the฀seller-
lessee.฀
The฀lease฀liability฀is฀originally฀recorded฀at฀the฀present฀value฀of฀lease฀payments.฀This฀amount฀
is฀then฀split฀between:฀
฀ The฀present฀value฀of฀lease฀payments฀at฀market฀rates;฀and฀
฀ The฀additional฀financing฀(the฀difference)฀which฀is฀in฀substance฀a฀loan.฀
Buyer-lessor฀
The฀ buyer-lessor฀ accounts฀ for฀ the฀ purchase฀ as฀ a฀ normal฀ purchase฀ and฀ for฀ the฀ lease฀ in฀
accordance฀with฀IFRS฀16฀(IFRS฀16:฀para.฀100).฀
3.2฀ Transfer฀of฀the฀asset฀is฀NOT฀in฀substance฀a฀sale฀
Seller-lessee฀
The฀seller-lessee฀continues฀to฀recognise฀the฀transferred฀asset฀and฀recognises฀a฀financial฀liability฀equal฀
to฀ the฀ transfer฀ proceeds฀ (and฀ accounts฀ for฀ it฀ in฀ accordance฀ with฀ IFRS฀9฀ Financial฀ Instruments)฀
(IFRS฀16:฀para.฀103).฀
Buyer-lessor฀
The฀ buyer-lessor฀ does฀ not฀ recognise฀ the฀ transferred฀ asset฀ and฀ recognises฀ a฀ financial฀ asset฀
equal฀to฀the฀transfer฀proceeds฀(and฀accounts฀for฀it฀in฀accordance฀with฀IFRS฀9)฀(IFRS฀16:฀para.฀103).฀
Illustration฀8฀
Fradin,฀an฀international฀hotel฀chain,฀is฀currently฀finalising฀its฀financial฀statements฀for฀the฀year฀ended฀
30฀June฀20X8฀and฀is฀unsure฀how฀to฀account฀for฀the฀following฀transaction.฀
On฀1฀July฀20X7,฀it฀sold฀one฀of฀its฀hotels฀to฀a฀third฀party฀institution฀and฀is฀leasing฀it฀back฀under฀a฀
10฀year฀lease.฀The฀sale฀price฀is฀$57฀million฀and฀the฀fair฀value฀of฀the฀asset฀is฀$60฀million.฀
The฀lease฀payment฀is฀$2.8฀million฀per฀annum฀in฀arrears฀commencing฀on฀30฀June฀20X8฀(below฀
market฀rate฀for฀this฀kind฀of฀lease).฀The฀present฀value฀of฀lease฀payments฀is฀$20฀million฀and฀the฀implicit฀
interest฀rate฀in฀the฀lease฀is฀6.6%.฀The฀purchaser฀can฀cancel฀the฀lease฀agreement฀and฀take฀full฀control฀
of฀the฀hotel฀with฀6฀months'฀notice.฀
The฀hotel฀had฀a฀remaining฀economic฀life฀of฀30฀years฀at฀1฀July฀20X7฀and฀a฀carrying฀amount฀(under฀
the฀cost฀model)฀of฀$48฀million.฀
Required฀
Discuss฀how฀the฀above฀transaction฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Fradin฀for฀the฀
year฀ended฀30฀June฀20X8.฀Work฀to฀the฀nearest฀$0.1฀million.฀
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฀฀
Solution฀
In฀substance,฀this฀transaction฀is฀a฀sale.฀A฀performance฀obligation฀is฀satisfied฀(IFRS฀15)฀as฀control฀of฀
the฀hotel฀is฀transferred฀as฀the฀significant฀risks฀and฀rewards฀of฀ownership฀have฀passed฀to฀the฀
purchaser,฀who฀can฀cancel฀the฀lease฀agreement฀and฀take฀full฀control฀of฀the฀hotel฀with฀six฀months'฀
notice.฀Additionally,฀the฀lease฀is฀only฀for฀10฀years฀of฀the฀hotel's฀remaining฀economic฀life฀of฀30฀years.฀
However,฀Fradin฀does฀retain฀an฀interest฀in฀the฀hotel,฀as฀it฀does฀expect฀to฀continue฀to฀operate฀it฀for฀the฀
next฀10฀years.฀Fradin฀was฀the฀legal฀owner฀and฀is฀now฀the฀lessee.฀
As฀a฀sale฀has฀occurred,฀the฀carrying฀amount฀of฀the฀hotel฀asset฀of฀$48฀million฀must฀be฀derecognised.฀
Per฀IFRS฀16,฀a฀right-of-use฀asset฀should฀then฀be฀recognised฀at฀the฀proportion฀of฀the฀previous฀carrying฀
amount฀that฀relates฀to฀the฀right฀of฀use฀retained.฀This฀amounts฀to฀$16฀million฀($48m฀carrying฀amount฀
×฀$20m฀present฀value฀of฀lease฀payments/$60m฀fair฀value).฀
As฀the฀fair฀value฀of฀$60฀million฀is฀in฀excess฀of฀the฀proceeds฀of฀$57฀million,฀IFRS฀16฀requires฀the฀
excess฀of฀$3฀million฀($60m฀–฀$57m)฀to฀be฀treated฀as฀a฀prepayment฀of฀the฀lease฀rentals.฀Therefore,฀
the฀$3฀million฀prepayment฀must฀be฀added฀to฀the฀right-of-use฀asset฀(like฀a฀payment฀made฀at/before฀
lease฀commencement฀date),฀bringing฀the฀right-of-use฀asset฀to฀$19฀million฀($16m฀+฀$3m).฀
A฀lease฀liability฀must฀also฀be฀recorded฀at฀the฀present฀value฀of฀lease฀payments฀of฀$20฀million.฀
A฀gain฀on฀sale฀is฀recognised฀in฀relation฀to฀the฀rights฀transferred฀to฀the฀buyer-lessor.฀฀
The฀total฀gain฀would฀be฀$12฀million฀($60m฀fair฀value฀–฀$48m฀carrying฀amount).฀฀ As฀fair฀value฀($60m)฀
The฀portion฀recognised฀as฀a฀gain฀relating฀to฀the฀rights฀transferred฀is฀$8฀million฀฀ exceeds฀sale฀proceeds฀
($57m),฀excess฀is฀a฀
($12m฀gain฀×฀($60m฀–฀$20m)/$60m฀portion฀of฀fair฀value฀transferred).฀฀ prepayment฀of฀lease฀
rentals฀
On฀1฀July฀20X7,฀the฀double฀entry฀to฀record฀the฀sale฀is:฀฀
DR฀ Cash฀ $57m฀
DR฀ Right-of-use฀asset฀($48m฀×฀$20m/$60m฀=฀$16m฀+฀$3m฀prepayment)฀ $19m฀
CR฀ Hotel฀asset฀ Proportion฀of฀carrying฀amount฀ ฀ $48m฀
re฀rights฀retained฀
CR฀ Lease฀liability฀ ฀ $20m฀
CR฀ Gain฀on฀sale฀(P/L)฀(balancing฀figure฀or฀($60m฀–฀$48m)฀×฀($60m฀–฀$20m)/$60m)฀ $8m฀
Interest฀on฀the฀lease฀liability฀is฀then฀accrued฀for฀the฀year:฀
Proportion฀of฀
DR฀ Finance฀costs฀(W)฀ $1.3m฀ profit฀re฀rights฀
CR฀ Lease฀liability฀ ฀ $1.3m฀ sold฀
The฀lease฀payment฀on฀30฀June฀20X8฀reduces฀the฀lease฀liability฀by฀$2.8m:฀฀
DR฀ Lease฀liability฀ $2.8m฀
CR฀ Cash฀ ฀ $2.8m฀
The฀carrying฀amount฀of฀the฀lease฀liability฀at฀30฀June฀20X8฀is฀therefore฀$18.5฀million฀(see฀Working฀
below).฀
The฀proportion฀of฀the฀carrying฀amount฀of฀the฀hotel฀asset฀relating฀to฀the฀right฀of฀use฀retained฀of฀
$19฀million฀(including฀the฀$3฀million฀lease฀prepayment)฀remains฀as฀a฀right-of-use฀asset฀in฀the฀
statement฀of฀financial฀position฀and฀is฀depreciated฀over฀the฀lease฀term:฀
DR฀ P/L฀($19m/10฀years)฀ $1.9m฀
CR฀ Right-of-use฀asset฀ ฀ $1.9m฀
This฀results฀in฀a฀net฀credit฀to฀profit฀or฀loss฀for฀the฀year฀ended฀30฀June฀20X8฀of฀$4.8฀million฀($8m฀–฀
$1.3m฀–฀$1.9m).฀
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Working:฀Lease฀liability฀for฀the฀year฀ending฀30฀June฀20X8฀
฀ $m ฀
b/d฀at฀1฀July฀20X7฀ 20 ฀
Interest฀(20฀×฀6.6%)฀ ฀ 1.3 ฀
Lease฀payment฀ ฀ (2.8) ฀
c/d฀at฀30฀June฀20X8฀ ฀18.5 ฀
฀
฀
Chapter฀8฀Section฀1.4฀of฀the฀Supplementary฀Reading฀contains฀a฀further฀example฀of฀accounting฀for฀a฀
sale฀ and฀ leaseback฀ transaction.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀
4฀฀Current฀developments฀
IFRS฀ 16฀ replaces฀ IAS฀ 17฀ Leases฀ effective฀ for฀ accounting฀ periods฀ beginning฀ on฀ or฀ after฀ 1฀ January฀
2019฀(with฀earlier฀application฀permitted฀for฀entities฀that฀apply฀IFRS฀15฀Revenue฀from฀Contracts฀with฀
Customers).฀
4.1฀ The฀issue฀
IAS฀17฀Leases฀classified฀leases฀into฀operating฀leases฀and฀finance฀leases฀for฀lessees,฀similar฀to฀
the฀approach฀used฀for฀lessor฀accounting฀in฀IFRS฀16฀(IAS฀17:฀para.฀8).฀
In฀the฀lessee's฀books,฀operating฀leases฀were฀not฀recognised฀as฀liabilities฀in฀the฀statement฀of฀
financial฀ position฀ and฀ instead฀ the฀ lease฀ rentals฀ were฀ recorded฀ as฀ an฀ expense฀ in฀ profit฀ or฀ loss฀
(IAS฀17:฀para.฀33).฀
However,฀ finance฀ leases฀ were฀ recorded฀ in฀ the฀ lessee's฀ books฀ as฀ an฀ asset฀ and฀ a฀ corresponding฀
liability฀(IAS฀17:฀para.฀20).฀
Therefore฀the฀classification฀of฀a฀lease฀as฀an฀operating฀or฀finance฀lease฀had฀a฀considerable฀impact฀
on฀the฀financial฀statements,฀most฀notably฀on฀indebtedness,฀gearing฀ratios,฀ROCE฀and฀interest฀cover.฀฀฀
It฀ was฀ argued฀ that฀ the฀ IAS฀ 17฀ accounting฀ treatment฀ of฀ operating฀ leases฀ was฀ inconsistent฀ with฀ the฀
definition฀ of฀ assets฀ and฀ liabilities฀ in฀ the฀ IASB's฀ Conceptual฀ Framework.฀ Therefore฀ all฀ leases฀ (with฀
limited฀ exceptions)฀ have฀ been฀ brought฀ onto฀ the฀ statement฀ of฀ financial฀ position,฀ following฀ two฀
Exposure฀ Drafts฀ issued฀ in฀ May฀2013฀ and฀ August฀ 2010฀ and฀ an฀ earlier฀ Discussion฀ Paper฀ issued฀ in฀
March฀2009.฀
In฀the฀event฀it฀was฀decided฀not฀to฀alter฀the฀accounting฀treatment฀for฀lessors,฀where฀a฀distinction฀is฀still฀
made฀between฀operating฀leases฀and฀finance฀leases.฀
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฀฀
Ethics฀note฀
Leases฀have฀traditionally฀been฀an฀area฀where฀ethical฀application฀of฀the฀Standard฀is฀essential฀to฀give฀
a฀true฀and฀fair฀view.฀Indeed,฀the฀accounting฀for฀leases฀in฀the฀financial฀statements฀of฀lessees฀was฀
revised฀in฀IFRS฀16฀to฀avoid฀the฀issue฀of฀'off฀balance฀sheet฀financing'฀that฀previously฀arose฀by฀not฀
recognising฀all฀leases฀as฀a฀liability฀in฀the฀financial฀statements฀of฀lessees.฀
In฀terms฀of฀this฀topic฀area,฀some฀potential฀ethical฀issues฀to฀watch฀out฀for฀include:฀
฀ Contracts฀which฀in฀substance฀contain฀a฀lease,฀where฀the฀lease฀element฀may฀not฀have฀been฀
accounted฀for฀correctly฀
฀ Material฀amounts฀of฀leases฀accounted฀for฀as฀short-term฀with฀no฀liability฀shown฀in฀the฀financial฀
statements฀(eg฀by฀writing฀contracts฀which฀expire฀every฀year)฀
฀ Use฀of฀sale฀and฀leaseback฀arrangements฀to฀improve฀an฀entity's฀cash฀position฀and฀alter฀
accounting฀ratios,฀as฀finance฀costs฀are฀generally฀shown฀below฀operating฀profit฀(profit฀before฀
interest฀and฀tax)฀whereas฀depreciation฀is฀shown฀above฀that฀line฀
฀ In฀lessor฀financial฀statements,฀manipulation฀of฀the฀accounting฀for฀leases฀as฀operating฀leases฀or฀
finance฀leases฀to฀achieve฀a฀particular฀accounting฀effect.฀For฀example,฀classification฀of฀a฀lease฀
as฀an฀operating฀leases฀since฀operating฀lease฀income฀is฀shown฀as฀rental฀income฀(and฀included฀
in฀operating฀profit)฀while฀finance฀lease฀income฀is฀shown฀as฀finance฀income,฀which฀could฀be฀
below฀a฀company's฀operating฀profit฀line฀if฀being฀a฀lessor฀is฀not฀their฀main฀business.฀฀
฀
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8:฀Leases฀
฀
Leases฀(IFRS฀16)
1.฀ Lessee฀accounting฀ 2.฀ Lessor฀accounting฀ 3.฀ Sale฀and฀leaseback฀

transactions฀
Definitions฀ Finance฀leases ฀ Transfer฀is฀in฀substance฀

฀ A฀contract,฀or฀part฀of฀a฀contract,฀that฀ ฀ A฀lease฀that฀transfers฀substantially฀all฀฀ a฀sale฀
conveys฀the฀right฀to฀use฀an฀asset฀(the฀ the฀risks฀and฀rewards฀incidental฀to฀ ฀ Seller/lessee:฀
underlying฀asset)฀for฀a฀period฀of฀time฀in฀ ownership฀of฀an฀underlying฀asset฀ ฀ –฀ Derecognises฀asset฀transferred฀
exchange฀for฀consideration฀ ฀ Indicators฀of฀a฀finance฀lease:฀ ฀ –฀ Recognises฀a฀right-of-use฀asset฀at฀
฀ Contract฀contains฀a฀lease฀if฀the฀contract฀ –฀ Transfer฀of฀ownership฀by฀end฀of฀term฀ proportion฀of฀previous฀CA฀re฀right฀
conveys฀the฀right฀to฀control฀an฀asset฀for฀ –฀ Option฀to฀purchase฀at฀bargain฀price฀ of฀use฀retained฀
a฀period฀of฀time฀for฀consideration,฀ –฀ Leased฀for฀major฀part฀of฀economic฀life฀ ฀ –฀ Recognises฀gain/loss฀in฀relation฀
where,฀throughout฀the฀period฀of฀use,฀the฀ –฀ PVLP฀is฀substantially฀all฀of฀FV฀ to฀rights฀transferred฀
customer฀has:฀ –฀ Asset฀very฀specialised฀฀
฀ If฀consideration฀received฀is฀not฀
(a)฀ Right฀to฀obtain฀substantially฀all฀of฀ –฀ Cancellation฀losses฀borne฀by฀lessee฀
equal฀to฀asset's฀FV฀(or฀lease฀
the฀economic฀benefits฀from฀use,฀ –฀ Gain/loss฀on฀RV฀accrue฀to฀lessee฀
payments฀not฀at฀market฀rates):฀
–฀ Secondary฀term฀at฀bargain฀rent฀
and฀ ฀ ฀ Below-market฀terms:฀
(b)฀ Right฀to฀direct฀use฀of฀identified฀ ฀ Derecognise฀underlying฀asset฀and฀
฀ prepayment฀of฀lease฀payments฀
asset฀ recognise฀lease฀receivable:฀฀
(add฀to฀right-of-use฀asset)฀
฀ ฀PV฀lease฀payments฀ X฀
฀ PV฀unguaranteed฀residual฀value฀ X฀ ฀ ฀ Above-market฀terms:฀
฀ =฀'Net฀investment฀in฀the฀lease'฀ X฀ ฀ additional฀financing฀(split฀PV฀
Accounting฀treatment฀ ฀ Unguaranteed฀residual฀value฀(UGRV)฀
lease฀liability฀between฀loan฀and฀
lease฀payments฀at฀market฀rates)฀
฀ Lease฀liability:฀ ฀ ฀ That฀portion฀of฀the฀residual฀value฀of฀
฀ Buyer-lessor฀accounts฀for:฀
the฀underlying฀asset,฀the฀realisation฀
฀ PVLP฀not฀paid฀at฀commence.฀date฀ ฀X฀ ฀ –฀ The฀purchase฀as฀normal฀purchase฀฀
of฀which฀by฀a฀lessor฀is฀not฀assured฀
฀ Interest฀at฀implicit฀%฀ ฀X฀ ฀ –฀ The฀lease฀per฀IFRS฀16฀
or฀is฀guaranteed฀solely฀by฀a฀party฀
฀ Payment฀in฀arrears฀ ฀(X)฀ ฀
related฀to฀the฀lessor฀
฀ Liability฀c/d฀(split฀NCL฀&฀CL)฀ ฀฀X฀฀ ฀
฀ Recognise฀finance฀income฀on฀lessor's฀฀ ฀
฀ Right-of-use฀asset:฀ net฀investment฀outstanding฀ ฀
฀ PVLP฀not฀paid฀at฀commence.฀date฀ ฀X฀ ฀ Manufacturer/dealer฀lessor:฀
฀ Payments฀on/before฀comm.฀date฀ ฀X฀ ฀ Transfer฀is฀NOT฀in฀
฀ Revenue฀(lower฀of฀FV฀&฀PVLP)฀ ฀X฀
฀ Initial฀direct฀costs฀ ฀X฀
Cost฀of฀sales฀(CA฀–฀UGRV)฀ ฀(X)฀
substance฀a฀sale฀
฀ Dismantling/restoration฀costs฀ ฀X฀ ฀ Seller-lessee:฀
Gross฀profit฀ ฀฀X฀
฀ ฀ ฀X฀ ฀ ฀ –฀ Continues฀to฀recognise฀transferred฀
฀ Depreciate฀to฀earlier฀of฀end฀of฀useful฀life฀ asset฀
(UL)฀and฀lease฀term฀(UL฀if฀ownership฀ ฀ –฀ Recognises฀financial฀liability฀
expected฀to฀transfer)฀ equal฀to฀transfer฀proceeds฀(and฀
฀ Optional฀exemptions฀(expense฀in฀P/L):฀ accounts฀for฀it฀per฀IFRS฀9)฀
฀ Short-term฀leases฀(lease฀term฀<฀12฀ ฀ ฀Buyer-lessor:฀
฀ Operating฀leases ฀ –฀ Does฀not฀recognise฀transferred฀
months)฀
฀ ฀ Underlying฀asset฀is฀low฀value฀(eg฀ ฀ A฀lease฀that฀does฀not฀transfer฀ asset฀
tablet฀PCs,฀small฀office฀furniture,฀ substantially฀all฀the฀risks฀and฀ ฀ –฀ Recognises฀financial฀asset฀equal฀
telephones)฀ rewards฀incidental฀to฀ownership฀of฀ to฀transfer฀proceeds฀(and฀accounts฀
฀ Remeasurement:฀ an฀underlying฀asset฀ for฀it฀per฀IFRS฀9)฀
฀ ฀ Revised฀lease฀payments฀discounted฀ ฀
฀ ฀Asset฀retained฀in฀books฀of฀lessor฀&฀
at฀original฀rate฀where฀re฀residual฀ depreciated฀over฀UL฀
value฀guarantee฀or฀payments฀linked฀
฀ Credit฀rentals฀to฀P/L฀straight฀line฀
to฀index฀or฀rate฀(and฀revised฀rate฀
over฀lease฀term฀unless฀another฀
otherwise)฀
฀ ฀ Adjust฀right-of-use฀asset฀
systematic฀basis฀is฀more฀ Deferred฀tax฀implications
representative฀
Accounting฀CA:฀ Right-of-use฀asset฀฀ ฀X฀ ฀
฀ ฀ Lease฀liability฀ ฀(X)฀ ฀
฀ ฀ ฀ ฀(X)
฀ Tax฀base:฀ ฀ ฀ ฀฀0฀฀
฀ Temporary฀difference฀ ฀฀ ฀(X)฀
Deferred฀tax฀asset฀at฀x%฀ ฀ ฀฀X฀฀
฀ ฀
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฀฀
1.฀ Lessee฀accounting฀
฀ Where฀a฀contract฀contains฀a฀lease,฀a฀right-of-use฀asset฀and฀a฀liability฀for฀the฀
present฀value฀of฀lease฀payments฀are฀recognised฀in฀the฀lessee's฀books.฀
฀ An฀optional฀exemption฀is฀available฀for฀short-term฀leases฀(lease฀term฀of฀12฀months฀or฀
less)฀and฀leases฀of฀low฀value฀assets,฀which฀can฀be฀accounted฀for฀as฀an฀expense฀over฀the฀
lease฀term.฀
฀ Deferred฀tax฀arises฀on฀leases฀where฀lease฀payments฀are฀tax฀deductible฀when฀paid:฀
฀ Carrying฀amount:฀
฀ ฀ Right-of-use฀asset฀ ฀X฀
฀ ฀ Lease฀liability฀ ฀(X)฀
฀ ฀ ฀X฀
฀ Tax฀base฀ (0)
฀ ฀
฀ Temporary฀difference฀ ฀฀X฀฀
฀ Deferred฀tax฀asset฀x%฀ X฀
2.฀ Lessor฀accounting฀
฀ Assets฀leased฀out฀under฀finance฀leases฀are฀derecognised฀from฀the฀lessor's฀books฀and฀
replaced฀with฀a฀receivable,฀the฀'net฀investment฀in฀the฀lease'.฀
฀ Assets฀leased฀under฀an฀operating฀lease฀remain฀in฀the฀lessor's฀books฀and฀rental฀income฀is฀
recognised฀on฀a฀straight฀line฀basis฀(or฀another฀systematic฀basis฀if฀more฀representative฀of฀the฀
pattern฀in฀which฀benefit฀from฀the฀underlying฀asset฀is฀diminished).฀
3.฀ Sale฀and฀leaseback฀transactions฀
฀ Accounting฀for฀sale฀and฀leaseback฀transactions฀depends฀on฀whether฀in฀substance฀a฀sale฀has฀
occurred฀(ie฀a฀performance฀obligation฀is฀satisfied)฀in฀accordance฀with฀IFRS฀15฀Revenue฀from฀
Contracts฀with฀Customers.฀
฀ Where฀the฀transfer฀is฀in฀substance฀a฀sale,฀the฀seller-lessee฀derecognises฀the฀asset฀
sold,฀and฀recognises฀a฀right-of-use฀asset฀and฀lease฀liability฀relating฀to฀the฀right฀of฀use฀
retained฀and฀a฀gain/loss฀in฀relation฀to฀the฀rights฀transferred.฀฀The฀buyer-lessor฀accounts฀for฀
the฀transaction฀as฀a฀normal฀purchase฀and฀a฀lease.฀
฀ Where฀the฀transfer฀is฀in฀substance฀not฀a฀sale,฀the฀seller-lessee฀accounts฀for฀the฀
proceeds฀as฀a฀financial฀liability฀(in฀accordance฀with฀IFRS฀9).฀฀The฀buyer-lessor฀
recognises฀a฀financial฀asset.฀
4.฀ Current฀developments฀
฀ IFRS฀16฀replaces฀IAS฀17฀Leases,฀effective฀for฀accounting฀periods฀beginning฀on฀or฀after฀1฀
January฀2019฀(with฀earlier฀application฀permitted฀for฀entities฀that฀apply฀IFRS฀15).฀ ฀
฀ IFRS฀16฀brings฀all฀leases฀onto฀the฀statement฀of฀financial฀position฀of฀lessees฀(with฀
limited฀exceptions฀for฀short-term฀leases฀and฀leases฀of฀low฀value฀assets).฀
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8:฀Leases฀
There฀are฀articles฀on฀the฀ACCA฀website฀which฀are฀relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀
would฀be฀useful฀to฀read:฀
All฀change฀for฀accounting฀for฀leases฀(2016)฀
฀ 195฀

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฀฀
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฀
฀
฀
฀
Share-based฀payment
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀recognition฀and฀measurement฀criteria฀for฀share-based฀ C8(a)฀
payment฀transactions.฀
Account฀for฀modifications,฀cancellations฀and฀settlements฀of฀share-based฀payment฀ C8(b)฀
transactions.฀
Exam฀context฀
Share-based฀payment฀is฀a฀very฀important฀topic฀for฀Strategic฀Business฀Reporting฀(SBR)฀and฀could฀be฀
tested฀as฀a฀full฀25-mark฀question฀in฀Section฀B฀of฀the฀exam฀or฀as฀part฀of฀a฀question฀in฀either฀Section฀A฀
or฀ Section฀ B.฀ Questions฀ could฀ include฀ the฀ more฀ challenging฀ parts฀ of฀ IFRS฀ 2,฀ such฀ as฀ performance฀
conditions,฀settlements฀and฀curtailments฀of฀share-based฀payment฀arrangements.฀Ethical฀issues฀related฀
to฀share-based฀payments฀could฀also฀be฀tested฀in฀any฀part฀of฀the฀exam.฀฀
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฀฀
฀
฀
1.฀ Types฀of฀share-
based฀payment฀
2. Recognition
Share-based฀฀
4.฀ Vesting฀ payment฀
conditions฀
3.฀ Measurement
6.฀ Deferred฀tax฀
implications฀
5.฀ Modifications,฀
cancellations฀and฀
settlements฀
Equity-settled Cash-settled Choice฀of฀

settlement฀
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9:฀Share-based฀payment฀
1฀฀Types฀of฀share-based฀payment฀
The฀use฀of฀share-based฀payment฀has฀increased฀in฀recent฀years.฀Until฀the฀issue฀of฀IFRS฀2฀Share-based฀
Payment฀ there฀ was฀ no฀ IFRS฀ on฀ this฀ topic,฀ other฀ than฀ disclosures฀ formerly฀ required฀ for฀ 'equity฀
compensation฀benefits'฀under฀IAS฀19฀Employee฀Benefits.฀
Improvements฀in฀accounting฀treatment฀were฀called฀for.฀In฀particular,฀the฀omission฀of฀expenses฀arising฀
from฀share-based฀payment฀transactions฀with฀employees฀was฀believed฀to฀cause฀economic฀distortions฀
and฀corporate฀governance฀concerns.฀
See฀ Chapter฀ 9฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ background฀ reading฀ on฀ the฀ reasons฀
IFRS฀2฀ was฀ required฀ and฀ Section฀ 2฀ on฀ the฀ scope฀ of฀ IFRS฀ 2.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀
digital฀edition฀of฀the฀Workbook.฀฀
There฀are฀a฀number฀of฀definitions฀in฀IFRS฀2฀which฀you฀need฀to฀be฀aware฀of.฀It฀isn't฀necessary฀to฀read฀
through฀all฀of฀these฀immediately,฀but฀you฀should฀refer฀back฀to฀them฀as฀you฀work฀through฀this฀chapter.฀
Share-based฀payment฀transaction:฀a฀transaction฀in฀which฀the฀entity฀receives฀goods฀or฀services฀
as฀consideration฀for฀equity฀instruments฀of฀the฀entity฀(including฀shares฀or฀share฀options),฀or฀acquires฀
Key฀term฀
goods฀or฀services฀by฀incurring฀liabilities฀to฀the฀supplier฀of฀those฀goods฀or฀services฀for฀amounts฀that฀
are฀based฀on฀the฀price฀of฀the฀entity's฀shares฀or฀other฀equity฀instruments฀of฀the฀entity.฀
Share-based฀payment฀arrangement:฀an฀agreement฀between฀the฀entity฀and฀another฀party฀
(including฀an฀employee)฀to฀enter฀into฀a฀share-based฀payment฀transaction.฀
Equity฀instrument฀granted:฀the฀right฀(conditional฀or฀unconditional)฀to฀an฀equity฀instrument฀of฀the฀
entity฀conferred฀by฀the฀entity฀on฀another฀party,฀under฀a฀share-based฀payment฀arrangement.฀
Share฀option:฀a฀contract฀that฀gives฀the฀holder฀the฀right,฀but฀not฀the฀obligation,฀to฀subscribe฀to฀the฀
entity's฀shares฀at฀a฀fixed฀or฀determinable฀price฀for฀a฀specified฀period฀of฀time.฀
Fair฀value:฀the฀amount฀for฀which฀an฀asset฀could฀be฀exchanged,฀a฀liability฀settled,฀or฀an฀equity฀
instrument฀granted฀could฀be฀exchanged฀between฀knowledgeable,฀willing฀parties฀in฀an฀arm's฀length฀
transaction.฀฀
Grant฀date:฀the฀date฀at฀which฀the฀entity฀and฀another฀party฀(including฀an฀employee)฀agree฀฀
to฀a฀share-based฀payment฀arrangement.฀At฀grant฀date฀the฀entity฀confers฀on฀the฀other฀party฀(the฀
counterparty)฀the฀right฀to฀cash,฀other฀assets,฀or฀equity฀instruments฀of฀the฀entity,฀provided฀the฀
specified฀vesting฀conditions,฀if฀any,฀are฀met.฀฀
Vest:฀to฀become฀an฀entitlement.฀Under฀a฀share-based฀payment฀arrangement,฀a฀counterparty's฀right฀
to฀receive฀cash,฀other฀assets,฀or฀equity฀instruments฀of฀the฀entity฀vests฀upon฀satisfaction฀of฀any฀
specified฀vesting฀conditions.฀
Vesting฀conditions:฀the฀conditions฀that฀must฀be฀satisfied฀for฀the฀counterparty฀to฀become฀entitled฀to฀
receive฀cash,฀other฀assets฀or฀equity฀instruments฀of฀the฀entity,฀under฀a฀share-based฀payment฀arrangement.฀฀
Vesting฀period:฀the฀period฀during฀which฀all฀the฀specified฀vesting฀conditions฀of฀a฀share-based฀
payment฀arrangement฀are฀to฀be฀satisfied.฀
฀
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฀฀
1.3฀Types฀of฀transaction฀
IFRS฀ 2฀ applies฀ to฀ all฀ share-based฀ payment฀ transactions฀ (IFRS฀ 2:฀ para.฀ 2).฀ There฀ are฀ three฀ types฀
(IFRS฀2:฀Appendix฀A):฀
Equity-settled฀share- The฀entity฀receives฀goods฀or฀services฀as฀consideration฀for฀equity฀
based฀payment฀ instruments฀of฀the฀entity฀(including฀shares฀or฀share฀options).฀
Cash-settled฀share- The฀entity฀acquires฀goods฀or฀services฀by฀incurring฀liabilities฀to฀the฀
based฀payment฀ supplier฀of฀those฀goods฀or฀services฀for฀amounts฀that฀are฀based฀on฀the฀
price฀(or฀value)฀of฀the฀entity's฀shares฀or฀other฀equity฀instruments.฀
Transactions฀with฀a฀ The฀entity฀receives฀or฀acquires฀goods฀or฀services฀and฀the฀terms฀of฀the฀
choice฀of฀settlement฀ arrangement฀provide฀either฀the฀entity฀or฀the฀supplier฀with฀a฀choice฀of฀
whether฀the฀entity฀settles฀the฀transaction฀in฀cash฀or฀by฀issuing฀equity฀
instruments.฀
1.4฀Share-based฀payments฀among฀group฀entities฀
Payment฀for฀goods฀or฀services฀by฀a฀subsidiary฀company฀may฀be฀made฀by฀granting฀equity฀instruments฀
of฀ its฀ parent฀ company฀ or฀ of฀ another฀ group฀ company.฀ These฀ transactions฀ are฀ within฀ the฀ scope฀ of฀
IFRS฀2.฀
See฀Chapter฀9฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀further฀detail฀on฀the฀scope฀of฀IFRS฀2฀and฀
share-based฀ payments฀ in฀ groups.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀
2฀ Recognition฀
An฀entity฀should฀recognise฀goods฀or฀services฀received฀or฀acquired฀in฀a฀share-based฀payment฀
transaction฀when฀it฀obtains฀the฀goods฀or฀as฀the฀services฀are฀received.฀฀฀
Goods฀or฀services฀received฀or฀acquired฀in฀a฀share-based฀payment฀transaction฀should฀be฀recognised฀
as฀expenses฀(unless฀they฀qualify฀for฀recognition฀as฀assets).฀฀
The฀corresponding฀entry฀in฀the฀accounting฀records฀depends฀on฀whether฀the฀transaction฀is฀equity-
settled฀or฀cash-settled฀(IFRS฀2:฀paras.฀7฀and฀8).฀
If฀equity-settled,฀recognise฀a฀ If฀cash-settled,฀recognise฀a฀
corresponding฀increase฀in฀equity corresponding฀liability
฀ ฀
DEBIT฀ Expense฀ X DEBIT฀ Expense฀ X
CREDIT฀ Equity*฀ ฀ ฀ X CREDIT฀ Liability฀ ฀ ฀ X
฀
*IFRS฀2฀does฀not฀specify฀where฀in฀the฀equity฀section฀the฀credit฀entry฀should฀be฀presented.฀Some฀
entities฀present฀a฀separate฀component฀of฀equity฀(eg฀'Share-based฀payment฀reserve');฀other฀entities฀
may฀include฀the฀credit฀in฀retained฀earnings.
฀
This฀section฀contains฀
some฀terms฀that฀you฀
2.1฀Recognising฀transactions฀in฀which฀services฀are฀received฀฀ may฀not฀be฀familiar฀
with,฀eg฀'vest'.฀Refer฀
If฀the฀granted฀equity฀instruments฀vest฀immediately,฀it฀is฀presumed฀that฀the฀services฀ back฀to฀the฀'Key฀terms'฀
have฀already฀been฀received฀and฀the฀full฀expense฀is฀recognised฀on฀the฀grant฀date฀ at฀the฀start฀of฀the฀
chapter฀for฀their฀
definitions.฀
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If,฀however,฀there฀are฀vesting฀ conditions฀attached฀to฀the฀equity฀instruments฀granted,฀the฀expense฀
should฀be฀spread฀over฀the฀vesting฀period.฀฀
For฀ example,฀ an฀ employee฀ may฀ be฀ required฀ to฀ complete฀ three฀ years฀ of฀ service฀ before฀ becoming฀
unconditionally฀entitled฀to฀a฀share-based฀payment.฀The฀expense฀is฀spread฀over฀this฀three฀year฀vesting฀
period฀as฀the฀services฀are฀received.฀
3฀ Measurement฀
The฀entity฀measures฀the฀expense฀using฀the฀method฀that฀provides฀the฀most฀reliable฀information:฀
(a)฀ Direct฀method฀฀⇒ Use฀the฀fair฀value฀of฀goods฀

or฀services฀received Equity-settled฀฀⇒ Use฀the฀fair฀value฀at฀
grant฀date฀and฀do฀not฀update฀for฀
Eg฀for฀employee฀ subsequent฀changes฀in฀fair฀value
services฀as฀it฀is฀ (b)฀ Indirect฀method฀⇒ By฀reference฀to฀the฀fair฀value฀
not฀normally฀ of฀the฀equity฀instruments฀(eg฀
possible฀to฀ share฀options)฀granted
measure฀directly฀ Cash-settled฀฀⇒ Update฀the฀fair฀value฀
the฀services฀ at฀each฀year฀end฀with฀changes฀
received.฀ recognised฀in฀profit฀or฀loss
฀
The฀ fair฀ value฀ of฀ equity฀ instruments฀ should฀ be฀ based฀ on฀ market฀ prices,฀ taking฀ into฀ account฀ the฀
terms฀and฀conditions฀upon฀which฀the฀equity฀instruments฀were฀granted฀(IFRS฀2:฀para.฀16).฀
Any฀changes฀in฀estimates฀of฀the฀expected฀number฀of฀employees฀being฀entitled฀to฀receive฀share-based฀
payment฀are฀treated฀as฀a฀change฀ in฀ accounting฀ estimate฀and฀recognised฀in฀the฀period฀of฀the฀
change.฀
฀
3.1฀Transactions฀with฀employees฀
It฀is฀very฀common฀for฀entities฀to฀reward฀employees฀by฀granting฀them฀a฀share-based฀payment฀if฀they฀
remain฀in฀employment฀for฀a฀certain฀period฀(the฀vesting฀period).฀฀
฀
In฀ this฀ case,฀ the฀ share-based฀ payment฀ expense฀ should฀ be฀ spread฀ over฀ the฀ vesting฀ period฀ and฀
measured฀ using฀ the฀ indirect฀ method.฀ In฀ the฀ first฀ year฀ of฀ the฀ share-based฀ payment,฀ the฀ expense฀ is฀
equal฀to฀the฀equity฀or฀liability฀balance฀at฀the฀year฀end:฀
฀
Share-based฀ Estimated฀ Number of฀ Fair฀ Proportion฀of฀
฀
payment฀equity฀ = number฀of฀ × instruments฀ × value*฀per฀ × vesting฀period฀
or฀liability฀ employees฀ per฀ instrument฀฀ elapsed฀at฀year฀
฀
value฀at฀year฀ entitled฀to฀ employee฀ end฀
end฀฀ benefits*฀
฀
*Remove฀expected฀leavers฀ *Equity-settled:฀at฀grant฀
over฀whole฀vesting฀period฀ date฀
฀
฀ Cash-settled:฀at฀year฀end฀
฀
For฀subsequent฀years,฀the฀expense฀is฀calculated฀as฀the฀movement฀in฀the฀equity฀or฀liability฀balance:฀
฀
The฀share-
Equity/liability฀
based฀payment฀
Balance฀b/d฀฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀฀฀X฀ expense฀is฀the฀
Cash฀paid฀(cash-settled฀only)฀฀฀฀฀ ฀ ฀ ฀ ฀ ฀฀(X)฀ balancing฀
figure,฀and฀is฀
Expense฀(balancing฀figure)฀ ฀ ฀ ฀ ฀ ฀฀฀X฀ charged฀to฀
Balance฀c/d฀฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀ ฀ ฀ ฀฀฀X฀ profit฀or฀loss฀
฀
฀ 201฀

lOMoARcPSD|6256454
฀฀
3.2฀Accounting฀for฀equity-settled฀share-based฀payment฀transactions฀฀
Examples฀of฀equity-settled฀share-based฀payments฀include฀shares฀or฀share฀options฀issued฀to฀employees฀
as฀part฀of฀their฀remuneration.฀฀
Illustration฀1฀
Accounting฀for฀equity-settled฀share-based฀payment฀transactions฀
On฀1฀January฀20X1฀an฀entity฀granted฀100฀share฀options฀to฀each฀of฀its฀400฀employees.฀Each฀grant฀is฀
conditional฀upon฀the฀employee฀working฀for฀the฀entity฀until฀31฀December฀20X3.฀The฀fair฀value฀of฀each฀
share฀option฀is฀$20.฀฀
On฀the฀basis฀of฀a฀weighted฀average฀probability,฀the฀entity฀estimates฀on฀1฀January฀that฀18%฀of฀
employees฀will฀leave฀during฀the฀3-year฀period฀and฀therefore฀forfeit฀their฀rights฀to฀share฀options.฀
During฀20X1,฀20฀employees฀leave฀and฀the฀estimate฀of฀total฀employee฀departures฀over฀the฀3-year฀
period฀is฀revised฀to฀20%฀(80฀employees).฀
During฀20X2,฀a฀further฀25฀employees฀leave฀and฀the฀entity฀now฀estimates฀that฀25%฀(100)฀of฀its฀
employees฀will฀leave฀during฀the฀3-year฀period.฀
During฀20X3,฀a฀further฀10฀employees฀leave.฀
Required฀
Show฀the฀accounting฀entries฀which฀will฀be฀required฀over฀the฀3-year฀period฀in฀respect฀of฀the฀share-
based฀payment฀transaction.฀
Solution฀
IFRS฀2฀requires฀the฀entity฀to฀recognise฀the฀remuneration฀expense,฀based฀on฀the฀fair฀value฀of฀the฀share฀
options฀granted,฀as฀the฀services฀are฀received฀during฀the฀3-year฀vesting฀period.฀
In฀20X1฀and฀20X2฀the฀entity฀estimates฀the฀number฀of฀options฀expected฀to฀vest฀(by฀estimating฀the฀
number฀of฀employees฀likely฀to฀leave)฀and฀bases฀the฀amount฀that฀it฀recognises฀for฀the฀year฀on฀this฀
estimate.฀
In฀20X3฀the฀entity฀recognises฀an฀amount฀based฀on฀the฀number฀of฀options฀that฀actually฀vest.฀A฀total฀of฀
55฀employees฀actually฀left฀during฀the฀3-year฀period฀and฀therefore฀34,500฀options฀((400฀–฀55)฀×฀
100)฀vested.฀
The฀accounting฀entries฀are฀calculated฀as฀follows:฀
1.฀Calculate฀
Year฀to฀31฀December฀20X1฀ ฀$฀฀฀฀฀฀
2.฀Then฀work฀out฀
equity฀ Equity฀b/d฀ the฀expense฀ ฀ 0฀
carried฀ as฀the฀
down฀ ฀Profit฀or฀loss฀expense balancing฀ ฀213,333฀
figure฀
1 ฀฀213,333฀
Equity฀c/d฀((400฀–฀80)฀×฀100฀×฀$20฀×฀ )฀
3
฀
The฀required฀accounting฀entries฀are:฀
DEBIT฀฀ Expenses฀ $213,333฀
CREDIT฀ Equity฀฀ ฀ ฀ $213,333฀
฀Equity฀b/d฀ ฀of฀the฀total฀ ฀213,333฀
฀Profit฀or฀loss฀expense expense฀has฀been฀
฀186,667฀
recognised฀at฀the฀end฀
2 of฀year฀2฀ ฀฀400,000฀
Equity฀c/d฀((400฀–฀100)฀×฀100฀×฀$20฀×฀ )฀฀
3 ฀
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lOMoARcPSD|6256454

Equity฀b/d฀ ฀400,000฀
฀Profit฀or฀loss฀expense฀ ฀290,000฀
Equity฀c/d฀((400฀–฀55)฀×฀100฀×฀$20)฀฀ ฀690,000฀
฀
฀ Actual฀number฀of฀employees฀entitled฀ Cumulative฀proportion฀of฀vesting฀period฀
to฀benefits฀at฀the฀vesting฀date฀ 3
฀ elapsed฀is฀ ฀=฀1,฀hence฀not฀shown฀here฀
3
฀
Activity฀1:฀Equity-settled฀share-based฀payment฀ ฀
An฀ entity฀ grants฀ 100฀ share฀ options฀ on฀ its฀ $1฀ shares฀ to฀ each฀ of฀ its฀ 500฀ employees฀ on฀ 1฀ January฀
20X5.฀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฀20X5฀is฀$15.฀
On฀ the฀ basis฀ of฀ a฀ weighted฀ average฀ probability,฀ the฀ entity฀ estimates฀ on฀ 1฀ January฀ that฀ 20%฀ of฀
employees฀will฀leave฀during฀the฀3-year฀period฀and฀therefore฀forfeit฀their฀rights฀to฀share฀options.฀
Required฀
Show฀ the฀ accounting฀ entries฀ which฀ will฀ be฀ required฀ over฀ the฀ three-year฀ period฀ in฀ the฀ event฀ of฀ the฀
following:฀
฀ 20฀ employees฀ leave฀ during฀ 20X5฀ and฀ the฀ estimate฀ of฀ total฀ employee฀ departures฀ over฀ the฀฀
3-year฀period฀is฀revised฀to฀15%฀(75฀employees)฀
฀ 22฀ employees฀ leave฀ during฀ 20X6฀ and฀ the฀ estimate฀ of฀ total฀ employee฀ departures฀ over฀ the฀฀
3-year฀period฀is฀revised฀to฀12%฀(60฀employees)฀
฀ 15฀employees฀leave฀during฀20X7,฀so฀a฀total฀of฀57฀employees฀left฀and฀forfeited฀their฀rights฀to฀
share฀options.฀A฀total฀of฀44,300฀share฀options฀(443฀employees฀×฀100฀options)฀are฀vested฀at฀
the฀end฀of฀20X7.฀
See฀Chapter฀9฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀more฀practice฀questions฀on฀equity-settled฀
share-based฀payments.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
฀
3.3฀Accounting฀for฀cash-settled฀share-based฀payment฀transactions฀฀
Examples฀of฀this฀type฀of฀transaction฀include:฀
(a)฀ Share฀ appreciation฀ rights฀ granted฀ to฀ employees:฀ the฀ employees฀ become฀ entitled฀ to฀ a฀
future฀ cash฀ payment฀ based฀ on฀ the฀ increase฀ in฀ the฀ entity's฀ share฀ price฀ from฀ a฀ specified฀ level฀
over฀a฀specified฀period฀of฀time฀
(b)฀ A฀right฀to฀shares฀that฀are฀redeemable.฀An฀entity฀might฀grant฀to฀its฀employees฀a฀right฀to฀
receive฀a฀future฀cash฀payment฀by฀granting฀to฀them฀a฀right฀to฀shares฀that฀are฀redeemable.฀
฀ 203฀

lOMoARcPSD|6256454
฀฀
Illustration฀2฀
Cash-settled฀share-based฀payment฀transaction฀
On฀1฀January฀20X1฀an฀entity฀grants฀100฀cash฀share฀appreciation฀rights฀(SARs)฀to฀each฀of฀its฀500฀
employees,฀on฀condition฀that฀the฀employees฀continue฀to฀work฀for฀the฀entity฀until฀31฀December฀20X3.฀
During฀20X1,฀35฀employees฀leave.฀The฀entity฀estimates฀that฀a฀further฀60฀will฀leave฀during฀20X2฀and฀
20X3.฀
During฀20X2,฀40฀employees฀leave฀and฀the฀entity฀estimates฀that฀a฀further฀25฀will฀leave฀during฀20X3.฀
During฀20X3,฀22฀employees฀leave.฀
There฀is฀an฀'exercise฀period'฀between฀31฀December฀20X3฀and฀31฀December฀20X5฀during฀which฀the฀
employees฀can฀choose฀when฀to฀exercise฀their฀SARs.฀At฀31฀December฀20X3,฀150฀employees฀exercise฀
their฀SARs.฀Another฀140฀employees฀exercise฀their฀SARs฀at฀31฀December฀20X4฀and฀the฀remaining฀
113฀employees฀exercise฀their฀SARs฀at฀the฀end฀of฀20X5.฀
The฀fair฀values฀of฀the฀SARs฀for฀each฀year฀in฀which฀a฀liability฀exists฀are฀shown฀below,฀together฀with฀
the฀intrinsic฀values฀at฀the฀dates฀of฀exercise.฀ The฀intrinsic฀value฀is฀
฀ Fair฀value Intrinsic฀ the฀difference฀
value฀ between฀the฀fair฀value฀
and฀the฀'exercise฀
฀ $ $ price'฀of฀the฀SARs.฀
20X1฀ 14.40 When฀the฀SARs฀are฀
20X2฀ 15.50 exercised,฀the฀
increase฀in฀share฀
20X3฀ 18.20 15.00฀ price฀above฀the฀
20X4฀ 21.40 20.00฀ exercise฀price฀is฀paid฀
20X5฀ 25.00฀ to฀the฀employees.฀
฀
Required฀
Calculate฀the฀amount฀to฀be฀recognised฀in฀the฀profit฀or฀loss฀for฀each฀of฀the฀five฀years฀ended฀
31฀December฀20X5฀and฀the฀liability฀to฀be฀recognised฀in฀the฀statement฀of฀financial฀position฀at฀
31฀December฀for฀each฀of฀the฀five฀years.฀
Solution฀
For฀the฀three฀years฀to฀the฀vesting฀date฀of฀31฀December฀20X3฀the฀expense฀is฀based฀on฀the฀entity's฀
estimate฀of฀the฀number฀of฀SARs฀that฀will฀actually฀vest฀(as฀for฀an฀equity-settled฀transaction).฀However,฀
the฀fair฀value฀of฀the฀liability฀is฀remeasured฀at฀each฀year-end.฀The฀fair฀value฀of฀the฀SARs฀at฀the฀
grant฀date฀is฀irrelevant.฀The฀intrinsic฀value฀of฀the฀SARs฀at฀the฀date฀of฀exercise฀is฀the฀amount฀of฀cash฀
actually฀paid฀to฀the฀employees.฀
฀ ฀$฀฀฀฀฀฀
฀Year฀ended฀31฀December฀20X1฀ ฀
Fair฀value฀of฀the฀
฀Liability฀b/d฀ SARs฀at฀31.12.X1฀ ฀ 0฀
฀฀Profit฀or฀loss฀expense฀ ฀194,400฀
1 ฀194,400฀
฀Liability฀c/d฀((500฀–฀60฀–฀35)฀×฀100฀×฀$14.40฀×฀ )฀
3
฀
฀
฀
204฀

lOMoARcPSD|6256454
9: Share-based payment
$
Year ended 31 December 20X2 Fair value of the
SARs at 31.12.X2
Liability b/d 194,400
 Profit or loss expense 218,933
2 413,333
Liability c/d ((500 – 35 – 40 – 25) × 100 × $15.50 × )
3
Intrinsic value of
150 employees
the SARs at $
exercise their SARs
Year ended 31 December 20X3 31.12.X3 = cash
Liability b/d paid out 413,333
SARs vest
on
31.12.X3
Less cash paid on exercise of SARs by employees (150 × 100 × $15.00) (225,000)
Liability c/d ((500 – 35 – 40 – 22 – 150) × 100 × $18.20) 460,460
$
Year ended 31 December 20X4
Liability b/d 460,460
 Profit or loss expense 272,127
Liability c/d ((500 – 35 – 40 – 22 – 150 – 140) × 100 × $21.40) 241,820
$
Remaining
employees 241,820
who have $
not
exercised
Year ended 31 December 20X5
their SARs Liability b/d 241,820
 Profit or loss credit (40,680)
Liability c/d –
Activity 2: Cash-settled share-based payment

On 1 January 20X4 an entity grants 100 cash share appreciation rights (SARs) to each of its 500
employees on condition that the employees remain in its employ for the next two years. The SARs
vest on 31 December 20X5 and may be exercised at any time up to 31 December 20X6. The fair
value of each SAR at the grant date is $7.40.
No. of
employees Estimated Intrinsic
exercising Outstanding further Fair value value (ie
Year ended Leavers rights SARs leavers of SARs cash paid)
$ $
31 December 20X4 50 – 450 60 8.00
31 December 20X5 50 100 300 – 8.50 8.10
31 December 20X6 – 300 – – – 9.00
Required
Show the expense and liability which will appear in the financial statements in each of the three
years.
205

lOMoARcPSD|6256454
฀฀
See฀ Chapter฀ 9฀ Section฀ 4฀ of฀ the฀ Supplementary฀ Reading฀ for฀ an฀ illustration฀ showing฀ the฀ difference฀
between฀ equity-settled฀ and฀ cash-settled฀ share-based฀ payment฀ transactions.฀ This฀ is฀ available฀ in฀
3.4฀Share-based฀payment฀with฀a฀choice฀of฀settlement฀฀
Entity฀has฀the฀choice฀
If฀the฀entity฀has฀the฀choice฀of฀whether฀to฀settle฀the฀share-based฀payment฀in฀cash฀or฀by฀issuing฀shares,฀
the฀ accounting฀ treatment฀ depends฀ on฀ whether฀ there฀ is฀ a฀ present฀ obligation฀ to฀ settle฀ the฀
transaction฀in฀cash.฀฀
Is฀there฀a฀present
obligation฀to฀settle฀in฀cash?
Yes No
Treat฀as฀cash-settled฀share-based฀ Treat฀as฀equity-settled฀share-based฀
payment฀transaction payment฀transaction
฀
A฀present฀obligation฀exists฀if฀the฀entity฀has฀a฀stated฀policy฀of฀settling฀such฀transactions฀in฀cash฀or฀past฀
practice฀of฀settling฀in฀cash,฀because฀this฀creates฀an฀expectation,฀and฀so฀a฀constructive฀obligation,฀to฀
settle฀future฀such฀transactions฀in฀cash.฀฀
Counterparty฀has฀the฀choice฀
If฀instead฀the฀counterparty฀(eg฀employee฀or฀supplier)฀has฀the฀right฀to฀choose฀whether฀the฀share-based฀
payment฀is฀settled฀in฀cash฀or฀shares,฀the฀entity฀has฀granted฀a฀compound฀financial฀instrument฀(IFRS฀2:฀
para.฀34).฀
The฀entity฀has฀issued฀a฀
compound฀financial฀instrument
Debt฀component Equity฀component
As฀for฀cash-settled฀transaction Measured฀as฀the฀residual฀fair฀value฀at฀grant฀date
Fair฀value฀of฀shares฀alternative฀at฀grant฀date฀ X
Fair฀value฀cash฀alternative฀at฀grant฀date฀ ฀ (X)
Equity฀component฀ ฀ ฀ X
฀
206฀

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Activity฀3:฀Choice฀of฀settlement฀ ฀
On฀ 30฀ September฀ 20X3,฀ Saddler฀ granted฀ one฀ of฀ its฀ directors฀ the฀ right฀ to฀ choose฀ either฀ 24,000฀
shares฀in฀Saddler฀or฀20,000฀'phantom'฀shares฀(a฀cash฀payment฀equal฀to฀the฀value฀of฀20,000฀shares)฀
on฀the฀settlement฀date,฀30฀September฀20X4.฀This฀right฀is฀not฀conditional฀on฀future฀employment.฀The฀
company฀ estimates฀ that฀ the฀ fair฀ value฀ of฀ the฀ share฀ alternative฀ is฀ $4.50฀ per฀ share฀ at฀ 30฀ September฀
20X3฀ (taking฀ into฀ account฀ a฀ condition฀ that฀ they฀ must฀ be฀ held฀ for฀ 2฀ years).฀ Saddler's฀ market฀ share฀
price฀was฀$5.20฀per฀share฀on฀30฀September฀20X3,฀and฀this฀rose฀to฀$5.40฀by฀the฀date฀the฀financial฀
statements฀were฀authorised฀for฀issue.฀
Required฀
Explain฀the฀accounting฀treatment฀of฀the฀above฀transaction฀for฀the฀year฀ended฀30฀September฀20X3.฀
4฀ Vesting฀conditions฀
Vesting฀ conditions฀ are฀ the฀ conditions฀ that฀ must฀ be฀ satisfied฀ for฀ the฀ counterparty฀ to฀ become฀
unconditionally฀ entitled฀ to฀ receive฀ payment฀ under฀ a฀ share-based฀ payment฀ agreement฀ (IFRS฀ 2:฀
Appendix฀A).฀฀
Vesting฀ conditions฀ include฀ service฀ conditions฀ and฀ performance฀ conditions.฀ Other฀ features,฀
such฀ as฀ a฀ requirement฀ for฀ employees฀ to฀ make฀ regular฀ contributions฀ into฀ a฀ savings฀ scheme,฀ are฀ not฀
vesting฀conditions.฀฀
4.1฀ Service฀conditions฀
Service฀conditions฀are฀where฀the฀counterparty฀is฀required฀to฀complete฀a฀specified฀period฀of฀service฀
(IFRS฀2:฀Appendix฀A).฀This฀is฀the฀typical฀scenario฀covered฀in฀Illustrations฀1฀and฀2฀above,฀in฀which฀an฀
employee฀is฀required฀to฀complete฀a฀specified฀period฀of฀service.฀฀
The฀share-based฀payment฀is฀recognised฀over฀the฀required฀period฀of฀service.฀
4.2฀ Performance฀conditions฀(other฀than฀market฀conditions)฀
There฀may฀be฀performance฀conditions฀that฀must฀be฀satisfied฀before฀share-based฀payment฀vests,฀such฀
as฀achieving฀a฀specific฀growth฀in฀profit฀or฀earnings฀per฀share.฀
The฀amount฀recognised฀as฀share-based฀payment฀is฀based฀on฀the฀best฀ available฀ estimate฀of฀the฀
number฀of฀equity฀instruments฀expected฀to฀vest฀(ie฀expectation฀of฀whether฀the฀profit฀target฀will฀be฀met),฀
revised฀as฀necessary฀at฀each฀period฀end฀(IFRS฀2:฀para.฀20).฀
A฀vesting฀period฀may฀vary฀in฀length฀depending฀on฀whether฀a฀performance฀condition฀is฀satisfied;฀for฀
example฀ where฀ different฀ growth฀ targets฀ are฀ set฀ for฀ different฀ years,฀ and฀ if฀ the฀ first฀ target฀ is฀ met,฀ the฀
instruments฀vest฀at฀the฀end฀of฀the฀first฀year,฀and฀if฀not฀the฀next฀target฀for฀the฀following฀year฀comes฀into฀
play.฀
In฀ such฀ circumstances,฀ the฀ share-based฀ payment฀ equity฀ figure฀ is฀ accrued฀ over฀ the฀ period฀ based฀ on฀
the฀most฀likely฀outcome฀of฀which฀target฀will฀be฀met,฀revised฀at฀each฀period฀end.฀
4.3฀ Market฀conditions฀
Market฀ conditions,฀ such฀ as฀ vesting฀ dependent฀ on฀ achieving฀ a฀ target฀ share฀ price,฀ are฀ not฀ taken฀
into฀consideration฀when฀calculating฀the฀number฀of฀equity฀instruments฀expected฀to฀vest.฀
This฀is฀because฀market฀conditions฀are฀already฀taken฀into฀consideration฀when฀estimating฀the฀fair฀value฀
of฀the฀share-based฀payment฀(at฀the฀grant฀date฀if฀equity-settled฀and฀at฀the฀year฀end฀if฀cash-settled).฀฀
Therefore฀ an฀ entity฀ recognises฀ share-based฀ payment฀ from฀ a฀ counterparty฀ who฀ satisfies฀ all฀ other฀
vesting฀conditions฀(eg฀employee฀service฀period)฀irrespective฀of฀whether฀a฀target฀share฀price฀has฀been฀
achieved.฀
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฀฀
Activity฀4:฀Performance฀conditions฀(other฀than฀market฀conditions)฀ ฀
At฀ the฀ beginning฀ of฀ year฀ 1,฀ Kingsley฀ grants฀ 100฀ shares฀ each฀ to฀ 500฀ employees,฀ conditional฀ upon฀
the฀employees฀remaining฀in฀the฀entity's฀employ฀during฀the฀vesting฀period.฀The฀shares฀will฀vest฀at฀the฀
end฀of฀year฀1฀if฀the฀entity's฀earnings฀increase฀by฀more฀than฀18%;฀at฀the฀end฀of฀year฀2฀if฀the฀entity's฀
earnings฀increase฀by฀more฀than฀an฀average฀of฀13%฀per฀year฀over฀the฀2-year฀period;฀and฀at฀the฀end฀
of฀year฀3฀if฀the฀entity's฀earnings฀increase฀by฀more฀than฀an฀average฀of฀10%฀per฀year฀over฀the฀3-year฀
period.฀The฀shares฀have฀a฀fair฀value฀of฀$30฀per฀share฀at฀the฀start฀of฀year฀1,฀which฀equals฀the฀share฀
price฀at฀grant฀date.฀No฀dividends฀are฀expected฀to฀be฀paid฀over฀the฀3-year฀period.฀
By฀the฀end฀of฀year฀1,฀the฀entity's฀earnings฀have฀increased฀by฀14%,฀and฀30฀employees฀have฀left.฀The฀
entity฀expects฀that฀earnings฀will฀continue฀to฀increase฀at฀a฀similar฀rate฀in฀year฀2,฀and฀therefore฀expects฀
that฀the฀shares฀will฀vest฀at฀the฀end฀of฀year฀2.฀The฀entity฀expects,฀on฀the฀basis฀of฀a฀weighted฀average฀
probability,฀ that฀ a฀ further฀ 30฀ employees฀ will฀ leave฀ during฀ year฀ 2,฀ and฀ therefore฀ expects฀ that฀ 440฀
employees฀will฀vest฀in฀100฀shares฀at฀the฀end฀of฀year฀2.฀
By฀the฀end฀of฀year฀2,฀the฀entity's฀earnings฀have฀increased฀by฀only฀10%฀and฀therefore฀the฀shares฀do฀
not฀ vest฀ at฀ the฀ end฀ of฀ year฀ 2.฀ 28฀ employees฀ have฀ left฀ during฀ the฀ year.฀ The฀ entity฀ expects฀ that฀ a฀
further฀25฀employees฀will฀leave฀during฀year฀3,฀and฀that฀the฀entity's฀earnings฀will฀increase฀by฀at฀least฀
6%,฀thereby฀achieving฀the฀average฀of฀10%฀per฀year.฀
By฀ the฀ end฀ of฀ year฀ 3,฀ 23฀ employees฀ have฀ left฀ and฀ the฀ entity's฀ earnings฀ had฀ increased฀ by฀ 8%,฀
resulting฀in฀an฀average฀increase฀of฀10.67%฀per฀year.฀Therefore฀419฀employees฀received฀100฀shares฀
at฀the฀end฀of฀year฀3.฀
Required฀
Show฀ the฀ expense฀ and฀ equity฀ figures฀ which฀ will฀ appear฀ in฀ the฀ financial฀ statements฀ in฀ each฀ of฀ the฀
3฀years.฀
See฀Chapter฀9฀Section฀5฀of฀the฀Supplementary฀Reading฀for฀a฀practice฀activity฀on฀vesting฀conditions.฀
5฀ Modifications,฀cancellations฀and฀settlements฀
The฀entity฀might:฀
(a)฀ Modify฀share฀options,฀eg฀by฀repricing฀or฀by฀changing฀from฀cash-settled฀to฀equity-settled;฀or฀
(b)฀ Cancel฀or฀settle฀the฀options.฀
Repricing฀of฀share฀options฀might฀occur,฀for฀example,฀where฀the฀share฀price฀has฀fallen.฀The฀entity฀may฀
then฀reduce฀the฀exercise฀price฀of฀the฀share฀options,฀which฀increases฀the฀fair฀value฀of฀those฀options฀
(IFRS฀2:฀para.฀26).฀฀฀
5.1฀ Modifications฀
General฀rule฀
At฀ the฀ date฀ of฀ the฀ modification,฀ the฀ entity฀ must฀ recognise,฀ as฀ a฀ minimum,฀ the฀ services฀ already฀
received฀ measured฀ at฀ the฀ grant฀ date฀ fair฀ value฀ of฀ the฀ equity฀ instruments฀ granted฀ (IFRS฀ 2:฀
para.฀27);฀ie฀the฀normal฀IFRS฀2฀approach฀is฀followed฀up฀to฀the฀date฀of฀the฀modification.฀
Any฀modifications฀that฀increase฀the฀total฀fair฀value฀of฀the฀share-based฀payment฀must฀be฀recognised฀
over฀ the฀ remaining฀ vesting฀ period฀ (ie฀ as฀ a฀ change฀ in฀ accounting฀ estimate).฀ This฀ increase฀ is฀
recognised฀ in฀ addition฀ to฀ the฀ amount฀ based฀ on฀ the฀ grant฀ date฀ fair฀ value฀ of฀ the฀ original฀ equity฀
instruments฀ (which฀ is฀ recognised฀ over฀ the฀ remainder฀ of฀ the฀ original฀ vesting฀ period)฀ (IFRS฀ 2:฀
para.฀B43).฀
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For฀equity-settled฀share-based฀payment,฀the฀increase฀in฀total฀fair฀value฀is฀measured฀as:฀
Fair฀value฀of฀modified฀equity฀instruments฀at฀the฀date฀of฀modification฀ X฀
Less฀fair฀value฀of฀original฀equity฀instruments฀at฀the฀date฀of฀modification฀ (X)
฀ ฀
฀ ฀ ฀฀X฀฀
฀
This฀ ensures฀ that฀ only฀ the฀ differential฀ between฀ the฀ original฀ and฀ modified฀ instrument฀ is฀ measured,฀
rather฀than฀any฀increase฀in฀the฀fair฀value฀of฀the฀original฀instruments฀(which฀would฀be฀inconsistent฀with฀
the฀principle฀of฀measuring฀equity-settled฀share-based฀payment฀at฀grant฀date฀fair฀values).฀
Illustration฀3฀
Grant฀of฀share฀options฀that฀are฀subsequently฀repriced฀
Background฀
At฀the฀beginning฀of฀year฀1,฀an฀entity฀grants฀100฀share฀options฀to฀each฀of฀its฀500฀employees.฀Each฀
grant฀is฀conditional฀upon฀the฀employee฀remaining฀in฀service฀over฀the฀next฀three฀years.฀The฀entity฀
estimates฀that฀the฀fair฀value฀of฀each฀option฀is฀$15.฀On฀the฀basis฀of฀a฀weighted฀average฀probability,฀
the฀entity฀estimates฀that฀100฀employees฀will฀leave฀during฀the฀3-year฀period฀and฀therefore฀forfeit฀their฀
rights฀to฀the฀share฀options.฀
Suppose฀that฀40฀employees฀leave฀during฀year฀1.฀Also฀suppose฀that฀by฀the฀end฀of฀year฀1,฀the฀entity's฀
share฀price฀has฀dropped,฀and฀the฀entity฀reprices฀its฀share฀options,฀and฀that฀the฀repriced฀share฀
options฀vest฀at฀the฀end฀of฀year฀3.฀The฀entity฀estimates฀that฀a฀further฀70฀employees฀will฀leave฀during฀
years฀2฀and฀3,฀and฀hence฀the฀total฀expected฀employee฀departures฀over฀the฀3-year฀vesting฀period฀is฀
110฀employees.฀฀
During฀year฀2฀a฀further฀35฀employees฀leave,฀and฀the฀entity฀estimates฀that฀a฀further฀30฀employees฀will฀
leave฀during฀year฀3,฀to฀bring฀the฀total฀expected฀employee฀departures฀over฀the฀3-year฀vesting฀period฀
to฀105฀employees.฀฀
During฀year฀3,฀a฀total฀of฀28฀employees฀leave,฀and฀hence฀a฀total฀of฀103฀employees฀ceased฀
employment฀during฀the฀vesting฀period.฀For฀the฀remaining฀397฀employees,฀the฀share฀options฀vested฀at฀
the฀end฀of฀year฀3.฀
The฀entity฀estimates฀that,฀at฀the฀date฀of฀repricing,฀the฀fair฀value฀of฀each฀of฀the฀original฀share฀options฀
granted฀(ie฀before฀taking฀into฀account฀the฀repricing)฀is฀$5฀and฀that฀the฀fair฀value฀of฀each฀repriced฀
share฀option฀is฀$8.฀
Application฀
The฀incremental฀value฀at฀the฀date฀of฀repricing฀is฀$3฀per฀share฀option฀($8–$5).฀This฀amount฀is฀
recognised฀over฀the฀remaining฀2฀years฀of฀the฀vesting฀period,฀along฀with฀remuneration฀expense฀
based฀on฀the฀original฀option฀value฀of฀$15.฀
The฀amounts฀recognised฀in฀years฀1–3฀are฀as฀follows:฀฀
Year฀1฀
This฀is฀the฀usual฀
฀ ฀ calculation฀for฀an฀equity- $฀฀฀฀฀฀
settled฀transaction฀
Equity฀b/d฀ ฀0฀
P/L฀charge฀ ฀195,000฀
Equity฀c/d฀[(500฀–฀110)฀×฀100฀×฀$15฀× 1/3] ฀195,000฀
DEBIT฀ Expenses฀ $195,000฀ ฀
CREDIT฀ Equity฀ ฀ ฀ ฀ $195,000 ฀
฀
At฀the฀end฀of฀year฀1,฀the฀shares฀options฀are฀repriced.฀Because฀this฀modification฀happens฀at฀the฀end฀
of฀year฀1,฀the฀effect฀of฀it฀is฀not฀shown฀in฀the฀financial฀statements฀until฀year฀2.฀
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฀฀
Year฀2฀ Continue฀to฀spread฀the฀ Add฀on฀the฀effect฀of฀the฀

original฀IFRS฀2฀charge฀ repricing,฀spread฀over฀the฀
฀ over฀the฀vesting฀period฀ remaining฀vesting฀period฀ $฀฀฀฀฀฀
Equity฀b/d฀ ฀ 195,000
P/L฀charge฀ ฀259,250
Equity฀c/d฀[(500฀–฀105)฀×฀100฀×฀(($15฀× 2/3)฀+฀($3฀× ½))] ฀454,250
DEBIT฀ Expenses฀ ฀$259,250฀ ฀
So฀in฀effect฀the฀repricing฀is฀
CREDIT฀ Equity฀ ฀ $259,250 like฀having฀a฀new฀grant฀of฀
share฀options฀in฀the฀middle฀
฀
of฀the฀vesting฀period฀
฀
Year฀3฀
฀ $ ฀฀฀฀฀฀
Equity฀b/d฀ ฀ 454,250฀
P/L฀charge฀ ฀260,350฀
2 ฀714,600฀
Equity฀c/d฀[(500฀–฀103)฀×฀100฀×฀(($15฀×฀3/3)฀+฀($3฀×฀ ))]
2
This฀is฀the฀total฀IFRS฀2฀
DEBIT฀ Expenses฀ $260,350฀ ฀
equity฀reserve฀
CREDIT฀ Equity฀ ฀ $260,350 ฀
฀ ฀
฀
Accounting฀for฀modifications฀of฀share-based฀payment฀transactions฀from฀฀
cash-settled฀to฀equity-settled฀
If฀ a฀ share-based฀ payment฀ arrangement฀ is฀ modified฀ so฀ that฀ it฀ is฀ now฀ equity-settled฀ rather฀ than฀ cash-
settled,฀the฀accounting฀treatment฀is฀as฀follows฀(IFRS฀2:฀paras.฀33A–33D):฀
(a)฀ The฀original฀ liability฀ recognised฀in฀respect฀of฀the฀cash-settled฀share-based฀payment฀should฀
be฀ derecognised฀ and฀ the฀ equity-settled฀ share-based฀ payment฀ should฀ be฀
recognised฀ at฀ the฀ modification฀ date฀ fair฀ value฀ to฀ the฀ extent฀ services฀ have฀
been฀rendered฀up฀to฀the฀modification฀date.฀฀
(b)฀ The฀ difference,฀ if฀ any,฀ between฀ the฀ carrying฀ amount฀ of฀ the฀ liability฀ as฀ at฀ the฀ modification฀
date฀and฀the฀amount฀recognised฀in฀equity฀at฀the฀same฀date฀would฀be฀recognised฀in฀profit฀
or฀loss฀immediately.฀฀
5.2฀ Cancellation฀or฀settlement฀during฀the฀vesting฀period฀
Cancellation฀
Early฀cancellation,฀whether฀by฀the฀entity,฀counterparty฀(eg฀employee)฀or฀third฀party฀(eg฀shareholder)฀
is฀ treated฀ as฀ an฀ acceleration฀ of฀ vesting,฀ meaning฀ that฀ the฀ full฀ amount฀ that฀ would฀ have฀ been฀
recognised฀for฀services฀received฀over฀the฀remainder฀of฀the฀vesting฀period฀is฀recognised฀immediately฀
(IFRS฀2:฀para.฀28(a)).฀
Settlement฀
If฀a฀payment฀(ie฀a฀settlement)฀is฀made฀to฀the฀employee฀on฀cancellation,฀it฀is฀treated฀as฀a฀deduction฀
from฀ (repurchase฀ of)฀ equity฀ or฀ extinguishment฀ of฀ a฀ liability฀ (depending฀ on฀ whether฀ the฀
share-based฀payment฀was฀equity-฀or฀cash-settled)฀(IFRS฀2:฀para.฀28(b)).฀
For฀ equity-settled฀ share-based฀ payment฀ settlements,฀ any฀ excess฀ of฀ the฀ payment฀ over฀ the฀ fair฀
value฀ of฀ equity฀ instruments฀ granted฀ measured฀ at฀ the฀ repurchase฀ date฀ is฀ recognised฀ as฀ an฀
expense฀(IFRS฀2:฀para.฀28(b)).฀
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A฀ liability฀ is฀ first฀ remeasured฀ to฀ fair฀ value฀ at฀ the฀ date฀ of฀ cancellation/settlement฀ and฀ any฀
payment฀made฀is฀treated฀as฀an฀extinguishment฀of฀the฀liability฀(IFRS฀2:฀para.฀28(b)).฀
Replacement฀
If฀equity฀instruments฀are฀granted฀to฀the฀employee฀as฀a฀replacement฀for฀the฀cancelled฀instruments฀(and฀
specifically฀identified฀as฀a฀replacement)฀this฀is฀treated฀as฀a฀modification฀of฀the฀original฀grant฀(IFRS฀2:฀
para.฀28(c)).฀฀
Applying฀this,฀the฀incremental฀fair฀value฀is฀measured฀as:฀
Fair฀value฀of฀replacement฀instruments฀ ฀฀X฀
Less฀net฀fair฀value฀of฀cancelled฀instruments*฀ ฀฀(X)฀
฀ ฀฀฀X฀฀
*Fair฀value฀immediately฀before฀cancellation฀less฀any฀payments฀to฀employee฀on฀cancellation฀
฀
Activity฀5:฀Cancellation฀of฀share฀options฀ ฀
On฀1฀January฀20X1,฀Piper฀made฀an฀award฀of฀3,000฀share฀options฀to฀each฀of฀its฀1,000฀employees.฀
The฀employees฀had฀to฀remain฀in฀Piper's฀employ฀until฀31฀December฀20X3฀in฀order฀to฀be฀entitled฀to฀
the฀share฀options.฀At฀the฀date฀of฀the฀award฀and฀at฀31฀December฀20X1,฀management฀estimated฀that฀
100฀ employees฀ would฀ leave฀ the฀ company฀ before฀ the฀ vesting฀ date.฀ Piper฀ accounted฀ for฀ the฀ options฀
correctly฀ in฀ its฀ financial฀ statements฀ for฀ the฀ year฀ ended฀ 31฀ December฀ 20X1.฀ The฀ fair฀ value฀ of฀ each฀
option฀on฀1฀January฀20X1฀was฀$5.฀
The฀share฀price฀of฀Piper฀fell฀substantially฀during฀20X1.฀On฀1฀January฀20X2฀the฀fair฀value฀of฀the฀share฀
options฀had฀fallen฀to฀$1฀each฀and฀975฀of฀the฀employees฀who฀were฀awarded฀options฀remained฀in฀
the฀company's฀employ.฀During฀the฀year฀ended฀31฀December฀20X2฀35฀of฀those฀employees฀left฀and฀
the฀company฀estimated฀that฀a฀further฀40฀would฀leave฀each฀year฀before฀31฀December฀20X4.฀
Required฀
Discuss,฀with฀suitable฀calculations,฀the฀accounting฀treatment฀of฀the฀share฀options฀in฀Piper's฀financial฀
statements฀for฀the฀year฀ended฀31฀December฀20X2฀if฀on฀1฀January฀20X2:฀
(a)฀ The฀original฀options฀were฀cancelled฀and฀$4฀million฀is฀paid฀to฀employees฀as฀compensation.฀
(b)฀ Piper's฀management฀cancelled฀the฀share฀options฀and฀replaced฀them฀with฀new฀share฀options,฀
vesting฀on฀31฀December฀20X4,฀the฀fair฀value฀of฀each฀replacement฀option฀on฀1฀January฀20X2฀
being฀$7.฀No฀compensation฀would฀be฀paid.฀
6฀ Deferred฀tax฀implications฀
6.1฀ Issue฀
An฀ entity฀ may฀ receive฀ a฀ tax฀ deduction฀ that฀ differs฀ from฀ related฀ cumulative฀ remuneration฀ expense฀
which฀may฀arise฀in฀a฀later฀accounting฀period.฀
For฀example,฀an฀entity฀recognises฀an฀expense฀for฀share฀options฀granted฀under฀IFRS฀2,฀but฀does฀not฀
receive฀a฀tax฀deduction฀until฀the฀options฀are฀exercised฀and฀receives฀the฀tax฀deduction฀based฀on฀the฀
share฀price฀on฀the฀exercise฀date.฀
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฀฀
6.2฀ Measurement฀
The฀deferred฀tax฀asset฀temporary฀difference฀is฀measured฀as:฀
Carrying฀amount฀of฀share-based฀payment฀expense 0฀
Less฀tax฀base฀of฀share-based฀payment฀expense ฀
฀฀฀฀฀฀(estimated฀amount฀tax฀authorities฀will฀permit฀as฀a฀deduction ฀
฀฀฀฀฀฀in฀future฀periods,฀based฀on฀year฀end฀information) ฀ (X)฀
Temporary฀difference ฀(X)฀
Deferred฀tax฀asset฀at฀x%฀ X฀
฀
If฀ the฀ amount฀ of฀ the฀ tax฀ deduction฀ (or฀ estimated฀ future฀ tax฀ deduction)฀ exceeds฀ the฀ amount฀ of฀ the฀
related฀ cumulative฀ remuneration฀ expense,฀ this฀ indicates฀ that฀ the฀ tax฀ deduction฀ relates฀ also฀ to฀ an฀
equity฀item.฀
The฀excess฀is฀therefore฀recognised฀directly฀in฀equity฀(note฀it฀is฀not฀reported฀in฀other฀comprehensive฀
income)฀(IAS฀12:฀paras.฀68A–68C).฀
Illustration฀4฀
Deferred฀tax฀implications฀of฀share-based฀payment฀
On฀1฀June฀20X5,฀Farrow฀grants฀16,000฀share฀options฀to฀one฀of฀its฀employees.฀At฀the฀grant฀date,฀the฀
fair฀value฀of฀each฀option฀is฀$4.฀The฀share฀options฀vest฀2฀years฀later฀on฀1฀June฀20X7.฀฀
Tax฀allowances฀arise฀when฀the฀options฀are฀exercised฀and฀the฀tax฀allowance฀is฀based฀on฀the฀option's฀
intrinsic฀value฀at฀the฀exercise฀date.฀The฀intrinsic฀value฀of฀the฀share฀options฀is฀$2.25฀at฀31฀May฀20X6฀
and฀$4.50฀at฀31฀May฀20X7฀on฀which฀date฀the฀options฀are฀exercised.฀฀฀
Required฀
Show฀the฀deferred฀tax฀accounting฀treatment฀of฀the฀above฀transaction฀at฀31฀May฀20X6,฀31฀May฀
20X7฀(before฀exercise),฀and฀on฀exercise.฀฀
Solution฀
฀ ฀31.5.X6฀ ฀31.5.X7฀
฀ ฀Before฀
This฀is฀always฀nil exercise฀
฀ $ ฀฀฀฀ $฀฀฀฀฀฀
Carrying฀amount฀of฀share-based฀payment฀expense ฀0 ฀0฀
Less฀tax฀base฀of฀share-based฀payment฀expense฀ ฀฀
฀฀(16,000฀×฀$2.25฀×฀½)/(16,000฀×฀$4.50) ฀(18,000) ฀(72,000)฀
฀ ฀
฀ ฀
Use฀intrinsic฀value฀at฀ Year฀1฀of฀2-year฀
฀ date฀of฀calculation฀ vesting฀period฀ ฀
฀ ฀
Temporary฀difference฀ ฀฀(18,000) ฀฀ (72,000)฀
Deferred฀tax฀asset฀at฀30%฀ ฀฀5,400฀ ฀฀21,600฀

฀
To฀determine฀where฀to฀record฀the฀deferred฀tax,฀we฀must฀first฀compare฀the฀cumulative฀accounting฀
expense฀with฀the฀cumulative฀tax฀deduction฀for฀each฀year.฀Where฀the฀tax฀deduction฀is฀greater฀than฀
the฀accounting฀expense฀recognised,฀the฀excess฀is฀taken฀directly฀to฀equity.฀
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฀ Year฀1฀ Year฀2฀
฀ $฀฀฀฀฀฀฀ $฀฀฀฀฀฀
Accounting฀expense฀recognised฀(16,000฀× $4฀× ½)/(16,000฀× $4) 32,000฀ 64,000
Tax฀deduction฀ ฀(18,000)฀ ฀(72,000)
Excess฀temporary฀difference฀ ฀ ฀฀ ฀0฀ ฀฀฀(8,000)
Excess฀deferred฀tax฀asset฀to฀equity฀at฀30% ฀ ฀0฀ 2,400
฀
In฀year฀1,฀the฀accounting฀expense฀is฀greater฀than฀the฀tax฀deduction,฀so฀the฀double฀entry฀to฀record฀the฀
deferred฀tax฀asset฀is:฀
DEBIT฀฀ Deferred฀tax฀asset฀ ฀฀$5,400฀
CREDIT฀฀ Deferred฀tax฀(P/L)฀ $5,400฀
In฀year฀2,฀the฀tax฀deduction฀is฀$8,000฀greater฀than฀the฀accounting฀expense,฀therefore฀the฀excess฀
deferred฀tax฀asset฀of฀$2,400฀is฀credited฀to฀equity:฀
Credit฀profit฀or฀loss฀
DEBIT฀฀ Deferred฀tax฀asset฀ ฀$16,200฀ with฀the฀increase฀in฀
CREDIT฀฀ Deferred฀tax฀(P/L)฀ ฀ $13,800฀ the฀deferred฀tax฀asset฀
฀ ฀฀฀(21,600฀–฀5,400฀–฀2,400)฀ less฀the฀amount฀
credited฀to฀equity฀
CREDIT฀฀ Deferred฀tax฀(equity)฀ ฀ $2,400฀
On฀exercise,฀the฀deferred฀tax฀asset฀is฀replaced฀by฀a฀current฀tax฀asset.฀The฀double฀entry฀is:฀
DEBIT฀฀ Deferred฀tax฀(P/L)฀ $19,200฀
Reversal฀of฀
DEBIT฀฀ Deferred฀tax฀(equity)฀ $2,400฀ deferred฀tax฀asset
CREDIT฀฀ Deferred฀tax฀asset฀ ฀ $21,600฀
DEBIT฀฀ Current฀tax฀asset฀ $21,600฀
CREDIT฀฀ Current฀tax฀(P/L)฀ ฀ $19,200฀
CREDIT฀฀ Current฀tax฀(equity)฀ ฀ $2,400฀
Activity฀6:฀Deferred฀tax฀implications฀of฀share-based฀payment฀ ฀
On฀1฀January฀20X2,฀an฀entity฀granted฀5,000฀share฀options฀to฀an฀employee฀vesting฀2฀years฀later฀on฀
31฀December฀20X3.฀The฀fair฀value฀of฀each฀option฀measured฀at฀the฀grant฀date฀was฀$3.฀฀
Tax฀law฀in฀the฀jurisdiction฀in฀which฀the฀entity฀operates฀allows฀a฀tax฀deduction฀of฀the฀intrinsic฀value฀
of฀the฀options฀on฀exercise.฀The฀intrinsic฀value฀of฀the฀share฀options฀was฀$1.20฀at฀31฀December฀20X2฀
and฀$3.40฀at฀31฀December฀20X3฀on฀which฀date฀the฀options฀were฀exercised.฀
Required฀
Show฀ the฀ deferred฀ tax฀ accounting฀ treatment฀ of฀ the฀ above฀ transaction฀ at฀ 31฀ December฀ 20X2,฀
31฀December฀20X3฀(before฀exercise),฀and฀on฀exercise.฀
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฀฀
Ethics฀note฀
principles฀of฀the฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀question.฀
In฀relation฀to฀share-based฀payments฀granted฀to฀directors,฀one฀key฀threat฀that฀could฀arise฀is฀that฀of฀฀
self-interest฀if฀the฀vesting฀conditions฀are฀based฀on฀performance฀measures.฀There฀is฀a฀danger฀that฀
strategies฀and฀accounting฀policies฀are฀manipulated฀to฀obtain฀maximum฀return฀on฀exercise฀of฀฀
share-based฀payments.฀For฀example,฀if฀vesting฀conditions฀are฀based฀on฀achieving฀a฀certain฀profit฀
figure,฀a฀director฀may฀be฀tempted฀to฀improve฀profits฀by฀suggesting฀that,฀for฀example:฀
฀ The฀useful฀lives฀of฀assets฀are฀extended฀(reducing฀depreciation฀or฀amortisation)฀
฀ A฀policy฀of฀revaluing฀property฀is฀changed฀to฀the฀cost฀model฀
฀ Development฀costs฀are฀capitalised฀when฀they฀should฀be฀expensed฀
฀ The฀revenue฀recognition฀policy฀is฀changed฀to฀recognise฀revenue฀earlier฀฀
฀ Some฀other฀form฀of฀'creative฀accounting'฀is฀undertaken฀
A฀change฀in฀accounting฀policy฀to฀provide฀more฀reliable฀and฀relevant฀information฀is฀of฀course฀
permitted฀by฀IAS฀8.฀But฀to฀change฀a฀policy฀purely฀to฀boost฀profits฀to฀maximise฀share-based฀payments฀
is฀unethical.฀
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฀
฀ ฀
1.฀ Types฀of฀share- 2.฀ Recognition฀
based฀payment฀
฀ Over฀vesting฀period฀
Equity-settled:฀
฀ Goods/services฀for฀shares/share฀
options฀
Cash-settled:฀
฀ Goods/services฀for฀cash฀based฀on฀
value฀of฀shares/share฀options฀
Choice฀of฀settlement:฀
฀ Entity฀chooses฀or฀counterparty฀chooses฀
4.฀ Vesting฀conditions฀
Share-based฀payment฀
Period฀of฀service:฀
฀ Over฀period฀ (IFRS฀2)฀
Performance฀conditions฀(other฀than฀ 3.฀ Measurement฀
market):฀
฀ Estimate฀at฀y/e฀instruments฀expected฀
to฀vest฀
฀ Where฀vesting฀period฀varies฀(eg฀ 6.฀ Deferred฀tax฀implications฀
target)฀accrue฀over฀most฀likely฀period฀ Deferred฀tax฀asset:฀
at฀y/e฀ A/c฀carrying฀amount฀of฀SBP฀expense฀ ฀0฀
Market฀conditions:฀ Less฀฀ tax฀base฀
฀ Ignore฀(already฀considered฀in฀FV)฀ ฀ ฀ (future฀tax฀ded'n฀estimated฀at฀y/e)฀ ฀(X)฀
Temporary฀difference฀ ฀(X)฀
5.฀ Modifications,฀ DT฀asset฀฀X%฀ ฀X฀
cancellations฀and฀ If฀tax฀ded'n฀>฀SBP฀expense,฀excess฀DT฀฀equity฀not฀
SPLOCI฀
settlements฀
฀ Modifications:฀
฀ Recognise฀(as฀a฀minimum)฀services฀
already฀received฀measured฀at฀grant฀
date฀FV฀of฀equity฀instrument฀granted฀
Equity-settled฀ Cash-settled Choice฀of฀
฀ Increases฀in฀FV฀due฀to฀modification:฀
฀ Recognise฀(FV฀of฀modified฀less฀FV฀ settlement฀
Dr฀Expense฀(/asset)฀ Dr฀Expense฀(/asset)฀
original,฀both฀at฀modification฀date)฀
over฀remaining฀vesting฀period฀ Cr฀Equity฀ ฀ Recognise฀at฀FV฀ If฀counterparty฀has฀the฀choice:฀
฀ Cancellation:฀ ฀ Treat฀as฀a฀compound฀instrument฀
฀ Expense฀amount฀remaining฀ ฀ Measure฀equity฀component฀at฀
฀ (acceleration฀of฀vesting)฀ Measure฀at:฀
฀ Cr฀Liability฀ ฀ grant฀date฀FV:฀
฀ Settlement:฀ ฀ FV฀shares฀alternative฀ ฀฀X฀
฀ FV฀goods/services฀rec'd,฀or฀
฀ Adjust฀ for฀ changes฀ in฀ FV฀ ฀ FV฀cash฀(debt)฀alternative฀ ฀฀(X)฀
฀ –฀ Treat฀as฀a฀repurchase฀of฀
฀ FV฀of฀equity฀instruments฀at฀ until฀date฀of฀settlement฀ ฀ Equity฀component฀
equity/extinguishment฀of฀liability฀ ฀฀X฀฀
grant฀date฀
–
฀ ฀ First฀remeasure฀liability฀to฀FV฀(if฀
If฀entity฀has฀the฀choice:฀
cash-settled)฀
฀ –฀ Dr฀ SBP฀reserve/liability฀(with฀฀ ฀ Treat฀as฀equity-settled฀unless฀
For฀employee฀services฀not฀
present฀obligation฀to฀settle฀in฀
FV฀of฀instrument฀measured฀฀ vesting฀immediately,฀recognise฀
cash฀
at฀repurchase฀date)฀ change฀in฀equity฀over฀vesting฀
฀ ฀ Dr฀ P/L฀(any฀excess)฀ period฀
฀ ฀ Cr฀ Cash฀
Equity/liability฀b/d฀ ฀X฀
Movement฀(bal)฀฀P/L฀ ฀฀X฀
Cash฀paid฀(liab฀only)฀ ฀(X)฀ Estimated฀no.฀ x Estimated฀no.฀ x FV฀per฀ x฀ Cumulative฀
of฀employees฀ of฀instruments฀ instrument*฀ proportion฀of฀
Equity/liability฀c/d฀ ฀฀X฀฀
entitled฀to฀ per฀employee vesting฀period฀
benefits฀at฀ ฀ elapsed฀
vesting฀date ฀
*฀ Equity-settled:฀grant฀date฀
฀ Cash-settled:฀year฀end฀
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฀฀
1.฀ Types฀of฀share-based฀payment฀
฀ There฀are฀three฀types฀of฀share-based฀payment฀฀
฀ ฀ Equity-settled,฀eg฀share฀options฀
฀ ฀ Cash-settled,฀eg฀share฀appreciation฀rights฀
฀ ฀ Choice฀of฀settlement,฀by฀entity฀or฀by฀counterparty฀
2.฀ Recognition฀
฀ The฀expense฀associated฀with฀share-based฀payment฀is฀recognised฀over฀the฀vesting฀period฀(ie฀
the฀period฀during฀which฀the฀counterparty฀becomes฀entitled฀to฀receive฀the฀payment).฀
3.฀ Measurement฀
฀ The฀expense฀is฀measured฀based฀on฀the฀expected฀fair฀value฀of฀the฀payment,฀using฀year-
end฀estimates฀of฀instruments฀expected฀to฀vest฀and฀fair฀values฀of฀instruments฀at฀grant฀date฀
(equity-settled)฀and฀at฀year฀end฀(cash-settled).฀
4.฀ Vesting฀conditions฀
฀ Vesting฀conditions฀are฀the฀conditions฀that฀must฀be฀satisfied฀for฀the฀counterparty฀to฀become฀
unconditionally฀entitled฀to฀receive฀payment฀under฀a฀share-based฀payment฀agreement.฀฀
฀ Vesting฀conditions฀include฀service฀conditions฀and฀performance฀conditions.฀
฀ Where฀there฀are฀performance฀conditions฀(other฀than฀market฀conditions฀which฀are฀already฀
factored฀into฀the฀fair฀value฀of฀the฀instrument),฀an฀estimate฀is฀made฀of฀the฀number฀of฀
instruments฀expected฀to฀vest,฀and฀revised฀at฀each฀year฀end.฀
5.฀ Modifications,฀cancellations฀and฀settlements฀
฀ The฀fair฀value฀of฀modifications฀is฀recognised฀over฀the฀remaining฀vesting฀period.฀
฀ When฀a฀cancellation/settlement฀occurs,฀the฀remaining฀share-based฀payment฀charge฀is฀
immediately฀expensed฀(acceleration฀of฀vesting).฀
6.฀ Deferred฀tax฀implications฀
฀ Since฀the฀accounting฀value฀of฀share-based฀payment฀is฀zero฀(it฀is฀expensed),฀any฀future฀tax฀
deductions฀(eg฀if฀there฀is฀no฀tax฀deduction฀until฀the฀share-based฀payment฀vests)฀will฀generate฀a฀
deferred฀tax฀asset.฀
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Q11฀Lambda฀
There฀are฀articles฀on฀the฀ACCA฀website฀which฀are฀relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀
Get฀to฀grips฀with฀IFRS฀2฀(2017)฀฀
IFRS฀2,฀Share-based฀Payment฀
Ernst฀&฀Young฀has฀produced฀a฀more฀detailed฀guide฀to฀IFRS฀2฀which฀can฀be฀found฀by฀visiting฀the฀Ernst฀&฀
Young฀website฀at฀the฀link฀below฀and฀navigating฀to฀the฀'Applying฀IFRS'฀tab:฀฀
www.ey.com/uk/en/issues/ifrs/issues_gl_ifrs_nav_publications฀
฀
฀ 217฀

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฀฀
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฀ ฀
฀
Resolving฀financial฀reporting฀issues฀
฀
฀
฀
aging information
Man
aging information
Man
An
sw
Resolving financial
er
pl
t
en
manag ime
reporting issues
an
em
t
nin
Good
g
r p re t ati o n
Specific SBR skills
e nts
Applying good
req f rrprneteation
consolidation
re m
Creating effective
i ts
techniques
discussion
m eun
of t inotect i
uireeq
Eff d p
an
c re
e c re
Performing
r re o r
C
ti v
se w ri
nt tin
Co
ati g
on
Efficient numerical
analysis
฀
฀
Introduction฀
questions฀that฀will฀total฀50฀marks.฀The฀first฀question฀will฀be฀based฀on฀the฀financial฀statements฀of฀
group฀entities,฀or฀extracts฀thereof฀(syllabus฀area฀D),฀and฀is฀also฀likely฀to฀require฀consideration฀of฀
some฀financial฀reporting฀issues฀(syllabus฀area฀C).฀The฀second฀question฀will฀require฀
candidates฀to฀consider฀the฀reporting฀implications฀and฀the฀ethical฀implications฀of฀specific฀
events฀in฀a฀given฀scenario.฀
Section฀B฀will฀contain฀two฀further฀questions฀which฀may฀be฀scenario฀or฀case-study฀or฀essay฀based฀
and฀will฀contain฀both฀discursive฀and฀numerical฀elements.฀Section฀B฀could฀deal฀with฀any฀
aspect฀of฀the฀syllabus.฀
As฀financial฀reporting฀issues฀are฀highly฀likely฀to฀be฀tested฀in฀both฀sections฀of฀your฀SBR฀exam,฀it฀is฀
essential฀that฀you฀have฀mastered฀the฀skill฀for฀resolving฀financial฀reporting฀issues฀in฀order฀to฀
maximise฀your฀chance฀of฀passing฀the฀SBR฀exam.฀
฀ ฀
฀ 219฀

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฀฀
Skills฀Checkpoint฀2:฀Resolving฀financial฀reporting฀issues฀
SBR฀Skill:฀Resolving฀financial฀reporting฀issues฀
The฀basic฀approach฀to฀resolving฀financial฀reporting฀issues฀is฀very฀similar฀to฀the฀one฀for฀
ethical฀ issues.฀ This฀ consistency฀ is฀ important฀ because฀ in฀ Question฀ 2฀ of฀ the฀ SBR฀ exam,฀
both฀will฀be฀tested฀together.฀฀
STEP฀1:
Look฀at฀the฀mark฀allocation฀of฀the฀question฀and฀
work฀out฀how฀many฀minutes฀you฀have฀to฀
answer฀the฀question฀(based฀on฀1.95฀minutes฀a฀
mark).
STEP฀2:฀
Read฀the฀requirement฀and฀analyse฀it.฀Highlight฀each฀
sub-requirement฀separately,฀identify฀the฀verb(s)฀and฀
ask฀yourelf฀what฀each฀sub-requirement฀means.฀
STEP฀3:
Read฀the฀scenario,฀asking฀yourself฀for฀each฀
paragraph฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀and฀
apply฀that฀acccounting฀standard฀to฀each฀paragraph฀
of฀the฀question.
STEP฀4:
Prepare฀an฀answer฀plan฀ensuring฀that฀you฀cover฀
each฀of฀the฀issues฀raised฀in฀the฀scenario.฀Choose฀
your฀preferred฀format฀(eg฀mind฀map,฀bullet฀pointed฀
list,฀annotating฀the฀question฀paper).
STEP฀5:
Write฀up฀your฀answer฀with฀a฀separate฀underlined฀
heading฀for฀each฀of฀the฀items฀in฀the฀scenario.฀Write฀
in฀full฀sentences฀and฀clearly฀explain฀each฀point.
฀
฀
฀ ฀
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However,฀ how฀ you฀ write฀ up฀ your฀ answer฀ in฀ Step฀ 5฀ depends฀ on฀ whether฀ in฀ the฀
scenario:฀
(a)฀ The฀items฀have฀not฀yet฀been฀accounted฀for;฀or฀
(b)฀ The฀items฀have฀already฀been฀accounted฀for.฀฀
The฀ diagram฀ below฀ summaries฀ how฀ you฀ should฀ write฀ up฀ your฀ answer฀ in฀ each฀ of฀ the฀
above฀circumstances:฀
Item฀not฀yet฀accounted฀for Item฀already฀accounted฀for
(a)฀ Identify฀what฀the฀
(a)฀ Identify฀the฀correct฀
company฀did฀or฀what฀it฀
accounting฀standard฀
is฀proposing฀(accounting฀
treatment฀in฀SOFP฀and฀
SPLOCI)฀
(b)฀ State฀the฀relevant฀rule฀or฀
principle฀per฀the฀ (b)฀ Identify฀the฀correct฀
accounting฀standard฀(very฀ accounting฀treatment:฀
briefly)฀ (i)฀ Identify฀correct฀IAS฀or฀
IFRS฀
(ii)฀ State฀relevant฀
(c)฀ Apply฀the฀rule/principle฀to฀ rule/principle฀per฀
the฀scenario฀eg:฀ IAS/IFRS฀
฀ Recognition฀(when฀to฀ (iii)฀ Apply฀rule/principle฀to฀
record฀it,฀impact฀on฀SOFP฀ scenario฀
and฀SPLOCI,฀and฀why)฀
฀ Initial฀measurement฀(on฀
recognition:฀what฀number฀ (c)฀ State฀the฀adjustment฀
and฀why)฀ required฀where฀necessary฀
฀ Subsequent฀measurement฀ (impact฀on฀SOFP฀and฀
(what฀number฀and฀why)฀ SPLOCI)฀
฀ Presentation฀(heading฀in฀ ฀
SOFP฀or฀SPLOCI)฀
฀ Disclosure฀(notes฀to฀the฀
accounts)฀
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฀฀
฀ Good฀ time฀ management.฀ Remember฀ that฀ as฀ the฀ exam฀ is฀ 3฀ hours฀ and฀
15฀minutes฀ long,฀ you฀ have฀ 1.95฀ minutes฀ a฀ mark.฀ The฀ following฀ question฀ is฀
worth฀15฀marks฀so฀you฀should฀allow฀approximately฀29฀minutes.฀Approximately฀
a฀quarter฀to฀a฀third฀of฀your฀time฀(7–10฀minutes)฀should฀be฀allocated฀to฀analysis฀
of฀ the฀ requirement,฀ active฀ reading฀ of฀ the฀ scenario฀ and฀ an฀ answer฀ plan.฀ The฀
remaining฀time฀should฀be฀used฀to฀write฀up฀your฀answer.฀
฀ Managing฀ information.฀ This฀ type฀ of฀ case฀ study฀ style฀ question฀ typically฀
contains฀ several฀ paragraphs฀ of฀ information฀ and฀ each฀ paragraph฀ is฀ likely฀ to฀
revolve฀around฀a฀different฀IAS฀or฀IFRS.฀This฀is฀a฀lot฀of฀information฀to฀absorb฀and฀
the฀ best฀ approach฀ is฀ effective฀ planning.฀ As฀ you฀ read฀ each฀ paragraph,฀ you฀
should฀think฀about฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀(there฀could฀be฀more฀than฀
one฀ relevant฀ for฀ each฀ paragraph)฀ and฀ if฀ you฀ cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀
IFRS,฀ you฀ can฀ fall฀ back฀ on฀ the฀ principles฀ of฀ the฀ Conceptual฀ Framework฀ for฀
Financial฀Reporting฀(the฀Conceptual฀Framework).฀฀
฀ Correct฀ interpretation฀ of฀ requirements.฀ Firstly,฀ you฀ should฀ identify฀ the฀
verb฀ in฀ the฀ requirement.฀ You฀ should฀ then฀ read฀ the฀ rest฀ of฀ the฀ requirement฀ and฀
analyse฀it฀to฀determine฀exactly฀what฀your฀answer฀needs฀to฀address.฀
฀ Answer฀planning.฀After฀Skills฀Checkpoint฀1,฀you฀should฀have฀practised฀some฀
questions฀which฀will฀have฀allowed฀you฀to฀identify฀your฀preferred฀format฀for฀an฀
answer฀ plan.฀ It฀ may฀ be฀ simply฀ annotating฀ the฀ question฀ paper฀ or฀ you฀ might฀
prefer฀to฀write฀out฀your฀own฀bullet-pointed฀list฀or฀even฀draw฀up฀a฀mind฀map.฀
฀ Effective฀ writing฀ and฀ presentation.฀ Each฀paragraph฀of฀the฀question฀will฀
usually฀relate฀to฀its฀own฀standalone฀transaction฀with฀its฀own฀related฀IAS฀or฀IFRS.฀
It฀is฀useful฀to฀set฀up฀separate฀headings฀in฀your฀answer฀for฀each฀paragraph฀in฀the฀
question.฀ As฀ for฀ ethical฀ issues฀ questions,฀ underline฀ your฀ headings฀ and฀ sub-
headings฀ with฀ a฀ ruler฀ and฀ write฀ in฀ full฀ sentences,฀ ensuring฀ your฀ style฀ is฀
professional.฀For฀Question฀2฀(where฀both฀financial฀reporting฀and฀ethical฀issues฀
are฀tested),฀there฀will฀be฀two฀professional฀skills฀marks฀available฀and฀if฀reporting฀
issues฀ are฀ tested฀ in฀ the฀ Section฀ B฀ analysis฀ question,฀ there฀ will฀ also฀ be฀ two฀
professional฀ skills฀ marks฀ available฀ in฀ this฀ question.฀ You฀ must฀ do฀ your฀ best฀ to฀
earn฀ these฀ marks.฀ It฀ could฀ end฀ up฀ being฀ the฀ difference฀ between฀ a฀ pass฀ and฀ a฀
fail.฀ The฀ use฀ of฀ headings,฀ sub-headings฀ and฀ full฀ sentences฀ as฀ well฀ as฀ clear฀
explanations฀and฀ensuring฀that฀all฀sub-requirements฀are฀met฀and฀all฀issues฀in฀the฀
scenario฀are฀addressed฀will฀help฀you฀obtain฀these฀two฀marks.฀
฀
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Skill฀Activity฀
฀ how฀ many฀ minutes฀ you฀ have฀ to฀ answer฀ the฀ question.฀ Just฀ the฀
requirement฀ and฀ mark฀ allocation฀ have฀ been฀ reproduced฀ here.฀ It฀ is฀ a฀
15฀ mark฀ question฀ and฀ at฀ 1.95฀ minutes฀ a฀ mark,฀ it฀ should฀ take฀
29฀minutes.฀This฀time฀should฀be฀split฀approximately฀as฀follows:฀
 Reading฀the฀question฀–฀4฀minutes฀
 Planning฀your฀answer฀–฀4฀minutes฀
 Writing฀up฀your฀answer฀–฀21฀minutes฀
Within฀each฀of฀these฀phases,฀your฀time฀should฀be฀split฀equally฀
between฀the฀three฀issues฀in฀the฀scenario฀as฀you฀can฀see฀from฀the฀
question฀that฀they฀are฀worth฀the฀same฀number฀of฀marks฀each฀(five฀
marks).฀
Required฀
Advise฀Cate฀on฀the฀matters฀set฀out฀above฀(in฀(a),฀(b)฀and฀(c))฀with฀reference฀to฀relevant฀
International฀Financial฀Reporting฀Standards.฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(15฀marks)฀
฀
STEP 2฀ Read฀the฀requirement฀for฀the฀following฀question฀and฀analyse฀it.฀
฀ Highlight฀each฀sub-requirement,฀identify฀the฀verb(s)฀and฀ask฀yourself฀
what฀each฀sub-requirement฀means.฀
There฀is฀just฀a฀
single฀
Verb฀–฀what฀
requirement฀
does฀this฀mean?฀
here฀
Required฀
Advise฀Cate฀on฀the฀matters฀set฀out฀above฀(in฀(a),฀(b)฀and฀(c))฀with฀reference฀to฀relevant฀
International฀Financial฀Reporting฀Standards.฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(15฀marks)฀
฀ For฀each฀paragraph฀in฀the฀
question,฀try฀to฀find฀the฀
฀ relevant฀IAS฀or฀IFRS฀
฀
Your฀ verb฀ is฀ 'advise'.฀ This฀ is฀ not฀ one฀ of฀ the฀ common฀ question฀ verbs฀ defined฀ by฀ the฀
ACCA฀ but฀ it฀ was฀ used฀ in฀ the฀ SBR฀ specimen฀ paper.฀ Given฀ that฀ there฀ is฀ no฀ ACCA฀
definition,฀ we฀ will฀ instead฀ refer฀ to฀ the฀ dictionary฀ definition฀ of฀ 'advise':฀ 'offer฀
suggestions฀ about฀ the฀ best฀ course฀ of฀ action฀ to฀ someone'฀ (English฀ Oxford฀ Living฀
Dictionaries).฀฀
In฀ the฀ context฀ of฀ this฀ question,฀ the฀ type฀ of฀ 'suggestions'฀ required฀ relate฀ to฀ the฀
appropriate฀accounting฀treatment฀to฀follow฀for฀each฀issue฀in฀the฀question฀according฀to฀
the฀ relevant฀ accounting฀ standard.฀ The฀ 'someone'฀ you฀ need฀ to฀ advise฀ here฀ is฀ the฀
company,฀Cate,฀and฀presumably฀more฀specifically,฀the฀board฀of฀directors.฀
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฀฀
STEP 3฀ Now฀read฀the฀scenario.฀For฀each฀paragraph,฀ask฀yourself฀which฀IAS฀
฀ or฀IFRS฀may฀be฀relevant฀(remember฀you฀do฀not฀need฀to฀know฀the฀IAS฀
or฀ IFRS฀ number).฀ Then฀ think฀ about฀ which฀ specific฀ rules฀ or฀ principles฀
from฀ that฀ IAS฀ or฀ IFRS฀ are฀ relevant฀ to฀ the฀ particular฀ transaction฀ or฀
balance฀ in฀ the฀ paragraph.฀ Then฀ you฀ need฀ to฀ decide฀ whether฀ the฀
proposed฀accounting฀treatment฀complies฀with฀the฀relevant฀IAS฀or฀IFRS.฀
If฀ you฀ cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀ IFRS,฀ then฀ refer฀ to฀ the฀
Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ (Conceptual฀
Framework).฀฀
To฀identify฀the฀issues,฀you฀might฀want฀to฀consider฀whether฀one฀or฀more฀
of฀the฀following฀are฀relevant฀in฀the฀scenario:฀
Potential฀issue฀ What฀does฀it฀mean?฀
Recognition฀ When฀should฀the฀item฀be฀recorded฀in฀the฀
financial฀statements?฀
Initial฀ What฀amount฀should฀be฀recorded฀when฀the฀
measurement฀ item฀is฀first฀recognised?฀
Subsequent฀ Once฀the฀item฀has฀been฀recognised,฀how฀
measurement฀ should฀the฀amount฀change฀year฀on฀year?฀
Presentation฀ What฀heading฀should฀the฀amount฀appear฀
under฀in฀the฀statement฀of฀financial฀position฀or฀
statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income?฀
Disclosure฀ Is฀a฀note฀to฀the฀accounts฀required฀in฀relation฀to฀
the฀transaction฀or฀balance?฀
฀
฀฀
฀
฀
฀
฀
฀
฀ ฀
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฀ Note฀the฀industry฀Cate฀operates฀
in฀–฀this฀will฀help฀you฀to฀identify฀
฀ the฀types฀of฀assets,฀liabilities,฀
The฀company฀has฀made฀losses฀
income฀and฀expenses฀the฀
company฀is฀likely฀to฀have฀and฀ for฀six฀consecutive฀years.฀There฀
may฀be฀going฀concern฀issues.฀
฀ which฀IASs฀or฀IFRSs฀may฀be฀
This฀could฀also฀be฀an฀
relevant.฀
impairment฀indicator.฀
฀ However,฀there฀is฀a฀small฀profit฀
in฀the฀current฀year.฀
Question฀–฀Cate฀(15฀marks)฀
(a)฀ Cate฀ is฀ an฀ entity฀ in฀ the฀ software฀ industry.฀ Cate฀ had฀ incurred฀
substantial฀ losses฀ in฀ the฀ financial฀ years฀ 31฀ May฀ 20X0฀ to฀
Likely฀to฀recur?฀ 31฀May฀ 20X5.฀In฀the฀financial฀year฀to฀31฀ May฀ 20X6฀ Cate฀ made฀ Relevant฀accounting฀

standard฀=฀IAS฀12฀
a฀small฀profit฀before฀tax.฀This฀included฀significant฀non-operating฀ Income฀Taxes.฀
Is฀the฀deferred฀tax฀asset฀
gains.฀In฀20X5,฀Cate฀recognised฀a฀material฀ deferred฀ tax฀ asset฀in฀ recoverable?฀Indicators฀
of฀recoverability฀฀
respect฀ of฀ carried฀ forward฀ losses,฀ which฀ will฀ expire฀ during฀ (IAS฀12:฀para.฀36)฀
฀
Can฀only฀carry฀forward฀
20X8.฀Cate฀again฀recognised฀the฀deferred฀tax฀asset฀in฀20X6฀
the฀losses฀for฀another฀
two฀years.฀Will฀there฀be฀
on฀the฀basis฀of฀anticipated฀performance฀in฀the฀years฀from฀20X6฀to฀20X8,฀
sufficient฀taxable฀profits฀
to฀offset฀them฀against?฀ based฀ on฀ budgets฀ prepared฀ in฀ 20X6.฀ The฀ budgets฀ included฀ high฀
At฀31฀May฀20X6,฀have฀
unused฀losses฀from฀ growth฀ rates฀ in฀ profitability.฀ Cate฀ argued฀ that฀ the฀ budgets฀ were฀
20X0–20X3฀which฀will฀
never฀be฀used฀because฀ realistic฀ as฀ there฀ were฀ positive฀ indications฀ from฀ customers฀ about฀ future฀
the฀carry฀forward฀period฀
has฀expired.฀IAS฀12฀ orders.฀Cate฀also฀had฀plans฀to฀expand฀sales฀to฀new฀markets฀and฀to฀sell฀
states฀existence฀of฀
new฀ products฀ whose฀ development฀ would฀ be฀ completed฀ soon.฀ Cate฀ was฀ Are฀budgets฀realistic?
unused฀tax฀losses฀=฀
strong฀evidence฀that฀
future฀taxable฀profits฀ taking฀ measures฀ to฀ increase฀ sales,฀ implementing฀ new฀ programs฀ to฀
might฀not฀be฀available฀
(IAS฀12:฀para.฀35)฀ improve฀ both฀ productivity฀ and฀ profitability.฀ Deferred฀ tax฀ assets฀ less฀
deferred฀tax฀liabilities฀represent฀25%฀of฀shareholders'฀equity฀at฀31฀May฀
20X6.฀ There฀ are฀ no฀ tax฀ planning฀ opportunities฀ available฀ to฀
Cate฀ that฀ would฀ create฀ taxable฀ profit฀ in฀ the฀ near฀ future.฀฀฀฀฀฀฀฀
฀ (5฀marks)฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀Assess฀deferred฀tax฀asset฀recoverability฀from฀IAS฀12฀(para.฀36)฀indicators:฀
฀฀ Sufficient฀taxable฀temporary฀differences฀which฀will฀result฀in฀taxable฀
amounts฀against฀which฀unused฀losses฀can฀be฀utilised฀before฀they฀expire฀
฀฀ Probable฀taxable฀profits฀before฀unused฀tax฀losses฀expire฀
฀฀ Losses฀result฀from฀identifiable฀causes฀which฀are฀unlikely฀to฀recur฀
฀
฀฀ Tax฀planning฀opportunities฀are฀available฀that฀will฀create฀taxable฀profit฀in฀
฀ the฀period฀in฀which฀unused฀tax฀losses฀can฀be฀utilised฀
฀
฀ ฀
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฀฀
Relevant฀accounting฀
฀
Investments฀in฀Associates฀
฀ and฀Joint฀Ventures฀
฀
(b)฀ At฀ 31฀ May฀ 20X6฀ Cate฀ held฀ an฀ investment฀ in฀ and฀ had฀ a฀ significant฀ Question฀is฀helpful฀
as฀mentions฀another฀
influence฀ over฀ Bates,฀ a฀ public฀ limited฀ company.฀ Cate฀ had฀ carried฀ out฀
relevant฀accounting฀
an฀ impairment฀ test฀ in฀ respect฀ of฀ its฀ investment฀ in฀ accordance฀ with฀ the฀ standard฀(IAS฀36,฀
Impairment฀of฀assets)
Another฀relevant฀
accounting฀ procedures฀ prescribed฀ in฀ IAS฀ 36฀ Impairment฀ of฀ Assets.฀ Cate฀
standard฀=฀IFRS฀
13฀Fair฀Value฀ argued฀that฀fair฀value฀was฀the฀only฀measure฀applicable฀in฀this฀case฀as฀
Acceptable฀
Measurement฀
value-in-use฀ was฀ not฀ determinable฀ as฀ cash฀ flow฀ estimates฀ reason฀to฀not฀
identify฀value฀in฀
had฀ not฀ been฀ produced.฀ Cate฀ stated฀ that฀ there฀ were฀ no฀ plans฀ to฀ use?฀
dispose฀ of฀ the฀ shareholding฀ and฀ hence฀ there฀ was฀ no฀ binding฀ sale฀
IFRS฀13฀definition฀
agreement.฀Cate฀also฀stated฀that฀the฀quoted฀share฀price฀was฀not฀an฀
of฀fair฀value฀
฀
appropriate฀ measure฀ when฀ considering฀ the฀ fair฀ value฀ of฀ Cate's฀
significant฀influence฀on฀Bates.฀Therefore,฀Cate฀measured฀the฀fair฀value฀of฀
Acceptable฀fair฀
its฀ interest฀ in฀ Bates฀ through฀ application฀ of฀ two฀ measurement฀
value฀measures฀
This฀should฀arouse฀ under฀IFRS฀13?฀
techniques;฀ one฀ based฀ on฀ earnings฀ multiples฀ and฀ the฀ other฀
your฀suspicions฀–฀is฀
Cate฀deliberately฀ based฀on฀an฀option-pricing฀model.฀Neither฀of฀these฀methods฀
avoiding฀recording฀
an฀impairment฀loss?฀ supported฀ the฀ existence฀ of฀ an฀ impairment฀ loss฀ as฀ of฀ 31฀ May฀
20X6.฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(5฀marks)฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Relevant฀accounting฀
(c)฀ In฀ its฀ 20X6฀ financial฀ statements,฀ Cate฀ disclosed฀ the฀ existence฀ of฀ a฀ Employee฀Benefits฀
Who฀has฀the฀risks฀ voluntary฀ fund฀ established฀ in฀ order฀ to฀ provide฀ a฀ post-retirement฀

and฀rewards฀
associated฀with฀the฀ benefit฀ plan฀ (Plan)฀ to฀ employees.฀ Cate฀ considers฀ its฀ contributions฀ to฀
pension฀plan?฀ Is฀this฀accounting฀
Employees฀=฀defined฀ the฀Plan฀to฀be฀voluntary,฀and฀has฀not฀recorded฀any฀related฀liability฀ treatment฀correct?฀
contribution;฀
employers฀=฀defined฀ in฀its฀consolidated฀financial฀statements.฀Cate฀has฀a฀history฀of฀paying฀
benefit฀
benefits฀ to฀ its฀ former฀ employees,฀ even฀ increasing฀ them฀ to฀ Creates฀a฀valid฀
expectation฀in฀
keep฀pace฀with฀inflation฀since฀the฀commencement฀of฀the฀Plan.฀ employees฀that฀they฀
will฀receive฀pension฀
Cate฀guaranteeing฀ The฀main฀characteristics฀of฀the฀Plan฀are฀as฀follows:฀ payments฀=฀
constructive฀obligation
pensions฀=฀defined฀
benefit฀ (i)฀฀ The฀Plan฀is฀totally฀funded฀by฀Cate.฀
(ii)฀฀ The฀contributions฀for฀the฀Plan฀are฀made฀periodically.฀
Contributions฀are฀not฀
fixed฀so฀not฀defined฀ Sounds฀like฀
contribution฀
(iii)฀ The฀post฀retirement฀benefit฀is฀calculated฀based฀on฀a฀ defined฀benefit฀
฀
percentage฀of฀the฀final฀salaries฀of฀Plan฀participants฀
dependent฀on฀the฀years฀of฀service.฀
Contributions฀are฀
not฀fixed฀as฀%฀of฀
(iv)฀฀ The฀annual฀contributions฀to฀the฀Plan฀are฀determined฀as฀a฀
salary฀so฀not฀
defined฀
function฀of฀the฀fair฀value฀of฀the฀assets฀less฀the฀liability฀
contribution฀
arising฀from฀past฀services.฀
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Cate฀ argues฀ that฀ it฀ should฀ not฀ have฀ to฀ recognise฀ the฀ Plan฀ because,฀
according฀ to฀ the฀ underlying฀ contract,฀ it฀ can฀ terminate฀ its฀
contributions฀ to฀ the฀ Plan,฀ if฀ and฀ when฀ it฀ wishes.฀ The฀ termination฀ Cate฀has฀obligation฀to฀
pay฀promised฀pension฀
clauses฀ of฀ the฀ contract฀ establish฀ that฀ Cate฀ must฀ immediately฀ either฀directly฀or฀via฀
purchasing฀an฀annuity฀
purchase฀ lifetime฀ annuities฀ from฀ an฀ insurance฀ company฀ for฀ all฀ the฀ =฀defined฀benefit฀
retired฀ employees฀ who฀ are฀ already฀ receiving฀ benefit฀ when฀ the฀

termination฀of฀the฀contribution฀is฀communicated.฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(5฀marks)฀ ฀
Required฀
Advise฀ Cate฀ on฀ the฀ matters฀ set฀ out฀ above฀ (in฀ (a),฀ (b)฀ and฀ (c))฀ with฀
reference฀to฀relevant฀International฀Financial฀Reporting฀Standards.฀
฀฀฀฀฀฀฀฀฀ (15฀marks)฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
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lOMoARcPSD|6256454
฀฀
STEP 4฀ Prepare฀an฀answer฀plan฀using฀a฀separate฀heading฀for฀each฀of฀the฀three฀issues฀in฀the฀
฀ scenario฀((a),฀(b)฀and฀(c)).฀Ask฀yourself:฀฀
(1)฀What฀is฀the฀proposed฀accounting฀treatment฀in฀the฀scenario?฀฀
(2)฀What฀is฀the฀correct฀accounting฀treatment฀(per฀relevant฀rules/principles฀from฀IAS฀or฀IFRS)฀
and฀why฀(apply฀the฀rules/principles฀per฀the฀IAS/IFRS฀to฀the฀scenario)?฀฀฀
(3)฀What฀adjustment฀(if฀any)฀is฀required?฀
As฀this฀is฀a฀15-mark฀question,฀you฀should฀aim฀to฀generate฀12–13฀points฀to฀achieve฀a฀
comfortable฀pass.฀
Deferred฀tax฀asset฀ ฀ Impairment฀ ฀ Pension฀plan฀
฀ Proposed฀accounting฀ ฀ ฀ Proposed฀accounting฀ ฀ ฀ Proposed฀accounting฀

treatment฀=฀recognise฀ treatment฀=฀no฀ treatment฀=฀no฀liability
deferred฀tax฀asset฀for฀ impairment฀of฀ ฀ Correct฀accounting฀
carry฀forward฀(c/f)฀ investment฀in฀ treatment฀=฀treat฀as฀
losses฀ associate฀ defined฀benefit฀
฀ Correct฀accounting฀ ฀ Correct฀accounting฀ pension฀plan฀
treatment฀=฀no฀deferred฀ treatment฀=฀repeat฀ (recognise฀plan฀assets฀
tax฀asset฀as฀not฀ impairment฀review฀ at฀fair฀value฀and฀plan฀
recoverable:฀ recalculating฀ liabilities฀at฀present฀
฀ (a)฀Future฀taxable฀profits฀ recoverable฀amount฀ value)฀because:฀
–฀positive฀indications฀ as฀higher฀of฀fair฀value฀ (a)฀Constructive฀
are฀insufficient฀ (number฀of฀shares฀×฀ obligation฀(created฀
evidence:฀no฀ [share฀price฀+฀ valid฀expectation฀
confirmed฀order฀ premium฀for฀ in฀employees฀that฀
significant฀influence])฀ Cate฀will฀pay฀
฀ (b)฀Losses฀likely฀to฀recur฀ and฀value฀in฀use฀
as฀they฀are฀ pension)฀
amount฀(present฀value฀
operating฀losses฀ (b)฀Pension฀not฀linked฀
of฀future฀cash฀flows฀of฀
(profits฀that฀have฀ solely฀to฀
associate฀and฀
arisen฀are฀due฀to฀ contributions฀
dividends฀receivable฀
non-operating฀gains฀ from฀associate)฀ (c)฀If฀Cate฀terminates฀
so฀non-recurring)฀ contributions,฀still฀
฀ Adjustment฀–฀
฀ (c)฀No฀tax฀planning฀ contractually฀
recognise฀impairment฀
opportunities฀to฀ obliged฀to฀
loss฀if฀necessary฀
create฀taxable฀profits฀ discharge฀liability฀
in฀the฀loss฀c/f฀period฀ (by฀purchasing฀
฀ Adjustment฀–฀reverse฀ lifetime฀annuities)฀
deferred฀tax฀asset฀ ฀ Adjustment฀–฀treat฀as฀
defined฀benefit฀plan฀฀฀฀฀
฀
฀
฀
฀
฀
฀
฀
฀ ฀
228฀

lOMoARcPSD|6256454
STEP 5฀ Write฀up฀your฀answer฀with฀a฀separate฀underlined฀heading฀for฀each฀
฀ of฀ the฀ three฀ items฀ in฀ the฀ scenario.฀ Write฀ in฀ full฀ sentences฀ and฀
clearly฀explain฀each฀point฀in฀professional฀language.฀Structure฀your฀
answer฀for฀each฀of฀the฀three฀items฀as฀follows:฀
 Rule/principle฀per฀IAS฀or฀IFRS฀(state฀briefly)฀
 Apply฀rule/principle฀to฀the฀scenario฀(correct฀accounting฀
treatment฀and฀why)฀
 Conclude฀
Underlined฀heading฀
Suggested฀solution฀ (one฀for฀each฀of฀the฀3฀
items฀in฀the฀scenario)฀
(a)฀ Deferred฀tax฀
In฀ principle,฀ IAS฀ 12฀ Income฀ Taxes฀ allows฀ recognition฀ of฀ deferred฀ tax฀
assets,฀ if฀ material,฀ for฀ deductible฀ temporary฀ differences,฀ unused฀ tax฀
losses฀ and฀ unused฀ tax฀ credits.฀ However,฀ IAS฀ 12฀ states฀ that฀ deferred฀
tax฀assets฀should฀only฀be฀recognised฀to฀the฀extent฀that฀they฀
Rule/principle฀(per฀
are฀ regarded฀ as฀ recoverable.฀ They฀ should฀ be฀ regarded฀ as฀ accounting฀standard)
recoverable฀to฀the฀extent฀that฀on฀the฀basis฀of฀all฀the฀evidence฀available฀it฀
is฀probable฀that฀there฀will฀be฀suitable฀taxable฀profits฀against฀
which฀ the฀ losses฀ can฀ be฀ recovered.฀ There฀ is฀ evidence฀ that฀ this฀ is฀
not฀the฀case฀for฀Cate:฀฀
(i)฀ While฀ Cate฀ has฀ made฀ a฀ small฀ profit฀ before฀ tax฀ in฀ the฀ year฀ to฀
31฀May฀20X6,฀this฀includes฀significant฀non-operating฀gains.฀
In฀other฀words฀the฀profit฀is฀not฀due฀to฀ordinary฀business฀activities.฀
(ii)฀ In฀ contrast,฀ Cate's฀ losses฀ were฀ due฀ to฀ ordinary฀ business฀
activities,฀not฀from฀identifiable฀causes฀unlikely฀to฀recur฀(IAS฀12).฀
(iii)฀ The฀ fact฀ that฀ there฀ are฀ unused฀ tax฀ losses฀ is฀ strong฀ evidence,฀
according฀ to฀ IAS฀ 12,฀ that฀ future฀ taxable฀ profits฀ may฀ not฀ be฀
Apply฀
available฀against฀which฀to฀offset฀the฀losses.฀
(iv)฀ When฀ considering฀ the฀ likelihood฀ of฀ future฀ taxable฀ profits,฀ Cate's฀
forecast฀ cannot฀ be฀ considered฀ as฀ sufficient฀ evidence.฀ These฀ are฀
estimates฀ which฀ cannot฀ be฀ objectively฀ verified,฀ and฀ are฀
based฀on฀possible฀customer฀interest฀rather฀than฀confirmed฀contracts฀
or฀orders.฀
(v)฀ Cate฀ does฀ not฀ have฀ available฀ any฀ tax฀ planning฀

opportunities฀which฀might฀give฀rise฀to฀taxable฀profits.฀
฀ 229฀

lOMoARcPSD|6256454
฀฀
In฀conclusion,฀Cate฀should฀not฀recognise฀deferred฀tax฀assets฀on฀ Conclude฀
losses฀ carried฀ forward,฀ as฀ there฀ is฀ insufficient฀ evidence฀ that฀ future฀
taxable฀profits฀can฀be฀generated฀against฀which฀to฀offset฀the฀losses.฀
(one฀for฀each฀of฀the฀
3฀items฀in฀the฀
scenario)฀
(b)฀ Investment฀in฀Bates฀
Cate's฀ approach฀ to฀ the฀ valuation฀ of฀ the฀ investment฀ in฀ Bates฀ is฀ open฀ to฀
question,฀ and฀ shows฀ that฀ Cate฀ may฀ wish฀ to฀ avoid฀ showing฀ an฀
impairment฀loss.฀฀
Rule/principle฀
(per฀accounting฀
There฀is฀an฀established฀principle฀that฀an฀asset฀should฀not฀be฀carried฀
standard)฀
at฀ more฀ than฀ its฀ recoverable฀ amount.฀If฀the฀carrying฀value฀is฀not฀
recoverable฀ in฀ full,฀ the฀ asset฀ must฀ be฀ written฀ down฀ to฀ the฀ recoverable฀
amount.฀It฀is฀said฀to฀be฀impaired.฀The฀recoverable฀amount฀is฀the฀highest฀
value฀ to฀ the฀ business฀ in฀ terms฀ of฀ the฀ cash฀ flows฀ that฀ the฀ asset฀ can฀
generate,฀and฀is฀the฀higher฀of:฀฀
(1)฀ The฀asset's฀fair฀value฀less฀costs฀of฀disposal;฀and฀
(2)฀ The฀asset's฀value฀in฀use.฀
Cate฀appears฀to฀be฀raising฀ difficulties฀ about฀both฀of฀these฀measures฀ Apply฀
in฀respect฀of฀Bates.฀
(i)฀ Fair฀value฀less฀costs฀of฀disposal฀
Rule/principle฀
An฀asset's฀fair฀value฀less฀costs฀of฀disposal฀is฀the฀amount฀net฀of฀ (per฀accounting฀
standard)฀
incremental฀costs฀directly฀attributable฀to฀the฀disposal฀of฀an฀asset฀
(excluding฀finance฀costs฀and฀income฀tax฀expense).฀Costs฀of฀disposal฀
include฀transaction฀costs฀such฀as฀legal฀expenses.฀
Cate฀argues฀that฀there฀is฀no฀binding฀sale฀agreement฀and฀that฀the฀quoted฀
share฀price฀is฀not฀an฀appropriate฀measure฀of฀the฀fair฀value฀or฀its฀
significant฀influence฀over฀Bates.฀IFRS฀13฀Fair฀Value฀Measurement฀defines฀
fair฀value฀as฀'the฀price฀that฀would฀be฀received฀to฀sell฀an฀asset…in฀an฀
Apply฀
orderly฀transaction฀between฀market฀participants'.฀Just฀because฀there฀is฀no฀
binding฀sale฀agreement฀does฀not฀mean฀that฀Cate฀cannot฀measure฀fair฀
value.฀IFRS฀13฀has฀a฀three-level฀hierarchy฀in฀measuring฀fair฀value:฀
฀ ฀
230฀

lOMoARcPSD|6256454
฀ Level฀1฀inputs฀=฀quoted฀prices฀(unadjusted)฀in฀active฀markets฀for฀
identical฀assets฀฀
Rule/principle฀
฀ Level฀2฀inputs฀=฀inputs฀other฀than฀quoted฀prices฀included฀within฀ (per฀accounting฀
standard)฀
Level฀1฀that฀are฀observable฀for฀the฀asset฀or฀liability,฀either฀directly฀
or฀indirectly฀(eg฀quoted฀prices฀for฀similar฀assets)฀
฀ Level฀3฀inputs฀=฀unobservable฀inputs฀for฀the฀asset฀฀
The฀ measurement฀ techniques฀ proposed฀ by฀ Cate฀ (earnings฀ multiple฀ and฀

option-pricing฀model)฀are฀both฀Level฀3฀inputs.฀Therefore,฀if฀better฀Level฀1฀
or฀2฀inputs฀are฀available,฀they฀should฀be฀used฀instead.฀A฀Level฀1฀input฀is฀
available฀–฀ie฀the฀quoted฀share฀price฀of฀Bates.฀Paragraph฀69฀of฀IFRS฀13฀
requires฀ a฀ premium฀ or฀ discount฀ to฀ be฀ considered฀ when฀ measuring฀ fair฀ Apply฀
value฀ when฀ it฀ is฀ a฀ characteristic฀ of฀ the฀ asset฀ that฀ market฀ participants฀
would฀ take฀ into฀ account฀ in฀ a฀ transaction.฀ Therefore,฀ the฀ premium฀
attributable฀to฀significant฀influence฀should฀be฀taken฀into฀account฀and฀this฀
adjusted฀share฀price฀used฀as฀fair฀value฀(rather฀than฀the฀earnings฀multiple฀
or฀option฀pricing฀model).฀฀
Costs฀of฀disposal฀will฀be฀fairly฀easy฀to฀estimate.฀Accordingly,฀it฀should฀
Conclude฀
be฀possible฀to฀arrive฀at฀a฀figure฀for฀fair฀value฀less฀costs฀of฀
disposal.฀
(ii)฀ Value฀in฀use฀
IAS฀36฀states฀that฀the฀value฀in฀use฀of฀an฀asset฀is฀measured฀as฀the฀present฀
value฀of฀estimated฀future฀cash฀flows฀(inflows฀minus฀outflows)฀generated฀by฀
the฀asset,฀including฀its฀estimated฀net฀disposal฀value฀(if฀any).฀IAS฀28฀
Investments฀in฀Associates฀and฀Joint฀Ventures฀gives฀some฀more฀specific฀
guidance฀on฀investments฀where฀there฀is฀significant฀influence.฀In฀
determining฀the฀value฀in฀use฀of฀these฀investments฀an฀entity฀should฀ Rule/principle฀
estimate:฀ standard)฀
(1)฀ Its฀share฀of฀the฀present฀value฀of฀the฀estimated฀future฀cash฀flows฀
expected฀to฀be฀generated฀by฀the฀associate฀(including฀disposal฀
proceeds);฀and฀
(2)฀ The฀present฀value฀of฀future฀cash฀flows฀expected฀to฀arise฀from฀
dividends฀to฀be฀received฀from฀the฀investment.฀
฀ 231฀

lOMoARcPSD|6256454
฀฀
Cate฀has฀not฀produced฀any฀cash฀flow฀estimates,฀but฀it฀could,฀ Apply฀
and฀should฀do฀so.฀฀
Conclusion฀
Cate฀is฀able฀to฀produce฀figures฀for฀fair฀value฀less฀cost฀to฀sell฀and฀for฀value฀
in฀use,฀and฀it฀should฀do฀so.฀If฀the฀carrying฀amount฀exceeds฀the฀higher฀of฀ Conclude฀
these฀two,฀then฀the฀asset฀ is฀ impaired฀and฀must฀be฀written฀down฀to฀its฀

recoverable฀amount.฀
(one฀for฀each฀of฀the฀3฀
฀(c)฀ 'Voluntary'฀post-retirement฀benefit฀plan฀ items฀in฀the฀scenario)฀
Cate฀ emphasises฀ that฀ the฀ fund฀ to฀ provide฀ post-retirement฀ benefits฀ is฀
voluntary,฀ and฀ perhaps฀ wishes฀ to฀ avoid฀ accounting฀ for฀ the฀ liability.฀
However,฀ there฀ is฀ evidence฀ that฀ in฀ fact฀ the฀ scheme฀ should฀ be฀
accounted฀for฀as฀a฀defined฀benefit฀plan:฀
(i)฀ While฀the฀plan฀is฀voluntary,฀IAS฀19฀Employee฀Benefits฀says฀that฀an฀ Rule/principle฀

entity฀must฀account฀for฀constructive฀as฀well฀as฀legal฀ standard)฀
obligations.฀These฀may฀arise฀from฀informal฀practices,฀where฀an฀
entity฀has฀no฀realistic฀alternative฀but฀to฀pay฀employee฀benefits,฀
because฀employees฀have฀a฀valid฀expectation฀that฀they฀will฀be฀
Apply฀
paid.฀
(ii)฀ The฀plan฀is฀not฀a฀defined฀contribution฀plan,฀because฀if฀the฀
fund฀does฀not฀have฀sufficient฀assets฀to฀pay฀employee฀benefits฀
Apply฀
relating฀to฀service฀in฀the฀current฀or฀prior฀periods,฀Cate฀has฀a฀legal฀
or฀constructive฀obligation฀to฀make฀good฀the฀deficit฀by฀paying฀
further฀contributions.฀
(iii)฀ The฀post-retirement฀benefit฀is฀based฀on฀final฀salaries฀and฀years฀of฀
service.฀In฀other฀words฀it฀is฀not฀linked฀solely฀to฀the฀amount฀ Apply฀
that฀Cate฀agrees฀to฀contribute฀to฀the฀fund.฀This฀is฀what฀
'defined฀benefit'฀means.฀
(iv)฀ Should฀Cate฀decide฀to฀terminate฀its฀contributions฀to฀the฀plan,฀it฀is฀
contractually฀obliged฀to฀discharge฀the฀liability฀created฀by฀ Apply฀
the฀plan฀by฀purchasing฀lifetime฀annuities฀from฀an฀insurance฀
company.฀
232฀

lOMoARcPSD|6256454
Cate฀must฀account฀for฀the฀scheme฀as฀a฀defined฀benefit฀plan฀and฀
Conclude฀
recognise,฀as฀a฀minimum,฀its฀net฀present฀obligation฀for฀the฀benefits฀to฀be฀
paid.฀
฀ This฀is฀a฀comprehensive,฀detailed฀answer.฀You฀could฀still฀have฀
scored฀a฀strong฀pass฀with฀a฀shorter฀answer฀as฀long฀as฀it฀addressed฀
all฀three฀issues฀and฀came฀to฀a฀justified฀conclusion฀for฀each.฀
฀ All฀three฀issues฀in฀the฀scenario฀have฀been฀addressed,฀each฀with฀
their฀own฀heading.฀
฀ The฀length฀of฀answer฀for฀each฀of฀the฀three฀changes฀is฀not฀the฀same฀
–฀there฀is฀more฀to฀say฀about฀the฀impairment฀because฀there฀are฀
three฀different฀accounting฀standards฀to฀apply฀here.฀
฀ This฀is฀a฀technically฀challenging฀question฀which฀required฀
application฀of฀detailed฀knowledge฀from฀several฀accounting฀
standards.฀Do฀not฀panic฀if฀you฀were฀not฀aware฀of฀all฀of฀the฀
technical฀points.฀View฀this฀question฀as฀an฀opportunity฀to฀improve฀
your฀knowledge฀and฀understanding฀of฀accounting฀standards.฀
฀ 233฀

lOMoARcPSD|6256454
฀฀
completed฀below฀for฀the฀Cate฀activity฀to฀go฀you฀an฀idea฀of฀how฀to฀complete฀the฀diagnostic.฀
Good฀time฀ Did฀you฀spend฀approximately฀a฀quarter฀to฀a฀third฀of฀your฀time฀
management฀ reading฀and฀planning?฀
Did฀you฀allow฀yourself฀time฀to฀address฀all฀three฀of฀the฀issues฀in฀
the฀scenario?฀
Your฀writing฀time฀should฀be฀split฀between฀these฀three฀issues฀but฀
it฀does฀not฀necessarily฀have฀to฀be฀spread฀evenly฀–฀there฀is฀more฀
to฀say฀about฀some฀issues฀(eg฀impairment)฀than฀others.฀
Managing฀ Did฀you฀identify฀which฀IASs฀or฀IFRSs฀were฀relevant฀for฀each฀
information฀฀฀ paragraph฀of฀the฀scenario?฀
Did฀you฀ask฀yourself฀whether฀the฀proposed฀accounting฀treatment฀
complies฀with฀that฀IAS฀or฀IFRS฀or฀the฀Conceptual฀Framework?฀
Correct฀ Did฀you฀understand฀what฀we฀meant฀by฀the฀verb฀‘advise'?฀
interpretation฀of฀ Did฀you฀understand฀what฀the฀requirement฀meant฀and฀therefore฀
requirements฀ what฀your฀answer฀should฀focus฀on?฀
Answer฀planning฀ Did฀you฀draw฀up฀an฀answer฀plan฀using฀your฀preferred฀
approach฀(eg฀mind฀map,฀bullet-pointed฀list฀or฀annotated฀
question฀paper)?฀
Did฀your฀plan฀address฀all฀three฀of฀the฀issues฀in฀the฀scenario?฀
Did฀you฀take฀the฀following฀approach฀in฀your฀plan?฀
(a)฀What฀is฀the฀proposed฀accounting฀treatment฀in฀the฀scenario?฀฀
(b)฀What฀is฀the฀correct฀accounting฀treatment฀(per฀the฀relevant฀
rules/principles)฀and฀why฀(apply฀the฀rules/principles฀per฀the฀
IAS/IFRS฀to฀the฀scenario)?฀฀
(c)฀What฀adjustment฀(if฀any)฀is฀required?฀
Effective฀writing฀and฀ Did฀you฀use฀full฀sentences฀and฀professional฀language฀with฀clear฀
presentation฀ explanations?฀
Did฀you฀structure฀your฀answer฀with฀underlined฀headings฀(one฀for฀
each฀of฀(a),฀(b)฀and฀(c)?฀
When฀stating฀the฀relevant฀rule฀or฀principle,฀was฀your฀answer฀
concise฀(remember฀most฀of฀the฀marks฀are฀for฀application฀of฀that฀
rule฀or฀principle)?฀
Did฀you฀structure฀your฀answer฀as฀follows?฀
(a)฀State฀relevant฀rule฀or฀principle฀briefly฀
(b)฀Apply฀the฀rule฀or฀principle฀to฀the฀scenario฀
(c)฀Conclude฀whether฀the฀proposed฀accounting฀treatment฀is฀
correct฀
234฀

lOMoARcPSD|6256454
฀
฀
฀
฀
Summary฀
To฀answer฀a฀financial฀reporting฀issues฀question฀well฀in฀the฀SBR฀exam,฀you฀need฀to฀be฀
familiar฀ with฀ the฀ key฀ rules฀ and฀ principles฀ of฀ accounting฀ standards฀ so฀ that฀ you฀ can฀
identify฀the฀relevant฀ones฀to฀apply฀in฀a฀question.฀The฀following฀website฀has฀very฀useful฀
summaries฀for฀IAS฀and฀IFRS:฀
www.iasplus.com/en-gb/standards฀
But฀ do฀ not฀ panic฀ if฀ you฀ cannot฀ identify฀ a฀ relevant฀ accounting฀ standard,฀ because฀ a฀
sensible฀ discussion฀ in฀ the฀ context฀ of฀ the฀ Conceptual฀ Framework฀ will฀ be฀ given฀ credit.฀
The฀ key฀ is฀ to฀ explain฀ why฀ you฀ are฀ proposing฀ a฀ certain฀ accounting฀ treatment.฀
Remember฀the฀best฀way฀to฀write฀up฀your฀answer฀is:฀
 State฀the฀relevant฀rule฀or฀principle฀per฀IAS฀or฀IFRS฀(state฀briefly)฀
 Apply฀the฀rule฀or฀principle฀to฀the฀scenario฀(correct฀accounting฀treatment฀and฀why)฀
 Conclude฀
฀ 235฀

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฀฀
236฀

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฀
฀
฀
฀
Basic฀groups
฀
฀
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀principles฀behind฀determining฀whether฀a฀business฀ D1(a)฀
combination฀has฀occurred.฀
Discuss฀and฀apply฀the฀method฀of฀accounting฀for฀a฀business฀combination฀including฀ D1(b)฀
identifying฀an฀acquirer฀and฀the฀principles฀in฀determining฀the฀cost฀of฀a฀business฀
combination.฀
Apply฀the฀recognition฀and฀measurement฀criteria฀for฀identifiable฀acquired฀assets฀ D1(c)฀
and฀liabilities฀including฀contingent฀amounts฀and฀intangible฀assets.฀
Discuss฀and฀apply฀the฀accounting฀for฀goodwill฀and฀non-controlling฀interest.฀ D1(d)฀
Discuss฀and฀apply฀the฀application฀of฀the฀control฀principle.฀ D1(f)฀
Identify฀and฀outline:฀ D1(k)฀
฀฀ The฀circumstances฀in฀which฀a฀group฀is฀required฀to฀prepare฀consolidated฀
฀฀ The฀circumstances฀when฀a฀group฀may฀claim฀an฀exemption฀from฀the฀
preparation฀of฀consolidated฀financial฀statements.฀
฀฀ Why฀directors฀may฀not฀wish฀to฀consolidate฀a฀subsidiary฀and฀where฀this฀is฀
permitted.฀
Determine฀and฀apply฀appropriate฀procedures฀to฀be฀used฀in฀preparing฀ D1(g)฀
consolidated฀financial฀statements฀ ฀
Identify฀associate฀entities.฀ D2(a)฀
Discuss฀and฀apply฀the฀equity฀method฀of฀accounting฀for฀associates.฀ D2(b)฀
Apply฀the฀method฀of฀accounting฀for฀associates.฀ D2(c)฀
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฀฀
Exam฀context฀
Group฀accounting฀is฀extremely฀important฀for฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam.฀Question฀1฀
of฀the฀exam฀will฀be฀based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀extracts฀from฀them.฀Group฀
accounting฀could฀also฀feature฀in฀a฀Section฀B฀question.฀A฀lot฀of฀this฀chapter฀is฀revision฀as฀it฀has฀been฀
covered฀in฀your฀earlier฀studies฀in฀Financial฀Reporting.฀However,฀ensure฀you฀study฀it฀carefully,฀as฀not฀
only฀does฀it฀form฀the฀basis฀for฀the฀more฀complex฀chapters฀that฀follow,฀some฀basic฀group฀accounting฀
techniques฀will฀usually฀be฀required฀in฀group฀accounting฀questions฀in฀the฀exam.฀฀
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10:฀Basic฀groups฀
฀
฀
1.฀ Consolidated฀
฀
financial฀ Basic฀groups฀
฀
statements฀
฀
฀
฀ ฀
2.฀ Subsidiaries฀
3.฀ Approach฀to฀
consolidation฀
4.฀ Associates฀ 5.฀ Fair฀values฀
฀ 239฀

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฀฀
1฀Consolidated฀financial฀statements฀
The฀three฀types฀of฀investment฀in฀the฀consolidated฀financial฀statements฀are฀each฀governed฀by฀an฀IFRS:฀
฀ Subsidiaries฀(IFRS฀10฀Consolidated฀Financial฀Statements)฀
฀ Associates฀(IAS฀28฀Investments฀in฀Associates฀and฀Joint฀Ventures)฀
฀ Joint฀ventures฀(IAS฀28฀Investments฀in฀Associates฀and฀Joint฀Ventures)฀
1.1฀ Preparing฀consolidated฀financial฀statements฀
IFRS฀10฀requires฀a฀parent฀to฀present฀consolidated฀financial฀statements฀in฀which฀the฀accounts฀of฀the฀
parent฀and฀subsidiary฀(or฀subsidiaries)฀are฀combined฀and฀presented฀as฀a฀single฀economic฀entity฀
(IFRS฀10:฀para.฀4).฀
The฀ individual฀ financial฀ statements฀ of฀ parents,฀ subsidiaries,฀ associates฀ and฀ joint฀ ventures฀ should฀ be฀
prepared฀to฀the฀same฀reporting฀date.฀
Where฀this฀is฀impracticable,฀the฀most฀recent฀financial฀statements฀are฀used,฀and:฀
฀ The฀difference฀must฀be฀no฀greater฀than฀three฀months;฀
฀ Adjustments฀are฀made฀for฀the฀effects฀of฀significant฀transactions฀in฀the฀intervening฀period;฀and฀
฀ The฀length฀of฀the฀reporting฀periods฀and฀any฀difference฀in฀the฀reporting฀dates฀must฀be฀the฀same฀
from฀period฀to฀period.฀฀ ฀
(IFRS฀10:฀para.฀B92–93)฀
Uniform฀accounting฀policies฀should฀be฀used.฀Adjustments฀must฀be฀made฀where฀members฀of฀a฀group฀
use฀different฀accounting฀policies,฀so฀that฀their฀financial฀statements฀are฀suitable฀for฀consolidation.฀
฀ (IFRS฀10:฀para.฀B87)฀
ED/2015/3฀Conceptual฀Framework฀for฀Financial฀Reporting฀has฀introduced฀the฀concept฀of฀the฀
reporting฀entity฀for฀the฀first฀time.฀A฀reporting฀entity฀is฀an฀entity฀that฀chooses,฀or฀is฀required,฀to฀prepare฀
general฀purpose฀financial฀statements.฀In฀the฀context฀of฀group฀accounts,฀ED/2015/3฀proposes฀to฀
determine฀the฀boundary฀of฀a฀reporting฀entity฀that฀has฀one฀or฀more฀subsidiaries฀on฀the฀basis฀of฀
control.฀Consolidated฀financial฀statements,฀according฀to฀the฀ED,฀are฀generally฀more฀likely฀to฀provide฀
useful฀information฀to฀users฀than฀unconsolidated฀financial฀statements.฀ED/2015/3฀is฀not฀expected฀to฀
have฀a฀significant฀impact฀on฀the฀requirements฀of฀IFRS฀3฀or฀IFRS฀10.฀
1.2฀ Exemption฀from฀presenting฀consolidated฀financial฀statements฀
A฀parent฀need฀not฀present฀consolidated฀financial฀statements฀providing฀(IFRS฀10:฀para.฀4):฀
(a)฀ It฀ is฀ itself฀ a฀ wholly-owned฀ subsidiary,฀ or฀ is฀ partially-owned฀ with฀ the฀ consent฀ of฀ the฀ non-
controlling฀interests;฀and฀
(b)฀ Its฀debt฀or฀equity฀instruments฀are฀not฀publicly฀traded;฀and฀
(c)฀ It฀ did฀ not฀ file฀ or฀ is฀ not฀ in฀ the฀ process฀ of฀ filing฀ its฀ financial฀ statements฀ with฀ a฀ regulatory฀
organisation฀for฀the฀purpose฀of฀publicly฀issuing฀financial฀instruments;฀and฀
(d)฀ The฀ultimate฀or฀any฀intermediate฀parent฀produces฀financial฀statements฀available฀for฀public฀use฀
that฀ comply฀ with฀ IFRSs฀ including฀ all฀ subsidiaries฀ (consolidated฀ or,฀ if฀ they฀ are฀ investment฀
entities,฀measured฀at฀fair฀value฀through฀profit฀or฀loss).฀
1.3฀ Accounting฀treatment฀in฀the฀separate฀financial฀statements฀of฀the฀
investor฀
Under฀IAS฀27฀Separate฀Financial฀Statements฀the฀investment฀in฀a฀subsidiary,฀associate฀or฀joint฀venture฀
can฀be฀carried฀in฀the฀investor's฀separate฀financial฀statements฀either:฀
฀ At฀cost;฀or฀
฀ At฀fair฀value฀(as฀a฀financial฀asset฀under฀IFRS฀9฀Financial฀Instruments);฀or฀
฀ Using฀the฀equity฀method฀as฀described฀in฀IAS฀28.฀฀ (IAS฀27:฀para.฀10)฀
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The฀equity฀method฀will฀apply฀in฀the฀individual฀financial฀statements฀of฀the฀investor฀when฀the฀
entity฀ has฀ investments฀ in฀ associates฀ and฀ joint฀ ventures฀ but฀ does฀ not฀ prepare฀ consolidated฀ financial฀
statements฀as฀it฀has฀no฀investments฀in฀subsidiaries.฀
If฀ the฀ investment฀ is฀ carried฀ at฀ fair฀ value฀ under฀ IFRS฀ 9,฀ both฀ the฀ investment฀ (at฀ fair฀ value)฀ and฀ the฀
revaluation฀gains฀or฀losses฀on฀the฀investment฀must฀be฀cancelled฀on฀consolidation.฀฀
2฀ Subsidiaries฀ ฀
Subsidiary:฀an฀entity฀that฀is฀controlled฀by฀another฀entity.฀฀
Key฀term฀ Control:฀the฀power฀to฀govern฀the฀financial฀and฀operating฀policies฀of฀an฀entity฀so฀as฀to฀obtain฀
benefits฀from฀its฀activities.฀
Power:฀existing฀rights฀that฀give฀the฀current฀ability฀to฀direct฀the฀relevant฀activities฀of฀the฀investee.฀
฀ ฀(IFRS฀10:฀Appendix฀A)฀฀฀฀
The฀key฀point฀in฀the฀definition฀of฀a฀subsidiary฀is฀control.฀An฀investor฀controls฀an฀investee฀if,฀and฀only฀
if,฀the฀investor฀has฀all฀of฀฀the฀following฀(IFRS฀10:฀paras.฀10–12):
Power฀over฀the฀ Exposure฀or฀rights฀to฀ The฀ability฀to฀use฀its฀

investee฀to฀direct฀the฀ variable฀returns฀from฀ power฀over฀the฀investee฀
relevant฀activities
+ its฀involvement฀with฀the฀
+ to฀affect฀the฀amount฀of฀
investee the฀investor's฀returns
Examples฀of฀power฀ Examples฀of฀variable฀returns฀ An฀investor฀can฀have฀the฀current฀

(IFRS฀10:฀para.฀B15): (IFRS฀10:฀paras.฀15,฀B57): ability฀to฀direct฀the฀activities฀of฀
an฀investee฀even฀if฀it฀does฀not฀
•฀฀฀Voting฀rights •฀฀฀Dividends
actively฀direct฀the฀activities฀
•฀฀฀Rights฀to฀appoint,฀ •฀฀฀Interest฀from฀debt of฀the฀investee
฀฀฀฀฀reassign฀or฀remove฀
•฀฀฀Changes฀in฀value฀of฀
฀฀฀฀฀key฀management฀ Only฀the฀principal฀(not฀an฀agent)฀
฀฀฀฀฀investment
฀฀฀฀฀personnel may฀control฀an฀investee฀when฀
•฀฀฀Remuneration฀for฀ exercising฀its฀decision-making฀
•฀฀฀Rights฀to฀appoint฀or฀
฀฀฀฀฀servicing฀investee's฀assets฀ powers
฀฀฀฀฀remove฀another฀entity฀
฀฀฀฀฀or฀liabilities
฀฀฀฀฀that฀directs฀relevant฀
฀฀฀฀฀activities •฀฀฀Fees/exposure฀to฀loss฀from฀
฀฀฀฀฀providing฀credit/liquidity฀
•฀฀฀Management฀contract
฀฀฀฀฀support
Examples฀of฀relevant฀ •฀฀฀Residual฀interest฀in฀assets฀
activities: ฀฀฀฀฀and฀liabilities฀on฀liquidation
•฀฀฀Sell฀and฀purchase฀ •฀฀฀Tax฀benefits
฀฀฀฀฀goods/services
•฀฀฀Access฀to฀future฀liquidity
•฀฀฀Manage฀financial฀assets
•฀฀฀Returns฀not฀available฀to฀
•฀฀฀Select,฀acquire,฀dispose฀ ฀฀฀฀฀other฀interest฀holders,฀
฀฀฀฀฀of฀assets ฀฀฀฀฀eg฀cost฀savings
•฀฀฀Research฀&฀develop฀new฀
฀฀฀฀฀products/processes
•฀฀฀Determine฀funding฀
฀฀฀฀฀structure/obtain฀funding ฀
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฀฀
Activity฀1:฀Control฀฀ ฀ ฀
Edwards,฀ a฀ public฀ limited฀ company,฀ acquires฀ 40%฀ of฀ the฀ voting฀ rights฀ of฀ Hope.฀ The฀ remaining฀
investors฀ each฀ hold฀ 5%฀ of฀ the฀ voting฀ rights฀ of฀ Hope.฀ A฀ shareholder฀ agreement฀ grants฀ Edwards฀ the฀
right฀ to฀ appoint,฀ remove฀ and฀ set฀ the฀ remuneration฀ of฀ management฀ responsible฀ for฀ key฀ business฀
decisions฀ of฀ Hope.฀ To฀ change฀ this฀ agreement,฀ a฀ two-thirds฀ majority฀ vote฀ of฀ the฀ shareholders฀ is฀
required.฀
Required฀
Discuss,฀using฀the฀IFRS฀10฀definition฀of฀control,฀whether฀Edwards฀controls฀Hope.฀
2.1฀ Exclusion฀of฀a฀subsidiary฀from฀the฀consolidated฀financial฀
statements฀
IFRS฀10฀does฀not฀permit฀entities฀meeting฀the฀definition฀of฀a฀subsidiary฀to฀be฀ Manipulating฀
results฀raises฀
excluded฀from฀the฀consolidated฀financial฀statements.฀
ethical฀issues.฀
The฀ rules฀ on฀ exclusion฀ of฀ subsidiaries฀ from฀ consolidation฀ are฀ necessarily฀ strict,฀ Look฀out฀for฀this฀
in฀the฀exam.฀฀
because฀ this฀ is฀ a฀ common฀ method฀ used฀ by฀ entities฀ to฀ manipulate฀ their฀ results.฀฀
The฀ reasons฀ directors฀ may฀ not฀ want฀ to฀ consolidate฀ a฀ subsidiary฀ and฀ why฀ that฀
would฀not฀be฀appropriate฀under฀IFRS฀are฀given฀below.฀฀฀
Reasons฀directors฀may฀not฀want฀to฀ IFRS฀treatment฀
consolidate฀a฀subsidiary฀
฀ The฀subsidiary's฀activities฀are฀not฀ Subsidiary฀should฀be฀consolidated:฀adequate฀
similar฀to฀the฀rest฀of฀the฀group฀ disaggregated฀information฀is฀provided฀by฀disclosures฀
under฀IFRS฀8฀Operating฀Segments฀(see฀Chapter฀17)฀
฀ Control฀is฀temporary฀as฀the฀subsidiary฀ Subsidiary฀should฀be฀consolidated:฀the฀
was฀purchased฀for฀re-sale฀ principles฀in฀IFRS฀5฀Non-current฀Assets฀Held฀for฀Sale฀
and฀Discontinued฀Operations฀should฀be฀applied฀(see฀
Chapter฀13)฀฀
฀ To฀reduce฀apparent฀gearing฀by฀not฀ Subsidiary฀should฀be฀consolidated:฀excluding฀
consolidating฀the฀subsidiary's฀loans฀ the฀subsidiary฀would฀be฀manipulating฀the฀group's฀
฀ The฀subsidiary฀is฀loss-making฀ results฀and฀would฀not฀give฀a฀true฀and฀fair฀view฀
฀ Severe฀long-term฀restrictions฀limit฀the฀ Consider฀parent's฀ability฀to฀control฀the฀subsidiary;฀if฀
parent's฀ability฀to฀run฀the฀subsidiary฀ it฀is฀not฀controlled,฀it฀should฀not฀be฀
consolidated฀(because฀the฀definition฀of฀a฀subsidiary฀
is฀not฀met)฀
Investment฀entities฀
An฀ exception฀ to฀ the฀ 'no฀ exclusion฀ from฀ consolidation'฀ principle฀ is฀ made฀ where฀ the฀ parent฀ is฀ an฀
investment฀ entity.฀ Investments฀ in฀ subsidiaries฀ are฀ not฀ consolidated,฀ and฀ instead฀ are฀ held฀ at฀
fair฀value฀through฀profit฀or฀loss.฀
This฀allows฀an฀investment฀entity฀to฀account฀for฀all฀of฀its฀investments,฀whatever฀interest฀is฀held,฀at฀
fair฀ value฀ through฀ profit฀ or฀ loss.฀The฀IASB฀believes฀this฀approach฀provides฀more฀ relevant฀
information฀to฀users฀of฀financial฀statements฀of฀investment฀entities.฀
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The฀accounting฀treatment฀is฀mandatory฀for฀entities฀meeting฀the฀definition฀of฀an฀investment฀entity,฀ie฀
an฀entity฀that฀(IFRS฀10:฀para.฀27):฀
(a)฀ Obtains฀funds฀from฀one฀or฀more฀investors฀for฀the฀purpose฀of฀providing฀those฀investor(s)฀
with฀investment฀management฀services;฀
(b)฀ Commits฀ to฀ its฀ investor(s)฀ that฀ its฀ business฀ purpose฀ is฀ to฀ invest฀ funds฀ solely฀ for฀
returns฀from฀capital฀appreciation,฀investment฀income,฀or฀both;฀and฀
(c)฀ Measures฀ and฀ evaluates฀ the฀ performance฀ of฀ substantially฀ all฀ of฀ its฀ investments฀ on฀ a฀
fair฀value฀basis.฀
Typical฀characteristics฀of฀an฀investment฀entity฀are฀(IFRS฀10:฀para.฀28):฀
฀ It฀has฀more฀than฀one฀investment;฀
฀ It฀has฀more฀than฀one฀investor;฀
฀ It฀has฀investors฀that฀are฀not฀related฀parties฀of฀the฀entity;฀and฀
฀ It฀has฀ownership฀interests฀in฀the฀form฀of฀equity฀or฀similar฀interests.฀
2.2฀ Adjustments฀for฀intragroup฀transactions฀with฀subsidiaries฀
On฀consolidation,฀the฀financial฀statements฀of฀a฀parent฀and฀its฀subsidiaries฀are฀combined฀and฀treated฀
as฀a฀single฀entity.฀As฀a฀single฀entity฀cannot฀trade฀with฀itself,฀the฀effect฀of฀any฀intragroup฀transactions฀
must฀be฀eliminated:฀
฀ All฀intragroup฀assets,฀liabilities,฀equity,฀income,฀expenses฀and฀cash฀flows฀are฀eliminated฀in฀full.฀
฀ Unrealised฀profits฀on฀intragroup฀transactions฀are฀eliminated฀in฀full.฀
The฀accounting฀entries฀to฀eliminate฀intragroup฀transactions฀seen฀in฀Financial฀Reporting฀are฀as฀follows.฀฀฀
Cancellation฀of฀intragroup฀sales/purchases Elimination฀of฀unrealised฀profit฀on฀
inventories฀or฀property,฀plant฀and฀equipment฀
DEBIT฀฀฀฀ Group฀revenue฀ X
(PPE)
CREDIT฀฀ Group฀cost฀of฀sales฀ ฀ X
Sales฀by฀parent฀(P)฀to฀subsidiary฀(S)
DEBIT฀฀฀฀ Cost฀of฀sales/retained฀ X
Cancellation฀of฀intragroup฀balances ฀ earnings฀of฀P
DEBIT฀฀฀฀ Payables฀ X CREDIT฀฀ Group฀inventories/PPE฀ ฀ X
CREDIT฀฀ Receivables฀ ฀ X
Sale฀by฀S฀to฀P^
DEBIT฀฀฀฀ Cost฀of฀sales/retained฀ X
฀ earnings฀of฀S
Goods฀in฀transit*
CREDIT฀฀ Group฀inventories/PPE฀ ฀ X
DEBIT฀฀฀฀ Inventories฀ X
CREDIT฀฀ Payables฀ ฀ X Âdjustment฀affects฀the฀non-controlling฀
interest฀(NCI)฀balance฀because฀S฀made฀the฀
sale,฀some฀of฀the฀unrealised฀profit฀'belongs'฀
Cash฀in฀transit* to฀the฀NCI.
DEBIT฀฀฀฀ Cash฀ X
CREDIT฀฀ Receivables฀ ฀ X
฀
*The฀convention฀is฀to฀make฀this฀adjustment฀in฀the฀accounts฀of฀the฀receiving฀company.฀
3฀ Approach฀to฀consolidation฀
3.1฀ Consolidation฀
Consolidation฀ is฀ the฀ process฀ of฀ adjusting฀ and฀ combining฀ financial฀ information฀ from฀ the฀ separate฀
financial฀statements฀of฀a฀parent฀and฀its฀subsidiaries฀to฀prepare฀consolidated฀financial฀statements฀that฀
present฀financial฀information฀for฀the฀group฀as฀a฀single฀economic฀entity.฀
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฀฀
3.2฀ Acquisition฀method฀
All฀ business฀ combinations฀ are฀ accounted฀ for฀ using฀ the฀ acquisition฀ method฀ in฀ IFRS฀ 3.฀ This฀ requires฀
(IFRS฀3:฀paras.฀4–5):฀
(a)฀ Identifying฀the฀acquirer.฀This฀is฀generally฀the฀party฀that฀obtains฀control฀(ie฀the฀parent).฀
(b)฀ Determining฀ the฀ acquisition฀ date.฀This฀is฀generally฀the฀date฀the฀consideration฀is฀legally฀
transferred,฀but฀it฀may฀be฀another฀date฀if฀control฀is฀obtained฀on฀that฀date.฀
(c)฀ Recognising฀and฀measuring฀the฀identifiable฀assets฀acquired,฀the฀liabilities฀assumed฀
(see฀Section฀5.2)฀and฀any฀non-controlling฀interest฀in฀the฀acquiree฀(ie฀the฀subsidiary)฀(see฀
Section฀3.1).฀฀
(d)฀ Recognising฀and฀measuring฀goodwill฀or฀a฀gain฀from฀a฀bargain฀purchase฀(see฀Section฀5.1).฀
3.3฀ Measuring฀non-controlling฀interests฀at฀acquisition฀฀
IFRS฀3฀allows฀the฀non-controlling฀interests฀in฀a฀subsidiary฀to฀be฀measured฀at฀the฀acquisition฀date฀in฀
one฀of฀two฀ways฀(IFRS฀3:฀para.฀19):฀
฀ At฀proportionate฀share฀of฀fair฀value฀of฀net฀assets฀('partial฀goodwill฀method')฀
฀ At฀fair฀value฀('full฀goodwill฀method')฀฀
For฀revision฀of฀these฀methods,฀including฀worked฀examples,฀see฀Chapter฀10฀฀Section฀1฀of฀the฀
Supplementary฀Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
3.4฀ Consolidated฀statement฀of฀financial฀position฀
Below฀is฀an฀overview฀of฀the฀major,฀but฀basic,฀rules฀of฀consolidation฀for฀the฀consolidated฀statement฀of฀
financial฀position.฀
Purpose฀ To฀show฀the฀assets฀and฀liabilities฀which฀the฀parent฀(P)฀controls฀and฀the฀
ownership฀of฀those฀assets฀and฀liabilities฀
Assets฀and฀ Always฀100%฀of฀P฀plus฀100%฀of฀the฀subsidiary฀(S)฀providing฀P฀controls฀S฀
liabilities฀
Goodwill฀ Consideration฀transferred฀plus฀non-controlling฀interests฀(NCI)฀less฀fair฀value฀
฀ (FV)฀of฀net฀assets฀at฀acquisition฀
Reason:฀shows฀the฀value฀of฀the฀reputation฀etc฀of฀the฀company฀acquired฀at฀
acquisition฀date฀
Share฀capital฀ P฀only฀
฀ Reason:฀consolidated฀financial฀statements฀are฀simply฀reporting฀to฀the฀
parent's฀shareholders฀in฀another฀form฀
Reserves฀ 100%฀of฀P฀plus฀group฀share฀of฀post-acquisition฀retained฀earnings฀of฀S,฀plus฀
฀ consolidation฀adjustments฀฀
Reason:฀to฀show฀the฀extent฀to฀which฀the฀group฀actually฀owns฀the฀assets฀and฀
liabilities฀included฀in฀the฀consolidated฀statement฀of฀financial฀position฀
Non-controlling฀ NCI฀at฀acquisition฀plus฀NCI฀share฀of฀post-acquisition฀changes฀in฀equity฀
interests฀ Reason:฀to฀show฀the฀extent฀to฀which฀other฀parties฀own฀net฀assets฀under฀the฀
฀ control฀of฀the฀parent฀
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Consolidation฀technique฀฀
Below฀ is฀ a฀ brief฀ recap฀ of฀ the฀ consolidation฀ technique฀ covered฀ in฀ Financial฀ Reporting.฀ The฀ SBR฀
syllabus฀introduces฀a฀range฀of฀extra฀complications฀in฀consolidations,฀but฀the฀basics฀will฀always฀form฀
part฀of฀any฀question.฀
Step฀1฀ Draw฀up฀the฀group฀structure.฀฀
Step฀2฀ Draw฀up฀a฀proforma.฀
Step฀3฀ Work฀methodically฀down฀the฀statement฀of฀financial฀position,฀transferring฀figures฀to฀฀
฀ ฀ the฀proforma฀or฀workings.฀
Step฀4฀ Read฀through฀the฀additional฀notes฀and฀attempt฀the฀adjustments฀showing฀workings฀for฀
฀ ฀ all฀calculations.฀
Step฀5฀ Complete฀the฀goodwill฀calculation:฀
Consideration฀transferred฀ ฀ ฀X฀
Non-controlling฀interests฀(at฀FV฀or฀at฀share฀of฀FV฀of฀net฀assets)฀ ฀ ฀X฀
Less:฀ net฀fair฀value฀of฀identifiable฀assets฀acquired฀and฀฀฀฀ ฀ ฀
liabilities฀assumed:฀
฀฀ Share฀capital฀ ฀X฀ ฀
฀฀ Share฀premium฀ ฀X฀ ฀
฀฀ Retained฀earnings฀at฀acquisition ฀X฀ ฀
฀฀ Other฀reserves฀at฀acquisition ฀X฀ ฀
฀฀ Fair฀value฀adjustments฀at฀acquisition ฀X฀ ฀
฀ ฀ ฀(X)฀
฀ ฀ ฀X฀
Less฀impairment฀losses฀on฀goodwill฀to฀date ฀ ฀(X)฀
฀ ฀ ฀฀X฀
฀
Step฀6฀ Complete฀the฀consolidated฀retained฀earnings฀calculation:฀
฀ ฀Parent฀ Subsidiary฀ ฀Associate/฀

joint฀venture฀
At฀year฀end฀ ฀ X฀ ฀ X฀ ฀฀X฀
Adjustments฀ ฀฀X(X) ฀฀฀฀X(X) ฀฀฀฀฀฀฀X(X)฀
Fair฀value฀adjustments฀movement฀ ฀฀฀X/(X)฀ ฀฀฀฀฀X/(X)฀
Pre-acquisition฀retained฀earnings฀ ฀฀฀฀฀฀฀(X)฀ ฀฀฀฀฀฀฀฀฀(X)฀
฀ ฀฀฀฀฀ Y ฀฀฀฀฀฀฀฀฀฀Z฀
Group฀share฀of฀post-acquisition฀retained฀฀ ฀
earnings:฀
฀฀฀฀฀Subsidiary฀(Y฀×฀group฀share)฀ ฀ X฀ ฀
฀฀฀฀฀Associate/Joint฀venture฀(Z฀× group฀ ฀X฀ ฀
share)
Less฀group฀share฀of฀impairment฀losses฀to฀ ฀(X)฀ ฀
date฀
฀ X ฀
฀
Step฀7฀ Complete฀'Investment฀in฀associate/joint฀venture'฀calculation฀(if฀appropriate฀–฀see฀Section฀4).฀
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฀฀
Step฀8฀ Complete฀the฀non-controlling฀interests฀calculation:฀฀
NCI฀at฀acquisition฀(from฀goodwill฀working) ฀ ฀X฀
NCI฀share฀of฀post-acquisition reserves฀(from฀reserves฀working฀Y฀× NCI฀
฀X฀
share)฀
Less฀NCI฀share฀of฀impairment฀losses฀(only฀if฀NCI฀at฀FV฀at฀acquisition)฀ ฀(X)
฀ ฀ ฀฀X฀
฀
See฀Chapter฀10฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀this฀technique.฀This฀is฀
Activity฀2:฀Consolidated฀statement฀of฀financial฀position฀ ฀
The฀statements฀of฀financial฀position฀for฀two฀entities฀for฀the฀year฀ended฀31฀December฀20X9฀are฀
presented฀below:฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀20X9฀
฀ Brown Harris฀
฀ ฀$'000฀ ฀$'000฀
Non-current฀assets฀ ฀
Property,฀plant฀and฀equipment฀ ฀2,300฀ ฀1,900฀
Investment฀in฀subsidiary฀(Note฀1)฀ ฀ 720฀ ฀ ฀฀฀฀฀฀–฀
฀ ฀ 3,220฀ ฀ 1,900฀
Current฀assets฀ ฀ 3,340฀ ฀ 1,790฀
฀ ฀ 6,360฀ ฀ 3,690฀
Equity฀฀ ฀
Share฀capital฀ ฀1,000฀ ฀500฀
Retained฀earnings฀ ฀ 3,430฀ ฀ 1,800฀
฀ ฀ 4,430฀ ฀ 2,300฀
Non-current฀liabilities฀ ฀350฀ ฀290฀
Current฀liabilities฀ ฀1,580฀ ฀ 1,100฀
฀ ฀ 6,360฀ ฀ 3,690฀
Additional฀information:฀
(1)฀ Brown฀ acquired฀ a฀ 60%฀ investment฀ in฀ Harris฀ on฀ 1฀ January฀ 20X6฀ for฀ $720,000฀ when฀ the฀
retained฀earnings฀of฀Harris฀were฀$300,000.฀฀
(2)฀ On฀ 30฀ November฀ 20X9,฀ Harris฀ sold฀ goods฀ to฀ Brown฀ for฀ $200,000,฀ one-quarter฀ of฀ which฀
remain฀in฀Brown's฀inventories฀at฀31฀December.฀Harris฀earns฀25%฀mark-up฀on฀all฀items฀sold.฀
(3)฀ An฀ impairment฀ review฀ was฀ conducted฀ at฀ 31฀ December฀ 20X9฀ and฀ it฀ was฀ decided฀ that฀ the฀
goodwill฀on฀acquisition฀of฀Harris฀was฀impaired฀by฀10%.฀
Required฀
Prepare฀the฀consolidated฀statement฀of฀financial฀position฀for฀the฀Brown฀group฀as฀at฀31฀December฀
20X9฀under฀the฀following฀assumptions:฀
(a)฀ It฀is฀group฀policy฀to฀value฀non-controlling฀interest฀at฀fair฀value฀at฀the฀date฀of฀acquisition.฀The฀
fair฀value฀of฀the฀non-controlling฀interest฀at฀1฀January฀20X6฀was฀$480,000.฀
(b)฀ It฀is฀group฀policy฀to฀value฀non-controlling฀interest฀at฀the฀proportionate฀share฀of฀the฀fair฀value฀of฀
the฀net฀assets฀at฀acquisition.฀
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3.5฀Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀
income฀
Overview฀
The฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀shows฀a฀true฀and฀fair฀
view฀of฀the฀group's฀activities฀since฀acquisition฀of฀any฀subsidiaries.฀
(a)฀ The฀ top฀ part฀ of฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀
shows฀the฀income,฀expenses,฀profit฀and฀other฀comprehensive฀income฀controlled฀by฀the฀group.฀
(b)฀ The฀ reconciliation฀ at฀ the฀ bottom฀ of฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀shows฀the฀ownership฀of฀those฀profits฀and฀total฀comprehensive฀income.฀
Consolidation฀technique฀฀
Below฀is฀a฀brief฀recap฀of฀the฀consolidation฀technique฀covered฀in฀Financial฀Reporting.฀
Step฀1฀ Draw฀up฀the฀group฀structure,฀and฀timeline฀(if฀helpful).฀
Step฀2฀ Draw฀up฀a฀proforma.฀
Step฀3฀ Work฀ methodically฀ down฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income,฀transferring฀figures฀to฀the฀proforma฀or฀workings.฀
Step฀4฀ Go฀ through฀ the฀ question,฀ calculating฀ the฀ necessary฀ adjustments,฀ showing฀ workings฀ for฀
all฀calculations.฀Transfer฀the฀numbers฀to฀your฀proforma฀and฀make฀the฀adjustments฀in฀the฀
NCI฀working฀where฀the฀subsidiary's฀profit฀is฀affected.฀
Step฀5฀ Calculate฀'Share฀of฀profit฀of฀associate/joint฀venture'฀and฀'Share฀of฀other฀comprehensive฀
income฀of฀associate/joint฀venture'฀(where฀appropriate฀–฀see฀Section฀4).฀
Step฀6฀ Complete฀NCI's฀share฀of฀subsidiary's฀profit฀for฀the฀year฀(PFY)฀and฀total฀comprehensive฀
income฀(TCI)฀calculation:฀
฀ PFY TCI฀(if฀req'd)
PFY/TCI฀per฀question฀(time-apportioned฀× x/12 if฀ ฀X฀ ฀X฀
appropriate)฀
Adjustments,฀eg฀unrealised฀profit฀on฀sales฀made฀by฀S ฀฀฀(X)/X ฀฀฀(X)/X฀
Impairment฀losses฀(if฀NCI฀held฀at฀fair฀value) (X) ฀(X)฀
฀ X ฀฀X฀
฀ ฀
×฀NCI฀share฀ X ฀฀X฀
฀ ฀
฀
See฀Chapter฀10฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀this฀technique.฀This฀is฀
available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀฀
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฀฀
Activity฀3:฀Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀ ฀
comprehensive฀income฀฀ ฀
The฀statements฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀two฀entities฀for฀the฀year฀ended฀
31฀December฀20X5฀are฀presented฀below.฀
STATEMENTS฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X5฀
฀ Constance฀ Spicer฀
฀ ฀$'000฀ ฀$'000฀
Revenue฀ ฀5,000฀ ฀4,200฀
Cost฀of฀sales฀ ฀(4,100)฀ ฀(3,500)฀
Gross฀profit฀ ฀900฀ ฀700฀
Distribution฀and฀administrative฀expenses฀ ฀ (320)฀ ฀ ฀(180) ฀
Profit฀before฀tax฀ ฀580฀ ฀520฀
Income฀tax฀expense฀ ฀ (190)฀ ฀฀(160)฀
Profit฀for฀the฀year฀฀ ฀ 390฀ ฀฀฀฀360฀
Other฀comprehensive฀income฀ ฀ ฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss ฀ ฀
฀฀฀Gain฀on฀revaluation฀of฀property฀(net฀of฀deferred฀tax)฀ ฀ 60฀ ฀฀฀฀฀40฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀ 450฀ ฀฀฀400฀
Additional฀information:฀
(a)฀ Constance฀ acquired฀ an฀ 80%฀ investment฀ in฀ Spicer฀ on฀ 1฀ April฀ 20X5.฀ It฀ is฀ group฀ policy฀ to฀
measure฀non-controlling฀interests฀at฀fair฀value฀at฀acquisition.฀Goodwill฀of฀$100,000฀arose฀on฀
acquisition.฀ The฀ fair฀ value฀ of฀ the฀ net฀ assets฀ was฀ deemed฀ to฀ be฀ the฀ same฀ as฀ the฀ carrying฀
amount฀of฀net฀assets฀at฀acquisition.฀
(b)฀ An฀ impairment฀ review฀ was฀ conducted฀ on฀ 31฀ December฀ 20X5฀ and฀ it฀ was฀ decided฀ that฀ the฀
goodwill฀on฀the฀acquisition฀of฀Spicer฀was฀impaired฀by฀10%.฀฀
(c)฀ On฀ 31฀ October฀ 20X5,฀ Spicer฀ sold฀ goods฀ to฀ Constance฀ for฀ $300,000.฀ Two-thirds฀ of฀ these฀
goods฀remain฀in฀Constance's฀inventories฀at฀the฀year฀end.฀Spicer฀charges฀a฀mark-up฀of฀25%฀on฀
cost.฀
(d)฀ Assume฀ that฀ the฀ profits฀ and฀ other฀ comprehensive฀ income฀ of฀ Spicer฀ accrue฀ evenly฀ over฀ the฀
year.฀
Required฀
Prepare฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀
Constance฀group฀for฀the฀year฀ended฀31฀December฀20X5.฀
4฀ Associates฀
Associate:฀an฀entity฀over฀which฀the฀investor฀has฀significant฀influence.฀฀
(IAS฀28:฀para.฀3)฀
Key฀term฀
Significant฀influence฀is฀the฀power฀to฀participate฀in฀the฀financial฀and฀operating฀policy฀decisions฀of฀
the฀ investee฀ but฀ is฀ not฀ control฀ or฀ joint฀ control฀ over฀ those฀ policies฀ (IAS฀ 28:฀ para.฀ 3).฀ This฀ could฀ be฀
shown฀by:฀
(a)฀ Representation฀on฀the฀board฀of฀directors฀
(b)฀ Participation฀in฀policy-making฀processes฀
(c)฀ Material฀transactions฀between฀the฀entity฀and฀investee฀
(d)฀ Interchange฀of฀managerial฀personnel฀฀
(e)฀ Provision฀of฀essential฀technical฀information฀
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If฀an฀investor฀holds฀20%฀or฀more฀of฀the฀voting฀power฀of฀the฀investee,฀it฀can฀be฀presumed฀that฀the฀
investor฀has฀significant฀influence฀over฀the฀investee,฀unless฀it฀can฀be฀clearly฀shown฀that฀this฀is฀not฀the฀
case฀(IAS฀28:฀para.฀5).฀
Significant฀influence฀can฀be฀presumed฀not฀to฀exist฀if฀the฀investor฀holds฀less฀than฀20%฀of฀the฀voting฀
power฀of฀the฀investee,฀unless฀it฀can฀be฀demonstrated฀otherwise.฀
4.1฀Equity฀method฀
An฀investment฀in฀an฀associate฀is฀accounted฀for฀in฀consolidated฀financial฀statements฀using฀the฀equity฀
method.฀
Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
The฀ basic฀ principle฀ is฀ that฀ the฀ investing฀ company฀ (P฀ Co)฀ should฀ take฀ account฀ of฀ its฀ share฀ of฀ the฀
earnings฀ of฀the฀associate,฀A฀Co,฀whether฀or฀not฀A฀Co฀distributes฀the฀earnings฀as฀dividends.฀P฀Co฀
achieves฀this฀by฀adding฀to฀consolidated฀profit฀the฀group's฀share฀of฀A฀Co's฀profit฀after฀tax.฀
The฀ associate's฀ sales฀ revenue,฀ cost฀ of฀ sales฀ and฀ so฀ on฀ are฀ not฀ amalgamated฀ with฀ those฀ of฀ the฀
group.฀ Instead,฀ only฀ the฀ group฀ share฀ of฀ the฀ associate's฀ profit฀ after฀ tax฀ and฀ other฀
comprehensive฀income฀for฀the฀year฀is฀included฀in฀the฀relevant฀sections฀of฀the฀statement฀of฀profit฀
or฀loss฀and฀other฀comprehensive฀income.฀
Consolidated฀statement฀of฀financial฀position฀
The฀consolidated฀statement฀of฀financial฀position฀should฀show฀a฀non-current฀asset,฀investments฀in฀
associates,฀which฀is฀calculated฀as:฀
Cost฀of฀investment฀in฀associate฀ ฀X฀
Share฀of฀post-acquisition฀retained฀earnings฀(and฀other฀reserves) of฀
฀฀X฀ This฀amount฀is฀
associate฀
calculated฀in฀the฀
Less฀impairment฀losses฀on฀associate฀to฀date฀ ฀(X)฀ consolidated฀
฀ retained฀earnings฀
฀ X฀ working
฀ ฀
Intragroup฀transactions฀
Intragroup฀ transactions฀ and฀ balances฀ are฀ not฀ eliminated.฀ However,฀ the฀ investor's฀ share฀ of฀
unrealised฀ profits฀ or฀ losses฀ on฀ transfer฀ of฀ assets฀ that฀ do฀ not฀ constitute฀ a฀ 'business'฀ is฀ eliminated฀
(IAS฀28:฀para.฀28).฀
The฀adjustments฀required฀depend฀on฀whether฀the฀parent฀or฀the฀associate฀made฀the฀sale.฀฀฀
Sale฀ by฀ parent฀ (P)฀ to฀ the฀ associate฀ (A),฀ where฀ A฀ still฀ holds฀ the฀ inventories,฀ where฀ A%฀ is฀ the฀
parent's฀holding฀in฀the฀associate฀and฀PUP฀is฀the฀unrealised฀profit฀
DEBIT฀฀฀฀ Cost฀of฀sales/Retained฀earnings฀of฀P฀฀ PUP฀×฀A%฀
฀ ฀ ฀
CREDIT฀฀ Investment฀in฀associate฀ ฀฀ PUP฀×฀A%฀
฀
Sale฀by฀associate฀(A)฀to฀parent฀(P),฀where฀P฀still฀holds฀the฀inventories,฀A%฀is฀the฀parent's฀holding฀
in฀the฀associate฀and฀PUP฀is฀the฀unrealised฀profit฀
DEBIT฀฀฀฀ Share฀of฀associate's฀profit/Retained฀earnings฀of฀P฀฀ PUP฀×฀A%฀
฀ ฀ ฀
CREDIT฀฀ Group฀inventories฀ ฀฀ PUP฀×฀A%฀
฀
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฀฀
Illustration฀1฀
Associate฀
P฀purchased฀a฀60%฀holding฀in฀S฀on฀1฀January฀20X0฀for฀$6.1m฀when฀the฀retained฀earnings฀of฀S฀
were฀$3.6m.฀The฀retained฀earnings฀of฀S฀at฀31฀December฀20X4฀were฀$10.6m.฀Since฀acquisition,฀
there฀has฀been฀no฀impairment฀of฀the฀goodwill฀in฀S.฀
P฀also฀has฀a฀30%฀holding฀in฀A฀which฀it฀acquired฀on฀1฀July฀20X1฀for฀$4.1m฀when฀the฀retained฀
earnings฀of฀A฀were฀$6.2m.฀The฀retained฀earnings฀of฀A฀at฀31฀December฀20X4฀were฀$9.2m.฀
An฀impairment฀test฀conducted฀at฀the฀year฀end฀revealed฀that฀the฀investment฀in฀associate฀was฀impaired฀
by฀$500,000.฀
During฀the฀year฀A฀sold฀goods฀to฀P฀for฀$3m฀at฀a฀profit฀margin฀of฀20%.฀One-third฀of฀these฀goods฀
remained฀in฀P's฀inventories฀at฀the฀year฀end.฀The฀retained฀earnings฀of฀P฀at฀31฀December฀20X4฀were฀
$41.6m.฀
Required฀
(a)฀ What฀accounting฀adjustment฀in฀relation฀to฀unrealised฀profit฀is฀required฀in฀the฀consolidated฀
financial฀statements฀of฀P฀for฀the฀year฀ended฀31฀December฀20X4?฀
(b)฀ Calculate฀the฀following฀amounts฀for฀inclusion฀in฀the฀consolidated฀statement฀of฀financial฀position฀
of฀the฀P฀group฀as฀at฀31฀December฀20X4:฀
฀ (i)฀ Investment฀in฀associate฀
฀ (ii)฀ Consolidated฀retained฀earnings฀
Solution฀
(a)฀ As฀the฀associate฀is฀the฀seller,฀the฀share฀of฀the฀profit฀of฀associate฀(rather฀than฀cost฀of฀sales)฀must฀
be฀reduced.฀฀
฀ Accounting฀adjustment฀
฀ DEBIT฀฀ Share฀of฀profit฀of฀associate฀ $60,000฀
฀ CREDIT฀฀ Inventories฀ $60,000฀
฀ Calculation:฀
Unrealised฀profit฀
20% 1
adjustment฀฀ =฀ $3,000,000฀×฀ margin฀×฀ ฀in฀inventory฀×฀30%฀group฀share฀฀฀
100% 3
฀฀ =฀ $60,000฀
฀
(b)฀ (i)฀ Investment฀in฀associate฀
฀ ฀$'000฀
Cost฀of฀associate฀ 4,100฀
Share฀of฀post-acquisition฀retained฀earnings฀(9,200฀– 6,200)฀× 30% ฀฀฀900฀
฀ 5,000฀
Less฀impairment฀losses฀on฀associate฀to฀date ฀ ฀฀฀(500)฀
฀ ฀4,500฀
฀
฀
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฀ (ii)฀ Consolidated฀retained฀earnings฀
฀ P S฀ A฀
฀ ฀฀$'000฀ ฀฀$'000฀ ฀฀$'000฀
At฀the฀year฀end฀ ฀฀41,600฀ ฀฀10,600฀ ฀฀9,200฀
Unrealised฀profit฀(part฀(a))฀ ฀฀(60)฀ ฀
Pre-acquisition฀retained฀earnings฀ ฀ ฀฀ (3,600)฀ ฀฀(6,200)฀
฀ ฀ 7,000฀ ฀฀3,000฀
S฀–฀share฀of฀post-acq'n฀earnings฀(7,000 × 60%)฀ ฀฀4,200฀ ฀ ฀
A฀–฀share฀of฀post-acq'n฀earnings฀(3,000 × 30%)฀ ฀฀900฀ ฀ ฀
Less฀impairment฀losses฀on฀associate฀to฀date฀ ฀฀ ฀ (500)฀ ฀ ฀
฀ ฀46,140฀ ฀ ฀
฀
฀ ฀ Tutorial฀note.฀฀
฀ ฀ Even฀though฀the฀associate฀was฀the฀seller฀for฀the฀intragroup฀trading,฀unrealised฀profit฀is฀
adjusted฀in฀the฀parent's฀column฀so฀as฀not฀to฀multiply฀it฀by฀the฀group฀share฀twice.฀
฀ ฀ Working:฀Group฀structure฀
P
1.1.X0฀฀฀฀60% 1.7.X1฀฀฀30%฀
S A
฀ ฀ Pre-acquisition฀retained฀earnings: $3.6m $6.2m฀ ฀
Where฀ a฀ parent฀ transfers฀ a฀ 'business'฀ to฀ its฀ associate฀ (or฀ joint฀ venture),฀ the฀ full฀ gain฀ or฀ loss฀ is฀
recognised฀(as฀it฀is฀similar฀to฀losing฀control฀of฀a฀subsidiary฀–฀covered฀in฀Chapter฀12).฀
A฀ 'business'฀ is฀ defined฀ as฀ 'an฀ integrated฀ set฀ of฀ activities฀ and฀ assets฀ that฀ is฀ capable฀ of฀ being฀
conducted฀and฀managed฀for฀the฀purpose฀of฀providing฀a฀return฀in฀the฀form฀of฀dividends,฀lower฀costs฀
or฀ other฀ economic฀ benefits฀ directly฀ to฀ investors฀ or฀ other฀ owners,฀ members฀ or฀ participants'฀ (IFRS฀ 3:฀
Appendix฀A).฀
5฀฀Fair฀values฀
5.1฀Goodwill฀
To฀ understand฀ the฀ importance฀ of฀ fair฀ values฀ in฀ the฀ acquisition฀ of฀ a฀ subsidiary฀ consider฀ again฀ the฀
calculation฀of฀goodwill.฀
Goodwill฀ ฀ $฀฀
Consideration฀transferred฀ X฀฀
Non-controlling฀interests฀at฀acquisition฀(at฀FV฀or฀at฀%฀FV฀of฀net฀assets)฀ X฀฀
Fair฀value฀of฀acquirer's฀previously฀held฀equity฀interest฀
฀฀฀(for฀business฀combinations฀achieved฀in฀stages฀–฀covered฀in฀Chapter฀11)฀ ฀X฀฀
฀ X฀฀
Less฀net฀acquisition-฀date฀fair฀value฀of฀identifiable฀assets฀acquired฀
and฀liabilities฀assumed฀ ฀(X)฀
฀ ฀X฀฀
฀
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฀฀
Both฀the฀consideration฀transferred฀and฀the฀net฀assets฀at฀acquisition฀must฀be฀measured฀at฀fair฀value฀
to฀arrive฀at฀true฀goodwill.฀
Normally฀ goodwill฀ is฀ a฀ positive฀ balance฀ which฀ is฀ recorded฀ as฀ an฀ intangible฀ non-current฀
asset.฀Occasionally฀it฀is฀negative฀and฀arises฀as฀a฀result฀of฀a฀'bargain฀purchase'.฀In฀this฀instance,฀
IFRS฀ 3฀ requires฀ reassessment฀ of฀ the฀ calculations฀ to฀ ensure฀ that฀ they฀ are฀ accurate฀ and฀ then฀ any฀
remaining฀negative฀goodwill฀should฀be฀recognised฀as฀a฀gain฀in฀profit฀or฀loss฀and฀therefore฀also฀
recorded฀in฀group฀retained฀earnings฀(IFRS฀3:฀paras.฀34,฀36).฀
Measurement฀period฀
If฀the฀initial฀accounting฀for฀a฀business฀combination฀is฀incomplete฀by฀the฀end฀of฀the฀reporting฀period฀in฀
which฀ the฀ combination฀ occurs,฀ provisional฀ figures฀ for฀ the฀ consideration฀ transferred,฀ assets฀
acquired฀and฀liabilities฀assumed฀are฀used฀(IFRS฀3:฀para.฀45).฀
Adjustments฀ to฀ the฀ provisional฀ figures฀ may฀ be฀ made฀ up฀ to฀ the฀ point฀ the฀ acquirer฀ receives฀ all฀ the฀
necessary฀ information฀ (or฀ learns฀ that฀ it฀ is฀ not฀ obtainable),฀ with฀ a฀ corresponding฀ adjustment฀ to฀
goodwill,฀ but฀ the฀ measurement฀ period฀ cannot฀ exceed฀ one฀ year฀ from฀ the฀ acquisition฀ date฀
Thereafter,฀goodwill฀is฀only฀adjusted฀for฀the฀correction฀of฀errors฀(IFRS฀3:฀para.฀50).฀
5.2฀ Fair฀value฀of฀consideration฀transferred฀
The฀consideration฀transferred฀is฀measured฀at฀fair฀value฀(in฀accordance฀with฀IFRS฀13),฀calculated฀as฀
the฀acquisition฀date฀fair฀values฀of:฀
฀ The฀assets฀transferred฀by฀the฀acquirer;฀
฀ The฀liabilities฀incurred฀by฀the฀acquirer฀(to฀former฀owners฀of฀the฀acquiree);฀and฀
฀ Equity฀interests฀issued฀by฀the฀acquirer฀(IFRS฀3:฀paras.฀37–40).฀
Specifically:฀
Item฀ Treatment฀
Deferred฀consideration฀ Discounted฀to฀present฀value฀to฀measure฀its฀fair฀value฀
Contingent฀ Measured฀at฀fair฀value฀at฀the฀acquisition฀date฀
consideration฀(to฀be฀ Subsequent฀measurement฀(IFRS฀3:฀para.฀58):฀
settled฀in฀cash฀or฀
(a)฀฀ If฀the฀change฀is฀due฀to฀additional฀information฀obtained฀that฀affects฀the฀
shares)฀
position฀at฀the฀acquisition฀date,฀goodwill฀should฀be฀remeasured฀(if฀
within฀the฀measurement฀period)฀
(b)฀฀ If฀the฀change฀is฀due฀to฀any฀other฀change,฀eg฀meeting฀earnings฀targets:฀
(i)฀ Consideration฀is฀equity฀instruments฀–฀not฀remeasured฀฀
(ii)฀ Consideration฀is฀cash฀–฀remeasure฀to฀fair฀value฀with฀gains฀or฀
losses฀through฀profit฀or฀loss฀
(iii)฀ Consideration฀is฀a฀financial฀instrument฀–฀account฀for฀under฀IFRS฀9฀
Costs฀involved฀in฀the฀transaction฀are฀charged฀to฀profit฀or฀loss.฀
However,฀costs฀to฀issue฀debt฀or฀equity฀instruments฀are฀treated฀in฀accordance฀with฀IFRS฀9/IAS฀32,฀so฀
are฀deducted฀from฀the฀financial฀liability฀or฀equity฀(IFRS฀3:฀para.฀53).฀
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Activity฀4:฀Fair฀value฀of฀consideration฀transferred฀ ฀ ฀
Pau,฀ a฀ public฀ company,฀ purchases฀ a฀ 60%฀ interest฀ of฀ another฀ company,฀ Pol,฀ on฀ 1฀ January฀ 20X1.฀฀
Scheduled฀payments฀comprised:฀
฀ $160m฀payable฀immediately฀in฀cash฀
฀ $120m฀payable฀on฀31฀December฀20X2฀
฀ An฀amount฀equivalent฀to฀three฀times฀the฀profit฀after฀tax฀of฀Pol฀for฀the฀year฀ended฀31฀December฀
20X1,฀payable฀on฀31฀March฀20X2฀
฀ $5m฀of฀fees฀paid฀for฀due฀diligence฀work฀to฀a฀firm฀of฀accountants.฀
On฀ 1฀ January฀ 20X1,฀ the฀ fair฀ value฀ attributed฀ to฀ the฀ consideration฀ based฀ on฀ profit฀ was฀ $54m.฀ By฀
31฀December฀20X1,฀the฀fair฀value฀was฀considered฀$65m.฀The฀change฀arose฀as฀a฀result฀of฀a฀change฀
in฀expected฀profits.฀
An฀appropriate฀discount฀rate฀for฀use฀where฀necessary฀is฀5%.฀
Required฀
Explain฀the฀treatment฀of฀the฀payments฀for฀the฀acquisition฀of฀Pol฀in฀the฀financial฀statements฀of฀the฀Pau฀
Group฀for฀the฀year฀ended฀31฀December฀20X1.฀
See฀Chapter฀10฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀more฀practice฀on฀calculating฀the฀fair฀
value฀of฀consideration.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
5.3฀ Fair฀value฀of฀the฀identifiable฀assets฀acquired฀and฀liabilities฀
assumed฀
The฀general฀rule฀under฀IFRS฀3฀is฀that,฀on฀acquisition,฀the฀subsidiary's฀assets฀and฀liabilities฀must฀be฀
recognised฀and฀measured฀at฀their฀acquisition฀date฀fair฀value฀except฀in฀limited,฀stated฀
cases.฀
To฀be฀recognised฀in฀applying฀the฀acquisition฀method฀the฀assets฀and฀liabilities฀must:฀
(a)฀ Meet฀the฀definitions฀of฀assets฀and฀liabilities฀in฀the฀Conceptual฀Framework;฀and฀
(b)฀ Be฀part฀of฀what฀the฀acquirer฀and฀the฀acquiree฀(or฀its฀former฀owners)฀exchanged฀in฀the฀business฀
combination฀rather฀than฀the฀result฀of฀separate฀transactions.฀
This฀ includes฀ intangible฀ assets฀ that฀ may฀ not฀ have฀ been฀ recognised฀ in฀ the฀ subsidiary's฀ separate฀
financial฀ statements,฀ such฀ as฀ brands,฀ licences,฀ trade฀ names,฀ domain฀ names,฀ customer฀ relationships฀
and฀so฀on.฀
IFRS฀13฀Fair฀Value฀Measurement฀(see฀Chapter฀3)฀provides฀extensive฀guidance฀on฀how฀the฀fair฀value฀
of฀assets฀and฀liabilities฀should฀be฀established.฀
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฀฀
Exceptions฀to฀the฀recognition฀and/or฀measurement฀principles฀in฀IFRS฀3฀are฀as฀follows.฀
Item฀ Valuation฀basis฀ This฀is฀a฀

departure฀from฀
Contingent฀liabilities฀ Can฀be฀recognised฀providing:฀ the฀normal฀rules฀
in฀IAS฀37;฀
฀ It฀is฀a฀present฀obligation;฀and฀ contingent฀
฀ Its฀fair฀value฀can฀be฀measured฀reliably฀ ฀ liabilities฀are฀
not฀normally฀
recognised,฀but฀
Deferred฀tax฀assets/liabilities฀ Measurement฀based฀on฀IAS฀12฀values฀(not฀IFRS฀13)฀
only฀disclosed฀
Employee฀benefit฀assets/฀ Measurement฀based฀on฀IAS฀19฀values฀(not฀IFRS฀13)฀
liabilities฀
Indemnification฀assets฀ Valuation฀is฀the฀same฀as฀the฀valuation฀of฀contingent฀
(amounts฀recoverable฀relating฀ liability฀indemnified฀less฀an฀allowance฀for฀any฀
to฀a฀contingent฀liability)฀ uncollectable฀amounts฀
Reacquired฀rights฀(eg฀a฀licence฀ Fair฀value฀is฀based฀on฀the฀remaining฀term,฀ignoring฀
granted฀to฀the฀subsidiary฀ the฀likelihood฀of฀renewal฀
before฀it฀became฀a฀subsidiary)฀
Share-based฀payment฀ Measurement฀based฀on฀IFRS฀2฀values฀(not฀IFRS฀13)฀฀
Assets฀held฀for฀sale฀ Measurement฀at฀fair฀value฀less฀costs฀to฀sell฀per฀
IFRS฀5฀
฀
See฀Chapter฀10฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀further฀detail฀on฀the฀application฀of฀
IFRS฀3฀to฀the฀valuation฀of฀a฀subsidiary's฀assets฀and฀liabilities฀in฀a฀business฀combination.฀This฀is฀
Activity฀5:฀Consolidation฀with฀associate฀฀ ฀
Bailey,฀a฀public฀limited฀company,฀has฀acquired฀shares฀in฀two฀companies.฀The฀details฀of฀the฀
acquisitions฀are฀as฀follows:฀
Company฀ Date฀of฀ Ordinary฀ Retained฀ Fair฀value฀of฀ Cost฀of฀ Ordinary฀
share฀capital฀ earnings฀at฀ net฀assets฀at฀ investment฀ share฀capital฀
acquisition฀
of฀$1฀ acquisition฀ acquisition฀ of฀$1฀
acquired฀
฀ ฀ $m฀ $m $m $m $m฀
Hill฀ 1฀January฀20X6฀ 500฀ 440 1,040 720 300฀
Campbell฀ 1฀May฀20X9 240฀ 270 510 225 72฀
The฀draft฀financial฀statements฀for฀the฀year฀ended฀31฀December฀20X9฀are:฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀20X9฀
฀ Bailey Hill฀ Campbell
Non-current฀assets฀ $m $m฀ $m฀
Property,฀plant฀and฀equipment฀ 2,300 1,900฀ 700฀
Investment฀in฀Hill฀ 72720 –฀ –฀
Investment฀in฀Campbell 225 ฀ ฀–฀ ฀฀฀฀฀฀฀–฀
฀ 3,245 1,900฀ ฀ ฀฀฀700฀
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Current฀assets฀ 3,115 1,790฀ ฀1,050฀
฀ ฀ 6,360 ฀ 3,690฀ ฀1,750฀
฀ ฀ ฀
Equity฀ ฀ ฀
Share฀capital฀ 1,000 500฀ 240฀
Retained฀earnings฀ 3,430 1,800฀ ฀฀฀฀฀330฀
฀ 4,430 2,300฀ ฀฀฀฀฀570฀
Non-current฀liabilities฀ 350 290฀ 220฀
Current฀liabilities฀ 1,580 1,100฀ ฀฀฀฀960฀
฀ ฀66,360 ฀3,690฀ ฀1,750฀
STATEMENTS฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀ FOR฀ THE฀ YEAR฀
ENDED฀31฀DECEMBER฀20X9฀
฀ $m $m฀ $m฀
Revenue฀ 5,000 4,200฀ 2,000฀
Cost฀of฀sales฀ (4,100) (3,500)฀ ฀(1,800)฀
Gross฀profit฀ 900 700฀ 200฀
Distribution฀and฀administrative฀expenses (320) (175)฀ (40)฀
Dividend฀income฀from฀Hill฀and฀Campbell 36 ฀–฀ ฀฀฀฀฀฀฀฀–฀
Profit฀before฀tax฀ 616 525฀ 160฀
Income฀tax฀expense฀ (240) (170)฀ ฀฀฀฀฀฀฀(50)฀
Profit฀for฀the฀year฀฀ ฀ 376 ฀ 355฀ ฀฀฀฀฀110฀
Items฀not฀reclassified฀to฀profit฀or฀loss฀ ฀ ฀
Gains฀on฀property฀revaluation฀(net฀of฀deferred฀tax) 50 20฀ ฀ ฀฀฀฀฀฀10฀
Total฀comprehensive฀income฀for฀the฀year ฀ 426 ฀ 375฀ ฀฀฀฀฀120฀
Dividends฀paid฀in฀the฀year฀(from฀post-acquisition฀profits) 250 50฀ ฀20฀

The฀following฀information฀is฀relevant฀to฀the฀preparation฀of฀the฀group฀financial฀statements฀of฀the฀Bailey฀
group:฀
(a)฀ The฀ fair฀ value฀ difference฀ in฀ Hill฀ relates฀ to฀ property,฀ plant฀ and฀ equipment฀ being฀ depreciated฀
through฀cost฀of฀sales฀over฀a฀remaining฀useful฀life฀of฀10฀years฀from฀the฀acquisition฀date.฀
(b)฀ During฀the฀year฀ended฀31฀December฀20X9,฀Hill฀sold฀$200฀million฀of฀goods฀to฀Bailey.฀Three-
quarters฀ of฀ these฀ goods฀ had฀ been฀ sold฀ to฀ third฀ parties฀ by฀ the฀ year฀ end.฀ The฀ profit฀ on฀ these฀
goods฀ was฀ 40%฀ of฀ sales฀ price.฀ There฀ were฀ no฀ opening฀ inventories฀ of฀ intragroup฀ goods฀ nor฀
any฀intragroup฀balances฀at฀the฀year฀end.฀
(c)฀ Bailey฀ elected฀ to฀ measure฀ the฀ non-controlling฀ interests฀ in฀ Hill฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀
acquisition.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interests฀ in฀ Hill฀ at฀ 1฀ January฀ 20X6฀ was฀
$450฀million.฀
(d)฀ Cumulative฀impairment฀losses฀on฀recognised฀goodwill฀in฀Hill฀at฀31฀December฀20X9฀amounted฀
to฀$20฀million,฀of฀which฀$15฀million฀arose฀during฀the฀year.฀It฀is฀the฀group's฀policy฀to฀recognise฀
impairment฀losses฀on฀positive฀goodwill฀in฀administrative฀expenses.฀฀No฀impairment฀losses฀have฀
been฀necessary฀on฀the฀investment฀in฀Campbell.฀฀
Required฀
Using฀the฀proformas฀below฀to฀help฀you,฀prepare฀the฀consolidated฀statement฀of฀financial฀position฀for฀
the฀Bailey฀Group฀as฀at฀31฀December฀20X9฀and฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀for฀the฀year฀then฀ended.฀
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฀฀
Solution฀
Bailey฀Group฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀20X9฀
฀ $m฀฀฀฀
Property,฀plant฀and฀equipment฀(2,300฀+฀1,900)฀ ฀
Goodwill฀(W2)฀ ฀
Investment฀in฀associate฀(W3)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Current฀assets฀(3,115฀+฀1,790)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Equity฀attributable฀to฀owners฀of฀the฀parent ฀
Share฀capital฀ 1,000฀
Retained฀earnings฀(W4) ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
Non-controlling฀interests฀(W5)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Non-current฀liabilities฀(350฀+฀290)฀ ฀
Current฀liabilities฀(1,580฀+฀1,100)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Bailey฀Group฀
CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀FOR฀
THE฀YEAR฀ENDED฀31฀DECEMBER฀20X9฀
฀ $m฀฀฀฀
Revenue฀(5,000฀+฀4,200)฀ ฀
Cost฀of฀sales฀(4,100฀+฀3,500)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Gross฀profit฀ ฀
Distribution฀costs฀and฀administrative฀expenses฀(320฀+฀175)฀ ฀
Share฀of฀profit฀of฀associate฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀before฀tax฀ ฀
Income฀tax฀expense฀(240฀+฀170)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Other฀comprehensive฀income฀ ฀
Items฀not฀reclassified฀to฀profit฀or฀loss฀ ฀
฀฀฀Gains฀on฀property฀revaluation฀(net฀of฀deferred฀tax)฀(50฀+฀20)฀ ฀
฀฀฀Share฀of฀gain฀on฀property฀revaluation of฀associate ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Other฀comprehensive฀income,฀net฀of฀tax ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀attributable฀to:฀ ฀
฀฀฀Owners฀of฀the฀parent ฀
฀฀฀Non-controlling฀interests฀(W6)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀attributable฀to: ฀
฀฀฀Owners฀of฀the฀parent ฀
฀฀฀Non-controlling฀interests฀(W6)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
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Workings฀
1฀ Group฀structure฀
฀ Bailey฀
฀ ฀1.1.X6฀(4฀years฀ago)฀ 1.5.X9฀(current฀year)฀
300 72
฀ ฀ ฀=฀60%฀ ฀ ฀=฀30%฀
500 240
฀
฀ Hill฀ Campbell฀
2฀ Goodwill฀
฀ ฀$m฀ ฀$m฀฀฀
฀฀Consideration฀transferred฀ 720฀
฀฀Non-controlling฀interests฀(at฀fair฀value)฀ ฀
฀฀Fair฀value฀of฀net฀assets฀at฀acquisition:฀ ฀
฀฀ Share฀capital฀ ฀
฀฀ Retained฀earnings฀ ฀
฀฀ Fair฀value฀adjustment฀ ฀ ฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀฀Less฀impairment฀losses฀to฀date฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
3฀ Investment฀in฀associate฀
฀ ฀$m ฀฀
฀฀Cost฀of฀associate฀ 225฀
฀฀Share฀of฀post-acquisition฀retained฀earnings฀ ฀
฀฀Less฀impairment฀losses฀to฀date฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
4฀ Retained฀earnings฀
฀ Bailey Hill Campbell
฀ $m $m฀ $m฀
฀฀At฀year฀end฀ 3,430฀ 1,800฀ 330฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀฀฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Group฀share฀of฀post-acquisition฀retained฀earnings: ฀ ฀
฀฀฀฀Hill฀฀ ฀ ฀
฀฀฀฀Campbell฀ ฀ ฀
฀฀Less฀impairment฀losses:฀ ฀ ฀
฀฀฀฀Hill฀ ฀ ฀
฀฀฀฀Campbell฀ ฀ ฀ ฀ ฀
฀ ฀ ฀ ฀ ฀
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฀฀
5฀ Non-controlling฀interests฀(statement฀of฀financial฀position)฀
฀ ฀$m฀
฀฀NCI฀at฀acquisition฀ ฀
฀฀NCI฀share฀of฀post-acquisition฀retained฀earnings฀ ฀
฀฀NCI฀share฀of฀impairment฀losses฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
6฀ Non-controlling฀interests฀(statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income)฀
฀ ฀ Profit฀for฀ Total฀
year฀ comprehensive฀
income฀
฀ ฀ $m $m฀
฀฀ Hill's฀PFY/TCI฀per฀question฀ 355฀ 375฀
฀ ฀
฀ ฀
฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀฀×฀NCI฀share฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
7฀ Fair฀value฀adjustment฀–฀Hill฀
฀ At฀acquisition Movement฀ Year฀end
฀ 1.1.X6฀ 31.12.X9฀
฀ $m $m $m฀
฀฀Property,฀plant฀and฀equipment฀ ฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
8฀ Intragroup฀trading฀
฀
Ethics฀note฀
Ethics฀could฀feature฀as฀part฀of฀any฀question฀in฀the฀SBR฀exam฀so฀you฀need฀to฀be฀alert฀to฀any฀possible฀
threats฀to฀the฀fundamental฀principles฀in฀the฀ACCA฀Code฀of฀Ethics฀and฀Conduct฀in฀question฀scenarios.฀฀
For฀example,฀in฀terms฀of฀group฀accounting,฀if฀there฀is฀pressure฀on฀the฀directors฀to฀keep฀gearing฀
below฀a฀certain฀level,฀directors฀may฀be฀tempted฀to฀keep฀loan฀liabilities฀out฀of฀the฀group฀accounts฀by฀
putting฀those฀liabilities฀into฀a฀new฀subsidiary฀and฀then฀creating฀reasons฀as฀to฀why฀that฀subsidiary฀
should฀not฀be฀consolidated.฀
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฀
฀
1.฀Consolidated฀financial฀
statements฀
฀ Basic฀groups฀
฀
Exemption:฀consolidated฀FS฀not฀necessary฀if:฀
฀ P฀is฀wholly฀owned฀subsidiary฀฀
฀
(or฀NCI฀agrees)฀
฀
฀ Debt/equity฀not฀publicly฀traded฀
฀ 2.฀ Subsidiaries฀
฀ Ultimate฀or฀any฀intermediate฀P฀publishes฀
฀ ฀
IFRS฀FS฀including฀all฀subs฀ Definition:฀ Key฀intragroup฀adjustments฀
฀ ฀฀ An฀entity฀that฀is฀controlled฀by฀ (a)฀ Cancellation฀of฀intragroup฀
฀ ฀ another฀entity฀(known฀as฀the฀parent)฀ sales/purchases:฀
฀ ฀฀ Control:฀when฀an฀investor฀has฀all฀ ฀ DR฀Group฀revenue฀ X฀
3.฀Approach฀to฀consolidation฀ ฀ the฀following:฀ ฀ CR฀Group฀cost฀of฀sales฀ X฀
Step฀1฀ Group฀structure฀or฀timeline฀(for฀a฀ ฀ (a)฀ power฀over฀the฀investee;฀ (b)฀ Elimination฀of฀unrealised฀profit฀on฀
SPLOCI)฀ ฀ (b)฀ exposure,฀or฀rights,฀to฀variable฀ inventories/PPE:฀
returns฀from฀its฀involvement฀with฀ ฀ Sales฀by฀P฀to฀S:฀
Step฀2฀ Proforma฀ ฀
the฀investee;฀and฀
Step฀3฀ Transfer฀figures฀to฀face฀or฀working฀ ฀ ฀ DR฀Cost฀of฀sales/฀ret'd฀earnings฀of฀P฀ X฀
(c)฀ the฀ability฀to฀use฀its฀power฀ ฀ CR฀Group฀inventories/PPE฀ X฀
Step฀4฀ Adjustments฀&฀add฀across฀ ฀ over฀the฀investee฀to฀affect฀the฀
฀ ฀ Sale฀by฀S฀to฀P:฀
Step฀5฀ Goodwill฀(for฀a฀SOFP)฀ amount฀of฀the฀investor's฀returns฀
฀ ฀ DR฀Cost฀of฀sales/฀ret'd฀earnings฀of฀S฀ X฀
Step฀6฀ Retained฀earnings฀(for฀a฀SOFP)฀ Accounting฀treatment฀(IFRS฀3,฀IFRS฀10):฀ ฀ CR฀Group฀inventories/PPE฀ X฀
Step฀7฀ Associate/joint฀venture฀(SOFP,฀ ฀฀ Consolidation฀(purchase฀method)฀of฀ ฀ (affects฀NCI)฀
share฀of฀P/L,฀share฀of฀OCI฀items)฀ ฀ 100%฀of฀assets,฀liabilities,฀income฀&฀
(c)฀ Cancellation฀of฀intragroup฀balances:฀
Step฀8฀ Non-controlling฀interests฀(in฀net฀ ฀ expenses฀
฀ DR฀Payables฀ X฀
assets฀(SOFP),฀P/L฀and฀TCI)฀ ฀฀ Cancellation฀of฀intragroup฀items฀ ฀ CR฀Receivables฀ X฀
฀฀ NCI฀shown฀separately฀
(d)฀ Cash฀in฀transit:฀
฀฀ Uniform฀accounting฀policies฀ ฀ DR฀Cash฀ X฀
฀฀ Adjustments฀to฀fair฀value฀ ฀ CR฀Receivables฀ X฀
฀฀ Goodwill฀arises฀(tested฀annually฀for฀ (e)฀ Goods฀in฀transit:฀
฀ impairment)฀ ฀ DR฀Inventories฀ X฀
฀ ฀ CR฀Payables฀ X฀
฀
Exclusion:฀not฀possible฀under฀IFRSs฀unless฀no฀control฀or฀parent฀is฀an฀investment฀entity:
Dissimilar฀activities฀฀ consolidated฀+฀IFRS฀8฀disclosures฀
Held฀for฀re-sale฀ consolidated฀under฀IFRS฀5฀principles฀(held฀for฀sale฀in฀CA/CL)฀
Severe฀LT฀restrictions฀ no฀control฀฀not฀a฀sub฀
Investment฀entities฀ subs฀held฀at฀FVTP/L฀
฀ Purpose฀is฀investment฀management฀services฀
฀ Invest฀solely฀for฀returns฀from฀capital฀appreciation฀and/or฀investment฀income฀฀
฀ Performance฀measured฀&฀evaluated฀on฀FV฀basis฀
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฀฀
4.฀ Associates฀
฀ Definition:฀
฀ ฀ An฀entity฀over฀which฀the฀investor฀has฀significant฀influence฀
฀ ฀ Significant฀influence:฀the฀power฀to฀participate฀in฀the฀financial฀and฀operating฀policy฀decisions฀of฀the฀
investee฀but฀not฀control฀or฀joint฀control฀over฀those฀policies฀
฀
฀ Accounting฀treatment฀(IAS฀28):฀
฀ ฀ Equity฀method฀
฀ ฀ SOFP:฀ Cost฀+฀share฀of฀post฀acqń฀retained฀reserves฀
฀ ฀฀ ฀ less:฀impairment฀losses฀to฀date฀
฀ ฀ SPLOCI:฀ Share฀of฀profit฀for฀the฀year฀(shown฀before฀group฀profit฀before฀tax)฀
฀฀ ฀ Share฀of฀other฀comprehensive฀income฀
฀ ฀ Eliminate฀investor's฀share฀of฀any฀unrealised฀profit/loss฀on฀transactions฀with฀associate฀(unless฀a฀'business'฀is฀
transferred฀to฀the฀associate฀–฀profit/loss฀not฀eliminated฀as฀similar฀to฀loss฀of฀control฀of฀a฀subsidiary)฀
฀
5.฀Fair฀values฀
Consideration฀transferred฀ Fair฀value฀(FV)฀of฀assets฀and฀liabilities฀
Measuring฀consideration:฀ Exceptions฀to฀FV฀recognition/measurement:฀
฀ Transaction฀costs฀฀–฀฀expensed฀to฀P/L฀ ฀ Contingent฀liabilities฀–฀recognised฀if฀present฀
฀ ฀ ฀–฀฀but฀to฀equity฀if฀re฀SC฀(IAS฀32)฀ obligation฀exists฀&฀FV฀can฀be฀measured฀
฀ Deferred฀–฀Present฀value฀฀ reliably฀
฀ Contingent฀–฀Fair฀value฀at฀acq'n฀date฀
฀ Indemnification฀assets฀–฀ same฀val'n฀as฀
฀ ฀฀ –฀Subsequent฀measurement:฀
contingent฀liability฀less฀allowance฀if฀
฀ (i)฀฀ Equity฀instruments฀–฀not฀remeasured฀฀ uncollectable฀
฀ (ii)฀฀Cash฀–฀remeasure฀to฀FV,฀gains฀or฀losses฀through฀ ฀ Reacquired฀rights฀–฀฀FV฀based฀on฀remaining฀
profit฀or฀loss฀ term฀(ignore฀renewal)฀
฀ (iii)฀Financial฀instrument฀–฀IFRS฀9฀ ฀ Use฀normal฀IFRS฀values฀for฀deferred฀tax,฀
employee฀bens,฀share-based฀payment฀&฀
assets฀held฀for฀sale฀
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1.฀ Consolidated฀financial฀statements฀
฀ ฀ Investments฀in฀subsidiaries,฀associates฀or฀joint฀ventures฀are฀accounted฀for฀in฀the฀investor's฀
own฀books฀at฀cost฀or฀at฀fair฀value฀(as฀a฀financial฀asset฀under฀IFRS฀9)฀or฀using฀the฀
equity฀method.฀
฀ ฀ A฀parent฀may฀be฀exempt฀from฀preparing฀consolidated฀financial฀statements฀if฀
not฀quoted฀and฀is฀part฀of฀a฀larger฀group.฀
2.฀ Subsidiaries฀
฀ ฀ The฀definition฀of฀a฀subsidiary฀is฀based฀on฀a฀control฀relationship.฀Subsidiaries฀are฀
consolidated฀in฀full,฀but฀intragroup฀transactions,฀balances฀and฀unrealised฀profits฀are฀
eliminated฀in฀full.฀
฀ ฀ A฀parent฀cannot฀exclude฀an฀entity฀that฀meets฀the฀definition฀of฀a฀subsidiary฀from฀the฀
consolidation฀unless฀the฀parent฀meets฀the฀definition฀of฀an฀investment฀entity฀(in฀which฀
case฀the฀subsidiary฀is฀measured฀at฀fair฀value฀through฀profit฀or฀loss).฀
3.฀ Approach฀to฀consolidation฀
฀ BPP฀recommends฀a฀methodical฀step฀by฀step฀approach฀to฀the฀consolidated฀statement฀of฀
financial฀position฀and฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income.฀
4.฀ Associates฀
฀ Associates฀arise฀where฀the฀investor฀has฀significant฀influence.฀They฀are฀accounted฀for฀using฀
the฀equity฀method฀as฀one฀line฀in฀the฀statement฀of฀financial฀position,฀one฀line฀in฀profit฀or฀loss฀and฀
one฀line฀in฀other฀comprehensive฀income.฀Intragroup฀transactions฀are฀not฀eliminated฀other฀than฀
the฀investor's฀share฀of฀unrealised฀profits฀on฀transfer฀of฀assets฀which฀do฀not฀constitute฀a฀
'business'.฀
5.฀ Fair฀values฀
฀ IFRS฀3฀contains฀detailed฀rules฀on฀how฀to฀determine฀the฀consideration฀transferred฀and฀the฀
fair฀value฀of฀the฀assets฀acquired฀and฀liabilities฀assumed฀to฀ensure฀the฀goodwill฀
figure฀is฀accurate.฀
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฀฀
Q12฀Highland฀
Q13฀Investor฀
The฀ACCA฀website฀includes฀an฀article฀on฀IFRS฀3฀which฀was฀written฀for฀the฀Financial฀Reporting฀exam฀and฀
provides฀useful฀revision:฀
www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f7/technical-articles/combinations.html฀
฀
฀
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฀
฀
฀
฀
Changes฀in฀group
฀
฀
฀
structures:฀step
฀
฀
acquisitions
฀ Syllabus฀
reference฀no.฀
Apply฀the฀accounting฀principles฀relating฀to฀a฀business฀combination฀achieved฀in฀ D1(e)฀
stages.฀
Discuss฀and฀apply฀the฀implications฀of฀changes฀in฀ownership฀interest฀and฀loss฀of฀ D1(h)฀
control.฀(Loss฀of฀control฀covered฀in฀Chapter฀12)฀
Prepare฀group฀financial฀statements฀where฀activities฀have฀been฀discontinued,฀or฀ D1(i)฀
have฀been฀acquired฀or฀disposed฀of฀in฀the฀period.฀
Note.฀Only฀acquisitions฀are฀covered฀in฀this฀chapter.฀Disposals฀are฀covered฀in฀
Chapter฀12฀and฀discontinued฀operations฀in฀Chapter฀13.฀
Exam฀context฀
Changes฀ in฀ group฀ structures฀ are฀ likely฀ to฀ feature฀ regularly฀ in฀ the฀ Strategic฀ Business฀ Reporting฀ (SBR)฀
exam.฀ The฀ most฀ likely฀ part฀ of฀ the฀ exam฀ for฀ this฀ topic฀ to฀ be฀ tested฀ in฀ is฀ the฀ first฀ Section฀ A฀ question฀
which฀ will฀ be฀ based฀ on฀ the฀ financial฀ statements฀ of฀ group฀ entities,฀ or฀ extracts฀ thereof.฀ This฀ question฀
could฀ require฀ you฀ to฀ prepare฀ a฀ full฀ consolidated฀ primary฀ statement฀ (statement฀ of฀ financial฀ position,฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀or฀statement฀of฀cash฀flows)฀or฀an฀extract฀
incorporating฀ an฀ increase฀ in฀ a฀ shareholding฀ in฀ an฀ existing฀ investment฀ (sometimes฀ referred฀ to฀ as฀ a฀
step฀ acquisition,฀ a฀ piecemeal฀ acquisition฀ or฀ a฀ business฀ combination฀ achieved฀ in฀ stages).฀
Alternatively,฀part฀(b)฀of฀this฀question฀could฀ask฀for฀a฀written฀explanation฀of฀the฀accounting฀treatment฀
of฀a฀change฀in฀group฀structure.฀
Part฀of฀the฀second฀question฀in฀Section฀A฀on฀reporting฀and฀ethical฀implications฀of฀specific฀events฀could฀
also฀test฀changes฀in฀group฀structures.฀This฀topic฀could฀also฀feature฀as฀part฀of฀either฀of฀the฀two฀Section฀
B฀questions฀which฀could฀deal฀with฀any฀aspect฀of฀the฀syllabus.฀
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฀฀
฀
฀
฀
1.฀ Step฀acquisitions฀
฀ 2.฀ Step฀acquisitions฀where฀
where฀significant฀ Changes฀in฀group฀structures
฀ control฀is฀retained฀
influence฀or฀control฀is฀
฀
achieved฀
฀
฀
฀
฀
Group฀financial฀ Group฀financial฀
฀ statements฀ ฀ statements฀
Subsidiary฀to฀subsidiary฀
Investment฀to฀ Investment฀to฀ Associate฀to฀
associate฀ subsidiary฀ subsidiary฀
NCI฀(SOFP)฀
Control฀achieved฀in฀stages฀ Adjustment฀to฀parent's฀equity฀
Goodwill฀calculation฀
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11:฀Changes฀in฀group฀structures:฀step฀acquisitions฀
1฀฀Step฀acquisitions฀where฀significant฀influence฀or฀control฀is฀
achieved฀
A฀ parent฀ company฀ may฀ build฀ up฀ its฀ shareholding฀ with฀ several฀ successive฀ share฀ purchases฀
rather฀than฀purchasing฀the฀shares฀all฀on฀the฀same฀day.฀฀
Where฀a฀controlling฀interest฀in฀a฀subsidiary฀is฀built฀up฀over฀a฀period฀of฀time,฀IFRS฀3฀Business฀
Combinations฀refers฀to฀this฀as฀'business฀combination฀achieved฀in฀stages'.฀This฀may฀be฀also฀
Key฀term฀
be฀known฀as฀a฀'step฀acquisition'฀or฀'piecemeal฀acquisition'.฀ ฀
It฀ is฀ also฀ possible฀ for฀ a฀ parent฀ to฀ increase฀ its฀ controlling฀ shareholding฀ in฀ a฀ subsidiary;฀ this฀ will฀ be฀
covered฀in฀Section฀2.฀
1.1฀ Scenarios฀฀
There฀are฀three฀possible฀scenarios฀where฀significant฀influence฀or฀control฀is฀achieved฀in฀stages.฀This฀is฀
referred฀ to฀ by฀ the฀ Deloitte฀ guide฀ Business฀ combinations฀ and฀ changes฀ in฀ ownership฀ interests฀ as฀
'crossing฀ an฀ accounting฀ boundary'฀ as฀ illustrated฀ by฀ the฀ diagram฀ below฀ (adapted฀ from฀ the฀
Deloitte฀guide,฀2008:฀p.7):฀
IFRS฀9 IAS฀28 IFRS฀10

0% (20%) (50%) 100%
S
I
G
N
10% 40% (a)฀Investment฀to฀associate
I
F
I
C C
A O
N
T N
10% T (b)฀Investment฀to฀subsidiary
80%
I R
N O
F
L L
U
E
N
C 30% (c)฀Associate฀to฀subsidiary
80%
E
For฀any฀change฀in฀group฀structure:฀
 The฀entity's฀status฀(investment,฀subsidiary,฀associate)฀during฀the฀year฀will฀determine฀the฀
accounting฀treatment฀in฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀(SPLOCI)฀(pro-rate฀accordingly).฀
 The฀entity's฀status฀at฀the฀year฀end฀will฀determine฀the฀accounting฀treatment฀in฀the฀
consolidated฀statement฀of฀financial฀position฀(SOFP)฀(never฀pro-rate).฀
The฀accounting฀treatment฀for฀each฀of฀the฀scenarios฀in฀the฀diagram฀is฀explained฀in฀the฀following฀
section.
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฀฀
1.2฀Accounting฀treatment฀in฀group฀financial฀statements฀
Significant฀influence฀achieved฀in฀stages฀
(a)฀ Investment฀to฀associate฀(eg฀10%฀to฀40%)฀
Where฀ an฀ investment฀ in฀ equity฀ instruments฀ becomes฀ an฀ associate,฀ the฀ investment฀ (measured฀
either฀at฀cost฀or฀at฀fair฀value)฀is฀treated฀as฀part฀of฀the฀cost฀of฀the฀associate.฀
Statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀ Equity฀account฀as฀an฀associate฀from฀the฀date฀of฀significant฀influence฀
Statement฀of฀financial฀position฀
฀ Equity฀account฀as฀an฀associate฀
Supplementary฀reading฀ ฀
See฀Chapter฀11฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀a฀further฀explanation฀and฀an฀illustration฀
of฀investment฀to฀associate฀step฀acquisitions.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀
the฀Workbook.฀
Control฀achieved฀in฀stages฀
(b)฀ Investment฀to฀subsidiary฀(eg฀10%฀to฀80%)฀
฀ Remeasure฀the฀investment฀to฀fair฀value฀at฀the฀date฀the฀parent฀achieves฀control฀
฀ Consolidate฀as฀a฀subsidiary฀from฀the฀date฀the฀parent฀achieves฀control฀
฀ Calculate฀goodwill฀at฀the฀date฀the฀parent฀achieves฀control฀
฀ Consolidate฀as฀a฀subsidiary฀at฀the฀year฀end฀
(c)฀ Associate฀to฀subsidiary฀(eg฀30%฀to฀80%)฀
฀ Equity฀account฀as฀an฀associate฀to฀the฀date฀the฀parent฀achieves฀control฀
฀ Remeasure฀the฀associate฀to฀fair฀value฀at฀the฀date฀the฀parent฀obtains฀control฀
฀ Consolidate฀as฀a฀subsidiary฀from฀the฀date฀the฀parent฀obtains฀control฀
฀ Calculate฀goodwill฀at฀the฀date฀the฀parent฀obtains฀control฀
฀ Consolidate฀as฀a฀subsidiary฀at฀the฀year฀end฀
Accounting฀concept฀
Items฀(b)฀and฀(c)฀are฀accounted฀for฀in฀the฀same฀way.฀The฀concept฀of฀substance฀over฀form฀drives฀the฀
accounting฀ treatment.฀ The฀ legal฀ form฀ is฀ that฀ some฀ shares฀ have฀ been฀ purchased.฀ However,฀ the฀
substance,฀which฀should฀be฀reflected฀in฀the฀group฀accounts,฀is฀that฀because฀the฀control฀boundary฀has฀
been฀crossed:฀
(1)฀ An฀ investment฀ (b)฀ or฀ associate฀ (c)฀ has฀ been฀ 'sold'฀ –฀ the฀ investment฀ previously฀ held฀ is฀
remeasured฀to฀fair฀value฀at฀the฀date฀of฀control฀(and฀a฀gain฀or฀loss฀reported*);฀and฀
฀ ฀
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(2)฀ A฀ subsidiary฀ has฀ been฀ 'purchased'฀ –฀ goodwill฀ is฀ calculated฀ including฀ the฀ fair฀ value฀ of฀ the฀
investment฀ previously฀ held฀ (eg฀ where฀ 35%฀ was฀ held฀ originally฀ then฀ an฀ additional฀ 40%฀ was฀
purchased฀giving฀the฀parent฀control):฀
฀ ฀
฀ ฀$฀
Consideration฀transferred฀(for฀40%฀purchased)฀ X฀฀
Fair฀value฀of฀previously฀held฀investment฀(35%)฀ ฀X฀฀
Non-controlling฀interests฀(at฀fair฀value฀or฀at฀NCI฀share฀of฀fair฀value฀of฀net฀assets)฀(25%)฀ ฀X฀฀
Less฀fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(X)฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀X฀฀
*The฀gain฀or฀loss฀is฀recognised฀in฀profit฀or฀loss฀unless฀the฀investment฀previously฀held฀was฀an฀
investment฀ in฀ equity฀ instruments฀ and฀ the฀ election฀ was฀ made฀ to฀ hold฀ the฀ investment฀ at฀ fair฀
value฀through฀other฀comprehensive฀income.฀
(IFRS฀3:฀paras.฀41–42)฀
Illustration฀1:฀Investment฀to฀subsidiary฀acquisition฀
Alpha฀acquired฀a฀15%฀investment฀in฀Beta฀in฀1฀January฀20X6฀for฀$360,000฀when฀Beta's฀retained฀
earnings฀were฀$100,000.฀At฀that฀date,฀Alpha฀had฀neither฀significant฀influence฀nor฀control฀of฀Beta.฀฀
The฀fair฀value฀of฀the฀investment฀at฀31฀December฀20X8฀was฀$480,000฀and฀at฀1฀July฀20X9฀was฀
$500,000.฀฀
On฀1฀July฀20X9,฀Alpha฀acquired฀an฀additional฀65%฀of฀the฀2฀million฀$1฀equity฀shares฀in฀Beta฀for฀
$2,210,000.฀The฀retained฀earnings฀of฀Beta฀at฀that฀date฀were฀$1,100,000.฀Beta฀has฀no฀other฀
reserves.฀Alpha฀elected฀to฀measure฀non-controlling฀interest฀at฀fair฀value฀at฀the฀date฀of฀acquisition.฀
The฀non-controlling฀interest฀had฀a฀fair฀value฀of฀$680,000฀at฀1฀July฀20X9.฀
There฀has฀been฀no฀impairment฀in฀the฀goodwill฀of฀Beta฀to฀date.฀
Required฀
(a)฀ Explain฀how฀the฀investment฀in฀Beta฀would฀be฀accounted฀for฀in฀Alpha's฀group฀accounts฀for฀the฀
year฀ended฀31฀December฀20X9.฀
(b)฀ Calculate฀the฀gain฀or฀loss฀on฀remeasurement฀of฀the฀15%฀investment฀at฀1฀July฀20X9฀(on฀the฀
assumption฀that฀the฀investment฀was฀still฀carried฀at฀its฀31฀December฀20X8฀fair฀value฀at฀that฀
date).฀
(c)฀ Calculate฀the฀goodwill฀in฀Beta฀for฀inclusion฀in฀the฀consolidated฀statement฀of฀financial฀position฀
of฀the฀Alpha฀group฀as฀at฀31฀December฀20X9.฀
Solution฀
(a)฀ Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀฀฀฀฀฀฀฀฀On฀acquisition฀of฀an฀additional฀65%฀in฀Beta฀on฀1฀July฀20X9,฀Alpha's฀total฀shareholding฀
amounted฀to฀80%฀(15%฀+฀65%),฀giving฀Alpha฀control฀of฀Beta.฀In฀the฀consolidated฀statement฀of฀
profit฀or฀loss฀and฀other฀comprehensive฀income,฀Alpha฀should฀consolidate฀Beta฀for฀the฀
6฀months฀that฀Beta฀was฀a฀subsidiary,฀pro-rating฀Beta's฀income฀and฀expenses฀accordingly฀
(assuming฀profits฀accrue฀evenly).฀฀
฀ Since,฀in฀substance,฀Alpha฀has฀sold฀a฀15%฀investment,฀the฀investment฀should฀be฀remeasured฀to฀
fair฀value฀on฀1฀July฀20X9฀and฀a฀gain฀or฀loss฀should฀be฀recognised฀either฀in฀profit฀or฀loss฀(if฀the฀
investment฀had฀been฀measured฀at฀fair฀value฀through฀profit฀or฀loss)฀or฀other฀comprehensive฀
income฀(if฀the฀election฀had฀been฀made฀to฀hold฀the฀investment฀at฀fair฀value฀through฀other฀
comprehensive฀income).฀
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฀฀
฀ Consolidated฀statement฀of฀financial฀position฀
฀ In฀substance,฀on฀1฀July฀20X9,฀Alpha฀purchased฀an฀80%฀subsidiary.฀Therefore,฀goodwill฀
should฀be฀calculated฀on฀the฀full฀80%฀shareholding,฀and,฀in฀the฀consolidated฀statement฀of฀
financial฀position,฀Beta฀should฀be฀consolidated฀as฀a฀subsidiary.฀
(b)฀ Gain฀or฀loss฀on฀remeasurement฀
฀ $’000฀
Fair฀value฀at฀date฀control฀achieved฀(1.7.X9)฀ 500฀
Carrying฀amount฀of฀investment฀(fair฀value฀at฀previous฀year฀end:฀31.12.X8)฀ ฀(480)฀
Gain฀on฀remeasurement฀฀ ฀฀฀฀20฀
Record฀in฀profit฀or฀loss฀if฀no฀
irrevocable฀election฀or฀in฀OCI฀if฀
฀
irrevocable฀election฀made฀
฀
(c)฀ Goodwill฀
฀ $’000฀ $’000฀
Consideration฀transferred฀(for฀65%฀on฀1฀July฀20X9)฀ ฀ 2,210฀
Relates฀to฀the฀
Fair฀value฀of฀previously฀held฀investment฀(15%)฀ ฀
20%฀not฀owned฀ 500฀
Fair฀value฀at฀ by฀the฀group฀on฀
date฀control฀ Non-controlling฀interests฀(at฀fair฀value)฀ ฀
1฀July฀20X9฀ 680฀
is฀achieved฀
(1฀July฀20X9)฀
Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition:฀ ฀ ฀
฀฀฀Share฀capital฀ 2,000฀ ฀
฀฀฀Retained฀earnings฀(1฀July฀20X9)฀฀ ฀1,100฀ ฀
฀ At฀the฀date฀ ฀ ฀(3,100)฀
control฀is฀
฀ achieved฀ ฀ ฀฀฀฀฀290฀
฀
1.3฀ Approach฀to฀questions฀requiring฀full฀consolidated฀primary฀
statement(s)฀
Step฀1฀ Group฀structure฀and฀timeline฀
Draw฀ up฀ the฀ group฀ structure฀ (including฀ all฀ acquisitions,฀ percentages฀ acquired,฀
acquisition฀dates฀and฀pre-acquisition฀reserves).฀
Draw฀up฀a฀timeline฀for฀the฀current฀accounting฀period.฀The฀status฀of฀the฀investment฀
during฀ the฀ year฀ (investment,฀ associate฀ or฀ subsidiary)฀ will฀ dictate฀ the฀ treatment฀ in฀
the฀ consolidated฀ SPLOCI฀ –฀ pro-rate฀ as฀ necessary.฀ The฀ status฀ of฀ the฀ investment฀ at฀
the฀year฀end฀will฀dictate฀the฀treatment฀in฀the฀SOFP฀–฀never฀pro-rate!฀
฀ ฀
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Step฀2฀ Proforma฀
Draw฀up฀the฀proforma(s)฀for฀the฀consolidated฀SOFP฀and฀consolidated฀SPLOCI฀(as฀
required).฀Remember฀to฀add฀in฀the฀extra฀headings฀as฀follows:฀
Consolidated฀SOFP:฀
 Goodwill฀
 Non-controlling฀interests฀(NCI)฀
Consolidated฀SPLOCI:฀
 Gain฀ or฀ loss฀ on฀ remeasurement฀ of฀ the฀ previously฀ held฀ investment฀ (where฀
control฀is฀achieved)฀
 Share฀ of฀ profit฀ of฀ associate฀ (where฀ investment฀ was฀ an฀ associate฀ before฀
becoming฀a฀subsidiary)฀
 Share฀of฀other฀comprehensive฀income฀of฀associate฀(where฀investment฀was฀an฀
associate฀before฀becoming฀a฀subsidiary)฀
 Ownership฀ reconciliation฀ (splitting฀ the฀ profit฀ for฀ the฀ year฀ and฀ total฀
comprehensive฀income฀between฀the฀owners฀of฀the฀parent฀and฀the฀NCI)฀
Step฀3฀ Transfer฀figures฀to฀face฀or฀working฀
Work฀down฀the฀SOFP฀and฀SPLOCI,฀transferring฀figures฀to฀the฀relevant฀proforma฀or฀
working:฀
(a)฀ Aggregate฀100%฀of฀assets/liabilities฀controlled฀at฀the฀year฀end฀in฀brackets฀on฀
the฀face฀of฀the฀SOFP฀proforma,฀ready฀for฀adjustments.฀
(b)฀ Post฀the฀share฀capital฀and฀share฀premium฀of฀the฀parent฀company฀to฀the฀SOFP฀
proforma.฀
(c)฀ Post฀reserves฀to฀the฀consolidated฀reserves฀workings.฀
x
(d)฀ Aggregate฀100%฀of฀income/expenses฀(time฀apportioned฀฀ /12฀if฀appropriate)฀
in฀brackets฀on฀the฀face฀of฀the฀SPLOCI฀proforma,฀ready฀for฀adjustments.฀
(e)฀ Post฀the฀subsidiary's฀profit฀for฀the฀year฀(PFY)฀and฀total฀comprehensive฀income฀
x
(TCI)฀(time฀apportioned฀฀ /12฀if฀only฀subsidiary฀for฀part฀of฀the฀year)฀to฀the฀NCI฀
(SPLOCI)฀working.฀
(f)฀ Post฀the฀associate's฀profit฀for฀the฀year฀and฀other฀comprehensive฀income฀(time฀
apportioned฀ ฀ /12฀ if฀ only฀ associate฀ for฀ part฀ of฀ the฀ year)฀ to฀ face฀ of฀ SPLOCI฀
x
proforma฀then฀multiply฀by฀group฀share.฀
Step฀4฀ Adjustments฀
Read฀ through฀ all฀ the฀ information฀ in฀ the฀ question฀ to฀ identify฀ any฀ adjustments฀
required.฀Attempt฀the฀adjustments฀showing฀workings฀for฀all฀calculations.฀
Post฀ the฀ double฀ entries฀ for฀ your฀ adjustments฀ to฀ the฀ SOFP,฀ SPLOCI฀ and/or฀ group฀
workings฀as฀appropriate.฀Then฀close฀the฀brackets฀and฀add฀across฀entering฀the฀total฀
for฀each฀line฀into฀your฀SOFP฀and/or฀SPLOCI฀proforma.฀฀
฀ ฀
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฀฀
Step฀5฀ Complete฀group฀workings฀
Complete฀the฀following฀group฀workings฀as฀appropriate:฀
Consolidated฀SOFP:฀
 Goodwill฀
 Consolidated฀reserves฀(where฀an฀associate฀has฀become฀a฀subsidiary฀part-way฀
through฀ the฀ year,฀ two฀ columns฀ for฀ that฀ entity฀ will฀ be฀ required฀ –฀ one฀ for฀ the฀
percentage฀ owned฀ before฀ the฀ step฀ acquisition฀ and฀ one฀ for฀ the฀ percentage฀
owned฀after฀the฀acquisition)฀
 NCI฀
Consolidated฀SPLOCI:฀
 NCI฀
 Gain฀ or฀ loss฀ on฀ remeasurement฀ of฀ the฀ previously฀ held฀ investment฀ (for฀ step฀
acquisition฀where฀control฀achieved)฀
Activity฀1:฀Associate฀to฀subsidiary฀acquisition฀ ฀
Peace฀acquired฀25%฀of฀Miel฀on฀1฀January฀20X1฀for฀$2,020,000฀and฀exercised฀significant฀influence฀
over฀the฀financial฀and฀operating฀policy฀decisions฀of฀Miel.฀The฀fair฀value฀of฀Miel's฀identifiable฀assets฀
and฀liabilities฀at฀that฀date฀was฀equivalent฀to฀their฀book฀value,฀and฀Miel's฀retained฀earnings฀stood฀at฀
$5,800,000.฀Miel฀does฀not฀have฀any฀other฀reserves.฀
A฀ further฀ 35%฀ stake฀ in฀ Miel฀ was฀ acquired฀ on฀ 30฀ September฀ 20X2฀ for฀ $4,200,000฀ (paying฀ a฀
premium฀ over฀ Miel's฀ market฀ share฀ price฀ to฀ achieve฀ control).฀ The฀ fair฀ value฀ of฀ Miel's฀ identifiable฀
assets฀ and฀ liabilities฀ at฀ that฀ date฀ was฀ $9,200,000,฀ and฀ Miel's฀ retained฀ earnings฀ stood฀ at฀
$7,800,000.฀The฀investment฀in฀Miel฀is฀held฀at฀cost฀in฀Peace's฀separate฀financial฀statements.฀
At฀30฀September฀20X2,฀Miel's฀share฀price฀was฀$14.50.฀
SUMMARISED฀STATEMENTS฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀FOR฀
฀ Peace Miel฀
฀ ฀ $'000 ฀ ฀ $'000 ฀
฀Revenue฀ ฀10,200฀ ฀4,000฀
฀Cost฀of฀sales฀and฀expenses฀ ฀(9,000)฀ ฀(3,600)฀
฀Profit฀before฀tax฀ ฀1,200฀ ฀400฀
฀Income฀tax฀expense฀ ฀ (360)฀ ฀฀฀฀฀฀(80)฀
฀Profit฀for฀the฀year฀ ฀ 840฀ ฀฀320฀
฀Other฀comprehensive฀income฀ ฀
฀Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss ฀
฀฀฀฀Gain฀on฀property฀valuation,฀net฀of฀tax฀ ฀ 240฀ ฀฀฀฀฀฀฀80฀
฀Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀ 240฀ ฀฀฀฀฀฀฀80฀
฀Total฀comprehensive฀income฀for฀the฀year฀ ฀ 1,080฀ ฀฀฀฀฀400฀
฀
฀ ฀
270฀

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SUMMARISED฀STATEMENTS฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X2฀
฀ Peace Miel฀
฀ ฀ $'000 ฀ ฀ $'000 ฀
฀Non-current฀assets฀ ฀
฀Property,฀plant฀and฀equipment฀ ฀38,650฀ ฀7,600฀
฀Investment฀in฀Miel฀(cost)฀ ฀ 6,220฀ ฀฀฀฀฀฀฀฀–฀฀
฀ ฀44,870฀ ฀7,600฀
฀Current฀assets฀ ฀12,700฀ ฀2,200฀
฀ ฀57,570฀ ฀9,800฀
฀Equity฀ ฀
฀Share฀capital฀($1฀shares)฀ ฀10,200฀ ฀800฀
฀Retained฀earnings฀ ฀39,920฀ ฀7,900฀
฀ ฀50,120฀ ฀8,700฀
฀Liabilities฀ ฀ 7,450฀ ฀1,100฀
฀ ฀57,570฀ ฀9,800฀
The฀difference฀between฀the฀fair฀value฀of฀the฀identifiable฀assets฀and฀liabilities฀of฀Miel฀and฀their฀book฀
value฀relates฀to฀Miel's฀brands.฀The฀brands฀were฀estimated฀to฀have฀an฀average฀remaining฀useful฀life฀
of฀5฀years฀from฀30฀September฀20X2.฀
Income฀and฀expenses฀are฀assumed฀to฀accrue฀evenly฀over฀the฀year.฀Neither฀company฀paid฀dividends฀
during฀the฀year.฀
Peace฀ elected฀ to฀ measure฀ non-controlling฀ interest฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀ acquisition.฀ No฀
impairment฀losses฀on฀recognised฀goodwill฀have฀been฀necessary฀to฀date.฀
Required฀
(a) Prepare฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀of฀the฀
Peace฀Group฀for฀the฀year฀ended฀31฀December฀20X2.฀
(b) Prepare฀the฀consolidated฀statement฀of฀financial฀position฀for฀the฀Peace฀Group฀as฀at฀31฀December฀
20X2.฀
Solution฀
(a) CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀
฀ $'000฀
Revenue฀ ฀ ฀
Cost฀of฀sales฀and฀expenses฀ ฀
Gain฀on฀remeasurement฀of฀associate฀(W4) ฀
Share฀of฀profit฀of฀associate฀ ฀฀฀฀฀฀฀฀฀฀฀
Profit฀before฀tax฀ ฀ ฀
Income฀tax฀expense ฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀ ฀ ฀
Items฀that฀will฀not฀be reclassified฀to฀profit฀or฀loss ฀
฀฀฀Gains฀on฀property฀revaluation,฀net฀of฀tax ฀
฀฀฀Share฀of฀gain฀on฀property฀revaluation฀of฀associate ฀฀฀฀฀฀฀฀฀฀฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀ 271฀

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฀฀
฀ $'000฀
Profit฀attributable฀to: ฀
฀฀Owners฀of฀parent ฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀attributable to: ฀
฀฀Owners฀of฀parent ฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
(b) CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀20X2฀
฀ $'000฀
Non-current฀assets ฀ ฀
Property,฀plant฀and฀equipment฀ ฀
Goodwill฀(W5)฀ ฀฀฀฀฀฀฀฀฀฀฀
Other฀intangible฀assets฀(W3)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
Current฀assets฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
Equity฀attributable฀to฀owners฀of฀the฀parent ฀ ฀
Share฀capital฀ ฀
Retained฀earnings฀(W6)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
Non-controlling฀interests฀(W7)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
Liabilities฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
Workings฀
1฀ Group฀structure฀and฀timeline฀
฀
1.1.X2฀ 30.9.X2฀ 31.12.X2฀
฀
2฀ Non-controlling฀interests฀(SPLOCI)฀
฀ PFY TCI฀
฀ ฀$'000฀ ฀$'000฀
฀Per฀question฀ ฀฀
฀Adjustments:฀ ฀
฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀×฀NCI%฀ ฀
272฀

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3฀ Fair฀value฀adjustments฀
฀ At฀ Movement฀ At฀year฀end

acquisition฀
฀ 30.9.X2 31.12.X2
฀ $'000 $'000฀ $'000฀
฀ ฀
฀ ฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
4฀ Gain฀on฀remeasurement฀of฀25%฀associate฀
฀ ฀$'000฀
฀Fair฀value฀at฀date฀control฀obtained฀
฀Carrying฀amount฀of฀associate฀
฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀ ฀
5฀ Goodwill฀
฀ $'000฀ $'000
฀Consideration฀transferred฀ ฀฀
฀FV฀of฀previously฀held฀investment฀ ฀
฀Non-controlling฀interests฀ ฀฀
฀Fair฀value฀of฀identifiable฀net฀assets at฀acquisition: ฀
฀Share฀capital฀ ฀
฀Retained฀earnings฀ ฀
฀Fair฀value฀adjustments฀(W3)฀ ฀ ฀฀฀฀฀฀฀฀
฀ ฀
฀ ฀ ฀฀฀฀฀฀ ฀
฀ ฀ ฀฀฀฀฀฀ ฀
6฀ Consolidated฀retained฀earnings฀
฀ Peace Miel฀ Miel฀
฀ 25%฀ 60%฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
฀At฀year฀end/date฀control฀obtained฀ ฀ ฀
฀Fair฀value฀movement฀(W3)฀ ฀ ฀
฀Gain฀on฀remeasurement฀of฀associate (W4) ฀ ฀
฀At฀acquisition฀ ฀ ฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀
฀Group฀share฀of฀post-acquisition฀retained฀earnings:฀ ฀ ฀
฀฀฀Miel฀฀–฀25%฀ ฀ ฀
฀฀฀฀ ฀–฀60%฀฀ ฀ ฀ ฀
฀ ฀ ฀ ฀ ฀
7฀ Non-controlling฀interests฀(SOFP)฀
฀ $'000฀ ฀
฀NCI฀at฀acquisition฀ ฀฀ ฀
฀NCI฀share฀of฀reserves฀post฀control:฀ ฀฀ ฀
฀฀฀Miel฀–฀40%฀ ฀ ฀฀฀฀ ฀
฀ ฀ ฀฀฀฀ ฀
฀
฀ 273฀

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฀฀
2฀Step฀acquisitions฀where฀control฀is฀retained฀
A฀step฀acquisition฀where฀control฀is฀retained:฀this฀occurs฀when฀there฀is฀an฀increase฀in฀the฀
parent's฀shareholding฀in฀an฀existing฀subsidiary฀through฀the฀purchase฀of฀additional฀shares.฀It฀is฀
Key฀term฀
sometimes฀known฀as฀'an฀increase฀in฀a฀controlling฀interest'.฀
No฀ accounting฀ boundary฀ is฀ crossed฀ as฀ illustrated฀ by฀ the฀ diagram฀ below฀ (adapted฀ from฀ the฀
Deloitte฀guide:฀Business฀combinations฀and฀changes฀in฀ownership฀interests฀(2008:฀p.6):฀฀
฀ ฀฀฀IFRS฀9฀฀฀฀฀฀฀฀฀฀฀฀฀IAS฀28฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀IFRS฀10฀
฀
฀ 0%฀ (20%)฀ (50%)฀ 100%฀
฀
S฀฀ ฀
฀ I฀
G฀
฀ N฀
฀ I฀
F฀
C
฀ I฀ O
C฀ N ฀฀฀฀60% ฀฀70%
฀ A฀ T฀ (NCI฀40%)฀ (NCI฀30%)฀
N฀
฀ R฀
T฀
฀ O
฀ I฀
L฀
N฀
฀ F฀
L฀
฀ U฀
E฀
฀ N฀
C฀
฀
E฀
฀
As฀for฀step฀acquisitions฀where฀control฀is฀achieved,฀the฀accounting฀treatment฀is฀driven฀by฀the฀concept฀
of฀substance฀over฀form.฀
In฀substance,฀there฀has฀been฀no฀acquisition฀because฀the฀entity฀is฀still฀a฀subsidiary.฀
Instead฀this฀is฀a฀transaction฀between฀group฀shareholders฀(ie฀the฀parent฀is฀buying฀10%฀from฀the฀non-
controlling฀interests).฀Therefore,฀it฀is฀recorded฀in฀equity฀as฀follows:฀
(a)฀ Decrease฀non-controlling฀interests฀(NCI)฀in฀the฀consolidated฀SOFP฀
(b)฀ Recognise฀the฀difference฀between฀the฀consideration฀paid฀and฀the฀decrease฀in฀NCI฀as฀an฀
adjustment฀to฀equity฀(post฀to฀the฀parent's฀column฀in฀the฀consolidated฀retained฀earnings฀
working).฀ (IFRS฀10:฀paras.฀23,฀B96)฀
2.1฀ Accounting฀treatment฀in฀group฀financial฀statements฀
(a)฀ Consolidate฀as฀a฀subsidiary฀in฀full฀for฀the฀whole฀period฀–฀no฀time฀apportioning.฀
(b)฀ Time฀apportion฀non-controlling฀interests฀based฀on฀percentage฀before฀and฀after฀acquisition.฀
274฀

lOMoARcPSD|6256454
(a)฀ Consolidate฀as฀a฀subsidiary฀at฀the฀year฀end฀
(b)฀ Calculate฀non-controlling฀interests฀as฀follows฀(using฀the฀60%฀to฀70%฀scenario฀as฀an฀example):฀
฀ $฀
฀NCI฀at฀acquisition฀(when฀control฀achieved – NCI฀held฀40%)฀ X฀
฀NCI฀share฀(40%)฀of฀post-acquisition฀reserves฀to฀date฀of฀step฀acquisition฀฀ X฀
฀NCI฀at฀date฀of฀step฀acquisition฀ A฀
฀Decrease฀in฀NCI฀on฀date฀of฀step฀acquisition฀(A฀× 10%/40%)* ฀฀(X)฀
฀NCI฀after฀step฀acquisition฀ X฀
฀฀฀฀฀฀฀฀฀฀฀Next฀two฀lines฀only฀required฀if฀step฀acquisition฀is฀partway฀through฀year: ฀
฀NCI฀share฀(30%)฀of฀post-acquisition฀reserves฀to฀year฀end X
฀฀ ฀
฀NCI฀at฀year฀end ฀฀X฀
(c)฀ Calculate฀ the฀ adjustment฀ to฀ equity฀ (post฀ to฀ the฀ parent's฀ column฀ in฀ the฀ consolidated฀
retained฀earnings฀working):฀
฀ $฀
฀Fair฀value฀of฀consideration฀paid฀ (X)฀
฀Decrease฀in฀NCI฀(A฀฀10%/40%)*฀ ฀฀฀฀฀฀X฀
฀Adjustment฀to฀parent's฀equity฀ ฀(X)/X฀
%฀purchased
*Calculated฀as:฀NCI฀at฀date฀of฀step฀acquisition฀฀฀฀×฀฀฀฀ ฀฀฀
NCI฀%฀before฀step฀acquisitio n
The฀double฀entry฀to฀record฀this฀adjustment฀is:฀
DEBIT฀(↓)฀Non-controlling฀interests฀ ฀ X฀
DEBIT฀(↓)/CREDIT฀(↑)฀Consolidated฀retained฀earnings฀(with฀adjustment฀to฀equity)฀ ฀ X฀
฀ CREDIT฀(↓)฀Cash฀ ฀ ฀ X฀
When฀there฀is฀an฀increase฀in฀a฀shareholding฀in฀a฀subsidiary,฀an฀adjustment฀to฀equity฀is฀
Key฀term฀
calculated฀as฀the฀difference฀between฀the฀consideration฀paid฀and฀the฀decrease฀in฀non-
controlling฀interests.฀The฀entity฀shall฀recognise฀this฀adjustment฀directly฀in฀equity฀and฀attribute฀it฀to฀
the฀owners฀of฀the฀parent.฀฀
฀ (IFRS฀10:฀para.฀B96)฀
Illustration฀2:฀Adjustment฀to฀equity฀
Stow฀owned฀70%฀of฀Needham's฀equity฀shares฀on฀31฀December฀20X2.฀Stow฀purchased฀another฀
20%฀of฀Needham's฀equity฀shares฀on฀30฀June฀20X3฀for฀$900,000฀when฀the฀existing฀non-controlling฀
interests฀in฀Needham฀were฀measured฀at฀$1,200,000.฀
Required฀
Calculate฀the฀adjustment฀to฀equity฀to฀be฀recorded฀in฀the฀group฀accounts฀on฀acquisition฀of฀the฀
additional฀20%฀in฀Needham.฀
Solution฀
฀ ฀$฀฀฀฀฀฀
NCI฀at฀date฀of฀step฀
฀Fair฀value฀of฀consideration฀paid฀ ฀฀(900,000)฀
acquisition฀฀฀
฀Decrease฀in฀NCI฀(1,200,000฀฀20%/30%)฀ NCI฀%฀purchased฀ ฀฀800,000฀
฀Adjustment฀to฀equity฀ NCI%฀before฀step฀ ฀฀(100,000)฀
฀
acquisition฀
฀
฀
฀ 275฀

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฀฀
Activity฀2:฀Subsidiary฀to฀subsidiary฀acquisition฀(SOFP)฀ ฀ ฀
On฀ 1฀ January฀ 20X2,฀ Denning฀ acquired฀ 60%฀ of฀ the฀ equity฀ interests฀ of฀ Heggie.฀ The฀ purchase฀
consideration฀ comprised฀ cash฀ of฀ $300฀ million.฀ At฀ acquisition,฀ the฀ fair฀ value฀ of฀ the฀ non-controlling฀
interest฀ in฀ Heggie฀ was฀ $200฀ million.฀ Denning฀ wishes฀ to฀ measure฀ the฀ non-controlling฀ interest฀ at฀ fair฀
value฀ at฀ the฀ date฀ acquisition.฀ On฀ 1฀ January฀ 20X2,฀ the฀ fair฀ value฀ of฀ the฀ identifiable฀ net฀ assets฀
acquired฀was฀$460฀million.฀The฀fair฀value฀of฀the฀net฀assets฀was฀equivalent฀to฀their฀book฀value.฀฀
On฀31฀December฀20X3,฀Denning฀acquired฀a฀further฀20%฀interest฀in฀Heggie฀for฀cash฀consideration฀
of฀$130฀million.฀฀
The฀ retained฀ earnings฀ of฀ Heggie฀ at฀ 1฀ January฀ 20X2฀ and฀ 31฀ December฀ 20X3฀ respectively฀ were฀
$180฀million฀and฀$240฀million.฀Heggie฀had฀no฀other฀reserves.฀The฀retained฀earnings฀of฀Denning฀on฀
31฀December฀20X3฀were฀$530฀million.฀
There฀has฀been฀no฀impairment฀of฀the฀goodwill฀in฀Heggie.฀
Required฀
Calculate฀ the฀ following฀ figures฀ for฀ inclusion฀ in฀ consolidated฀ statement฀ of฀ financial฀ position฀ for฀ the฀
Denning฀Group฀as฀at฀31฀December฀20X3:฀
(a) Goodwill฀
(b) Consolidated฀retained฀earnings฀
(c) Non-controlling฀interests฀
Solution฀
(a) Goodwill฀
฀ $m
฀Consideration฀transferred฀(for฀60%)฀ ฀
฀Non-controlling฀interests฀(at฀fair฀value)฀ ฀
฀Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition ฀฀฀฀
฀ ฀฀฀฀
฀
(b) Consolidated฀retained฀earnings฀
฀ Denning Heggie฀
฀ ฀$m฀ ฀$m฀
฀At฀year฀end฀ ฀
฀Adjustment฀to฀equity฀ ฀
฀At฀acquisition฀ ฀฀฀฀฀฀
฀ ฀
฀Group฀share฀of฀post-acquisition฀retained฀earnings:฀ ฀
฀฀฀฀ ฀฀ ฀
฀ ฀
(c) Non-controlling฀interests฀
฀ $m฀
฀NCI฀at฀acquisition฀
฀NCI฀share฀of฀post-acquisition฀reserves฀up฀to฀step฀acquisition฀
฀ ฀฀฀฀฀฀฀฀
฀NCI฀at฀date฀of฀step฀acquisition฀
฀Decrease฀in฀NCI฀on฀date฀of฀step฀acquisition฀ ฀฀฀฀฀฀฀฀
฀NCI฀at฀year฀end ฀฀฀฀฀฀฀฀
276฀

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Workings฀
1 Group฀structure฀
2฀ Adjustment฀to฀equity฀on฀acquisition฀of฀additional฀20%฀of฀Heggie฀
฀ ฀$m฀
฀Fair฀value฀of฀consideration฀paid฀
฀Decrease฀in฀NCI฀฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀
฀
฀ ฀
฀ 277฀

lOMoARcPSD|6256454
฀฀
Activity฀3:฀Subsidiary฀to฀subsidiary฀acquisition฀(SPLOCI)฀ ฀ ฀
Gaze฀acquired฀60%฀of฀the฀equity฀interests฀of฀Trek฀on฀1฀January฀20X3.฀
On฀1฀May฀20X5,฀Gaze฀acquired฀a฀further฀10%฀interest฀in฀Trek.฀฀
There฀has฀been฀no฀impairment฀of฀goodwill฀since฀acquisition.฀
Profits฀of฀both฀entities฀can฀be฀assumed฀to฀accrue฀evenly฀throughout฀the฀year.฀฀
SUMMARISED฀STATEMENTS฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
฀ Gaze Trek฀
฀ ฀$m฀ ฀$m฀
฀Revenue฀ ฀2,500฀ ฀1,500฀
฀Cost฀of฀sales฀and฀expenses฀ ฀(1,900)฀ ฀(1,200)฀
฀Profit฀before฀tax฀ ฀600฀ ฀300฀
฀Income฀tax฀expense฀ ฀ (180)฀ ฀฀฀฀฀฀(90)฀
฀Profit฀for฀the฀year฀ ฀ 420฀ ฀฀210฀
฀฀฀฀Gain฀on฀property฀valuation,฀net฀of฀tax ฀ 80฀ ฀฀฀฀฀฀฀30฀
฀Total฀comprehensive฀income฀for฀the฀year฀ ฀฀ 500฀ ฀฀฀฀฀240฀
Required฀
Prepare฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀of฀the฀Gaze฀
฀
Solution฀
฀ $m฀
Revenue฀ ฀ ฀
Cost฀of฀sales฀and฀expenses฀ ฀
Profit฀before฀tax฀ ฀ ฀
Income฀tax฀expense฀ ฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀ ฀ ฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss ฀
฀฀฀Gains฀on฀property฀revaluation,฀net฀of฀tax ฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀฀฀Owners฀of฀parent฀ ฀
฀฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀
฀฀฀Owners฀of฀parent฀ ฀
฀฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀
฀
฀ ฀
278฀

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Workings฀
2฀ Non-controlling฀interests฀฀
฀ Profit฀for฀the฀year
฀ 1.1.X5 1.5.X5
–30.4.X5 –31.12.X5฀
฀ ฀$m฀ ฀$m฀
฀Per฀question฀
฀฀ ฀ ฀ ฀ ฀
฀×฀NCI%฀
฀
฀ Total฀comprehensive฀
฀ income฀
฀ 1.1.X5 1.5.X5
–30.4.X5 –31.12.X5฀
฀ ฀$m฀ ฀$m฀
฀Per฀question฀
฀฀ ฀ ฀ ฀ ฀
฀×฀NCI%฀
฀
฀
Activity฀4฀ ฀ ฀
On฀1฀June฀20X6,฀Robe฀acquired฀80%฀of฀the฀equity฀interests฀of฀Dock.฀Robe฀elected฀to฀measure฀the฀
non-controlling฀interests฀in฀Dock฀at฀fair฀value฀at฀acquisition.฀
On฀31฀May฀20X9,฀Robe฀purchased฀an฀additional฀5%฀interest฀in฀Dock฀for฀$10฀million.฀The฀carrying฀
value฀of฀Dock's฀identifiable฀net฀assets฀other฀than฀goodwill฀was฀$140฀million฀at฀the฀date฀of฀sale.฀On฀
31฀May฀20X9,฀prior฀to฀this฀acquisition,฀non-controlling฀interests฀in฀Dock฀amounted฀to฀$32฀million.฀
In฀the฀group฀financial฀statements฀for฀the฀year฀ended฀31฀May฀20X9,฀the฀group฀accountant฀recorded฀a฀
decrease฀ in฀ non-controlling฀ interests฀ of฀ $7฀ million,฀ being฀ the฀ group฀ share฀ of฀ net฀ assets฀ purchased฀
($140฀million฀×฀5%).฀He฀then฀recognised฀the฀difference฀between฀the฀cash฀consideration฀paid฀for฀the฀
5%฀interest฀and฀the฀decrease฀in฀non-controlling฀interests฀in฀profit฀or฀loss.฀
฀ 279฀

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฀฀
Required฀
Explain฀to฀the฀directors฀of฀Robe,฀with฀suitable฀calculations,฀whether฀the฀group฀accountant's฀treatment฀
of฀the฀purchase฀of฀an฀additional฀5%฀in฀Dock฀is฀correct,฀showing฀the฀adjustment฀which฀needs฀to฀be฀
made฀to฀the฀consolidated฀financial฀statements฀to฀correct฀any฀errors฀by฀the฀group฀accountant.฀
฀
Solution฀
Explanation:฀
฀
฀
฀
฀
฀
Calculations:฀
฀
฀
฀
฀
฀
Correcting฀entry:฀
฀
฀
฀
฀
฀
฀
฀ ฀
280฀

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Working:฀Group฀structure฀
฀
฀
฀
Ethics฀note฀
Step฀acquisitions฀are฀very฀complex.฀Watch฀out฀for฀threats฀to฀the฀fundamental฀principles฀of฀ACCA's฀
Code฀of฀Ethics฀and฀Conduct฀in฀groups฀questions.฀For฀example,฀time฀pressure฀around฀year฀end฀
reporting฀or฀inexperience฀of฀the฀reporting฀accountant฀could฀lead฀to฀errors฀in฀the฀calculation฀of:฀
฀ Goodwill฀on฀step฀acquisitions฀where฀control฀is฀achieved฀(eg฀failing฀to฀remeasure฀the฀existing฀
investment฀to฀fair฀value฀at฀the฀date฀of฀control)฀
฀ The฀adjustment฀to฀equity฀or฀the฀change฀to฀non-controlling฀interests฀(NCI)฀where฀there฀is฀an฀
increase฀in฀a฀controlling฀interest฀(eg฀reporting฀the฀adjustment฀in฀profit฀or฀loss฀instead฀of฀equity,฀
recording฀additional฀goodwill฀instead฀of฀an฀adjustment฀to฀equity,฀ignoring฀the฀NCI's฀share฀of฀
goodwill฀when฀calculating฀the฀decrease฀in฀NCI฀under฀the฀full฀goodwill฀method,฀failing฀to฀pro-
rate฀the฀NCI฀in฀the฀consolidated฀SPLOCI฀for฀a฀mid-year฀acquisition).฀
Alternatively,฀there฀could฀be฀a฀fundamental฀misunderstanding฀of฀the฀principles฀involved฀(eg฀reporting฀
the฀legal฀form฀rather฀than฀the฀substance).฀
It฀is฀also฀possible฀that฀a฀specific฀accounting฀policy฀is฀chosen฀(eg฀full฀goodwill฀method฀versus฀partial฀
goodwill฀method)฀to฀create฀a฀particular฀financial฀effect฀(eg฀to฀increase฀profit฀to฀maximise฀a฀profit-
related฀bonus฀or฀share-based฀payment).฀
฀
฀
฀
฀
฀ ฀
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฀฀
฀Chapter฀summary฀
฀
฀
1.฀ Step฀acquisitions฀ 2.฀ Step฀acquisitions฀where฀
฀
where฀significant฀ Changes฀in฀group฀structures control฀is฀retained฀
฀
influence฀or฀control฀is฀
achieved฀
฀
฀
฀
Group฀financial฀
฀ Group฀financial฀
statements฀ statements฀
฀
฀
฀ ฀ Subsidiary฀to฀subsidiary฀
SPLOCI:฀
Investment฀to฀ Investment฀to฀ Associate฀to฀ ฀ Consolidate฀results฀for฀฀
associate฀ subsidiary฀ subsidiary฀ whole฀period฀
SPLOCI:฀ ฀ SPLOCI:฀฀ SPLOCI:฀฀ ฀ Time฀apportion฀NCI฀
฀ Equity฀account฀from฀ ฀ Remeasure฀investment฀ SOFP:฀
฀ Equity฀account฀to฀date฀of฀
date฀of฀significant฀ to฀fair฀value฀ ฀ Consolidate฀
control฀
influence฀ ฀ Consolidate฀from฀date฀ ฀ Record฀decrease฀in฀NCI฀
฀ Remeasure฀associate฀to฀
SOFP:฀฀ of฀control฀ fair฀value฀ ฀ Calculate฀and฀record฀adjustment฀
฀ Equity฀account฀ SOFP:฀฀ ฀ Consolidate฀from฀date฀of฀ to฀equity฀(in฀parent's฀column฀in฀
(original฀investment฀is฀ ฀ Calculate฀goodwill฀at฀ control฀ consolidated฀retained฀earnings฀
treated฀as฀part฀of฀ date฀of฀control฀ working)฀
SOFP:฀฀
cost฀of฀associate฀ ฀ Consolidate฀฀ ฀ Calculate฀goodwill฀at฀
measured฀either฀at฀
cost฀or฀fair฀value)฀ ฀ ฀ date฀of฀control฀ NCI฀(SOFP)
 Consolidate฀ NCI฀at฀acquisition฀(date฀of฀control)฀฀฀฀฀฀฀฀฀฀฀฀X฀ ฀฀
NCI฀share฀of฀post฀acq'n฀reserves฀to฀฀
date฀of฀step฀acquisition฀ ฀฀ ฀X฀
NCI฀at฀date฀of฀step฀acquisition฀ ฀X฀
Decrease฀in฀NCI฀*฀ ฀ ฀(X)฀
Control฀achieved฀in฀stages฀ NCI฀after฀step฀acquisition฀ ฀ ฀X฀
Goodwill฀calculation฀(at฀date฀control฀achieved):฀ Next฀2฀lines฀only฀required฀if฀step฀acquisition฀is฀
partway฀through฀year:฀
Consideration฀transferred฀ ฀ ฀X฀
NCI฀share฀of฀post-acquisition฀reserves฀฀
NCI฀(at฀FV฀or฀at฀%FVNA)฀ ฀ ฀X฀
to฀year฀end฀ ฀ ฀X฀
FV฀of฀previously฀held฀investment฀ ฀X฀
NCI฀at฀year฀end฀ X
FV฀of฀net฀assets฀at฀acquisition฀ ฀ ฀(X)฀
฀ ฀ ฀ ฀ ฀ ฀฀X฀฀
Adjustment฀to฀equity฀
FV฀of฀consideration฀paid฀ ฀(X)฀
Decrease฀in฀NCI฀*฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀X฀
Adjustment฀to฀equity฀ ฀(X)/X฀฀
*฀NCI฀at฀date฀of฀step฀acquisition฀฀฀฀฀%฀purchased฀฀฀ ฀฀฀฀฀฀฀฀฀฀
NCI฀%฀before฀step฀acq'n
Consolidated฀retained฀earnings฀if฀step฀acquisition฀partway฀through฀year฀(associate฀to฀subsidiary฀
and฀subsidiary฀to฀subsidiary):฀
฀ ฀฀฀ ฀ P฀ ฀฀ ฀ S฀ ฀฀ ฀ S฀
฀ ฀ ฀฀ ฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀%฀before฀step฀acq'n฀฀฀฀%฀after฀step฀acq'n฀ ฀
At฀year฀end/date฀of฀step฀acq'n฀ ฀฀ X฀ ฀฀ ฀ ฀X฀ ฀฀ ฀ ฀X฀
Group฀or฀loss฀on฀remeasurement/฀
adjustment฀to฀parent's฀equity฀ ฀ X/(X)฀
At฀acquisition/date฀of฀control฀ ฀ ฀ ฀ ฀ (X)฀ ฀ ฀ (X)฀ ฀
฀ ฀ ฀฀ ฀ ฀ ฀ ฀Y฀ ฀฀ ฀ ฀Z฀
Group฀share:฀
(Y฀x฀%฀before฀step฀acq'n)฀ ฀฀ ฀ X฀
(Z฀x฀%฀after฀step฀acq'n)฀ ฀ ฀ X฀
฀ ฀฀ ฀ X
282฀

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1. Step฀acquisitions฀where฀significant฀influence฀or฀control฀is฀achieved฀
฀ The฀accounting฀treatment฀in฀the฀group฀financial฀statements฀is฀driven฀by฀the฀concept฀of฀substance฀
over฀form.฀
฀ For฀step฀acquisitions฀where฀significant฀influence฀or฀control฀is฀achieved,฀in฀substance,฀as฀one฀or฀
more฀accounting฀boundary฀has฀been฀crossed:฀
฀ ฀ An฀ investment฀ (for฀ investment฀ to฀ associate฀ or฀ investment฀ to฀ subsidiary฀ acquisitions)฀ or฀ an฀
associate฀ (for฀ associate฀ to฀ subsidiary฀ acquisitions)฀ has฀ been฀ 'sold'฀ so฀ the฀ investment฀ or฀
associate฀must฀be฀remeasured฀to฀fair฀value฀and฀gain฀or฀loss฀recognised฀
฀ ฀ An฀ associate฀ (for฀ investment฀ to฀ associate฀ acquisition)฀ or฀ subsidiary฀ (for฀ investment฀ to฀
subsidiary฀or฀associate฀to฀subsidiary฀acquisitions)฀has฀been฀'purchased'฀so฀must฀be฀equity฀
accounted฀or฀consolidated฀from฀date฀of฀significant฀influence฀or฀control฀
2. Step฀acquisitions฀where฀control฀is฀retained฀
฀ In฀ substance,฀ there฀ has฀ been฀ no฀ acquisition฀ because฀ the฀ entity฀ is฀ still฀ a฀ subsidiary฀ and฀ no฀
accounting฀boundary฀has฀been฀crossed.฀
฀ This฀is฀a฀transaction฀between฀group฀shareholders฀which฀is฀recorded฀in฀equity:฀
฀ ฀ Reduce฀non-controlling฀interests฀in฀consolidated฀SOFP฀
฀ ฀ Recognise฀an฀adjustment฀to฀equity฀(post฀to฀the฀parent's฀column฀in฀the฀consolidated฀retained฀
earnings฀working)฀
3.฀ Summary฀of฀approach฀
฀ For฀any฀change฀in฀group฀structure:฀
฀ ฀ The฀ entity's฀ status฀ (investment,฀ subsidiary,฀ associate)฀ during฀ the฀ year฀ will฀ determine฀ the฀
accounting฀ treatment฀ in฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
฀ ฀ The฀ entity's฀ status฀ at฀ the฀ year฀ end฀ will฀ determine฀ the฀ accounting฀ treatment฀ in฀ the฀
฀ 283฀

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฀฀
Q14฀ROB฀Group฀
฀ The฀examining฀team฀have฀written฀an฀article฀entitled฀'Business฀combinations฀–฀IFRS฀3฀revised'.฀Read฀
through฀Examples฀3฀and฀4฀which฀are฀on฀step฀acquisitions:฀
฀฀ www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles.html฀฀
฀ Deloitte฀has฀a฀useful฀website฀with฀summaries฀of฀IAS฀and฀IFRS.฀Read฀the฀section฀entitled฀'Business฀
combinations฀achieved฀in฀stages฀(step฀acquisitions)'฀in฀the฀summary฀of฀IFRS฀3฀and฀the฀section฀entitled฀
'Changes฀in฀ownership฀interests'฀in฀the฀summary฀of฀IFRS฀10:฀
www.iasplus.com/en/standards฀
฀
284฀

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฀
฀
฀
฀ Changes฀in฀group
฀
฀
฀
structures:฀disposals
฀
฀
and฀group
reorganisations
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀implications฀of฀changes฀in฀ownership฀interest฀and฀loss฀of฀ D1(h)฀
control.฀
Note.฀Only฀disposals฀are฀covered฀in฀this฀chapter.฀Acquisitions฀are฀covered฀in฀
Chapter฀11฀and฀discontinued฀operations฀in฀Chapter฀13.฀
Discuss฀and฀apply฀accounting฀for฀group฀companies฀in฀the฀separate฀financial฀ D3(a)฀
statements฀of฀the฀parent฀company.฀
Apply฀the฀accounting฀principles฀where฀the฀parent฀reorganises฀the฀structure฀of฀the฀ D3(b)฀
group฀by฀establishing฀a฀new฀entity฀or฀changing฀the฀parent.฀
Exam฀context฀
Changes฀in฀group฀structures฀incorporates฀three฀topics:฀
(a)฀ Step฀acquisitions฀–฀covered฀in฀the฀previous฀chapter฀
(b)฀ Disposals฀–฀covered฀in฀this฀chapter฀
(c)฀ Group฀reorganisations฀–฀covered฀in฀this฀chapter.฀
In฀ the฀ Strategic฀ Business฀ Reporting฀ (SBR)฀ exam฀ disposals฀ are฀ likely฀ to฀ be฀ tested฀ in฀ a฀ similar฀ way฀ to฀
step฀acquisitions฀–฀primarily฀as฀part฀of฀the฀Section฀A฀question฀on฀groups.฀However,฀they฀could฀also฀
feature฀as฀part฀of฀a฀Section฀B฀question.฀Questions฀on฀group฀reorganisations฀are฀more฀likely฀to฀focus฀
on฀the฀principles฀behind฀the฀numbers฀rather฀than฀on฀the฀numbers฀themselves.฀฀
฀ 285฀

lOMoARcPSD|6256454
฀฀
฀ 4.฀ ฀ Group฀
reorganisations฀
฀
฀
฀
฀
1.฀฀ Disposals฀where฀ Changes฀in฀group฀structures
฀ significant฀influence฀ ฀
or฀control฀is฀lost฀
3.฀ Deemed฀disposals฀
statements฀
2.฀ Disposals฀where฀
control฀is฀retained฀
Parent's฀separate฀
statements฀
Subsidiary฀to฀ Subsidiary฀to฀ Associate฀to฀
Full฀disposal฀
associate฀ investment฀ investment฀
Subsidiary฀to฀
subsidiary฀
Calculation฀of฀profit฀or฀loss฀on฀
disposal฀
Adjustment฀to฀
equity฀
286฀

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12:฀Changes฀in฀group฀structures:฀disposals฀and฀group฀reorganisations฀
1฀ Disposals฀where฀control฀or฀significant฀influence฀is฀lost฀
Disposals:฀these฀occur฀when฀the฀parent฀company฀sells฀some฀ or฀ all฀ of฀ its฀ shareholding฀ in฀ a฀
group฀ company.฀ When฀ the฀ full฀ shareholding฀ is฀ sold,฀ this฀ is฀ known฀ as฀ a฀ full฀ disposal.฀ When฀
Key฀term฀
only฀some฀of฀the฀shareholding฀is฀sold,฀this฀is฀referred฀to฀as฀a฀partial฀disposal.฀
This฀section฀will฀focus฀on฀disposals฀where฀control฀or฀significant฀influence฀is฀lost.฀It฀is฀also฀possible฀for฀
a฀parent฀to฀decrease฀its฀controlling฀shareholding฀in฀a฀subsidiary฀but฀this฀will฀be฀covered฀in฀the฀next฀
section.฀
1.1฀ Scenarios฀฀
There฀are฀four฀possible฀scenarios฀where฀control฀or฀significant฀influence฀is฀lost.฀This฀is฀referred฀to฀by฀
the฀ Deloitte฀ guide฀ Business฀ combinations฀ and฀ change฀ in฀ ownership฀ interests฀ as฀ 'crossing฀ an฀
accounting฀boundary'฀as฀illustrated฀by฀the฀diagram฀below฀(adapted฀from฀the฀Deloitte฀guide฀p.8).฀
This฀is฀revisiting฀the฀same฀concept฀seen฀in฀the฀previous฀chapter฀for฀step฀acquisitions฀where฀significant฀
influence฀or฀control฀is฀achieved.฀The฀accounting฀boundary฀is฀just฀crossed฀in฀the฀opposite฀direction.฀฀
IFRS฀9 IAS฀28 IFRS฀10

0% (20%) (50%) 100%
S
I
G
N
80% (a)฀ Full฀disposal
0% I
F
I C
C O
A
N N (b)฀ Subsidiary฀to฀associate
30% 80%
T T
R
I O
N
F L
L 80%
(c)฀ Subsidiary฀to฀investment
U
E
10% N
C
40%
E
(d)฀ Associate฀to฀investment
฀
฀฀
For฀any฀change฀in฀group฀structure฀(step฀acquisition฀or฀disposal):฀
 The฀entity's฀status฀(investment,฀subsidiary,฀associate)฀during฀the฀year฀will฀determine฀the฀
accounting฀treatment฀in฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
 The฀entity's฀status฀at฀the฀year฀end฀will฀determine฀the฀accounting฀treatment฀in฀the฀
฀ 287฀

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฀฀
1.2฀Accounting฀treatment฀in฀group฀financial฀statements฀
Accounting฀concept฀
With฀a฀partial฀disposal฀((b),฀(c),฀(d)),฀the฀accounting฀treatment฀in฀the฀group฀accounts฀is฀driven฀by฀the฀
concept฀ of฀ substance฀ over฀ form.฀ While฀ the฀ legal฀ form฀ is฀ that฀ the฀ parent฀ company฀ has฀ sold฀ some฀
shares,฀ the฀ table฀ below฀ shows฀ the฀ substance฀ of฀ each฀ transaction฀ and฀ the฀ consequent฀ accounting฀
treatment.฀฀฀฀฀
Type฀of฀partial฀disposal฀ Substance฀
Subsidiary฀to฀associate฀ 'Sold'฀a฀subsidiary฀–฀ 'Purchased'฀an฀associate฀–฀

deconsolidate฀the฀subsidiary฀ remeasure฀the฀investment฀
(goodwill,฀NCI฀and฀100%฀of฀ retained฀to฀fair฀value฀
net฀assets)฀and฀recognise฀a฀
group฀profit฀or฀loss฀on฀disposal฀
Subsidiary฀to฀investment฀ 'Sold'฀a฀subsidiary฀–฀ 'Purchased'฀an฀investment฀–฀

deconsolidate฀the฀subsidiary฀ remeasure฀the฀investment฀
(goodwill,฀NCI฀and฀100%฀of฀ retained฀to฀fair฀value฀
net฀assets)฀and฀recognise฀a฀
group฀profit฀or฀loss฀on฀disposal฀
Associate฀to฀investment฀฀ 'Sold'฀an฀associate฀–฀recognise฀ 'Purchased'฀an฀investment฀–฀

a฀group฀profit฀or฀loss฀on฀ remeasure฀the฀investment฀
disposal฀ retained฀to฀fair฀value฀
(IFRS฀10:฀para.฀25,฀B98)฀
The฀ accounting฀ treatment฀ for฀ each฀ of฀ the฀ scenarios฀ in฀ the฀ diagram฀ is฀ explained฀ further฀ in฀ the฀
following฀section.฀
Control฀lost฀
(a)฀ Full฀disposal฀
฀ Consolidate฀the฀results฀and฀non-controlling฀interests฀to฀the฀date฀of฀disposal.฀
฀ Show฀a฀group฀profit฀or฀loss฀on฀disposal.฀
฀ No฀consolidation฀(and฀no฀non-controlling฀interests)฀as฀there฀is฀no฀subsidiary฀at฀the฀year฀
end.฀
(b)฀ Subsidiary฀to฀associate฀
฀ Treat฀ as฀ a฀ subsidiary฀ to฀ the฀ date฀ of฀ disposal;฀ ie฀ consolidate฀ for฀ correct฀ number฀ of฀
months฀and฀show฀non-controlling฀interests฀for฀that฀period.฀
฀ Treat฀as฀an฀associate฀thereafter฀(ie฀equity฀account).฀
฀ Remeasure฀the฀investment฀retained฀to฀fair฀value฀at฀the฀date฀of฀disposal.฀
฀ Equity฀account฀(fair฀value฀at฀date฀of฀control฀lost฀=฀cost฀of฀associate)฀thereafter.฀
฀ ฀
288฀

lOMoARcPSD|6256454
(c)฀ Subsidiary฀to฀investment฀
฀ Consolidate฀as฀a฀subsidiary฀to฀the฀date฀of฀disposal.฀
฀ Show฀fair฀value฀changes฀(and฀any฀dividend฀income)฀thereafter.฀
฀ Remeasure฀the฀investment฀retained฀to฀fair฀value฀at฀the฀date฀of฀disposal.฀
฀ Investment฀in฀equity฀instruments฀(IFRS฀9)฀thereafter.฀
Calculation฀of฀group฀profit฀or฀loss฀on฀disposal฀
฀ $ $฀
฀Fair฀value฀of฀consideration฀received฀ X฀
฀Fair฀value฀of฀any฀investment฀retained฀ X฀
฀Less:฀ share฀of฀consolidated฀carrying฀amount at฀date฀control฀lost:฀ ฀฀฀฀(X)฀
฀ net฀assets฀at฀date฀control฀lost฀ X ฀
฀ goodwill฀at฀date฀control฀lost฀ X ฀
฀ ฀฀฀Less฀non-controlling฀interests฀at฀date฀control฀lost ฀ (X) ฀
฀ ฀ ฀ ฀฀฀฀(X)฀
฀Group฀profit/(loss)฀(recognise฀in฀SPL)฀ ฀X/(X)฀
(IFRS฀10:฀para.฀25,฀B97–B98) ฀
Where฀significant,฀the฀profit฀or฀loss฀should฀be฀disclosed฀separately฀(IAS฀1:฀para.฀85).฀
Significant฀influence฀lost฀
(d)฀ Associate฀to฀investment฀
฀ Equity฀account฀as฀an฀associate฀to฀date฀of฀disposal.฀
฀ Show฀fair฀value฀changes฀(and฀any฀dividend฀income)฀thereafter.฀
฀ Remeasure฀the฀investment฀remaining฀to฀fair฀value฀at฀the฀date฀of฀disposal.฀
฀ Investment฀in฀equity฀instruments฀(IFRS฀9)฀thereafter.฀
See฀Chapter฀12฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀the฀calculation฀of฀group฀profit฀or฀loss฀on฀
disposal฀for฀an฀associate฀to฀investment฀disposal฀and฀for฀treatment฀on฀disposal฀of฀amounts฀previously฀
recognised฀in฀other฀comprehensive฀income฀by฀the฀subsidiary฀or฀associate.฀This฀is฀available฀in฀
1.3฀Profit฀or฀loss฀on฀disposal฀in฀parent's฀separate฀financial฀
statements฀
Income฀tax฀is฀normally฀payable฀by฀reference฀to฀the฀gain฀in฀the฀parent's฀separate฀financial฀statements.฀
This฀should฀only฀be฀accounted฀for฀in฀exams฀if฀specifically฀requested.฀
In฀ the฀ parent's฀ separate฀ financial฀ statements,฀ investments฀ in฀ subsidiaries฀ are฀ held฀ at฀ cost฀ or฀ at฀ fair฀
value฀under฀IFRS฀9฀(IAS฀27:฀para.฀10).฀
฀ 289฀

lOMoARcPSD|6256454
฀฀
Consequently฀the฀profit฀or฀loss฀on฀disposal฀is฀different฀from฀the฀group฀profit฀or฀loss฀on฀disposal:฀
฀ $฀
฀Less฀carrying฀amount฀of฀investment฀disposed of฀ ฀฀฀฀(X)฀
฀Profit/(loss)฀ ฀X/(X)฀
Tutorial฀note฀฀
This฀calculation฀would฀be฀the฀same฀for฀any฀disposal฀of฀shares฀in฀a฀subsidiary฀(regardless฀of฀whether฀
control฀is฀lost)฀as฀the฀treatment฀in฀the฀parent's฀separate฀financial฀statements฀follows฀the฀legal฀form฀
(shares฀have฀been฀sold)฀rather฀than฀the฀substance.฀฀
฀
Illustration฀1:฀Subsidiary฀to฀investment฀disposal฀
The฀summarised฀statements฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀of฀Mart,฀Oat฀and฀Pipe฀
are฀shown฀below.฀
SUMMARISED฀STATEMENTS฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀
FOR฀THE฀YEAR฀ENDED฀30฀APRIL฀20X4฀
฀ ฀
฀ Mart Oat Pipe฀
฀ $m $m $m฀
Revenue฀ ฀ 800 140 230฀
Cost฀of฀sales฀and฀expenses฀ ฀฀ (680) ฀(90) ฀(170)฀
Profit฀before฀tax฀ 120 50 60฀
Income฀tax฀expense฀ ฀(30) (15) ฀(20)฀
Profit฀for฀the฀year฀ 90 35 40฀
Other฀comprehensive฀income฀for฀the฀year฀(net฀of฀tax) ฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss฀
฀฀฀Gains฀on฀property฀revaluation฀ ฀฀฀฀20 ฀฀฀5฀ ฀10฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀฀95 ฀40฀ ฀50฀
฀
฀
Additional฀information฀
(a)฀ Mart฀has฀owned฀60%฀of฀the฀equity฀interest฀in฀Oat฀for฀several฀years.฀
(b)฀ On฀1฀May฀20X2,฀Mart฀acquired฀80%฀of฀the฀equity฀interests฀of฀Pipe.฀The฀purchase฀
consideration฀comprised฀cash฀of฀$250฀million฀and฀the฀fair฀value฀of฀the฀identifiable฀net฀assets฀
acquired฀was฀$300฀million฀at฀that฀date.฀฀
(c)฀ Mart฀wishes฀to฀use฀the฀'partial฀goodwill'฀method฀for฀all฀acquisitions.฀There฀has฀been฀no฀
impairment฀of฀goodwill฀in฀either฀Oat฀or฀Pipe฀since฀acquisition.฀
(d)฀ Mart฀disposed฀of฀a฀70%฀equity฀interest฀in฀Pipe฀on฀31฀October฀20X3฀for฀$290฀million.฀At฀that฀
date฀Pipe's฀identifiable฀net฀assets฀were฀$370฀million.฀The฀remaining฀equity฀interest฀of฀Pipe฀
held฀by฀Mart฀was฀fair฀valued฀at฀$40฀million.฀
(e)฀ ST฀wishes฀to฀measure฀non-controlling฀interest฀at฀its฀proportionate฀share฀of฀net฀assets฀at฀the฀date฀
of฀acquisition.฀
Required฀
(a)฀ Calculate฀the฀group฀profit฀on฀disposal฀of฀the฀shares฀in฀Pipe.฀
(b)฀ Prepare฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀
year฀ended฀30฀April฀20X4฀for฀the฀Mart฀Group.฀
290฀

lOMoARcPSD|6256454
Solution฀
(a)฀ Group฀profit฀on฀disposal฀of฀the฀shares฀in฀Pipe฀
Step฀1฀ Group฀structure฀
฀฀฀฀Mart฀
฀ 1.5.X2฀ 80%฀ Subsidiary฀
฀ 31.10.X3฀ ฀(70%)฀
60%฀
฀ 10%฀ Investment฀
฀
฀
฀ Oat Pipe
Step฀2฀ Calculate฀goodwill฀in฀Pipe฀(for฀inclusion฀in฀the฀group฀profit฀on฀
disposal฀calculation)฀
Goodwill฀
฀ ฀฀฀฀฀฀$m฀
฀Consideration฀transferred฀ 250
฀Non-controlling฀interests (20%฀× 300)฀ 60
฀Fair฀value฀of฀identifiable฀net฀assets ฀(300)
฀ ฀฀฀10฀
฀
Step฀3฀ Calculate฀non-controlling฀interests฀at฀the฀disposal฀date฀(for฀inclusion฀
in฀the฀group฀profit฀on฀disposal฀calculation)฀
Non-controlling฀interests฀(SOFP)฀฀
฀ ฀฀฀฀฀฀฀฀$m฀
฀NCI฀at฀acquisition฀(20%฀× 300)฀ 60฀
฀NCI฀share฀of฀post-acquisition฀reserves฀to฀disposal฀(20%฀×฀[370฀–฀300])฀฀14฀
฀ ฀74฀
In฀this฀question฀reserves฀were฀not฀provided.฀However,฀net฀
assets฀at฀acquisition฀and฀disposal฀were฀given.฀As฀net฀assets฀ ฀
=฀equity,฀the฀movement฀in฀net฀assets฀will฀be฀the฀movement฀
in฀reserves฀(as฀there฀has฀been฀no฀share฀issue฀by฀Pipe).฀
฀
฀
฀ 291฀

lOMoARcPSD|6256454
฀฀
In฀substance,฀as฀the฀accounting฀
boundary฀has฀been฀crossed,฀Mart฀has฀
'purchased'฀a฀10%฀investment฀in฀Pipe฀so฀
the฀investment฀must฀be฀remeasured฀to฀
fair฀value฀at฀the฀date฀control฀was฀lost฀
(31.10.20X3)฀
Step฀4฀ Calculate฀the฀group฀profit฀on฀disposal฀
฀ $m฀ $m
฀Fair฀value฀of฀consideration฀received (for฀70%฀sold)฀ ฀ 290฀
In฀substance,฀as฀the฀ ฀Fair฀value฀of฀any฀investment retained (10%)฀ ฀ 40฀
accounting฀boundary฀has฀ Less฀share฀of฀consolidated฀carrying฀amount at฀date฀control฀lost ฀
฀ ฀
been฀crossed,฀Mart฀has฀
'sold'฀an฀80%฀subsidiary฀ ฀ Net฀assets 370฀
so฀Pipe฀must฀be฀ ฀ Goodwill฀(from฀Step฀2) 10฀
deconsolidated฀(remove฀
฀ Less฀non-controlling฀interests฀(from฀Step฀3) ฀ (74) ฀
goodwill,฀NCI฀and฀100%฀
of฀net฀assets).฀
฀ ฀ ฀ ฀(306)
฀
฀
฀Group฀profit฀on฀disposal฀ ฀ ฀฀฀฀24฀
฀
฀
(b)฀ Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀
30฀April฀20X4฀
Step฀5฀ Draw฀up฀a฀timeline฀to฀work฀out฀the฀treatment฀in฀the฀consolidated฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀(SPLOCI)
Oat฀was฀a฀subsidiary฀for฀the฀full฀year฀so฀should฀be฀consolidated฀for฀a฀full฀year.฀
However,฀there฀was฀a฀change฀in฀the฀shareholding฀in฀Pipe฀in฀the฀year฀as฀shown฀
below.฀
฀
1.5.X3฀ 31.10.X3 30.4.X4
฀
฀
SPLOCI
฀ ฀ ฀ Consolidate฀for 6/12
฀ ฀ ฀ NCI฀20%฀for฀6/12฀
฀ Had฀80%฀of฀Pipe Sold฀70%฀of฀Pipe฀
฀ so฀10%฀
remaining฀=฀
฀
investment฀฀
฀
฀
฀
292฀

lOMoARcPSD|6256454
Pro-rate฀as฀Pipe฀only฀a฀
Step฀6฀ subsidiary฀for฀6฀months฀
Calculate฀non-controlling฀interests฀(NCI)฀ in฀the฀year฀(1.5.X3฀–฀
31.10.X3)฀
In฀profit฀for฀the฀year:฀
฀ Oat฀ Pipe
฀ $m฀ $m
Per฀question฀(40฀×฀6/12) 35฀ 20
NCI฀share฀฀ × 40%฀ ×฀20%
฀ =฀14฀ =฀4
฀
฀ 18฀
Pro-rate฀as฀Pipe฀only฀a฀
subsidiary฀for฀6฀months฀in฀
the฀year฀(1.5.X3฀–฀
31.10.X3)฀
In฀total฀comprehensive฀income:฀
฀ Oat฀ Pipe
฀ $m฀ $m
Per฀question฀(50฀×฀6/12) 40฀ 25
NCI฀share฀฀ × 40%฀ × 20%
฀ =฀16฀ =฀5
฀
฀
21฀
฀
฀
฀
฀
฀
Step฀7฀฀ Prepare฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀
฀ ฀
฀ $m฀
Revenue฀(800฀+฀140฀+฀[6/12฀× 230]) 1,055฀
Cost฀of฀sales฀and฀expenses฀(680฀+฀90฀+฀[6/12฀× 170]) (855)
Profit฀on฀disposal฀of฀share฀in฀subsidiary฀(from฀Step฀4) ฀฀฀฀฀24฀
Profit฀before฀tax฀ 224฀
Income฀tax฀expense฀(30฀+฀15฀+฀[6/12฀× 20]) ฀฀฀฀(55)
Profit฀for฀the฀year฀ 169฀
Other฀comprehensive฀income฀for฀the฀year฀(net฀of฀tax) ฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss฀ ฀
฀฀฀Gains฀on฀property฀revaluation฀(20฀+฀5฀+฀[6/12฀×฀10])฀ 30
฀฀฀฀ ฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀199฀
฀ ฀
Profit฀attributable฀to: ฀
฀฀฀Owners฀of฀the฀parent฀(169฀– 18) 151฀
฀฀฀Non-controlling฀interests฀(see฀Step฀6) ฀฀฀฀18฀
฀ ฀฀169฀
฀฀฀Owners฀of฀the฀parent฀(199฀– 21) 178฀
฀฀฀Non-controlling฀interests฀(see฀Step฀6) ฀฀฀21฀
฀ ฀199฀
฀
฀
฀
฀ 293฀

lOMoARcPSD|6256454
฀฀
Activity฀1:฀Subsidiary฀to฀associate฀disposal฀ ฀
On฀ 1฀ January฀ 20X6,฀ Amber,฀ a฀ public฀ listed฀ company,฀ owned฀ 320,000฀ shares฀ in฀ Byrne,฀ a฀ public฀
listed฀company.฀Amber฀had฀acquired฀the฀shares฀in฀Byrne฀on฀1฀January฀20X2฀for฀$1,200,000฀when฀
the฀balance฀on฀Byrne's฀reserves฀stood฀at฀$760,000.฀The฀fair฀value฀of฀the฀identifiable฀assets฀acquired฀
and฀liabilities฀assumed฀was฀equivalent฀to฀book฀value.฀
The฀summarised฀statements฀of฀financial฀position฀as฀at฀31฀December฀20X6฀are฀given฀below.฀
SUMMARISED฀STATEMENTS฀OF฀FINANCIAL฀POSITION ฀
฀ Amber฀ Byrne
฀ ฀ $'000฀ ฀฀$'000฀
Property,฀plant฀and฀equipment฀ ฀ 9,600฀ ฀฀1,600฀
Investment฀in฀equity฀instrument฀(Byrne)฀(fair฀value฀at฀30฀Sept฀20X6)฀ ฀ 2,000฀ ฀฀฀฀฀฀ –฀
฀ ฀ 11,600฀ ฀฀1,600฀
Current฀assets฀ ฀ 2,800฀ ฀฀฀฀฀620฀
฀ ฀ 14,400฀ ฀฀2,220฀
Equity฀ ฀
Share฀capital฀($1฀ordinary฀shares)฀ ฀ 2,800฀ ฀฀400฀
Reserves฀ ฀ 9,800฀ ฀ ฀1,280฀
฀ ฀ 12,600฀ ฀ ฀1,680฀
Liabilities฀ ฀ 1,800฀ ฀฀฀฀฀540฀
฀ ฀ 14,400฀ ฀฀2,220฀
Profit฀or฀loss฀and฀revaluations฀accrued฀evenly฀over฀the฀year.฀Amber฀holds฀Byrne฀in฀its฀own฀books฀at฀
fair฀value฀based฀on฀the฀share฀price฀multiplied฀by฀the฀number฀of฀shares฀held.฀Reserves฀include฀a฀fair฀
value฀gain฀on฀the฀investment฀in฀Byrne฀of฀$800,000฀from฀1฀January฀20X2฀to฀30฀September฀20X6,฀
which฀is฀tax฀exempt.฀There฀were฀no฀fair฀value฀changes฀between฀then฀and฀31฀December.฀
To฀ date฀ no฀ impairment฀ losses฀ at฀ a฀ group฀ level฀ have฀ been฀ necessary.฀ No฀ dividends฀ were฀ paid฀ by฀
either฀company฀in฀20X6.฀
Amber฀sold฀200,000฀of฀its฀shares฀in฀Byrne฀for฀$1,250,000฀on฀30฀September฀20X6.฀The฀sale฀has฀
not฀yet฀been฀paid฀for฀or฀accounted฀for.฀At฀that฀date฀Byrne฀has฀reserves฀of฀$1,240,000.฀
Amber฀chose฀to฀measure฀the฀non-controlling฀interests฀at฀fair฀value฀at฀the฀date฀of฀acquisition.฀The฀fair฀
value฀of฀the฀non-controlling฀interests฀in฀Byrne฀on฀1฀January฀20X2฀was฀$300,000.฀
Byrne's฀total฀comprehensive฀income฀for฀the฀year฀ended฀31฀December฀20X6฀amounted฀to฀$160,000.฀
Required฀
(a)฀ Explain฀ the฀ accounting฀ treatment฀ for฀ the฀ investment฀ in฀ Byrne฀ in฀ the฀ consolidated฀ financial฀
statements฀of฀the฀Amber฀Group฀for฀the฀year฀ended฀31฀December฀20X6.฀
(b)฀ Calculate฀the฀group฀profit฀on฀disposal฀of฀the฀shares฀in฀Byrne฀for฀inclusion฀in฀the฀consolidated฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀Amber฀Group฀for฀the฀year฀
ended฀31฀December฀20X6.฀
Ignore฀income฀tax฀on฀the฀disposal.฀
(c)฀ Show฀ the฀ investment฀ in฀ associate฀ for฀ inclusion฀ in฀ the฀ consolidated฀ statement฀ of฀ financial฀
position฀of฀the฀Amber฀Group฀as฀at฀31฀December฀20X6.฀
294฀

lOMoARcPSD|6256454
Solution฀
(a)฀ Explanation฀of฀accounting฀treatment฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
(b)฀ Group฀profit฀on฀disposal฀
฀ ฀$'000฀ ฀$'000฀
฀Fair฀value฀of฀consideration฀received฀ ฀
฀Fair฀value฀of฀30%฀investment฀retained ฀
฀Less:฀ share฀of฀consolidated฀carrying฀amount when฀control฀lost:฀ ฀
฀฀฀฀฀฀฀฀฀net฀assets฀ ฀
฀฀฀฀฀฀฀฀฀goodwill฀ ฀
฀฀฀฀฀฀฀฀฀฀฀฀฀Less฀non-controlling฀interests ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀฀฀฀฀ ฀
฀ ฀ ฀฀฀฀฀ ฀
Workings฀
1฀ Group฀structure฀&฀timeline฀
฀
1.1.X6฀ 30.9.X6฀ 31.12.X6฀
฀
2฀ Goodwill฀฀
฀ ฀$'000฀ ฀$'000
฀Consideration฀transferred฀ ฀
฀Non-controlling฀interests฀ ฀
฀Less:฀ fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition:฀ ฀
฀ share฀capital฀ ฀
฀ reserves฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀฀ ฀ ฀฀฀฀
฀ ฀ ฀฀฀฀
฀ 295฀

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฀฀
3฀ Non-controlling฀interests฀(SOFP)฀at฀date฀of฀loss฀of฀control฀
฀ ฀฀$'000฀
฀NCI฀at฀acquisition฀ ฀
฀NCI฀share฀of฀post-acquisition฀reserves ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀
(c)฀ Investment฀in฀associate฀as฀at฀31฀December฀20X6฀
Investment฀in฀associate฀
฀ ฀฀$'000฀
฀Cost฀=฀Fair฀value฀at฀date฀control฀lost฀฀ ฀
฀Share฀of฀post-acquisition฀retained฀reserves฀ ฀
฀฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀
฀
296฀

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Activity฀2฀ ฀
Vail฀ purchased฀ a฀ 60%฀ interest฀ in฀ Nest฀ for฀ $80฀ million฀ on฀ 1฀ January฀ 20X4฀ when฀ the฀ fair฀ value฀ of฀
identifiable฀net฀assets฀was฀$100฀million.฀Vail฀elected฀to฀measure฀the฀non-controlling฀interest฀in฀Nest฀
at฀ the฀ proportionate฀ share฀ of฀ the฀ fair฀ value฀ of฀ identifiable฀ net฀ assets.฀ An฀ impairment฀ of฀ $4฀ million฀
arose฀on฀the฀goodwill฀in฀Nest฀in฀the฀year฀ended฀31฀December฀20X5.฀Vail฀sold฀a฀50%฀stake฀in฀Nest฀
for฀$75฀million฀on฀31฀December฀20X5.฀The฀fair฀value฀of฀the฀Vail's฀remaining฀investment฀in฀Nest฀was฀
$15฀million฀at฀that฀date.฀The฀carrying฀value฀of฀Nest's฀identifiable฀net฀assets฀other฀than฀goodwill฀was฀
$130฀ million฀ at฀ the฀ date฀ of฀ sale.฀ Vail฀ had฀ carried฀ the฀ investment฀ at฀ cost.฀ The฀ Finance฀ Director฀
calculated฀ that฀ a฀ gain฀ of฀ $10฀ million฀ arose฀ on฀ the฀ sale฀ of฀ Nest฀ in฀ the฀ group฀ financial฀ statements,฀
being฀ the฀ sales฀ proceeds฀ of฀ $75฀ million฀ less฀ $65฀ million,฀ being฀ the฀ percentage฀ of฀ identifiable฀ net฀
assets฀sold฀(50%฀×฀$130฀million).฀
Required฀
Explain฀to฀the฀directors฀of฀Vail,฀with฀suitable฀calculations,฀how฀the฀group฀profit฀on฀disposal฀of฀the฀
shareholding฀in฀Nest฀should฀have฀been฀accounted฀for.฀
Solution฀
Explanation:฀
฀
฀
฀
฀
฀
Calculation:฀
Group฀profit฀or฀loss฀on฀disposal฀
฀
฀
฀
฀
฀
Workings฀
1 Group฀structure฀
฀
฀
฀ ฀
฀ 297฀

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฀฀
2 Goodwill฀
฀
฀
฀
฀
3 Non-controlling฀interests฀(SOFP)฀at฀date฀of฀loss฀of฀control฀
฀
฀
฀
฀
฀
฀
2฀Disposals฀where฀control฀is฀retained฀
Disposal฀where฀control฀is฀retained:฀this฀occurs฀when฀there฀is฀a฀decrease฀in฀the฀parent's฀
shareholding฀in฀an฀existing฀subsidiary฀through฀the฀sale฀of฀shares.฀It฀is฀sometimes฀known฀as฀'a฀
Key฀term฀
decrease฀in฀a฀controlling฀interest'.฀
As฀for฀acquisitions฀where฀control฀is฀retained,฀no฀accounting฀boundary฀is฀crossed฀as฀illustrated฀
by฀ the฀ diagram฀ below฀ (adapted฀ from฀ the฀ Deloitte฀ guide:฀ Business฀ combinations฀ and฀ changes฀ in฀
ownership฀interests,฀2008:฀p.6):฀฀
฀ ฀฀฀IFRS฀9฀฀฀฀฀฀฀฀฀฀฀฀฀IAS฀28฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀IFRS฀10
฀
0%฀ (20%)฀ (50%) 100%
฀
฀ ฀S฀ ฀
I฀
฀
G฀
฀ N฀
I฀
฀
F฀ C
฀ I฀
O
C฀
฀ N
A฀
N฀ T฀ 55% 70%
฀
T฀ R฀ (NCI฀45%)฀ (NCI฀30%)฀
฀ ฀ O
I฀
฀ L฀
N฀
฀ F฀
L฀
฀ U฀
฀ E฀
฀
N฀
C฀
E฀
298฀

lOMoARcPSD|6256454
The฀treatment฀in฀the฀group฀accounts฀is฀driven฀by฀the฀concept฀of฀substance฀over฀form.฀In฀substance,฀
there฀has฀been฀no฀ disposal฀ because฀the฀entity฀is฀still฀a฀subsidiary฀so฀no฀profit฀on฀disposal฀should฀
be฀recognised.฀
Instead฀ this฀ is฀ a฀ transaction฀ between฀ group฀ shareholders฀ (eg฀ the฀ parent฀ is฀ selling฀ 15%฀ to฀ the฀ non-
controlling฀interests).฀Therefore,฀it฀is฀recorded฀in฀equity฀as฀follows:฀
(a)฀ Increase฀non-controlling฀interests฀(NCI)฀in฀the฀consolidated฀SOFP฀
(b)฀ Recognise฀the฀difference฀between฀the฀consideration฀received฀and฀the฀increase฀in฀NCI฀as฀an฀
adjustment฀to฀equity฀(post฀to฀the฀parent's฀column฀in฀the฀consolidated฀retained฀earnings฀
working).฀
(IFRS฀10:฀para.฀23,฀B96)฀
2.1฀ Accounting฀treatment฀in฀group฀financial฀statements฀
฀ Consolidate฀as฀a฀subsidiary฀in฀full฀for฀the฀whole฀period.฀
฀ Time฀apportion฀non-controlling฀interests฀based฀on฀percentage฀before฀and฀after฀acquisition.฀
฀ Consolidate฀as฀a฀subsidiary฀at฀the฀year฀end.฀
 Calculate฀non-controlling฀interests฀as฀follows฀(using฀the฀70%฀to฀55%฀scenario฀as฀an฀example):฀
฀ $฀
฀NCI฀at฀acquisition฀(when฀control฀achieved – 30%)฀ X฀
฀NCI฀share฀(30%)฀of฀post-acquisition฀reserves฀to฀date฀of฀disposal฀฀ ฀฀X฀
฀NCI฀at฀date฀of฀disposal฀ A฀
฀Increase฀in฀NCI฀on฀date฀of฀disposal฀(A฀× 15%/30%)* ฀(X)฀
฀NCI฀after฀disposal฀ X฀
฀฀฀฀฀฀฀฀฀฀฀Next฀two฀lines฀only฀required฀if฀disposal is฀partway฀through฀year: ฀
฀NCI฀share฀(45%)฀of฀post-acquisition฀reserves฀to฀year฀end X
฀฀ ฀
฀NCI฀at฀year฀end ฀฀X฀
฀
฀ Calculate฀ the฀ adjustment฀ to฀ equity฀ (post฀ to฀ the฀ parent's฀ column฀ in฀ the฀ consolidated฀
retained฀earnings฀working):฀
฀ $฀
฀Increase฀in฀NCI฀(A฀×฀15%/30%)*฀ ฀฀฀฀฀(X)฀
฀Adjustment฀to฀parent's฀equity฀ ฀฀X/(X)฀
฀%฀sold
*฀ Calculated฀as:฀NCI฀at฀date฀of฀disposal฀฀฀฀×฀฀฀฀ ฀฀
NCI฀%฀before฀disposal
The฀accounting฀entry฀to฀record฀this฀adjustment฀to฀equity฀is:฀
DEBIT฀(↑)฀Cash฀ X฀
฀ CREDIT฀(↑)฀Non-controlling฀interests฀ X฀
฀ CREDIT฀(↑)/DEBIT฀(↓)฀Consolidated฀retained฀earnings฀(with฀adjustment฀to฀equity)฀ X฀
฀ ฀
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฀฀
Activity฀3:฀Subsidiary฀to฀subsidiary฀disposal฀ ฀
On฀ 1฀ December฀ 20X0,฀ Trail฀ acquired฀ 80%฀ of฀ the฀ Dial's฀ 600฀ million฀ $1฀ shares฀ for฀ a฀ cash฀
consideration฀of฀$800฀million.฀At฀acquisition,฀the฀fair฀value฀of฀the฀non-controlling฀interest฀in฀Dial฀was฀
$190฀ million.฀ Trail฀ wishes฀ to฀ measure฀ the฀ non-controlling฀ interest฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀
acquisition.฀ On฀ 1฀ December฀ 20X0,฀ the฀ retained฀ earnings฀ of฀ Dial฀ were฀ $300฀ million฀ and฀ other฀
components฀ of฀ equity฀ were฀ $20฀ million.฀ The฀ fair฀ value฀ of฀ Dial's฀ net฀ assets฀ was฀ equivalent฀ to฀ their฀
book฀value.฀
On฀ 30฀ November฀ 20X1,฀ Trail฀ sold฀ a฀ 5%฀ shareholding฀ in฀ Dial฀ for฀ $60฀ million.฀ At฀ 30฀ November฀
20X1,฀Dial฀had฀retained฀earnings฀of฀$450฀million฀and฀other฀components฀of฀equity฀of฀$30฀million.฀
Required฀
Calculate฀ the฀ following฀ figures฀ in฀ relation฀ to฀ Dial฀ for฀ inclusion฀ in฀ the฀ consolidated฀ statement฀ of฀
financial฀position฀of฀the฀Trail฀group฀as฀at฀30฀November฀20X1:฀
(a) Non-controlling฀interests฀
(b) Adjustment฀to฀equity฀
Solution฀
(a) Non-controlling฀interest฀
฀ $m฀
฀NCI฀at฀acquisition฀
฀NCI฀share฀of฀post-acquisition฀retained฀earnings to฀disposal฀
฀
฀NCI฀share฀of฀post-acquisition฀other฀components฀of฀equity฀to฀disposal฀
฀ ฀฀฀฀฀฀฀฀
฀NCI฀at฀date฀of฀disposal฀
฀Increase฀in฀NCI฀on฀date฀of฀disposal฀ ฀฀฀฀฀฀฀฀
฀NCI฀at฀year฀end ฀฀฀฀฀฀฀฀
฀ ฀$m฀
฀Fair฀value฀of฀consideration฀received฀
฀Increase฀in฀NCI฀฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀
฀
฀
฀
฀
฀
฀
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lOMoARcPSD|6256454
3฀Deemed฀disposals฀
'Deemed'฀disposal:฀this฀occurs฀when฀a฀subsidiary฀issues฀new฀shares฀and฀the฀parent฀does฀not฀
Key฀term฀
take฀up฀all฀of฀its฀rights฀such฀that฀its฀holding฀is฀reduced.฀
In฀substance฀this฀is฀a฀disposal฀and฀is฀therefore฀accounted฀for฀as฀such.฀
See฀Chapter฀12฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀an฀illustration฀of฀a฀deemed฀disposal.฀
4฀Group฀reorganisations฀
4.1฀Internal฀group฀reorganisations฀
A฀group฀may฀restructure฀itself฀internally฀to฀achieve฀a฀desired฀effect.฀Companies฀move฀around฀within฀
the฀group฀but฀typically:฀
•฀ The฀ultimate฀shareholders฀remain฀the฀same.฀
•฀ No฀cash฀leaves฀the฀group.฀
•฀ There฀is฀no฀change฀in฀non-controlling฀interests.฀
In฀substance,฀the฀group฀has฀remained฀the฀same฀so฀there฀is฀no฀impact฀on฀the฀consolidated฀financial฀
statements.฀However,฀the฀accounts฀of฀the฀individual฀entities฀within฀the฀group฀will฀be฀affected.฀
Questions฀ on฀ group฀ reorganisations฀ are฀ more฀ likely฀ to฀ focus฀ on฀ the฀ principles฀ behind฀ the฀ numbers฀
rather฀than฀the฀numbers฀themselves.฀฀
Various฀examples฀of฀group฀reorganisations฀follow.฀
4.2฀Sub-subsidiary฀moved฀up฀
฀
฀ Before฀ After
฀ ฀
฀ Shareholders฀ Shareholders฀
฀
฀
฀ ฀
฀ ฀ P฀ P฀
฀
฀ ฀
฀ ฀ ฀ S1฀ ฀
S1฀฀ ฀
S2฀
฀
฀
฀
฀ ฀ ฀ S2฀
฀
Analysis฀
Methods฀฀
P฀could฀buy฀S2฀for฀cash฀or฀other฀assets฀
S1฀could฀pay฀a฀dividend฀to฀P฀in฀the฀form฀of฀the฀shares฀in฀S2฀
฀
฀ 301฀

lOMoARcPSD|6256454
฀฀
Possible฀reasons฀for฀this฀type฀of฀reorganisation฀include:฀
S1 can฀be฀sold฀off฀
Divisionalisation฀so฀that฀S1
(perhaps฀to฀reduce฀ Potential฀tax฀advantages฀
and฀S2 report฀
group฀gearing)฀without฀ (eg฀loss฀relief)
independently฀to฀P
selling฀off฀S2
฀
4.3฀Sub-subsidiary฀moved฀across฀
฀
฀
฀ Before฀ After฀
฀ ฀
฀
฀
฀ ฀
฀ ฀ P฀ P฀
฀
฀ ฀
฀ ฀S1฀ ฀
S2฀ S1฀฀ ฀
S2฀
฀
฀
฀
฀ ฀S3฀ S3฀
฀ ฀ ฀ ฀
฀
Analysis฀
Method฀
S2฀could฀buy฀S3฀for฀cash฀or฀other฀assets฀
To฀be฀able฀to฀sell฀S1 For฀divisionalisation฀(so฀S3฀
To฀create฀a฀tax฀group
without฀selling฀S3 reports฀to฀S2)
฀
4.4฀Sub-subsidiary฀moved฀down฀
฀
฀ Before฀ After฀
฀
฀
฀ ฀ Shareholders฀ Shareholders฀
฀ ฀
฀
฀ ฀ P฀ P฀
฀ ฀
฀
฀
฀S1฀ ฀
S2฀ ฀
S1฀
฀ ฀
฀ ฀
฀ ฀ S2฀
฀ ฀ ฀ ฀
฀
฀
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Analysis฀
Method฀
S1฀could฀buy฀S2฀for฀cash฀or฀other฀assets฀
S1฀could฀issue฀additional฀shares฀in฀itself฀to฀P฀to฀pay฀for฀S2฀
For฀divisionalisation฀(so฀S2฀
To฀create฀a฀tax฀group
reports฀to฀S1)
฀
Such฀ reorganisations฀ (known฀ as฀ 'entities฀ under฀ common฀ control')฀ are฀ excluded฀ from฀ the฀ scope฀ of฀
IFRS฀ 3฀ Business฀ Combinations฀ at฀ the฀ present฀ time฀ and฀ there฀ are฀ therefore฀ no฀ specific฀ accounting฀
requirements.฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀฀฀฀฀(IFRS฀3:฀para.฀2(c))฀
The฀substance฀of฀the฀transaction฀from฀the฀shareholders'฀point฀of฀view฀is฀that฀no฀sale฀has฀occurred฀
as฀they฀own฀the฀same฀assets฀before฀and฀after฀the฀transaction฀(assuming฀ownership฀of฀each฀subsidiary฀
is฀100%).฀
However,฀a฀gain฀or฀loss฀may฀be฀made฀in฀the฀separate฀financial฀statements฀of฀S1.฀฀This฀is฀unrealised฀
from฀ the฀ group฀ point฀ of฀ view฀ and฀ would฀ need฀ to฀ be฀ eliminated฀ in฀ the฀ consolidated฀ financial฀
statements.฀
See฀Chapter฀12฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀an฀illustration฀of฀a฀group฀reorganisation.฀
4.6฀New฀parent฀
A฀group฀may฀restructure฀itself฀by฀adding฀a฀new฀parent฀to฀the฀group:฀
฀ ฀ Before฀ After฀
฀ ฀
฀
฀
฀ ฀
฀ ฀ ฀ New฀P฀
฀
฀ ฀
฀ ฀ ฀ Original฀P฀ ฀ ฀
Original฀P฀
฀
฀
฀
฀ ฀ ฀ S฀ ฀ ฀ S฀
฀ ฀
Where฀an฀entity฀(an฀individual฀entity฀or฀an฀existing฀parent)฀does฀this,฀if฀the฀new฀parent฀chooses฀to฀
measure฀ the฀ investment฀ in฀ the฀ original฀ parent฀ at฀ cost฀ per฀ IAS฀ 27฀ Separate฀ Financial฀ Statements฀
(para.฀10(a)),฀cost฀is฀measured฀at฀its฀share฀of฀the฀carrying฀ amount฀of฀the฀original฀entity's฀equity฀
(shown฀ in฀ the฀ separate฀ financial฀ statements฀ of฀ the฀ original฀ parent฀ at฀ the฀ date฀ of฀ reorganisation),฀
providing฀all฀of฀the฀following฀criteria฀are฀met:฀
฀ 303฀

lOMoARcPSD|6256454
฀฀
(a)฀ The฀ new฀ parent฀ obtains฀ control฀ of฀ the฀ original฀ entity฀ by฀ issuing฀ equity฀ instruments฀ in฀
exchange฀for฀existing฀equity฀instruments฀of฀the฀original฀entity;฀
(b)฀ The฀assets฀and฀liabilities฀of฀the฀new฀and฀original฀group฀are฀the฀same฀immediately฀before฀and฀
after฀the฀reorganisation;฀and฀
(c)฀ The฀ owners฀ of฀ the฀ original฀ entity฀ before฀ the฀ reorganisation฀ have฀ the฀ same฀ absolute฀ and฀
relative฀ interests฀in฀the฀net฀assets฀of฀the฀original฀and฀new฀group฀immediately฀before฀and฀
after฀the฀reorganisation.฀
(IAS฀27:฀para.฀13)฀
Ethics฀note฀
Disposals฀and฀group฀reorganisations฀are฀technically฀challenging฀topics฀and฀therefore฀there฀is฀
significant฀scope฀for฀error฀and฀manipulation.฀At฀least฀one฀question฀in฀the฀SBR฀exam฀will฀involve฀
ethical฀issues.฀Therefore,฀when฀reading฀a฀scenario฀involving฀groups,฀you฀need฀to฀look฀out฀for฀threats฀
to฀the฀fundamental฀principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct.฀For฀example,฀there฀may฀be฀
pressure฀from฀the฀CEO฀on฀the฀reporting฀accountant฀to฀achieve฀a฀certain฀effect฀(eg฀meet฀a฀loan฀
covenant฀ratio,฀maximise฀share฀price)฀which฀might฀tempt฀the฀accountant฀to฀overstate฀the฀group฀profit฀
on฀disposal฀(on฀loss฀of฀control)฀or฀where฀a฀controlling฀interest฀is฀reduced,฀report฀the฀adjustment฀in฀
profit฀or฀loss฀rather฀than฀equity.฀
Alternatively,฀time฀pressure฀around฀year฀end฀reporting฀or฀inexperience฀of฀the฀reporting฀accountant฀
could฀lead฀to฀errors฀such฀as:฀
฀ Not฀remeasuring฀any฀remaining฀investment฀to฀fair฀value฀on฀loss฀of฀control฀
฀ Incorrect฀treatment฀of฀the฀shareholding฀in฀the฀group฀accounts฀–฀this฀is฀a฀particular฀risk฀for฀
disposals฀(eg฀not฀equity฀accounting฀for฀the฀period฀the฀entity฀was฀an฀associate,฀not฀
consolidating฀for฀the฀period฀the฀entity฀was฀a฀subsidiary)฀
฀ Miscalculation฀of฀the฀calculation฀of฀the฀group฀profit฀or฀loss฀on฀disposal฀or฀the฀adjustment฀to฀
equity฀
฀ Not฀recording฀the฀increase฀in฀non-controlling฀interests฀for฀diposals฀where฀control฀is฀retained฀
฀ Not฀eliminating฀a฀gain฀or฀loss฀on฀disposal฀of฀an฀investment฀in฀the฀group฀accounts฀in฀the฀
context฀of฀a฀group฀reorganisation.฀
฀
฀
฀ ฀
304฀

lOMoARcPSD|6256454
฀ ฀
฀
1.฀ Disposals฀where฀ Changes฀in฀group฀structures 3.฀ Deemed฀disposals฀
฀significant฀influence฀ ฀ Where฀a฀subsidiary฀issues฀new฀
฀or฀control฀is฀lost฀ shares฀and฀parent฀does฀not฀take฀
฀ up฀its฀proportionate฀share฀(ie฀%฀
falls)฀
฀
฀ Treat฀as฀normal฀disposal
฀ ฀
Group฀financial฀ 2.฀ Disposals฀where฀

statements฀ control฀is฀retained฀
Parent's฀separate฀financial฀
statements฀
Calculation฀of฀gain/(loss)฀on฀disposal:฀
FV฀consideration฀received฀ ฀X฀
statements฀
Less฀carrying฀amount฀of฀investment฀ ฀฀฀(X)฀฀฀
฀ ฀X/(X)฀
SPLOCI:฀
฀ Consolidate฀results฀for฀฀
whole฀period฀
Subsidiary฀to฀
Subsidiary฀to฀ Associate฀to฀ ฀ Time฀apportion฀NCI฀
Full฀disposal฀ associate฀
investment฀ investment฀ SOFP:฀
SPLOCI:฀ SPLOCI:฀
SPLOCI:฀ SPLOCI:฀ ฀ Consolidate฀
฀ Consolidate/time฀ ฀ Consolidate฀to฀ ฀ Record฀increase฀in฀NCI฀
฀ Consolidate฀to฀ ฀ Equity฀account฀to฀
apportion฀ disposal฀then฀
disposal฀(time฀ disposal฀(time฀ ฀ Calculate฀and฀record฀adjustment฀
results/NCI฀to฀ equity฀account฀
apportion)฀then฀ apportion)฀then฀ to฀equity฀(in฀parent's฀column฀in฀
date฀of฀disposal฀ (time฀apportion)฀฀
recognise฀ recognise฀ consolidated฀retained฀earnings฀
฀ Nothing฀after฀ SOFP:฀ changes฀in฀FV฀ changes฀in฀FV฀ working)฀
SOFP:฀฀ ฀ Equity฀account฀ and฀dividend฀ and฀dividend฀
(fair฀value฀at฀ income฀฀ income฀
No฀subsidiary฀to฀ NCI฀(SOFP)
date฀control฀lost฀ SOFP:฀ SOFP:฀
consolidate฀ NCI฀at฀acquisition฀(date฀of฀control)฀฀฀฀฀฀฀฀฀฀฀฀X฀
=฀cost฀of฀
฀ ฀ Treat฀per฀IFRS฀9฀ ฀ Treat฀per฀IFRS฀9฀ NCI฀share฀of฀post-acquisition฀reserves฀to฀฀
associate)฀
date฀of฀disposal฀ ฀฀ ฀X฀
NCI฀at฀date฀of฀disposal฀ ฀ ฀X฀
Increase฀in฀NCI฀*฀ ฀ ฀X฀
NCI฀after฀disposal฀ ฀ ฀X฀
Next฀2฀lines฀only฀required฀if฀step฀acquisition฀
Consolidated฀retained฀earnings฀(if฀ is฀partway฀through฀year:฀
Group฀profit฀or฀loss฀on฀disposal฀ disposal฀partway฀through฀year)฀ NCI฀share฀of฀post-acquisition฀reserves฀฀
FV฀consideration฀received฀ ฀ ฀X฀ ฀(eg฀80%฀subsidiary฀to฀30%฀associate):฀ to฀year฀end฀ ฀ ฀X฀
FV฀any฀investment฀retained฀ ฀ ฀X฀ NCI฀at฀year฀end฀ ฀ ฀X฀
฀ ฀฀ P฀ ฀S฀ ฀S฀
Less฀ share฀of฀consol฀carrying฀amount฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀80%฀฀฀฀30%฀฀
฀ at฀date฀control฀lost:฀ ฀ At฀year฀end/date฀of฀disposal฀ ฀X฀ ฀X฀ ฀X฀
฀ Net฀assets฀ ฀ X฀ Group฀profit฀on฀disposal฀ ฀ ฀X฀ Adjustment฀to฀equity฀
฀ Goodwill฀ ฀ X฀ At฀acquisition/date฀control฀lost฀ ฀ ฀(X)฀ ฀(X)฀ FV฀of฀consideration฀paid฀ ฀(X)฀
฀ Less฀NCI฀ ฀ ฀(X)฀ ฀ ฀ ฀ ฀Y฀ ฀Z฀ Increase฀in฀NCI฀*฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀X฀
฀ ฀ ฀ ฀ ฀฀฀(X)฀฀฀ Group฀share:฀ Adjustment฀to฀equity฀ ฀(X)/X฀฀
(Y฀×฀80%)฀ ฀X฀
฀ ฀X/(X)฀ *฀NCI฀at฀date฀of฀disposal฀฀×฀฀฀฀฀฀฀฀฀฀฀฀%฀sold฀฀ ฀฀
(Z฀×฀30%)฀ ฀X฀
฀ X NCI฀%฀
before฀
disposal฀
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฀฀
฀ ฀
฀
฀ Changes฀in฀group฀structures
฀
฀
฀ 4.฀ Group฀reorganisations฀
฀ ฀ Internal฀group฀reorganisations฀
฀ A฀group฀may฀restructure฀itself฀
internally:฀
฀ –฀฀To฀sell฀off฀a฀subsidiary฀
฀ –฀฀For฀divisionalisation฀
฀ –฀฀To฀save฀tax฀
฀ Types:฀
–฀฀Sub-subsidiary฀moves฀up฀
฀ –฀฀Sub-subsidiary฀moves฀across฀
฀ –฀฀Sub-subsidiary฀moves฀down฀
–฀฀New฀parent฀
Accounting฀treatment
฀ Outside฀the฀scope฀of฀IFRS฀3฀
฀ In฀substance,฀the฀group฀remains฀the฀
same฀–฀no฀impact฀on฀group฀
accounts฀
฀ Accounts฀of฀individual฀companies฀
affected฀but฀any฀profits฀made฀in฀
the฀separate฀books฀of฀each฀
company฀are฀unrealised฀from฀the฀
group฀point฀of฀view฀so฀eliminated฀
on฀consolidation฀
New฀parent฀company
฀ If฀new฀parent฀chooses฀to฀measure฀
investment฀in฀old฀parent฀at฀cost,฀cost฀
=฀carrying฀amount฀of฀its฀share฀of฀
the฀equity฀items฀in฀old฀parent's฀
SOFP฀at฀date฀of฀reorganisation฀if:฀
(a) New฀parent฀obtains฀control฀through฀
exchange฀of฀equity฀instruments฀with฀
old฀parent฀
(b) Assets฀and฀liabilities฀of฀new฀and฀
original฀group฀are฀the฀same฀before฀
and฀after฀the฀reorganisation฀
(c) Owners฀of฀the฀original฀parent฀
before฀the฀reorganisation฀have฀the฀
same฀absolute฀and฀relative฀interest฀
in฀net฀assets฀of฀original฀and฀new฀
group฀
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1. Disposals฀where฀significant฀influence฀or฀control฀is฀lost฀
฀ The฀accounting฀treatment฀in฀the฀group฀financial฀statements฀is฀driven฀by฀the฀concept฀of฀substance฀
over฀form.฀
฀ Where฀significant฀influence฀or฀control฀is฀lost,฀in฀substance,฀as฀one฀or฀more฀accounting฀boundary฀
has฀been฀crossed:฀
฀ ฀ An฀ associate฀ (for฀ associate฀ to฀ investment฀ disposals)฀ or฀ a฀ subsidiary฀ (for฀ subsidiary฀ to฀
associate฀฀disposals,฀subsidiary฀to฀investment฀disposals฀and฀full฀disposals)฀has฀been฀'sold'฀
so฀a฀group฀profit฀or฀loss฀on฀disposal฀must฀be฀recognised.฀
฀ ฀ An฀ investment฀ (for฀ associate฀ to฀ investment฀ and฀ subsidiary฀ to฀ investment฀ disposals)฀ or฀
associate฀ (for฀ subsidiary฀ to฀ associate฀ disposals)฀ has฀ been฀ 'purchased'฀ so฀ the฀ remaining฀
investment฀must฀be฀remeasured฀to฀fair฀value.฀
2. Disposals฀where฀control฀is฀retained฀
฀ In฀ substance,฀ there฀ has฀ been฀ no฀ disposal฀ because฀ the฀ entity฀ is฀ still฀ a฀ subsidiary฀ and฀ no฀
accounting฀boundary฀has฀been฀crossed.฀
฀ This฀is฀a฀transaction฀between฀group฀shareholders฀which฀is฀recorded฀in฀equity:฀
฀ ฀ Increase฀non-controlling฀interests฀in฀the฀consolidated฀SOFP฀
฀ ฀ Recognise฀an฀adjustment฀to฀equity฀(post฀to฀the฀parent's฀column฀in฀the฀consolidated฀retained฀
earnings฀working)฀
฀ Summary฀of฀approach฀for฀all฀disposals:฀
฀ For฀any฀change฀in฀group฀structure:฀
฀ ฀ The฀ entity's฀ status฀ (investment,฀ subsidiary,฀ associate)฀ during฀ the฀ year฀ will฀ determine฀ the฀
accounting฀ treatment฀ in฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
฀ ฀ The฀ entity's฀ status฀ at฀ the฀ year฀ end฀ will฀ determine฀ the฀ accounting฀ treatment฀ in฀ the฀
3. Deemed฀disposals฀
฀ ฀ When฀ a฀ subsidiary฀ issues฀ shares฀ and฀ the฀ parent฀ does฀ not฀ take฀ up฀ all฀ of฀ its฀ rights,฀ its฀
shareholding฀is฀reduced.฀This฀is฀accounted฀for฀as฀a฀normal฀disposal.฀฀
฀ ฀ The฀percentages฀owned฀by฀the฀parent฀before฀and฀after฀the฀subsidiary฀issues฀shares฀must฀be฀
calculated฀and฀where฀control฀is฀lost,฀a฀group฀profit฀on฀disposal฀must฀be฀recognised.฀
4. Group฀reorganisations฀
฀ ฀ When฀a฀group฀restructures฀itself฀internally,฀the฀individual฀books฀are฀updated฀for฀changes฀in฀
ownership฀of฀investments.฀
฀ ฀ However,฀in฀substance,฀it฀is฀still฀the฀same฀group฀because฀typically฀the฀ultimate฀shareholders฀
are฀ the฀ same,฀ no฀ cash฀ has฀ left฀ and฀ group.฀ Therefore,฀ there฀ is฀ no฀ impact฀ on฀ the฀ group฀
accounts.฀
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฀฀
Q15฀Holmes฀and฀Deakin฀
฀ Deloitte฀has฀a฀useful฀website฀with฀summaries฀of฀IAS฀and฀IFRS.฀Read฀the฀section฀entitled฀'Changes฀in฀
ownership฀interests'฀in฀the฀summary฀of฀IFRS฀10:฀
www.iasplus.com/en/standards฀
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฀
฀
Non-current฀assets฀held
฀
฀
฀
฀
฀
for฀sale฀and
discontinued฀operations
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀accounting฀requirements฀for฀the฀classification฀and฀ C2(b)฀
measurement฀of฀non-current฀assets฀held฀for฀sale.฀
Note.฀Only฀discontinued฀operations฀are฀covered฀in฀this฀chapter.฀Acquisitions฀are฀
covered฀in฀Chapter฀11฀and฀disposals฀in฀Chapter฀12.฀
Discuss฀and฀apply฀the฀treatment฀of฀a฀subsidiary฀which฀has฀been฀acquired฀ D1(j)฀
exclusively฀with฀a฀view฀to฀subsequent฀disposal.฀
Exam฀context฀
You฀studied฀non-current฀assets฀held฀for฀sale฀and฀discontinued฀operations฀in฀your฀previous฀studies฀so฀
both฀ areas฀ are฀ revision;฀ however,฀ the฀ topic฀ can฀ be฀ examined฀ in฀ more฀ detail฀ in฀ Strategic฀ Business฀
Reporting฀ (SBR).฀ These฀ topics฀ could฀ form฀ the฀ basis฀ of฀ part฀ of฀ a฀ written฀ question,฀ with฀ relevant฀
calculations.฀Both฀areas฀could฀also฀be฀examined฀in฀the฀context฀of฀consolidated฀financial฀statements฀at฀
this฀level.฀
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฀฀
฀
฀
Non-current฀assets฀held฀for฀
฀
sale฀and฀discontinued฀
฀ operations฀
฀
฀
฀ 1.฀ Non-current฀ ฀ 3.฀ Discontinued฀
assets/disposal฀groups฀ operations฀
held฀for฀sale฀
2.฀ Non-current฀
assets/disposal฀groups฀to฀
be฀abandoned฀
310฀

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13:฀Non-current฀assets฀held฀for฀sale฀and฀discontinued฀operations฀
1฀ IFRS฀5฀Non-current฀Assets฀Held฀for฀Sale฀and฀Discontinued฀
Operations฀
1.1฀ Introduction฀
IFRS฀5฀covers:฀
฀ Measurement,฀ presentation฀ and฀ disclosure฀ of฀ non-current฀ assets฀ and฀ disposal฀ groups฀ of฀ an฀
entity;฀and฀
฀ The฀presentation฀and฀disclosure฀of฀discontinued฀operations.฀
It฀ was฀ the฀ first฀ IFRS฀ to฀ be฀ issued฀ as฀ a฀ result฀ of฀ the฀ Norwalk฀ Agreement฀ working฀ towards฀ the฀
harmonisation฀of฀international฀and฀US฀GAAP.฀
1.2฀ Scope฀
IFRS฀ 5฀ applies฀ to฀ all฀ of฀ an฀ entity's฀ recognised฀ non-current฀ assets฀ and฀ disposal฀ groups฀ (as฀ defined฀
below)฀with฀the฀following฀exceptions฀(IFRS฀5:฀para.฀5):฀
฀ Deferred฀tax฀assets;฀
฀ Assets฀arising฀from฀employee฀benefits;฀
฀ Financial฀assets฀within฀the฀scope฀of฀IFRS฀9;฀
฀ Investment฀properties฀accounted฀for฀under฀the฀fair฀value฀model;฀
฀ Biological฀assets฀measured฀at฀fair฀value;฀and฀
฀ Contractual฀rights฀under฀insurance฀contracts.฀฀
1.3฀Disposal฀groups฀
Disposal฀group:฀a฀group฀of฀assets฀to฀be฀disposed฀of,฀by฀sale฀or฀otherwise,฀together฀as฀a฀group฀in฀
a฀single฀transaction,฀and฀liabilities฀directly฀associated฀with฀those฀assets฀that฀will฀be฀transferred฀in฀the฀
Key฀term฀
transaction.฀
The฀ disposal฀ group฀ may฀ be฀ a฀ group฀ of฀ CGUs฀ (cash-generating฀ units),฀ a฀ single฀ CGU,฀ or฀ part฀ of฀ a฀
CGU.฀
1.4฀ Classification฀of฀non-current฀assets฀(or฀disposal฀groups)฀as฀held฀
for฀sale฀
An฀ entity฀ shall฀ classify฀ a฀ non-current฀ asset฀ (or฀ disposal฀ group)฀ as฀ held฀ for฀ sale฀ if฀ its฀ carrying฀
amount฀ will฀ be฀ recovered฀ principally฀ through฀ a฀ sale฀ transaction฀ rather฀ than฀ through฀ continuing฀ use฀
To฀be฀classified฀as฀'held฀for฀sale',฀the฀following฀criteria฀must฀be฀met฀(IFRS฀5:฀paras.฀7–8):฀
(a)฀ The฀ asset฀ (or฀ disposal฀ group)฀ must฀ be฀ available฀ for฀ immediate฀ sale฀ in฀ its฀ present฀
condition,฀subject฀only฀to฀usual฀and฀customary฀sales฀terms;฀and฀
(b)฀ The฀sale฀must฀be฀highly฀probable.฀For฀this฀to฀be฀the฀case:฀
–฀ Price฀ at฀ which฀ the฀ asset฀ (or฀ disposal฀ group)฀ is฀ actively฀ marketed฀ for฀ sale฀ must฀ be฀
reasonable฀in฀relation฀to฀its฀current฀fair฀value;฀
–฀ Unlikely฀ that฀ significant฀ changes฀ will฀ be฀ made฀ to฀ the฀ plan฀ or฀ the฀ plan฀ withdrawn฀
(indicated฀by฀actions฀required฀to฀complete฀the฀plan);฀
–฀ Management฀(at฀the฀appropriate฀level)฀must฀be฀committed฀to฀a฀plan฀to฀sell;฀
–฀ Active฀programme฀to฀locate฀a฀buyer฀and฀complete฀the฀plan฀must฀have฀been฀initiated;฀
–฀ Sale฀expected฀to฀qualify฀for฀recognition฀as฀a฀completed฀sale฀within฀one฀year฀from฀the฀
date฀of฀classification฀as฀held฀for฀sale฀(subject฀to฀limited฀specified฀exceptions).฀
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฀฀
1.5฀ Measurement฀and฀presentation฀of฀non-current฀assets฀(or฀disposal฀
groups)฀classified฀as฀held฀for฀sale฀
1.5.1฀฀Approach฀
Immediately฀before฀initial฀classification฀as฀held฀for฀sale,฀the฀asset฀(or฀disposal฀group)฀is฀
Step฀1 measured฀in฀accordance฀with฀the฀applicable฀IFRS฀(eg฀property,฀plant฀and฀
equipment฀held฀under฀the฀IAS฀16฀revaluation฀model฀is฀revalued).
On฀classification฀of฀the฀non-current฀asset฀(or฀disposal฀group)฀as฀held฀for฀sale,฀it฀is฀written฀
down฀to฀fair฀value฀less฀costs฀to฀sell฀(if฀less฀than฀carrying฀amount).
Step฀2 Any฀impairment฀loss฀arising฀under฀IFRS฀5฀is฀charged฀to฀profit฀or฀loss฀(and฀the฀credit฀
allocated฀to฀assets฀of฀a฀disposal฀group฀using฀the฀IAS฀36฀rules,฀ie฀first฀to฀goodwill฀then฀to฀
other฀assets฀pro฀rata฀based฀on฀carrying฀amount).
Non-current฀assets/disposal฀groups฀classified฀as฀held฀for฀sale฀are฀not฀
Step฀3 depreciated/amortised.
Any฀subsequent฀changes฀in฀fair฀value฀less฀costs฀to฀sell฀are฀recognised฀as฀a
further฀impairment฀loss฀(or฀reversal฀of฀an฀imapairment฀loss).
Step฀4
However,฀gains฀recognised฀cannot฀exceed฀cumulative฀impairment฀losses฀to฀date฀(whether฀
under฀IAS฀36฀or฀IFRS฀5).
Presented:
•฀ As฀single฀amounts฀(of฀assets฀and฀liabilities);
Step฀5 •฀ On฀the฀face฀of฀the฀statement฀of฀financial฀position;
•฀ Separately฀from฀other฀assets฀and฀liabilities;฀and
•฀ Normally฀as฀current assets฀and฀liabilities฀(not฀offset).
฀฀
(IFRS฀5:฀paras.฀15,฀18,฀20–22,฀25,฀38)฀
Similar฀ principles฀ apply฀ if฀ an฀ asset฀ (or฀ disposal฀ group)฀ is฀ held฀ for฀ distribution฀ to฀ owners฀ when฀ the฀
entity฀ is฀ committed฀ to฀ do฀ so฀ (ie฀ when฀ the฀ assets฀ are฀ available฀ for฀ immediate฀ distribution฀ and฀ the฀
distribution฀is฀highly฀probable).฀The฀write฀down฀in฀that฀case฀is฀to฀fair฀value฀less฀costs฀to฀distribute฀
(IFRS฀5:฀para.฀15A).฀
Illustration฀1฀
An฀item฀of฀property,฀plant฀and฀equipment฀measured฀under฀the฀revaluation฀model฀has฀a฀revalued฀
carrying฀amount฀of฀$76m฀at฀1฀January฀20X1฀and฀a฀remaining฀useful฀life฀of฀20฀years฀(and฀a฀zero฀
residual฀value).฀On฀1฀July฀20X1฀the฀asset฀met฀the฀criteria฀to฀be฀classified฀as฀held฀for฀sale.฀Its฀fair฀
value฀was฀$80m฀and฀costs฀to฀sell฀were฀$1m฀on฀that฀date.฀
Analysis฀
The฀asset฀is฀depreciated฀to฀1฀July฀20X1฀reducing฀its฀carrying฀amount฀by฀$1.9m฀($76m/฀20฀years฀×฀
6/12)฀to฀$74.1m.฀The฀asset฀is฀revalued฀(under฀IAS฀16)฀to฀$80m฀on฀that฀date฀and฀a฀gain฀of฀$5.9m฀
($80m฀–฀$74.1m)฀is฀recognised฀in฀other฀comprehensive฀income.฀
On฀classification฀as฀held฀for฀sale,฀the฀asset฀is฀remeasured฀to฀fair฀value฀less฀costs฀to฀sell฀of฀$79m฀
($80m฀–฀$1m)฀as฀this฀is฀lower฀than฀its฀carrying฀amount฀($80m).฀The฀loss฀of฀$1m฀is฀recognised฀in฀
The฀asset฀is฀no฀longer฀depreciated฀and฀is฀presented฀as฀a฀separate฀line฀item฀'Non-current฀assets฀held฀
for฀sale'฀at฀$79m฀within฀current฀assets.฀
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1.5.2฀฀Disclosure฀
As฀ well฀ as฀ separate฀ presentation฀ of฀ non-current฀ assets฀ held฀ for฀ sale,฀ and฀ liabilities฀
directly฀ associated฀ with฀ assets฀ held฀ for฀ sale฀ in฀ the฀ statement฀ of฀ financial฀ position,฀ any฀
cumulative฀income฀or฀expense฀recognised฀in฀other฀comprehensive฀income฀relating฀to฀
a฀ non-current฀ asset฀ held฀ for฀ sale฀ is฀ presented฀ separately฀ in฀ the฀ reserves฀ section฀ of฀ the฀ statement฀ of฀
financial฀position฀(IFRS฀5:฀para.฀38).฀
The฀ following฀ is฀ disclosed฀ in฀ the฀ notes฀ to฀ the฀ financial฀ statements฀ in฀ respect฀ of฀ non-current฀
assets/disposal฀groups฀held฀for฀sale฀or฀sold฀(IFRS฀5:฀para.฀41):฀
(a)฀ A฀description฀of฀the฀non-current฀asset฀(or฀disposal฀group);฀
(b)฀ A฀description฀of฀the฀facts฀and฀circumstances฀of฀the฀sale,฀or฀leading฀to฀the฀expected฀disposal,฀
and฀the฀expected฀manner฀and฀timing฀of฀the฀disposal;฀
(c)฀ The฀ gain฀ or฀ loss฀ recognised฀ on฀ assets฀ classified฀ as฀ held฀ for฀ sale,฀ and฀ (if฀ not฀ presented฀
separately฀on฀the฀face฀of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income)฀the฀
caption฀which฀includes฀it;฀
(d)฀ If฀applicable,฀the฀operating฀segment฀in฀which฀the฀non-current฀asset฀is฀presented฀in฀accordance฀
with฀IFRS฀8฀Operating฀Segments.฀
1.5.3฀฀Proforma฀presentation฀
Non-current฀assets฀held฀for฀sale฀(adapted฀from฀IFRS฀5:฀IG฀Example฀12฀and฀IAS฀1:฀IG)฀
XYZ฀GROUP฀฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀20X3฀
฀ 20X3 ฀ ฀20X2฀
฀ $'000 ฀ ฀$'000฀
Assets฀ ฀ ฀
Non-current฀assets฀ ฀ ฀
฀฀฀Property,฀plant฀and฀equipment฀ X ฀ ฀X฀
฀฀฀Goodwill฀ X ฀ ฀X฀
฀฀฀Other฀intangible฀assets฀ X ฀ ฀X฀
฀฀฀Financial฀assets฀ ฀X฀ ฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
Current฀assets฀ ฀ ฀
฀฀฀Inventories฀ X ฀ ฀X฀
฀฀฀Trade฀and฀other฀receivables฀ X ฀ ฀X฀
฀฀฀Cash฀and฀cash฀equivalents฀ X
฀ ฀ ฀ ฀X฀
฀ X ฀ ฀X฀
Non-current฀assets฀held฀for฀sale฀ X
฀ ฀ ฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
Total฀assets฀ ฀X฀ ฀ ฀X฀
฀ ฀ ฀
฀ 313฀

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฀฀
฀ 20X3 ฀ ฀20X2฀
฀ $'000 ฀ ฀$'000฀
Equity฀and฀liabilities฀ ฀ ฀
฀฀฀Share฀capital฀ X ฀ ฀X฀
฀฀฀Retained฀earnings฀ X ฀ ฀X฀
฀฀฀Other฀components฀of฀equity฀ X ฀ ฀X฀
Amounts฀recognised฀in฀other฀comprehensive฀income฀and฀฀
accumulated฀in฀equity฀relating฀to฀non-current฀assets฀held฀for฀sale฀ ฀X฀ ฀ ฀X฀
฀ X ฀ ฀X฀
Non-controlling฀interests฀ X
฀ ฀ ฀ ฀X฀
Total฀equity฀ ฀X฀ ฀ ฀ X฀
Non-current฀liabilities฀ ฀ ฀
฀฀฀Long-term฀financial฀liabilities฀ X ฀ ฀X฀
฀฀฀Deferred฀tax฀ X ฀ ฀X฀
฀฀฀Long-term฀provisions฀ ฀X฀ ฀ ฀ X฀
฀ ฀X฀ ฀ ฀X฀
Current฀liabilities฀ ฀ ฀
฀฀฀Trade฀and฀other฀payables฀ X ฀ ฀X฀
฀฀฀Short-term฀financial฀liabilities฀ X ฀ ฀X฀
฀฀฀Current฀tax฀payable฀ ฀X฀ ฀ ฀ X฀
฀ X ฀ ฀X฀
Liabilities฀ directly฀ associated฀ with฀ non-current฀ assets฀ classified฀ as
held฀for฀sale฀ ฀X฀ ฀ ฀X฀
฀ ฀X฀ ฀ ฀ X฀
Total฀equity฀and฀liabilities฀ ฀X฀ ฀ ฀ X฀
2฀Non-current฀assets฀to฀be฀abandoned฀
Non-current฀ assets฀ (or฀ disposal฀ groups)฀ to฀ be฀ abandoned฀ are฀not฀ classified฀ as฀ held฀ for฀ sale,฀ since฀
their฀carrying฀amount฀will฀be฀recovered฀principally฀through฀continuing฀use฀(IFRS฀5:฀para.฀13).฀
This฀includes฀non-current฀assets฀(or฀disposal฀groups)฀that฀are฀to฀be฀(IFRS฀5:฀para฀13):฀
฀ Used฀to฀the฀end฀of฀their฀economic฀life;฀or฀
฀ Closed฀rather฀than฀sold.฀
However,฀ if฀ the฀ disposal฀ group฀ meets฀ the฀ definition฀ of฀ a฀ discontinued฀ operation฀ (see฀ below),฀ it฀ is฀
presented฀as฀such฀at฀the฀date฀it฀ceases฀to฀be฀used฀(IFRS฀5:฀para.฀13).฀
Illustration฀2฀
On฀20฀October฀20X3฀the฀directors฀of฀a฀parent฀company฀made฀a฀public฀announcement฀of฀plans฀to฀
close฀a฀steel฀works฀owned฀by฀a฀subsidiary.฀The฀closure฀means฀that฀the฀group฀will฀no฀longer฀carry฀out฀
this฀type฀of฀operation,฀which฀until฀recently฀has฀represented฀about฀10%฀of฀its฀total฀turnover.฀The฀works฀
will฀be฀gradually฀shut฀down฀over฀a฀period฀of฀several฀months,฀with฀complete฀closure฀expected฀in฀July฀
20X4.฀At฀31฀December฀output฀had฀been฀significantly฀reduced฀and฀some฀redundancies฀had฀already฀
taken฀place.฀The฀cash฀flows,฀revenues฀and฀expenses฀relating฀to฀the฀steel฀works฀can฀be฀clearly฀
distinguished฀from฀those฀of฀the฀subsidiary's฀other฀operations.฀
Required฀
How฀should฀the฀closure฀be฀treated฀in฀the฀consolidated฀financial฀statements฀for฀the฀year฀ended฀
31฀December฀20X3?฀
314฀

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Solution฀
Because฀the฀steel฀works฀is฀being฀closed฀rather฀than฀sold,฀it฀cannot฀be฀classified฀as฀'held฀for฀sale'.฀In฀
addition,฀the฀steel฀works฀is฀not฀a฀discontinued฀operation.฀Although฀at฀31฀December฀20X3฀the฀group฀
was฀firmly฀committed฀to฀the฀closure,฀this฀has฀not฀yet฀taken฀place฀and฀therefore฀the฀steel฀works฀must฀
be฀included฀in฀continuing฀operations.฀Information฀about฀the฀planned฀closure฀could฀be฀disclosed฀in฀the฀
notes฀to฀the฀financial฀statements.฀
3฀ Discontinued฀operations฀
Discontinued฀operation:฀a฀component฀of฀an฀entity฀that฀either฀has฀been฀disposed฀of฀or฀is฀
classified฀as฀held฀for฀sale฀and:฀
Key฀term฀
(a)฀ Represents฀a฀separate฀major฀line฀of฀business฀or฀geographical฀area฀of฀operations;฀
(b)฀ Is฀part฀of฀a฀single฀coordinated฀plan฀to฀dispose฀of฀a฀separate฀major฀line฀of฀business฀or฀
geographical฀area฀of฀operations;฀or฀
(c)฀ Is฀a฀subsidiary฀acquired฀exclusively฀with฀a฀view฀to฀resale.฀
Component฀of฀an฀entity:฀a฀part฀that฀has฀operations฀and฀cash฀flows฀that฀can฀be฀clearly฀
distinguished,฀operationally฀and฀for฀financial฀reporting฀purposes,฀from฀the฀rest฀of฀the฀entity.฀
3.1฀ Presentation฀and฀disclosure฀
The฀general฀requirement฀is฀that฀an฀entity฀shall฀present฀and฀disclose฀information฀that฀enables฀users฀of฀
financial฀statements฀to฀evaluate฀the฀financial฀effects฀of฀discontinued฀operations฀and฀disposals฀of฀non-
current฀assets฀and฀disposal฀groups฀(IFRS฀5:฀para.฀30).฀
The฀following฀presentation฀and฀disclosure฀requirements฀apply:฀
Discontinued฀operations฀(IFRS฀5:฀para.฀33)฀
(a)฀ On฀the฀face฀of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
(i)฀ A฀single฀amount฀comprising฀the฀total฀of:฀
(1)฀ The฀post-tax฀profit฀or฀loss฀of฀discontinued฀operations;฀and฀
(2)฀ The฀post-tax฀gain฀or฀loss฀recognised฀on฀the฀remeasurement฀to฀fair฀value฀less฀
costs฀ to฀ sell฀ or฀ on฀ the฀ disposal฀ of฀ assets/disposal฀ groups฀ comprising฀ the฀
discontinued฀operation.฀
(b)฀ On฀the฀face฀of฀the฀financial฀statements฀or฀in฀the฀notes฀
(i)฀ The฀ revenue,฀ expenses,฀ and฀pre-tax฀ profit฀ or฀ loss฀ of฀ discontinued฀ operations,฀
and฀the฀related฀income฀tax฀expense;฀
(ii)฀ The฀gain฀ or฀ loss฀recognised฀on฀the฀measurement฀to฀fair฀value฀less฀costs฀to฀sell฀or฀on฀
the฀disposal฀of฀assets/disposal฀groups฀comprising฀the฀discontinued฀operation,฀and฀the฀
related฀income฀tax฀expense;฀
(iii)฀ The฀net฀cash฀flows฀attributable฀to฀the฀operating,฀investing,฀and฀financing฀activities฀of฀
discontinued฀operations.฀
฀ 315฀

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฀฀
Illustration฀3฀
A฀70%฀subsidiary฀of฀a฀group฀with฀a฀31฀December฀year฀end฀meets฀the฀definition฀of฀a฀discontinued฀
operation,฀through฀being฀classified฀as฀held฀for฀sale,฀on฀1฀September฀20X1.฀
The฀subsidiary's฀profit฀for฀the฀year฀ended฀31฀December฀20X1฀is฀$36m.฀The฀carrying฀amount฀of฀the฀
consolidated฀net฀assets฀on฀1฀September฀20X1฀is฀$220m฀and฀goodwill฀$21m.฀The฀non-controlling฀
interests฀were฀measured฀at฀the฀proportionate฀share฀of฀the฀fair฀value฀of฀the฀net฀assets฀at฀acquisition;฀ie฀
the฀goodwill฀is฀partial฀goodwill.฀The฀fair฀value฀less฀costs฀to฀sell฀of฀the฀subsidiary฀on฀1฀September฀
20X1฀was฀$245m.฀
Analysis฀
In฀the฀consolidated฀statement฀of฀profit฀or฀loss,฀the฀subsidiary฀is฀consolidated฀line-by-line฀for฀8/12฀of฀
the฀year฀($36m฀×฀8/12฀=฀$24m).฀
The฀profit฀for฀the฀other฀4฀months฀($36m฀×฀4/12฀=฀$12m)฀must฀be฀shown฀as฀a฀discontinued฀
operation฀as฀a฀single฀line฀item฀combined฀with฀any฀loss฀on฀remeasurement.฀
The฀loss฀on฀remeasurement฀as฀held฀for฀sale฀is฀calculated฀as:฀
As฀only฀partial฀goodwill฀is฀recognised,฀it฀
฀ $m฀ must฀ be฀ grossed฀ up฀ for฀ the฀ impairment฀
'Notional'฀goodwill฀(21฀×฀100%/70%)฀ 30฀ test฀ to฀ compare฀ correctly฀ fair฀ value฀ less฀
costs฀to฀sell฀(which฀is฀100%)฀with฀100%฀
Consolidated฀net฀assets฀ ฀฀220฀
of฀the฀subsidiary฀
Consolidated฀carrying฀amount฀of฀subsidiary฀ 250฀
Less฀fair฀value฀less฀costs฀to฀sell฀ ฀(245)฀
Impairment฀loss฀(gross)฀฀ ฀฀฀฀฀฀5฀
However,฀as฀only฀the฀group฀share฀of฀the฀goodwill฀is฀recognised฀in฀the฀financial฀statements,฀only฀the฀
group฀share฀of฀the฀impairment฀loss฀฀–฀฀70%฀×฀$5m฀=฀$3.5m฀–฀is฀recognised.฀
The฀single฀amount฀recognised฀as฀a฀separate฀line฀item฀in฀the฀statement฀of฀profit฀or฀loss฀as฀profit฀on฀the฀
discontinued฀operation฀is:฀
฀ $m฀
Profit฀or฀loss฀of฀discontinued฀operations฀($36m฀×฀4/12)฀ 12฀
Loss฀on฀remeasurement฀to฀fair฀value฀less฀costs฀to฀sell฀(ignoring฀any฀tax฀effect)฀ ฀(3.5)฀
฀ ฀฀8.5฀
3.2฀ Proforma฀presentation฀
Discontinued฀operations฀(IFRS฀5:฀IG฀Example฀11)฀
XYZ฀GROUP฀฀฀
STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀ FOR฀ THE฀ YEAR฀
ENDED฀31฀DECEMBER฀20X3฀
฀ 20X3 ฀ ฀20X2฀
฀ $'000 ฀ ฀$'000฀
Continuing฀operations฀ ฀ ฀
Revenue฀ X ฀ ฀X฀
Cost฀of฀sales฀ (X) ฀ ฀(X)฀
Gross฀profit฀ X ฀ ฀X฀
Other฀income฀ X ฀ ฀X฀
Distribution฀costs฀ (X) ฀ ฀(X)฀
Administrative฀expenses (X) ฀ ฀(X)฀
Other฀expenses฀ (X) ฀ ฀(X)฀
Finance฀costs฀ (X) ฀ ฀(X)฀
Share฀of฀profit฀of฀associates฀ X ฀ ฀฀X฀
Profit฀before฀tax฀ X ฀ ฀X฀
Income฀tax฀expense฀ (X) ฀ ฀(X)฀
Profit฀for฀the฀year฀from฀continuing฀operations X ฀ ฀X฀
316฀

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฀ 20X3 ฀ ฀20X2฀
฀ $'000 ฀ ฀$'000฀
Discontinued฀operations ฀ ฀
Profit฀for฀the฀year฀from฀discontinued฀operations X ฀ ฀฀X฀
Profit฀for฀the฀year฀ X ฀ ฀฀X฀
฀ ฀ ฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀ X ฀ ฀฀X฀
Total฀comprehensive฀income฀for฀the฀year X ฀฀X฀
฀
฀฀฀฀Owners฀of฀the฀parent ฀ ฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀from฀continuing฀operations X ฀ X฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀from฀discontinued฀operations X ฀ ฀฀X฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀attributable฀to฀owners฀of฀the฀parent X ฀ ฀฀X฀
฀฀฀฀Non-controlling฀interests฀ ฀ ฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀from฀continuing฀operations X ฀ X฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀from฀discontinued฀operations X ฀ ฀฀X฀
฀฀฀฀฀฀฀Profit฀for฀the฀year฀attributable฀to฀non-controlling฀interests X ฀ ฀฀X฀
฀ X ฀ ฀฀X฀
Total฀comprehensive฀income฀attributable฀to: ฀ ฀
฀฀฀฀Owners฀of฀the฀parent X ฀ X฀
฀฀฀฀Non-controlling฀interests฀ X ฀ ฀฀X฀
฀ X ฀ ฀฀X฀
฀
Activity฀1:฀Discontinued฀operation฀ ฀ ฀
Titan฀is฀the฀parent฀entity฀of฀a฀group฀of฀companies฀with฀two฀subsidiaries,฀Cronus฀and฀Rhea.฀Cronus฀is฀
100%฀owned฀and฀Rhea฀is฀80%฀owned.฀Both฀subsidiaries฀have฀been฀owned฀for฀a฀number฀of฀years.฀
฀ Titan ฀Cronus฀ ฀Rhea
฀ $m ฀$m฀ ฀$m
฀Revenue฀ 450 ฀265฀ ฀182
฀Cost฀of฀sales฀ ฀(288)฀ ฀(152)฀ ฀(106)฀
฀Gross฀profit฀ 162 ฀113฀ ฀76
฀Operating฀expenses฀ (71) ฀(45)฀ ฀(22)
฀Finance฀costs฀ ฀ (5)฀ ฀฀฀฀฀(3)฀ ฀฀฀฀฀(2)฀
฀Profit฀before฀tax฀ 86 ฀65฀ ฀52
฀Income฀tax฀expense฀ ฀ (17)฀ ฀฀฀(13)฀ ฀฀฀(10)฀
฀Profit฀for฀the฀year฀ 69 ฀฀฀฀52฀ ฀฀42
฀Gain฀on฀property฀revaluation,฀net฀of฀tax฀ ฀ 16฀ ฀ ฀฀฀฀฀9฀ ฀฀฀฀ 6฀
฀Total฀comprehensive฀income฀for฀the฀year฀ ฀ 85฀ ฀฀฀฀61฀ ฀฀฀48฀
The฀ consolidated฀ carrying฀ amount฀ of฀ the฀ net฀ assets฀ of฀ Rhea฀ on฀ 1฀ January฀ 20X5฀ was฀ $320m.฀ The฀
goodwill฀ of฀ Rhea฀ was฀ $38m฀ on฀ that฀ date.฀ The฀ non-controlling฀ interests฀ were฀ measured฀ at฀ the฀
proportionate฀share฀of฀the฀fair฀value฀of฀the฀net฀assets฀at฀acquisition.฀
Titan฀decided฀to฀sell฀its฀investment฀in฀Rhea฀and฀on฀1฀October฀20X5฀the฀investment฀in฀Rhea฀met฀the฀
criteria฀ to฀ be฀ classified฀ as฀ held฀ for฀ sale.฀ ฀ The฀ fair฀ value฀ less฀ costs฀ to฀ sell฀ of฀ Rhea฀ on฀ that฀ date฀ was฀
$395m.฀฀No฀further฀adjustment฀was฀required฀at฀the฀year฀end.฀
฀ 317฀

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฀฀
Required฀
Prepare฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ Titan฀
The฀ profit฀ and฀ total฀ comprehensive฀ income฀ figures฀ attributable฀ to฀ owners฀ of฀ the฀ parent฀ and฀
attributable฀ to฀ non-controlling฀ interests฀ need฀ not฀ be฀ subdivided฀ into฀ continuing฀ and฀ discontinued฀
operations.฀฀Ignore฀the฀tax฀effects฀of฀any฀impairment฀loss.฀
Work฀to฀the฀nearest฀$0.1m.฀
Solution฀
TITAN฀GROUP฀
฀ ฀$m฀฀฀฀
Continuing฀operations฀ ฀
Revenue฀ ฀
Cost฀of฀sales฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Operating฀expenses฀ ฀
Finance฀costs฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Income฀tax฀expense฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀from฀continuing฀operations ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀
Discontinued฀operations ฀
Profit฀for฀the฀year฀from฀discontinued฀operations ฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀ ฀
฀฀฀Gain฀on฀property฀revaluation,฀net฀of฀tax฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀฀Owners฀of฀the฀parent ฀฀
฀฀Non-controlling฀interests฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀฀Owners฀of฀the฀parent ฀฀
฀฀Non-controlling฀interests฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
318฀

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Workings฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
3.3฀ Subsidiaries฀held฀for฀sale฀
Where฀ an฀ entity฀ is฀ committed฀ to฀ a฀ sale฀ plan฀ involving฀ loss฀ of฀ control,฀ but฀ a฀ retention฀ of฀ a฀
non-controlling฀ interest฀ (see฀ Chapter฀ 12฀ Changes฀ in฀ group฀ structures:฀ disposals฀ and฀ group฀
reorganisations),฀the฀assets฀and฀liabilities฀of฀the฀subsidiary฀are฀still฀ classified฀ as฀ held฀ for฀ sale฀
and฀ disclosed฀ as฀ a฀ discontinued฀ operation,฀ when฀ the฀ respective฀ criteria฀ are฀ met฀
(IFRS฀5:฀para.฀36A).฀
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฀฀
Chapter฀13฀Section฀1฀of฀the฀Supplementary฀Reading฀contains฀a฀comprehensive฀activity฀of฀a฀
subsidiary฀held฀for฀sale.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
Ethics฀note฀
Classification฀of฀assets฀as฀held฀for฀sale฀or฀treatment฀of฀an฀operation฀as฀discontinued฀means฀that฀the฀
user฀of฀the฀financial฀statements฀will฀view฀that฀data฀in฀a฀different฀way.฀For฀example,฀a฀user฀will฀expect฀
the฀value฀of฀non-current฀assets฀held฀for฀sale฀to฀be฀replaced฀with฀cash฀resources฀within฀a฀year,฀and฀
that฀any฀losses฀relating฀to฀a฀discontinued฀operation฀will฀cease฀to฀arise.฀
It฀is฀therefore฀important฀for฀management฀to฀behave฀ethically฀when฀applying฀these฀principles฀to฀ensure฀
the฀financial฀statements฀give฀a฀true฀and฀fair฀view.฀
It฀is฀also฀worth฀noting฀that฀assets฀classified฀as฀held฀for฀sale฀are฀not฀depreciated฀which฀could฀result฀in฀
an฀increase฀in฀profits฀as฀a฀result,฀so฀there฀is฀an฀incentive฀for฀management฀to฀classify฀assets฀in฀that฀
way.฀
฀
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฀ Continuing฀and฀discontinued฀
฀ interests฀(IFRS฀5)฀
฀
฀
1.฀ Non-current฀ 3.฀ Discontinued฀operations฀
฀
฀ assets/disposal฀groups฀
฀ A฀component฀of฀an฀entity฀(ie฀operations฀
held฀for฀sale฀ and฀cash฀flows฀can฀be฀clearly฀
distinguished฀operationally฀and฀for฀
Only฀when฀at฀year฀end:฀ financial฀reporting฀purposes)฀that฀either:฀
฀ Available฀for฀immediate฀sale฀in฀ ฀ Has฀been฀disposed฀of,฀or฀
present฀condition,฀subject฀to฀usual฀and฀ ฀ Is฀classified฀as฀held฀for฀sale฀
customary฀sales฀terms,฀and฀
and฀
฀ Sale฀is฀highly฀probable:฀ (a)฀ Represents฀a฀separate฀major฀line฀of฀
฀ P฀ rice฀actively฀marketed฀at฀is฀ business฀or฀geographical฀area฀of฀
reasonable฀vs฀FV฀ operations,฀
฀ U฀ nlikely฀that฀significant฀changes฀ (b)฀ Is฀part฀of฀a฀single฀co-ordinated฀plan฀to฀
made฀to฀plan฀ dispose฀of฀a฀separate฀major฀line฀of฀
฀ M฀anagement฀committed฀to฀plan฀to฀sell business฀or฀geographical฀area฀of฀
฀ A฀ ctive฀programme฀to฀locate฀buyer฀ operations,฀or฀
฀ S฀ ale฀expected฀to฀be฀completed฀
(c)฀ Is฀a฀subsidiary฀acquired฀exclusively฀
within฀one฀year฀of฀classification฀
with฀a฀view฀to฀resale฀
฀ Presentation/disclosure฀
฀On฀face฀of฀SPLOCI฀
Accounting฀treatment฀ Presentation฀ ฀Single฀amount฀comprising:฀
(1)฀ Depreciate฀&฀(if฀฀ ฀ Single฀amount฀
฀฀ Post-tax฀profit/loss฀of฀
previously฀held฀at฀FV)฀ ฀ On฀face฀of฀SOFP฀
discontinued฀operations฀
revalue฀ ฀ Separate฀ ฀
฀ Post-tax฀gain฀or฀loss฀on฀
฀ ฀ Normally฀current฀฀ ฀ remeasurement฀to฀FV฀–฀CTS฀฀
(2)฀ Reclassify฀as฀'held฀for฀ assets/liabilities฀฀
(not฀offset)฀
฀ or฀on฀disposal฀
sale'฀&฀write฀down฀to฀fair฀
value฀less฀costs฀to฀sell*฀ ฀ On฀face฀or฀in฀notes฀
฀ (if฀<฀carrying฀amount)฀ ฀ ฀ Revenue฀ ฀ X฀
฀ ฀ ฀ Expenses฀ ฀ (X)฀
(3)฀ Any฀loss฀recognised฀ ฀ Profit฀before฀tax฀ ฀ X฀
฀ ฀ Income฀tax฀expense฀ ฀ (X)฀
in฀P/L฀
฀ ฀ ฀ ฀ ฀ X฀
฀ ฀ Gain/loss฀on฀remeasurement/฀
(4)฀ Do฀not฀depreciate฀ ฀
฀ disposal฀ X฀
฀ ฀ ฀ Tax฀thereon฀฀ (X)฀
(5)฀ Subsequent฀changes฀ ฀ ฀ ฀ ฀ X฀
฀ –฀Impairment฀loss/loss฀ ฀ ฀ ฀ X฀
฀ ฀ Net฀cash฀flows฀
reversal฀(reversals฀
capped฀at฀losses฀to฀ ฀ ฀ –฀฀Operating฀ X/(X)฀
date)฀ ฀ ฀ –฀฀Investing฀ X/(X)฀
฀ –฀฀Financing฀ X/(X)฀
฀
*฀'Costs฀to฀distribute'฀if฀the฀
asset฀is฀held฀for฀distribution฀to฀
owners฀
2.฀ Non-current฀
assets/disposal฀groups฀to฀
be฀abandoned฀
฀ Not฀classified฀as฀held฀for฀sale฀
฀ Show฀results฀and฀cash฀flows฀as฀
discontinued฀operation฀if฀meets฀
definition
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฀฀
1.฀ Non-current฀assets/disposal฀groups฀held฀for฀sale฀
Non-current฀assets฀or฀disposal฀groups฀of฀assets฀(and฀associated฀liabilities)฀are฀
classified฀as฀held฀for฀sale฀when฀certain฀criteria฀are฀met.฀Such฀assets฀and฀liabilities฀are฀
presented฀as฀separate฀line฀items฀in฀the฀statement฀of฀financial฀position฀and฀the฀assets฀are฀
not฀depreciated.฀
2.฀ Non-current฀assets/disposal฀groups฀to฀be฀abandoned฀
Non-current฀assets฀or฀disposal฀groups฀being฀abandoned฀are฀not฀classified฀as฀held฀for฀
sale฀as฀they฀are฀not฀being฀sold.฀฀However,฀if฀they฀represent฀a฀big฀enough฀component฀to฀
meet฀the฀discontinued฀operation฀definition,฀they฀are฀classified฀as฀such,฀but฀not฀until฀the฀
period฀of฀discontinuance.฀
3.฀ Discontinued฀operations฀
Discontinued฀operations฀are฀also฀presented฀as฀a฀separate฀line฀item฀in฀the฀statement฀of฀
profit฀or฀loss฀and฀other฀comprehensive฀income.฀The฀minimum฀disclosure฀on฀the฀face฀of฀the฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀is฀a฀single฀figure฀comprising฀the฀
profit/loss฀on฀the฀discontinued฀operations฀and฀any฀gains฀or฀losses฀on฀sale฀or฀
remeasurement฀if฀classified฀as฀held฀for฀sale.฀
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There฀are฀articles฀on฀the฀ACCA฀website฀which฀are฀relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀which฀
The฀challenge฀of฀implementing฀IFRS฀5฀(2017)฀
฀
฀ ฀
฀ 323฀

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฀฀
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฀
฀
฀
Joint฀arrangements
฀
฀
฀
and฀group฀disclosures
฀
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀application฀of฀the฀joint฀control฀principle.฀ D2(d)฀
Discuss฀and฀apply฀the฀classification฀of฀joint฀arrangements.฀ D2(e)฀
Prepare฀the฀financial฀statements฀of฀parties฀to฀the฀joint฀arrangement.฀ D2(f)฀
Exam฀context฀
Joint฀ arrangements฀ could฀ feature฀ in฀ the฀ Strategic฀ Business฀ Reporting฀ (SBR)฀ exam฀ either฀ as฀ an฀
adjustment฀ in฀ a฀ consolidation฀ question฀ or฀ as฀ a฀ separate฀ part฀ of฀ a฀ written฀ question฀ discussing฀ their฀
accounting฀treatment.฀You฀need฀an฀overview฀of฀the฀key฀disclosures฀relating฀to฀consolidated฀financial฀
statements฀required฀by฀IFRS฀12.฀
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฀฀
฀
฀ Joint฀arrangements฀and฀
฀ group฀disclosures฀
฀
฀
฀
฀1.฀ Joint฀ ฀ 2.฀ IFRS฀12:฀Disclosure฀of฀
arrangements฀ interests฀in฀other฀
entities฀
Definitions฀
Joint฀operations฀
Joint฀ventures฀
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14:฀Joint฀arrangements฀and฀group฀disclosures฀
1฀Joint฀arrangements฀
Joint฀arrangement:฀an฀arrangement฀of฀which฀two฀or฀more฀parties฀have฀joint฀control.฀
Key฀terms฀ Joint฀control:฀the฀contractually฀agreed฀sharing฀of฀control฀of฀an฀arrangement,฀which฀exists฀only฀
when฀decisions฀about฀the฀relevant฀activities฀require฀the฀unanimous฀consent฀of฀the฀parties฀sharing฀
control.฀
A฀joint฀arrangement฀has฀the฀following฀characteristics฀(IFRS฀11:฀para.฀5):฀
(a)฀ The฀parties฀are฀bound฀by฀a฀contractual฀arrangement฀
(b)฀ The฀ contractual฀ arrangement฀ gives฀ two฀ or฀ more฀ of฀ those฀ parties฀ joint฀ control฀ of฀ the฀
arrangement.฀
Chapter฀14฀Section฀1฀of฀the฀Supplementary฀Reading฀contains฀more฀detail฀about฀what฀constitutes฀a฀
contractual฀arrangement฀and฀how฀this฀distinguishes฀between฀joint฀operations฀and฀joint฀ventures.฀This฀
Types฀of฀joint฀arrangement฀
There฀are฀two฀types฀of฀joint฀arrangement:฀
Key฀terms฀ Joint฀operation:฀a฀joint฀arrangement฀whereby฀the฀parties฀that฀have฀joint฀control฀of฀the฀
arrangement฀have฀rights฀to฀the฀assets,฀and฀obligations฀for฀the฀liabilities,฀relating฀to฀the฀
arrangement.฀
Joint฀venture:฀a฀joint฀arrangement฀whereby฀the฀parties฀that฀have฀joint฀control฀of฀the฀arrangement฀
have฀rights฀to฀the฀net฀assets฀of฀the฀arrangement.฀
Under฀these฀definitions,฀accounting฀treatment฀is฀determined฀based฀on฀whether฀or฀not฀the฀investor฀has฀
direct฀ rights฀ to฀ assets฀ and฀ obligations฀ for฀ liabilities฀ that฀ should฀ be฀ recognised฀ separately฀ in฀ its฀
financial฀statements,฀rather฀than฀merely฀following฀the฀legal฀form฀of฀the฀joint฀arrangement:฀
฀
Not฀structured฀
JOINT฀OPERATION฀
฀ through฀a฀
separate฀vehicle฀ (line฀by฀line฀
Entity฀considers:฀ accounting)฀
฀
฀ Legal฀form฀
฀ ฀ Terms฀of฀the฀contractual฀
Structured฀through฀ arrangement฀
JOINT฀VENTURE฀
฀ a฀separate฀vehicle฀ ฀ (Where฀relevant)฀other฀
(equity฀accounting)฀
facts฀and฀circumstances
฀
฀(IFRS฀11:฀para.฀B15)
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฀฀
1.2฀Accounting฀for฀joint฀operations฀
In฀its฀separate฀financial฀statements฀a฀joint฀operator฀recognises฀(IFRS฀11:฀para.฀20):฀
฀ Its฀own฀assets,฀liabilities฀and฀expenses฀
฀ Its฀share฀of฀assets฀held฀and฀expenses฀and฀liabilities฀incurred฀jointly฀
฀ Its฀revenue฀from฀the฀sale฀of฀its฀share฀of฀the฀output฀arising฀from฀the฀joint฀operation฀
฀ Its฀share฀of฀revenue฀from฀the฀sale฀of฀output฀by฀the฀joint฀operation฀itself.฀
No฀ adjustments฀are฀necessary฀on฀consolidation฀as฀the฀figures฀are฀already฀incorporated฀correctly฀
into฀the฀separate฀financial฀statements฀of฀the฀joint฀operator.฀
Activity฀1:฀Joint฀arrangement฀ ฀
ABM฀ Mining฀ entered฀ into฀ an฀ arrangement฀ with฀ another฀ entity,฀ Delta฀ Extractive฀ Industries,฀ and฀ the฀
national฀Government฀to฀extract฀coal฀from฀a฀surface฀mine.฀Under฀the฀terms฀of฀the฀agreement,฀each฀of฀
the฀two฀entities฀is฀entitled฀to฀40%฀of฀the฀income฀from฀selling฀the฀coal฀with฀the฀remainder฀allocated฀to฀
the฀ government.฀ Machinery฀ is฀ purchased฀ by฀ each฀ investor฀ as฀ necessary฀ and฀ all฀ costs฀ (including฀
depreciation฀in฀the฀case฀of฀the฀machinery฀which฀remains฀the฀property฀of฀each฀entity)฀are฀shared฀in฀
the฀ same฀ proportions฀ as฀ the฀ income.฀ Coal฀ inventories฀ on฀ hand฀ at฀ any฀ point฀ in฀ time฀ belong฀ to฀ the฀
three฀parties฀in฀the฀same฀proportions.฀All฀decisions฀must฀be฀made฀unanimously฀by฀the฀three฀parties.฀
During฀ the฀ first฀ accounting฀ period฀ where฀ the฀ arrangement฀ existed,฀ 460,000฀ tons฀ of฀ coal฀ were฀
extracted฀ by฀ ABM฀ and฀ sold฀ at฀ an฀ average฀ market฀ price฀ of฀ $120฀ per฀ ton.฀ 540,000฀ tons฀ were฀
extracted฀and฀sold฀by฀Delta฀at฀an฀average฀price฀of฀$118฀per฀ton.฀All฀coal฀extracted฀was฀sold฀before฀
the฀year฀end.฀The฀price฀of฀coal฀at฀the฀year฀end฀was฀$124฀per฀ton.฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ the฀ accounting฀ treatment฀ of฀ the฀ above฀ arrangement฀ in฀ ABM฀
Mining's฀financial฀statements฀during฀the฀first฀accounting฀period.฀
1.3฀Accounting฀for฀joint฀ventures฀
Parent's฀separate฀financial฀statements฀
Investments฀ in฀ subsidiaries,฀ associates฀ and฀ joint฀ ventures฀ are฀ carried฀ in฀ the฀ investor's฀ separate฀
financial฀statements฀(IAS฀27:฀para.฀10):฀
฀ At฀cost;฀฀
฀ At฀fair฀value฀(as฀a฀financial฀asset฀under฀IFRS฀9฀Financial฀Instruments);฀or฀
฀ Using฀ the฀ equity฀ method฀ as฀ described฀ in฀ IAS฀ 28฀ Investments฀ in฀ Associates฀ and฀ Joint฀
Ventures.฀
Where฀a฀joint฀venturer฀has฀no฀subsidiaries,฀the฀equity฀method฀must฀be฀used.฀฀
฀ (IFRS฀11:฀para.฀24)฀
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Consolidated฀financial฀statements฀
Joint฀ventures฀are฀accounted฀for฀using฀the฀equity฀ method฀in฀the฀consolidated฀financial฀statements฀
in฀exactly฀the฀same฀way฀as฀for฀associates฀(covered฀earlier)฀(IFRS฀11:฀para.฀24).฀
Illustration฀1฀
XYZ฀Group฀has฀a฀50%฀share฀in฀a฀joint฀venture,฀acquired฀a฀number฀of฀years฀ago.฀XYZ's฀accounting฀
policy฀is฀to฀measure฀investments฀in฀joint฀ventures฀using฀the฀equity฀method฀in฀both฀its฀separate฀and฀its฀
consolidated฀financial฀statements.฀
Details฀relating฀to฀the฀joint฀venture฀for฀the฀year฀ended฀31฀December฀20X7฀are:฀
฀ $m฀
Cost฀of฀the฀50%฀share฀ 11฀
Reserves฀at฀31฀December฀20X7฀ 44฀ ฀
Reserves฀at฀the฀date฀of฀acquisition฀of฀the฀joint฀venture฀ 18฀
Profit฀for฀the฀year฀ended฀31฀December฀20X7฀ 6฀
Other฀comprehensive฀income฀(gain฀on฀property฀ 2฀
฀฀฀revaluations)฀for฀the฀year฀ended฀31฀December฀20X7฀
Analysis฀
In฀the฀statement฀of฀financial฀position,฀the฀investment฀is฀shown฀using฀the฀equity฀method:฀
฀ $m฀
Cost฀of฀50%฀share฀ 11฀
Share฀of฀post฀acquisition฀reserves฀((44฀–฀18)฀×฀50%)฀ ฀13฀ ฀
฀ ฀24฀
In฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀the฀following฀are฀shown฀as฀
separate฀line฀items:฀
฀ $m฀
Share฀of฀profit฀of฀joint฀venture฀(6฀×฀50%)฀ 3฀
Share฀of฀other฀comprehensive฀income฀of฀joint฀venture฀(2฀฀50%)฀ 1฀
Presentation฀
XYZ฀GROUP฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀(Extract)฀
฀ 20X7 20X6฀
Assets฀ $m $m฀
฀฀฀Property,฀plant฀and฀equipment฀ X X฀
฀฀฀Goodwill฀ X X฀
฀฀฀Other฀intangible฀assets฀ X X฀
฀฀฀Investment฀in฀joint฀venture฀ 24 X฀
฀฀฀Investment฀in฀equity฀instruments฀ X ฀X฀฀
฀ ฀
X ฀X฀฀
฀
฀
฀ ฀
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฀฀
XYZ฀GROUP฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀FOR฀THE฀YEAR฀
ENDED฀31฀DECEMBER฀20X7฀(Extract)฀
฀ 20X7 20X6฀
฀ $m $m฀
Revenue฀฀ X X฀
Cost฀of฀sales฀ (X) (X)
฀ ฀
Gross฀profit฀฀ X X฀
Other฀income฀฀ X X฀
Distribution฀costs฀฀ (X) (X)฀
Administrative฀expenses฀ (X) (X)฀
Other฀expenses฀฀ (X) (X)฀
Finance฀costs฀฀ (X) (X)฀
Share฀of฀profit฀of฀joint฀venture฀ 3 ฀X฀฀
Profit฀before฀tax฀฀ X X฀
Income฀tax฀expense฀฀ (X) ฀(X)฀
Profit฀for฀the฀year฀฀ X ฀X฀฀
฀฀฀Gains฀on฀property฀revaluation฀ X X฀
฀฀฀Investments฀in฀equity฀instruments฀ (X) (X)฀
Share฀of฀other฀comprehensive฀income฀of฀joint฀venture 1 X฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified X ฀X฀฀
฀ X ฀X฀฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀ (X) ฀(X)฀
Total฀comprehensive฀income฀for฀the฀year฀
฀
X ฀X฀฀
฀
2฀ IFRS฀12฀Disclosure฀of฀Interests฀in฀Other฀Entities฀
2.1฀ Objective฀
The฀objective฀of฀the฀standard฀is฀to฀require฀a฀reporting฀entity฀to฀disclose฀information฀that฀enables฀the฀
user฀ of฀ the฀ financial฀ statements฀ to฀ evaluate฀ the฀ nature฀ of,฀ and฀ risks฀ associated฀ with,฀ interests฀ in฀
other฀ entities,฀ and฀ the฀ effects฀ of฀ those฀ interests฀ on฀ its฀ financial฀ position,฀ financial฀ performance฀ and฀
cash฀flows฀(IFRS฀12:฀para.฀1).฀
This฀is฀particularly฀relevant฀in฀light฀of฀the฀financial฀crisis฀and฀recent฀accounting฀scandals.฀The฀IASB฀
believes฀that฀better฀information฀about฀interests฀in฀other฀entities฀is฀necessary฀to฀help฀users฀to฀identify฀
the฀ profit฀ or฀ loss฀ and฀ cash฀ flows฀ available฀ to฀ the฀ reporting฀ entity,฀ and฀ to฀ determine฀ the฀ value฀ of฀ a฀
current฀or฀future฀investment฀in฀the฀reporting฀entity.฀
IFRS฀12฀covers฀disclosures฀for฀entities฀which฀have฀interests฀in฀(IFRS฀12:฀para.฀5):฀
฀ Subsidiaries฀
฀ Joint฀arrangements฀(ie฀joint฀operations฀and฀joint฀ventures)฀
฀ Associates฀฀
฀ Unconsolidated฀structured฀entities.฀
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2.2฀ Structured฀entities฀
Structured฀entity:฀an฀entity฀that฀has฀been฀designed฀so฀that฀voting฀or฀similar฀rights฀are฀not฀
the฀dominant฀factor฀in฀deciding฀who฀controls฀the฀entity,฀such฀as฀when฀any฀voting฀rights฀
Key฀term฀
relate฀to฀administrative฀tasks฀only฀and฀the฀relevant฀activities฀are฀directed฀by฀means฀of฀contractual฀
arrangements.฀
Disclosures฀are฀required฀for฀structured฀entities฀due฀to฀their฀sensitive฀nature฀(see฀below).฀
2.3฀ Disclosures฀
The฀main฀disclosures฀required฀by฀IFRS฀12฀for฀an฀entity฀that฀has฀investments฀in฀other฀entities฀are:฀
(a)฀ The฀significant฀ judgements฀ and฀ assumptions฀made฀in฀determining฀whether฀the฀entity฀
has฀control,฀joint฀control฀or฀significant฀influence฀over฀the฀other฀entities,฀and฀in฀determining฀the฀
type฀of฀joint฀arrangement฀(IFRS฀12:฀para.฀7)฀
(b)฀ Information฀ to฀ understand฀ the฀ composition฀ of฀ the฀ group฀ and฀ the฀ interest฀ that฀ non-
controlling฀interests฀have฀in฀the฀group's฀activities฀and฀cash฀flows฀(IFRS฀12:฀para.฀10)฀
(c)฀ The฀ nature,฀ extent฀ and฀ financial฀ effects฀ of฀ interests฀ in฀ joint฀ arrangements฀ and฀
associates,฀including฀the฀nature฀and฀effects฀of฀the฀entity's฀contractual฀relationship฀with฀other฀
investors฀(IFRS฀12:฀para.฀20)฀
(d)฀ The฀ nature฀ and฀ extent฀ of฀ interests฀ in฀ unconsolidated฀ structured฀ entities฀ (IFRS฀12:฀
para.฀24)฀
(e)฀ The฀nature฀and฀extent฀of฀significant฀ restrictions฀on฀the฀entity's฀ability฀to฀access฀ or฀ use฀
assets฀and฀settle฀liabilities฀of฀the฀group฀(IFRS฀12:฀para.฀10)฀
(f)฀ The฀ nature฀ of,฀ and฀ changes฀ in,฀ the฀ risks฀ associated฀ with฀ the฀ entity's฀ interests฀ in฀
consolidated฀ structured฀ entities,฀ joint฀ ventures,฀ associates฀ and฀ unconsolidated฀ structured฀
entities฀(eg฀commitments฀and฀contingent฀liabilities)฀(IFRS฀12:฀paras.฀10,฀20,฀24)฀
(g)฀ The฀consequences฀ of฀ changes฀ in฀ the฀ entity's฀ ownership฀interest฀in฀a฀subsidiary฀that฀
do฀not฀ result฀ in฀ loss฀ of฀ control฀(ie฀the฀effects฀on฀the฀equity฀attributable฀to฀owners฀of฀the฀
parent)฀(IFRS฀12:฀paras.฀10,฀18)฀
(h)฀ The฀ consequences฀ of฀ losing฀ control฀ of฀ a฀ subsidiary฀ during฀ the฀ reporting฀ period฀ (ie฀ the฀
gain฀ or฀ loss,฀ and฀ the฀ portion฀ of฀ it฀ that฀ relates฀ to฀ measuring฀ any฀ remaining฀ investment฀ at฀ fair฀
value,฀ and฀ the฀ line฀ item(s)฀ in฀ profit฀ or฀ loss฀ in฀ which฀ the฀ gain฀ or฀ loss฀ is฀ recognised฀ if฀ not฀
presented฀separately฀(IFRS฀12:฀paras.฀10,฀19).฀
Ethics฀note฀
You฀should฀be฀alert฀for฀evidence฀of฀directors฀classifying฀a฀joint฀arrangement฀as฀a฀joint฀venture฀when฀
it฀may฀be฀a฀joint฀operation.฀The฀reasons฀for฀doing฀this฀could฀be฀ethically฀dubious.฀For฀example,฀joint฀
ventures฀are฀equity฀accounted,฀which฀means฀the฀liabilities฀of฀the฀joint฀venture฀are฀not฀visible฀in฀the฀
joint฀operator's฀financial฀statements.฀However,฀in฀accounting฀for฀a฀joint฀operation,฀the฀assets฀and฀
liabilities฀are฀presented฀'gross',฀separate฀from฀each฀other฀in฀the฀joint฀operator's฀statement฀of฀financial฀
position.฀IFRS฀11฀focuses฀on฀the฀substance฀of฀the฀arrangement,฀not฀just฀the฀legal฀form,฀to฀ensure฀that฀
this฀does฀not฀happen,฀but฀this฀does฀not฀prevent฀directors฀from฀acting฀unethically.฀
Structured฀entities฀are฀another฀way฀of฀achieving฀'off฀balance฀sheet฀finance'฀if฀they฀are฀not฀
consolidated.฀For฀this฀reason,฀IFRS฀12฀requires฀substantial฀disclosures฀relating฀to฀the฀decision-making฀
process฀of฀the฀treatment฀of฀investments฀in฀other฀entities฀and฀disclosures฀where฀they฀are฀not฀
consolidated฀or฀equity฀accounted฀in฀the฀financial฀statements.฀
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฀฀
฀ Joint฀arrangements฀and฀
฀ group฀disclosures฀
฀
฀
฀
1.฀Joint฀arrangements ฀ 2.฀ IFRS฀12:฀Disclosure฀of฀฀
฀ interests฀in฀other฀entities฀
฀ ฀
฀ Disclosures฀to฀evaluate฀the฀nature฀of,฀
Definitions฀ and฀risks฀associated฀with,฀interests฀in฀
other฀entities:฀
฀ Joint฀arrangement:฀an฀
arrangement฀of฀which฀two฀or฀more฀ –฀ The฀significant฀judgements฀and฀
parties฀have฀joint฀control฀ assumptions฀in฀determining฀control,฀
฀ Joint฀control:฀the฀contractually฀ joint฀control฀or฀significant฀influence฀฀
agreed฀sharing฀of฀control฀of฀an฀ –฀ Composition฀of฀the฀group฀
arrangement,฀which฀exists฀only฀when฀ –฀ The฀nature,฀extent฀and฀financial฀
decisions฀about฀the฀relevant฀activities฀ effects฀of฀interests฀in฀joint฀
require฀unanimous฀consent฀ arrangements฀and฀associates฀
–฀ The฀nature฀and฀extent฀of฀interests฀
in฀unconsolidated฀structured฀
Joint฀operations฀ entities*฀
Definition:฀ –฀ The฀nature฀and฀extent฀of฀significant฀
฀ The฀parties฀that฀have฀joint฀control฀of฀ restrictions฀on฀the฀entity's฀ability฀to฀
the฀arrangement฀have฀rights฀to฀ access฀or฀use฀assets฀and฀settle฀
the฀assets,฀and฀obligations฀for฀ liabilities฀
the฀liabilities,฀relating฀to฀the฀ –฀ The฀nature฀of,฀and฀changes฀in,฀the฀
arrangement฀฀ risks฀associated฀with฀the฀
Accounting฀treatment:฀ entity's฀interests฀in฀consolidated฀
฀ In฀investor's฀separate฀financial฀ structured฀entities,฀joint฀ventures,฀
statements,฀show:฀ associates฀and฀unconsolidated฀
–฀ Own฀assets,฀liabilities฀and฀ structured฀entities฀
expenses฀
–฀ Consequences฀of฀changes฀in฀the฀
–฀ Share฀of฀assets฀held฀and฀
entity's฀ownership฀of฀a฀subsidiary฀
expenses฀and฀liabilities฀incurred฀
jointly฀ that฀do฀not฀result฀in฀loss฀of฀
–฀ Revenue฀from฀the฀sale฀of฀its฀share฀ control฀
of฀the฀output฀arising฀from฀the฀joint฀ –฀ Consequences฀of฀losing฀control฀
operation฀ of฀a฀subsidiary฀฀
–฀ Share฀of฀revenue฀from฀the฀sale฀of฀
output฀by฀the฀joint฀operation฀itself.฀ *฀ Structured฀entity฀(IFRS฀12)฀
'An฀entity฀that฀has฀been฀designed฀so฀that฀
฀ No฀adjustments฀required฀on฀
voting฀or฀similar฀rights฀are฀not฀the฀
consolidation฀
dominant฀factor฀in฀deciding฀who฀
controls฀the฀entity,฀such฀as฀when฀any฀
voting฀rights฀relate฀to฀administrative฀tasks฀
Joint฀ventures฀ only฀and฀the฀relevant฀activities฀are฀
Definition฀ directed฀by฀means฀of฀contractual฀
฀ The฀parties฀that฀have฀joint฀control฀of฀ arrangements'฀
the฀arrangement฀have฀rights฀to฀the฀
net฀assets฀of฀the฀arrangement฀
Accounting฀treatment:฀
฀ Parent's฀separate฀financial฀statements฀
฀ –฀ Cost;฀or฀
฀ –฀ Fair฀value;฀or฀
฀ –฀ Equity฀method฀(required฀if฀no฀
subs)฀
฀ Consolidated฀financial฀statements฀
–฀ Equity฀method฀(as฀associates)฀
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1.฀ Joint฀arrangements฀
฀ There฀are฀two฀types฀of฀joint฀arrangement.฀Joint฀ventures฀(where฀the฀venturers฀have฀rights฀to฀
the฀net฀assets)฀are฀accounted฀for฀using฀the฀equity฀method฀in฀the฀consolidated฀financial฀
statements.฀Joint฀operations฀(where฀the฀operators฀have฀rights฀to฀the฀assets฀and฀
obligations฀for฀the฀liabilities)฀are฀accounted฀for฀based฀on฀the฀relevant฀share฀in฀the฀joint฀
operator's฀own฀financial฀statements.฀
2.฀ IFRS฀12฀Disclosure฀of฀Interests฀in฀Other฀Entities฀ ฀
฀ An฀entity฀must฀make฀disclosures฀relating฀to฀the฀nature฀and฀extent฀of,฀and฀risks฀associated฀
with,฀investments฀in฀subsidiaries,฀associates,฀joint฀arrangements฀and฀both฀consolidated฀and฀
unconsolidated฀structured฀entities.฀
฀
฀
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฀฀
Q16฀Burley฀฀
There฀are฀articles฀on฀the฀ACCA฀website฀which฀are฀relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀which฀
Vexed฀Concept฀(2014)฀(Equity฀accounting฀current฀issues)฀
฀
฀
฀
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฀
฀
฀
Foreign฀transactions
฀
฀
฀
฀
฀
and฀entities
฀
฀ Syllabus฀
reference฀no.฀
Outline฀and฀apply฀the฀translation฀of฀foreign฀currency฀amounts฀and฀transactions฀ D4(a)฀
into฀the฀functional฀currency฀and฀the฀presentation฀currency.฀
Account฀for฀the฀consolidation฀of฀foreign฀operations฀and฀their฀disposal.฀ D4(b)฀
Exam฀context฀
Foreign฀ currency฀ transactions฀ could฀ feature฀ as฀ part฀ of฀ a฀ groups฀ question฀ in฀ the฀ Strategic฀ Business฀
Reporting฀(SBR)฀exam,฀where฀the฀entity฀has฀a฀foreign฀subsidiary฀or฀investment.฀You฀therefore฀need฀to฀
be฀comfortable฀with฀the฀treatment฀of฀foreign฀currency฀in฀both฀the฀individual฀financial฀statements฀of฀an฀
entity฀ and฀ consolidated฀ financial฀ statements฀ including฀ a฀ foreign฀ operation.฀ You฀ need฀ to฀ be฀ able฀ to฀
explain฀the฀accounting฀treatment,฀and฀not฀just฀calculate฀the฀numbers.฀฀
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฀฀
฀
฀ Foreign฀transactions฀and฀
฀ entities฀
฀
฀
฀
฀ ฀
1.฀ Currency฀
concepts฀
3.฀ Presentation฀
2.฀ Functional฀currency฀ currency฀
4.฀ Foreign฀operations฀
5.฀ Monetary฀items฀
forming฀part฀of฀net฀
investment฀in฀foreign฀
operation฀
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15:฀Foreign฀transactions฀and฀entities฀
1฀Currency฀concepts฀
1.1฀ Objective฀
The฀translation฀of฀foreign฀currency฀transactions฀and฀financial฀statements฀should:฀
(a)฀ Produce฀ results฀ which฀ are฀ generally฀ compatible฀ with฀ the฀ effects฀ of฀ rate฀ changes฀ on฀ a฀
company's฀cash฀flows฀and฀its฀equity;฀and฀
(b)฀ Ensure฀ that฀ the฀ financial฀ statements฀ present฀ a฀ true฀ and฀ fair฀ view฀ of฀ the฀ results฀ of฀
management฀actions.฀
IAS฀21฀The฀Effects฀of฀Changes฀in฀Foreign฀Exchange฀Rates฀covers฀this฀area.฀
฀
Two฀currency฀concepts฀
฀
฀
FUNCTIONAL฀ PRESENTATION฀
฀ CURRENCY฀ CURRENCY฀
฀ ฀ Currency฀of฀the฀primary฀  Currency฀in฀which฀the฀financial฀
economic฀environment฀ statements฀are฀presented฀
฀ in฀which฀the฀entity฀operates฀฀ (IAS฀21:฀para.฀8)฀
(IAS฀21:฀para.฀8)฀ ฀ Can฀be฀any฀currency฀
฀ ฀ The฀currency฀used฀for฀ ฀ Special฀rules฀apply฀to฀translation฀
measurement฀in฀the฀ from฀functional฀currency฀to฀
฀ financial฀statements฀ presentation฀currency฀
฀ ฀ Other฀currencies฀treated฀as฀a฀ ฀ Same฀rules฀used฀for฀translating฀
foreign฀currency฀ foreign฀operations฀
฀
2฀ Functional฀currency฀
Functional฀currency:฀the฀currency฀of฀the฀primary฀economic฀environment฀in฀which฀the฀entity฀
operates.฀
Key฀term฀
Monetary฀items:฀units฀of฀currency฀held฀and฀assets฀and฀liabilities฀to฀be฀received฀or฀
paid฀in฀a฀fixed฀or฀determinable฀number฀of฀units฀of฀currency.฀
Spot฀exchange฀rate:฀the฀exchange฀rate฀for฀immediate฀delivery.฀
Closing฀rate:฀the฀spot฀exchange฀rate฀at฀the฀end฀of฀the฀reporting฀period.฀
฀ (IAS฀21:฀para.฀8)฀
Functional฀currency฀is฀the฀currency฀in฀which฀the฀financial฀statement฀transactions฀are฀measured.฀
2.1฀ Determining฀an฀entity's฀functional฀currency฀
An฀entity฀considers฀the฀following฀factors฀in฀determining฀its฀functional฀currency฀(IAS฀21:฀para.฀9):฀
(a)฀ The฀currency:฀
(i)฀ That฀ mainly฀ influences฀ sales฀ prices฀ for฀ goods฀ and฀ services฀ (this฀ will฀ often฀ be฀ the฀
currency฀in฀which฀sales฀prices฀for฀its฀goods฀and฀services฀are฀denominated฀and฀settled);฀
and฀
(ii)฀ Of฀ the฀ country฀ whose฀ competitive฀ forces฀ and฀ regulations฀ mainly฀ determine฀ the฀
sales฀prices฀of฀its฀goods฀and฀services.฀
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฀฀
(b)฀ The฀currency฀that฀mainly฀influences฀labour,฀material฀and฀other฀costs฀of฀providing฀goods฀
or฀services฀(this฀will฀often฀be฀the฀currency฀in฀which฀such฀costs฀are฀denominated฀and฀settled).฀
The฀ following฀ factors฀ may฀ also฀ provide฀ evidence฀ of฀ an฀ entity's฀ functional฀ currency฀ (IAS฀21:฀
para.฀10):฀
(a)฀ The฀currency฀in฀which฀funds฀from฀financing฀activities฀are฀generated฀
(b)฀ The฀currency฀in฀which฀receipts฀from฀operating฀activities฀are฀usually฀retained.฀
2.2฀ Reporting฀foreign฀currency฀transactions฀in฀the฀functional฀currency฀
Initial฀recognition฀
Translate฀each฀transaction฀by฀applying฀the฀spot฀ exchange฀ rate฀between฀the฀functional฀currency฀
and฀the฀foreign฀currency฀at฀the฀date฀of฀transaction.฀An฀average฀rate฀for฀a฀period฀may฀be฀used฀
as฀an฀approximation฀if฀rates฀do฀not฀fluctuate฀significantly฀(IAS฀21:฀paras.฀21–22).฀
At฀the฀end฀of฀the฀reporting฀period฀
At฀ the฀ end฀ of฀ the฀ reporting฀ period฀ foreign฀ currency฀ assets฀ and฀ liabilities฀ are฀ treated฀ as฀ follows฀
(IAS฀21:฀para.฀23):฀
Monetary฀assets฀and฀liabilities฀ Restated฀at฀the฀closing฀rate฀
Non-monetary฀assets฀measured฀in฀terms฀of฀ Not฀ restated฀(ie฀they฀remain฀at฀historical฀rate฀at฀
historical฀cost฀(eg฀non-current฀assets)฀ the฀date฀of฀the฀original฀transaction)฀
Translated฀ using฀ the฀ exchange฀ rate฀ at฀ the฀ date฀
Non-monetary฀assets฀measured฀at฀fair฀value฀
when฀the฀fair฀value฀was฀measured฀
Recognition฀of฀exchange฀differences฀
Exchange฀differences฀are฀recognised฀in฀profit฀or฀loss฀for฀the฀period฀in฀which฀they฀arise.฀
However,฀ if฀ fair฀ value฀ changes฀ for฀ a฀ non-monetary฀ asset฀ measured฀ at฀ fair฀ value฀ are฀ recognised฀ in฀
other฀ comprehensive฀ income,฀ eg฀ property,฀ plant฀ and฀ equipment฀ held฀ under฀ the฀ revaluation฀ model,฀
the฀ exchange฀ difference฀ component฀ of฀ the฀ change฀ in฀ fair฀ value฀ is฀ also฀ recognised฀ in฀ other฀
comprehensive฀income,฀ie฀it฀need฀not฀be฀separated฀out฀(IAS฀21:฀para.฀30).฀
Illustration฀1฀
An฀entity฀whose฀functional฀currency฀is฀the฀dollar฀($)฀sold฀goods฀to฀a฀customer฀on฀credit฀for฀100,000฀
antons฀on฀1฀November฀20X1.฀The฀anton฀is฀a฀foreign฀currency.฀Exchanges฀rates฀were:฀
1฀November฀20X1฀ $1฀=฀5.8฀antons฀
31฀December฀20X1฀ $1฀=฀6.3฀antons฀
The฀entity's฀year฀end฀is฀31฀December฀20X1.฀
Required฀
Show฀the฀accounting฀treatment฀at฀the฀date฀of฀the฀transaction฀and฀at฀the฀year฀end฀(to฀the฀nearest฀$).฀
Solution฀ Spot฀exchange฀rate฀at฀
1฀November฀20X1฀
At฀1฀November฀20X1:฀
DEBIT฀ Trade฀receivables฀(100,000/5.8)฀ $17,241฀
CREDIT฀ Revenue฀ ฀ $17,241฀
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At฀31฀December฀20X1:฀
As฀it฀is฀a฀monetary฀item,฀the฀trade฀receivable฀must฀be฀retranslated฀to฀$15,873฀(100,000/6.3).฀
An฀exchange฀loss฀is฀reported฀in฀profit฀or฀loss฀as฀follows:฀ At฀closing฀(year฀end)฀
exchange฀rate฀
DEBIT฀ Profit฀or฀loss฀ $1,368฀
CREDIT฀ Trade฀receivables฀(17,241฀–฀15,873)฀ ฀ $1,368฀
Activity฀1:฀Functional฀currency฀principles฀ ฀
San฀Francisco,฀a฀company฀whose฀functional฀currency฀is฀the฀dollar,฀entered฀into฀the฀following฀foreign฀
currency฀transactions:฀
31.10.X8฀ Purchased฀goods฀on฀credit฀from฀Mexico฀SA฀for฀129,000฀Mexican฀pesos฀
31.12.X8฀ Payables฀have฀not฀yet฀been฀paid฀
31.1.X9฀ San฀Francisco฀paid฀its฀payables.฀
The฀exchange฀rates฀are฀as฀follows:฀
฀ Pesos฀to฀$1฀
31.10.X8฀ 9.5฀
31.12.X8฀ 10฀฀
31.1.X9฀ 9.7฀
Required฀
How฀ would฀ these฀ transactions฀ be฀ recorded฀ in฀ the฀ books฀ of฀ San฀ Francisco฀ for฀ the฀ years฀ ended฀
31฀December฀20X8฀and฀20X9?฀
Chapter฀15฀Section฀1฀of฀the฀Supplementary฀Reading฀contains฀notes฀about฀changes฀in฀an฀entity's฀
functional฀currency.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
3฀ Presentation฀currency฀
Presentation฀currency:฀the฀currency฀in฀which฀the฀financial฀statements฀are฀presented.฀
฀ (IAS฀21:฀para.฀8)฀
Key฀term฀
An฀entity฀may฀present฀its฀financial฀statements฀in฀any฀currency฀(or฀currencies)฀(IAS฀฀21:฀para.฀38).฀
3.1฀ Translation฀rules฀
The฀ results฀ and฀ financial฀ position฀ of฀ an฀ entity฀ whose฀ functional฀ currency฀ is฀ not฀ the฀ currency฀ of฀ a฀
hyperinflationary฀ economy฀ are฀ translated฀ into฀ a฀ different฀ presentation฀ currency฀ as฀ follows฀ (IAS฀21:฀
para.฀39):฀
(a)฀ Assets฀ and฀ liabilities฀ for฀ each฀ statement฀ of฀ financial฀ position฀ presented฀ (ie฀ including฀
comparatives)฀
฀ translated฀at฀the฀closing฀rate฀at฀the฀date฀of฀that฀statement฀of฀financial฀position;฀
(b)฀ Income฀and฀expenses฀for฀each฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
(ie฀including฀comparatives)฀
฀ translated฀at฀actual฀exchange฀rates฀at฀the฀dates฀of฀the฀transactions฀(an฀average฀ rate฀
for฀the฀period฀may฀be฀used฀if฀exchange฀rates฀do฀not฀fluctuate฀significantly)฀
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฀฀
(c)฀ All฀resulting฀exchange฀differences฀
฀ recognised฀ in฀ other฀ comprehensive฀ income฀ (and,฀ as฀ a฀ separate฀ component฀ of฀
equity,฀the฀translation฀reserve).฀฀
4฀ Foreign฀operations฀
Foreign฀operation:฀an฀entity฀that฀is฀a฀subsidiary,฀associate,฀joint฀arrangement฀or฀branch฀of฀a฀
reporting฀entity,฀the฀activities฀of฀which฀are฀based฀or฀conducted฀in฀a฀country฀or฀currency฀other฀than฀
Key฀term฀
those฀of฀the฀reporting฀entity.฀
฀ (IAS฀21:฀para.฀8)฀
4.1฀ Translation฀method฀
The฀foreign฀operation฀determines฀its฀own฀functional฀currency฀and฀prepares฀its฀financial฀statements฀in฀
that฀currency.฀
Where฀different฀from฀the฀parent's฀functional฀currency,฀the฀financial฀statements฀need฀to฀be฀translated฀
before฀consolidation.฀
The฀ financial฀ statements฀ are฀ translated฀ into฀ the฀ presentation฀ currency฀ (functional฀ currency฀ of฀ the฀
reporting฀ entity)฀ using฀ the฀ presentation฀ currency฀ rules฀ outlined฀ above฀ (and฀ adapted฀ for฀ foreign฀
operations฀below).฀
4.2฀Determining฀a฀foreign฀operation's฀functional฀currency฀
The฀ following฀ additional฀ factors฀ are฀ considered฀ in฀ determining฀ the฀ functional฀ currency฀ of฀ a฀ foreign฀
operation,฀ and฀ whether฀ its฀ functional฀ currency฀ is฀ the฀ same฀ as฀ that฀ of฀ the฀ reporting฀ entity฀ (IAS฀21:฀
para.฀11):฀
(a)฀ Whether฀ the฀ activities฀ of฀ the฀ foreign฀ operation฀ are฀ carried฀ out฀ as฀ an฀ extension฀ of฀ the฀
reporting฀ entity,฀ rather฀ than฀ being฀ carried฀ out฀ with฀ a฀ significant฀ degree฀ of฀
autonomy.฀฀
An฀ example฀ of฀ the฀ former฀ is฀ when฀ the฀ foreign฀ operation฀ only฀ sells฀ goods฀ imported฀ from฀ the฀
reporting฀entity฀and฀remits฀the฀proceeds฀to฀it.฀
An฀ example฀ of฀ the฀ latter฀ is฀ when฀ the฀ operation฀ accumulates฀ cash฀ and฀ other฀ monetary฀ items,฀
incurs฀ expenses,฀ generates฀ income฀ and฀ arranges฀ borrowings฀ all฀ substantially฀ in฀ its฀ local฀
currency.฀
(b)฀ Whether฀transactions฀with฀the฀reporting฀entity฀are฀a฀high฀or฀a฀low฀proportion฀of฀
the฀foreign฀operation's฀activities.฀
(c)฀ Whether฀cash฀ flows฀from฀the฀activities฀of฀the฀foreign฀operation฀directly฀ affect฀ the฀ cash฀
flows฀of฀the฀reporting฀entity฀and฀are฀readily฀available฀for฀remittance฀to฀it.฀
(d)฀ Whether฀ cash฀ flows฀ from฀ the฀ activities฀ of฀ the฀ foreign฀ operation฀ are฀ sufficient฀ to฀ service฀
existing฀ and฀ normally฀ expected฀ debt฀ obligations฀ without฀ funds฀ being฀ made฀
available฀by฀the฀reporting฀entity.฀
4.3฀ Exchange฀rates฀
Where฀a฀foreign฀operation฀has฀a฀different฀ functional฀ currency฀ to฀ the฀ parent,฀the฀financial฀
statements฀of฀the฀operation฀must฀be฀translated฀prior฀to฀consolidation.฀
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In฀ practical฀ terms฀ the฀ following฀ approach฀ is฀ used฀ when฀ translating฀ the฀ financial฀ statements฀ of฀ a฀
foreign฀operation฀for฀exam฀purposes฀(IAS฀21:฀para.฀39):฀
(a)฀ STATEMENT฀OF฀FINANCIAL฀POSITION฀
All฀assets฀and฀liabilities฀ –฀ Closing฀rate฀(CR)฀
Share฀capital฀and฀pre-acquisition฀reserves฀ –฀ Historical฀rate฀(HR)฀at฀date฀of฀control฀
(for฀exam฀purposes)฀
Post-acquisition฀reserves:฀
฀฀Profit฀for฀each฀year฀ –฀ Actual฀(or฀average)฀rate฀(AR)฀for฀each฀year฀
฀฀Dividends฀ –฀ Actual฀rate฀at฀date฀of฀payment฀
฀฀Exchange฀differences฀on฀net฀assets฀ –฀ Balancing฀figure฀()฀
฀ Functional฀ Rate฀ Presentation฀
฀ ฀currency฀ ฀ currency฀
Assets฀ ฀X฀ CR฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
Share฀capital฀ ฀X฀ HR฀฀ ฀X฀
Share฀premium฀ ฀X฀ HR฀ ฀X฀
Pre฀acq'n฀retained฀earnings฀ ฀X฀ HR฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
Post-acq'n฀retained฀earnings฀
฀฀Profit฀for฀year฀1฀ ฀X฀ ฀AR฀฀ ฀X฀
฀฀Dividend฀(year฀1)฀ ฀(X)฀ ฀actual฀฀ ฀(X)฀
฀฀Profit฀for฀year฀2฀ ฀X฀ ฀AR฀฀ ฀X฀
฀฀Dividend฀(year฀2)฀ ฀(X)฀ ฀actual฀฀ ฀(X)฀
฀฀etc฀
Exchange฀differences฀on฀net฀assets฀ ฀฀–฀ ฀฀฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
Liabilities฀ ฀X฀ CR฀ ฀X฀
฀ ฀X฀ ฀ ฀X฀
(b)฀ STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀
All฀ items฀ are฀ translated฀ at฀ actual฀ rate฀ at฀ date฀ of฀ the฀ transaction฀ (or฀ average฀ rate฀ as฀ an฀
approximation)฀(AR)฀
฀ Functional฀ Rate฀ Presentation฀
฀ ฀currency฀ ฀ currency฀
Revenue฀ ฀X฀ ฀฀ ฀X฀
Cost฀of฀sales฀ ฀(X)฀ ฀ ฀(X)฀
Gross฀profit฀ ฀X฀ ฀฀฀฀฀฀฀฀ ฀X฀
Other฀expenses฀ ฀(X)฀ ฀ ฀(X)฀
Profit฀before฀tax฀ ฀X฀ ฀ AR฀ ฀X฀
Income฀tax฀expense฀ ฀(X)฀ ฀ ฀(X)฀
Profit฀for฀the฀year฀ ฀X฀ ฀฀฀฀฀฀฀ ฀X฀
Other฀comprehensive฀income฀ ฀X฀ ฀ ฀X฀
Total฀comprehensive฀income฀ ฀X฀ ฀ ฀X฀
(c)฀ Exchange฀differences฀
All฀ exchange฀ differences฀ on฀ translation฀ of฀ a฀ foreign฀ operation฀ are฀ recognised฀ in฀ other฀
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฀฀
4.4฀ Calculation฀of฀exchange฀differences฀
The฀exchange฀differences฀result฀from฀(IAS฀21:฀para.฀41):฀
(a)฀ Translating฀ income฀ and฀ expenses฀ at฀ the฀ exchange฀ rates฀ at฀ the฀ dates฀ of฀ the฀ transactions฀ and฀
assets฀and฀liabilities฀at฀the฀closing฀rate;฀
(b)฀ Translating฀the฀opening฀net฀assets฀at฀a฀closing฀rate฀that฀differs฀from฀the฀previous฀closing฀rate;฀
and฀
(c)฀ Translating฀goodwill฀on฀consolidation฀at฀the฀closing฀rate฀at฀each฀year฀end.฀
You฀ may฀ be฀ required฀ to฀ calculate฀ exchange฀ differences฀ for฀ the฀ year฀ in฀ order฀ to฀ recognise฀ them฀ in฀
other฀comprehensive฀income.฀฀The฀exam฀approach฀is฀as฀follows:฀
฀ ฀ $฀
Exchange฀differences฀in฀the฀year฀
On฀translation฀of฀net฀assets฀
Closing฀net฀assets฀as฀translated฀(at฀closing฀rate)฀ ฀X ฀
Less฀opening฀net฀assets฀as฀translated฀at฀the฀time (at฀opening฀rate)฀ ฀ ฀฀฀(X)฀
฀ ฀X ฀
Less฀retained฀profit฀as฀translated฀at฀the฀time (profit฀at฀average฀rate฀less฀dividends฀at฀actual฀rate) ฀฀฀฀฀(X)฀
฀ ฀X/(X)฀
฀
On฀goodwill฀–฀see฀standard฀working฀below฀ ฀X/(X)฀
฀ ฀X/(X)฀
4.5฀ Calculation฀of฀goodwill฀for฀a฀foreign฀operation฀
Any฀goodwill฀ and฀ fair฀ value฀ adjustments฀are฀treated฀as฀assets฀and฀liabilities฀of฀the฀foreign฀
operation฀and฀are฀translated฀at฀each฀year฀end฀at฀the฀closing฀rate฀(IAS฀21:฀para.฀47).฀
However,฀the฀goodwill฀must฀first฀be฀calculated฀at฀the฀date฀of฀control.฀Practically,฀this฀can฀be฀achieved฀
by฀adding฀two฀additional฀columns฀to฀the฀standard฀goodwill฀calculation:฀
฀ Functional฀ Functional฀ Rate฀ Presentation฀
currency฀ currency฀ currency฀($)฀
฀Consideration฀transferred ฀X ฀X฀
฀Non-controlling฀interests฀(at฀FV฀or฀at฀%FVNA) ฀X ฀X฀
฀Fair฀value฀of฀net฀assets฀at฀acquisition:฀ ฀
HR฀at฀date฀of฀
฀฀฀Share฀capital฀ ฀X ฀
control฀
฀฀฀Share฀premium฀ ฀X฀ (eg฀1.1.X1)฀ ฀
฀฀฀Reserves฀ ฀X ฀
฀฀฀Fair฀value฀adjustments฀ ฀X ฀
฀ ฀(X) ฀(X)฀
฀At฀acquisition฀(1.1.20X1) ฀X ฀X฀
฀Impairment฀losses฀20X1 ฀(X) AR/CR* 20X1฀ ฀(X)฀
฀Exchange฀differences฀20X1฀ ฀– –฀ ฀฀
฀At฀31.12.X1฀ ฀X CR฀20X1฀ ฀X฀ Cumulative฀FX฀
฀Impairment฀losses฀20X2฀ ฀(X) AR/CR* 20X2฀ ฀(X)฀ differences฀
฀Exchange฀differences฀20X2฀(post฀to฀OCI) ฀– –฀ ฀฀
฀At฀31.12.X2฀ ฀X CR฀20X2฀ ฀X฀
฀
*There฀is฀no฀explicit฀rule฀on฀which฀rate฀to฀use฀for฀impairment฀losses,฀therefore฀use฀of฀an฀average฀rate฀
or฀the฀closing฀rate฀is฀acceptable.฀
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Illustration฀2฀
Hood,฀a฀public฀limited฀company฀whose฀functional฀currency฀is฀the฀dollar฀($)฀has฀recently฀purchased฀a฀
foreign฀subsidiary,฀Robin.฀The฀functional฀currency฀of฀Robin฀is฀the฀crown.฀
Hood฀purchased฀80%฀of฀the฀ordinary฀share฀capital฀of฀Robin฀on฀1฀September฀20X5฀for฀86฀million฀
crowns.฀The฀carrying฀amount฀of฀the฀net฀assets฀of฀Robin฀at฀that฀date฀was฀90฀million฀crowns฀(share฀
capital:฀5m฀crowns,฀share฀premium:฀12m฀crowns,฀other฀reserves:฀73m฀crowns).฀The฀fair฀value฀of฀the฀
net฀assets฀at฀that฀date฀was฀100m฀crowns.฀At฀the฀year฀end฀of฀31฀December฀20X5,฀the฀goodwill฀was฀
tested฀for฀impairment฀and฀this฀review฀indicated฀that฀it฀had฀been฀impaired฀by฀1.8฀million฀crowns.฀
The฀exchange฀rates฀were฀as฀follows:฀
฀ Crowns฀to฀$฀
1฀September฀20X5฀ 2.5฀
31฀December฀20X5฀ 2.0฀
Average฀rate฀for฀20X5฀ 2.25฀
Hood฀elected฀to฀measure฀the฀non-controlling฀interests฀in฀Robin฀at฀fair฀value฀at฀the฀date฀of฀acquisition.฀
The฀fair฀value฀of฀the฀non-controlling฀interests฀in฀Robin฀on฀1฀September฀20X5฀was฀20฀million฀crowns.฀
The฀management฀of฀Hood฀is฀unsure฀how฀to฀account฀for฀the฀goodwill฀so฀has฀measured฀it฀at฀the฀
exchange฀rate฀at฀1฀September฀20X5฀in฀the฀consolidated฀financial฀statements.฀No฀adjustment฀has฀
been฀made฀since฀that฀date.฀
Required฀
Explain฀the฀correct฀accounting฀treatment฀of฀the฀goodwill,฀showing฀any฀relevant฀calculations฀and฀any฀
adjustments฀necessary฀to฀correct฀the฀consolidated฀financial฀statements.฀
Solution฀
Goodwill฀
The฀goodwill฀should฀be฀calculated฀in฀the฀functional฀currency฀of฀Robin฀(the฀crown).฀It฀is฀initially฀
translated฀into฀$฀at฀the฀exchange฀rate฀at฀the฀date฀control฀is฀achieved฀(1฀September฀20X5),฀but฀then฀
needs฀to฀be฀retranslated฀at฀the฀closing฀rate฀at฀each฀year฀end.฀
฀ Crowns฀m฀ Crowns฀m฀ Rate฀ ฀$m฀
Consideration฀transferred฀ ฀86.0฀ ฀ ฀
Non-controlling฀interests฀(at฀fair฀value)฀ ฀20.0฀ ฀ ฀
฀ ฀ ฀
Less:฀fair฀value฀of฀net฀assets฀at฀acquisition ฀ ฀
฀ share฀capital฀ ฀5.0฀ ฀ ฀
฀ share฀premium฀ ฀12.0฀ ฀ ฀
฀ other฀reserves฀ ฀73.0฀ ฀ ฀
฀ fair฀value฀adjustments฀(100฀–฀90)฀ ฀10.0฀ ฀ ฀
฀ ฀(100.0)฀ ฀ ฀
Goodwill฀at฀acquisition (1฀September฀20X5)฀ ฀6.0฀ 2.5฀ ฀2.4฀
Impairment฀losses฀ (1.8) 2.25฀ ฀(0.8)฀
Exchange฀difference฀(balancing฀figure)฀ ฀฀ – β฀ ฀0.5฀
Goodwill฀at฀year฀end฀(31฀December฀20X5)฀ ฀ ฀ 4.2฀ 2.0฀ ฀2.1฀
฀
฀
The฀goodwill฀should฀be฀shown฀at฀$2.1m฀in฀the฀consolidated฀statement฀of฀financial฀position.฀฀
Management฀have฀recorded฀it฀at฀$2.4m฀using฀the฀exchange฀rate฀on฀1฀September฀20X5.฀
The฀impairment฀loss฀should฀be฀recognised฀in฀consolidated฀profit฀or฀loss฀(translated฀at฀either฀the฀
average฀rate฀or฀the฀closing฀rate).฀In฀this฀case฀the฀average฀rate฀has฀been฀used฀giving฀an฀impairment฀
loss฀of฀$0.8m,฀but฀there฀is฀no฀fixed฀rule,฀so฀the฀closing฀rate฀could฀alternatively฀have฀been฀used.฀
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฀฀
An฀adjustment฀is฀also฀required฀to฀record฀the฀exchange฀gain฀on฀the฀goodwill฀of฀$0.5m฀in฀other฀
comprehensive฀income.฀In฀the฀consolidated฀statement฀of฀financial฀position,฀as฀non-controlling฀interests฀
are฀measured฀at฀fair฀value฀at฀acquisition฀(‘full฀goodwill’฀method),฀this฀is฀reported฀in฀the฀translation฀
reserve฀($0.4m,฀80%฀group฀share)฀and฀non-controlling฀interests฀($0.1m,฀20%฀non-controlling฀share),฀
similar฀to฀the฀treatment฀of฀exchanges฀differences฀on฀the฀translation฀of฀the฀net฀assets.฀If฀non-controlling฀
interests฀had฀been฀measured฀at฀the฀proportionate฀share฀of฀net฀assets฀at฀acquisition฀('partial฀goodwill'฀
method),฀the฀exchange฀difference฀on฀goodwill฀would฀only฀be฀the฀group฀share฀($0.4m),฀all฀of฀which฀
would฀be฀reported฀in฀the฀translation฀reserve฀with฀no฀impact฀on฀non-controlling฀interests.฀
Activity฀2:฀Foreign฀operation฀ ฀
Bennie,฀ a฀ public฀ limited฀ company฀ whose฀ functional฀ currency฀ is฀ the฀ dollar฀ ($),฀ acquired฀ 80%฀ of฀
Jennie,฀a฀limited฀company,฀for฀$993,000฀on฀1฀January฀20X1.฀฀Jennie฀is฀a฀foreign฀operation฀whose฀
functional฀currency฀is฀the฀jen฀(J).฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X2฀
฀ ฀Bennie฀ ฀Jennie฀
฀ ฀$'000฀฀ ฀J'000฀
฀ ฀
Cost฀of฀investment฀in฀Jennie฀ ฀ 993฀ ฀฀฀฀฀฀฀฀–฀
฀ ฀6,698฀ ฀7,280฀
Current฀assets฀ ฀2,222฀ ฀฀฀5,600฀
฀ ฀8,920฀ ฀12,880฀
฀
Share฀capital฀ ฀1,700฀ ฀1,200฀
Pre-acquisition฀retained฀earnings฀ ฀ ฀5,280฀
Post-acquisition฀retained฀earnings฀ ฀5,185฀ ฀2,400฀
฀ ฀6,885฀ ฀8,880฀
Current฀liabilities฀ ฀2,035฀ ฀฀฀4,000฀
฀ ฀8,920฀ ฀12,880฀
STATEMENTS฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀ FOR฀ YEAR฀ ENDED฀
31฀DECEMBER฀20X2฀
฀ Bennie฀ Jennie
฀ ฀$'000฀ ฀J'000฀
Revenue฀ ฀9,840฀ ฀14,620฀
Cost฀of฀sales฀ ฀(5,870)฀ ฀(8,160)฀
Gross฀profit฀ ฀3,970฀ ฀6,460฀
Operating฀expenses฀ ฀(2,380)฀ ฀(3,570)฀
Dividend฀from฀Jennie฀ ฀ ฀฀112฀ ฀฀฀฀฀฀฀ ฀
Profit฀before฀tax฀ ฀1,702฀ ฀2,890฀
Income฀tax฀expense฀ ฀ ฀(530)฀ ฀฀฀(850)฀
Profit/total฀comprehensive฀income฀for฀the฀year฀ ฀1,172฀ ฀2,040฀
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STATEMENTS฀OF฀CHANGES฀IN฀EQUITY฀FOR฀THE฀YEAR฀(Extract฀for฀retained฀earnings)฀
฀ ฀ $'000 ฀ ฀J'000฀
Balance฀at฀1฀January฀20X2฀ ฀ 4,623 ฀ ฀6,760฀
Dividends฀paid฀ ฀฀฀฀(610)฀ ฀(1,120)฀
Total฀profit/comprehensive฀income฀for฀the฀year ฀1,172฀ ฀2,040฀
Balance฀at฀31฀December฀20X2฀ ฀5,185฀ ฀7,680฀
Jennie฀ pays฀ its฀ dividends฀ on฀ 31฀ December.฀ Jennie's฀ profit฀ for฀ 20X1฀ was฀ 2,860,000฀ jens฀ and฀ a฀
dividend฀of฀1,380,000฀Jens฀was฀paid฀on฀31฀December฀20X1.฀
Jennie's฀statements฀of฀financial฀position฀at฀acquisition฀and฀at฀31฀December฀20X1฀were฀as฀follows.฀
JENNIE฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT:฀
฀ 1.1.X1 31.12.X1฀
฀ ฀J'000฀฀ ฀J'000฀
฀ ฀
Current฀assets฀ ฀3,360฀ ฀฀฀5,040฀
฀ ฀9,070฀ ฀11,840฀
฀ ฀
Share฀capital฀ ฀1,200฀ ฀ 1,200 ฀
Retained฀earnings฀ ฀5,280฀ ฀6,760฀
฀ ฀6,480฀ ฀7,960฀
Current฀liabilities฀ ฀2,590฀ ฀ ฀฀3,880 ฀
฀ ฀9,070฀ ฀11,840฀
Exchange฀rates฀were฀as฀follows฀
1฀January฀20X1฀ $1:฀12฀Jens฀
31฀December฀20X1฀ $1:฀10฀Jens฀
31฀December฀20X2฀ $1:฀8฀Jens฀
Weighted฀average฀rate฀for฀20X1฀ $1:฀11฀Jens฀
Weighted฀average฀rate฀for฀20X2฀ $1:฀8.5฀Jens฀
The฀ fair฀ values฀ of฀ the฀ identifiable฀ net฀ assets฀ of฀ Jennie฀ were฀ equivalent฀ to฀ their฀ book฀ values฀ at฀ the฀
acquisition฀date.฀Bennie฀chose฀to฀measure฀the฀non-controlling฀interests฀in฀Jennie฀at฀fair฀value฀at฀the฀
date฀ of฀ acquisition.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interests฀ in฀ Jennie฀ was฀ measured฀ at฀
2,676,000฀Jens฀on฀1฀January฀20X1.฀฀
An฀ impairment฀ test฀ conducted฀ at฀ the฀ year฀ end฀ 31฀ December฀ 20X2฀ revealed฀ impairment฀ losses฀ of฀
1,870,000฀ Jens฀ on฀ recognised฀ goodwill.฀ No฀ impairment฀ losses฀ were฀ necessary฀ in฀ the฀ year฀ ended฀
Ignore฀deferred฀tax฀on฀translation฀differences.฀
Required฀
Prepare฀the฀consolidated฀statement฀of฀financial฀position฀as฀at฀31฀December฀20X2฀and฀consolidated฀
statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ Bennie฀ Group฀ for฀ the฀ year฀ then฀
ended.฀
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฀฀
Solution฀
BENNIE฀GROUP฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X2฀
฀ ฀$'000฀
Property,฀plant฀and฀equipment฀(5,705฀+฀(W2)) ฀฀
Goodwill฀(W4)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Current฀assets฀(2,222฀+฀(W2))฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Share฀capital฀ ฀1,700฀
Retained฀earnings฀(W5) ฀฀
Other฀components฀of฀equity฀–฀translation฀reserve฀(W8) ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
Non-controlling฀interests฀(W6)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Current฀liabilities฀(2,035฀+฀(W2))฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
YEAR฀ENDED฀31฀DECEMBER฀20X2฀
฀ ฀$'000฀
Revenue฀(9,840฀+฀(W3))฀ ฀
Cost฀of฀sales฀(5,870฀+฀(W3))฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Operating฀expenses฀(2,380฀+฀(W3))฀ ฀
Goodwill฀impairment฀loss฀(W4)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Income฀tax฀expense฀(530฀+฀(W3))฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Profit฀for฀the฀year฀ ฀
Items฀that฀may฀be฀reclassified฀subsequently฀to฀profit฀or฀loss: ฀
฀฀฀Exchange฀differences฀on฀translating฀foreign฀operations฀(W9)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀฀฀Owners฀of฀the฀parent฀ ฀
฀฀฀Non-controlling฀interests฀(W7)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀฀฀Owners฀of฀the฀parent฀ ฀
฀฀฀Non-controlling฀interests฀(W7)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Workings฀
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2฀ Translation฀of฀Jennie฀–฀Statement฀of฀financial฀position฀
฀ ฀J'000฀ ฀Rate฀ ฀$'000฀
฀Property,฀plant฀and฀equipment฀ ฀7,280฀ ฀ ฀
฀Current฀assets฀ ฀ 5,600฀ ฀ ฀฀฀฀฀฀฀฀
฀ ฀12,880฀ ฀ ฀฀฀฀฀฀฀฀
฀ ฀
฀Share฀capital฀ ฀1,200฀ ฀
฀Pre-acquisition฀ret'd฀earnings฀ ฀5,280฀ ฀
฀Post-acquisition฀ret'd฀earnings฀ –฀20X1฀profit฀ ฀ 2,860฀ ฀
฀฀ –฀20X1฀dividend฀ ฀ (1,380) ฀
฀ –฀20X2฀profit฀ ฀ 2,040฀ ฀
฀฀ –฀20X2฀dividend฀ ฀ (1,120) ฀
฀Exchange฀differences฀on฀net฀assets฀ ฀ ฀ balance฀ ฀฀฀฀฀฀฀฀
฀ ฀8,880฀ ฀
฀Current฀liabilities฀ ฀ 4,000฀ ฀ ฀฀฀฀฀฀฀฀
฀ ฀12,880฀ ฀ ฀฀฀฀฀฀฀฀
3฀ Translation฀of฀Jennie฀–฀Statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀ ฀J'000฀ Rate฀ ฀$'000฀
฀Revenue฀ ฀ 14,620 ฀ ฀
฀Cost฀of฀sales฀ ฀ (8,160) ฀ ฀ ฀฀฀฀฀฀฀฀
฀Gross฀profit฀ ฀6,460฀ ฀
฀Operating฀expenses฀ ฀(3,570)฀ ฀ ฀฀฀฀฀฀฀฀
฀Profit฀before฀tax฀ ฀2,890฀ ฀
฀Income฀tax฀expense฀ ฀ (850)฀ ฀ ฀฀฀฀฀฀฀฀
฀Profit฀for฀the฀year฀ ฀2,040฀ ฀ ฀฀฀฀฀฀฀฀
4฀ Goodwill฀
฀ ฀J'000 ฀J'000 Rate฀ ฀$'000฀
฀Consideration฀transferred฀(993฀
฀Non-controlling฀interests฀
฀Less:฀ FV฀of฀net฀assets฀at฀acquisition฀
฀฀ share฀capital฀
฀฀ retained฀earnings฀ ฀
฀ ฀
฀Goodwill฀at฀acquisition฀
฀Impairment฀losses฀20X1฀
฀Exchange฀gain/(loss)฀20X1฀ ฀ ฀฀฀– ฀฀฀฀฀฀฀฀฀ ฀
฀Goodwill฀at฀31฀December฀20X1฀
฀Impairment฀losses฀20X2฀
฀Exchange฀gain/(loss)฀20X2฀ ฀ ฀฀฀– ฀฀฀฀฀฀฀฀฀ ฀
฀Goodwill฀at฀year฀end฀ ฀ ฀฀฀฀฀฀฀฀฀ ฀
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฀฀
$'000฀ $'000฀
฀Retained฀earnings฀at฀year฀end฀(W2)฀ 5,185฀
฀Retained฀earnings฀at฀acquisition฀(W2)฀ ฀ ฀ ฀
฀ ฀
฀Group฀share฀of฀post-acquisition฀retained฀earnings (฀฀฀฀฀฀฀฀฀฀× ฀ ฀%) ฀
฀Less฀group฀share฀of฀impairment฀losses฀to฀date฀((W4) (฀฀฀฀฀฀฀฀฀฀× ฀%)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀$'000฀฀
NCI฀at฀acquisition (W4)฀
NCI฀share฀of฀post-acquisition฀retained฀earnings฀((W5)฀ ฀฀฀฀฀฀฀฀× ฀ ฀%)
NCI฀share฀of฀exchange฀differences on฀net฀assets ((W2)฀ ฀฀฀฀฀฀฀฀× ฀ ฀%)
NCI฀share฀of฀exchange฀differences฀on฀goodwill฀[((W4) ฀ ฀฀ ฀+฀ ฀฀ ฀฀฀฀) ฀× ฀ ฀฀฀%]฀
Less:฀NCI฀share฀of฀impairment฀losses฀to฀date฀((W4) (฀฀฀฀฀฀฀฀฀฀× ฀ ฀%)฀ ฀฀฀฀฀฀ ฀
฀฀ ฀฀฀฀฀฀ ฀
฀ ฀฀PFY฀ ฀฀TCI฀
฀ ฀฀$'000฀ ฀฀$'000฀
Profit฀for฀the฀year฀(W3)฀ ฀
Impairment฀losses฀(W4)฀ ฀
Other฀comprehensive฀income:฀exchange฀differences฀(W9)฀ –
฀
฀
฀฀×฀฀฀฀฀฀%฀ ฀฀×฀฀฀฀฀฀%฀
฀
8฀ Consolidated฀translation฀reserve฀
฀ ฀$'000฀
Exchange฀differences฀on฀net฀assets ((W2) ฀฀฀฀฀฀฀฀฀× ฀ ฀%)
Exchange฀differences฀on฀goodwill [((W4) ฀ ฀฀ ฀+฀ ฀฀ ฀฀฀฀) ฀× ฀ ฀%]฀
฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
9฀ Exchange฀differences฀arising฀during฀the฀year฀
฀ ฀$'000฀
On฀translation฀of฀net฀assets฀of฀Jennie:
Closing฀net฀assets฀as฀translated฀(at฀CR)฀(W2)
Less฀opening฀net฀assets฀as฀translated฀at฀the฀time (at฀OR)฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀
Less฀retained฀profit฀as฀translated฀at฀the฀time
฀ (profit฀at฀average฀rate฀less฀dividends฀at฀actual฀rate) ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀
On฀goodwill฀(W4)฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
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4.6฀ Disposal฀of฀foreign฀operations฀
On฀ disposal,฀ the฀ cumulative฀ amount฀ of฀ the฀ exchange฀ differences฀ accumulated฀ in฀ equity฀ (and฀
previously฀ reported฀ in฀ other฀ comprehensive฀ income)฀ relating฀ to฀ the฀ foreign฀ operation฀ are฀
reclassified฀ to฀ profit฀ or฀ loss฀ (as฀ a฀ reclassification฀ adjustment)฀ at฀ the฀ same฀ time฀ as฀ the฀ disposal฀
gain/loss฀is฀recognised฀(IAS฀21:฀para.฀48).฀
5฀฀Monetary฀items฀forming฀part฀of฀a฀net฀investment฀in฀a฀
foreign฀operation฀
Net฀investment฀in฀a฀foreign฀operation:฀the฀amount฀of฀the฀reporting฀entity's฀interest฀in฀the฀net฀
Key฀term฀
assets฀of฀a฀foreign฀operation.฀
฀ (IAS฀21:฀para.฀8)฀
An฀ entity฀ may฀ have฀ a฀ monetary฀ item฀ that฀ is฀ receivable฀ from฀ or฀ payable฀ to฀ a฀ foreign฀ operation฀ for฀
which฀settlement฀is฀neither฀planned฀nor฀likely฀to฀occur฀in฀the฀foreseeable฀future.฀This฀may฀include฀a฀
long-term฀ receivable฀ or฀ loan.฀ They฀ do฀ not฀ include฀ trade฀ receivables฀ or฀ trade฀ payables.฀ (IAS฀21:฀
para.฀15)฀
In฀substance฀such฀items฀are฀part฀of฀the฀entity's฀net฀investment฀in฀a฀foreign฀operation.฀
The฀ amount฀ could฀ be฀ due฀ between฀ the฀ parent฀ and฀ the฀ foreign฀ operation,฀ or฀ a฀ subsidiary฀ and฀ the฀
foreign฀operation.฀฀
Separate฀financial฀statements฀
(a)฀ Where฀denominated฀in฀the฀functional฀currency฀of฀the฀reporting฀entity฀or฀foreign฀operation฀any฀
exchange฀differences฀are฀recognised฀in฀profit฀or฀loss฀in฀the฀separate฀financial฀statements฀of฀
the฀reporting฀entity฀or฀foreign฀operation฀as฀appropriate฀(as฀normal)฀(IAS฀21:฀para.฀33).฀
(b)฀ Where฀denominated฀in฀a฀currency฀other฀than฀the฀functional฀currency฀of฀the฀reporting฀entity฀or฀
foreign฀operation,฀exchange฀differences฀will฀be฀recognised฀in฀profit฀or฀loss฀in฀the฀separate฀
financial฀statements฀of฀both฀parties฀(as฀normal)฀(IAS฀21:฀para.฀33).฀
Consolidated฀financial฀statements฀
(a)฀ Any฀ exchange฀ differences฀ are฀ recognised฀ initially฀ in฀ (ie฀ moved฀ to)฀ other฀ comprehensive฀
income฀(IAS฀21:฀para.฀32);฀and฀
(b)฀ Are฀reclassified฀from฀equity฀to฀profit฀ or฀ loss฀ on฀disposal฀of฀the฀net฀investment฀(IAS฀21:฀
para.฀32).฀
Illustration฀3฀
On฀1฀January฀20X8,฀Gabby,฀a฀company฀whose฀functional฀currency฀is฀the฀dollar฀($),฀bought฀a฀100%฀
interest฀in฀a฀Japanese฀company฀for฀¥฀75,000,000.฀The฀company฀is฀run฀as฀an฀autonomous฀
subsidiary.฀On฀the฀day฀of฀purchase฀a฀long-term฀loan฀was฀advanced฀to฀the฀subsidiary฀–฀value฀¥฀
5,000,000฀(repayable฀in฀yen).฀
On฀1฀January฀20X8฀the฀exchange฀rate฀was฀$1:฀150฀¥;฀on฀31฀December฀20X8,฀$1:฀130฀¥.฀
Required฀
(a)฀ Explain฀the฀accounting฀treatment฀of฀the฀investment฀and฀loan฀in฀Gabby's฀separate฀financial฀
statements฀at฀31฀December฀20X8.฀
(b)฀ Explain฀the฀effect฀in฀Gabby's฀consolidated฀financial฀statements฀at฀31฀December฀20X8.฀
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฀฀
(c)฀ Show฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀effect฀in฀Gabby's฀
consolidated฀financial฀statements฀if฀the฀subsidiary฀was฀sold฀on฀30฀June฀20X9฀for฀$720,000฀
when฀the฀exchange฀rate฀was฀120฀¥฀to฀the฀dollar฀and฀the฀value฀of฀the฀Japanese฀subsidiary's฀
net฀assets฀and฀goodwill฀in฀the฀consolidated฀books฀was฀$660,000.฀
Assume฀that฀the฀investment฀is฀held฀in฀Gabby's฀separate฀financial฀statements฀using฀the฀cost฀option฀in฀
IAS฀27฀and฀that฀cumulative฀exchange฀gains฀on฀translation฀of฀the฀financial฀statements฀of฀the฀foreign฀
operation฀of฀$128,900฀were฀recognised฀in฀the฀consolidated฀financial฀statements฀up฀to฀31฀December฀
20X8.฀
Solution฀
(a)฀ Separate฀financial฀statements฀of฀Gabby฀
฀ The฀accounting฀treatment฀is฀as฀follows:฀
฀ At฀recognition:฀
Both฀at฀the฀historical฀exchange฀
¥75,000,000 rate฀(150)฀at฀the฀date฀of฀initial฀
฀ Investment฀ ฀=฀$500,000.฀ recognition฀
150
¥5,000,000
฀ Loan฀asset฀ ฀=฀$33,333.฀
150
฀ At฀the฀year฀end:฀ At฀closing฀exchange฀rate฀
(130)฀because฀the฀loan฀is฀a฀
฀ The฀investment฀in฀the฀subsidiary฀remains฀at฀cost฀(Gabby's฀accounting฀policy).฀ monetary฀item฀
¥5,000,000
฀ The฀loan฀asset฀is฀retranslated฀to฀฀ ฀=฀$38,462฀at฀the฀closing฀rate.฀
130
฀ Therefore,฀a฀gain฀of฀$5,129฀($38,462฀–฀$33,333)฀on฀the฀loan฀receivable฀is฀recognised฀in฀
(b)฀ Consolidated฀financial฀statements฀
฀ The฀subsidiary฀will฀be฀consolidated฀and฀shown฀at฀the฀translated฀value฀of฀its฀net฀assets฀and฀
goodwill฀(both฀at฀the฀closing฀exchange฀rate).฀Exchange฀differences฀on฀the฀translation฀are฀
recognised฀in฀other฀comprehensive฀income.฀No฀exchange฀gain฀or฀loss฀on฀the฀loan฀payable฀
occurs฀in฀the฀individual฀financial฀statements฀of฀the฀Japanese฀company฀as฀the฀loan฀is฀
denominated฀in฀yen.฀
฀ IAS฀21฀requires฀the฀exchange฀difference฀on฀the฀retranslation฀of฀the฀loan฀in฀Gabby's฀books฀to฀
be฀taken฀in฀full฀(moved)฀to฀other฀comprehensive฀income฀on฀consolidation฀(ie฀it฀is฀reported฀in฀
the฀same฀section฀of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀as฀the฀
exchange฀difference฀on฀translation฀of฀the฀subsidiary).฀
฀ Therefore฀the฀$5,129฀gain฀on฀the฀loan฀is฀reported฀in฀other฀comprehensive฀income฀rather฀than฀
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(c)฀ Consolidated฀financial฀statements฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extracts)฀
฀ Gain฀on฀sale฀of฀subsidiary฀
฀ ฀$฀฀฀฀฀฀
Sale฀proceeds฀ ฀720,000฀
Less฀net฀assets฀and฀goodwill฀of฀Japanese฀company฀ ฀(660,000)฀
Add:฀ cumulative฀ gain฀ on฀ retranslation฀ of฀ net฀ assets฀ and฀ goodwill฀ ฀128,900฀
reclassified฀from฀other฀comprehensive฀income฀to฀profit฀or฀loss฀
฀
Add:฀ gain฀on฀retranslation฀of฀loan:
฀ in฀period฀(Working)฀ ฀3,205฀
฀ reclassified฀from฀other฀comprehensive฀income฀to฀profit฀or฀loss฀฀ ฀฀฀฀฀5,129฀
฀ ฀197,234฀
฀
฀
Working฀
฀ Further฀gain฀on฀the฀loan฀in฀the฀period฀31฀December฀20X8฀to฀30฀June฀20X9:฀
¥5,000,000 ¥5,000,000
฀ ฀ =฀฀฀$3,205฀
120 130
Activity฀3:฀Ethics฀ ฀
Rankin฀ owns฀ 60%฀ of฀ Jenkin.฀ The฀ directors฀ of฀ Rankin฀ are฀ thinking฀ of฀ acquiring฀ further฀ foreign฀
investments฀ in฀ the฀ near฀ future,฀ but฀ the฀ entity฀ currently฀ lacks฀ sufficient฀ cash฀ to฀ exploit฀ such฀
opportunities.฀ They฀ would฀ prefer฀ to฀ raise฀ finance฀ from฀ an฀ equity฀ issue฀ as฀ Rankin฀ already฀ has฀
significant฀loans฀within฀non-current฀liabilities฀and฀they฀do฀not฀wish฀to฀increase฀Rankin’s฀gearing฀any฀
further.฀They฀are฀therefore฀keen฀to฀maximise฀the฀balance฀on฀the฀group฀retained฀earnings฀in฀order฀to฀
attract฀the฀maximum฀level฀of฀investment฀possible.฀One฀proposal฀is฀that฀they฀may฀sell฀5%฀of฀the฀equity฀
interest฀in฀Jenkin฀during฀20X6.฀This฀will฀improve฀the฀cash฀position฀but฀will฀enable฀Rankin฀to฀maintain฀
control฀over฀Jenkin.฀In฀addition,฀the฀directors฀believe฀that฀the฀shares฀can฀be฀sold฀profitably฀to฀boost฀
the฀ retained฀ earnings฀ of฀ Rankin฀ and฀ of฀ the฀ group.฀ The฀ directors฀ intend฀ to฀ transfer฀ the฀ relevant฀
proportion฀ of฀ the฀ exchange฀ differences฀ on฀ translation฀ of฀ the฀ subsidiary฀ to฀ group฀ retained฀ earnings,฀
knowing฀that฀this฀is฀contrary฀to฀accounting฀standards.฀
Required฀
Discuss฀why฀the฀proposed฀treatment฀of฀the฀exchange฀differences฀by฀the฀directors฀is฀not฀in฀compliance฀
with฀International฀Financial฀Reporting฀Standards,฀explaining฀any฀ethical฀issues฀which฀may฀arise.฀
Ethics฀note฀
Foreign฀currency฀translation฀adds฀additional฀complexity฀to฀the฀financial฀statements.฀It฀also฀makes฀the฀
financial฀statements฀less฀transparent,฀because฀the฀translation฀itself฀is฀not฀visible฀to฀the฀user฀of฀the฀
financial฀statements.฀The฀choice฀of฀exchange฀rate฀and฀need฀for฀consistent฀application฀of฀the฀
translation฀principles฀are฀areas฀where฀manipulation฀of฀the฀financial฀statements฀could฀arise.฀
Similarly,฀the฀choice฀of฀presentation฀currency฀(which฀is฀a฀free฀choice฀under฀IAS฀21)฀could฀affect฀the฀
image฀the฀financial฀statements฀give฀depending฀on฀which฀currency฀is฀chosen฀and฀the฀volatility฀of฀
exchange฀rates฀with฀that฀currency.฀
฀ 351฀

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฀฀
฀
฀ Foreign฀transactions฀and฀
฀ entities฀(IAS฀21)฀
฀
฀
฀ 1.฀ Currency฀
฀ concepts฀
฀
฀
2.฀฀Functional฀currency 3. Presentation฀currency
฀
'The฀currency฀of฀the฀primary฀economic฀
฀ 'The฀currency฀in฀which฀the฀financial฀
environment฀in฀which฀the฀entity฀operates'฀ statements฀are฀presented'฀
฀
 ฀Transactions฀are฀measured฀in฀this฀  Can฀be฀any฀currency฀
฀currency฀  Translation฀from฀functional฀
 ฀Translated฀at฀spot฀rate฀at฀date฀of฀ currency:฀
฀transaction฀(or฀average฀for฀period)฀ ฀ –฀ Presentation฀currency฀
฀
 At฀year฀end:฀ method฀(see฀below)฀
฀
฀ –฀ Restate฀monetary฀items฀฀CR฀  Exchange฀differences฀฀other฀
฀ comprehensive฀income฀
฀ –฀ Non-monetary฀items฀฀not฀restated฀
฀
฀ ฀–฀ Items฀held฀at฀FV฀฀use฀rate฀when฀FV฀
฀ determined฀
 ฀Exchange฀differences฀฀P/L฀ ฀ Use฀presentation฀currency฀rules: 5.฀ Monetary฀items฀
฀ SOFP:฀ forming฀part฀of฀net฀
 ฀Considerations฀in฀determining฀functional฀
฀currency:฀ ฀ ฀ FC฀ ฀ PC฀ investment฀in฀
฀ ฀ Assets฀ ฀X฀ CR฀ ฀X฀ foreign฀operation฀
–฀ Currency฀that฀mainly฀influences฀sales฀ ฀ ฀
฀ ฀X฀ ฀ ฀X฀ Receivable/payable฀and฀
prices฀
฀ ฀ SC฀ ฀X฀ HR฀฀ ฀X฀ settlement฀neither฀planned฀
–฀ Currency฀of฀the฀country฀whose฀
฀ ฀ SP฀ ฀X฀ HR฀ ฀X฀ nor฀likely฀to฀occur฀in฀
regulations฀mainly฀determine฀sales฀
฀ ฀ Pre฀acq'n฀RE฀ ฀X฀ HR฀ ฀X฀ foreseeable฀future฀
prices฀
฀ ฀ ฀ ฀X฀ ฀ ฀X฀ ฀
฀ Currency฀that฀mainly฀influences฀
–฀
฀ Post-acq'n:฀
฀ labour,฀material฀and฀other฀costs฀ ฀ ฀฀PFY฀year฀1฀ ฀X฀ ฀AR฀฀ ฀X฀ Separate฀FS฀of฀Co:฀
฀Also:฀ ฀ FX฀differences฀฀
฀ ฀฀Dividend฀ ฀(X)฀ ฀actual฀฀฀(X)฀
฀–฀ Currency฀in฀which฀financing฀ ฀P/L฀
฀ ฀฀PFY฀year฀2฀ ฀X฀ ฀AR฀฀ ฀X฀
฀ generated฀
฀ ฀฀Dividend฀ ฀(X)฀ ฀actual฀฀฀(X)฀ Consolidated฀FS:฀
฀–฀ Currency฀in฀which฀operating฀receipts฀
฀ usually฀retained฀
฀ Trans฀res฀ ฀฀–฀฀ ฀฀฀ ฀X฀ ฀ FX฀differences฀฀OCI฀(&฀
฀ ฀ ฀X฀ ฀ ฀X฀ reserves)฀
฀Also฀for฀a฀foreign฀operation:฀
฀ Liabilities฀ ฀ X฀ CR฀ ฀X฀ ฀ Reclassified฀from฀OCI฀to฀
฀
–฀ Degree฀of฀autonomy฀ ฀ ฀ ฀X฀ ฀ ฀X฀ P/L฀on฀disposal฀of฀net฀
฀
–฀ Volume฀of฀transactions฀with฀parent฀ investment
฀ ฀ SPLOCI:฀
฀–฀ Whether฀cash฀flows฀directly฀impact฀ ฀ ฀ FC฀ ฀ ฀PC฀
฀ the฀parent฀ ฀ Revenue฀ ฀X฀ ฀฀ ฀X฀
฀–฀ Dependence฀on฀parent฀finance฀ ฀ ..฀ ฀X฀ ฀ ฀X฀
฀ ฀ ..฀ ฀X฀ ฀฀฀฀฀฀฀฀ ฀X฀
฀ ฀ PFY฀ ฀X฀฀฀฀฀฀AR฀ ฀X฀
฀ ฀ OCI฀ ฀X฀ ฀ ฀X฀
฀ ฀ ฀ TCI฀ X฀ ฀
฀ ฀X฀
฀ Calculate฀goodwill฀(see฀earlier)฀
฀ Calculate฀FX฀differences฀for฀
352฀
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lOMoARcPSD|6256454
1.฀ Currency฀concepts฀
฀ IAS฀21฀introduces฀functional฀currency฀and฀presentation฀currency฀concepts.฀
2.฀ Functional฀currency฀
฀ The฀functional฀currency฀is฀the฀currency฀of฀the฀primary฀economic฀environment฀that฀the฀
entity฀faces.฀This฀is฀based฀on฀an฀entity's฀circumstances.฀It฀is฀not฀a฀free฀choice.฀
฀ The฀measurement฀of฀the฀financial฀statements฀is฀made฀in฀this฀currency.฀
฀ Transactions฀in฀foreign฀currency฀are฀translated฀at฀the฀spot฀exchange฀rate฀at฀the฀date฀of฀
the฀transaction.฀
฀ At฀the฀period฀end,฀monetary฀assets฀and฀liabilities฀are฀retranslated฀at฀the฀closing฀
rate,฀and฀the฀exchange฀difference฀is฀recognised฀in฀profit฀or฀loss.฀
฀ Non-monetary฀assets฀and฀liabilities฀are฀not฀retranslated฀(unless฀they฀are฀measured฀
at฀fair฀value,฀in฀which฀case฀they฀are฀translated฀at฀the฀exchange฀rate฀at฀the฀date฀of฀the฀fair฀
value฀measurement).฀
3.฀ Presentation฀currency฀฀
฀ The฀presentation฀currency฀is฀the฀currency฀in฀which฀the฀financial฀statements฀are฀
presented.฀฀An฀entity฀can฀choose฀any฀currency฀as฀its฀presentation฀currency.฀
฀ There฀are฀specific฀translation฀rules฀to฀translate฀from฀the฀functional฀currency฀to฀a฀different฀
presentation฀currency.฀
฀ Assets฀and฀liabilities฀are฀translated฀at฀the฀closing฀rate.฀Income฀and฀expenses฀are฀
translated฀at฀the฀exchange฀rate฀at฀the฀date฀of฀the฀transaction฀(or฀an฀average฀rate฀
for฀the฀period฀if฀exchange฀rates฀do฀not฀fluctuate฀significantly).฀
฀ Any฀resulting฀exchange฀differences฀are฀recognised฀in฀other฀comprehensive฀income.฀
฀ Foreign฀operations฀are฀translated฀using฀the฀presentation฀currency฀rules฀where฀their฀
functional฀currency฀is฀different฀to฀that฀of฀the฀parent.฀
5.฀ Monetary฀items฀forming฀part฀of฀a฀net฀investment฀in฀a฀foreign฀operation฀
฀ Exchange฀differences฀arising฀on฀monetary฀items฀forming฀part฀of฀a฀net฀investment฀in฀
a฀foreign฀operation฀are฀recognised฀in฀profit฀or฀loss฀in฀the฀individual฀entity's฀financial฀
statements฀under฀the฀normal฀functional฀currency฀rules.฀฀However,฀they฀are฀reclassified฀as฀
other฀comprehensive฀income฀in฀the฀consolidated฀financial฀statements฀(so฀that฀they฀are฀
recognised฀in฀the฀same฀location฀as฀the฀re-translation฀of฀the฀foreign฀operation฀itself).฀
฀
฀
฀ 353฀

lOMoARcPSD|6256454
฀฀
Q17฀Harvard฀฀
IAS฀21฀–฀Does฀it฀need฀amending?฀(2017)฀
www.accaglobal.com/us/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles/ias21.html฀
฀
354฀

lOMoARcPSD|6256454
฀
฀
฀
Group฀statements฀of
฀
฀
฀
฀
฀
cash฀flows
฀
฀ Syllabus฀
reference฀no.฀
Prepare฀and฀discuss฀group฀statements฀of฀cash฀flows.฀ D1(l)฀ ฀
฀
Exam฀content฀
Group฀statements฀of฀cash฀flows฀could฀be฀examined฀in฀either฀Section฀A฀or฀B฀of฀the฀Strategic฀Business฀
Reporting฀ (SBR)฀ exam.฀ The฀ first฀ question฀ in฀ Section฀ A฀ of฀ the฀ exam฀ will฀ be฀ based฀ on฀ the฀ financial฀
statements฀of฀groups฀and฀could฀therefore฀be฀entirely฀focused฀on฀the฀group฀statement฀of฀cash฀flows.฀
Questions฀may฀require฀the฀preparation฀of฀extracts฀from฀the฀group฀statement฀of฀cash฀flows,฀and฀will฀
require฀ discussion฀ and฀ explanation฀ of฀ any฀ calculations฀ performed.฀ Threats฀ to฀ ethical฀ principles฀ in฀
preparing฀the฀group฀statement฀of฀cash฀flows฀could฀also฀be฀examined,฀either฀in฀the฀ethics฀question฀in฀
Section฀A,฀or฀as฀a฀part฀of฀a฀question฀in฀Section฀B.฀Analysis฀and฀interpretation฀of฀a฀group฀statement฀of฀
cash฀flows฀could฀also฀be฀examined฀in฀Section฀B.฀฀
฀ 355฀

lOMoARcPSD|6256454
฀฀
฀
฀
฀
฀ Group฀statements฀
฀ of฀cash฀flows฀
฀
฀ ฀
2.฀ Consolidated฀ 3.฀ Approach฀to฀

1.฀ Definitions฀and฀ preparing฀a฀group฀
format฀ statements฀of฀cash฀
statement฀of฀cash฀
flows฀
flows฀
4.฀ Analysis฀and฀
interpretation฀of฀
group฀statements฀of฀
cash฀flow฀
356฀

lOMoARcPSD|6256454
16:฀Group฀statements฀of฀cash฀flows฀
1฀Definitions฀and฀format฀
A฀ consolidated฀ statement฀ of฀ cash฀ flows฀ explains฀ the฀ movement฀ in฀ a฀ group’s฀ cash฀ and฀ cash฀
equivalents฀ balance฀ during฀ a฀ period.฀ IAS฀ 7฀ Statement฀ of฀ Cash฀ Flows฀ is฀ the฀ relevant฀ standard฀ to฀
apply.฀
Cash:฀comprises฀cash฀on฀hand฀and฀demand฀deposits.฀
Key฀term฀ Cash฀equivalents:฀these฀are฀short-term,฀highly฀liquid฀investments฀that฀are฀readily฀convertible฀into฀
known฀amounts฀of฀cash฀and฀are฀subject฀to฀an฀insignificant฀risk฀of฀changes฀in฀value.฀
Cash฀flows:฀these฀are฀inflows฀and฀outflows฀of฀cash฀and฀cash฀equivalents.฀
฀฀ (IAS฀7:฀para.฀6)฀
1.2฀Format฀฀
You฀should฀be฀familiar฀with฀the฀usefulness฀of฀cash฀flow฀information฀and฀with฀the฀format฀and฀
preparation฀of฀single฀entity฀statements฀of฀cash฀flows฀from฀your฀earlier฀studies฀in฀Financial฀Reporting.฀
Chapter฀16฀Section฀1฀of฀the฀Supplementary฀Reading฀revises฀the฀detail฀if฀you฀are฀unsure.฀This฀is฀
The฀format฀of฀a฀consolidated฀statement฀of฀cash฀flows฀is฀consistent฀with฀that฀for฀a฀single฀entity.฀Both฀
the฀direct฀and฀indirect฀methods฀of฀preparing฀the฀group฀statements฀of฀cash฀flows฀are฀acceptable฀
(IAS฀7:฀para.฀18).฀฀
Illustration฀1฀
Indirect฀method:฀illustrative฀consolidated฀statement฀of฀cash฀flows฀
Note.฀New฀entries฀for฀a฀consolidated฀statement฀of฀cash฀flows฀are฀shaded฀in฀grey.฀
฀ 31.12.X1฀
฀ $'000 $'000฀
Cash฀flows฀from฀operating฀activities฀ ฀
Profit฀before฀taxation฀ ฀ 3,350 ฀ ฀
Adjustment฀for:฀ ฀
฀฀Depreciation฀ ฀520฀ ฀
฀฀Profit฀on฀sale฀of฀property,฀plant฀and฀equipment ฀(10)฀ ฀
฀฀Share฀of฀profit฀of฀associate/joint฀venture ฀(60)฀ ฀
฀฀Foreign฀exchange฀loss฀ ฀40฀ ฀
฀฀Investment฀income฀ ฀(500)฀ ฀
฀฀Interest฀expense฀ ฀฀฀400฀ ฀
฀ ฀3,740฀ ฀
฀฀Decrease฀in฀inventories฀ ฀1,050฀ ฀
฀฀Increase฀in฀trade฀and฀other฀receivables฀ ฀(500)฀ ฀
฀฀Decrease฀in฀trade฀payables฀ ฀(1,740)฀ ฀
Cash฀generated฀from฀operations฀ ฀2,550฀ ฀
Interest฀paid฀ ฀(270)฀ ฀
Income฀taxes฀paid฀ ฀ ฀(900)฀ ฀
Net฀cash฀from฀operating฀activities฀ ฀1,380฀
฀
฀ 357฀

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฀฀
Cash฀flows฀from฀investing฀activities฀ ฀
Acquisition฀of฀subsidiary฀X฀net฀of฀cash฀acquired (550) ฀
Purchase฀of฀property,฀plant฀and฀equipment฀ ฀(350)฀ ฀
Proceeds฀from฀sale฀of฀equipment฀ ฀20฀ ฀
Interest฀received฀ ฀200฀ ฀
Dividends฀received฀(from฀associates/JVs฀and฀other฀investments) ฀200 ฀
Net฀cash฀used฀in฀investing฀activities฀ ฀ (480) ฀
฀ ฀
Cash฀flows฀from฀financing฀activities฀ ฀
Proceeds฀from฀issue฀of฀share฀capital฀ ฀250฀ ฀
Proceeds฀from฀long-term฀borrowings฀ ฀250฀ ฀
Payments฀of฀finance฀lease฀liabilities฀ ฀(90)฀ ฀
Dividends฀paid*฀(to฀owners฀of฀parent฀and฀NCI) (1,200) ฀
Net฀cash฀used฀in฀financing฀activities฀ ฀(790)฀
฀ ฀
Net฀increase฀in฀cash฀and฀cash฀equivalents฀ ฀110฀
Cash฀and฀cash฀equivalents฀at฀beginning฀of฀the฀period฀ ฀฀120฀
Cash฀and฀cash฀equivalents฀at฀end฀of฀the฀period฀ ฀฀230฀
฀
฀
*This฀could฀also฀be฀shown฀as฀an฀operating฀cash฀flow.฀
(IAS฀7:฀Illustrative฀Examples฀para.฀3)฀
฀
Illustration฀2฀
Indirect฀method:฀illustrative฀consolidated฀statement฀of฀cash฀flows฀
Note.฀New฀entries฀for฀a฀consolidated฀statement฀of฀cash฀flows฀are฀shaded฀in฀grey.฀
฀ 31.12.X1฀
฀ ฀$'000฀ ฀$'000฀
Cash฀receipts฀from฀customers฀ ฀30,150฀ ฀
Cash฀paid฀to฀suppliers฀and฀employees฀ ฀(27,600)฀ ฀
Interest฀paid฀ ฀(270)฀ ฀
Income฀taxes฀paid฀ (900) ฀
Net฀cash฀from฀operating฀activities฀ ฀1,380฀
฀ ฀
Acquisition฀of฀subsidiary฀X,฀net฀of฀cash฀acquired (550) ฀
Purchase฀of฀property,฀plant฀and฀equipment฀ ฀(250)฀ ฀
Purchase฀of฀intangible฀assets฀ ฀(100)฀ ฀
Proceeds฀from฀sale฀of฀equipment฀ ฀20฀ ฀
Interest฀received฀ ฀200฀ ฀
Dividends฀received฀(from฀associates/JVs฀and฀other฀investments) 200 ฀
Net฀cash฀used฀in฀investing฀activities฀ ฀(480)฀
฀
358฀

lOMoARcPSD|6256454
Proceeds฀from฀issue฀of฀share฀capital฀ ฀ 250 ฀
Proceeds฀from฀long-term฀borrowings฀ ฀250฀
Payments฀of฀lease฀liabilities฀ ฀(90)฀
Dividends฀paid*฀(to฀owners฀of฀parent฀and฀NCI)฀ ฀(1,200)฀
Net฀cash฀used฀in฀financing฀activities฀ ฀ ฀(790)฀
Net฀increase฀in฀cash฀and฀cash฀equivalents฀ ฀ ฀110฀
Cash฀and฀cash฀equivalents฀at฀beginning฀of฀period฀ ฀ ฀120฀
Cash฀and฀cash฀equivalents฀at฀end฀of฀period฀ ฀ ฀230฀
฀
฀
*This฀could฀also฀be฀shown฀as฀an฀operating฀cash฀flow.฀
(IAS฀7:฀Illustrative฀Examples฀para.฀3)฀
The฀ direct฀ method฀ is฀ encouraged฀ where฀ the฀ necessary฀ information฀ is฀ not฀ too฀ costly฀ to฀ obtain,฀ but฀
IAS฀7฀does฀not฀require฀it.฀In฀practice฀the฀direct฀method฀is฀rarely฀used฀because฀the฀indirect฀method฀is฀
much฀ easier฀ to฀ prepare.฀ However,฀ it฀ could฀ be฀ argued฀ that฀ companies฀ ought฀ to฀ monitor฀ their฀ cash฀
flows฀carefully฀enough฀on฀an฀ongoing฀basis฀to฀be฀able฀to฀use฀the฀direct฀method฀at฀minimal฀extra฀cost.฀
Tutorial฀note฀
A฀question฀in฀the฀exam฀on฀the฀direct฀method฀is฀more฀likely฀to฀be฀a฀written฀discussion฀question,฀rather฀
than฀requiring฀lots฀of฀calculations.฀Consider฀the฀illustration฀below.฀฀
Illustration฀3฀
During฀December฀20X5,฀the฀Smith฀Group฀obtained฀a฀new฀bank฀loan฀which฀will฀be฀used฀to฀purchase฀
assets฀in฀the฀first฀quarter฀of฀20X6.฀The฀interest฀paid฀on฀the฀loan฀will฀be฀included฀as฀an฀operating฀cash฀
outflow฀in฀the฀consolidated฀statement฀of฀cash฀flows฀for฀the฀year฀ended฀31฀December฀20X5.฀The฀
directors฀of฀the฀Smith฀Group฀also฀want฀to฀include฀the฀loan฀proceeds฀as฀an฀operating฀cash฀inflow฀
because฀they฀suggest฀that฀presenting฀the฀loan฀proceeds฀and฀loan฀interest฀together฀will฀be฀more฀useful฀
for฀users฀of฀the฀accounts.฀The฀directors฀also฀wish฀to฀present฀the฀consolidated฀statement฀of฀cash฀flows฀
using฀the฀indirect฀method฀because฀they฀believe฀that฀the฀indirect฀method฀is฀more฀useful฀and฀
informative฀to฀users฀of฀financial฀statements฀than฀the฀direct฀method.฀The฀directors฀of฀Smith฀will฀each฀
receive฀a฀bonus฀if฀the฀Smith฀Group's฀operating฀cash฀flow฀for฀the฀year฀exceeds฀a฀certain฀amount.฀฀
Required฀
Comment฀on฀the฀directors'฀view฀that฀the฀indirect฀method฀of฀preparing฀statements฀of฀cash฀flow฀is฀more฀
useful฀and฀informative฀to฀users฀than฀the฀direct฀method,฀providing฀specific฀reference฀to฀the฀treatment฀of฀
the฀loan฀proceeds.฀
Solution฀
The฀direct฀method฀of฀preparing฀cash฀flow฀statements฀discloses฀major฀classes฀of฀gross฀cash฀
receipts฀and฀gross฀cash฀payments.฀It฀shows฀the฀items฀that฀affected฀cash฀flow฀and฀the฀size฀of฀
those฀cash฀flows.฀Cash฀received฀from,฀and฀cash฀paid฀to,฀specific฀sources฀such฀as฀customers฀and฀
suppliers฀are฀presented.฀This฀contrasts฀with฀the฀indirect฀method,฀where฀accrual-basis฀net฀income฀(loss)฀
is฀converted฀to฀cash฀flow฀information฀by฀means฀of฀add-backs฀and฀deductions.฀
For฀users฀of฀the฀accounts฀an฀important฀advantage฀of฀the฀direct฀method฀is฀that฀the฀users฀can฀see฀and฀
understand฀the฀actual฀cash฀flows,฀and฀how฀they฀relate฀to฀items฀of฀income฀or฀expense.฀In฀this฀way,฀the฀
user฀is฀able฀to฀better฀understand฀the฀cash฀receipts฀and฀payments฀for฀the฀period.฀It฀is฀also฀arguably฀
more฀understandable฀as฀under฀the฀direct฀method฀all฀items฀in฀the฀statement฀of฀cash฀flows฀are฀actual฀
cash฀inflows฀and฀outflows.฀From฀the฀point฀of฀view฀of฀the฀user,฀the฀direct฀method฀is฀preferable,฀
because฀it฀discloses฀information฀not฀available฀elsewhere฀in฀the฀financial฀statements,฀which฀could฀be฀
of฀use฀in฀estimating฀future฀cash฀flow.฀
฀ 359฀

lOMoARcPSD|6256454
฀฀
The฀indirect฀method฀involves฀adjusting฀the฀net฀profit฀or฀loss฀for฀the฀period฀for:฀
(a)฀ Changes฀during฀the฀period฀in฀inventories,฀operating฀receivables฀and฀payables฀
(b)฀ Non-cash฀items,฀eg฀depreciation,฀provisions,฀profits/losses฀on฀the฀sales฀of฀assets฀
(c)฀ Other฀items,฀the฀cash฀flows฀from฀which฀should฀be฀classified฀under฀investing฀or฀financing฀
activities฀
From฀the฀point฀of฀view฀of฀the฀preparer฀of฀accounts,฀the฀indirect฀method฀is฀easier฀to฀
prepare,฀and฀nearly฀all฀companies฀use฀it฀in฀practice.฀The฀main฀argument฀companies฀have฀for฀using฀
the฀indirect฀method฀is฀that฀the฀direct฀method฀is฀too฀costly.฀The฀disadvantage฀of฀the฀indirect฀
method฀is฀that฀users฀find฀it฀difficult฀to฀understand฀and฀it฀is฀therefore฀more฀open฀to฀manipulation.฀
This฀is฀particularly฀true฀with฀regard฀to฀classification฀of฀cash฀flows.฀฀
The฀directors฀wish฀to฀inappropriately฀classify฀the฀loan฀proceeds฀as฀an฀operating฀cash฀inflow฀
(rather฀than฀a฀financing฀cash฀inflow฀as฀required฀by฀IAS฀7)฀on฀the฀basis฀that฀this฀will฀be฀more฀useful฀to฀
users.฀This฀may฀be฀due฀to฀a฀misunderstanding฀of฀the฀requirements฀of฀IAS฀7.฀Alternatively,฀it฀may฀be฀
an฀attempt฀by฀the฀directors฀to฀manipulate฀the฀statement฀of฀cash฀flows฀by฀improving฀the฀net฀cash฀from฀
operating฀activities฀which฀will฀improve฀their฀bonus฀prospects.฀Although฀this฀misclassification฀could฀
also฀take฀place฀using฀the฀direct฀method,฀it฀is฀arguably฀easier฀to฀'hide'฀when฀using฀the฀indirect฀
method,฀because฀users฀find฀it฀more฀difficult฀to฀understand.฀฀฀
Therefore฀the฀indirect฀method฀would฀not,฀as฀is฀claimed฀by฀the฀directors,฀be฀more฀useful฀and฀
informative฀to฀users฀than฀the฀direct฀method.฀IAS฀7฀allows฀both฀methods,฀however,฀so฀the฀indirect฀
method฀would฀still฀be฀permissible.฀
2฀Consolidated฀statement฀of฀cash฀flows฀
A฀group's฀statement฀of฀cash฀flows฀should฀only฀deal฀with฀flows฀of฀ Group
cash฀ external฀ to฀ the฀ group.฀ Cash฀ flows฀ that฀ are฀ internal฀ to฀ Cash฀out P
the฀group฀should฀be฀eliminated฀(IAS฀7:฀para.฀37).฀฀฀
Additional฀ considerations฀ for฀ a฀ group฀ statement฀ of฀ cash฀ flows฀
include:฀ Cash฀in
S1 S2
฀ Dividends฀paid฀to฀the฀non-controlling฀interests฀
฀ Dividends฀received฀from฀associates฀and฀joint฀ventures฀
฀ Cash฀flows฀on฀acquisition฀or฀disposal฀of฀associates฀and฀joint฀ventures฀
฀ Removing฀ the฀ group฀ share฀ of฀ the฀ profit฀ or฀ loss฀ of฀ associates฀ and฀ joint฀ ventures฀ from฀ group฀
profit฀before฀tax฀in฀the฀'cash฀flows฀from฀operating฀activities'฀section฀(indirect฀method฀only)฀
฀ Cash฀flows฀on฀acquisition฀or฀disposal฀of฀subsidiaries฀
฀ The฀effect฀of฀assets฀and฀liabilities฀of฀subsidiaries฀acquired฀or฀disposed฀of฀on฀the฀calculation฀of฀
working฀capital฀adjustments฀and฀cash฀flows฀
฀ Impairment฀losses฀on฀goodwill.฀฀
We฀will฀cover฀these฀issues฀in฀the฀rest฀of฀this฀section.฀฀
360฀

lOMoARcPSD|6256454
2.1฀Dividends฀paid฀to฀non-controlling฀interests฀฀
Actual฀cash฀payments฀made฀in฀the฀form฀of฀dividends฀paid฀to฀non-controlling฀interests฀are฀shown฀in฀
the฀consolidated฀statement฀of฀cash฀flows.฀฀
The฀dividend฀paid฀to฀the฀non-controlling฀interests฀(NCI)฀during฀the฀reporting฀period฀can฀be฀calculated฀
from฀the฀NCI฀figures฀in฀the฀consolidated฀financial฀statements:฀
฀ Non-controlling฀
interests฀
฀ ฀$'000฀
Opening฀balance฀(b/d)฀ ฀X฀
NCI฀share฀of฀total฀comprehensive฀income ฀X฀
Acquisition฀of฀subsidiary฀(NCI฀at฀fair฀value฀or฀share฀of฀net฀assets) ฀X฀
Disposal฀of฀subsidiary ฀(X)฀
Non-cash฀(eg฀exchange฀loss฀on฀foreign฀operation)฀฀ ฀(X)฀
Dividends฀paid฀to฀NCI฀(balancing฀figure฀(β)) ฀(X)฀
Closing฀balance฀(c/d) ฀฀฀X฀
฀
฀
Illustration฀4฀
Dividends฀paid฀to฀non-controlling฀interests฀
Woody฀Group฀has฀owned฀a฀number฀of฀subsidiaries฀for฀several฀years.฀It฀acquired฀a฀new฀subsidiary,฀
Hamm฀Co,฀during฀the฀year฀ended฀31฀December฀20X7.฀The฀fair฀value฀of฀the฀non-controlling฀interests฀
in฀Hamm฀Co฀at฀the฀date฀of฀acquisition฀was฀$1,200,000.฀The฀statement฀of฀financial฀position฀of฀
Woody฀Group฀shows฀non-controlling฀interest฀of฀$5,150,000฀at฀the฀start฀of฀the฀year฀and฀
$6,040,000฀at฀the฀end฀of฀the฀year.฀The฀non-controlling฀interest's฀share฀of฀total฀comprehensive฀
income฀for฀the฀year฀is฀$1,680,000.฀
Required฀
Calculate฀the฀cash฀dividend฀paid฀to฀the฀non-controlling฀interests฀(NCI)฀in฀the฀year.฀
Solution฀
฀ Non-controlling฀
interests
฀ ฀$'000฀
Dividends฀paid฀
Opening฀balance฀(b/d)฀ ฀5,150 to฀NCI฀included฀
NCI฀share฀of฀total฀comprehensive฀income as฀an฀outflow฀in฀
฀1,680 'cash฀flow฀from฀
Acquisition฀of฀subsidiary฀(NCI฀at฀fair฀value) ฀1,200 financing฀
activities'฀
Cash฀(dividends฀paid฀to฀NCI)฀β฀฀ ฀ ฀(1,990)฀
Closing฀balance฀(c/d)฀ ฀ ฀6,040
฀
฀
฀ 361฀

lOMoARcPSD|6256454
฀฀
Activity฀1:฀Dividend฀paid฀to฀non-controlling฀interests฀ ฀
CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
฀ ฀$'000
Profit฀before฀tax฀ ฀30
Income฀tax฀expense฀ ฀฀฀(10)
Profit฀for฀the฀year฀ ฀฀฀20
Other฀comprehensive฀income฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss
Gains฀on฀property฀revaluation฀ ฀12
Income฀tax฀expense฀relating฀to฀gain฀on฀property฀revaluation ฀฀฀฀(4)฀
Total฀comprehensive฀income฀for฀the฀year ฀฀28
฀
Profit฀attributable฀to:฀
฀฀Owners฀of฀the฀parent ฀15
฀฀Non-controlling฀interests฀ ฀฀฀฀฀5
฀ ฀฀20
Total฀comprehensive฀income฀attributable฀to:
฀฀Owners฀of฀the฀parent ฀22
฀฀Non-controlling฀interests฀ ฀฀฀฀6
฀ ฀฀฀28
CONSOLIDATED฀STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀
฀ 20X2฀ 20X1
฀ $'000฀ $'000
Non-controlling฀interests 102฀ 99
Required฀
Calculate฀the฀dividend฀paid฀to฀non-controlling฀interests,฀using฀the฀proforma฀below฀to฀help฀you.฀฀
Solution฀
Non-controlling฀interests฀
฀ $'000฀
Opening฀balance฀(b/d)฀ ฀
NCI฀share฀of฀total฀comprehensive฀income฀ ฀
฀ ฀
Dividends฀paid฀to฀NCI฀(balancing฀figure)฀ ฀
Closing฀balance฀(c/d)฀ ฀
362฀

lOMoARcPSD|6256454
2.2฀Dividends฀received฀from฀associates฀and฀joint฀ventures฀฀
Dividends฀ received฀ from฀ associates฀ or฀ joint฀ ventures฀ can฀ be฀ calculated฀ from฀ the฀ investment฀ in฀
associate฀or฀investment฀joint฀venture฀figures฀in฀the฀consolidated฀financial฀statements.฀฀
฀ Investment฀in฀
associate/฀
joint฀venture฀
฀ ฀$'000฀
Opening฀balance฀(b/d)฀ X฀
Group฀share฀of฀associate's/joint฀venture's฀ profit฀for฀the฀year฀ X฀
Group฀share฀of฀associate's/joint฀venture's฀OCI฀ X฀
Acquisition฀of฀associate/joint฀venture X฀ Dividends฀received฀
Disposal฀of฀associate/joint฀venture฀ ฀(X)฀ from฀associates฀or฀
joint฀ventures฀
Non-cash฀items฀(eg฀exchange฀loss฀on฀associate/joint฀venture)฀฀ ฀(X)฀ included฀as฀an฀
inflow฀in฀'cash฀flow฀
Cash฀(dividends฀received฀from฀associate/joint฀venture)฀β ฀ ฀(X)฀ from฀investing฀
Closing฀balance฀(c/d) ฀฀X฀ activities'฀
฀
฀
2.3฀Acquisitions฀and฀disposals฀of฀associates฀and฀joint฀ventures฀฀
When฀an฀associate฀or฀joint฀venture฀is฀purchased฀or฀sold,฀the฀cash฀paid฀to฀acquire฀the฀shares฀or฀the฀
cash฀ received฀ from฀ selling฀ the฀ shares฀ must฀ be฀ recorded฀ in฀ the฀ 'cash฀ flows฀ from฀ investing฀ activities'฀
section.฀
2.4฀Adjustment฀required฀under฀indirect฀method฀for฀associates฀and฀
joint฀ventures฀
Under฀ the฀ indirect฀ method฀ of฀ preparing฀ a฀ group฀ statement฀ of฀ cash฀ flows,฀ the฀ group฀ share฀ of฀ the฀
associate's/joint฀venture's฀profit฀or฀loss฀for฀the฀year฀must฀be฀removed฀from฀the฀group฀profit฀before฀tax฀
figure฀as฀an฀adjustment฀in฀the฀'cash฀flows฀from฀operating฀activities'฀section.฀฀
Activity฀2:฀Dividend฀received฀from฀associate฀ ฀
Shown฀below฀are฀extracts฀of฀Pull฀Group's฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀and฀consolidated฀statement฀of฀financial฀position.฀฀
THE฀YEAR฀ENDED฀31฀DECEMBER฀20X2฀(Extracts)฀
฀ ฀ ฀$'000฀
Profit฀before฀interest฀and฀tax฀ ฀ ฀60฀
Share฀of฀profit฀of฀associates฀ ฀ ฀฀฀7฀
Profit฀before฀tax฀ ฀ ฀67฀
Income฀tax฀expense฀ ฀ ฀(20)฀
Profit฀for฀the฀year฀ ฀ ฀47฀
฀ 363฀

lOMoARcPSD|6256454
฀฀
฀ ฀ ฀$'000฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss ฀ ฀
Gains฀on฀property฀revaluation฀ ฀ 15
฀ ฀
Share฀of฀gain฀on฀property฀revaluation฀of฀associate฀ ฀ ฀ 3฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified ฀ ฀฀(5)฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀ 13฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀ ฀60฀
CONSOLIDATED฀STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀(Extracts)฀
฀ ฀ 20X2฀ ฀ 20X1฀
฀ ฀ $'000฀ $'000฀
Investment฀in฀associates 94฀ 88฀
During฀the฀year,฀the฀Pull฀Group฀purchased฀25%฀of฀the฀equity฀shares฀of฀Acton฀for฀$12,000.฀The฀
investment฀has฀been฀appropriately฀accounted฀for฀using฀the฀equity฀method฀in฀the฀group's฀consolidated฀
Required฀
Calculate฀the฀dividend฀received฀from฀associates฀and฀complete฀the฀profit฀before฀tax฀and฀associate฀
lines฀in฀the฀extract฀from฀the฀operating฀section฀of฀the฀group฀statement฀of฀cash฀flows฀below.฀
Solution฀
Investment฀in฀associates฀
฀ $'000
Opening฀balance฀(b/d) ฀
Group฀share฀of฀associate's฀profit฀for฀the฀year ฀
Group฀share฀of฀associate's฀OCI฀(gain฀on฀property฀revaluation)฀ ฀
Acquisition฀of฀associate ฀
Dividends฀received฀from฀associates฀(balancing฀figure) ฀
Closing฀balance฀(c/d)฀ ฀
EXTRACT฀FROM฀STATEMENT฀OF฀CASH฀FLOWS฀(OPERATING฀ACTIVITIES)฀
฀ $'000฀
Profit฀before฀taxation฀ ฀
฀฀Share฀of฀profit฀of฀associate฀ ฀
฀฀฀ ฀
฀
฀
364฀

lOMoARcPSD|6256454
2.5฀Cash฀flows฀on฀acquisition฀or฀disposal฀of฀a฀subsidiary฀
There฀are฀two฀cash฀flows฀associated฀with฀the฀acquisition฀or฀disposal฀of฀a฀subsidiary:฀
Acquisition
(1)฀ The฀cash฀paid฀to฀buy฀the฀shares฀
฀ (for฀an฀acquisition)฀or฀the฀cash฀
Group Cash฀ ฀ received฀from฀selling฀the฀shares฀
P (1) ฀ (for฀a฀disposal).฀฀
New฀subsidiary (2)฀ The฀cash฀or฀overdraft฀balance฀

฀ consolidated฀for฀the฀first฀time฀
Cash฀ ฀ (for฀an฀acquisitions)฀or฀
S1 S2
(2) ฀ deconsolidated฀(for฀a฀disposal).฀฀
These฀two฀cash฀flows฀should฀be฀netted฀off฀and฀shown฀as฀a฀single฀line฀in฀the฀consolidated฀
statement฀of฀cash฀flows฀under฀'cash฀flows฀from฀investing฀activities'฀(IAS฀7:฀paras.฀39,฀42).฀
Acquisition฀of฀subsidiary฀฀ Disposal฀of฀subsidiary฀
Cash฀consideration฀฀ ฀ ฀ (X)฀ Cash฀proceeds฀ ฀ ฀ ฀ X฀
Subsidiary's฀cash฀and฀cash฀ ฀ ฀ Subsidiary's฀cash฀and฀cash฀ ฀ ฀
equivalents฀at฀acquisition฀date฀ ฀ ฀X฀฀ equivalents฀at฀disposal฀date฀ (X)
฀฀ ฀
Cash฀to฀acquire฀subsidiary฀ ฀ (X)฀ Proceeds฀of฀sale฀of฀subsidiary฀ ฀ X฀

฀
Illustration฀5฀
Disposal฀of฀subsidiary฀
Darth฀Group฀disposed฀of฀its฀100%฀owned฀subsidiary฀Jynn฀during฀the฀year฀ended฀31฀August฀20X5.฀
Darth฀Group฀received฀$52m฀cash฀proceeds฀from฀the฀acquirer.฀Jynn฀had฀a฀cash฀balance฀of฀$14m฀at฀
the฀date฀of฀disposal.฀฀
Required฀
Show฀how฀the฀disposal฀of฀Jynn฀should฀be฀presented฀in฀the฀'cash฀flows฀from฀investing฀activities'฀
section฀of฀the฀consolidated฀statement฀of฀cash฀flows฀of฀the฀Darth฀Group.฀฀
Solution฀
DARTH฀GROUP฀
CONSOLIDATED฀STATEMENT฀OF฀CASH฀FLOWS฀(Extract)฀฀ ฀ ฀ ฀ ฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $m฀
Cash฀flows฀from฀investing฀activities฀ ฀ ฀ ฀
Net฀cash฀received฀on฀disposal฀of฀subsidiary฀(W)฀ 38฀
฀
Working฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $m฀
Cash฀proceeds฀from฀acquirer฀ 52฀
Less฀cash฀disposed฀of฀in฀the฀subsidiary฀ ฀฀(14)฀
Net฀cash฀received฀on฀disposal฀of฀subsidiary฀฀ ฀฀38฀
฀ 365฀

lOMoARcPSD|6256454
฀฀
2.6฀The฀effect฀on฀assets฀and฀liabilities฀if฀subsidiaries฀are฀acquired฀or฀
disposed฀of฀฀
฀
The฀parent฀has฀not฀
purchased฀ When฀calculating฀cash฀flows฀(eg฀as฀balancing฀figures)฀in฀asset฀and฀liability฀workings,฀the฀
individually฀each฀ workings฀need฀to฀be฀adjusted฀for฀assets฀and฀liabilities฀acquired฀(or฀disposed฀of)฀as฀a฀
asset/liability฀of฀the฀
result฀of฀the฀acquisition฀(or฀disposal)฀of฀a฀subsidiary.฀
subsidiary,฀it฀has฀
purchased฀shares,฀ ฀
so฀the฀statement฀of฀ This฀is฀dealt฀with฀simply฀by฀showing฀the฀increase฀or฀decrease฀due฀to฀the฀acquisition฀or฀
cash฀flows฀reflects฀
disposal฀on฀a฀separate฀line฀in฀each฀affected฀working,฀as฀follows.฀฀
that฀fact.฀
฀฀
Subsidiary฀ The฀subsidiary’s฀property,฀plant฀ Reason:฀the฀new฀susbsidiary's฀assets฀
acquired฀in฀the฀ and฀equipment,฀inventories,฀ and฀liablities฀have฀been฀consolidated฀
period฀ payables,฀receivables฀etc฀at฀the฀ for฀the฀first฀time฀in฀the฀period.฀We฀need฀to฀
date฀of฀acquisition฀should฀be฀ take฀account฀of฀that฀when฀we฀look฀at฀the฀
added฀in฀the฀relevant฀cash฀flow฀ movement฀in฀group฀assets฀and฀liabilities฀
working.฀ in฀the฀relevant฀cash฀flow฀working.฀
Subsidiary฀ The฀subsidiary’s฀property,฀plant฀and฀ Reason:฀the฀assets฀and฀liabilities฀

disposed฀of฀in฀ equipment,฀inventories,฀payables,฀ of฀the฀sold฀subsidiary฀have฀been฀
the฀period฀ receivables฀etc฀at฀the฀date฀of฀ deconsolidated฀in฀the฀period.฀
disposal฀should฀be฀deducted฀in฀ We฀need฀to฀take฀account฀of฀that฀when฀
the฀relevant฀cash฀flow฀working.฀ we฀look฀at฀the฀movement฀in฀group฀assets฀
and฀liabilities฀in฀the฀relevant฀cash฀flow฀
working.฀฀
Acquisition฀of฀a฀subsidiary฀–฀effect฀on฀cash฀flow฀workings฀
Below฀is฀an฀extract฀from฀the฀consolidated฀statement฀of฀financial฀position฀of฀Chip฀Group฀for฀the฀year฀
ended฀31฀December:฀
฀ 20X6 20X5
฀ $'000 $'000
Property,฀plant฀and฀equipment฀ 34,800 27,400
฀
฀
Chip฀Group฀acquired฀100%฀of฀the฀equity฀shares฀of฀Potts฀on฀1฀August฀20X6.฀At฀the฀date฀of฀
acquisition,฀Potts฀had฀property,฀plant฀and฀equipment฀with฀a฀carrying฀amount฀of฀$3,980,000.฀฀
During฀the฀year,฀Chip฀Group฀charged฀depreciation฀of฀$3,420,000฀and฀acquired฀new฀equipment฀
under฀lease฀agreements฀totalling฀$4,450,000.฀฀
Required฀
Calculate฀the฀cash฀purchase฀of฀property,฀plant฀and฀equipment฀for฀the฀Chip฀Group฀for฀the฀year฀ended฀
366฀

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Solution฀
You฀should฀approach฀this฀in฀the฀same฀way฀as฀for฀a฀single฀entity,฀but฀remember฀to฀add฀the฀assets฀on฀
acquisition฀of฀Potts.฀฀
Property,฀plant฀and฀equipment฀
฀ $'000฀
Opening฀balance฀(b/d) 27,400 Add฀amounts฀
Add฀acquired฀with฀subsidiary฀ 3,980฀ acquired฀from฀Potts฀
Add฀acquired฀under฀lease฀agreements฀ 4,450
Less฀depreciation฀ (3,420)
฀ 32,410 Balancing฀figure฀is฀
Acquired฀for฀cash฀β฀ the฀cash฀outflow฀฀
฀2,390
Closing฀balance฀(c/d)฀ ฀34,800฀
฀
The฀cash฀outflow฀of฀$2,390฀is฀shown฀in฀the฀consolidated฀statement฀of฀cash฀flows฀under฀the฀'cash฀
from฀investing฀activities'฀section.฀
2.7฀Impairment฀losses฀under฀the฀indirect฀method฀
Impairment฀ losses฀ (for฀ example฀ on฀ goodwill,฀ investment฀ in฀ associate฀ or฀ investment฀ in฀ joint฀ venture),฀
like฀depreciation฀and฀amortisation,฀are฀accounting฀expenses฀rather฀than฀cash฀outflows฀and฀therefore฀
must฀be฀added฀back฀to฀profit฀before฀tax฀when฀calculating฀cash฀generated฀from฀operations.฀
2.8฀Disclosure฀฀
Chapter฀16฀Section฀3฀of฀the฀Supplementary฀Reading฀considers฀the฀additional฀disclosure฀requirements฀
for฀group฀statements฀of฀cash฀flows฀and฀amendments฀made฀to฀IAS฀7฀disclosure฀requirements฀as฀a฀
result฀of฀the฀IASB's฀Disclosure฀Initiative.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.
3฀Approach฀to฀preparing฀a฀group฀statement฀of฀cash฀flows฀฀
Tutorial฀note฀
Question฀1฀of฀the฀exam฀could฀require฀the฀preparation฀of฀a฀full฀group฀statement฀of฀cash฀flows,฀or,฀
more฀likely,฀extracts฀from฀it.฀You฀need฀to฀be฀able฀to฀prepare฀the฀full฀statement฀in฀order฀to฀gain฀a฀
good฀understanding฀of฀how฀the฀figures฀within฀it฀are฀generated,฀so฀that฀you฀can฀interpret฀a฀group฀
statement฀of฀cash฀flows฀as฀well฀as฀prepare฀extracts฀from฀it.฀BPP฀recommends฀the฀following฀approach฀
to฀questions฀requiring฀the฀preparation฀of฀a฀full฀group฀statement฀of฀cash฀flows,฀which฀you฀can฀practise฀
in฀the฀activity฀below.฀฀
Step฀1฀ Read฀the฀question฀and฀set฀up฀a฀proforma,฀including฀operating,฀investing฀and฀financing฀
sections.฀฀
Step฀2฀ Work฀ through฀ the฀ consolidated฀ statement฀ of฀ financial฀ position฀ figures,฀ transferring฀ the฀
opening฀ and฀ closing฀ balances฀ to฀ workings฀ for฀ assets,฀ equity,฀ liabilities฀ and฀ working฀
capital฀adjustments,฀or฀to฀the฀face฀of฀the฀statement฀of฀cash฀flows,฀eg฀for฀the฀cash฀and฀
cash฀equivalents฀balances.฀
Step฀3฀ Work฀ through฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income,฀ transferring฀ the฀ relevant฀ figures฀ to฀ the฀ face฀ of฀ the฀ statement฀ of฀ cash฀ flows฀ (eg฀
profit฀before฀tax)฀or฀to฀workings฀(eg฀income฀tax).฀฀
฀
฀ 367฀

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฀฀
Step฀4฀ Deal฀with฀any฀additional฀information,฀remembering฀to฀focus฀on฀the฀cash฀implication฀of฀
the฀information,฀particularly฀if฀there฀has฀been฀an฀acquisition฀or฀disposal฀of฀members฀of฀
the฀group฀during฀the฀period.฀Include฀the฀additional฀information฀in฀the฀workings.฀
Step฀5฀ Complete฀the฀workings฀(using฀the฀missing฀figure฀approach฀to฀calculate฀the฀cash฀inflow฀
or฀outflow).฀Transfer฀the฀figures฀to฀the฀statement฀of฀cash฀flows฀and฀cross-reference฀to฀the฀
working,฀ remembering฀ to฀ show฀ inflows฀ as฀ positive฀ figures฀ and฀ outflows฀ as฀ negative฀
figures.฀฀฀
Step฀6฀ If฀the฀direct฀method฀is฀required,฀do฀any฀additional฀workings฀needed฀(eg฀calculate฀cash฀
received฀from฀customers,฀cash฀paid฀to฀suppliers฀and฀employees).฀฀ If฀required฀to฀prepare฀
a฀full฀statement฀in฀the฀
Step฀7฀ Finish฀off฀the฀statement฀of฀cash฀flows฀by฀adding฀up฀each฀section.฀฀ exam,฀only฀do฀this฀step฀
฀ if฀you฀have฀spare฀time฀
–฀it฀is฀not฀usually฀worth฀
฀ many฀marks.
Chapter฀16฀Section฀2฀of฀the฀Supplementary฀Reading฀contains฀an฀illustration฀showing฀the฀preparation฀
of฀a฀group฀statement฀of฀cash฀flows.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
Activity฀3:฀Group฀statement฀of฀cash฀flows฀ ฀ ฀
The฀consolidated฀statements฀of฀financial฀position฀of฀P฀Group฀as฀at฀31฀December฀were฀as฀follows.฀
CONSOLIDATED฀STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER:฀
฀ 20X8฀ 20X7฀
฀ ฀$'000฀ ฀฀฀$'000฀
Goodwill฀ ฀1,940฀ ฀1,400฀฀ ฀
Investment฀in฀associate฀ ฀ 3,820฀ ฀ ฀฀3,100 ฀
฀ ฀50,630฀ ฀ 46,200 ฀
Inventories฀ ฀ 9,600 ฀ ฀ 8,100 ฀
Trade฀receivables฀ ฀8,500฀ ฀7,600฀
Cash฀and฀cash฀equivalents฀ ฀ ฀2,800฀ ฀฀฀1,500฀
฀ ฀20,900฀ ฀17,200฀
฀ ฀71,530฀ ฀63,400฀
Share฀capital฀($1฀ordinary฀shares)฀ ฀ 5,300 ฀ ฀ 5,000 ฀
Share฀premium฀account฀ ฀11,340฀ ฀9,000฀
Revaluation฀surplus฀ ฀ 6,900฀ ฀฀฀6,000฀
฀ ฀56,320฀ ฀49,700฀
Non-controlling฀interests฀ ฀ 2,160฀ ฀฀฀1,700฀
฀ ฀58,480฀ ฀51,400฀
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฀ 20X8฀ 20X7฀
฀ ฀$'000฀ ฀฀฀$'000฀
Deferred฀tax฀ ฀ 2,350฀ ฀฀฀2,100฀
฀ ฀ ฀
Trade฀payables฀ ฀10,100฀ ฀9,400฀
Current฀tax฀ ฀ 600฀ ฀฀฀฀฀500฀
฀ ฀10,700฀ ฀฀฀9,900฀
฀ ฀71,530฀ ฀63,400฀
The฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ year฀ ended฀
31฀December฀20X8฀was฀as฀follows.฀
CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀
฀ $'000฀
Revenue฀ ฀60,800฀
Cost฀of฀sales฀ ฀(48,600)฀
Gross฀profit฀ ฀12,200฀
Expenses฀ ฀(8,320)฀
Other฀operating฀income฀ ฀120฀
Share฀of฀profit฀of฀associate฀ ฀ ฀฀฀฀฀฀800฀
Profit฀before฀tax฀ ฀ 4,800 ฀
Income฀tax฀expense฀ ฀฀฀(1,200)฀
Profit฀for฀the฀year฀ ฀฀฀฀3,600฀
Gains฀on฀property฀revaluation฀ ฀1,000฀
Share฀of฀gain฀on฀property฀revaluation฀of฀associates฀ ฀180฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified฀ ฀ ฀฀(250) ฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀ ฀ ฀฀฀930฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀4,530฀
฀ ฀
฀฀Owners฀of฀the฀parent฀ ฀3,440฀
฀฀Non-controlling฀interests฀ ฀฀฀฀160฀
฀ ฀3,600฀
฀฀Owners฀of฀the฀parent 4,340฀
฀฀Non-controlling฀interests฀ ฀฀฀฀190฀
฀ ฀4,530฀
The฀following฀information฀is฀also฀relevant:฀
(a)฀ On฀ 1฀ April฀ 20X8,฀ P,฀ a฀ public฀ limited฀ company,฀ acquired฀ 90%฀ of฀ S,฀ a฀ limited฀ company,฀
obtaining฀ control฀ of฀ the฀ company,฀ by฀ issuing฀ 200,000฀ shares฀ at฀ an฀ agreed฀ value฀ of฀ $8.50฀
per฀share฀and฀$1,300,000฀in฀cash.฀
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฀฀
At฀that฀time฀the฀statement฀of฀financial฀position฀of฀S฀(equivalent฀to฀the฀fair฀values฀of฀the฀assets฀
and฀liabilities)฀was฀as฀follows:฀
฀ $'000฀
Property,฀plant฀and฀equipment฀ ฀1,900฀
Inventories฀ ฀700฀
Trade฀receivables฀฀ ฀300฀
Cash฀and฀cash฀equivalents฀ ฀100฀
Trade฀payables฀ ฀฀฀(400)฀
฀ ฀2,600฀
฀ P฀ elected฀ to฀ measure฀ the฀ non-controlling฀ interests฀ in฀ S฀ at฀ the฀ date฀ of฀ acquisition฀ at฀ their฀ fair฀
value฀of฀$320,000.฀
(b)฀ Depreciation฀charged฀to฀consolidated฀profit฀or฀loss฀amounted฀to฀$2,200,000.฀
(c)฀ Part฀of฀the฀additions฀to฀property,฀plant฀and฀equipment฀during฀the฀year฀were฀imports฀made฀by฀P฀
from฀a฀foreign฀supplier฀on฀30฀September฀20X8฀for฀1,080,000฀corona.฀This฀was฀paid฀in฀full฀
on฀30฀November฀20X8.฀
฀ Exchange฀ gains฀ and฀ losses฀ are฀ included฀ in฀ other฀ operating฀ income฀ or฀ expenses.฀ Relevant฀
exchange฀rates฀were฀as฀follows:฀
฀ ฀ Corona฀to฀$1฀
฀ 30฀September฀20X8฀ 4.0฀
฀ 30฀November฀20X8฀ 4.5฀
(d)฀ There฀were฀no฀disposals฀of฀property,฀plant฀and฀equipment฀during฀the฀year.฀
Required฀
Prepare฀ the฀ consolidated฀ statement฀ of฀ cash฀ flows฀ for฀ P฀ Group฀ for฀ the฀ year฀ ended฀ 31฀ December฀ 20X8฀
under฀the฀indirect฀method฀in฀accordance฀with฀IAS฀7,฀using฀the฀proforma฀below฀to฀help฀you.฀
Notes฀to฀the฀statement฀of฀cash฀flows฀are฀not฀required.฀฀
Solution฀
P฀GROUP฀
CONSOLIDATED฀STATEMENT฀OF฀CASH฀FLOWS฀FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X8฀
฀ $'000฀ $'000฀
฀Cash฀flows฀from฀operating฀activities฀ ฀
฀Profit฀before฀taxation฀ ฀
฀Adjustments฀for:฀ ฀
฀฀฀Depreciation฀ ฀
฀฀฀Impairment฀loss฀ ฀
฀฀฀Share฀of฀profit฀of฀associate฀ ฀
฀฀฀Foreign฀exchange฀gain฀ ฀ ฀฀฀฀ ฀
฀ ฀
฀฀ ฀ ฀ in฀inventories฀ ฀
Increase฀or฀
decrease฀
฀ ฀ ฀ in฀trade฀and฀other฀receivables฀ ฀
฀ ฀ ฀ in฀trade฀payables฀ ฀ ฀฀฀฀฀ ฀
฀
฀Cash฀generated฀from฀operations฀
฀Income฀taxes฀paid฀ ฀ ฀฀฀฀฀ ฀
฀ ฀
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฀Net฀cash฀from฀operating฀activities฀ ฀
฀ ฀
฀Cash฀flows฀from฀investing฀activities฀ ฀
฀Acquisition฀of฀subsidiary,฀net฀of฀cash฀acquired฀ ฀
฀Purchase฀of฀property,฀plant฀&฀equipment฀ ฀
฀Dividends฀received฀from฀associate฀ ฀ ฀฀฀฀฀ ฀
฀ ฀
฀Net฀cash฀used฀in฀investing฀activities฀ ฀
฀ ฀
฀Cash฀flows฀from฀financing฀activities฀ ฀
฀Proceeds฀from฀issue฀of฀share฀capital฀ ฀
฀Dividends฀paid฀to฀owners฀of฀the฀parent฀ ฀
฀Dividends฀paid฀to฀non-controlling฀interests฀ ฀ ฀฀฀฀฀ ฀
฀ ฀
฀Net฀cash฀from฀financing฀activities฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀
฀Net฀increase฀in฀cash฀and฀cash฀equivalents฀ ฀
฀Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀the฀year฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀
฀Cash฀and฀cash฀equivalents฀at฀the฀end฀of฀the฀year฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀
Workings฀
1฀ Assets฀
฀ Property,฀plant฀ Goodwill Associate฀
&฀equipment
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Opening฀balance฀(b/d)฀
Statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀(SPLOCI)฀
Depreciation฀
Impairment฀
Acquisition฀of฀subsidiary฀
Non-cash฀additions฀
Cash฀paid/(rec'd)฀β฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀balance฀(c/d)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
2฀ Equity฀
฀ Share฀capital/ Retained NCI฀
share฀premium earnings฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
SPLOCI฀
Cash฀(paid)/rec'd฀β฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀balance฀(c/d)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ 371฀

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฀฀
3฀ Liabilities฀
฀ Tax฀payable
฀ ฀$'000฀
SPLOCI฀
Cash฀(paid)/rec'd฀β฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀balance฀(c/d)฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
4฀ Working฀capital฀changes฀
฀ Inventories฀ Trade฀receivables฀ Trade
payables
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Opening฀balance฀(b/d)฀ ฀
Acquisition฀of฀subsidiary฀ ฀
Increase/(decrease)฀β฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀
Closing฀balance฀(c/d)฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀
5฀ Foreign฀transaction฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
Chapter฀16฀Section฀2.1฀of฀the฀Supplementary฀Reading฀includes฀an฀activity฀requiring฀the฀preparation฀
of฀a฀consolidated฀statement฀of฀cash฀flows฀including฀the฀disposal฀of฀a฀subsidiary฀during฀the฀year.฀This฀
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4฀Analysis฀and฀interpretation฀of฀group฀statements฀of฀cash฀
flow฀
Tutorial฀note฀
You฀will฀be฀expected฀to฀go฀beyond฀the฀preparation฀of฀group฀statements฀of฀cash฀flows฀(or฀extracts฀
thereof)฀and฀be฀able฀to฀discuss฀and฀interpret฀the฀information฀they฀contain.฀It฀is฀advisable฀to฀break฀the฀
statement฀of฀cash฀flows฀down฀into฀its฀component฀parts฀(operating,฀investing฀and฀financing฀activities)฀
and฀consider฀the฀reasons฀for฀movements฀and฀the฀business฀implications฀of฀significant฀cash฀flows.฀You฀
should฀always฀consider฀the฀perspective฀of฀the฀user฀when฀analysing฀cash฀flow฀information.฀฀
4.1฀Areas฀to฀consider฀฀
Asking฀ the฀ following฀ questions฀ will฀ help฀ you฀ to฀ analyse฀ and฀ interpret฀ a฀ group's฀ statement฀ of฀ cash฀
flows.฀฀฀
Gives฀an฀
Cash฀balance฀ Is฀there฀an฀overall฀increase฀or฀decrease฀in฀cash?฀฀ indication฀of฀
how฀good฀the฀
฀Companies฀that฀are฀seen฀as฀cash฀rich฀can฀often฀come฀under฀pressure฀from฀ entity฀is฀at฀
investors฀to฀either฀invest฀the฀cash฀within฀the฀business฀or฀distribute฀it฀in฀the฀ turning฀profit฀
form฀of฀dividends฀paid.฀Not฀all฀stakeholders฀view฀increases฀in฀cash฀ into฀cash.฀฀
positively.฀A฀lender,฀such฀as฀a฀bank,฀may฀consider฀it฀more฀likely฀that฀a฀
company฀with฀a฀positive฀cash฀balance฀will฀repay฀its฀debts฀early฀or฀not฀
require฀future฀finance,฀which฀has฀a฀negative฀impact฀on฀the฀bank’s฀profits.฀฀ If฀profit฀made,฀
but฀no฀cash฀
generated,฀has฀
Cash฀flows฀from฀ ฀ Is฀there฀a฀cash฀inflow฀or฀outflow?฀ profit฀been฀
operating฀activities฀ manipulated?฀
฀ Is฀the฀operation฀profit฀or฀loss฀making?฀
฀
฀ Depreciation฀–฀is฀there฀a฀likely฀increase฀or฀decrease฀of฀depreciation฀in฀the฀ Or฀is฀this฀due฀to฀
movement฀in฀
future?฀Has฀property,฀plant฀and฀equipment฀(PPE)฀been฀purchased฀or฀sold฀in฀
working฀
the฀year฀(see฀'investing฀activities')?฀฀฀ capital?
฀ Is฀there฀any฀profit฀or฀loss฀on฀the฀sale฀of฀PPE?฀Why฀has฀the฀entity฀sold฀PPE?฀฀
฀ Is฀there฀a฀gain฀or฀loss฀on฀investments฀and฀any฀investment฀income?฀Are฀
investments฀generating฀a฀strong฀return?฀Does฀the฀entity฀have฀weak฀or฀
strong฀treasury฀management?฀
฀ Are฀there฀increases฀or฀decreases฀in฀trade฀receivables,฀inventories฀and฀
trade฀payables?฀Does฀this฀show฀weak฀or฀strong฀management฀of฀working฀
capital?฀Different฀stakeholders฀may฀have฀alternate฀views฀on฀a฀company's฀
working฀capital฀position.฀A฀supplier฀who฀provides฀goods฀on฀credit฀will฀be฀
concerned฀that฀poor฀working฀capital฀management฀may฀indicate฀that฀the฀
company฀is฀a฀credit฀risk฀and฀so฀may฀impose฀strict฀credit฀terms฀on฀the฀
company.฀A฀bank฀or฀other฀lender฀may,฀however,฀see฀an฀opportunity฀to฀
provide฀the฀company฀with฀a฀loan฀or฀overdraft฀to฀help฀with฀any฀working฀
capital฀deficits.฀
Note฀that฀the฀consolidated฀information฀is฀often฀not฀that฀meaningful฀to฀
creditors,฀who฀are฀interested฀in฀the฀ability฀to฀pay฀its฀debts฀of฀the฀individual฀
company฀which฀owes฀them฀money.฀One฀of฀the฀group฀companies฀could฀be฀
insolvent฀or฀have฀a฀declining฀working฀capital฀position,฀but฀that฀cannot฀be฀
seen฀from฀the฀consolidated฀statement฀of฀cash฀flows.฀
The฀degree฀to฀which฀the฀consolidated฀statement฀of฀cash฀flows฀gives฀a฀faithful฀
representation฀of฀the฀cash฀position฀of฀the฀individual฀group฀companies฀
depends฀on฀the฀degree฀of฀deviation฀of฀the฀individual฀statements฀of฀cash฀flow฀
from฀the฀group฀statement.฀
฀ Has฀any฀interest฀been฀paid฀in฀the฀year?฀Have฀any฀borrowings฀been฀repaid฀
or฀taken฀out฀in฀the฀year฀(see฀'financing฀activities')?฀
฀ 373฀

lOMoARcPSD|6256454
฀฀
Cash฀flows฀from฀ ฀ Is฀there฀a฀cash฀inflow฀or฀outflow?฀ Generally,฀a฀

cash฀outflow฀
investing฀activities฀
฀ Are฀there฀any฀acquisitions฀of฀PPE฀and/or฀investments฀in฀the฀year?฀How฀ from฀investing฀
were฀they฀funded฀(operating฀or฀financing)?฀What฀could฀be฀the฀impact฀of฀ activities฀implies฀
this฀in฀the฀future฀(eg฀increased฀operational฀capacity)?฀ a฀growing฀
business.฀
฀ Are฀there฀any฀disposals฀of฀PPE฀and/or฀investments฀in฀the฀year?฀Were฀they฀
at฀a฀profit฀or฀loss฀(see฀'operating฀activities')?฀Why฀were฀they฀sold?฀Impact฀
Has฀PPE฀been฀
on฀future?฀ sold฀to฀
฀ Have฀any฀interest฀or฀dividends฀been฀received?฀Assess฀the฀return฀on฀ manipulate฀
cash฀flows?฀
investment฀and฀treasury฀management.฀ Or฀old฀PPE฀
replaced฀with฀
The฀employees฀of฀the฀company฀or฀group฀will฀be฀encouraged฀by฀cash฀
new?฀
outflows฀from฀investing฀activities฀as฀this฀indicates฀job฀security฀and฀
potentially฀expanded฀operations฀going฀forward.฀They฀may,฀however,฀put฀
the฀company฀or฀group฀under฀pressure฀to฀also฀invest฀in฀its฀employees฀by฀
paying฀increased฀wages฀or฀bonuses฀to฀match฀any฀investment฀in฀
operations.฀฀As฀noted฀above,฀the฀consolidated฀statement฀of฀cash฀flows฀
may฀not฀reveal฀important฀information฀regarding฀the฀underlying฀individual฀
company฀position.฀
Cash฀flows฀from฀ ฀ Is฀there฀a฀cash฀inflow฀or฀outflow?฀
financing฀activities฀
฀ Has฀new฀finance฀been฀raised฀in฀the฀year?฀Debt฀or฀equity?฀Why฀has฀it฀
Eg฀if฀new฀
been฀raised?฀What฀are฀the฀future฀implications?฀Lenders฀will฀be฀interested฀
finance฀used฀for฀
in฀this฀as฀they฀will฀be฀able฀to฀assess฀whether฀finance฀has฀been฀obtained฀ working฀capital฀
from฀alternative฀sources฀and฀what฀the฀implications฀of฀this฀are฀on฀ management฀
covenants,฀security฀of฀finance฀and฀the฀group's฀risk฀profile.฀฀Again฀though,฀ could฀indicate฀
the฀individual฀statement฀of฀cash฀flow฀of฀the฀company฀to฀which฀it฀has฀ liquidity฀issues฀
provided฀finance฀is฀likely฀to฀be฀more฀useful.฀
฀ Has฀any฀finance฀been฀repaid฀in฀the฀year?฀How฀has฀the฀entity฀afforded฀to฀ Eg,฀if฀cash฀used฀
repay฀it?฀฀฀ to฀pay฀off฀a฀
lease฀or฀loan,฀it฀
฀ Have฀any฀dividends฀been฀paid฀in฀the฀year?฀What฀proportion฀of฀profit฀ will฀have฀
before฀tax฀has฀been฀paid฀out฀compared฀to฀the฀proportion฀reinvested?฀ positive฀impact฀
Assess฀the฀generosity฀of฀the฀directors'฀dividend฀policy.฀ on฀future฀profit฀
&฀cash฀flow฀
Ratio฀analysis฀฀
You฀might฀find฀it฀helpful฀to฀your฀analysis฀to฀calculate฀some฀or฀all฀of฀these฀ratios:฀
฀
฀ Cash฀return฀on฀capital฀employed฀
Cash generated from operations
=฀ ฀×฀100%฀
Capital฀employed
Cash฀generated฀from฀operations฀to฀total฀debt฀
Cash generated from operations

=฀฀ ฀
Long - term borrowings
Net฀cash฀from฀operating฀activities฀to฀capital฀expenditure฀
Net cash from operating activities

=฀ ×฀100%฀
Net capital expenditure
374฀

lOMoARcPSD|6256454
Activity฀4:฀Analysis฀ ฀
The฀Horwich฀Group฀has฀been฀trading฀for฀a฀number฀of฀years฀and฀is฀currently฀going฀through฀a฀period฀
of฀expansion฀of฀its฀core฀business฀area.฀
The฀ statement฀ of฀ cash฀ flows฀ for฀ the฀ year฀ ended฀ 31฀ December฀ 20X0฀ for฀ the฀ Horwich฀ Group฀ is฀
presented฀below.฀
Cash฀flows฀from฀operating฀activities฀ $'000 $'000฀
Profit฀before฀taxation฀ 2,200 ฀
Adjustments฀for:฀ ฀
Depreciation฀ 380 ฀
Gain฀on฀sale฀of฀investments฀ (50) ฀
Loss฀on฀sale฀of฀property,฀plant฀and฀equipment 45 ฀
Investment฀income฀ (180) ฀
Interest฀costs฀ 420 ฀
฀ 2,815 ฀
Increase฀in฀trade฀receivables฀ (400) ฀
Increase฀in฀inventories฀ (390) ฀
Increase฀in฀payables฀ 550 ฀
Cash฀generated฀from฀operations฀ 2,575 ฀
Interest฀paid฀ (400) ฀
Income฀taxes฀paid฀ (760) ฀
Net฀cash฀from฀operating฀activities฀ 1,415฀
฀ ฀
Acquisition฀of฀subsidiary฀(net฀of฀cash฀acquired) (800) ฀
Acquisition฀of฀property,฀plant฀and฀equipment (340) ฀
Proceeds฀from฀sale฀of฀equipment฀ 70 ฀
Proceeds฀from฀sale฀of฀investments฀ 150 ฀
Interest฀received฀ 100 ฀
Dividends฀received฀ 80 ฀
Net฀cash฀used฀in฀investing฀activities฀ (740)฀
฀ ฀
Proceeds฀from฀share฀issue฀ 300 ฀
Proceeds฀from฀long฀term฀borrowings฀ 300 ฀
Dividend฀paid฀to฀owners฀of฀the฀parent฀ (1,000) ฀
Net฀cash฀used฀in฀financing฀activities฀ ฀฀(400)฀
Net฀increase฀in฀cash฀and฀cash฀equivalents 275฀
Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀the฀period ฀฀฀110฀
Cash฀and฀cash฀equivalents฀at฀the฀end฀of฀the฀period ฀฀฀385฀
Required฀
Analyse฀ the฀ above฀ statement฀ of฀ cash฀ flows฀ for฀ the฀ Horwich฀ Group,฀ highlighting฀ the฀ key฀ features฀ of฀
each฀category฀of฀cash฀flows.฀
฀ 375฀

lOMoARcPSD|6256454
฀฀
Exercise฀1:฀Cash฀flow฀analysis฀ ฀
Go฀ online฀ and฀ look฀ up฀ the฀ annual฀ report฀ of฀ a฀ company฀ you฀ are฀ familiar฀ with.฀ Have฀ a฀ go฀ at฀
analysing฀the฀statement฀of฀cash฀flows฀for฀that฀company,฀then฀review฀the฀narrative฀material฀in฀the฀front฀
of฀the฀annual฀report฀to฀see฀what฀the฀company฀has฀said฀about฀its฀cash฀flows.฀
Ethics฀note฀
At฀least฀one฀question฀in฀the฀SBR฀exam฀will฀involve฀ethical฀issues,฀so฀you฀need฀to฀be฀alert฀to฀any฀
threats฀to฀the฀fundamental฀principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀
statement฀of฀cash฀flow฀questions.฀For฀example,฀there฀may฀be฀pressure฀on฀the฀reporting฀accountant฀to฀
achieve฀a฀certain฀level฀of฀cash฀flows฀from฀operating฀activities,฀which฀might฀tempt฀the฀accountant฀to฀
manipulate฀how฀certain฀cash฀flows฀are฀presented฀(this฀could฀be฀a฀self-interest฀or฀intimidation฀threat,฀
depending฀on฀the฀reasons฀for฀the฀pressure).฀
It฀is฀possible฀to฀manipulate฀cash฀flows฀by,฀for฀example,฀delaying฀paying฀suppliers฀until฀after฀the฀year฀
end,฀or฀perhaps฀by฀selling฀assets฀and฀then฀repurchasing฀them฀immediately฀after฀the฀year฀end฀in฀order฀
to฀show฀an฀improved฀cash฀position฀at฀the฀year฀end.฀฀
It฀is฀also฀possible฀to฀manipulate฀how฀cash฀flows฀are฀classified.฀Most฀entities฀opt฀to฀present฀'cash฀flows฀
from฀operating฀activities'฀using฀the฀indirect฀method.฀This฀is฀usually฀because฀gathering฀the฀information฀
required฀to฀use฀the฀direct฀method฀is฀deemed฀too฀costly.฀However,฀the฀indirect฀method฀requires฀
complicated฀adjustments฀to฀get฀from฀profit฀before฀tax฀to฀cash฀from฀operations.฀These฀adjustments฀are฀
difficult฀to฀understand฀and฀confusing฀to฀users฀of฀the฀financial฀statements,฀and฀therefore฀provide฀
opportunities฀for฀manipulation฀by฀preparers.฀฀
There฀may฀be฀a฀temptation฀to฀misclassify฀cash฀flows฀between฀operating,฀investing฀and฀financing฀
activities฀in฀order฀to฀improve,฀say,฀cash฀from฀operations.฀The฀lack฀of฀understanding฀of฀the฀indirect฀
method฀may฀make฀it฀easier฀to฀hide฀the฀misclassification.฀If฀the฀classification฀of฀a฀cash฀flow฀is฀
motivated฀by฀say,฀self-interest฀on฀behalf฀of฀the฀reporting฀accountant,฀rather฀than฀by฀the฀most฀
appropriate฀application฀of฀IAS฀7,฀the฀behaviour฀of฀the฀accountant฀would฀be฀unethical.฀฀
Time฀pressure฀at฀the฀year฀end฀may฀also฀lead฀to฀errors,฀especially฀when฀preparing฀the฀statement฀of฀
cash฀flows฀using฀the฀indirect฀method฀where฀some฀of฀the฀adjustments฀are฀not฀straightforward.฀
376฀

lOMoARcPSD|6256454
฀
฀ Group฀statements฀
฀ of฀cash฀flows฀(IAS฀7)฀
฀
฀
฀
2.฀ Consolidated฀statements฀฀ 3.฀ Approach฀to฀preparing฀
1.฀฀ Definitions฀and฀
of฀cash฀flows฀ a฀group฀statement฀of฀
formats฀
Additional฀considerations:฀ cash฀flows฀
฀ Cash฀flows฀are฀cash฀and฀
฀ Cash฀paid/received฀to฀acquire/sell฀ 1฀ Proforma฀
'cash฀equivalents'฀ subsidiaries฀(net฀of฀cash฀acq'd/disposed)฀
(short฀term฀highly฀liquid฀ 2฀ Transfer฀SOFP฀info฀to฀
฀ Cash฀paid/received฀to฀acquire/sell฀ face/working฀
investments฀
associates/joint฀ventures฀
–฀ Readily฀convertible฀ 3฀ Transfer฀SPLOCI฀info฀
฀ Adjust฀workings฀for฀assets/liabilities฀of฀
into฀cash฀ 4฀ Additional฀info฀inc฀
subsidiaries฀acquired/disposed฀
–฀ Insignificant฀risk฀of฀ acquisition/disposals฀
฀ Dividends฀paid฀to฀NCI:฀
changes฀in฀value)฀ 5฀ Complete฀workings฀and฀transfer฀
฀ NCI฀
Formats:฀ figures฀
b/d฀–฀SOFP฀ X฀
SPLOCI฀(NCI฀in฀TCI)฀ X฀ 6฀ (Additional฀workings฀if฀direct฀
฀ Indirect฀method฀
method)฀
Acquisition฀of฀S฀(NCI฀at฀FV฀ X฀
฀ Direct฀method฀
or฀%FVNA)฀ 7฀ Add฀up฀SOCF฀
Disposal฀of฀S฀ (X)฀
Non-cash฀฀ (X)฀
(eg฀FX฀loss฀foreign฀S)฀
Cash฀(dividends฀paid฀ ฀(X)฀
to฀NCI)฀฀
c/d฀–฀SOFP฀ X฀ 4.฀ Analysis฀and฀
interpretation฀of฀
฀ Dividends฀rec'd฀from฀associates/JVs:฀
group฀statements฀of฀
฀ Inv฀in฀
A/JV฀
cash฀flow฀
b/d฀ X฀ ฀ Components฀of฀cash฀flows฀
SPLOCI฀(%PFY฀+฀%OCI)฀ X฀ ฀ Overall฀change฀in฀cash฀
Acquisition฀of฀A/JV฀ X฀ ฀ Cash฀flows฀vs฀expectations,฀
Disposal฀of฀A/JV฀ (X)฀ eg฀operating฀activities฀should฀
Non-cash฀(eg฀FX฀loss฀ (X)฀ be฀a฀key฀inflow,฀investing฀
foreign฀A/JV)฀ activities฀a฀key฀outflow฀
Cash฀(dividends฀ ฀(X)฀
rec'd)฀฀
c/d฀ ฀X฀฀
Foreign฀currency฀transactions:฀
฀ Eliminate฀FX฀differences฀that฀are฀not฀cash฀
flows:฀
Profit฀before฀taxation฀ 3,350฀
฀Depreciation฀ 450฀
฀Foreign฀฀
฀exchange฀loss฀ 40฀
฀Investment฀income฀ (500)฀
฀Interest฀expense฀ ฀400฀
฀ 3,740฀
฀ Adjust฀in฀workings฀(see฀examples฀above)฀
฀
฀ 377฀

lOMoARcPSD|6256454
฀฀
1.฀ Definitions฀and฀formats฀
฀ The฀format฀of฀a฀consolidated฀statement฀of฀cash฀flows฀is฀consistent฀with฀that฀for฀a฀single฀entity.฀
Both฀the฀direct฀and฀indirect฀methods฀of฀preparation฀are฀acceptable.฀
฀ ฀ The฀preferred฀method฀under฀IAS฀7฀is฀the฀direct฀method฀(as฀it฀shows฀information฀not฀
available฀elsewhere฀in฀the฀financial฀statements).฀However,฀the฀indirect฀method฀is฀more฀
common฀in฀practice฀as฀it฀is฀easier฀to฀prepare.฀฀
฀ ฀ The฀indirect฀method฀is฀more฀difficult฀for฀users฀to฀understand฀and฀is฀therefore฀open฀to฀
manipulation.฀
2.฀ Consolidated฀statements฀of฀cash฀flows฀
฀ ฀ Additional฀considerations฀include:฀
฀ ฀ –฀ Dividends฀paid฀to฀non-controlling฀shareholders฀
฀ ฀ –฀ Dividends฀received฀from฀associates฀
฀ ฀ –฀ Cash฀flows฀on฀acquisition/disposal฀of฀group฀entities฀
3.฀ Approach฀to฀preparing฀a฀group฀statement฀of฀cash฀flows฀
฀ ฀ BPP฀recommends฀a฀methodical฀approach฀of฀working฀through฀the฀statement฀of฀financial฀
position,฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀then฀notes,฀thinking฀
'each฀figure฀goes฀somewhere:฀face฀or฀working฀(or฀both)'.฀
4.฀ Analysis฀and฀interpretation฀of฀group฀statements฀of฀cash฀flows฀
฀ ฀ The฀statement฀of฀cash฀flows฀itself฀can฀tell฀us฀useful฀information฀about฀the฀business'฀ability฀
to฀generate฀cash฀and฀the฀source/use฀of฀cash.฀Ratio฀analysis฀can฀also฀assist฀in฀
interpretation.฀
฀
฀ ฀
378฀

lOMoARcPSD|6256454
Q18฀Porter฀฀
topics฀studied฀in฀this฀chapter฀and฀which฀are฀useful฀reading:฀
Cashflow฀statements฀(2010)฀
Cash฀equivalents฀or฀not฀cash...฀(2013)฀
Reconciliation?฀(2015)฀
฀ 379฀

lOMoARcPSD|6256454
฀฀
฀
฀
฀
฀฀
฀
380฀

lOMoARcPSD|6256454
฀ ฀
฀
Applying฀good฀consolidation฀techniques฀
฀
฀
฀
aging information
Man
aging information
Man
An
sw
er
pl
t
en
manag ime
an
em
t
nin
Good
g
Applying good
r p re t ati o n
consolidation Specific SBR skills
e nts
techniques
Applying good
req f rrprneteation
consolidation
re m
Creating effective
i ts
techniques
discussion
m eun
of t inotect i
uireeq
Eff d p
an
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Performing
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Co
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on analysis
Efficient numerical
analysis
฀
Introduction฀
questions฀that฀will฀total฀50฀marks.฀The฀first฀question฀will฀be฀based฀on฀the฀financial฀
statements฀of฀group฀entities,฀or฀extracts฀thereof.฀ACCA's฀approach฀to฀examining฀the฀
syllabus฀states฀that฀'candidates฀should฀understand฀that฀in฀addition฀to฀the฀consideration฀of฀the฀
numerical฀aspects฀of฀group฀accounting฀(max.฀25฀marks),฀a฀discussion฀and฀explanation฀
of฀these฀numbers฀will฀also฀be฀required'฀(Strategic฀Business฀Reporting฀Syllabus฀and฀Study฀Guide,฀
p11).฀
This฀Skills฀Checkpoint฀is฀designed฀to฀demonstrate฀application฀of฀good฀consolidation฀techniques฀
when฀answering฀both฀written฀and฀numerical฀aspects฀of฀Question฀1฀of฀your฀SBR฀exam.฀
Note฀that฀Section฀B฀of฀the฀exam฀could฀deal฀with฀any฀aspect฀of฀the฀syllabus฀so฀it฀is฀also฀
possible฀that฀groups฀feature฀in฀Question฀3฀or฀4.฀The฀technique฀that฀you฀learn฀in฀this฀Skills฀
Checkpoint฀will฀also฀prepare฀you฀for฀answering฀a฀Section฀B฀question฀featuring฀group฀
accounting.฀
In฀the฀Workbook฀groups฀chapters฀(Chapters฀10–16),฀the฀techniques฀for฀preparing฀a฀full฀
consolidated฀primary฀statement฀have฀been฀explained.฀Therefore,฀this฀Skills฀Checkpoint฀will฀
focus฀on฀the฀more฀challenging฀technique฀for฀correcting฀errors฀in฀group฀financial฀
statements฀that฀have฀already฀been฀prepared.฀
฀ ฀
฀ 381฀

lOMoARcPSD|6256454
฀฀
Skills฀Checkpoint฀3:฀Applying฀good฀consolidation฀techniques฀
SBR฀Skill:฀Applying฀good฀consolidation฀techniques฀
A฀ step฀ by฀ step฀ technique฀ for฀ applying฀ good฀ consolidation฀ techniques฀ has฀ been฀
outlined฀ below.฀ Each฀ step฀ will฀ be฀ explained฀ further฀ as฀ the฀ question฀ in฀ this฀ Skills฀
Checkpoint฀is฀attempted฀in฀stages.฀
STEP฀1:
Look฀at฀the฀mark฀allocation฀of฀the฀question฀and฀
work฀out฀how฀many฀minutes฀you฀have฀to฀
answer฀each฀part฀of฀the฀question฀(based฀on฀
1.95฀minutes฀a฀mark).
STEP฀2:฀
Read฀the฀requirement฀for฀each฀part฀of฀the฀question฀
and฀analyse฀it.฀Highlight฀each฀sub-requirement฀
separately,฀identify฀the฀verb(s)฀and฀ask฀yourself฀what฀
each฀sub-requirement฀means.฀
STEP฀3:
Read฀the฀scenario.฀Identify฀exactly฀what฀information฀
has฀been฀provided฀(eg฀individual฀company฀financial฀
statements,฀group฀financial฀statements,฀extracts฀thereof฀
and/or฀narrative฀information).฀Ask฀yourself฀what฀you฀
need฀to฀do฀with฀this฀information฀(eg฀prepare฀a฀full฀
group฀primary฀statement฀or฀an฀extract฀thereof฀or฀
correct฀existing฀group฀financial฀statements).฀Identify฀
which฀group฀workings฀or฀consolidation฀adjustments฀
may฀be฀required.
STEP฀4:
Draw฀up฀a฀group฀structure฀(incorporating฀%฀
acquired,฀acquisition฀date฀and฀reserves฀at฀
acquisition).฀Make฀notes฀in฀the฀margins฀of฀the฀
question฀as฀to฀which฀consolidation฀working,฀
adjustment฀or฀correction฀to฀error฀is฀required.฀Do฀not฀
perform฀any฀detailed฀calculations฀at฀this฀stage.฀
STEP฀5:
Write฀up฀your฀answer฀using฀key฀words฀from฀the฀
requirements฀as฀headings฀(if฀preparing฀narrative).฀
When฀correcting฀errors,฀it฀is฀easier฀to฀perform฀the฀
calculations฀first฀then฀explain฀them.฀Be฀careful฀not฀to฀
overrun฀on฀time฀with฀your฀calculations฀– they฀will฀
typically฀be฀worth฀only฀approximately฀40%฀of฀the฀
marks.
฀
฀
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Tutorial฀note฀
Steps฀1–3฀apply฀to฀all฀types฀of฀groups฀questions฀(preparation฀of฀a฀full฀group฀primary฀
statement฀or฀extract฀thereof฀or฀correction฀of฀errors฀in฀existing฀group฀financial฀
statements).฀However,฀Steps฀4฀and฀5฀focus฀more฀specifically฀on฀correction฀of฀errors฀as฀
this฀is฀the฀most฀challenging฀type฀of฀groups฀question,฀and฀the฀question฀in฀this฀Skills฀
Checkpoint฀will฀focus฀on฀this.฀
฀ Good฀time฀management.฀The฀groups฀question฀is฀likely฀to฀be฀the฀most฀time-
pressured฀ in฀ the฀ SBR฀ exam.฀ You฀ need฀ to฀ divide฀ your฀ time฀ between฀ the฀
requirements฀based฀on฀1.95฀minutes฀a฀mark.฀Write฀the฀finishing฀time฀for฀each฀
requirement฀ on฀ your฀ question฀ paper฀ and฀ make฀ sure฀ that฀ you฀ do฀ not฀ overrun.฀฀
The฀ temptation฀ will฀ be฀ to฀ ensure฀ that฀ every฀ single฀ number฀ in฀ your฀ answer฀ is฀
exactly฀right฀but฀there฀will฀not฀be฀time฀for฀this.฀Remember฀that฀the฀pass฀mark฀is฀
50%฀so฀you฀should฀be฀aiming฀for฀at฀least฀a฀65%฀answer฀to฀give฀yourself฀margin฀
for฀ error.฀ Focus฀ on฀ the฀ easy฀ marks฀ and฀ do฀ not฀ worry฀ if฀ you฀ are฀ unable฀ to฀
address฀all฀of฀the฀more฀complex฀marks.฀
฀ Managing฀information.฀The฀most฀important฀skill฀here฀is฀active฀reading.฀A฀lot฀
of฀information฀(both฀numerical฀and฀narrative)฀is฀typically฀provided฀in฀the฀groups฀
question.฀ For฀ each฀ piece฀ of฀ information,฀ you฀ should฀ be฀ asking฀ yourself฀ 'what฀
should฀I฀do฀with฀this?'฀In฀other฀words,฀you฀need฀to฀identify฀which฀consolidation฀
working,฀adjustment฀or฀correction฀is฀required฀and฀jot฀this฀down฀in฀the฀margin฀of฀
the฀question฀next฀to฀the฀relevant฀piece฀of฀information.฀
฀ Correct฀ interpretation฀ of฀ requirements.฀ For฀ the฀ groups฀ question,฀ you฀
need฀to฀ascertain฀whether฀your฀answer฀should฀be฀narrative,฀numerical฀or฀both.฀
You฀ should฀ establish฀ whether฀ it฀ is฀ a฀ preparation฀ style฀ question฀ (of฀ a฀ group฀
financial฀statement฀or฀extract฀thereof)฀or฀a฀correction฀of฀errors฀style฀question฀(of฀
pre-prepared฀group฀financial฀statements).฀The฀requirement฀will฀be฀clear฀–฀make฀
sure฀you฀produce฀what฀you฀are฀asked฀for.฀
฀ Answer฀ planning.฀For฀a฀groups฀question,฀you฀will฀typically฀spend฀less฀time฀
planning฀ than฀ for฀ a฀ discussion฀ type฀ question.฀ You฀ should฀ aim฀ to฀ draw฀ up฀ the฀
group฀ structure฀ (including฀ the฀ percentage฀ acquired,฀ date฀ of฀ acquisition฀ and฀
reserves฀ at฀ acquisition).฀ Then,฀ rather฀ than฀ drawing฀ up฀ a฀ formal฀ plan,฀ the฀ best฀
use฀of฀your฀time฀is฀to฀annotate฀the฀question฀paper฀margins฀noting฀which฀group฀
working,฀adjustment฀or฀correction฀of฀error฀will฀be฀required.฀
฀ Efficient฀ numerical฀ analysis.฀ The฀ key฀ to฀ success฀ here฀ is฀ knowing฀ the฀
proformas฀ for฀ typical฀ consolidation฀ workings.฀ For฀ example,฀ for฀ a฀ consolidated฀
statement฀of฀financial฀position,฀you฀need฀to฀be฀familiar฀with฀the฀proformas฀for:฀
–฀ Goodwill฀ ฀
–฀ Investment฀in฀associate฀
–฀ Consolidated฀ reserves฀ (one฀ working฀ for฀ each฀ type฀ of฀ reserve฀ where฀
applicable฀ –฀ retained฀ earnings,฀ other฀ components฀ of฀ equity,฀ revaluation฀
surplus)฀฀
–฀ Non-controlling฀interests.฀฀
For฀a฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
(SPLOCI),฀the฀key฀working฀is฀for฀non-controlling฀interests฀(share฀of฀profit฀for฀year฀
and฀total฀comprehensive฀income).฀฀
฀ 383฀

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฀฀
Make฀sure฀you฀know฀how฀to฀calculate฀and฀adjust฀for฀a฀provision฀for฀unrealised฀
profit฀and฀that฀you฀can฀draw฀up฀the฀fair฀value฀adjustment฀table฀where฀required.฀
฀ Effective฀writing฀and฀presentation.฀When฀asked฀for฀an฀explanation฀with฀
suitable฀calculations,฀the฀best฀approach฀is฀to฀prepare฀the฀calculation฀first฀as฀this฀
should฀ enable฀ you฀ to฀ then฀ explain฀ what฀ you฀ have฀ done.฀ Be฀ careful฀ not฀ to฀
overrun฀ on฀ your฀ calculations฀ –฀ with฀ a฀ question฀ like฀ this,฀ calculations฀ are฀ only฀
likely฀ to฀ be฀ worth฀ about฀ 40%฀ of฀ your฀ marks฀ with฀ the฀ remaining฀ 60%฀ being฀
awarded฀to฀the฀written฀explanation.฀
Where฀ a฀ question฀ involves฀ correcting฀ errors฀ in฀ group฀ financial฀ statements,฀ the฀
explanation฀should฀be฀written฀up฀as฀follows:฀
(1)฀ Identify฀the฀incorrect฀accounting฀treatment฀in฀the฀question฀
(2)฀ Explain฀why฀that฀accounting฀treatment฀is฀incorrect฀
(3)฀ Explain฀what฀the฀correct฀accounting฀treatment฀should฀be฀
(4)฀ Explain฀the฀adjustment฀required฀to฀correct฀the฀errors฀in฀the฀question฀–฀it฀is฀
useful฀to฀include฀the฀correcting฀journal(s)฀here.฀
384฀

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Skill฀Activity฀
฀ how฀ many฀ minutes฀ you฀ have฀ to฀ answer฀ each฀ part฀ of฀ the฀ question.฀
Based฀ on฀ 1.95฀ minutes฀ a฀ mark,฀ you฀ have฀ approximately฀ 29฀ minutes฀
to฀answer฀part฀(a)฀and฀approximately฀10฀minutes฀to฀answer฀part฀(b).฀
You฀ should฀ write฀ the฀ finishing฀ time฀ for฀ each฀ part฀ on฀ your฀ question฀
paper,฀ensuring฀that฀you฀do฀not฀overrun.฀
฀
Required฀
(a)฀ Explain,฀ with฀ suitable฀ workings,฀ how฀ the฀ following฀ figures฀ should฀ have฀ been฀
calculated฀for฀inclusion฀in฀the฀consolidated฀statement฀of฀financial฀position฀of฀the฀
Grape฀ Group฀ as฀ at฀ 30฀ November฀ 20X9,฀ showing฀ the฀ adjustments฀ required฀ to฀
correct฀any฀errors:฀
฀ (i)฀ Goodwill฀on฀acquisition฀of฀Pear฀
฀ (ii)฀ Non-controlling฀interests฀in฀Pear.฀฀ (15฀marks)฀ ฀ ฀
฀ ฀
(b)฀ Show฀how฀the฀goodwill฀in฀Fraise฀should฀have฀been฀calculated฀and฀explain฀the฀
adjustment฀required฀to฀correct฀any฀errors.฀฀ (5฀marks)฀฀
฀ ฀ (Total฀=฀20฀marks)฀
STEP 2฀ Read฀the฀requirement฀for฀each฀part฀of฀the฀following฀question฀and฀
฀ analyse฀it.฀Highlight฀each฀sub-requirement,฀identify฀the฀verb(s)฀and฀ask฀
yourself฀what฀each฀sub-requirement฀means.฀
฀
Sub-requirement฀1฀
Required฀
(a)฀ Explain,฀ with฀ suitable฀ workings,฀ how฀ the฀ following฀ figures฀ should฀ have฀ been฀
calculated฀for฀inclusion฀in฀the฀consolidated฀statement฀of฀financial฀position฀of฀the฀
Grape฀ Group฀ as฀ at฀ 30฀ November฀ 20X9,฀ showing฀ the฀ adjustments฀ required฀ to฀
correct฀any฀errors:฀฀ Sub-requirement฀2฀
(i)฀ Goodwill฀on฀acquisition฀of฀Pear฀
(ii)฀ Non-controlling฀interests฀in฀Pear.฀฀ Note฀the฀two฀consolidated฀ (15฀marks)฀

SOFP฀workings฀required฀
฀ ฀
Sub-requirement฀1฀
฀
(b)฀ Show฀how฀the฀goodwill฀in฀Fraise฀should฀have฀been฀calculated฀and฀explain฀the฀
adjustment฀required฀to฀correct฀any฀errors.฀฀ (5฀marks)฀฀
฀ ฀ Sub-requirement฀2฀
฀ 385฀

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฀฀
Note฀the฀three฀verbs฀used฀in฀the฀requirements.฀Two฀of฀them฀have฀been฀defined฀by฀the฀
ACCA฀ in฀ their฀ list฀ of฀ common฀ question฀ verbs฀ ('explain'฀ and฀ 'calculate').฀ A฀ dictionary฀
definition฀can฀be฀used฀for฀the฀third฀('show').฀These฀definitions฀are฀shown฀below:฀
Verb฀ Definition฀ Tip฀for฀answering฀this฀

question฀
Explain฀ To฀make฀an฀idea฀clear;฀to฀show฀ Identify฀the฀error฀and฀explain฀

logically฀how฀a฀concept฀is฀ why฀it฀is฀an฀error.฀State฀the฀
developed;฀to฀give฀the฀reason฀for฀ correct฀accounting฀treatment฀
an฀event.฀ and฀explain฀why฀it฀is฀correct.฀
Conclude฀with฀the฀adjustment฀
required฀to฀correct฀the฀error.฀
Calculate฀฀฀ To฀ascertain฀by฀computation,฀to฀ Provide฀a฀narrative฀description฀

make฀an฀estimate฀of;฀evaluation,฀to฀ for฀each฀line฀in฀your฀
perform฀a฀mathematical฀process.฀ calculation.฀Use฀the฀standard฀
consolidation฀working฀
proforma฀to฀structure฀your฀
calculation.฀
Show฀ 'To฀explain฀something฀to฀someone฀ Complete฀the฀following฀

by฀doing฀it฀or฀giving฀instructions'฀ calculations:฀
(Cambridge฀English฀Dictionary).฀  Goodwill฀in฀Pear฀
 NCI฀in฀Pear฀
 Goodwill฀in฀Fraise฀
STEP 3฀ Read฀ the฀ scenario.฀ Identify฀ exactly฀ what฀ information฀ has฀ been฀
฀ provided฀(eg฀individual฀company฀financial฀statements,฀group฀financial฀
statements,฀extracts฀thereof฀and/or฀narrative฀information).฀Ask฀yourself฀
what฀ you฀ need฀ to฀ do฀ with฀ this฀ information฀ (eg฀ prepare฀ a฀ full฀ group฀
primary฀ statement฀ or฀ an฀ extract฀ thereof,฀ or฀ correct฀ existing฀ group฀
financial฀ statements).฀ Identify฀ which฀ group฀ workings฀ or฀ consolidation฀
adjustments฀may฀be฀required.฀฀
฀
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Consolidated฀
SOFP฀has฀
Question฀–฀Grape฀(20฀marks)฀ Three฀group฀
companies฀–฀
already฀been฀ you฀will฀need฀
prepared฀–฀
The฀ following฀ group฀ statement฀ of฀ financial฀ position฀ relates฀ to฀ the฀ Grape฀
to฀prepare฀a฀
you฀will฀need฀
to฀correct฀
Group฀which฀comprises฀Grape,฀Pear฀and฀Fraise.฀฀ group฀structure
errors฀
GROUP฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀30฀NOVEMBER฀20X9฀
฀ $m฀
Assets฀ ฀
฀ Property,฀plant฀and฀equipment 690฀
฀
฀ Goodwill฀฀ ฀45฀
Positive฀goodwill฀
฀ Intangible฀assets฀฀ in฀subsidiaries฀ ฀฀30฀
฀
฀ 765฀
Current฀assets฀฀ ฀฀฀฀420฀
฀ ฀1,185฀
Equity฀and฀liabilities฀ ฀
Share฀capital฀ ฀250฀
Retained฀earnings฀฀ ฀300฀
Other฀components฀of฀equity฀ ฀60฀
Non-controlling฀interests฀฀ Partly฀owned฀ ฀195฀
฀ subsidiaries฀ 805฀
Non-current฀liabilities฀ ฀220฀
Current฀liabilities฀ ฀฀฀฀160฀
฀ ฀1,185฀
The฀ following฀ information฀ was฀ relevant฀ to฀ the฀ preparation฀ of฀ the฀ group฀
financial฀statements฀for฀the฀year฀ended฀30฀November฀20X9.฀฀
Pear฀is฀a฀
6฀months฀ago฀–฀a฀ subsidiary฀
mid-year฀acquisition฀ ฀
(i)฀ On฀1฀ June฀ 20X9,฀Grape฀acquired฀60%฀of฀the฀220฀million฀$1฀

Consideration฀ Fair฀value฀of฀
transferred฀for฀ equity฀ shares฀ of฀ Pear,฀ a฀ public฀ limited฀ company.฀ The฀ purchase฀ identifiable฀net฀
goodwill฀ assets฀for฀
working฀ consideration฀ comprised฀ cash฀ of฀ $240฀ million.฀ goodwill฀
working฀but฀is฀
Excluding฀the฀franchise฀referred฀to฀below,฀the฀fair฀value฀of฀ this฀figure฀
correct?฀Should฀
the฀ identifiable฀ net฀ assets฀ was฀ $350฀ million.฀ The฀ excess฀ the฀franchise฀
have฀been฀
of฀the฀fair฀value฀of฀the฀net฀assets฀is฀due฀to฀an฀increase฀in฀the฀value฀ included?฀
of฀non-depreciable฀land.฀ No฀subsequent฀depreciation฀
of฀fair฀value฀adjustment฀to฀
include฀in฀consolidated฀
retained฀earnings฀and฀NCI฀
workings฀
฀ 387฀

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฀฀
Pear฀held฀a฀ franchise฀ right,฀which฀at฀1฀June฀20X9฀had฀a฀fair฀

IFRS฀3฀requires฀
value฀ of฀ $10฀ million.฀This฀had฀not฀ been฀ recognised฀in฀the฀ separate฀
recognition฀of฀
financial฀ statements฀ of฀ Park.฀ The฀ franchise฀ agreement฀ had฀ a฀ identifiable฀
Amortise฀
franchise฀right฀ intangible฀assets
remaining฀ term฀ of฀ five฀ years฀ to฀ run฀ at฀ that฀ date฀ and฀ is฀ not฀
for฀6฀months฀
post-acquisition฀ renewable.฀Pear฀still฀holds฀this฀franchise฀at฀the฀year-end.฀
Measure฀NCI฀
Grape฀ wishes฀ to฀ use฀ the฀ 'full฀ goodwill'฀ method฀ for฀ all฀
at฀acquisition฀
Post฀to฀2nd฀line฀of฀ at฀fair฀value฀
acquisitions.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interest฀ in฀ Pear฀
goodwill฀working฀and฀
1st฀line฀of฀NCI฀working฀
was฀ $155฀ million฀ on฀ 1฀ June฀ 20X9.฀ The฀ retained฀ earnings฀
and฀ other฀ components฀ of฀ equity฀ of฀ Pear฀ were฀฀
Use฀to฀work฀out฀NCI฀ $115฀million฀and฀$10฀million฀at฀the฀date฀of฀acquisition฀
share฀of฀post- Permitted฀under฀
acquisition฀reserves฀in฀ IFRS฀3฀but฀
and฀ $170฀ million฀ and฀ $15฀ million฀ at฀ 30฀ November฀ group฀wishes฀
NCI฀working฀
to฀use฀full฀
20X9.฀ goodwill฀
method฀–฀need฀
The฀accountant฀accidentally฀used฀the฀'partial฀ goodwill'฀method฀ to฀amend฀NCI฀
from฀%฀of฀net฀
Add฀franchise฀ to฀calculate฀the฀goodwill฀in฀Pear฀and฀used฀the฀fair฀value฀of฀net฀ assets฀to฀fair฀
right฀to฀fair฀value฀ value฀(in฀
of฀net฀assets฀in฀ assets฀of฀$350฀million฀excluding฀the฀franchise฀right.฀This฀ goodwill฀and฀
goodwill฀ NCI฀workings)
calculation฀ valuation฀ of฀ goodwill฀ $30฀ million฀ calculated฀ as฀ the฀ consideration฀
transferred฀ of฀ $240฀ million฀ plus฀ non-controlling฀ interests฀ (NCI)฀ of฀
Revise฀to฀fair฀
value฀of฀$155฀ $140฀ million฀ ($350฀ million฀ ×฀ 40%)฀ less฀ net฀ assets฀ of฀
million฀in฀ Add฀franchise฀
goodwill฀and฀ $350฀ million฀ has฀ been฀ included฀ in฀ the฀ group฀ statement฀ of฀ right฀to฀fair฀
NCI฀workings฀ value฀of฀net฀
(full฀goodwill฀ financial฀ position฀ above.฀ There฀ has฀ been฀ no฀ impairment฀ of฀ assets฀in฀
method)฀ goodwill฀
goodwill฀since฀acquisition.฀฀ calculation฀
Also฀need฀to฀ The฀accountant฀has฀calculated฀NCI฀in฀Pear฀at฀30฀November฀20X9฀as฀
deduct฀
Revise฀to฀fair฀
amortisation฀on฀ $164฀million฀being฀NCI฀of฀$140฀million฀at฀acquisition฀plus฀NCI฀
value฀
franchise฀rights฀
(fair฀value฀ share฀ of฀ post-acquisition฀ retaining฀ earnings฀ (($170฀
adjustment)฀
million฀ –฀ $115฀ million)฀ ×฀ 40%)฀and฀post-acquisition฀ other฀
Correct฀–฀no฀
adjustment฀
components฀of฀equity฀(($15฀million฀–฀$10฀million)฀×฀40%).฀ needed฀
388฀

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฀
฀
On฀the฀first฀day฀of฀
Fraise฀is฀a฀subsidiary฀
the฀current฀
accounting฀period฀ ฀
฀(ii)฀ On฀ 1฀ December฀ 20X8,฀ Grape฀ acquired฀ 70%฀ of฀ the฀ equity฀
Foreign฀
subsidiary฀–฀ interests฀ of฀ Fraise.฀ Fraise฀ operates฀ in฀ a฀ foreign฀ country฀ and฀ the฀ Consideration฀
will฀need฀to฀ transferred฀for฀
translate฀from฀ functional฀ currency฀ of฀ Fraise฀ is฀ the฀ crown.฀ The฀ purchase฀ goodwill฀
crowns฀into฀$฀ working฀
for฀the฀group฀ consideration฀ comprised฀ cash฀ of฀ 370฀ million฀ crowns.฀ The฀ fair฀
accounts฀
value฀of฀the฀identifiable฀net฀assets฀of฀Fraise฀on฀1฀December฀20X8฀
was฀ 430฀ million฀ crowns.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ NCI฀for฀goodwill฀
Fair฀value฀of฀
identifiable฀net฀ working฀
interest฀ in฀ Fraise฀ at฀ 1฀ December฀ 20X8฀ was฀ 150฀ million฀
assets฀for฀
goodwill฀working฀
crowns.฀ Goodwill฀ has฀ been฀ calculated฀ correctly฀ using฀ the฀ 'full฀
goodwill'฀method.฀However,฀the฀ accountant฀ translated฀ it฀ at฀ IAS฀21฀requires฀
goodwill฀to฀be฀
the฀ exchange฀ rate฀ at฀ the฀ acquisition฀ date฀of฀1฀December฀ translated฀at฀the฀
closing฀rate฀
20X8฀ for฀ inclusion฀ in฀ the฀ consolidated฀ statement฀ of฀ financial฀
position฀as฀at฀30฀November฀20X9.฀
Goodwill฀
incorrectly฀
There฀has฀been฀no฀impairment฀of฀the฀goodwill฀in฀Fraise.฀฀ included฀in฀
consolidated฀
The฀following฀exchange฀rates฀are฀relevant:฀฀ SOFP฀at฀this฀
acquisition฀date฀
rate฀
฀ ฀ Crowns฀to฀$฀
1฀December฀20X8฀ 6฀
This฀rate฀is฀not฀
30฀November฀20X9฀ 5฀ Retranslate฀
required฀for฀this฀
question฀ goodwill฀using฀
Average฀for฀the฀year฀to฀30฀November฀20X9฀ 5.5฀ this฀closing฀rate฀
฀
Required฀
(a)฀ Explain,฀ with฀ suitable฀ workings,฀ how฀ the฀ following฀ figures฀ should฀
have฀been฀calculated฀for฀inclusion฀in฀the฀consolidated฀statement฀of฀
financial฀position฀of฀the฀Grape฀Group฀as฀at฀30฀November฀20X9,฀
showing฀the฀adjustments฀required฀to฀correct฀any฀errors:฀
฀ (i)฀ Goodwill฀on฀acquisition฀of฀Pear฀
฀ (ii)฀ Non-controlling฀interests฀in฀Pear.฀
฀ ฀ ฀฀฀(15฀marks)฀฀
(b)฀ Show฀how฀the฀goodwill฀in฀Fraise฀should฀have฀been฀calculated฀and฀
explain฀the฀adjustment฀required฀to฀correct฀any฀errors.฀฀ (5฀marks)฀฀
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฀฀
STEP 4฀ Draw฀up฀a฀group฀structure฀(incorporating฀the฀percentage฀acquired,฀
฀ acquisition฀ date฀ and฀ reserves฀ at฀ acquisition).฀ Make฀ notes฀ in฀ the฀
margins฀ of฀ the฀ question฀ as฀ to฀ which฀ consolidation฀ working,฀
adjustment฀ or฀ correction฀ to฀ error฀ is฀ required.฀ Do฀ not฀ perform฀ any฀
detailed฀calculations฀at฀this฀stage.฀
Group฀structure฀
Grape฀($)฀
1.6.X9฀ 60%฀฀฀฀฀฀฀ 1.12.X8 70%

(mid-year฀acquisition)฀ (on฀first฀day฀of฀year)฀
฀
Pear฀($) Fraise฀(crowns)
Reserves฀at฀acquisition:฀ Reserves฀ at฀ acquisition฀ not฀ given฀
Retained฀earnings฀=฀$115฀million฀ but฀ fair฀ value฀ of฀ identifiable฀ net฀
Other฀ components฀ of฀ equity฀ =฀ assets฀=฀430฀million฀crowns฀
$10฀฀million฀
฀
The฀remainder฀of฀your฀planning฀should฀be฀in฀the฀form฀of฀annotations฀in฀the฀margin฀of฀
the฀question฀paper.฀This฀has฀been฀demonstrated฀for฀you฀in฀Step฀3.฀
฀
฀ headings.฀ When฀ correcting฀ errors,฀ it฀ is฀ easier฀ to฀ perform฀ the฀
calculations฀ first฀ then฀ explain฀ them.฀ Be฀ careful฀ not฀ to฀ overrun฀ on฀
time฀with฀your฀calculations฀–฀you฀can฀see฀from฀the฀marking฀guide฀
below฀ that฀ they฀ are฀ only฀ worth฀ 40%฀ of฀ the฀ marks.฀ Therefore,฀ you฀
need฀ to฀ leave฀ 60%฀ of฀ your฀ writing฀ time฀ for฀ the฀ explanations.฀ You฀
will฀ not฀ be฀ able฀ to฀ pass฀ the฀ question฀ with฀ calculations฀ alone.฀ For฀
the฀ explanation,฀ you฀ might฀ find฀ it฀ helpful฀ to฀ write฀ up฀ your฀ answer฀
using฀the฀following฀structure:฀
(1)฀ Identify฀the฀incorrect฀accounting฀treatment฀in฀the฀question฀
(2)฀฀ Explain฀why฀that฀accounting฀treatment฀is฀incorrect฀
(3)฀ Explain฀what฀the฀correct฀accounting฀treatment฀should฀be฀
(4)฀ Explain฀ the฀ adjustment฀ required฀ to฀ correct฀ the฀ errors฀ in฀ the฀
question.฀
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Marking฀guide฀
฀ ฀ ฀Marks฀
(a)(i)฀ Explanation฀of฀goodwill฀calculation฀and฀adjustments฀–฀1฀mark฀per฀ ฀
point฀to฀a฀maximum฀of:฀ 5฀
Calculation฀of฀goodwill฀ 3฀
(a)(ii)฀ Explanation฀of฀non-controlling฀interests'฀calculation฀and฀adjustment฀–฀฀ ฀
1฀mark฀per฀point฀to฀a฀maximum฀of:฀฀ 4฀
Calculation฀of฀non-controlling฀interests฀ 3฀
(b)฀ Explain฀adjustment฀to฀goodwill฀–฀1฀mark฀per฀point฀to฀a฀maximum฀of:฀ 3฀
Calculation฀of฀goodwill฀ ฀฀2฀
฀ ฀ ฀20฀
฀ The฀answers฀to฀(a)(i)฀and฀(ii)฀have฀
been฀combined฀because฀converting฀
from฀partial฀to฀full฀goodwill฀methods฀
฀ affects฀the฀same฀numbers฀in฀both฀the฀
goodwill฀and฀NCI฀workings฀so฀
combining฀answers฀avoids฀repetition฀
Suggested฀solution฀ of฀points฀and฀saves฀time.฀
(a)฀ Goodwill฀and฀non-controlling฀interests฀in฀Pear฀
(1)฀Explain฀the฀
The฀junior฀accountant฀has฀used฀the฀ 'partial฀ goodwill'฀ method฀
incorrect฀
accounting฀
to฀ account฀ for฀ the฀ acquisition,฀ which฀ means฀ that฀ non-controlling฀
treatment.฀
interest฀(NCI)฀at฀acquisition฀was฀measured฀at฀the฀ proportionate฀
share฀of฀identifiable฀net฀assets฀of฀$140฀million฀(net฀assets฀of฀
$350฀ million฀ ฀ NCI฀ share฀ of฀ 40%).฀ However,฀ the฀ group฀ has฀
(2)฀Explain฀why฀the฀
elected฀to฀use฀the฀'full฀goodwill'฀method฀for฀all฀acquisitions฀ accounting฀
treatment฀is฀
(although฀IFRS฀3฀Business฀Combinations฀allows฀the฀entity฀to฀choose฀ incorrect.฀
on฀ a฀ transaction฀ by฀ transaction฀ basis)฀ (IFRS฀ 3:฀ para.฀ 19).฀ This฀
requires฀ non-controlling฀ interests฀ (NCI)฀ at฀ acquisition฀฀
(3)฀Explain฀what฀the฀ to฀ be฀ measured฀ at฀ fair฀ value฀ which฀ is฀฀
correct฀accounting฀
treatment฀should฀ $155฀ million฀ for฀ Pear฀ on฀ 1฀ June฀ 20X9.฀ Therefore฀ the฀ NCI฀ figure฀
be.฀
needs฀ adjusting฀ in฀ the฀ goodwill฀ working฀ and฀ the฀ NCI฀
working.฀฀ (4)฀Explain฀the฀
adjustment฀
required.฀
฀ 391฀

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฀฀
A฀ second฀ error฀ has฀ been฀ made฀ because฀ the฀ fair฀ value฀ of฀
incorrect฀ identifiable฀ net฀ assets฀ used฀ in฀ the฀ goodwill฀ calculation฀ excludes฀
accounting฀
treatment.฀ (2)฀Explain฀why฀
the฀ franchise฀ right.฀ IFRS฀ 3฀ requires฀ the฀ parent฀ to฀ recognise฀ the฀accounting฀
treatment฀is฀
goodwill฀ separately฀ from฀ the฀ identifiable฀ intangible฀ assets฀ incorrect.฀
acquired฀ in฀ a฀ business฀ combination฀ even฀ if฀ they฀ have฀ not฀ been฀
recognised฀ in฀ the฀ subsidiary's฀ individual฀ financial฀ statements฀฀
(IFRS฀ 3:฀ para.฀ 13,฀ B31).฀ An฀ intangible฀ asset฀ is฀ identifiable฀ if฀ it฀
meets฀either฀the฀separability฀criterion฀(capable฀of฀being฀separated฀
or฀ divided฀ from฀ the฀ subsidiary฀ and฀ sold,฀ transferred,฀ licensed,฀
(3)฀Explain฀what฀
rented฀or฀exchanged)฀or฀the฀contractual-legal฀criterion฀(arises฀from฀
the฀correct฀
accounting฀
contractual฀or฀legal฀rights)฀(IFRS฀3:฀para.฀B31,฀B33).฀The฀franchise฀
treatment฀
should฀be฀
right฀arises฀for฀contractual฀arrangements;฀therefore฀they฀should฀be฀
(initial฀
measurement).
recognised฀as฀a฀separate฀intangible฀asset฀in฀the฀consolidated฀
(4)฀Explain฀the฀ statement฀ of฀ financial฀ position฀ of฀ the฀ Grape฀ Group.฀ This฀
adjustment฀
required฀ increases฀ the฀ fair฀ value฀ of฀ identifiable฀ net฀ assets฀ at฀
(initial฀
measurement).฀ acquisition฀and฀decreases฀goodwill฀as฀shown฀by฀the฀corrected฀
goodwill฀ calculation฀ below.฀ Note฀ that฀ the฀ fair฀ value฀ adjustment฀
required฀for฀the฀land฀has฀already฀been฀included฀in฀the฀fair฀value฀of฀
identifiable฀net฀assets฀of฀$350฀million฀given฀in฀the฀question.฀
Goodwill฀in฀Pear฀
฀ $m ฀$m฀
Consideration฀transferred฀ ฀240฀ Calculation:฀
Non-controlling฀interests฀(at฀fair฀value)฀ ฀ Use฀
฀155฀ ฀ standard฀
฀ ฀ ฀ proforma฀
Less:฀fair฀value฀of฀identifiable฀net฀assets฀ ฀ ฀
฀ Complete฀
at฀acquisition฀ ฀ before฀
฀฀ per฀question฀ 350 ฀ ฀ explanation฀
฀ but฀show฀after฀
฀฀ fair฀value฀adjustment฀฀ ฀10฀ ฀
฀ (360)฀
Goodwill฀(under฀'full฀goodwill' method) ฀฀฀฀35฀
฀
The฀correcting฀entry฀for฀goodwill฀is:฀
฀ ฀ $m฀ $m฀
DEBIT฀ Goodwill฀ ฀ ฀ 5฀฀
Show฀correcting฀
entry฀for฀ DEBIT฀฀ Intangible฀assets฀ ฀ 10฀฀
adjustment฀
CREDIT฀ Non-controlling฀interests฀ ฀ ฀ 15฀฀
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Once฀ the฀ franchise฀ right฀ has฀ been฀ recognised฀ as฀ a฀ separate฀

(3)฀Explain฀what฀
intangible฀ asset,฀ it฀ must฀ be฀ amortised฀ over฀ its฀ useful฀ life฀ the฀correct฀
accounting฀
which฀ is฀ its฀ remaining฀ term฀ of฀ five฀ years,฀ given฀ that฀ it฀ is฀ not฀ treatment฀
should฀be฀
renewable฀ at฀ the฀ end฀ of฀ its฀ term.฀ Since฀ the฀ acquisition฀ occurred฀฀ (subsequent฀
measurement)
six฀ months฀ into฀ the฀ year,฀ only฀ six฀ months'฀ amortisation฀ should฀ be฀
charged฀in฀the฀year฀ended฀30฀November฀20X9,฀which฀amounts฀to฀
$1฀ million฀ ($10฀ million฀ ×฀ 1/5฀ ×฀ 6/12).฀ The฀ amortisation฀ should฀
adjustment฀ be฀ included฀ in฀ expenses฀ in฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀
required฀
(subsequent฀ loss฀and฀the฀group฀share฀(60%)฀deducted฀from฀retained฀earnings฀in฀
measurement)฀
the฀consolidated฀statement฀of฀financial฀position฀with฀the฀NCI฀share฀
(40%)฀ being฀ deducted฀ in฀ the฀ NCI฀ working.฀ The฀ remaining฀
intangible฀ asset฀ of฀ $9฀ million฀ ($10฀ million฀ less฀ $1฀ million฀
amortisation)฀ should฀ be฀ included฀ in฀ the฀ consolidated฀ statement฀ of฀
financial฀position฀as฀at฀30฀November฀20X9.฀
Non-controlling฀interest฀in฀Pear฀
฀ ฀$m฀ Calculation:฀
NCI฀at฀acquisition฀(at฀fair฀value) 155.0฀
฀฀ Use฀standard฀
NCI฀share฀of฀post-acquisition: ฀฀ ฀ proforma฀
฀฀Retained฀earnings ฀
฀฀ Complete฀
฀฀(170฀–฀115฀–฀1฀amortisation)฀฀40% 21.6฀ ฀ before฀
฀฀Other฀components฀of฀equity ฀ ฀ explanation฀
฀ but฀show฀
฀฀฀(15฀–฀10)฀฀40% ฀฀฀฀฀2.0฀ ฀ after฀
NCI฀at฀30.11.X9฀ ฀฀178.6฀
As฀ the฀ NCI฀ at฀ acquisition฀ figure฀ has฀ already฀ been฀ corrected฀ from฀
share฀of฀net฀assets฀to฀fair฀value฀in฀the฀correcting฀entry฀for฀goodwill฀
–฀ the฀ only฀ remaining฀ correction฀ required฀ is฀ to฀ record฀ the฀
amortisation฀of฀the฀franchise฀right:฀
฀ $m฀ $m฀
DEBIT฀฀ Non-controlling฀interests฀ ฀ 0.4฀
entry฀for฀ DEBIT฀฀฀ Consolidated฀retained฀earnings฀ 0.6฀
adjustment฀
CREDIT฀ Intangible฀assets฀ 1฀
The฀ end฀ result฀ is฀ a฀ corrected฀ NCI฀ figure฀ of฀ $178.6฀ million฀
(calculated฀as:฀original฀NCI฀$164m฀+฀adjustment฀to฀bring฀NCI฀at฀
acquisition฀ up฀ to฀ fair฀ value฀ $15m฀ –฀ NCI฀ share฀ of฀ amortisation฀ of฀
franchise฀right฀$0.4m).฀
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lOMoARcPSD|6256454
฀฀
Tutorial฀note฀
You฀might฀have฀found฀it฀helpful฀to฀prepare฀a฀fair฀value฀adjustments฀table฀to฀
assist฀your฀understanding฀but฀this฀was฀not฀required.฀
Fair฀value฀adjustments฀
฀ At฀acq'n฀ Movement฀ Year-end฀
(1.6.X9)฀ (30.11.X9)฀
฀ ฀$m฀ ฀$m฀ ฀$m฀
Land฀[350฀– (220฀+฀115฀+฀10)] ฀ 5฀ ฀–฀ ฀5฀
Franchise฀at฀1.6.X8฀ ฀10฀ ฀(1)฀ ฀ ฀9฀
฀ ฀15฀ ฀(3)฀ ฀14฀
฀
(b)฀ Goodwill฀in฀Fraise฀
(2)฀Explain฀why฀the฀
The฀ junior฀ accountant฀ has฀ translated฀ the฀ goodwill฀ of฀ Fraise฀ at฀ the฀ accounting฀
(1)฀Explain฀the฀ treatment฀is฀
incorrect฀ acquisition฀ date฀ rate฀ (crowns฀ 6:฀ $1).฀ However,฀ IAS฀ 21฀ The฀ incorrect฀
accounting฀
treatment฀ Effects฀of฀Changes฀in฀Foreign฀Exchange฀Rates฀requires฀goodwill฀in฀
Fraise฀ to฀ be฀ translated฀ at฀ the฀ closing฀ rate฀ each฀ year฀ end฀ as฀ (3)฀Explain฀what฀the฀
correct฀accounting฀
required฀by฀(IAS฀21:฀para.฀47).฀฀Therefore,฀goodwill฀will฀need฀to฀ treatment฀should฀
be฀฀
be฀retranslated฀and฀since฀the฀'full฀goodwill'฀method฀has฀been฀used,฀
adjustment฀ the฀group฀share฀of฀the฀exchange฀gain฀should฀be฀recognised฀
required฀
(subsequent฀ in฀ the฀ translation฀ reserve฀ and฀ the฀ NCI฀ share฀ in฀ NCI฀ in฀ the฀
measurement)฀
consolidated฀statement฀of฀financial฀position.฀
Goodwill฀in฀Fraise฀
Calculation:฀ ฀ Crown฀(m) Rate฀ $m฀
฀ Use฀ Consideration฀transferred฀ 370฀ ฀ ฀
฀ standard฀
฀ proforma฀ Non-controlling฀interests฀(at฀fair฀value)฀ 150฀ ฀ ฀
฀฀ Complete฀ Less฀fair฀value฀of฀identifiable฀net฀assets฀฀ ฀(430)฀ ฀ ฀
฀ before฀
Goodwill฀at฀1฀December฀20X8฀ 90฀ 6฀ 15฀
฀ explanation฀
฀ but฀show฀ Exchange฀gain฀(balancing฀figure)฀ ฀฀฀฀฀– ฀ ฀฀฀3฀
฀ after฀
Goodwill฀at฀30฀November฀20X9฀ ฀฀฀90฀ 5฀ ฀18฀
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The฀correcting฀entry฀in฀the฀group฀statement฀of฀financial฀position฀is:฀
฀ $m฀ $m฀
DEBIT฀฀ Goodwill฀ 3฀
entry฀for฀ CREDIT฀Translation฀reserve฀(70%฀×฀$3m)฀ 2.1฀
adjustment฀
CREDIT฀Non-controlling฀interests฀(30%฀×฀$3m)฀ 0.9฀
฀ It฀would฀be฀very฀easy฀in฀a฀question฀like฀this฀to฀spend฀most฀or฀all฀of฀
your฀time฀on฀the฀calculations฀and฀to฀write฀little฀or฀nothing฀in฀terms฀
of฀explanations.฀However,฀as฀you฀can฀see฀from฀the฀marking฀
guide,฀60%฀of฀the฀marks฀are฀for฀narrative฀explanation฀and฀40%฀
for฀the฀calculations฀so฀you฀really฀needed฀to฀tackle฀the฀narrative฀
explanation฀in฀order฀to฀pass.฀
฀ Both฀parts฀of฀the฀questions฀((a)฀and฀(b))฀have฀been฀answered฀and฀
the฀relative฀length฀of฀the฀answers฀is฀in฀proportion฀to฀the฀mark฀
allocations.฀
฀ All฀three฀of฀the฀verbs฀in฀the฀requirements฀have฀been฀addressed฀–฀
'explain',฀'calculate'฀and฀'show'.฀
฀ There฀is฀a฀narrative฀for฀each฀number฀in฀the฀calculations฀to฀ensure฀
that฀they฀are฀clear฀to฀follow.฀
฀ 395฀

lOMoARcPSD|6256454
฀฀
completed฀ below฀ for฀ the฀ Grape฀ activity฀ to฀ give฀ you฀ an฀ idea฀ of฀ the฀ type฀ of฀ points฀ that฀ you฀
should฀ be฀ considering฀ when฀ assessing฀ your฀ answer.฀ Complete฀ the฀ section฀ entitled฀ 'most฀
important฀action฀points฀to฀apply฀to฀your฀next฀question'.฀
Exam฀success฀sills฀ Your฀reflections/observations฀
Good฀time฀ Did฀you฀split฀your฀time฀according฀to฀the฀mark฀allocations฀so฀
management฀ that฀approximately฀three-quarters฀of฀your฀time฀was฀spent฀
answering฀part฀(a)฀and฀one-quarter฀on฀part฀(b)?฀
When฀writing฀up฀your฀answer,฀did฀you฀leave฀60%฀of฀your฀
time฀for฀written฀explanations?฀
Managing฀information฀฀฀ Did฀you฀spot฀all฀of฀the฀errors฀by฀the฀junior฀accountant฀in฀the฀
scenario?฀฀
Did฀you฀know฀how฀to฀correct฀these฀errors?฀
Answer฀planning฀ Did฀you฀draw฀up฀a฀group฀structure?฀฀
Did฀you฀then฀complete฀your฀planning฀by฀annotating฀the฀
margin฀of฀the฀question฀paper?฀It฀is฀useful฀to฀circle฀a฀number฀
in฀the฀question฀and฀make฀a฀note฀of฀which฀consolidation฀
working฀it฀should฀be฀included฀in฀or฀which฀consolidation฀
adjustment฀is฀required.฀
Correct฀interpretation฀ Did฀you฀spot฀the฀two฀sub-requirements฀in฀each฀of฀part฀(a)฀
of฀requirements฀ and฀part฀(b)?฀
Did฀you฀understand฀what฀was฀meant฀by฀the฀two฀key฀verbs฀
'explain'฀and฀'show'?฀
Effective฀numerical฀ Did฀you฀know฀and฀use฀the฀standard฀consolidation฀workings฀
analysis฀ for฀goodwill฀and฀non-controlling฀interests?฀฀
Were฀you฀able฀to฀extract฀the฀numbers฀required฀from฀the฀
scenario?฀฀
Did฀you฀manage฀to฀identify฀the฀adjustments฀required฀to฀
correct฀the฀errors?฀
Effective฀writing฀and฀ Did฀you฀use฀underlined฀headings฀in฀your฀answer?฀฀
presentation฀ Did฀your฀answer฀contain฀both฀written฀explanations฀and฀
calculations?฀
Were฀all฀of฀the฀numbers฀in฀your฀calculations฀clearly฀
labelled?฀฀
Did฀you฀answer฀both฀part฀(a)฀and฀part฀(b)?฀฀
Did฀you฀clearly฀explain฀the฀adjustments฀required฀to฀correct฀
the฀errors?฀฀
Did฀you฀use฀full฀sentences?฀
Did฀you฀explain฀why฀the฀junior฀accountant's฀treatment฀was฀
incorrect฀and฀did฀you฀justify฀the฀correct฀accounting฀
treatment?฀
฀
฀
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lOMoARcPSD|6256454
Summary฀
Groups฀ are฀ very฀ important฀ in฀ your฀ SBR฀ exam฀as฀ they฀ are฀ guaranteed฀ to฀ be฀ tested฀ in฀
Question฀1.฀Therefore,฀applying฀good฀consolidation฀techniques฀will฀have฀an฀important฀
part฀to฀play฀in฀you฀passing฀the฀exam.฀
The฀activity฀in฀this฀Skills฀Checkpoint฀demonstrated฀the฀approach฀to฀correcting฀errors฀in฀
consolidated฀financial฀statements.฀With฀this฀type฀of฀question,฀the฀key฀to฀success฀is฀not฀
spending฀ all฀ your฀ time฀ on฀ the฀ calculations.฀ Sufficient฀ time฀ must฀ be฀ allocated฀ to฀ the฀
narrative฀ explanation฀ or฀ you฀ will฀ not฀ pass฀ the฀ question.฀ Make฀ sure฀ that฀ when฀ your฀
practise฀ further฀ questions฀ on฀ groups฀ that฀ you฀ attempt฀ all฀ written฀ requirements฀ rather฀
than฀just฀focusing฀on฀the฀calculations.฀฀
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฀฀
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฀
฀
Interpreting฀financial
฀
฀
฀
statements฀for฀different
฀
฀
stakeholders
฀
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀relevant฀indicators฀of฀financial฀and฀non-financial฀performance฀ E1(a)฀
including฀earnings฀per฀share฀and฀additional฀performance฀measures.฀
Discuss฀the฀increased฀demand฀for฀transparency฀in฀corporate฀reports฀and฀the฀ E1(b)฀
emergence฀of฀non-financial฀reporting฀standards.฀
Appraise฀the฀impact฀of฀environmental,฀social฀and฀ethical฀factors฀on฀performance฀ E1(c)฀
measurement.฀
Discuss฀the฀current฀framework฀for฀integrated฀reporting฀(IR)฀including฀the฀ E1(d)฀
objectives,฀concepts,฀guiding฀principles฀and฀content฀of฀an฀integrated฀report.฀
Determine฀the฀nature฀and฀extent฀of฀reportable฀segments.฀ E1(e)฀
Discuss฀the฀nature฀of฀segment฀information฀to฀be฀disclosed฀and฀how฀segmental฀ E1(f)฀
information฀enhances฀the฀quality฀and฀sustainability฀of฀performance.฀
Discuss฀the฀impact฀of฀current฀issues฀in฀corporate฀reporting.฀The฀following฀ F1(c)฀
examples฀are฀relevant฀to฀the฀current฀syllabus:฀
1. The฀revision฀of฀the฀Conceptual฀Framework฀
2. The฀IASB's฀Principles฀of฀Disclosure฀Initiative฀
3. Materiality฀in฀the฀context฀of฀financial฀reporting฀
4. Primary฀financial฀statements฀
5. Management฀commentary฀
6. Developments฀in฀sustainability฀reporting฀
Note.฀Only฀items฀(5)฀and฀(6)฀are฀covered฀in฀this฀chapter.฀The฀remaining฀items฀
are฀covered฀in฀Chapter฀19.฀
Discuss฀developments฀in฀devising฀a฀structure฀for฀corporate฀reporting฀that฀ F1(d)฀
addresses฀the฀needs฀of฀stakeholders.฀
฀
฀ ฀
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฀฀
Exam฀context฀
The฀Strategic฀Business฀Reporting฀(SBR)฀syllabus฀requires฀students฀to฀examine฀financial฀statements฀from฀
a฀ number฀ of฀ different฀ stakeholder฀ perspectives.฀ Section฀ B฀ of฀ the฀ exam฀ will฀ always฀ include฀ a฀ full฀
question฀or฀a฀part฀of฀a฀question฀that฀requires฀the฀analysis฀and฀interpretation฀of฀financial฀and/or฀non-
financial฀information฀from฀the฀preparer's฀or฀another฀stakeholder's฀perspective.฀This฀takes฀you฀beyond฀
simply฀ preparing฀ financial฀ statements฀ to฀ understanding฀ how฀ the฀ financial฀ statements฀ provide฀
information฀to฀end฀users.฀
฀
฀ ฀
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17:฀Interpreting฀financial฀statements฀for฀different฀stakeholders฀
฀
฀
฀ Non-฀฀
Financial฀฀ Alternative฀฀ Reportable฀
Financial฀฀ Disclosures฀฀
฀ segments฀
฀
฀
฀
1.฀ Stakeholders฀ 2.฀ Performance฀measures฀ 5.฀Segment฀reporting
Interpreting฀financial฀statements฀for฀
different฀stakeholders฀
3.฀฀ Non-financial฀ 4.฀฀ Integrated฀

reporting฀ reporting฀
Demand฀for฀ Current฀ Environmental฀ Management฀

transparency฀ reporting฀ and฀social฀ commentary฀
฀ 401฀

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฀฀
1฀Stakeholders฀฀
Stakeholder:฀anyone฀with฀an฀interest฀in฀a฀business;฀they฀can฀either฀affect฀or฀be฀affected฀by฀the฀
business.฀
Key฀term฀
Interpretation฀ and฀ analysis฀ of฀ financial฀ statements฀ and฀ other฀ elements฀ of฀ corporate฀ reports฀ is฀ often฀
performed฀ by฀ stakeholders฀ for฀ decision฀ making.฀ Not฀ all฀ stakeholders฀ are฀ interested฀ in฀ the฀ financial฀
performance฀of฀a฀business,฀and฀the฀SBR฀exam฀is฀likely฀to฀test฀you฀on฀a฀range฀of฀different฀stakeholder฀
groups,฀often฀with฀competing฀interests.฀
The฀ most฀ common฀ stakeholders,฀ and฀ one฀ reason฀ for฀ their฀ interest฀ in฀ an฀ entity,฀ are฀ provided฀ in฀฀
Activity฀1฀below.฀The฀table฀is฀not฀exhaustive฀and฀you฀should฀use฀the฀space฀provided฀to฀include฀other฀
reasons฀and฀stakeholders.฀
Activity฀1:฀Stakeholders฀ ฀
Required฀
Complete฀the฀table฀below฀by฀including฀an฀additional฀reason฀why฀each฀of฀the฀given฀stakeholders฀may฀
be฀interested฀in฀the฀financial฀statements฀prepared฀by฀an฀entity,฀and฀identify฀two฀further฀stakeholders฀
with฀reasons.฀
Group฀ Reason฀ Further฀reason฀

Try฀to฀
Management฀ Management฀are฀often฀set฀ ฀ think฀of฀
some฀non-
performance฀targets฀and฀use฀the฀ financial฀
financial฀statements฀to฀compare฀ reasons฀
company฀performance฀to฀the฀targets฀
set,฀often฀with฀a฀view฀to฀achieving฀
bonuses.฀
Employees฀ Employees฀are฀concerned฀with฀job฀ ฀
stability฀and฀may฀use฀corporate฀
reports฀to฀better฀understand฀the฀future฀
prospects฀of฀their฀employer.฀
Present฀and฀ Existing฀investors฀will฀assess฀whether฀ ฀
potential฀ their฀investment฀is฀sound฀and฀
investors฀ generates฀acceptable฀returns.฀
Potential฀investors฀will฀use฀the฀
financial฀statements฀to฀help฀them฀
decide฀whether฀or฀not฀to฀buy฀shares฀
in฀that฀company.฀
Lenders฀and฀ Lenders฀and฀suppliers฀are฀concerned฀ ฀
suppliers฀ with฀the฀credit฀worthiness฀of฀an฀entity฀
and฀the฀likelihood฀that฀they฀will฀be฀
repaid฀amounts฀owing.฀
Customers฀ Customers฀may฀want฀to฀know฀that฀ ฀
products฀and฀services฀provided฀by฀an฀
entity฀are฀consistent฀with฀their฀ethical฀
and฀moral฀expectations.฀
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฀ ฀ ฀
฀
฀
฀ ฀ ฀
฀
฀
2฀Performance฀measures฀
'Performance'฀ can฀ mean฀ different฀ things฀ to฀ different฀ stakeholders.฀ Traditional฀ financial฀ performance฀
measures฀ preferred฀ by฀ shareholders฀ remain฀ important,฀ but฀ there฀ is฀ an฀ increasing฀ focus฀ on฀ non-
financial฀and฀alternative฀performance฀measures฀such฀as฀employee฀well-being฀and฀the฀environmental฀
impact฀that฀an฀entity฀has.฀฀
Preparers฀ of฀ financial฀ statements฀ need฀ to฀ carefully฀ balance฀ the฀ demand฀ for฀ a฀ wide฀ range฀ of฀
information฀against฀the฀cost฀of฀preparing฀it฀and฀the฀risk฀of฀publishing฀information฀that฀is฀potentially฀
commercially฀sensitive.฀฀
It฀ is฀ important฀ to฀ put฀ yourself฀ in฀ the฀ shoes฀ of฀ the฀ stakeholder฀ in฀ a฀ question฀ in฀ order฀ to฀ perform฀ the฀
appropriate฀type฀of฀analysis.฀
2.1฀Financial฀performance฀measures฀
Financial฀indicators฀of฀performance฀are฀useful฀for฀comparing฀the฀results฀of฀an฀entity฀to:฀
฀ Prior฀year(s)฀
฀ Other฀companies฀operating฀in฀the฀same฀industry฀
฀ Industry฀averages฀
฀ Benchmarks฀
฀ Budgets฀or฀forecasts฀฀
Financial฀performance฀analysis฀can฀take฀many฀forms.฀These฀are฀explained฀in฀the฀following฀sections.฀
2.1.1฀Ratio฀analysis฀
The฀broad฀categories฀of฀ratios฀
You฀should฀be฀familiar฀with฀how฀to฀calculate฀the฀common฀ratios.฀Chapter฀17฀Section฀1฀of฀the฀
Supplementary฀Reading฀provides฀revision฀of฀the฀calculations฀and฀the฀basic฀definitions฀of฀ratios฀฀
and฀Section฀2฀explains฀common฀problems฀with฀ratio฀analysis.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀
digital฀edition฀of฀the฀Workbook.฀
Ratio฀ analysis฀ involves฀ comparing฀ one฀ figure฀ against฀ another฀ to฀ produce฀ a฀ ratio,฀ and฀
assessing฀whether฀that฀ratio฀indicates฀a฀weakness฀or฀strength฀in฀the฀company's฀affairs.฀
You฀are฀unlikely฀to฀be฀asked฀to฀calculate฀many฀ratios฀in฀the฀SBR฀exam,฀or฀not฀directly฀at฀any฀rate.฀If,฀
say,฀you฀were฀asked฀to฀comment฀on฀a฀company's฀past฀or฀potential฀future฀performance,฀you฀would฀be฀
expected฀to฀select฀your฀own฀ratios฀in฀order฀to฀do฀so.฀The฀skill฀here฀is฀picking฀appropriate฀ratios฀in฀
the฀ context฀ of฀ the฀ question.฀ For฀ example,฀ non-current฀ asset฀ turnover฀ will฀ be฀ more฀ relevant฀ to฀ a฀
company฀in฀the฀manufacturing฀sector฀than฀the฀services฀sector.฀
A฀ question฀ could฀ also฀ ask฀ for฀ the฀ impact฀ on฀ a฀ specified฀ ratio฀ of฀ certain฀ accounting฀
treatments฀or฀you฀may฀be฀required฀to฀correct฀errors฀then฀recalculate฀the฀specified฀ratio.฀
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฀฀
Ratios฀are฀commonly฀categorised฀into฀the฀following฀types.฀
Financial฀performance฀
Profitability฀ Efficiency฀ Investor฀

Gross฀profit฀margin฀ Asset฀turnover฀ Earnings฀per฀share฀(EPS)*฀
Net฀profit฀margin฀ Non-current฀asset฀turnover฀ Price/Earnings฀(P/E฀ratio)฀
Return฀on฀capital฀employed฀ Profit฀retention฀ratio฀
Return฀on฀equity฀ Dividend฀payout฀rate฀
Dividend฀yield฀
Dividend฀cover฀
฀
Financial฀position฀
Liquidity฀ Working฀capital฀ Financial฀leverage฀

management฀
Current฀ratio฀ Gearing฀
Acid-test฀ratio฀ Current฀ratio฀ Interest฀cover฀
฀ Acid-test฀ratio฀
Inventory฀holding฀period฀
Receivables฀collection฀period฀
Payables฀payment฀period฀
฀
*EPS฀will฀be฀covered฀further฀in฀Section฀2.1.2฀
In฀the฀context฀of฀interpreting฀the฀financial฀statements,฀it฀is฀important฀that฀you฀consider฀the฀following฀
points฀relating฀to฀ratio฀analysis:฀
(a)฀ Calculations฀are฀not฀analysis.฀฀
(b)฀ Explaining฀ what฀ the฀ ratio฀ tells฀ you฀ is฀ a฀ starting฀ point฀ to฀ analysis฀ but฀ is฀ unlikely฀ to฀ score฀
much฀credit.฀
(c)฀ Analysis฀often฀involves฀comparison฀(eg฀to฀prior฀periods฀or฀industry฀averages)฀–฀you฀have฀to฀
interpret฀ what฀ the฀ movement/difference฀ is฀ telling฀ you.฀ You฀ should฀ use฀ information฀ you฀ are฀
given฀in฀the฀scenario฀or฀have฀formed฀in฀other฀parts฀of฀the฀question฀to฀suggest฀reasons฀for฀the฀
outcome฀of฀the฀ratio.฀Also฀consider฀if฀there฀are฀any฀non-financial฀consequences.฀฀
Eg:฀Profitability฀has฀deteriorated฀because฀the฀entity฀has฀used฀a฀new฀higher฀priced฀supplier฀in฀
the฀period.฀Consider฀whether฀there฀are฀any฀non-financial฀consequences฀–฀does฀the฀new฀
supplier฀have฀a฀higher฀ethical฀standard฀or฀does฀it฀offer฀a฀higher฀quality฀product฀that฀is฀more฀
reliable฀for฀customers?฀
(d)฀ You฀should฀consider฀the฀implication฀of฀ratios฀on฀the฀entity฀and฀other฀stakeholders.฀
Eg:฀What฀is฀the฀impact฀of฀the฀payables฀period฀increasing?฀฀฀
From฀the฀entity's฀perspective,฀this฀has฀a฀positive฀impact฀on฀working฀capital฀management฀
but฀is฀it฀planned฀or฀necessary฀due฀to฀a฀shortage฀of฀cash฀flow?฀What฀are฀the฀non-financial฀
implications฀of฀this?฀Does฀it฀impact฀the฀entity's฀ability฀to฀obtain฀future฀credit฀from฀a฀supplier?฀
Will฀the฀entity's฀reputation฀be฀adversely฀affected?฀฀
From฀the฀supplier's฀perspective,฀there฀might฀be฀concern฀as฀to฀whether฀they฀will฀receive฀
amounts฀owed,฀or฀if฀there฀will฀be฀repeat฀orders฀and฀the฀resulting฀implications฀for฀the฀amount฀of฀
inventory฀held.฀
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(e)฀ Consider฀ whether฀ the฀ entity฀ has฀ undertaken฀ any฀ transactions/events฀ in฀ the฀ year฀ that฀
have฀a฀significant฀impact฀on฀ratios.฀
Eg:฀An฀issue฀of฀debt฀in฀the฀year฀will฀impact฀gearing฀and฀interest฀cover฀ratios.฀Why฀did฀the฀
entity฀issue฀the฀debt฀–฀is฀it฀restructuring?฀฀฀Is฀it฀investing฀in฀assets?฀Don't฀just฀assume฀that฀an฀
increase฀in฀gearing฀is฀necessarily฀a฀'bad'฀thing฀if฀there฀will฀be฀other฀benefits฀for฀the฀entity.฀
(f)฀ Consider฀the฀impact฀of฀different฀accounting฀policies฀on฀ratios,฀particularly฀if฀comparing฀
to฀other฀entities.฀฀
Eg:฀An฀entity฀that฀revalues฀its฀land฀and฀buildings฀regularly฀might฀have฀a฀lower฀return฀on฀assets฀
than฀a฀very฀similar฀entity฀that฀holds฀its฀land฀and฀buildings฀at฀historical฀cost.฀
The฀following฀three฀step฀approach฀is฀recommended฀in฀ratio฀analysis:฀
Step฀1฀ If฀comparing฀two฀years,฀state฀whether฀the฀ratio฀has฀improved฀or฀deteriorated฀(don't฀just฀
say฀'increased'฀or฀'decreased'฀–฀you฀need฀to฀demonstrate฀your฀understanding฀is฀not฀just฀
numerical).฀ If฀ comparing฀ two฀ companies,฀ state฀ which฀ company's฀ ratio฀ is฀ better฀ (rather฀
than฀'higher').฀This฀adds฀value.฀
Step฀2฀ State฀ why฀ the฀ ratio฀ has฀ increased/decreased฀ or฀ is฀ better/worse฀ –฀ avoid฀ generic฀
reasons;฀ use฀ reasons฀ in฀ the฀ scenario฀ (link฀ numbers฀ together฀ and฀ use฀ narrative฀
information).฀
Step฀3฀ Conclude฀ –฀ explain฀ the฀ longer฀ term฀ impact฀ on฀ the฀ company฀ and฀ make฀ a฀
recommendation฀for฀action฀where฀appropriate.฀
Activity฀2:฀Liquidity฀analysis฀ ฀
The฀ following฀ is฀ an฀ extract฀ from฀ the฀ financial฀ statements฀ of฀ Wheels฀ for฀ the฀ year฀ ended฀ 31฀ August฀
20X7.฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀ ฀ ฀
฀ 20X7฀ 20X6฀
$'000฀ $'000฀
Revenue฀ 32,785฀ 31,390฀
Gross฀profit฀ 16,880฀ 14,310฀
Profit฀for฀the฀year฀ 3,300฀ 2,700฀
STATEMENT฀OF฀FINANCIAL฀POSITION
Current฀assets฀
Inventory฀ 430฀ 445฀
Receivables฀ 3,860฀ 2,510฀
Cash฀ 12฀ 37฀
Current฀liabilities฀
Payables฀ (4,660)฀ (2,890)฀
Bank฀overdraft฀ (280)฀ (40)฀
Wheels฀secured฀a฀large฀new฀contract฀to฀supply฀goods฀to฀a฀large฀department฀store฀across฀a฀two฀year฀
period฀ from฀ 1฀ April฀ 20X7.฀ Wheels฀ normally฀ offers฀ wholesale฀ customers฀ 30฀ days'฀ credit,฀ but฀ the฀
department฀store฀would฀only฀agree฀to฀the฀contract฀with฀90฀days฀credit฀terms.฀The฀directors฀of฀Wheels฀
agreed฀ to฀ this฀ as฀ they฀ believed฀ it฀ was฀ worth฀ it฀ to฀ have฀ their฀ products฀ placed฀ with฀ this฀ department฀
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฀฀
store.฀฀Wheels฀has฀an฀average฀45฀day฀credit฀from฀its฀suppliers.฀The฀bank฀overdraft฀is฀used฀to฀fund฀
working฀capital฀and฀currently฀has฀a฀limit฀of฀$300,000.฀฀฀
Required฀
(a)฀ Analyse฀the฀liquidity฀of฀Wheels฀from฀the฀entity's฀perspective.฀
(b)฀ Discuss฀the฀other฀stakeholders฀who฀may฀be฀interested฀in฀the฀liquidity฀of฀Wheels.฀
Activity฀3:฀Ratio฀analysis฀฀ ฀
LOP฀ operates฀ in฀ the฀ construction฀ industry฀ and฀ prepares฀ its฀ financial฀ statements฀ in฀ accordance฀ with฀
IFRS.฀It฀is฀listed฀on฀its฀local฀exchange.฀LOP฀is฀looking฀to฀expand฀its฀overseas฀operations฀by฀acquiring฀
a฀ new฀ subsidiary.฀ Two฀ geographical฀ areas฀ have฀ been฀ targeted,฀ Frontland฀ and฀ Sideland.฀ Entity฀ A฀
operates฀ in฀ Frontland฀ and฀ entity฀ B฀ operates฀ in฀ Sideland.฀ Both฀ entities฀ are฀ listed฀ on฀ their฀ local฀
exchanges.฀
The฀financial฀highlights฀for฀entities฀A,฀B฀and฀LOP฀are฀provided฀below฀for฀the฀last฀trading฀period.฀
฀ A B LOP
Revenue฀ $160m $300m $500m
Gross฀profit฀margin฀ 26% 17% 28%
Net฀profit฀ 9% 11% 16%
Gearing฀ 65% 30% 38%
Average฀rate฀of฀interest฀available฀in฀the฀ 5% 9% 8%
฀ respective฀markets฀
P/E฀ratio฀ 11.6 15.9 16.3
Required฀
Analyse฀the฀information฀provided฀by฀the฀key฀financial฀indicators฀above฀and฀explain฀the฀impact฀that฀
each฀entity฀would฀have฀on฀the฀financial฀indicators฀of฀LOP.฀
The฀ problems฀ with฀ financial฀ performance฀ measures฀ are฀ explained฀ in฀ Chapter฀ 17฀ Section฀ 4฀ of฀ the฀
Supplementary฀Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
2.1.2฀IAS฀33฀Earnings฀Per฀Share฀(EPS)฀
You฀should฀be฀familiar฀with฀the฀definitions฀used฀in฀IAS฀33฀and฀with฀how฀to฀calculate฀basic฀EPS฀and฀
diluted฀EPS฀from฀your฀previous฀studies.฀Chapter฀17฀Section฀3฀of฀the฀Supplementary฀Reading฀provides฀
further฀detail฀on฀the฀definitions,฀calculations,฀presentation฀and฀significance฀of฀EPS.฀This฀is฀available฀in฀
2.1.3฀฀Calculation฀and฀use฀of฀EPS฀
Earnings฀ per฀ share฀ is฀ one฀ of฀ the฀ most฀ widely฀ used฀ investor฀ ratios.฀ EPS฀ is฀ presented฀ within฀ the฀
financial฀statements.฀฀฀
The฀objective฀of฀IAS฀33฀is฀to฀improve฀the฀comparison฀of฀the฀performance฀of฀different฀entities฀in฀the฀
same฀period฀and฀of฀the฀same฀entity฀in฀different฀accounting฀periods.฀It฀is฀a฀measure฀of฀the฀amount฀of฀
profits฀(after฀tax,฀non-controlling฀interests฀and฀preference฀dividends)฀earned฀by฀a฀company฀for฀each฀
ordinary฀share฀(IAS฀33:฀para.฀1).฀฀
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There฀are฀two฀EPS฀figures฀which฀must฀be฀disclosed฀–฀basic฀EPS฀and฀diluted฀EPS:฀
Basic฀EPS฀ ฀ Diluted฀EPS฀
Calculated฀by฀dividing฀the฀net฀profit฀ Calculated฀by฀adjusting฀the฀net฀
or฀loss฀for฀the฀period฀attributable฀to฀ profit฀or฀loss฀and฀weighted฀
ordinary฀equity฀holders฀of฀the฀parent฀ average฀number฀of฀ordinary฀
by฀the฀weighted฀average฀number฀ shares฀that฀are฀used฀in฀the฀basic฀
of฀ordinary฀shares฀outstanding฀ EPS฀calculation฀to฀reflect฀the฀
during฀the฀period฀(IAS฀33:฀para.฀10).฀ impact฀of฀potential฀ordinary฀
shares.฀
EPS฀is฀an฀important฀factor฀in฀assessing฀the฀stewardship฀ and฀ management฀ role฀performed฀by฀

company฀ directors฀ and฀ managers.฀ Remuneration฀ packages฀ might฀ be฀ linked฀ to฀ EPS฀ growth,฀ thereby฀
increasing฀ the฀ pressure฀ on฀ management฀ to฀ improve฀ EPS.฀ The฀ danger฀ of฀ this,฀ however,฀ is฀ that฀
management฀effort฀may฀go฀into฀distorting฀results฀to฀produce฀a฀favourable฀EPS.฀฀
Tutorial฀note฀
You฀ are฀ unlikely฀ to฀ have฀ to฀ deal฀ with฀ complicated฀ EPS฀ calculations฀ in฀ the฀ SBR฀ exam.฀ You฀ should฀
however฀be฀alert฀to฀situations฀in฀which฀EPS฀is฀subject฀to฀manipulation฀ by฀ the฀ directors฀ of฀an฀
entity,฀particularly฀in฀respect฀of฀the฀earnings฀figure.฀
You฀ should฀ also฀ be฀ able฀ to฀ explain฀ and฀ calculate฀ the฀ impact฀ on฀ EPS฀ of฀ certain฀
accounting฀treatments.฀A฀question฀could฀ask฀you฀to฀correct฀accounting฀treatments฀and฀calculate฀
a฀revised฀EPS฀figure.฀
฀
Illustration฀1฀฀฀
EPS฀Earnings฀manipulation฀
Vero฀manufactures฀furniture฀and฀is฀heavily฀capitalised.฀The฀depreciation฀expense฀is฀significant฀to฀the฀
financial฀statements,฀marking฀up฀around฀40%฀of฀the฀operating฀expenses฀of฀the฀company฀for฀the฀last฀
3฀years.฀For฀unrelated฀reasons,฀the฀EPS฀of฀the฀company฀has฀been฀declining฀across฀the฀same฀period.฀฀
The฀Finance฀Director฀of฀Vero฀is฀considering฀extending฀the฀remaining฀useful฀lives฀of฀its฀property,฀plant฀
and฀equipment฀by฀an฀average฀of฀5฀years,฀which฀will฀reduce฀the฀depreciation฀expense฀by฀around฀
$4m฀per฀annum,฀and฀in฀turn฀help฀to฀increase฀EPS.฀
Required฀
Comment฀on฀any฀ethical฀issues฀associated฀with฀the฀proposed฀change฀in฀useful฀life฀of฀Vero's฀assets.฀
Remember฀that฀
ethics฀will฀be฀
tested฀in฀
Question฀2฀of฀
the฀SBR฀exam฀
but฀could฀also฀
be฀tested฀in฀
other฀questions฀
฀ 407฀

lOMoARcPSD|6256454
฀฀
Solution฀
Step฀1฀ State฀the฀relevant฀rule฀or฀principle฀per฀the฀accounting฀standard(s)฀
IAS฀16฀Property,฀Plant฀and฀Equipment฀requires฀an฀entity฀to฀review฀the฀useful฀life฀of฀
its฀assets฀at฀least฀every฀financial฀year฀end,฀and,฀if฀expectations฀differ฀from฀previous฀
estimates,฀the฀change฀should฀be฀accounted฀for฀as฀a฀change฀in฀accounting฀estimate฀
(IAS฀16:฀para.฀51).฀฀
IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀only฀
permits฀revisions฀of฀accounting฀estimates฀if฀changes฀occur฀in฀the฀circumstances฀on฀
which฀the฀estimate฀was฀based฀or฀as฀a฀result฀of฀new฀information฀or฀more฀
experience฀(IAS฀8:฀para.฀34).฀฀
Step฀2฀ Apply฀the฀rule฀or฀principle฀to฀the฀scenario฀
Therefore,฀Vero฀would฀only฀be฀able฀to฀extend฀the฀useful฀life฀of฀its฀assets฀if฀the฀
proposed฀revised฀useful฀life฀is฀a฀better฀reflection฀of฀the฀period฀across฀which฀the฀
company฀expects฀to฀extract฀benefits฀from฀the฀assets.฀Evidence฀to฀justify฀this฀could฀
include฀large฀profits฀on฀disposals฀of฀assets฀as฀a฀result฀of฀too฀short฀a฀useful฀life.฀฀
An฀increase฀to฀the฀useful฀life฀would฀reduce฀expenses,฀increase฀earnings฀and฀
therefore฀result฀in฀a฀more฀favourable฀EPS฀figure.฀฀฀
Step฀3฀ Explain฀the฀ethical฀issues฀(threats฀to฀the฀ethical฀principles฀of฀the฀
ACCA฀Code฀of฀Ethics฀and฀Conduct)฀
However,฀it฀appears฀that฀the฀aim฀of฀the฀Director฀is฀to฀use฀the฀change฀in฀useful฀life฀
as฀a฀means฀to฀manipulate฀earnings.฀We฀are฀told฀that฀EPS฀has฀been฀declining฀and฀
this฀appears฀to฀be฀an฀attempt฀to฀cover฀up฀the฀reason฀for฀the฀decline.฀฀฀฀
Therefore,฀there฀is฀a฀threat฀to฀the฀fundamental฀principles฀of฀integrity฀and฀objectivity฀
if฀the฀Finance฀Director฀deliberately฀changes฀an฀accounting฀estimate฀to฀increase฀
earnings฀and฀EPS.฀Furthermore,฀an฀unjustified฀change฀would฀result฀in฀non-
compliance฀with฀IAS฀16฀and฀therefore,฀contravene฀the฀fundamental฀principle฀of฀
professional฀competence.฀
From฀an฀ethical฀perspective,฀the฀Director฀should฀not฀actively฀take฀steps฀to฀
manipulate฀earnings฀and฀attempt฀to฀mislead฀stakeholders.฀
฀
฀
฀
฀
฀
฀
฀฀฀
฀
฀
฀
408฀

lOMoARcPSD|6256454
Activity฀4:฀EPS฀manipulation฀ ฀
IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀requires฀prior฀period฀errors฀
to฀be฀adjusted฀by฀restating฀prior฀year฀comparatives฀as฀if฀the฀error฀had฀never฀taken฀place.฀The฀impact฀
of฀ the฀ error฀ is฀ adjusted฀ for฀ through฀ retained฀ earnings฀ meaning฀ the฀ correction฀ of฀ errors฀ does฀ not฀
impact฀reported฀profit฀or฀loss฀in฀the฀current฀period.฀฀
Required฀
Discuss,฀giving฀a฀relevant฀example,฀how฀the฀requirements฀of฀IAS฀8฀could฀be฀used฀as฀a฀method฀for฀
manipulating฀ earnings฀ and฀ explain฀ the฀ implications฀ this฀ may฀ have฀ for฀ using฀ EPS฀ as฀ a฀ performance฀
indicator.฀
Ethics฀note฀
This฀section฀has฀discussed฀manipulation฀of฀earnings,฀which฀is฀one฀of฀a฀number฀of฀potential฀ethical฀
issues฀you฀may฀be฀required฀to฀comment฀on฀in฀the฀SBR฀exam.฀Other฀examples฀could฀include฀a฀
company฀that฀makes฀significant฀sales฀to฀related฀parties฀and฀the฀directors฀not฀wanting฀to฀disclose฀
details฀of฀the฀transactions,฀directors฀trying฀to฀window฀dress฀revenue฀by฀offering฀large฀incentives฀to฀
make฀sales฀to฀un-creditworthy฀customers฀(although฀IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀
makes฀this฀difficult),฀or฀manipulating฀estimates฀to฀achieve฀required฀results.฀
2.2฀Alternative฀performance฀measures฀
Entities฀are฀increasingly฀reporting฀alternative฀performance฀measures฀(APMs)฀rather฀than฀'text฀book'฀
ratios.฀฀
The฀ European฀ Securities฀ and฀ Markets฀ Authority฀ (ESMA)฀ has฀ issued฀ Guidelines฀ on฀ Alternative฀
Performance฀Measures฀for฀listed฀issuers.฀The฀aim฀of฀the฀guidelines฀is฀to฀promote฀the฀usefulness฀and฀
transparency฀of฀APMs.฀฀In฀those฀guidelines,฀ESMA฀defines฀an฀APM฀as฀follows.฀฀
฀
Alternative฀performance฀measure฀(APM):฀an฀APM฀is฀understood฀as฀a฀financial฀measure฀of฀
historical฀or฀future฀financial฀performance,฀financial฀position,฀or฀cash฀flows,฀other฀than฀a฀financial฀
Key฀term฀
measure฀defined฀or฀specified฀in฀the฀applicable฀financial฀reporting฀framework.฀฀
(ESMA฀Guidelines฀on฀Alternative฀Performance฀Measures,฀2015:฀para.฀17)฀
฀
฀
฀ 409฀

lOMoARcPSD|6256454
฀฀
Examples฀of฀commonly฀reported฀APMs฀
EBITDA฀(earnings฀before฀interest,฀tax,฀depreciation฀and฀amortisation)฀
Description฀ Advantages฀ Disadvantages฀
EBITDA฀is฀considered฀an฀ EBITDA฀is฀often฀used฀ It฀is฀subject฀to฀manipulation฀

indicator฀of฀the฀earnings฀ internally฀by฀ by฀the฀directors฀as฀entities฀have฀
potential฀of฀a฀business.฀It฀can฀ management฀as฀it฀ discretion฀as฀to฀what฀is฀included฀
be฀used฀to฀analyse฀and฀ represents฀the฀earnings฀฀ in฀the฀calculation฀and฀can฀
compare฀profitability฀ of฀a฀business฀that฀management฀ change฀what฀is฀included฀from฀
between฀companies฀because฀it฀ has฀most฀control฀over.฀ one฀reporting฀period฀to฀the฀next.฀
eliminates฀the฀effects฀of฀ Reporting฀this฀measure฀gives฀ There฀is฀a฀common฀
financing฀and฀accounting฀ stakeholders฀an฀indication฀ misconception฀that฀EBITDA฀
decisions.฀ of฀management฀ represents฀cash฀earnings.฀฀฀
performance.฀EBITDA฀is฀a฀ Stakeholders฀using฀EBITDA฀as฀
good฀metric฀to฀evaluate฀ a฀performance฀measure฀should฀
profitability฀(but฀not฀cash฀flow).฀฀ be฀aware฀of฀its฀weaknesses฀
and฀should฀use฀it฀in฀conjunction฀
with฀other฀performance฀measures฀
to฀make฀sure฀EBITDA฀is฀consistent.฀
EVA®฀(Economic฀Value฀Added)฀
EVA®฀is฀a฀measure฀of฀a฀ Maximisation฀of฀EVA®฀will฀ EVA®฀can฀encourage฀managers฀

company's฀financial฀ create฀real฀wealth฀for฀the฀ to฀focus฀on฀short-term฀
performance฀based฀on฀its฀ shareholders.฀ performance.฀฀
residual฀wealth฀by฀ EVA®฀may฀be฀less฀distorted฀ EVA®฀is฀based฀on฀historical฀
deducting฀its฀costs฀of฀capital฀ accounts฀which฀may฀be฀of฀
by฀the฀accounting฀policies฀
from฀its฀operating฀profit,฀ selected฀as฀the฀measure฀is฀ limited฀use฀as฀a฀guide฀to฀the฀
adjusted฀for฀taxes฀on฀a฀cash฀ based฀on฀figures฀that฀are฀ future.฀
basis.฀฀ closer฀to฀cash฀flows฀than฀ A฀large฀number฀of฀
It฀shows฀the฀amount฀by฀ accounting฀profits.฀ adjustments฀are฀required฀to฀
which฀earnings฀exceed฀or฀ EVA®฀recognises฀costs฀such฀ calculate฀net฀operating฀profit฀
fall฀short฀of฀the฀minimum฀ as฀advertising฀and฀ after฀taxes฀(NOPAT)฀and฀the฀
rate฀of฀return฀that฀investors฀ development฀as฀investments฀ economic฀value฀of฀net฀assets.฀
could฀get฀by฀investing฀ for฀the฀future฀and฀thus฀they฀ Allowance฀for฀relative฀size฀
elsewhere.฀ do฀not฀immediately฀reduce฀the฀ must฀be฀made฀when฀comparing฀
EVA®฀in฀the฀year฀of฀ the฀relative฀performance฀of฀
expenditure.฀ investment฀centres.
EVA®฀focuses฀on฀efficient฀
use฀of฀capital.
410฀

lOMoARcPSD|6256454
Benchmarking฀
Benchmarking฀involves฀an฀ Benchmarking฀uses฀realistic฀ There฀is฀no฀consistency฀in฀

entity฀setting฀best฀practice฀ performance฀targets฀for฀ what฀is฀reported฀–฀an฀entity฀
or฀industry฀standards฀as฀a฀ the฀operations฀of฀a฀business฀ could฀report฀only฀those฀
target.฀The฀business฀then฀ and฀allows฀stakeholders฀to฀ benchmarks฀that฀it฀has฀success฀in฀
attempts฀to฀improve฀its฀own฀ understand฀what฀an฀entity฀has฀ and฀elect฀not฀to฀report฀others.฀
performance฀by฀being฀as฀good฀ focused฀on฀in฀a฀period.฀ They฀focus฀on฀past฀
as,฀or฀better฀than,฀targets฀in฀ It฀is฀useful฀in฀not-for-profit฀ performance฀and฀do฀฀
the฀most฀important฀areas฀of฀ organisations฀in฀which฀ not฀look฀forward฀to฀the฀future฀
operation.฀ earning฀profit฀is฀not฀the฀ aims฀of฀the฀entity.฀
Some฀entities฀report฀ primary฀focus.฀
benchmarking฀metrics฀within฀
It฀helps฀to฀highlight฀the฀
their฀financial฀statements.฀
importance฀of฀non-
financial฀performance฀
measures฀(see฀Section฀2.3).฀
฀
Advantages฀and฀disadvantages฀of฀APMs฀฀
฀
Advantages Disadvantages
Clearer฀story฀of฀how฀ Scepticism฀from฀
the฀business฀has฀ investors฀about฀
performed฀ quality฀and฀reliability
More฀freedom฀and฀
flexibility฀to฀tailor฀ Scope฀for฀
measures฀to฀company฀ manipulation
฀
฀
APMs฀ can฀ enhance฀ a฀ user's฀ understanding฀ of฀ the฀ performance฀ of฀ a฀ business,฀ but฀ they฀ can฀ also฀ be฀
misleading.฀APMs฀may฀be฀subject฀to฀management฀bias฀in฀their฀calculation฀because฀management฀can฀
choose฀ to฀ report฀ certain฀ APMs฀ and฀ not฀ others,฀ or฀ they฀ could฀ manipulate฀ calculations฀ to฀ present฀ the฀
entity฀ in฀ a฀ more฀ favourable฀ light.฀ Comparability฀ is฀ an฀ issue฀ as฀ there฀ can฀ be฀ inconsistency฀ in฀ the฀
calculation฀of฀APMs฀from฀year฀to฀year฀and฀in฀which฀particular฀APMs฀are฀reported.฀Unless฀an฀APM฀is฀
appropriately฀described,฀there฀may฀be฀a฀lack฀of฀transparency฀about฀what฀information฀is฀included฀in฀
the฀calculation฀of฀it.฀Furthermore,฀APMs฀are฀often฀described฀using฀terminology฀that฀is฀not฀defined฀in฀
accounting฀standards฀and฀therefore฀users฀cannot฀easily฀understand฀what฀the฀APM฀is฀reporting.฀
The฀ IASB฀ has฀ started฀ to฀ look฀ at฀ the฀ issues฀ arising฀ from฀ the฀ use฀ of฀ APMs฀ as฀ part฀ of฀ its฀ Disclosure฀
Initiative,฀focusing฀particularly฀on฀IAS฀1.฀The฀users฀of฀financial฀statements฀have฀suggested฀that฀APMs฀
provide฀useful฀information฀only฀if฀they฀are฀fairly฀presented.฀฀
฀
Improving฀the฀usefulness฀of฀APMs฀to฀investors฀
ESMA฀ believes฀ that฀ adhering฀ to฀ its฀ guidelines฀ will฀ improve฀ the฀ comparability,฀ reliability฀ and/or฀
comprehensibility฀of฀APMs.฀
฀ 411฀

lOMoARcPSD|6256454
฀฀
Exercise฀1:฀APMs฀ ฀
Go฀ online฀ and฀ have฀ a฀ look฀ at฀ ESMA's฀ Guidelines฀ on฀ Alternative฀ Performance฀ Measures.฀ They฀ are฀
available฀at฀www.esma.europa.eu฀in฀the฀Rules,฀Databases฀&฀Library฀tab.฀฀
Then฀do฀some฀research฀on฀the฀types฀of฀APMs฀disclosed฀by฀companies฀you฀are฀familiar฀with.฀
2.3฀Non-financial฀performance฀indicators฀
Non-financial฀ performance฀ indicators฀ (NFPIs)฀ are฀measures฀of฀performance฀based฀on฀non-
financial฀information฀which฀may฀originate฀in,฀and฀be฀used฀by,฀operating฀departments฀to฀monitor฀and฀
control฀their฀activities฀without฀any฀accounting฀input.฀
The฀most฀effective฀NFPIs฀will฀be฀both฀specific฀and฀measurable.฀ There฀is฀an฀increasing฀focus฀on฀
non-financial฀performance฀measures,฀and฀entities฀are฀reporting฀key฀non-financial฀indicators฀alongside฀
the฀primary฀financial฀statements.฀฀
Entities฀have฀different฀'success฀measures'–฀some฀of฀the฀more฀common฀ones฀include:฀
Area฀assessed฀฀ Examples฀of฀performance฀measures฀
Employees฀  Employee฀satisfaction฀scores฀from฀company฀surveys฀
 Employee฀turnover฀rates฀
 Absence฀rates฀
 Remuneration฀gap฀between฀upper฀and฀lower฀earning฀
employees฀
 Working฀conditions,฀particularly฀if฀an฀entity฀has฀overseas฀
operations฀
 Gender฀pay฀gap฀and฀gender฀equality฀measures฀
Customers฀  Average฀delivery฀times฀
 Average฀product/service฀reviews฀(from฀eg฀TripAdvisor)฀
 After฀care฀policies฀including฀return฀policies฀and฀
warranties฀
 Number฀of฀repeat฀customer฀orders฀received฀
 Number฀of฀new฀accounts฀gained฀or฀lost฀
 Number฀of฀visits฀by฀representatives฀to฀customer฀premises฀
Productivity฀  Capacity฀utilisation฀of฀facilities฀and฀personnel฀
 Number฀of฀units฀produced฀per฀day฀
 Average฀set-up฀time฀for฀new฀production฀run฀
Social฀  Brand฀awareness฀and฀marketing฀
 Reputation฀of฀the฀entity,฀particularly฀if฀there฀has฀been฀
negative฀press฀relating฀to฀the฀industry฀
 Charitable฀work฀undertaken฀by฀staff฀such฀as฀'giving฀
something฀back'฀days฀and฀entity-sponsored฀donations฀
 Tax฀and฀involvement฀in฀tax฀avoidance฀schemes฀
Environmental฀  Levels฀of฀emissions฀and฀commitments฀to฀reduce฀emissions฀
 Energy฀usage฀and฀investment฀in฀renewable฀sources฀
 Resource฀usage฀(eg฀water,฀gas,฀oil,฀metals,฀coal,฀
minerals,฀forestry)฀
 Impact฀of฀business฀activities฀on฀biodiversity฀
 Environmental฀fines฀and฀expenditures฀฀
412฀

lOMoARcPSD|6256454
Balanced฀scorecard฀
Entities฀ often฀ use฀ the฀ 'balanced฀ scorecard'฀ to฀ assess฀ its฀ performance฀ because฀ it฀ focuses฀ on฀ both฀
financial฀and฀non-financial฀perspectives฀(customer,฀internal,฀innovation฀and฀training):฀
Perspective฀ Question฀ Explanation฀
Customer฀ What฀do฀existing฀and฀new฀ Gives฀rise฀to฀targets฀that฀matter฀

customers฀value฀about฀us?฀ to฀customers฀(eg฀cost,฀quality,฀
delivery,฀inspection,฀handling)฀
Internal฀ What฀processes฀must฀we฀excel฀ Aims฀to฀improve฀internal฀

at฀to฀achieve฀our฀financial฀and฀ processes฀and฀decision฀
customer฀objectives?฀ making฀
Innovation฀and฀learning฀ Can฀we฀continue฀to฀improve฀ Considers฀the฀business's฀

and฀create฀future฀value?฀ capacity฀to฀maintain฀its฀
competitive฀position฀through฀
the฀acquisition฀of฀new฀skills฀
and฀the฀development฀of฀new฀
products฀
Financial฀ How฀do฀we฀create฀value฀for฀ Covers฀traditional฀measures฀

our฀shareholders?฀ such฀as฀growth,฀profitability฀
and฀shareholder฀value฀but฀set฀
through฀talking฀to฀the฀
shareholder(s)฀directly฀
Activity฀5:฀Non-financial฀measures฀ ฀
ZJET฀ is฀ an฀ airline฀ company฀ that฀ operates฀ both฀ domestically฀ and฀ internationally฀ using฀ a฀ fleet฀ of฀ 20฀
aircraft.฀Passengers฀book฀flights฀using฀the฀internet฀or฀by฀telephone฀and฀pay฀for฀their฀flights฀at฀the฀time฀
of฀booking฀using฀a฀debit฀or฀credit฀card.฀฀
The฀ airline฀ has฀ also฀ entered฀ into฀ profit฀ sharing฀ arrangements฀ with฀ hotels฀ and฀ local฀ car฀ hire฀
companies฀that฀allow฀rooms฀and฀cars฀to฀be฀booked฀by฀the฀airline's฀passengers฀through฀the฀airline's฀
website.฀฀
ZJET฀ currently฀ measures฀ its฀ performance฀ using฀ financial฀ ratios.฀ The฀ new฀ Managing฀ Director฀ has฀
suggested฀that฀other฀measures฀are฀equally฀important฀as฀financial฀measures฀and฀has฀suggested฀using฀
the฀balanced฀scorecard.฀
Required฀
Identify฀three฀non-financial฀performance฀measures฀(one฀from฀each฀of฀three฀non-financial฀perspectives฀
of฀the฀balanced฀scorecard)฀that฀ZJET฀could฀use฀as฀part฀of฀its฀performance฀measurement฀process.฀
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฀฀
Solution฀
Perspective฀ Measure฀ Why?฀
Customer฀฀ ฀ ฀
฀
฀
฀
฀
฀
Internal฀ ฀ ฀
฀
฀
฀
฀
฀
Innovation฀&฀learning฀ ฀ ฀
฀
฀
฀
฀
฀
3฀Non-financial฀reporting฀
Non-financial฀ reporting฀ enables฀ entities฀ to฀ be฀ more฀ transparent฀ in฀ communicating฀ non-financial฀
elements฀ of฀ their฀ business฀ to฀ their฀ stakeholders.฀ Non-financial฀ reporting฀ can฀ have฀ significant฀
benefits฀to฀an฀entity฀in฀terms฀of฀its฀reputation฀and฀positive฀stakeholder฀engagement.฀
3.1฀Demand฀for฀transparency฀
Entities,฀particularly฀large฀multi-nationals,฀are฀an฀integral฀ part฀ of฀ society.฀They฀provide฀us฀with฀
products฀ and฀ services,฀ they฀ employ฀ us,฀ they฀ pay฀ taxes฀ that฀ support฀ our฀ economies,฀ and฀ they฀ get฀
involved฀in฀political฀discussions฀and฀agendas.฀As฀such,฀it฀has฀become฀increasingly฀important฀that฀we฀
understand฀how฀an฀entity฀does฀business.฀฀
There฀are฀some฀principles฀(such฀as฀those฀published฀in฀the฀Global฀Reporting฀Initiative฀Standards)฀of฀
non-financial฀ reporting฀ that฀ have฀ helped฀ develop฀ a฀ generally฀ accepted฀ concept฀ as฀ to฀ what฀ non-
financial฀reporting฀should฀achieve:฀
Stakeholder฀ Completeness
inclusiveness฀
Materiality฀ Sustainability฀
context
฀
฀(GRI฀101:฀Foundation,฀p7)฀
These฀principles฀have฀helped฀to฀shape฀the฀types฀of฀non-financial฀report฀we฀see฀today.฀฀
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3.2฀Current฀reporting฀requirements฀
3.2.1฀IFRS฀requirements฀
Under฀IFRSs฀there฀are฀no฀required฀disclosure฀requirements฀for฀environmental฀and฀social฀matters.฀
However,฀ environmental฀ matters฀ may฀ be฀ disclosed฀ where฀ they฀ fall฀ under฀ specific฀ accounting฀
principles:฀
฀ Provisions฀ for฀ environmental฀ damage฀ are฀ recognised฀ and฀ contingent฀ liabilities฀ are฀ disclosed฀
under฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets.฀
฀ IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements฀ requires฀ disclosure฀ of฀ facts฀ material฀ to฀ a฀ proper฀
understanding฀of฀financial฀statements.฀
3.2.2฀National฀requirements฀
Some฀ countries฀ require฀ disclosure฀ of฀ environmental฀ performance฀ under฀ national฀ law.฀ For฀ example,฀
the฀ Netherlands,฀ Denmark,฀ Norway฀ and฀ Sweden฀ have฀ had฀ required฀ environmental฀ reporting฀ for฀ a฀
number฀of฀years.฀
The฀European฀Union's฀Business฀Review฀under฀the฀Accounts฀Modernisation฀Directive,฀which฀came฀into฀
effect฀ (through฀ implementation฀ in฀ national฀ law)฀ in฀ 2005฀ encourages฀ the฀ disclosure฀ of฀ key฀
performance฀indicators฀(KPIs)฀on฀environmental฀and฀employee฀matters.฀
3.2.3฀Voluntary฀disclosure฀
Voluntary฀disclosure฀and฀the฀publication฀of฀environmental฀reports฀has฀now฀become฀the฀ norm฀ for฀
quoted฀ companies฀ in฀ certain฀ countries฀ as฀ a฀ result฀ of฀ pressure฀ from฀ stakeholder฀ groups฀ to฀ give฀
information฀about฀their฀environmental฀and฀social฀'footprint'.฀
The฀creation฀of฀ethical฀indices฀has฀added฀to฀this฀pressure฀–฀for฀example฀the฀FTSE4Good฀index฀in฀the฀
UK,฀and฀the฀Dow฀Jones฀Sustainability฀Group฀Index฀in฀the฀US.฀
Sustainability฀reporting฀
The฀initial฀disclosure฀of฀environmental฀matters฀has฀now฀expanded฀into฀sustainability฀reporting฀which฀
integrates฀environmental,฀social฀and฀economic฀performance฀data฀and฀measures฀(including฀the฀
economic฀element฀of฀sustainability฀such฀as฀wages,฀taxes฀and฀core฀financial฀statistics).฀
A฀number฀of฀guidelines฀and฀standards฀for฀sustainability฀disclosure฀are฀available,฀but฀the฀most฀well-
known฀is฀the฀Global฀Reporting฀Initiative.฀
The฀Global฀Reporting฀Initiative฀฀
The฀ Global฀ Reporting฀ Initiative฀ (GRI)฀ (www.globalreporting.org)฀ is฀ a฀ long-term,฀ multi-
stakeholder,฀ international฀ not-for-profit฀ organisation฀ whose฀ mission฀ is฀ to฀ develop฀ and฀ disseminate฀
globally฀applicable฀GRI฀Standards฀on฀sustainability฀reporting฀for฀voluntary฀use฀by฀organisations.฀
Further฀detail฀on฀the฀GRI฀Standards฀can฀be฀found฀in฀Chapter฀17฀Section฀5฀of฀the฀Supplementary฀
Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
3.3฀฀Environmental฀and฀social฀reporting฀
3.3.1฀Environmental฀reporting฀
The฀ aim฀ of฀ environmental฀ reporting฀ is฀ the฀ disclosure฀ of฀ an฀ organisation's฀ corporate฀
environmental฀responsibilities฀and฀the฀effects฀of฀its฀activities฀on฀its฀environment.฀
The฀ growing฀ awareness฀ within฀ the฀ general฀ population฀ of฀ environmental฀ issues฀ plus฀ pressure฀ from฀฀
non-governmental฀organisations฀(NGOs)฀has฀led฀to฀the฀expectation฀ that฀ quoted฀ organisations฀
will฀make฀these฀disclosures.฀
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฀฀
External฀reporting฀of฀social฀and฀environmental฀issues฀is฀now฀seen฀as฀a฀key฀part฀of฀a฀company's฀
dialogue฀with฀its฀stakeholders.฀The฀issues฀reported฀often฀vary฀due฀to฀trends฀being฀reported฀in฀
media฀or฀by฀governments฀in฀a฀given฀period.฀฀
฀
฀ General฀public฀ ฀ Regulators฀and฀
฀ and฀future฀ ฀ policy฀makers฀
฀ population฀
฀
฀
฀
฀ ฀ Core฀values฀of฀a฀sustainable฀
฀ ฀ business฀
฀
฀
฀
฀ Banks฀and฀ Economic฀viability฀ Local฀
฀ shareholders฀ Environmental฀responsibility฀ communities฀
฀ ฀ Social฀accountability฀
฀
฀
฀
฀
฀
฀ Employees฀ ฀ Customers฀and฀
฀ ฀ ฀ suppliers฀
3.3.2฀Social฀reporting฀
The฀aim฀of฀social฀reporting฀is฀to฀measure฀and฀disclose฀the฀social฀impact฀of฀a฀business's฀activities:฀
Examples฀of฀social฀measures฀include:฀
฀ Philanthropic฀ donations,฀ whether฀ of฀ corporate฀ resources,฀ profit฀ based฀ donations฀ or฀ allowing฀
employees฀time฀to฀support฀charitable฀causes;฀
฀ Employee฀satisfaction฀levels฀and฀remuneration฀issues;฀
฀ Community฀support;฀and฀
฀ Stakeholder฀consultation฀information.฀
The฀benefits฀of฀environmental฀and฀social฀reporting฀and฀the฀concept฀of฀human฀capital฀accounting฀are฀
explained฀in฀Chapter฀17฀Section฀6฀of฀the฀Supplementary฀Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀
the฀digital฀edition฀of฀the฀Workbook.฀
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3.4฀Management฀commentary฀
3.4.1฀Definition฀of฀management฀commentary฀
Management฀commentary:฀a฀narrative฀report฀that฀relates฀to฀financial฀statements฀that฀have฀
been฀prepared฀in฀accordance฀with฀IFRSs.฀Management฀commentary฀provides฀users฀with฀
Key฀term฀
historical฀explanations฀of฀the฀amounts฀presented฀in฀the฀financial฀statements,฀specifically฀the฀
entity's฀financial฀position,฀financial฀performance฀and฀cash฀flows.฀It฀also฀provides฀commentary฀on฀an฀
entity's฀prospects฀and฀other฀information฀not฀presented฀in฀the฀financial฀statements.฀Management฀
commentary฀also฀serves฀as฀a฀basis฀for฀understanding฀management's฀objectives฀and฀its฀
strategies฀for฀achieving฀those฀objectives.฀฀ ฀
฀ (IFRS฀Practice฀Statement:฀Appendix)฀
3.4.2฀IFRS฀Practice฀Statement฀
The฀IFRS฀Practice฀Statement฀is฀a฀non-binding฀guidance฀document฀rather฀than฀an฀IFRS.฀
It฀is฀intended฀to฀be฀applied฀by฀entities฀that฀present฀management฀commentary฀that฀relates฀to฀financial฀
statements฀prepared฀in฀accordance฀with฀IFRSs.฀It฀is฀designed฀for฀publicly฀traded฀entities,฀but฀it฀is฀left฀
to฀regulators฀to฀decide฀which฀entities฀are฀required฀to฀publish฀management฀commentary฀and฀how฀
frequently฀they฀should฀report.฀
This฀approach฀avoids฀the฀adoption฀hurdle,฀ie฀that฀the฀perceived฀cost฀of฀applying฀IFRSs฀increases.฀฀
This฀perceived฀extra฀cost฀could฀dissuade฀jurisdictions/countries฀that฀have฀not฀already฀adopted฀IFRS฀
from฀ requiring฀ its฀ adoption,฀ especially฀ where฀ IFRS฀ requirements฀ differ฀ significantly฀ from฀ existing฀
national฀requirements.฀
Principles฀for฀the฀preparation฀of฀management฀commentary฀
Management฀ should฀ present฀ commentary฀ that฀ is฀ consistent฀ with฀ the฀ following฀ principles฀ from฀ the฀฀
IFRS฀Practice฀Statement:฀
(a)฀ To฀provide฀management's฀view฀of฀the฀entity's฀performance,฀position฀and฀progress;฀and฀
(b)฀ To฀supplement฀and฀complement฀information฀presented฀in฀the฀financial฀statements.฀
฀ (IFRS฀Practice฀Statement:฀para.฀12)฀
In฀aligning฀with฀these฀principles,฀management฀commentary฀should฀include:฀
(a)฀ Forward-looking฀information฀(including฀prospective฀results);฀and฀
(b)฀ Information฀ that฀ possesses฀ the฀ qualitative฀ characteristics฀ described฀ in฀ the฀ Conceptual฀
Framework฀for฀Financial฀Reporting.฀
Presentation฀
The฀ form฀ and฀ content฀ of฀ management฀ commentary฀ will฀ vary฀ between฀ entities,฀ reflecting฀ the฀
nature฀ of฀ their฀ business,฀ the฀ strategies฀ adopted฀ by฀ management฀ and฀ the฀ regulatory฀ environment฀ in฀
which฀they฀operate฀(IFRS฀Practice฀Statement:฀para.฀22).฀฀
Therefore,฀ the฀ Practice฀ Statement฀ does฀ not฀ require฀ a฀ fixed฀ format,฀ nor฀ does฀ it฀ provide฀ application฀
guidance฀or฀illustrative฀examples,฀as฀this฀could฀be฀interpreted฀as฀a฀floor฀or฀ceiling฀for฀disclosures.฀฀
Elements฀of฀management฀commentary฀
The฀particular฀focus฀of฀management฀commentary฀will฀depend฀on฀the฀facts฀and฀circumstances฀
of฀the฀entity.฀
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฀฀
However,฀ the฀ Practice฀ Statement฀ requires฀ a฀ management฀ commentary฀ to฀ include฀ information฀ that฀ is฀
essential฀to฀an฀understanding฀of:฀
(a)฀ The฀nature฀of฀the฀business฀
(b)฀ Management's฀objectives฀and฀its฀strategies฀for฀meeting฀those฀objectives฀
(c)฀ The฀entity's฀most฀significant฀resources,฀risks฀and฀relationships฀
(d)฀ The฀results฀of฀operations฀and฀prospects฀
(e)฀ The฀ critical฀ performance฀ measures฀ and฀ indicators฀ that฀ management฀ uses฀ to฀ evaluate฀
the฀entity's฀performance฀against฀stated฀objectives.฀
These฀elements฀are฀explained฀further฀in฀Chapter฀17฀Section฀7฀of฀the฀Supplementary฀Reading.฀The฀
advantages฀and฀disadvantages฀of฀a฀compulsory฀management฀commentary฀are฀covered฀in฀the฀same฀
section.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
4฀Integrated฀reporting฀
4.1฀International฀Integrated฀Reporting฀<IR>฀Framework฀฀
Integrated฀reporting฀is฀a฀relatively฀new฀concept฀that฀urges฀entities฀to฀focus฀on฀the฀value฀ creators฀
within฀ their฀ business,฀ with฀ view฀ on฀ the฀ longer฀ term฀ success฀ of฀ a฀ business฀ rather฀ than฀ the฀ short฀
term฀focus฀on฀results฀that฀arises฀from฀other฀types฀of฀reporting.฀
4.1.1฀Definitions฀
Integrated฀reporting฀<IR>:฀a฀process฀founded฀on฀integrated฀thinking฀that฀results฀in฀a฀periodic฀
integrated฀report฀by฀an฀organisation฀about฀value฀creation฀over฀time฀and฀related฀communications฀
Key฀term฀
regarding฀aspects฀of฀value฀creation.฀฀ ฀
฀ (International฀<IR>฀Framework,฀Glossary)฀
Integrated฀report:฀a฀concise฀communication฀about฀how฀an฀organisation's฀strategy,฀
governance,฀performance฀and฀prospects,฀in฀the฀context฀of฀its฀external฀environment,฀lead฀to฀the฀
creation฀of฀value฀over฀the฀short,฀medium฀and฀long฀term.฀
฀ (International฀<IR>฀Framework,฀Part฀I,฀1A,฀1.1)฀
4.1.2฀Objectives฀of฀<IR>฀
The฀ International฀ <IR>฀ Framework฀ was฀ published฀ by฀ the฀ International฀ Integrated฀ Reporting฀ Council฀
(IIRC),฀ a฀ global฀ coalition฀ of฀ regulators,฀ investors,฀ companies,฀ standard฀ setters,฀ the฀ accounting฀
profession฀and฀NGOs.฀฀
The฀stated฀aims฀of฀<IR>฀are฀to:฀
฀ 'Improve฀the฀quality฀of฀information฀available฀to฀providers฀of฀financial฀capital฀to฀enable฀
a฀more฀efficient฀and฀productive฀allocation฀of฀capital;฀฀
฀ Promote฀a฀more฀cohesive฀and฀efficient฀approach฀to฀corporate฀reporting฀that฀draws฀on฀
different฀reporting฀strands฀and฀communicates฀the฀full฀range฀of฀factors฀that฀materially฀affect฀
the฀ability฀of฀an฀organisation฀to฀create฀value฀over฀time;฀฀
฀ Enhance฀ accountability฀ and฀ stewardship฀ with฀ respect฀ to฀ the฀ broad฀ base฀ of฀ capitals฀
(financial,฀ manufactured,฀ intellectual,฀ human,฀ social฀ and฀ relationship,฀ and฀ natural)฀ and฀
promote฀understanding฀of฀their฀interdependencies;฀฀
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lOMoARcPSD|6256454
฀ Support฀integrated฀thinking,฀decision-making฀and฀actions฀that฀focus฀on฀the฀creation฀
of฀value฀over฀the฀short,฀medium฀and฀long฀term.'฀
฀ (International฀<IR>฀Framework,฀About฀Integrated฀Reporting)฀
4.1.3฀Fundamental฀concepts฀
There฀are฀three฀elements฀to฀the฀fundamental฀concepts:฀
Value฀creation฀ Value฀created฀by฀an฀organisation฀over฀time฀manifests฀itself฀in฀
(International฀<IR>฀ increases,฀decreases฀or฀transformations฀of฀the฀capitals฀caused฀
Framework,฀Part฀I,฀2B)฀฀ by฀the฀organisation's฀business฀activities฀and฀outputs.฀That฀value฀
has฀two฀interrelated฀aspects฀–฀value฀created฀for:฀
฀
฀ The฀organisation฀itself฀(enabling฀financial฀returns฀to฀
providers฀of฀financial฀capital);฀and฀
฀ Others฀(ie฀stakeholders฀and฀society฀at฀large).฀
The฀capitals฀ Stocks฀of฀value฀that฀are฀increased,฀decreased฀or฀transformed฀
(International฀<IR>฀ through฀the฀activities฀and฀outputs฀of฀the฀organisation.฀Includes:฀
Framework,฀Part฀I,฀2C)฀ ฀ Financial฀capital฀
฀ Manufactured฀capital฀
฀
฀ Intellectual฀capital฀
฀ Human฀capital฀
฀ Social฀and฀relationship฀capital฀
฀ Natural฀capital.฀
The฀value฀creation฀ At฀the฀core฀of฀the฀organisation฀is฀its฀business฀model,฀which฀
process฀ draws฀on฀various฀capitals฀as฀inputs฀and,฀through฀its฀business฀
(International฀<IR>฀ activities,฀converts฀them฀to฀outputs฀(products,฀services,฀by-
Framework,฀Part฀I,฀2D)฀ products฀and฀waste).฀฀
4.1.4฀Guiding฀principles฀
<IR>฀has฀a฀number฀of฀guiding฀principles฀which฀provide฀the฀foundations฀for฀what฀an฀integrated฀report฀
should฀be฀focused฀on:฀
฀ An฀integrated฀report฀should:฀
A฀ Strategic฀focus฀ ฀ Provide฀insight฀into฀the฀organisation's฀strategy,฀and฀how฀it฀
and฀future฀ relates฀to฀its฀ability฀to฀create฀value฀in฀the฀short,฀medium฀
orientation฀ and฀long฀term,฀and฀to฀its฀use฀of฀and฀effects฀on฀the฀
capitals.฀
B฀ Connectivity฀of฀ ฀ Show฀a฀holistic฀picture฀of฀the฀combination,฀
information฀ interrelatedness฀and฀dependencies฀between฀the฀factors฀
that฀affect฀the฀organisation's฀ability฀to฀create฀value฀over฀
time.฀
C฀ Stakeholder฀ ฀ Provide฀insight฀into฀the฀nature฀and฀quality฀of฀the฀
relationships฀ organisation's฀relationships฀with฀its฀key฀stakeholders฀and฀
how฀and฀to฀what฀extent฀the฀organisation฀understands,฀
takes฀into฀account฀and฀responds฀to฀their฀legitimate฀needs฀
and฀interests.฀
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lOMoARcPSD|6256454
฀฀
฀ An฀integrated฀report฀should:฀
D฀ Materiality฀฀ ฀ Disclose฀information฀about฀matters฀that฀substantively฀affect฀
the฀organisation's฀ability฀to฀create฀value฀over฀the฀short,฀
medium฀and฀long฀term.฀
E฀ Conciseness฀ ฀ Include฀sufficient฀context฀to฀understand฀the฀organisation's฀
strategy,฀governance,฀performance฀and฀prospects฀without฀
being฀burdened฀with฀less฀relevant฀information.฀
F฀ Reliability฀and฀ ฀ Include฀all฀material฀matters,฀both฀positive฀and฀negative,฀in฀
completeness฀ a฀balanced฀way฀and฀without฀material฀error.฀
G฀ Consistency฀and฀ ฀ Present฀information฀on฀a฀basis฀that฀is฀consistent฀over฀time฀
comparability฀ and฀in฀a฀way฀that฀enables฀comparison฀with฀other฀
organisations฀to฀the฀extent฀it฀is฀material฀to฀the฀
organisation's฀own฀ability฀to฀create฀value฀over฀time.฀
(International฀<IR>฀Framework:฀Part฀II,฀p16–23)฀
4.1.5฀Content฀elements฀
<IR>฀also฀provides฀guidance฀as฀to฀what฀an฀integrated฀report฀should฀include:฀
฀ Question฀that฀should฀be฀answered฀by฀an฀
integrated฀report:฀
A฀ Organisational฀overview฀ What฀does฀the฀organisation฀do฀and฀what฀are฀the฀
and฀external฀environment฀ circumstances฀under฀which฀it฀operates?฀
B฀ Governance฀ How฀does฀the฀organisation's฀governance฀structure฀
support฀its฀ability฀to฀create฀value฀in฀the฀short,฀medium฀and฀
long฀term?฀
C฀ Business฀model฀ What฀is฀the฀organisation's฀business฀model?฀฀
D฀ Risks฀and฀opportunities฀ What฀are฀the฀specific฀risks฀and฀opportunities฀that฀affect฀
the฀organisation's฀ability฀to฀create฀value฀over฀the฀short,฀
medium฀and฀long฀term,฀and฀how฀is฀the฀organisation฀
dealing฀with฀them?฀
E฀ Strategy฀and฀resource฀ Where฀does฀the฀organisation฀want฀to฀go฀and฀how฀does฀it฀
allocation฀ intend฀to฀get฀there?฀
F฀ Performance฀ To฀what฀extent฀has฀the฀organisation฀achieved฀its฀strategic฀
objectives฀and฀what฀are฀its฀outcomes฀in฀terms฀of฀effects฀
on฀the฀capitals?฀
G฀ Outlook฀ What฀challenges฀and฀uncertainties฀is฀the฀organisation฀
likely฀to฀encounter฀in฀pursuing฀its฀strategy,฀and฀what฀are฀
the฀potential฀implications฀for฀its฀business฀model฀and฀future฀
performance?฀
H฀ Basis฀of฀preparation฀and฀ How฀does฀the฀organisation฀determine฀what฀matters฀to฀
presentation฀ include฀in฀the฀integrated฀report฀and฀how฀are฀such฀matters฀
quantified฀or฀evaluated?฀
(International฀<IR>฀Framework:฀part฀II,฀p24–32)฀
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4.1.6฀General฀reporting฀guidance฀
Disclosure฀of฀material฀matters฀ ฀ Taking฀the฀nature฀of฀a฀material฀matter฀into฀
(International฀<IR>฀฀Framework,฀ consideration,฀consider฀providing:฀
Part฀II,฀p30)฀ (a)฀ Key฀information฀(eg฀explanation฀of฀matter฀and฀
effect฀on฀strategy/business฀model/capitals,฀relevant฀
interactions/interdependencies,฀actions฀to฀manage฀
the฀matter,฀extent฀of฀organisation's฀control฀over฀the฀
matter,฀quantitative฀and฀qualitative฀disclosures)฀
(b)฀ Disclosures฀about฀any฀uncertainty฀surrounding฀a฀
matter฀(eg฀explanation,฀range฀of฀possible฀outcomes฀
and฀assumptions,฀volatility)฀
(c)฀ If฀information฀is฀indeterminable,฀disclose฀this฀fact฀
and฀reason฀for฀it฀
(d)฀ If฀significant฀loss฀of฀competitive฀advantage฀would฀
result,฀make฀disclosures฀of฀a฀general฀nature฀
฀ May฀be฀appropriate฀to฀present฀matter฀in฀its฀own฀
integrated฀report฀
฀ Care฀is฀needed฀to฀avoid฀generic฀disclosures฀
฀ Quantitative฀disclosures฀(eg฀KPIs)฀can฀help฀increase฀
comparability฀and฀are฀helpful฀in฀reporting฀against฀
targets฀
Disclosures฀about฀the฀capitals฀ ฀ Determined฀by฀effects฀on฀the฀organisation's฀ability฀
(International฀<IR>฀฀Framework,฀ to฀create฀value฀over฀time฀(include฀factors฀affecting฀
Part฀II,฀p31)฀ availability,฀quality,฀affordability,฀organisation's฀
ability฀to฀produce฀flows฀from฀them฀to฀meet฀demand)฀
฀ Where฀not฀practical฀to฀quantify,฀make฀qualitative฀
disclosures฀
฀ Disclose฀interdependencies฀considered฀in฀
determining฀reporting฀boundary฀and฀important฀
trade-offs฀influencing฀value฀creation฀over฀time฀
Time฀frames฀for฀short,฀medium฀ ฀ Typically฀longer฀than฀for฀some฀other฀forms฀of฀
and฀long฀term฀ reporting฀(refer฀to฀business,฀investment฀cycles,฀
(International฀<IR>฀฀Framework,฀ strategies,฀stakeholders'฀needs)฀
Part฀II,฀p32)฀ ฀ Time฀frames฀differ฀by฀industry฀or฀sector฀and฀nature฀
of฀outcomes฀
฀ Length฀of฀each฀reporting฀time฀frame฀and฀reason฀for฀
length฀might฀affect฀nature฀of฀disclosure.฀
Aggregation฀and฀disaggregation฀ ฀ Level฀of฀aggregation฀(eg฀by฀country,฀division,฀site)฀
(International฀<IR>฀฀Framework,฀ appropriate฀to฀circumstances฀of฀organisation฀
Part฀II,฀p32)฀ ฀ Aggregation฀could฀result฀in฀loss฀of฀meaning฀and฀
failure฀to฀highlight฀strong฀or฀poor฀performance฀but฀
unnecessary฀disaggregation฀can฀result฀in฀clutter฀
฀ Disaggregate฀(or฀aggregate)฀based฀on฀how฀senior฀
management฀oversees฀operations฀
฀
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฀฀
Materiality฀and฀integrated฀reporting฀
Materiality฀is฀an฀issue฀in฀preparing฀financial฀statements฀and฀is฀cited฀as฀one฀of฀the฀reasons฀why฀
financial฀statements฀often฀contain฀too฀much฀irrelevant฀information฀('clutter')฀and฀not฀enough฀relevant฀
information฀upon฀which฀stakeholders฀can฀take฀decisions.฀The฀IAS฀1฀Presentation฀of฀Financial฀
Statements฀definition฀of฀material฀is฀not฀wholly฀consistent฀with฀the฀integrated฀reporting฀definition฀of฀
materiality.฀฀฀
Required฀
Discuss฀whether฀the฀concept฀of฀materiality฀in฀IAS฀1฀is฀appropriate฀for฀use฀in฀an฀integrated฀report.฀
Solution฀
In฀traditional฀financial฀reporting,฀materiality฀refers฀to฀whether฀the฀inclusion฀or฀not฀of฀an฀item฀gives฀rise฀
to฀the฀potential฀for฀misstatement฀in฀the฀financial฀statements.฀IAS฀1฀defines฀material฀omissions฀or฀
misstatements฀as฀being฀'material฀if฀they฀could,฀individually฀or฀collectively,฀influence฀the฀economic฀
decisions฀that฀users฀make฀on฀the฀basis฀of฀the฀financial฀statements'฀(IAS฀1:฀para.฀7).฀฀
Integrated฀reporting฀considers฀transactions฀and฀events฀to฀be฀material฀if฀they฀impact฀an฀entity's฀ability฀
to฀create฀value฀for฀its฀owners฀in฀the฀short,฀medium฀and฀long฀term.฀฀
The฀IAS฀1฀definition฀of฀materiality฀is฀too฀narrow฀to฀be฀applied฀to฀an฀integrated฀report฀as฀its฀sole฀฀
focus฀is฀the฀financial฀statements.฀The฀Integrated฀Reporting฀framework฀takes฀a฀wider฀view฀that฀items฀
considered฀material฀under฀IAS฀1฀would฀only฀also฀be฀material฀to฀an฀integrated฀report฀if฀they฀influence฀
those฀who฀may฀provide฀capital฀(in฀its฀many฀different฀forms)฀with฀regards฀to฀the฀organisation's฀ability฀
to฀create฀value.฀Additional฀matters฀may,฀however,฀be฀deemed฀material฀in฀integrated฀reporting฀if฀the฀
matter฀could฀influence฀the฀assessments฀of฀the฀report's฀users.฀฀฀฀
The฀Integrated฀Reporting฀framework฀would฀also฀consider฀an฀item฀material฀if฀it฀helped฀to฀demonstrate฀
that฀senior฀management฀was฀discharging฀its฀responsibilities,฀regardless฀of฀the฀financial฀value฀of฀that฀
item.฀
Activity฀6:฀Integrated฀reporting฀ ฀
Integrated฀reporting฀is฀focused฀on฀how฀an฀entity฀creates฀value฀for฀its฀owners฀in฀the฀short,฀medium฀and฀
long฀ term.฀ Stakeholders฀ are฀ unlikely,฀ however,฀ to฀ rely฀ only฀ on฀ an฀ integrated฀ report฀ when฀ making฀
decisions฀about฀an฀entity.฀฀
Required฀
Discuss฀ any฀ concerns฀ that฀ stakeholders฀ may฀ have฀ in฀ considering฀ whether฀ integrated฀ reporting฀ is฀
suitable฀for฀helping฀to฀evaluate฀a฀company.฀
Exercise฀2:฀Non-financial฀reporting฀ ฀
The฀ annual฀ report฀ of฀ UK฀ listed฀ company,฀ Marks฀ &฀ Spencer฀ plc,฀ is฀ a฀ good฀ example฀ of฀ an฀ annual฀
report฀that฀contains฀non-financial฀performance฀measures฀and฀non-financial฀reporting.฀You฀can฀take฀a฀
look฀at฀the฀report฀here:฀http://annualreport.marksandspencer.com/฀
Take฀ some฀ time฀ to฀ research฀ the฀ annual฀ reports฀ of฀ some฀ companies฀ that฀ you฀ are฀ familiar฀ with฀ and฀
review฀the฀non-financial฀disclosures฀and฀alternative฀performance฀measures฀that฀they฀have฀presented.฀฀
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5฀Segment฀reporting฀
5.1฀ Introduction฀฀
Financial฀statements฀are฀highly฀aggregated฀which฀can฀make฀them฀of฀limited฀use฀for฀stakeholders฀
who฀ want฀ to฀ understand฀ more฀ about฀ how฀ an฀ entity฀ has฀ arrived฀ at฀ its฀ financial฀ performance฀ and฀
position฀for฀a฀period.฀฀
Large฀entities฀in฀particular฀often฀have฀a฀wide฀range฀of฀products฀or฀services฀and฀operate฀in฀
a฀diverse฀range฀of฀locations,฀all฀of฀which฀contribute฀to฀the฀results฀of฀the฀entity฀as฀a฀whole.฀฀
In฀order฀to฀allow฀shareholders฀to฀fully฀understand฀the฀development฀of฀the฀company's฀business,฀certain฀
entities฀ are฀ required฀ to฀ provide฀ segment฀ information฀ which฀ discloses฀ revenues,฀ profits฀ and฀
assets฀(amongst฀other฀items)฀by฀major฀business฀area.฀
IFRS฀ 8฀ Operating฀ Segments฀ is฀ only฀ compulsory฀ for฀ entities฀ whose฀ debt฀ or฀ equity฀ instruments฀ are฀
traded฀in฀a฀public฀market฀(or฀entities฀filing฀or฀in฀the฀process฀of฀filing฀financial฀statements฀for฀the฀
purpose฀of฀issuing฀instruments)฀(IFRS฀8:฀para.฀2).฀฀
It฀is฀key฀that฀you฀understand:฀
฀
what฀a฀reportable฀ what฀information฀
segment฀is฀ should฀be฀disclosed฀
5.2฀ Definition฀
An฀operating฀segment฀is฀a฀component฀of฀an฀entity:฀
(a)฀ That฀engages฀in฀business฀activities฀from฀which฀it฀may฀earn฀revenues฀and฀incur฀expenses฀
Key฀term฀
(including฀revenues฀and฀expenses฀relating฀to฀transactions฀with฀other฀components฀of฀the฀same฀
entity);฀
(b)฀ Whose฀operating฀results฀are฀regularly฀reviewed฀by฀the฀entity's฀chief฀operating฀decision฀maker฀
to฀make฀decisions฀about฀resources฀to฀be฀allocated฀to฀the฀segment฀and฀assess฀its฀performance;฀
and฀฀
(c)฀ For฀which฀discrete฀financial฀information฀is฀available.฀
5.3฀ Reportable฀segments฀
An฀ operating฀ segment฀ should฀ be฀ reported฀ on฀ separately฀ in฀ the฀ financial฀ statements฀ if฀ any฀ of฀ the฀
following฀criteria฀are฀met฀(IFRS฀8:฀para.13):฀
(a)฀ Its฀revenue฀(internal฀and฀external)฀is฀10%฀or฀more฀of฀total฀revenue;฀
(b)฀ Its฀ reported฀ profit฀ or฀ loss฀ is฀ 10%฀ or฀ more฀ of฀ all฀ segments฀ in฀ profit฀ (or฀ all฀ segments฀ in฀ loss฀ if฀
greater);฀or฀
(c)฀ Its฀assets฀are฀10%฀or฀more฀of฀total฀assets.฀
Segments฀ should฀ be฀ reported฀ until฀ at฀ least฀ 75%฀ of฀ the฀ entity's฀ external฀ revenue฀ has฀ been฀
disclosed.฀
If฀ all฀ segments฀ satisfying฀ the฀ 10%฀ criteria฀ have฀ been฀ disclosed฀ and฀ they฀ do฀ not฀ amount฀ to฀ 75%฀ of฀
total฀external฀revenue,฀additional฀operating฀segments฀should฀be฀disclosed฀(even฀if฀they฀do฀not฀meet฀
the฀above฀criteria)฀until฀the฀75%฀level฀is฀reached฀(IFRS฀8:฀para.15).฀
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฀฀
Operating฀segments฀that฀do฀not฀meet฀any฀of฀the฀quantitative฀thresholds฀may฀be฀reported฀separately฀if฀
management฀ believes฀ that฀ information฀ about฀ the฀ segment฀ would฀ be฀ useful฀ to฀ users฀ of฀ the฀ financial฀
statements฀(IFRS฀8:฀para.฀14).฀฀
฀
Illustration฀3:฀Identifying฀reportable฀segments฀
Jesmond,฀a฀retail฀and฀leisure฀group,฀has฀three฀businesses฀operating฀in฀different฀parts฀of฀the฀world.฀
Jesmond฀reports฀to฀management฀on฀the฀basis฀of฀region.฀The฀results฀of฀the฀regional฀segments฀for฀the฀
year฀ended฀31฀December฀20X9฀are฀as฀follows.฀
฀ Revenue฀ Segment฀results Segment฀
Region฀ External฀ Internal profit/(loss) assets฀
฀ $m฀ $m $m $m
Europe฀฀ 140฀฀ 5฀฀ (10)฀฀ 300฀฀
North฀America฀฀ 300฀฀ 280฀ 60฀ 800฀฀
Asia฀฀
฀
300฀฀ 475฀ 105฀ 2,000฀฀
฀
There฀were฀no฀significant฀intra-group฀balances฀in฀the฀segment฀assets฀and฀liabilities.฀Due฀to฀the฀
disappointing฀performance฀of฀Europe฀in฀the฀year,฀the฀management฀of฀Jesmond฀would฀prefer฀not฀to฀
include฀Europe฀as฀a฀reportable฀segment.฀They฀believe฀reporting฀North฀America฀and฀the฀other฀regions฀
will฀provide฀the฀stakeholders฀with฀sufficient฀information.฀
Required฀
Advise฀the฀management฀of฀Jesmond฀on฀the฀principles฀for฀determining฀reportable฀segments฀under฀฀
IFRS฀8฀and฀comment฀on฀whether฀Europe฀can฀be฀omitted฀as฀a฀reportable฀segment.฀฀
Solution฀
IFRS฀8฀requires฀a฀business฀to฀determine฀its฀operating฀segments฀on฀the฀basis฀of฀its฀internal฀
management฀reporting.฀As฀Jesmond฀reports฀to฀management฀on฀the฀basis฀of฀geographical฀reasons,฀
this฀is฀how฀Jesmond฀determines฀its฀segments.฀
IFRS฀8฀requires฀an฀entity฀to฀report฀separate฀information฀about฀each฀operating฀segment฀that:฀
(a)฀ Has฀been฀identified฀as฀meeting฀the฀definition฀of฀an฀operating฀segment;฀and฀
(b)฀ Has฀a฀segment฀total฀that฀is฀10%฀or฀more฀of฀total:฀
฀ (i)฀฀ Revenue฀(internal฀and฀external);฀or฀
฀ (ii)฀฀ All฀segments฀not฀reporting฀a฀loss฀(or฀all฀segments฀in฀loss฀if฀greater);฀or฀
฀ (iii)฀฀ Assets.฀
฀
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The฀quantitative฀10%฀criteria฀have฀been฀applied฀to฀Europe฀in฀the฀following฀table:฀
Category฀ Criteria฀ Jesmond฀ Europe฀

reportable฀
Revenue฀ Reported฀revenue฀is฀10%฀or฀more฀ Total฀revenue฀=฀$140m฀ No฀

the฀combined฀revenue฀of฀all฀ +฀$300m฀+฀$300m฀+฀
operating฀segments฀(external฀and฀ $5m฀+฀$280m฀+฀
intersegment)฀ $475m฀=฀$1,500m฀
10%฀=฀$150m฀
Profit฀or฀loss฀ The฀absolute฀amount฀of฀its฀reported฀ Total฀of฀all฀segments฀in฀ No฀

profit฀or฀loss฀is฀10%฀or฀more฀of฀ profit฀=฀$60m฀+฀
the฀greater฀of,฀in฀absolute฀ $105m฀=฀$165m฀
amount,฀all฀operating฀segments฀ Total฀of฀all฀segments฀in฀
not฀reporting฀a฀loss,฀and฀all฀ loss฀=฀$(10)m฀
operating฀segments฀reporting฀
10%฀of฀greater฀=฀
a฀loss฀
$16.5m฀
Assets฀ Its฀assets฀are฀10%฀or฀more฀of฀ Total฀assets฀=฀$300m฀ No฀

the฀total฀assets฀of฀all฀operating฀ +฀$800m฀+฀$2,000m฀
segments฀ =฀$3,100m฀
10%฀=฀$310m฀
฀
฀
Therefore฀Europe฀is฀not฀a฀reportable฀segment.฀฀฀฀
However,฀IFRS฀8฀also฀requires฀that฀at฀least฀75%฀of฀total฀external฀revenue฀must฀be฀reported฀by฀
operating฀ segments.฀ Reporting฀ North฀ America฀ and฀ Asia฀ accounts฀ for฀ 81%฀ of฀ external฀ revenue฀ Remember฀the฀
($600m/$740m)฀ and฀ therefore฀ the฀ test฀ is฀ satisfied.฀ There฀ is฀ no฀ requirement฀ for฀ Jesmond฀ to฀ include฀ importance฀of฀
Europe฀as฀a฀reportable฀segment฀under฀the฀IFRS฀8฀criteria.฀฀ ethics฀in฀your฀
SBR฀exam.฀
Nevertheless,฀it฀could฀be฀perceived฀as฀being฀unethical฀not฀to฀report฀Europe฀separately฀if฀the฀sole฀ Watch฀out฀for฀
threats฀to฀the฀
motivation฀were฀to฀hide฀losses.฀Given฀that฀IFRS฀8฀allows฀management฀to฀choose฀to฀report฀ fundamental฀
segments฀that฀do฀not฀meet฀any฀of฀the฀qualitative฀thresholds,฀Jesmond฀might฀like฀to฀consider฀disclosing฀ principles฀of฀
ACCA's฀Code฀
Europe฀as฀a฀separate฀reportable฀segment.฀
of฀Ethics฀and฀
Conduct฀
Activity฀7:฀Identifying฀reportable฀segments฀ ฀
Endeavour,฀a฀public฀limited฀company,฀trades฀in฀six฀business฀areas฀which฀are฀reported฀separately฀in฀
its฀ internal฀ accounts฀ provided฀ to฀ the฀ chief฀ operating฀ decision฀ maker.฀ The฀ operating฀ segments฀ have฀
historically฀been฀Chemicals,฀Pharmaceuticals฀wholesale,฀Pharmaceuticals฀retail,฀Cosmetics,฀Hair฀care฀
and฀ Body฀ care.฀ Each฀ operating฀ segment฀ constituted฀ a฀ 100%฀ owned฀ sub-group฀ except฀ for฀ the฀
Chemicals฀ market฀ which฀ is฀ made฀ up฀ of฀ two฀ sub-groups.฀ The฀ results฀ of฀ these฀ segments฀ for฀ the฀ year฀
ended฀31฀December฀20X5฀before฀taking฀account฀of฀the฀information฀below฀are฀as฀follows.฀
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฀฀
Operating฀ segment฀ information฀ as฀ at฀ 31฀ December฀ 20X5฀ before฀ the฀ sale฀ of฀ the฀
body฀care฀operations฀
฀ Revenue Segment Segment฀ Segment
฀ External฀ Internal Total profit/(loss) assets฀ liabilities
฀ ฀$m฀ ฀$m฀ ฀$m฀ ฀$m฀ ฀$m฀ ฀$m฀
Chemicals:฀Europe฀ ฀14฀ ฀ 7฀ ฀21฀ ฀ 1฀ ฀31฀ ฀14฀
฀ Rest฀of฀world฀ ฀56฀ ฀ 3฀ ฀59฀ ฀13฀ ฀778฀ ฀34฀
Pharmaceuticals฀wholesale฀ ฀59฀ ฀ 8฀ ฀67฀ ฀ 9฀ ฀104฀ ฀35฀
Pharmaceuticals฀retail฀ ฀17฀ ฀ 5฀ ฀22฀ ฀(2)฀ ฀30฀ ฀12฀
Cosmetics฀ ฀12฀ ฀ 3฀ ฀15฀ ฀ 2฀ ฀18฀ ฀10฀
Hair฀care฀ ฀11฀ ฀ 1฀ ฀12฀ ฀ 4฀ ฀21฀ ฀ 8฀
Body฀care฀ ฀฀฀18฀ ฀24฀ ฀ ฀42฀ ฀ (6)฀ ฀ ฀54฀ ฀฀฀19฀
฀ ฀187฀ ฀51฀ ฀238฀ ฀21฀฀ ฀336฀฀ ฀132฀
There฀ were฀ no฀ significant฀ intragroup฀ balances฀ in฀ the฀ segment฀ assets฀ and฀ liabilities.฀ All฀ companies฀
were฀ originally฀ set฀ up฀ by฀ the฀ Endeavour฀ Group.฀ ฀ Endeavour฀ decided฀ to฀ sell฀ off฀ its฀ Body฀ care฀
operations฀ and฀ the฀ sale฀ was฀ completed฀ on฀ 31฀ December฀ 20X5.฀ On฀ the฀ same฀ date฀ the฀ group฀
acquired฀another฀group฀in฀the฀Hair฀care฀area.฀The฀fair฀values฀of฀the฀assets฀and฀liabilities฀of฀the฀new฀
Hair฀care฀group฀were฀$32฀million฀and฀$13฀million฀respectively.฀The฀purpose฀of฀the฀purchase฀was฀to฀
expand฀the฀group's฀presence฀by฀entering฀the฀Chinese฀market,฀with฀a฀subsidiary฀providing฀lower฀cost฀
products฀for฀the฀mass฀retail฀markets.฀Until฀then,฀Hair฀care฀products฀had฀been฀'high฀end'฀products฀sold฀
mainly฀wholesale฀to฀hairdressing฀chains.฀The฀directors฀plan฀to฀report฀the฀new฀purchase฀as฀part฀of฀the฀
Hair฀care฀segment.฀
Required฀
Discuss฀ which฀ of฀ the฀ operating฀ segments฀ of฀ Endeavour฀ constitute฀ a฀ 'reportable'฀ operating฀ segment฀
under฀IFRS฀8฀Operating฀Segments฀for฀the฀year฀ended฀31฀December฀20X5.฀
5.4฀Disclosures฀
Disclosures฀required฀by฀IFRS฀8฀are฀extensive.฀Chapter฀17฀Section฀8฀of฀the฀Supplementary฀Reading฀
includes฀an฀illustrative฀example฀of฀an฀IFRS฀8฀disclosure.฀You฀are฀more฀likely฀to฀be฀asked฀to฀determine฀
reportable฀segments฀or฀to฀interpret฀or฀critique฀disclosures฀than฀prepare฀them.฀This฀is฀available฀in฀
This฀section฀also฀includes฀advantages฀and฀disadvantages฀of฀the฀IFRS฀8฀requirements฀for฀segment฀
reporting.฀
Key฀items฀to฀be฀disclosed฀are:฀
(a)฀ Factors฀used฀to฀identify฀the฀entity's฀reportable฀segments฀
(b)฀ Types฀of฀products฀and฀services฀from฀which฀each฀reportable฀segment฀derives฀its฀revenues฀
(c)฀ Reportable฀segment฀revenues,฀profit฀or฀loss,฀assets,฀liabilities฀and฀other฀material฀items฀
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External
Revenue
Inter฀segment
Interest฀revenue
Interest฀expense
Depreciation฀and฀amortisation
Other฀material฀non-cash฀items
Material฀income/expense฀(IAS฀1)
Profit,฀assets฀
Share฀of฀profit฀of฀associates/joint฀ventures฀equity฀accounted฀
&฀liabilities฀
Profit/loss฀(as฀reported฀to฀chief฀operating฀decision฀maker)฀
Income฀tax฀expense
Segment฀assets
Investments฀in฀associates/jointly฀controlled฀entities฀
(1)
Expenditures฀for฀non-current฀assets฀
Segment฀liabilities
฀
A฀reconciliation฀of฀each฀of฀the฀above฀material฀items฀to฀the฀entity's฀reported฀figures฀is฀required.฀
Reporting฀ of฀ a฀ measure฀ of฀ profit฀ or฀ loss฀ by฀ segment฀ is฀ compulsory.฀ Other฀ items฀ are฀
disclosed฀ if฀ included฀ in฀ the฀ figures฀ reviewed฀ by฀ or฀ regularly฀ provided฀ to฀ the฀ chief฀ operating฀
decision฀maker.฀
(d)฀ External฀revenue฀by฀each฀product฀and฀service฀(if฀reported฀basis฀is฀not฀products฀and฀services)฀
(e)฀ Geographical฀information:฀
฀ External฀revenue ฀
฀(2)
by:฀
Geographical฀
฀ ฀areas฀ ฀ ฀ Entity's฀country฀of฀domicile฀
฀ Non-current฀assets฀
฀
(1)
฀ ฀ All฀foreign฀countries฀(subdivided฀if฀material)฀
(f)฀ Information฀ about฀ reliance฀ on฀ major฀ customers฀ (ie฀ those฀ who฀ represent฀ >฀ 10%฀ external฀
revenue)฀
1฀ Excludes฀financial฀instruments,฀deferred฀tax฀assets,฀post-employment฀benefit฀assets,฀and฀
rights฀under฀insurance฀contracts฀
2฀ Allocated฀based฀on฀customer's฀location฀
฀
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฀฀
5.5 Interpreting฀reportable฀segment฀disclosures฀
The฀following฀points฀may฀be฀relevant฀when฀analysing฀segment฀data:฀
฀ Growing฀segments฀versus฀declining฀segments฀
฀ Loss-making฀segments฀
฀ Return฀(and฀other฀key฀indicators)฀analysed฀by฀segment฀
฀ The฀proportion฀of฀costs฀or฀assets฀etc฀that฀have฀remained฀unallocated฀
฀ Any฀additional฀segment฀information฀required.฀
Activity฀8:฀IFRS฀8฀disclosures฀ ฀
The฀ core฀ principle฀ of฀ IFRS฀ 8฀ Operating฀ Segments฀ is฀ to฀ 'disclose฀ information฀ to฀ enable฀ users฀ of฀ its฀
financial฀statements฀to฀evaluate฀the฀nature฀and฀financial฀effects฀of฀the฀business฀activities฀in฀which฀it฀
engages฀and฀the฀economic฀environment฀in฀which฀it฀operates'.฀
For฀a฀publicly฀traded฀company฀which฀is฀required฀to฀prepare฀a฀segment฀report,฀the฀key฀users฀of฀this฀
report฀are฀likely฀to฀be฀existing฀and฀potential฀investors฀(in฀debt฀and฀equity฀instruments).฀
Below฀is฀an฀example฀of฀a฀segment฀report฀for฀JH,฀one฀of฀the฀world's฀leading฀suppliers฀in฀fast-moving฀
consumer฀goods:฀
JH'S฀SEGMENT฀REPORT฀FOR฀THE฀YEAR฀ENDED฀31฀MARCH฀20X3฀(Extracts)฀
Information฀about฀reportable฀segment฀profit฀or฀loss,฀assets฀and฀liabilities฀
฀ Personal฀ All฀ ฀
Food฀ care฀ Home฀care฀ others฀ Total฀
$m฀ $m฀ $m฀ $m฀ $m฀
Revenue฀from฀external฀customers฀ 190 100 60 10฀ 360
Intersegment฀revenues฀ – – – 2฀ 2
Interest฀revenue฀ 20 16 9 ฀–฀฀ 45
Interest฀expense฀ 16 14 8 –฀ 38
Depreciation฀and฀amortisation฀ 7 5 6 –฀ 18
Reportable฀segment฀profit฀ 15 3 4 1฀ 23
Other฀material฀non-cash฀items฀ ฀
Impairment฀of฀assets฀ –฀ 10฀ –฀ –฀ 10฀
Reportable฀segment฀assets฀ 80 20 40 5฀ 145
Expenditure฀on฀non-current฀assets฀ 9 4 5 –฀฀ 18
Reportable฀liabilities฀ 60 15 35 3฀ 113
Reconciliations฀of฀reportable฀segment฀revenues,฀profit฀or฀loss,฀assets฀and฀liabilities฀
฀ Total฀for฀ Elimination฀ ฀
reportable฀ ฀ of฀inter- Unallocated฀ ฀
segments฀ Other฀ segment฀ amounts฀ Group฀
$m฀ $m฀ $m฀ $m฀ $m฀
Revenue฀ 352 10 (2) –฀ 360
Profit฀or฀loss฀ 22 1 (0.5) (5)฀ 17.5
Assets฀ 140 5 (2) 8฀ 151
Liabilities฀ 110 3 (2) 20฀ 131
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Required฀
Discuss฀the฀usefulness฀of฀the฀disclosure฀requirements฀of฀IFRS฀8฀for฀investors,฀illustrating฀your฀answer฀
where฀applicable฀with฀JH's฀segment฀report.฀ (13฀marks)฀
Professional฀marks฀will฀be฀awarded฀for฀clarity฀and฀quality฀of฀presentation.฀ (2฀marks)฀
฀ (Total฀=฀15฀marks)฀
฀ ฀
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฀฀
฀
฀ Reportable฀ Disclosure฀
segments฀ requirements฀
Financial฀ ฀
Alternative฀ Non- Financial฀
EBITDA฀ '10%'฀test฀for฀ Revenue,฀profit฀or฀
Ratios฀ ฀ Staff฀
EVA฀ identifying฀ loss,฀assets฀
EPS฀ ฀ Customers฀
Benchmarking฀ reportable฀segments฀ mandatory฀
Scope฀for฀manipulation฀฀ Productivity฀
฀ Balanced฀scorecard฀ 75%฀external฀ Geographical฀
Environmental
฀ ฀ revenue฀reported฀ segments฀
1.฀ Stakeholders฀ 2.฀ Performance฀

5.฀ Segment฀reporting
measurement
Interpretation฀of฀financial฀ 4.฀฀ Integrated฀

statements฀ Reporting฀
฀
(see฀over)฀
฀
3.฀฀ Non-financial฀
reporting฀
Demand฀for฀transparency฀
฀ Increased฀role฀of฀business฀ Social฀and฀environmental฀
฀ in฀society฀ Current฀reporting฀requirements฀ Improved฀investor฀
฀ relations/confidence฀
฀ Want฀to฀understand฀how฀ ฀ No฀IFRS฀requirements฀
฀ Competitive฀advantage฀
฀ entities฀do฀business฀
฀ Some฀national฀requirements ('First฀mover'฀effect)฀
฀ Public฀recognition฀
฀ Many฀companies฀chose฀
฀ Improved฀risk฀management฀
voluntary฀disclosure:฀
฀ Access฀to฀'preferred฀
฀ Global฀Reporting฀Initiative฀ suppliers'฀lists฀
(GRI)฀ ฀ Cost฀savings/improved฀
฀ Universal฀disclosures฀ profitability฀
฀ GRI฀101:฀Foundation฀ …฀but฀
฀ GRI฀102:฀General฀disclosures฀ ฀ Market฀comes฀to฀expect฀it฀
฀ GRI฀103:฀Management฀ ฀ Negative฀impact฀if฀only฀
commentary฀Topic฀specific฀ partial฀disclosures฀
standards฀
฀
Management฀commentary฀
฀ Explains฀corporate฀฀performance฀
฀ Looks฀forward฀to฀future฀financial฀
position฀
฀ IFRS฀practise฀statement฀–฀non฀
binding฀IFRS฀sets฀out฀principles฀
for฀preparation฀of฀management฀
commentary฀
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฀
฀
฀
4.฀Integrated฀reporting฀
฀
฀ Integrated฀reporting฀<IR>฀focuses฀on฀value฀creation฀
฀ An฀ integrated฀ report฀ is฀ a฀ concise฀ report฀ focusing฀ on฀
฀ value฀creation฀in฀short,฀medium฀and฀long฀term.฀
฀
Fundamental฀ concepts:฀ value฀ creation,฀ the฀
฀
capitals,฀value฀creation฀process฀
฀
Guiding฀ principles:฀ Strategic฀ focus฀ and฀ future฀
฀
orientation;฀ Connectivity฀ of฀ information;฀ Stakeholder฀
฀
relationships;฀ materiality;฀ conciseness;฀ reliability฀ and฀
฀
completeness;฀consistency฀and฀comparability฀
฀
Report฀ content:฀ Organisational฀ overview฀ and฀
฀
external฀ environment;฀ governance;฀ business฀ model;฀
฀
risks฀ and฀ opportunities;฀ strategy฀ and฀ resource;฀
฀ ฀
performance;฀future฀outlook;฀basis฀of฀preparation฀and฀
฀
presentation฀
฀
General฀ disclosure฀ requirements:฀ material฀
฀
matters;฀ disclosure฀ about฀ the฀ capitals;฀ time฀ frame฀ for฀
฀
short,฀ medium฀ and฀ long-term;฀ aggregation฀ and฀
฀
disaggregation฀
฀
฀
฀
฀
฀
฀
฀ ฀
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฀฀
1.฀ Stakeholders฀฀฀
฀ A฀stakeholder฀is฀anyone฀with฀an฀interest฀in฀a฀business,฀and฀can฀either฀affect฀or฀be฀affected฀by฀
the฀business.฀There฀are฀many฀different฀stakeholder฀groups.฀Not฀all฀stakeholders฀are฀interested฀in฀
the฀financial฀performance฀of฀a฀business฀and฀the฀SBR฀exam฀is฀likely฀to฀test฀you฀on฀a฀range฀of฀
different฀stakeholder฀groups,฀often฀with฀competing฀interests.฀฀
2.฀ Performance฀measurement฀
฀ Financial.฀Mainly฀ratio฀analysis.฀฀Make฀sure฀that฀you฀can฀define฀all฀the฀ratios.฀Look฀out฀for฀
variations฀in฀definitions฀of฀ratios฀which฀might฀appear฀in฀questions.฀Always฀remember฀that฀'profit'฀
and฀'net฀assets'฀are฀fairly฀arbitrary฀figures,฀affected฀by฀different฀accounting฀policies฀and฀
manipulation฀
฀ EPS฀is฀a฀measure฀of฀the฀amount฀of฀profits฀earned฀by฀a฀company฀for฀each฀ordinary฀share.฀
Earnings฀are฀profits฀after฀tax฀and฀preferred฀dividends.฀Accounting฀policies฀may฀be฀adopted฀for฀
the฀purpose฀of฀manipulation.฀Changes฀in฀accounting฀standards฀can฀have฀a฀significant฀
impact฀on฀the฀financial฀statements฀and฀therefore฀EPS.฀
฀ Alternative฀performance฀measures฀such฀as฀EBITDA,฀EVA®,฀benchmarking฀and฀balanced฀
scorecard฀help฀management฀disclosure฀information฀that฀is฀relevant฀for฀that฀entity,฀but฀there฀is฀a฀
lack฀of฀consistency฀in฀reporting฀and฀APMs฀are฀subject฀to฀manipulation.฀
฀ Non-financial฀measures฀such฀as฀employee฀wellbeing,฀customer฀satisfaction,฀productivity฀
levels,฀social฀and฀environmental฀are฀increasingly฀important.฀
3.฀ Non-financial฀reporting฀
฀ There฀is฀an฀increased฀demand฀for฀transparency฀as฀companies฀become฀ever฀more฀
important฀in฀our฀society.฀
฀ Current฀reporting฀requirements฀–฀there฀are฀no฀requirements฀under฀IFRS฀but฀some฀
countries฀have฀local฀requirements.฀฀Many฀companies฀make฀voluntary฀disclosures.฀The฀
Global฀Reporting฀Initiative฀has฀helped฀to฀establish฀principles฀of฀good฀reporting.฀It฀arose฀
from฀the฀need฀to฀address฀the฀failure฀of฀the฀current฀governance฀structures฀to฀
respond฀to฀changes฀in฀the฀global฀economy฀
฀ Environmental฀and฀social฀reporting฀disclosures฀information฀about฀the฀impact฀of฀an฀entity.฀
฀ Some฀of฀the฀limitations฀of฀financial฀statements฀may฀be฀addressed฀by฀a฀management฀
commentary.฀The฀IASB฀has฀issued฀a฀practice฀statement฀on฀a฀management฀commentary฀
to฀supplement฀and฀complement฀the฀financial฀statements฀
4.฀ Integrated฀reporting฀฀
฀ Integrated฀reporting฀is฀concerned฀with฀conveying฀a฀wider฀message฀on฀organisational฀
performance.฀It฀is฀fundamentally฀concerned฀with฀reporting฀on฀the฀value฀created฀by฀the฀
organisation's฀resources.฀Resources฀are฀referred฀to฀as฀'capitals'.฀Value฀is฀created฀or฀lost฀when฀
capitals฀interact฀with฀one฀another.฀It฀is฀intended฀that฀integrated฀reporting฀should฀lead฀to฀a฀
holistic฀view฀when฀assessing฀organisational฀performance.฀
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5.฀ Segment฀reporting฀
฀ Operating฀segments฀are฀parts฀of฀a฀business฀that฀engage฀in฀revenue฀earnings฀activities,฀
management฀review฀and฀for฀which฀financial฀information฀is฀available.฀
฀ Reportable฀segments฀are฀operating฀segments฀or฀aggregation฀of฀operating฀segments฀that฀
meet฀specified฀criteria.฀
฀ IFRS฀8฀disclosures฀are฀of:฀
฀ ฀ Operating฀segment฀profit฀or฀loss฀
฀ ฀ Segment฀assets฀
฀ ฀ Segment฀liabilities฀
฀ ฀ Certain฀income฀and฀expense฀items฀
฀ Disclosures฀are฀also฀required฀about฀the฀revenues฀derived฀from฀products฀or฀services฀and฀about฀
the฀countries฀in฀which฀revenues฀are฀earned฀or฀assets฀held,฀even฀if฀that฀information฀is฀not฀used฀by฀
management฀in฀making฀decisions.฀
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฀฀
Now฀try฀the฀questions฀below฀from฀the฀Further฀question฀practice฀bank:฀
Q19฀฀Grow฀by฀acquisition฀
Q20฀฀Ghorse฀
Q21฀฀German฀competitor฀
Q22฀฀Peter฀Holdings฀
Q23฀฀Jay฀
฀
topics฀studied฀in฀this฀chapter฀and฀which฀are฀useful฀reading:฀
Changing฀face฀of฀additional฀performance฀measures฀in฀the฀UK฀(2014)฀
Giving฀investors฀what฀they฀need฀
The฀definition฀and฀disclosure฀of฀capital฀฀
The฀Integrated฀report฀framework฀
Bin฀the฀clutter฀
www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f7/technical-articles.html฀
฀
For฀further฀information฀on฀<IR>฀and฀GRI:฀
http://integratedreporting.org/฀
www.pwc.com/my/en/services/sustainability/gri-index.html฀
www.globalreporting.org/Pages/default.aspx฀
฀
฀
฀
฀
฀
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฀ ฀
฀
Performing฀financial฀analysis
฀
฀
฀
฀
aging information
Man
aging information
Man
An
sw
er
pl
t
en
manag ime
an
em
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nin
Good
g
r p re t ati o n
Specific SBR skills
e nts
Applying good
req f rrprneteation
consolidation
re m
Creating effective
i ts
discussion Performingtechniques
m eun
financial analysis
of t inotect i
uireeq
Eff d p
an
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e c re
Performing
r re o r
C
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Co
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on analysis
Efficient numerical
analysis
฀
Introduction฀
Section฀B฀of฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam฀will฀contain฀two฀questions,฀which฀may฀
be฀scenario฀or฀case-study฀or฀essay฀based฀and฀will฀contain฀both฀discursive฀and฀computational฀
elements.฀Section฀B฀could฀deal฀with฀any฀aspect฀of฀the฀syllabus฀but฀will฀always฀include฀either฀a฀
full฀question,฀or฀part฀of฀a฀question฀that฀requires฀appraisal฀of฀financial฀or฀non-
financial฀information฀from฀either฀the฀preparer's฀and/or฀another฀stakeholder's฀
perspective.฀Two฀professional฀marks฀will฀be฀awarded฀to฀the฀question฀in฀Section฀B฀that฀requires฀
analysis.฀
Given฀that฀financial฀analysis฀will฀feature฀in฀Section฀B฀of฀every฀exam,฀it฀is฀essential฀that฀you฀have฀
mastered฀the฀appropriate฀technique฀for฀financial฀analysis฀in฀order฀to฀maximise฀your฀chance฀of฀
passing฀the฀SBR฀exam.฀
As฀a฀reminder,฀the฀detailed฀syllabus฀learning฀outcomes฀for฀financial฀analysis฀are:฀
E฀฀฀฀Interpret฀financial฀statements฀for฀different฀stakeholders฀
(a) Discuss฀and฀apply฀relevant฀indicators฀of฀financial฀and฀non-financial฀performance฀including฀
earnings฀per฀share฀and฀additional฀performance฀measures.฀
(b) Discuss฀the฀increased฀demand฀for฀transparency฀in฀corporate฀reports,฀and฀the฀emergence฀of฀
non-financial฀reporting฀standards.฀
(c) Appraise฀the฀impact฀of฀environmental,฀social฀and฀ethical฀factors฀on฀performance฀
measurement.฀
(d) Discuss฀the฀current฀framework฀for฀integrated฀reporting฀(IR)฀including฀the฀objectives,฀
concepts,฀guiding฀principles฀and฀content฀of฀an฀integrated฀report.฀
(e) Determine฀the฀nature฀and฀extent฀of฀reportable฀segments.฀
(f) Discuss฀the฀nature฀of฀segment฀information฀to฀be฀disclosed฀and฀how฀segmental฀information฀
enhances฀quality฀and฀sustainability฀of฀performance.฀
฀ ฀
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฀฀
Skills฀Checkpoint฀4:฀Performing฀financial฀analysis฀฀
SBR฀Skill:฀Performing฀financial฀analysis฀฀
There฀ are฀ many฀ possible฀ types฀ of฀ financial฀ analysis฀ questions.฀ This฀ Skills฀ Checkpoint฀
will฀focus฀on฀the฀analysis฀of฀the฀impact฀of฀accounting฀treatment฀on฀ratios.฀
The฀basic฀five฀steps฀adopted฀in฀Skills฀Checkpoints฀1–3฀should฀also฀be฀used฀in฀financial฀
analysis฀questions฀(you฀should฀be฀familiar฀with฀these฀steps฀now,฀but฀if฀not฀refer฀back฀to฀
Skills฀Checkpoints฀1–3).฀฀
STEP฀1:
Work฀out฀the฀time฀per฀requirement฀(1.95฀minutes฀a฀
mark).
STEP฀2:฀
Read฀and฀analyse฀the฀requirement.฀
STEP฀3:
Read฀and฀analyse฀the฀scenario.
STEP฀4:
Prepare฀an฀answer฀plan.
STEP฀5:
Write฀up฀your฀answer.
฀
฀
฀ ฀
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In฀this฀question,฀we฀will฀focus฀on฀the฀following฀exam฀success฀skills฀and฀in฀particular:฀
฀ Good฀ time฀ management.฀ The฀ exam฀ will฀ be฀ time-pressured฀ and฀ you฀ will฀
need฀ to฀ manage฀ it฀ carefully฀ to฀ ensure฀ that฀ you฀ can฀ make฀ a฀ good฀ attempt฀ at฀
every฀part฀of฀every฀question.฀You฀will฀have฀3฀hours฀and฀15฀minutes฀in฀the฀exam,฀
which฀ works฀ out฀ at฀ 1.95฀ minutes฀ a฀ mark.฀ The฀ following฀ question฀ is฀ worth฀ 17฀
marks฀so฀you฀should฀allow฀33฀minutes.฀For฀the฀other฀syllabus฀areas,฀our฀advice฀
has฀ been฀ to฀ allow฀ a฀ third฀ to฀ a฀ quarter฀ of฀ your฀ time฀ for฀ reading฀ and฀ planning.฀
However,฀financial฀analysis฀questions฀require฀deep฀thinking฀at฀the฀planning฀time฀
so฀ it฀ is฀ recommended฀ that฀ you฀ dedicate฀ a฀ third฀ of฀ your฀ time฀ to฀ reading฀ and฀
planning฀ (here,฀ 11฀ minutes)฀ and฀ the฀ remainder฀ for฀ writing฀ up฀ your฀ answer฀
(here,฀22฀minutes).฀฀
฀ Managing฀ information.฀ There฀ is฀ a฀ lot฀ of฀ information฀ to฀ absorb฀ in฀ this฀
question฀and฀the฀best฀approach฀is฀active฀reading.฀Firstly฀you฀should฀identify฀any฀
specific฀ratio฀mentioned฀in฀the฀requirement฀–฀in฀this฀question,฀it฀is฀earnings฀per฀
share.฀You฀need฀to฀think฀of฀the฀formula฀and,฀as฀you฀read฀each฀paragraph฀of฀the฀
question,฀ you฀ should฀ assess฀ whether฀ the฀ accounting฀ treatment฀ in฀ the฀ scenario฀
complies฀ with฀ the฀ relevant฀ IAS฀ or฀ IFRS.฀ Where฀ the฀ accounting฀ treatment฀ is฀
incorrect,฀ you฀ need฀ to฀ work฀ out฀ the฀ impact฀ on฀ the฀ numerator฀ and/or฀
denominator฀of฀the฀ratio฀in฀question.฀Also฀look฀out฀for฀threats฀to฀the฀fundamental฀
principles฀from฀the฀ACCA฀Code฀of฀Ethics฀and฀Conduct.฀It฀can฀be฀helpful฀to฀jot฀
down฀your฀ideas฀in฀the฀margins฀of฀the฀question฀paper.฀
฀ Correct฀ interpretation฀ of฀ the฀ requirements.฀ There฀ are฀ two฀ parts฀ to฀ the฀
following฀ question฀ and฀ the฀ first฀ part฀ has฀ two฀ sub-requirements.฀ Make฀ sure฀ you฀
identify฀the฀verbs฀and฀analyse฀the฀requirement฀carefully฀so฀you฀understand฀how฀
to฀approach฀your฀answer.฀
฀ Answer฀ planning.฀Everyone฀will฀have฀a฀preferred฀style฀for฀an฀answer฀plan.฀
For฀example,฀it฀may฀be฀a฀mind฀map,฀bullet-pointed฀lists฀or฀simply฀annotating฀the฀
question฀paper.฀Choose฀the฀approach฀that฀you฀feel฀most฀comfortable฀with฀or,฀if฀
you฀ are฀ not฀ sure,฀ try฀ out฀ different฀ approaches฀ for฀ different฀ questions฀ until฀ you฀
have฀ found฀ your฀ preferred฀ style.฀ You฀ will฀ typically฀ be฀ awarded฀ 1฀ mark฀ per฀
relevant,฀well฀explained฀point฀so฀you฀should฀aim฀to฀generate฀sufficient฀points฀to฀
score฀a฀comfortable฀pass.฀
฀ Efficient฀ numerical฀ analysis.฀The฀most฀effective฀way฀to฀approach฀this฀part฀
of฀ the฀ question฀ is฀ to฀ draw฀ up฀ a฀ proforma฀ to฀ correct฀ the฀ original฀ earnings฀ per฀
share฀(EPS)฀calculation฀–฀you฀will฀need฀a฀working฀for฀earnings฀and฀a฀separate฀
working฀ for฀ the฀ number฀ of฀ shares.฀ You฀ should฀ start฀ off฀ with฀ the฀ figures฀ per฀ the฀
question฀then฀correct฀each฀of฀the฀errors฀to฀arrive฀at฀the฀revised฀figures.฀Clearly฀
label฀each฀number฀in฀your฀working.฀
฀ Effective฀ writing฀ and฀ presentation.฀ Use฀ headings฀ and฀ sub-headings฀ in฀
your฀answer,฀underlined฀with฀a฀ruler,฀and฀write฀in฀full฀sentences,฀ensuring฀your฀
style฀ is฀ professional.฀ Two฀ professional฀ marks฀ will฀ be฀ awarded฀ to฀ the฀ analysis฀
question฀in฀Section฀B฀of฀the฀SBR฀exam.฀The฀use฀of฀headings,฀sub-headings฀and฀
full฀ sentences฀ as฀ well฀ as฀ clear฀ explanations฀ and฀ ensuring฀ that฀ all฀ sub-
requirements฀are฀answered฀and฀that฀all฀issues฀in฀the฀scenario฀are฀addressed฀will฀
help฀you฀obtain฀these฀two฀marks.฀
฀ 437฀

lOMoARcPSD|6256454
฀฀
Skill฀Activity฀฀
question฀ and,฀ at฀ 1.95฀ minutes฀ a฀ mark,฀ it฀ should฀ take฀ 33฀ minutes,฀ of฀
which฀a฀third฀should฀be฀spent฀reading฀and฀planning฀(11฀minutes)฀and฀
the฀ remainder฀ writing฀ up฀ your฀ answer฀ (22฀ minutes).฀ You฀ then฀ divide฀
your฀writing฀time฀between฀the฀two฀parts฀of฀the฀question฀in฀accordance฀
with฀ the฀ mark฀ allocation฀ –฀ so฀ two-thirds฀ of฀ your฀ time฀ on฀ (a)฀ (15฀
minutes)฀and฀one-third฀on฀(b)฀(8฀minutes).฀
Required฀
(a)฀ Advise฀ Mr฀ Low฀ as฀ to฀ whether฀ earnings฀ per฀ share฀ has฀ been฀ accurately฀
calculated฀ by฀ the฀ directors฀ and฀ show฀ a฀ revised฀ calculation฀ of฀ earnings฀
per฀share฀if฀necessary.฀ (10฀marks)฀
(b)฀ Discuss฀whether฀the฀directors฀may฀have฀acted฀unethically฀in฀the฀way฀they฀
have฀calculated฀earnings฀per฀share.฀ (5฀marks)฀
Professional฀marks฀will฀be฀awarded฀for฀clarity฀and฀quality฀of฀presentation.฀ ฀(2฀marks)฀
STEP 2฀ Read฀ the฀ requirements฀ for฀ the฀ following฀ question฀ and฀ analyse฀ them.฀
฀ Watch฀ out฀ for฀ hidden฀ sub-requirements!฀ Underline฀ and฀ number฀ each฀
sub-requirement฀ or฀ highlight฀ them฀ in฀ different฀ colours.฀ Identify฀ the฀
verb(s)฀and฀ask฀yourself฀what฀each฀sub-requirement฀means.฀
฀
฀
฀ Verb฀–฀refer฀to฀ Sub-
dictionary฀ requirement฀1฀
฀ definition฀ (written)฀
Sub-
Required฀ requirement฀2฀
(numerical)฀
(a)฀ Advise฀ Mr฀ Low฀ as฀ to฀ whether฀ earnings฀ per฀ share฀ has฀ been฀ accurately฀
calculated฀ by฀ the฀ directors฀ and฀ show฀ a฀ revised฀ calculation฀ of฀ earnings฀
per฀share฀if฀necessary.฀ (10฀marks)฀
Single฀requirement฀(written)฀
(b)฀ Discuss฀whether฀the฀directors฀may฀have฀acted฀unethically฀in฀the฀way฀they฀
have฀calculated฀earnings฀per฀share.฀ (5฀marks)฀
Verb฀–฀refer฀to฀
dictionary฀
definition฀ Professional฀marks฀will฀be฀awarded฀for฀clarity฀and฀quality฀of฀presentation.฀ (2฀marks)฀
Part฀(a)฀of฀this฀question฀tests฀financial฀analysis฀skills฀(covered฀in฀this฀Skills฀Checkpoint฀4).฀
Part฀(b)฀tests฀approaching฀ethical฀issues฀(covered฀in฀more฀detail฀in฀Skills฀Checkpoint฀1).฀
438฀

lOMoARcPSD|6256454
Note฀the฀three฀verbs฀used฀in฀the฀requirements.฀One฀of฀them฀has฀been฀defined฀by฀the฀
ACCA฀in฀their฀list฀of฀common฀question฀verbs฀('discuss').฀As฀'advise'฀and฀'show'฀are฀not฀
defined฀by฀the฀ACCA,฀dictionary฀definitions฀can฀be฀used฀instead.฀These฀definitions฀are฀
shown฀below:฀
Verb฀ Definition฀ Tip฀for฀answering฀this฀

question฀
Advise฀ 'To฀offer฀suggestions฀about฀ Think฀about฀who฀the฀advice฀is฀for฀

the฀best฀course฀of฀action฀to฀ (Mr฀Low)฀and฀what฀you฀are฀advising฀
someone'฀(English฀Oxford฀ him฀about฀(earnings฀per฀share).฀
Living฀Dictionaries).฀ Then฀break฀down฀the฀earnings฀per฀
share฀(EPS)฀ratio฀into฀its฀numerator฀
(profit฀attributable฀to฀the฀ordinary฀
equity฀holders฀of฀the฀parent฀entity)฀
and฀denominator฀(the฀weighted฀
average฀number฀of฀ordinary฀shares฀
outstanding฀during฀the฀period).฀฀
You฀will฀then฀need฀to฀assess฀the฀
accounting฀treatments฀in฀the฀
question,฀how฀they฀have฀affected฀the฀
numerator฀and/or฀denominator฀of฀
the฀EPS฀and฀what฀if฀any฀correction฀
is฀required.฀
Show฀ 'To฀explain฀something฀to฀ Set฀up฀two฀proformas:฀

someone฀by฀doing฀it฀or฀  Earnings฀
giving฀instructions.'฀
 Number฀of฀shares฀
(Cambridge฀English฀
Dictionary).฀ Enter฀the฀original฀figures฀per฀the฀
question฀then฀a฀line฀for฀each฀
adjustment,฀totalling฀the฀amounts฀to฀
arrive฀at฀the฀revised฀figures.฀Then฀
recalculate฀EPS.฀Make฀sure฀that฀
every฀number฀in฀your฀working฀has฀a฀
narrative฀label฀so฀it฀is฀easy฀to฀
follow.฀
Discuss฀ To฀consider฀and฀ Ethical฀issues฀are฀rarely฀black฀and฀

debate/argue฀about฀the฀pros฀ white.฀Any฀incorrect฀accounting฀
and฀cons฀of฀an฀issue.฀ treatment฀could฀be฀due฀to฀genuine฀
Examine฀in฀detail฀by฀using฀ error฀or฀deliberate฀misstatement฀–฀
arguments฀in฀favour฀or฀ you฀need฀to฀consider฀both฀positive฀
against.฀ and฀negative฀aspects฀in฀your฀
answer.฀Watch฀out฀for฀threats฀to฀the฀
ACCA฀Code's฀ethical฀principles.฀
฀ 439฀

lOMoARcPSD|6256454
฀฀
STEP 3฀ Now฀ read฀ the฀ scenario.฀ For฀ the฀ advice฀ on฀ calculation฀ of฀ EPS,฀
฀ keep฀in฀mind฀the฀IAS฀33฀Earnings฀per฀Share฀formula฀and฀for฀each฀of฀
the฀ three฀ paragraphs฀ in฀ the฀ question,฀ ask฀ yourself฀ which฀ IAS฀ or฀ IFRS฀
may฀be฀relevant฀(remember฀you฀do฀not฀need฀to฀know฀the฀IAS฀or฀IFRS฀
number),฀ whether฀ the฀ accounting฀ treatment฀ complies฀ with฀ that฀ IAS฀ or฀
IFRS฀and฀the฀impact฀any฀correction฀would฀have฀on฀the฀numerator฀and฀
denominator฀of฀EPS.฀฀
For฀ the฀ ethical฀ implications,฀ consider฀ the฀ ACCA฀ Code.฀ Identify฀
any฀ of฀ the฀ fundamental฀ principles฀ that฀ may฀ be฀ relevant฀ (integrity,฀
objectivity,฀ professional฀ competence฀ and฀ due฀ care,฀ confidentiality,฀
professional฀ behaviour)฀ and฀ any฀ threats฀ (self-interest,฀ self-review,฀
advocacy,฀familiarity,฀intimidation)฀to฀these฀principles.฀For฀more฀detail฀
on฀ the฀ approach฀ to฀ ethical฀ requirements,฀ please฀ refer฀ back฀ to฀ Skills฀
Checkpoint฀1.฀
฀
฀
Mr฀Low฀=฀
฀ Question฀–฀Low฀Paints฀(17฀marks)฀ recipient฀of฀our฀
First฀day฀of฀
answer฀to฀part฀(a)฀
current฀ On฀ 1฀ October฀ 20X0,฀ the฀ Chief฀ Executive฀ of฀ Low฀ Paints,฀ Mr฀ –฀former฀CEO฀and฀
accounting฀
majority฀
period฀ Low,฀ retired฀from฀the฀company.฀The฀ordinary฀share฀capital฀at฀the฀time฀ shareholder฀
of฀his฀retirement฀was฀six฀million฀shares฀of฀$1.฀Mr฀Low฀owns฀52%฀of฀
Denominator฀of฀
the฀ ordinary฀ shares฀ of฀ Low฀ Paints฀ and฀ the฀ remainder฀ is฀ owned฀ by฀
Self-interest฀threat฀
EPS฀(but฀at฀start฀ to฀principles฀of฀
of฀year฀–฀watch฀
employees.฀As฀an฀incentive฀to฀the฀new฀management,฀Mr฀Low฀agreed฀to฀a฀
integrity,฀
out฀for฀any฀ objectivity฀and฀
share฀issues฀in฀
new฀executive฀compensation฀plan฀which฀commenced฀after฀his฀retirement.฀
professional฀
the฀year)฀ competence฀–฀
The฀ plan฀ provides฀ cash฀ bonuses฀ to฀ the฀ board฀ of฀ directors฀ when฀ the฀
incentive฀to฀
overstate฀profit฀to฀
company's฀ earnings฀ per฀ share฀ exceeds฀ the฀ 'normal'฀ earnings฀
maximise฀bonus฀
(Ethics)฀
per฀ share฀ which฀ has฀ been฀ agreed฀ at฀ $0.50฀ per฀ share.฀ The฀ cash฀
bonuses฀are฀calculated฀as฀being฀20%฀of฀the฀profit฀generated฀in฀excess฀of฀
that฀required฀to฀give฀an฀earnings฀per฀share฀figure฀of฀$0.50.฀
The฀ new฀ board฀ of฀ directors฀ has฀ reported฀ that฀ the฀ compensation฀ to฀ be฀
paid฀ is฀ $360,000฀ based฀ on฀ earnings฀ per฀ share฀ of฀ $0.80฀ for฀ the฀ year฀
Hint฀that฀EPS฀
ended฀ 30฀ September฀ 20X1.฀ However,฀ Mr฀ Low฀ is฀ surprised฀ at฀ the฀ is฀overstated฀
size฀ of฀ the฀ compensation฀ as฀ other฀ companies฀ in฀ the฀ same฀
industry฀were฀either฀breaking฀ even฀or฀making฀losses฀in฀the฀
period.฀ He฀ was฀ anticipating฀ that฀ no฀ bonus฀ would฀ be฀ paid฀ during฀ the฀
year฀as฀he฀felt฀that฀the฀company฀would฀not฀be฀able฀to฀earn฀the฀equivalent฀
of฀the฀normal฀earnings฀per฀share฀figure฀of฀$0.50.฀ Mr฀Low฀is฀now฀
a฀non-executive฀
Mr฀ Low,฀ who฀ had฀ taken฀ no฀ active฀ part฀ in฀ management฀ decisions,฀ director฀(and฀
majority฀
decided฀to฀take฀advantage฀of฀his฀role฀as฀non-executive฀director฀and฀ shareholder)฀
demanded฀an฀explanation฀of฀how฀the฀earnings฀per฀share฀figure฀of฀$0.80฀
440฀

lOMoARcPSD|6256454
Relevant฀IAS฀=฀IAS฀
20฀Accounting฀for฀
had฀ been฀ calculated.฀ His฀ investigations฀ revealed฀ the฀ following฀ Government฀
Grants฀and฀
information.฀฀ Disclosure฀of฀
Government฀
Assistance฀
(i)฀ On฀1฀October฀20X0,฀the฀company฀received฀a฀grant฀from฀the฀
Two฀possible฀
First฀day฀of฀
Government฀ of฀ $5฀ million฀ towards฀ the฀ cost฀ of฀ purchasing฀ a฀ treatments฀for฀grants฀
accounting฀ related฀to฀asset฀under฀
period฀
non-current฀asset฀of฀$15฀million.฀The฀grant฀had฀been฀credited฀ IAS฀20:฀฀
(1)฀Record฀as฀deferred฀
to฀the฀statement฀of฀profit฀or฀loss฀in฀total฀and฀the฀non-current฀ income฀and฀release฀
Incorrect฀
to฀P/L฀over฀useful฀
treatment฀per฀ asset฀ had฀ been฀ recognised฀ at฀ $15฀ million฀ in฀ the฀ statement฀ of฀ life฀of฀asset฀
IAS฀20฀–฀need฀
(2)฀Net฀off฀cost฀of฀
to฀correct฀(will฀ financial฀ position฀ and฀ depreciated฀ at฀ a฀ rate฀ of฀ 10%฀ per฀ asset฀
decrease฀
earnings฀and฀ annum฀on฀the฀straight฀line฀basis.฀The฀directors฀believed฀that฀neither฀
EPS).฀
of฀ the฀ approaches฀ for฀ grants฀ related฀ to฀ assets฀ under฀ IAS฀ 20฀ Apply฀to฀asset฀
Genuine฀error฀
or฀deliberate฀to฀ and฀grant฀
Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀Government฀
maximise฀
bonus?฀(Ethics)฀
฀
Assistance฀were฀appropriate฀because฀ deferred฀ income฀ does฀
not฀ meet฀ the฀ definition฀ of฀ a฀ liability฀ under฀ the฀ IASB's฀
Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ and฀
Justifiable฀
reasons฀not฀to฀ netting฀ the฀ grant฀ off฀ the฀ related฀ asset฀ would฀ hide฀ the฀
apply฀IAS฀20?฀
(Ethics)฀ asset's฀true฀cost.฀
(ii)฀ Shortly฀ after฀ Mr฀ Low฀ had฀ retired฀ from฀ the฀ company,฀ Low฀ Paints฀
made฀an฀initial฀public฀offering฀of฀its฀shares.฀The฀sponsor฀of฀
Relevant฀IAS฀=฀
IAS฀32฀ the฀ issue฀ charged฀ a฀ cash฀ fee฀ of฀ $300,000.฀ The฀ directors฀ had฀
Financial฀
Incorrect฀– per฀
Instruments:฀ charged฀ the฀ cash฀ paid฀ as฀ an฀ expense฀ in฀ the฀ statement฀ of฀ IAS฀32฀should฀
Presentation฀
deduct฀from฀
profit฀ or฀ loss.฀ The฀ public฀ offering฀ was฀ made฀ on฀ 1฀ January฀ equity.฀Need฀to฀
reverse฀from฀
20X1฀and฀involved฀vesting฀four฀million฀ordinary฀shares฀of฀$1฀at฀a฀ earnings฀in฀EPS฀
3฀months฀into฀ calculation.฀
the฀year฀so฀ market฀ price฀ of฀ $1.20.฀ Mr฀ Low฀ and฀ other฀ current฀ shareholders฀ Adjustment฀will฀
only฀multiply฀ increase฀EPS฀so฀
the฀new฀shares฀ decided฀ to฀ sell฀ three฀ million฀ of฀ their฀ shares฀ as฀ part฀ of฀ the฀ offer,฀ does฀not฀look฀
by฀9/12฀in฀ deliberate฀–฀
EPS฀calculation฀ leaving฀one฀million฀new฀shares฀to฀be฀issued.฀฀ genuine฀error?฀
(Ethics)฀฀
฀ Check฀if฀included฀in฀
denominator฀in฀EPS฀
calculation฀
฀ (multiplied฀by฀9/12฀
to฀give฀weighted฀
average)฀
฀
฀ ฀
฀ 441฀

lOMoARcPSD|6256454
฀฀
(iii)฀ The฀directors฀had฀calculated฀earnings฀per฀share฀for฀the฀year฀ended฀
30฀September฀20X1฀as฀follows:฀
Adjust฀for฀grant฀and฀
Recalculate฀and฀ issue฀costs฀
Profit฀for฀the฀year฀ $4.8฀million
check฀if฀still฀hits฀the฀
$0.50฀bonus฀
Ordinary฀shares฀of฀$1 6,000,000 Number฀of฀shares฀at฀
threshold฀
start฀of฀year฀so฀add฀in฀
Earnings฀per฀share฀ $0.80 new฀share฀issue฀
Mr฀Low฀was฀concerned฀over฀the฀way฀that฀earnings฀per฀share฀had฀
been฀ calculated฀ by฀ the฀ directors฀ and฀ he฀ also฀ felt฀ that฀ the฀
In฀part฀(b),฀will฀
need฀to฀advise฀ above฀ accounting฀ practices฀ were฀ at฀ best฀ unethical฀ and฀
Mr฀Low฀on฀what฀
to฀do฀next฀ at฀ worst฀ fraudulent.฀ He฀ therefore฀ asked฀ your฀ technical฀ and฀
ethical฀advice฀on฀the฀practices฀of฀the฀directors.฀
Required฀
(a)฀ Advise฀ Mr฀ Low฀ as฀ to฀ whether฀ earnings฀ per฀ share฀ has฀ been฀
accurately฀ calculated฀ by฀ the฀ directors฀ and฀ show฀ a฀ revised฀
calculation฀of฀earnings฀per฀share฀if฀necessary.฀ (10฀marks)฀
(b)฀ Discuss฀ whether฀ the฀ directors฀ may฀ have฀ acted฀ unethically฀ in฀ the฀
way฀they฀have฀calculated฀earnings฀per฀share.฀ (5฀marks)฀
Professional฀ marks฀ will฀ be฀ awarded฀ for฀ clarity฀ and฀ quality฀ of฀
presentation.฀ ฀฀฀฀(2฀marks)฀
฀
STEP 4฀ Prepare฀ an฀ answer฀ plan฀ for฀ each฀ part฀ of฀ the฀ question.฀ For฀ part฀ (a),฀
฀ identify฀ whether฀ the฀ accounting฀ treatment฀ in฀ the฀ question฀ is฀ correct฀
per฀ the฀ relevant฀ IAS฀ or฀ IFRS฀ and฀ where฀ it฀ is฀ incorrect,฀ think฀ about฀
how฀the฀adjustment฀will฀impact฀the฀numerator฀and/or฀denominator฀of฀
the฀EPS฀ratio.฀
For฀part฀(b),฀be฀very฀careful฀to฀give฀a฀balanced฀answer.฀Try฀and฀think฀
of฀ genuine฀ reasons฀ why฀ the฀ directors฀ might฀ have฀ come฀ up฀ with฀ the฀
accounting฀ treatment฀ in฀ the฀ question฀ but฀ also฀ look฀ out฀ for฀ threats฀ to฀
the฀ACCA฀Code's฀ethical฀principles.฀Consider฀each฀of฀the฀accounting฀
treatments฀ mentioned฀ in฀ the฀ question.฀ Make฀ sure฀ you฀ conclude฀ with฀
advice฀on฀what฀Mr฀Low฀should฀do฀next.฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
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฀ Advice฀on฀EPS฀calculation฀
฀
฀
EPS฀=฀ ฀ ฀
฀
฀ ฀
Government฀grant฀ Share฀issue฀
Issue฀costs฀
Reverse฀from฀P/L฀ Include฀1฀million฀new฀
Reverse฀expense฀from฀P/L
Treat฀as฀deferred฀income฀or฀ shares฀for฀9฀months฀in฀
Deduct฀from฀equity฀
฀ number฀of฀shares฀in฀EPS฀
deduct฀from฀cost฀of฀asset฀then฀
depreciate/amortise฀for฀1฀year฀ calculation฀
Increase฀earnings฀
Reduce฀earnings฀
Discuss฀ whether฀ directors฀

have฀acted฀unethically฀
Deliberate฀or฀due฀to฀genuine฀error?฀฀฀
Bonus฀based฀on฀EPS฀=฀incentive฀to฀
manipulate฀profit฀
Issue฀costs฀
Government฀grant฀ Share฀issue฀
Likely฀to฀be฀lack฀of฀knowledge฀
Well-intentioned฀or฀ Very฀basic฀error฀which฀has฀
as฀complex฀area฀and฀directors'฀
deliberate?฀Contravenes฀ increased฀EPS฀–฀deliberate?฀
error฀has฀decreased฀EPS฀
IAS฀20฀–฀breach฀of฀
Contravenes฀IAS฀33฀
professional฀competence฀ Contravenes฀IAS฀32฀
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฀฀
STEP 5฀ Write฀up฀your฀answer฀using฀separate฀underlined฀headings฀for฀each฀
฀ of฀parts฀(a)฀and฀(b).฀Then฀use฀sub-headings฀for฀items฀(i),฀(ii)฀and฀(iii)฀
where฀appropriate.฀Ensure฀that฀you฀use฀full฀sentences฀and฀explain฀
your฀points฀clearly.฀฀
For฀part฀(a),฀the฀following฀approach฀is฀recommended:฀
 What฀is฀the฀correct฀accounting฀treatment฀per฀the฀IAS฀or฀IFRS?฀
 Is฀the฀directors'฀accounting฀treatment฀allowed?฀If฀not,฀why฀not?฀
 What฀adjustment฀is฀required฀in฀the฀revised฀EPS฀working?฀
For฀part฀(b):฀
 Examine฀the฀motive฀behind฀each฀of฀the฀accounting฀treatments฀
 Identify฀relevant฀ethical฀principles฀and฀threats฀to฀them฀
 Conclude฀with฀advice฀on฀what฀Mr฀Low฀should฀do฀next฀
Suggested฀solution฀ Underlined฀heading฀
using฀key฀words฀
(a)฀฀฀฀฀Calculation฀of฀earnings฀per฀share฀ from฀requirements฀
Earnings฀ per฀ share฀ is฀ a฀ widely฀ used฀ measure฀ of฀ financial฀

performance.฀ Detailed฀ guidance฀ on฀ its฀ calculation฀ and฀ on฀
presentation฀and฀disclosure฀issues฀is฀given฀in฀IAS฀33฀Earnings฀per฀
Share.฀฀
You฀do฀not฀ IAS฀ 33฀ does฀ not฀ address฀ the฀ issue฀ of฀ manipulation฀ of฀ the฀
need฀to฀know฀
Introductory฀
the฀accounting฀ numerator฀ in฀ the฀ calculation,฀ the฀ profit฀ attributable฀ to฀ ordinary฀ paragraph฀
standard฀
recommended฀
number,฀you฀ shareholders.฀ The฀ directors฀ may฀ manipulate฀ it฀ by฀ selecting฀ in฀discussion฀
just฀need฀to฀be฀
questions฀–฀
able฀to฀apply฀ accounting฀ policies฀ designed฀ generally฀ to฀ boost฀ the฀ earnings฀ introduces฀
the฀relevant฀
formula฀for฀
rules฀or฀ figure,฀and฀hence฀the฀earnings฀per฀share.฀฀ EPS฀ratio฀
principles฀of฀
and฀how฀it฀
the฀IAS฀or฀
The฀ denominator฀ in฀ the฀ calculation฀ is฀ the฀ number฀ of฀ shares฀ by฀ could฀be฀
IFRS.฀
manipulated฀
which฀the฀earnings฀figure฀is฀divided.฀It฀is฀defined฀as฀the฀weighted฀ through฀
unethical฀
average฀number฀of฀ordinary฀shares฀outstanding฀during฀the฀period฀ behaviour฀฀
and฀ is฀ more฀ difficult฀ to฀ manipulate,฀ although฀ the฀ directors฀

may฀try,฀as฀explained฀below.฀
(i)฀ Government฀grant฀
IAS฀20฀Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀
Government฀ Assistance฀ allows฀ two฀ methods฀ of฀ accounting฀
for฀government฀grants.฀
฀ ฀
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Identify฀the฀ (1)฀ Set฀up฀the฀grant฀as฀deferred฀income฀and฀release฀it฀

correct฀
accounting฀ to฀profit฀or฀loss฀over฀the฀useful฀life฀of฀the฀asset฀to฀offset฀
treatment฀per฀
the฀IAS฀or฀ the฀depreciation฀charge;฀or฀
IFRS.฀
(2)฀ Deduct฀the฀grant฀in฀arriving฀at฀the฀carrying฀amount฀of฀
the฀asset฀and฀depreciate฀the฀net฀figure.฀
Is฀the฀ The฀directors฀justify฀their฀treatment฀by฀stating฀that฀deferred฀
directors'฀
accounting฀ income฀ would฀ not฀ meet฀ the฀ IASB's฀ Conceptual฀ Framework฀
treatment฀
allowed?฀If฀ for฀ Financial฀ Reporting's฀ definition฀ of฀ a฀ liability฀ and฀ netting฀
not,฀why฀not?฀
the฀grant฀off฀the฀related฀asset฀would฀hide฀the฀true฀cost.฀Here,฀
they฀ are฀ letting฀ their฀ own฀ personal฀ view฀ override฀ the฀
accounting฀treatment฀prescribed฀by฀IAS฀20.฀This฀justification฀
could฀be฀an฀attempt฀to฀hide฀their฀true฀motivation฀to฀increase฀
profit฀in฀order฀to฀earn฀their฀bonus.฀฀
To฀ comply฀ with฀ IAS฀ 20,฀ the฀ grant฀ should฀ therefore฀ be฀
What฀ removed฀from฀the฀statement฀of฀profit฀or฀loss฀and฀deducted฀
adjustment฀is฀
required฀in฀the฀ from฀ earnings฀ in฀ the฀ revised฀ EPS฀ calculation.฀Only฀
revised฀EPS฀
working?฀ $500,000฀ ($5m฀ ÷฀ 10฀ years)฀ should฀ be฀ credited฀ to฀ income฀
and฀ added฀ to฀ earnings฀ in฀ the฀ revised฀ EPS฀ calculation;฀ the฀
balance฀ of฀ $4.5฀ million฀ should฀ be฀ shown฀ as฀ a฀ deferred฀
income฀or฀deducted฀from฀the฀cost฀of฀the฀asset.฀
(ii)฀ Share฀issue฀
In฀the฀calculation฀of฀EPS,฀the฀directors฀have฀used฀the฀number฀
Is฀the฀
directors'฀ of฀ shares฀ in฀ issue฀ when฀ Mr฀ Low฀ retired฀ from฀ the฀ company฀฀
accounting฀
treatment฀ (6฀million).฀They฀have฀not฀taken฀into฀account฀the฀new฀
allowed?฀If฀
not,฀why฀not?฀ issue฀of฀shares฀made฀at฀the฀initial฀public฀offering.฀฀
Identify฀the฀ The฀ number฀ of฀ new฀ shares฀ issued฀ is฀ 1฀ million.฀ This฀ What฀
correct฀ adjustment฀is฀
accounting฀ needs฀ to฀ be฀ time฀ apportioned฀ (the฀ shares฀ were฀ in฀ issue฀ required฀in฀
treatment฀per฀ the฀revised฀
the฀IAS฀or฀ for฀ 10฀ months)฀ and฀ added฀ to฀ the฀ denominator฀ of฀ the฀ EPS฀working?
IFRS.฀
EPS฀calculation.฀
Is฀the฀
directors'฀ The฀ treatment฀ of฀ the฀ issue฀ costs฀ is฀ also฀ incorrect.฀฀
accounting฀
treatment฀ IAS฀ 32฀ states฀ that฀ transaction฀ costs,฀ defined฀ as฀
allowed?฀If฀
not,฀why฀not?฀ incremental฀ external฀ costs฀ directly฀ attributable฀ to฀ an฀
equity฀ transaction,฀ should฀ be฀ accounted฀ for฀ as฀ a฀
฀ 445฀

lOMoARcPSD|6256454
฀฀
Identify฀the฀ deduction฀ from฀ equity.฀ It฀ was฀ therefore฀ incorrect฀ to฀

correct฀
accounting฀ credit฀the฀issue฀costs฀to฀the฀statement฀of฀profit฀or฀loss.฀Instead฀ What฀
treatment฀per฀ adjustment฀is฀
the฀IAS฀or฀ they฀should฀have฀been฀deducted฀from฀equity.฀In฀the฀revised฀ required฀in฀
IFRS.฀ the฀revised฀
EPS฀calculation,฀the฀issue฀costs฀must฀be฀added฀back฀to฀the฀ EPS฀working?
earnings฀in฀the฀EPS฀calculation.฀
Logical฀approach฀and฀all฀
Revised฀EPS฀calculation฀ numbers฀in฀working฀
clearly฀labelled฀so฀easy฀to฀
Revised฀earnings฀ mark.฀
฀ ฀฀฀ ฀$'000฀
฀Earnings฀per฀directors฀ ฀4,800฀
฀(i)฀ ฀Government฀grant฀taken฀to฀deferred฀income฀ ฀(5,000)฀

฀ ฀Credited฀to฀income฀in฀year฀ ฀500฀
฀(ii)฀ ฀Issue฀costs฀incorrectly฀expensed฀ ฀300฀

฀฀฀฀฀฀฀฀฀฀฀฀Revised฀earnings฀ ฀600฀
฀
Revised฀number฀of฀shares฀
Number฀of฀shares฀per฀directors 6,000,000
Additional฀shares฀issued
9
1,000,000฀×฀ ฀ ฀฀฀750,000฀
12
Revised฀number฀of฀shares ฀6,750,000
600, 000 ฀
฀Revised฀EPS฀=฀ ฀=฀$0.09฀฀
6, 750, 000
฀ Underlined฀heading฀
summarising฀in฀tactful฀
professional฀language฀
(b)฀฀ Ethical฀matters฀ what฀the฀answer฀will฀cover฀
Introductory฀ It฀ is฀ not฀ always฀ easy฀ to฀ determine฀ whether฀ creative฀ accounting฀ of฀
paragraph฀
required฀for฀ this฀kind฀is฀deliberate฀or฀whether฀it฀arises฀from฀ignorance฀
discussion฀
questions฀and฀ or฀oversight.฀The฀assessment฀of฀whether฀directors฀have฀acted฀
takes฀the฀
balanced฀ ethically฀ is฀ often฀ a฀ matter฀ of฀ the฀ exercise฀ of฀ professional฀
approach฀
needed฀for฀the฀ judgement.฀In฀practice,฀it฀is฀important฀to฀act฀fairly฀and฀tactfully฀
verb฀'discuss'฀
and฀not฀jump฀to฀unwarranted฀conclusions.฀฀
In฀factual฀terms฀when฀the฀correct฀accounting฀treatment฀is฀used,฀an฀
EPS฀of฀80฀ cents฀ is฀ converted฀ into฀ an฀ EPS฀ of฀ 9฀ cents฀ per฀
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lOMoARcPSD|6256454
share.฀ Since฀ the฀ directors฀ are฀ entitled฀ to฀ a฀ cash฀ bonus฀ for฀ an฀
Clearly฀explains฀
threats฀and฀ EPS฀ of฀ above฀ 50฀ cents,฀ there฀ would฀ appear฀ to฀ be฀ a฀ strong฀
fundamental฀
principles฀from฀ incentive฀ for฀ them฀ to฀ select฀ accounting฀ policies฀ designed฀ to฀
the฀ACCA฀
Code฀which฀are฀ boost฀ it.฀ There฀ is฀ definitely฀ a฀ self-interest฀ threat฀ here฀ to฀ the฀
relevant฀to฀this฀
scenario฀ fundamental฀principles฀of฀integrity฀and฀objectivity฀in฀the฀
ACCA฀Code฀of฀Ethics฀and฀Conduct฀(the฀ACCA฀Code).฀
฀
Each฀of฀the฀
accounting฀treatments฀
฀ covered฀separately฀
because฀each฀has฀its฀
own฀distinct฀ethical฀
Government฀grant฀ issues฀
The฀directors'฀attempt฀to฀improve฀on฀the฀IAS฀20฀treatment฀
for฀ grants,฀ even฀ if฀ it฀ is฀ well-intentioned฀ and฀ founded฀ on฀ the฀
principles฀ of฀ the฀ IASB's฀ Conceptual฀ Framework฀ is฀ not฀ permitted฀
Examines฀ because฀ it฀ contravenes฀ the฀ required฀ treatment฀ of฀ IAS฀ 20.฀ The฀
motive฀behind฀
directors'฀ apparent฀justification฀could฀be฀a฀mask฀to฀hide฀a฀deliberate฀attempt฀
accounting฀
Identifies฀the฀
treatment฀ to฀ increase฀ the฀ profit฀ to฀ meet฀ the฀ EPS฀ target฀ for฀ their฀ cash฀ bonus.฀ relevant฀
ethical฀
Non-compliance฀ with฀ IAS฀ 20฀ would฀ result฀ in฀ a฀ breach฀ of฀ the฀ principle฀and฀
the฀threat฀to฀it฀
principle฀ of฀ professional฀ competence฀ from฀ the฀ ACCA฀ in฀this฀
scenario฀
Code฀which฀requires฀the฀directors฀to฀prepare฀financial฀statements฀
in฀accordance฀with฀accounting฀standards.฀
Share฀issue฀
Examines฀
motive฀behind฀ The฀ treatment฀ of฀ the฀ issue฀ costs฀ of฀ the฀ shares฀ may฀ simply฀
directors'฀
accounting฀ reflect฀lack฀ of฀ knowledge฀on฀the฀part฀of฀directors,฀rather฀than฀
treatment฀
unethical฀accounting฀and฀the฀error฀actually฀reduces฀profit฀and฀EPS,฀
suggesting฀it฀was฀not฀a฀deliberate฀action฀to฀increase฀profit฀to฀meet฀
their฀ bonus฀ target.฀ When฀ corrected,฀ the฀ earnings฀ figure฀ is฀
actually฀increased.฀
The฀omission฀of฀the฀new฀shares฀issued฀from฀the฀denominator฀
Examines฀
motive฀behind฀ of฀ EPS฀ seems฀ to฀ be฀ a฀ very฀ basic฀ error฀ and฀ does฀ have฀ the฀
directors'฀
accounting฀ advantage฀ to฀ the฀ directors฀ of฀ making฀ EPS฀ seem฀ higher฀ than฀ it฀
treatment฀
should฀be฀which฀suggests฀it฀may฀have฀been฀a฀deliberate฀action฀
rather฀than฀a฀genuine฀mistake.฀
Unless฀the฀treatment฀of฀the฀share฀issue฀costs฀is฀made฀and฀the฀new฀
shares฀ added฀ to฀ the฀ EPS฀ denominator,฀ IAS฀ 32฀ and฀ IAS฀ 33฀
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lOMoARcPSD|6256454
฀฀
would฀ be฀ contravened฀ and฀ the฀ directors฀ would฀ not฀ be฀ Identifies฀the฀
relevant฀
demonstrating฀professional฀competence.฀ ethical฀
principle฀and฀
the฀threat฀to฀
Conclusion฀ it฀in฀this฀
scenario฀
In฀practice฀unethical฀intent฀is฀difficult฀to฀prove.฀The฀best฀approach฀
should฀be฀a฀proactive,฀preventative฀one,฀rather฀than฀letting฀matters฀
get฀out฀of฀hand.฀
On฀ the฀ facts฀ of฀ the฀ case,฀ accounting฀ standards฀ have฀ not฀
been฀ followed.฀ The฀ likely฀ result฀ of฀ not฀ following฀ the฀ required฀
standards฀is฀that฀EPS฀will฀improve.฀฀฀
Accusations฀ of฀ fraud฀ should฀ not฀ be฀ made฀ hastily฀ without฀ taking฀
legal฀ advice.฀ The฀ best฀ approach฀ would฀ be฀ to฀ discuss฀ an฀
Conclude฀
ethical฀issues฀ appropriate฀action฀plan฀with฀the฀chairman฀and฀other฀non-executive฀
questions฀with฀
what฀the฀ directors.฀This฀is฀likely฀to฀involve฀explaining฀to฀the฀directors฀why฀the฀
person฀(here,฀
Mr฀Low)฀ accounting฀ treatments฀ and฀ EPS฀ calculation฀ are฀ incorrect฀ and฀
should฀do฀next฀
reminding฀ them฀ of฀ their฀ responsibility฀ for฀ the฀ accuracy฀ and฀
fairness฀ of฀ the฀ financial฀ statements฀ and฀ their฀ obligation฀ to฀
apply฀accounting฀standards.฀
 Both฀parts฀of฀the฀question฀((a)฀and฀(b))฀and฀both฀sub-requirements฀
in฀part฀(a)฀(advice฀on฀EPS฀calculation฀and฀revised฀EPS฀calculation)฀
have฀been฀addressed,฀each฀with฀their฀own฀heading.฀
 All฀of฀the฀accounting฀treatments฀in฀the฀scenario฀have฀been฀
covered฀(government฀grant,฀issue฀costs,฀share฀issue).฀
 The฀answer฀to฀part฀(a)฀is฀approximately฀twice฀as฀long฀as฀the฀
answer฀to฀part฀(b)฀reflecting฀their฀relative฀mark฀allocations.฀
 The฀answer฀to฀part฀(b)฀involves฀'discussion'฀–฀for฀each฀accounting฀
treatment฀proposed฀by฀the฀directors,฀it฀considers฀both฀genuine฀
reasons฀for฀the฀error฀and฀deliberate฀manipulation.฀
 The฀professional฀marks฀have฀been฀obtained฀through฀answering฀
both฀parts฀of฀the฀question฀and฀all฀sub-requirements,฀addressing฀all฀
of฀the฀accounting฀treatments฀in฀the฀scenario,฀using฀headings฀and฀
sub-headings,฀and฀writing฀a฀balanced฀answer฀to฀part฀(b).฀
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lOMoARcPSD|6256454
completed฀ below฀ for฀ the฀ Low฀ Paints฀ activity฀ to฀ give฀ you฀ an฀ idea฀ of฀ how฀ to฀ complete฀ the฀
diagnostic.฀
Good฀time฀ Did฀you฀spend฀a฀third฀of฀your฀time฀reading฀and฀planning?฀
management฀ Do฀you฀spend฀two-thirds฀of฀your฀writing฀time฀on฀part฀(a)฀and฀
one-third฀on฀part฀(b)?฀
Did฀you฀spread฀your฀time฀to฀cover฀each฀of฀the฀accounting฀
treatments฀in฀the฀scenario฀(government฀grant,฀issue฀costs฀
and฀share฀issue)?฀
Managing฀information฀฀฀ Did฀you฀identify฀the฀relevant฀IAS฀or฀IFRS฀for฀each฀issue฀in฀
the฀scenario?฀
Did฀you฀highlight฀or฀underline฀useful฀information฀and฀make฀
notes฀in฀the฀margins฀where฀appropriate?฀
Did฀you฀think฀about฀the฀impact฀of฀correcting฀each฀
accounting฀treatment฀on฀both฀the฀numerator฀and฀
denominator฀of฀EPS?฀
Did฀you฀remember฀to฀look฀out฀for฀threats฀to฀the฀ethical฀
principles?฀฀
Answer฀planning฀ Did฀your฀plan฀cover฀both฀parts฀of฀the฀question?฀
Did฀you฀generate฀enough฀points฀to฀score฀a฀pass?฀
Correct฀interpretation฀ Did฀you฀understand฀the฀verbs฀in฀the฀requirements?฀
of฀the฀requirements฀ Did฀you฀analyse฀the฀requirements฀and฀address฀all฀aspects฀in฀
your฀answer?฀
Efficient฀numerical฀ Did฀you฀draw฀up฀a฀proforma฀for฀the฀revised฀EPS฀
analysis฀ calculation?฀
Did฀you฀have฀separate฀workings฀for฀earnings฀and฀the฀
number฀of฀shares?฀
Did฀you฀start฀with฀the฀figures฀per฀the฀question฀then฀post฀the฀
relevant฀adjustments?฀
Were฀all฀your฀numbers฀clearly฀labelled?฀
Effective฀writing฀and฀ Did฀you฀use฀underlined฀headings฀and฀sub-headings?฀
presentation฀ Did฀you฀write฀in฀full฀sentences฀and฀use฀professional฀
language?฀
Did฀you฀answer฀all฀the฀requirements?฀
Did฀you฀structure฀your฀answer฀as฀follows?฀
For฀part฀(a):฀฀
 What฀is฀the฀correct฀accounting฀treatment฀per฀the฀IAS฀or฀
IFRS?฀
฀ 449฀

lOMoARcPSD|6256454
฀฀
 Is฀the฀directors' accounting฀treatment฀allowed?฀If฀not,฀
why฀not?฀
 What฀adjustment฀is฀requirement฀in฀the฀revised฀EPS฀
working?฀
For฀part฀(b):฀
 Examine฀the฀motive฀behind฀each฀of฀the฀accounting฀
treatments฀
 Identify฀relevant฀ethical฀principles฀and฀threats฀to฀them฀
 Conclude฀with฀advice฀on฀what฀Mr฀Low฀should฀do฀next฀
฀
฀
฀
฀
Summary฀
For฀ a฀ financial฀ analysis฀ question฀ requiring฀ you฀ to฀ explain฀ the฀ impact฀ on฀ a฀ specified฀
ratio,฀the฀key฀to฀success฀is฀to฀think฀of฀the฀formula฀of฀the฀ratio.฀Then฀you฀need฀to฀think฀
about฀ the฀ double฀ entry฀ and฀ the฀ impact฀ it฀ has฀ on฀ the฀ numerator฀ and/or฀ denominator฀
and฀therefore฀the฀overall฀ratio.฀
However,฀this฀is฀a฀very฀broad฀syllabus฀area฀which฀could฀generate฀many฀different฀types฀
of฀questions฀so฀the฀approach฀in฀this฀Skills฀Checkpoint฀will฀have฀to฀be฀adapted฀to฀suit฀
the฀specific฀requirements฀and฀scenario฀in฀the฀exam.฀The฀basic฀five฀steps฀for฀answering฀
any฀SBR฀question฀will฀always฀be฀a฀good฀starting฀point:฀
(1) Time฀(1.95฀minutes฀per฀mark)฀
(2) Read฀and฀analyse฀the฀requirement(s)฀
(3) Read฀and฀analyse฀the฀scenario฀
(4) Prepare฀an฀answer฀plan฀
(5) Write฀up฀your฀answer฀
450฀

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฀
฀
Reporting฀requirements
฀
฀
฀
of฀small฀and฀medium-
฀
฀
฀
฀
sized฀entities
฀ Syllabus฀
reference฀no.฀
Discuss฀the฀key฀differences฀in฀accounting฀treatment฀between฀full฀IFRS฀and฀IFRS฀for฀ C10(a)฀
SMEs.฀
Discuss฀and฀apply฀the฀simplifications฀introduced฀by฀the฀IFRS฀for฀SMEs.฀ C10(b)฀
Exam฀context฀
You฀ should฀ be฀ aware฀ that฀ smaller฀ entities฀ have฀ different฀ accounting฀ needs฀ from฀ larger฀ entities฀ and฀
that฀ the฀ IFRS฀ for฀ Small฀ and฀ Medium-Sized฀ Entities฀ (IFRS฀ for฀ SMEs)฀ helps฀ to฀ meet฀ these฀ needs.฀ It฀ is฀
important฀that฀you฀understand฀the฀key฀differences฀between฀full฀IFRS฀and฀the฀IFRS฀for฀SMEs.฀This฀topic฀
is฀ in฀ syllabus฀ area฀ C฀ and฀ could฀ therefore฀ be฀ examined฀ in฀ either฀ Section฀ A฀ or฀ Section฀ B฀ of฀ the฀
Strategic฀Business฀Reporting฀(SBR)฀exam.฀It฀is฀likely฀to฀form฀part฀of฀a฀larger฀question.฀
฀ 451฀

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฀฀
฀
฀ Reporting฀requirements฀of฀
฀ small฀and฀
฀ medium-sized฀entities฀
฀
฀
฀
1.฀ Background฀to฀IFRS฀for฀ ฀
2.฀ Differences฀in฀ 3.฀ Simplifications฀
SMEs฀ accounting฀treatment฀ introduced฀by฀IFRS฀for฀
between฀full฀IFRS฀and฀ SMEs฀
the฀IFRS฀for฀SMEs฀
Accounting฀treatments฀not฀
Omissions฀under฀IFRS฀for฀SMEs฀
allowable฀under฀IFRS฀for฀SMEs฀
452฀

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18:฀Reporting฀requirements฀of฀small฀and฀medium-sized฀entities฀
1฀ IFRS฀for฀Small฀and฀Medium-sized฀Entities฀
1.1฀ Background฀to฀IFRS฀for฀Small฀and฀Medium-sized฀Entities฀(IFRS฀for฀
SMEs)฀
1.1.1฀Small฀and฀medium-sized฀entities฀
Full฀ IFRSs฀ are฀ designed฀ for฀ entities฀ quoted฀ on฀ the฀ world's฀ capital฀ markets.฀ However,฀ most฀ entities฀
are฀small฀or฀medium-sized.฀฀
Small฀or฀medium-sized฀entities฀often฀have฀the฀following฀characteristics:฀
฀
฀
Owner-managed฀with฀a฀ Relatively฀small฀number฀
Less฀subject฀to฀external฀
฀ small,฀close฀shareholder฀ of฀employees฀and฀other฀
attention฀and฀scrutiny฀
฀ base฀ key฀stakeholders฀
฀
฀ Generate฀less฀revenue,฀
Undertake฀less฀complex฀
฀ control฀fewer฀assets฀and฀
transactions฀
have฀smaller฀liabilities฀
฀
฀
These฀characteristics฀mean฀there฀are฀some฀issues฀with฀trying฀to฀apply฀full฀IFRS฀to฀small฀and฀medium-
sized฀entities฀such฀as:฀
Some฀IFRSs฀are฀not฀relevant฀to฀small฀and฀medium-sized฀company฀accounts;฀for฀
Relevance฀ example,฀a฀company฀with฀equity฀that฀is฀not฀quoted฀on฀a฀stock฀exchange฀has฀no฀
need฀to฀comply฀with฀IAS฀33฀Earnings฀per฀Share.฀
One฀of฀the฀underlying฀principles฀of฀financial฀reporting฀is฀that฀the฀cost฀and฀effort฀
Cost฀to฀
required฀to฀prepare฀financial฀statements฀should฀not฀exceed฀the฀benefits฀to฀
prepare฀
users.฀This฀applies฀to฀all฀reporting฀entities,฀not฀just฀smaller฀ones.฀However,฀smaller฀
entities฀are฀more฀likely฀to฀make฀use฀of฀this฀as฀a฀reason฀not฀to฀comply฀with฀full฀IFRS.
IFRSs฀apply฀to฀material฀items.฀In฀the฀case฀of฀smaller฀entities,฀the฀amount฀that฀is฀
material฀may฀be฀very฀small฀in฀monetary฀terms.฀However,฀the฀effect฀of฀not฀reporting฀
that฀item฀may฀be฀material฀by฀nature฀in฀that฀it฀would฀mislead฀users฀of฀the฀financial฀
Materiality฀
statements.฀Consider,฀for฀example,฀IAS฀24฀Related฀Party฀Disclosures.฀Smaller฀
entities฀may฀well฀rely฀on฀trade฀with฀relatives฀of฀the฀directors/shareholders฀which฀are฀
relatively฀small฀in฀value,฀but฀essential฀to฀the฀operations฀of฀the฀entity฀and฀should฀
therefore฀be฀disclosed.
1.1.2฀Issue฀and฀scope฀of฀IFRS฀for฀SMEs฀
IASB฀ issued฀ the฀ IFRS฀ for฀ Small฀ and฀ Medium-sized฀ Entities฀ (IFRS฀ for฀ SMEs)฀ in฀ July฀ 2009฀ and฀ last฀
revised฀it฀in฀2015.฀There฀is฀no฀specific฀effective฀date฀as฀this฀depends฀on฀national฀law,฀but฀IFRS฀
for฀SMEs฀contains฀transitional฀rules฀for฀entities฀moving฀from฀full฀IFRSs฀or฀previous฀national฀GAAP.฀
IFRS฀for฀SMEs฀is฀a฀single฀self-contained฀standard,฀with฀sections฀for฀each฀topic.฀These฀sections฀
are฀not฀numbered฀in฀the฀order฀of฀current฀IFRSs,฀but฀have฀been฀re-ordered฀into฀a฀logical฀format.฀
The฀IASB฀followed฀an฀approach฀of฀extracting฀the฀core฀ principles฀of฀existing฀IFRSs฀for฀inclusion฀in฀
IFRS฀ for฀ SMEs฀ with฀ a฀ 'rebuttable฀ presumption'฀ of฀ no฀ changes฀ being฀ made฀ to฀ recognition฀ and฀
measurement฀principles.฀
฀ 453฀

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฀฀
The฀ range฀ of฀ users฀ of฀ the฀ financial฀ statements฀ of฀ small฀ and฀ medium-sized฀ entities฀ is฀ generally฀
narrower฀ than฀ that฀ of฀ large฀ companies.฀ The฀ shareholders฀ generally฀ form฀ part฀ of฀ the฀ management฀
group฀ and฀ the฀ biggest฀ external฀ stakeholder฀ group฀ is฀ lenders฀ and฀ others฀ who฀ provide฀ credit฀ to฀ the฀
entity.฀ The฀ IASB฀ states฀ that฀ the฀ IFRS฀ for฀ SMEs฀ is฀ focused฀ on฀ the฀ information฀ needs฀ of฀ lenders฀ and฀
creditors฀ and฀ any฀ other฀ stakeholders฀ interested฀ in฀ information฀ relating฀ to฀ cash฀ flow,฀ solvency฀ and฀
liquidity.฀Having฀a฀single฀standard฀that฀applies฀to฀small฀and฀medium-sized฀entities฀helps฀to฀promote฀
transparency฀ and฀ comparability฀ between฀ entities,฀ allowing฀ the฀ providers฀ of฀ finance฀ to฀ make฀ more฀
informed฀judgements฀about฀the฀performance฀and฀position฀of฀the฀entity.฀
Chapter฀18฀Section฀1฀of฀the฀Supplementary฀Reading฀provides฀further฀information฀on฀the฀background฀
to฀the฀development฀of฀the฀IFRS฀for฀SMEs.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
1.2฀ Scope฀
The฀standard฀is฀intended฀for฀small฀and฀medium-sized฀entities,฀defined฀as฀those฀that:฀
฀
฀
do฀not฀have฀public฀
฀ ฀ accountability฀฀
฀ ฀ ฀ ฀ ฀ ฀฀฀
฀ (ie฀do฀not฀issue฀debt฀ do฀publish฀general฀
or฀equity฀instruments฀ and purpose฀financial฀
฀ in฀a฀public฀market฀or฀ statements฀for฀
฀ hold฀assets฀in฀a฀ external฀users฀
fiduciary฀capacity฀฀
฀
for฀others)฀
฀
฀
There฀is฀no฀size฀test,฀as฀this฀would฀be฀difficult฀to฀apply฀to฀companies฀operating฀under฀different฀legal฀
frameworks.฀
1.3฀Transition฀to฀the฀IFRS฀for฀SMEs฀
Transition฀to฀the฀IFRS฀for฀SMEs฀from฀previous฀GAAP฀is฀made฀retrospectively฀as฀a฀prior฀period฀
adjustment฀at฀the฀beginning฀of฀the฀earliest฀comparative฀period฀presented.฀The฀standard฀allows฀all฀
of฀ the฀ exemptions฀ in฀ IFRS฀ 1฀ First-time฀ Adoption฀ of฀ IFRSs.฀ It฀ also฀ contains฀ 'impracticability'฀
exemptions฀for฀comparative฀information฀and฀the฀restatement฀of฀the฀opening฀statement฀of฀financial฀
position.฀
2฀฀Key฀differences฀in฀accounting฀treatment฀between฀full฀IFRS฀
and฀the฀IFRS฀for฀SMEs฀
2.1฀Key฀omissions฀from฀the฀IFRS฀for฀SMEs฀
Some฀accounting฀standards฀have฀been฀omitted฀completely฀from฀IFRS฀for฀SMEs,฀mainly฀due฀to฀the฀
standards฀not฀being฀relevant฀or฀the฀cost฀of฀reporting฀exceeding฀the฀perceived฀benefits.฀
Earnings฀per฀ Full฀IFRS฀requires฀IAS฀33฀Earnings฀per฀Share฀to฀be฀applied฀for฀listed฀
share฀(EPS)฀ companies.฀IAS฀33฀requires฀calculation฀and฀presentation฀of฀EPS฀and฀diluted฀
EPS฀for฀all฀reported฀periods.฀The฀concept฀of฀EPS฀is฀not฀relevant฀to฀SMEs฀as฀they฀
are฀not฀listed.฀
454฀

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Interim฀reporting฀ IAS฀34฀Interim฀Financial฀Reporting฀applies฀when฀an฀entity฀prepares฀interim฀
reports.฀SMEs฀are฀highly฀unlikely฀to฀prepare฀such฀reports.฀Interim฀reporting฀is฀
omitted฀from฀the฀IFRS฀for฀SMEs.฀
Segmental฀ IFRS฀8฀Operating฀Segments฀requires฀listed฀entities฀to฀report฀information฀on฀the฀
reporting฀ different฀types฀of฀operations฀they฀are฀involved฀in,฀different฀geographical฀areas฀
etc.฀SMEs฀are฀not฀listed฀and฀therefore฀IFRS฀8฀does฀not฀apply.฀The฀IFRS฀for฀
SMEs฀does฀not฀require฀any฀other฀segmental฀reporting฀as฀SMEs฀are฀unlikely฀to฀
have฀such฀diverse฀operations฀and฀the฀cost฀of฀reporting฀such฀information฀would฀
be฀prohibitive฀for฀such฀entities.฀฀
Assets฀held฀for฀ IFRS฀5฀Non-current฀Assets฀Held฀for฀Sale฀and฀Discontinued฀Operations฀contains฀
sale฀ specific฀accounting฀requirements฀for฀assets฀classified฀as฀held฀for฀sale.฀The฀cost฀
of฀reporting฀in฀this฀way฀is฀expected฀to฀exceed฀the฀benefits฀for฀SMEs฀and฀it฀is฀
therefore฀omitted฀from฀the฀IFRS฀for฀SMEs฀(instead,฀holding฀assets฀for฀sale฀is฀an฀
impairment฀indicator).฀
฀
2.2฀Different฀accounting฀treatments฀under฀the฀IFRS฀for฀SMEs฀
There฀are฀a฀number฀of฀differences฀between฀the฀accounting฀treatment฀required฀under฀full฀IFRS฀and฀
that฀under฀the฀IFRS฀for฀SMEs.฀
Area฀ IFRS฀for฀SMEs฀ Full฀IFRSs฀

Go฀back฀to฀฀
Investment฀ Fair฀value฀through฀profit฀or฀loss฀ Permitted฀to฀make฀a฀choice฀between฀ the฀relevant฀
property฀ must฀be฀used฀(if฀fair฀value฀can฀be฀ fair฀value฀model,฀or฀cost฀model฀ chapter฀if฀฀
you฀need฀a฀
measured฀without฀undue฀cost฀or฀ (accounting฀policy฀choice)฀
reminder฀of฀full฀
effort);฀otherwise฀the฀cost฀model฀is฀ IFRS฀approach฀
applied฀(IFRS฀for฀SMEs:฀para.฀16.7)฀
Intangible฀assets฀ The฀revaluation฀model฀is฀not฀ Revaluations฀permitted฀where฀active฀

permitted.฀Intangible฀assets฀must฀be฀ market฀
held฀at฀cost฀less฀accumulated฀ ฀
amortisation฀(IFRS฀for฀SMEs:฀para.฀
18.18)฀
Government฀ No฀specified฀future฀performance฀ Grants฀relating฀to฀income฀

grants฀ conditions:฀ recognised฀in฀profit฀or฀loss฀over฀
→฀ recognise฀as฀income฀when฀the฀ period฀to฀match฀to฀related฀costs฀
grant฀is฀receivable฀ Grants฀relating฀to฀assets฀either:฀
Otherwise:฀ ฀ Presented฀as฀deferred฀income;฀
→ recognise฀as฀income฀when฀ or฀
performance฀conditions฀met฀ ฀ Deducted฀in฀arriving฀at฀the฀
(IFRS฀for฀SMEs:฀para.฀24.4)฀ carrying฀amount฀of฀the฀asset฀
Borrowing฀costs฀ Expensed฀when฀incurred฀ Capitalised฀(when฀relate฀to฀

(IFRS฀for฀SMEs:฀para.฀25.2)฀ construction฀of฀a฀qualifying฀asset)฀
Development฀ All฀internally฀generated฀research฀฀ Development฀expenditure฀

costs฀ and฀development฀expenditure฀ capitalised฀when฀the฀IAS฀38฀
expensed฀(IFRS฀for฀SMEs:฀para.฀18.4) Intangible฀Assets฀criteria฀are฀met฀
฀ 455฀

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฀฀
Pension฀actuarial฀ Actuarial฀gains฀and฀losses฀can฀be฀ Remeasurements฀in฀OCI฀only฀

gains฀and฀losses฀ recognised฀immediately฀in฀profit฀or฀ ฀
loss฀or฀other฀comprehensive฀ ฀
income฀(OCI)฀ ฀
(IFRS฀for฀SMEs:฀para.฀28.24)฀ ฀
Simplified฀calculation฀of฀defined฀ Projected฀unit฀credit฀method฀must฀be฀
benefit฀obligations฀(ignoring฀future฀ used฀
service/salary฀rises)฀permitted฀if฀not฀
able฀to฀use฀projected฀unit฀credit฀
method฀without฀undue฀cost/effort฀
(IFRS฀for฀SMEs:฀para.฀28.18)฀
Financial฀ All฀classified฀at฀either฀cost฀or฀ FINANCIAL฀ASSETS฀

instruments฀ amortised฀cost฀or฀fair฀value฀ Investments฀in฀debt฀instruments
through฀profit฀or฀loss฀
Business฀model:฀held฀to฀collect฀
'Basic'฀debt฀instruments฀ contractual฀cash฀flows฀
฀ Amortised฀cost฀ ฀ Amortised฀cost฀
Investments฀in฀shares฀(excluding฀ Business฀model:฀held฀to฀collect฀
convertible฀preference฀shares฀and฀ contractual฀cash฀flows฀and฀sell฀
puttable฀shares)฀
฀ Fair฀value฀through฀OCI฀
฀ Fair฀value฀through฀profit฀or฀loss฀
Investments฀in฀equity฀
฀ Cost฀less฀impairment฀(where฀fair฀ instruments฀not฀held฀for฀
value฀cannot฀be฀measured฀reliably฀ trading฀
without฀undue฀cost/effort)฀
฀ Fair฀value฀through฀OCI฀(if฀
Other฀financial฀instruments฀ irrevocable฀election฀made)฀
฀ Fair฀value฀through฀profit฀or฀loss฀ All฀other฀financial฀assets฀
(IFRS฀for฀SMEs:฀para.฀11.14)฀ ฀ Fair฀value฀through฀profit฀or฀loss฀
฀ FINANCIAL฀LIABILITIES฀
(main฀categories฀only)฀
Most฀financial฀labilities฀
฀ Amortised฀cost฀
Financial฀liabilities฀at฀fair฀value฀
through฀profit฀or฀loss฀
฀ Held฀for฀trading฀
฀ Derivatives฀that฀are฀liabilities฀
฀ Accounting฀mismatch฀
฀ Group฀managed฀and฀evaluated฀on฀
FV฀basis฀
456฀

lOMoARcPSD|6256454
Illustration฀1฀฀฀
Borrowing฀costs฀–฀full฀IFRS฀v฀IFRS฀for฀SMEs฀
Harold฀Co฀completed฀the฀construction฀of฀a฀new฀warehouse฀facility฀during฀the฀year฀ended฀฀
31฀December฀20X6.฀Harold฀incurred฀borrowing฀costs฀totalling฀$1,680,000฀in฀the฀year.฀Of฀this,฀
$980,000฀was฀incurred฀before฀the฀warehouse฀was฀complete฀on฀1฀August฀20X6฀and฀$700,000฀was฀
incurred฀between฀completion฀and฀the฀year฀end฀date.฀The฀warehouse฀facility฀was฀available฀for฀use฀
and฀brought฀into฀use฀on฀1฀October฀20X6฀and฀has฀an฀estimated฀useful฀life฀of฀20฀years.฀
Required฀
Briefly฀discuss฀the฀difference฀in฀accounting฀treatment฀in฀respect฀of฀the฀borrowing฀costs฀incurred฀under฀
full฀IFRS฀and฀IFRS฀for฀SMEs฀and฀consider฀the฀impact฀on฀the฀reported฀profit฀of฀Harold฀Co฀for฀the฀year฀
Solution฀
Under฀full฀IFRS฀
Borrowing฀costs฀incurred฀up฀to฀1฀August฀20X6฀should฀be฀capitalised฀as฀part฀of฀the฀cost฀of฀the฀asset.฀
Those฀incurred฀after฀the฀asset฀is฀completed฀should฀be฀expensed฀to฀profit฀or฀loss.฀The฀asset฀should฀be฀
depreciated฀from฀the฀date฀it฀is฀first฀brought฀into฀use.฀The฀amount฀charged฀to฀profit฀or฀loss฀in฀respect฀
of฀the฀borrowing฀costs฀would฀be:฀
฀$ ฀฀฀฀฀
฀Expensed฀borrowing฀costs฀ ฀700,000฀ Remember฀
฀Depreciation฀on฀capitalised฀costs฀ ฀12,250฀ depreciation฀starts฀
when฀asset฀is฀
฀(980,000฀/฀20฀yrs฀ 3/12)฀ ฀ ฀ ฀฀฀฀ ฀฀฀฀฀ available฀for฀use฀฀
฀Total฀expense฀
฀
฀712,250฀
฀
Under฀the฀IFRS฀for฀SMEs฀
The฀whole฀borrowing฀cost฀of฀$1,680,000฀would฀be฀expensed฀to฀profit฀or฀loss฀in฀the฀current฀year.฀
Impact฀on฀reported฀profit฀
The฀reported฀profit฀for฀the฀period฀would฀be฀lower฀under฀the฀IFRS฀for฀SMEs.฀This฀has฀a฀negative฀
impact฀on฀profitability฀ratios.฀
Activity฀1:฀Intangible฀assets฀–฀full฀IFRS฀v฀IFRS฀for฀SMEs฀ ฀
Diamond฀Co฀is฀preparing฀its฀financial฀statements฀for฀the฀year฀ended฀31฀March฀20X5.฀It฀acquired฀a฀
licence฀to฀operate฀a฀train฀service฀in฀the฀region฀of฀Southland.฀The฀licence฀cost฀Diamond฀Co฀$2.6m฀on฀
1฀ April฀ 20X4฀ and฀ has฀ a฀ useful฀ life฀ of฀ 10฀ years฀ from฀ that฀ date.฀ There฀ is฀ an฀ active฀ market฀ for฀ the฀
licence฀and฀the฀fair฀value฀of฀the฀licence฀at฀31฀March฀20X5฀has฀been฀assessed฀as฀$2.8m.฀
Required฀
(a)฀ Briefly฀ discuss,฀ using฀ calculations฀ to฀ illustrate฀ your฀ answer,฀ how฀ the฀ licence฀ would฀ be฀
accounted฀for฀in฀the฀year฀to฀31฀March฀20X5฀using:฀
(i)฀ Full฀IFRS฀
(ii)฀ IFRS฀for฀SMEs฀
(b)฀ Explain฀the฀impact฀of฀the฀above฀on฀Diamond฀Co's฀return฀on฀assets฀ratio.฀
฀ 457฀

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฀฀
3฀Simplifications฀introduced฀by฀the฀IFRS฀for฀SMEs฀
฀
Simplifications฀under฀IFRS฀for฀SMEs฀
There฀are฀several฀accounting฀and฀reporting฀standards฀that฀have฀been฀simplified฀before฀inclusion฀in฀
IFRS฀for฀SMEs.฀฀
Area฀ IFRS฀for฀SMEs฀ Full฀IFRSs฀
Presentation฀and฀Disclosure฀
Presentation฀and฀ Combined฀statement฀of฀profit฀or฀loss฀ Not฀permitted฀

disclosure฀ (SPL)฀and฀other฀comprehensive฀income฀ ฀
(OCI)฀and฀statement฀of฀changes฀in฀ ฀
equity฀(SOCIE)฀permitted฀(where฀no฀ ฀
OCI฀nor฀equity฀movements฀other฀than฀ ฀
profit฀or฀loss,฀dividends฀and/or฀prior฀ ฀
period฀adjustments฀(PPA)).฀ ฀
Segment฀disclosures฀and฀ Required฀(as฀full฀IFRSs฀apply฀to฀
earnings฀per฀share฀not฀ publicly฀quoted฀companies)฀
required.฀Other฀disclosures฀reduced฀ ฀
by฀90%฀versus฀full฀IFRSs฀
Revenue฀ Goods:฀when฀significant฀risks฀and฀ When฀performance฀obligation฀

rewards฀of฀ownership฀ satisfied฀(IFRS฀15฀Revenue฀from฀
transferred฀(and฀no฀continuing฀ Contracts฀with฀Customers฀five฀step฀
managerial฀involvement฀nor฀effective฀ approach)฀
control)฀
(IFRS฀for฀SMEs:฀para.฀23.10)฀
Services:฀stage฀of฀completion฀
Intangible฀assets฀ All฀intangibles฀(including฀goodwill)฀ Only฀amortised฀if฀finite฀useful฀life฀

are฀amortised฀ ฀
Useful฀life฀cannot฀exceed฀10฀ No฀specific฀limit฀on฀useful฀lives฀
years฀if฀cannot฀be฀established฀
reliably฀ ฀
(IFRS฀for฀SMEs:฀paras.฀18.19,฀18.20)฀
An฀impairment฀test฀is฀required฀ An฀annual฀impairment฀test฀is฀
only฀if฀there฀is฀an฀indication฀of฀ required฀for฀goodwill,฀for฀intangible฀
impairment฀ assets฀with฀an฀indefinite฀useful฀life,฀and฀
for฀an฀intangible฀asset฀not฀yet฀available฀
for฀use฀
Separate฀ Investments฀in฀subsidiaries,฀associates฀ Cost฀or฀under฀IFRS฀9฀Financial฀

financial฀ and฀joint฀ventures฀can฀be฀held฀at฀cost฀ Instruments฀(fair฀value฀through฀profit฀
statements฀of฀ (less฀any฀impairment)฀or฀fair฀value฀ or฀loss,฀or฀fair฀value฀through฀other฀
investor฀ through฀profit฀or฀loss฀or฀using฀ comprehensive฀income฀if฀an฀
the฀equity฀method.฀ election฀was฀made฀on฀purchase)฀or฀
(IFRS฀for฀SMEs:฀para.฀9.26)฀ using฀the฀equity฀method฀฀
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Consolidated฀ Investments฀in฀associates฀and฀joint฀ Associates฀and฀joint฀ventures฀

financial฀ ventures฀can฀remain฀at฀the฀same฀ equity฀accounted฀
statements฀ value฀as฀in฀the฀separate฀ ฀
financial฀statements.฀ ฀
Only฀partial฀goodwill฀allowed,฀ie฀ Choice฀of฀full฀or฀partial฀goodwill฀
non-controlling฀interests฀cannot฀be฀ method.฀Compulsory฀annual฀test฀for฀
measured฀at฀full฀fair฀value.฀Goodwill฀ impairment,฀not฀amortised฀
is฀amortised฀as฀for฀intangible฀assets฀
Exchange฀differences฀on฀translating฀a฀ Recognised฀in฀other฀comprehensive฀
foreign฀operation฀are฀recognised฀in฀ income฀and฀reclassified฀to฀profit฀
other฀comprehensive฀income฀ or฀loss฀on฀disposal฀of฀the฀foreign฀
and฀not฀subsequently฀ operation.฀
reclassified฀to฀profit฀or฀loss฀ ฀
Subsidiaries฀acquired฀and฀held฀with฀ Consolidated,฀but฀using฀IFRS฀5฀
the฀intention฀of฀selling/disposing฀ principles฀(held฀for฀sale).฀
within฀one฀year฀are฀not฀
consolidated฀
฀
Goodwill฀–฀full฀IFRS฀v฀IFRS฀for฀SMEs฀
Poppy฀Co฀acquired฀70%฀of฀the฀ordinary฀shares฀of฀Branch฀Co฀on฀1฀August฀20X3.฀Poppy฀Co฀paid฀
$3.45m฀to฀acquire฀the฀investment฀in฀Branch฀Co.฀The฀fair฀value฀of฀Branch฀Co’s฀identifiable฀net฀assets฀
was฀assessed฀as฀$4.5m฀at฀the฀date฀of฀acquisition.฀The฀fair฀value฀of฀the฀non-controlling฀interest฀(NCI)฀
in฀Branch฀Co฀was฀assessed฀to฀be฀$1.7m.฀
Required฀
(a)฀ Calculate฀the฀amount฀that฀would฀be฀recognised฀as฀goodwill฀using฀฀
฀ (i)฀ Full฀IFRS,฀assuming฀NCI฀is฀valued฀at฀fair฀value฀
฀ (ii)฀ IFRS฀for฀SMEs.฀
(b)฀ Briefly฀discuss฀the฀reason฀for฀the฀difference฀between฀the฀two฀methods.฀
Solution฀
(a)(i)฀Full฀IFRS฀ $m฀ (a)(ii)฀IFRS฀for฀SMEs฀ $m฀

฀ Consideration฀ 3.45 ฀ Consideration฀ 3.45฀
NCI฀at฀share฀of฀net฀
฀ NCI฀at฀fair฀value฀ ฀1.7 ฀ ฀฀assets฀(30%)฀ ฀1.35฀
5.15 4.8฀
฀ Fair฀value฀of฀assets฀less฀ Fair฀value฀of฀assets฀less฀
฀ ฀฀liabilities฀ ฀4.5 ฀ ฀฀liabilities฀ ฀4.5฀
฀ ฀
Goodwill฀ 0.65 ฀ Goodwill฀ 0.3฀
฀
(b)฀ Under฀full฀IFRS,฀the฀non-controlling฀interest฀can฀be฀valued฀either฀at฀its฀share฀of฀net฀assets฀or฀its฀
fair฀value฀whereas฀the฀IFRS฀for฀SMEs฀does฀not฀permit฀fair฀value฀to฀be฀used.฀In฀the฀given฀
example฀the฀fair฀value฀of฀the฀NCI฀is฀higher฀than฀its฀share฀of฀net฀assets,฀which฀gives฀rise฀to฀a฀
higher฀amount฀of฀goodwill฀being฀recognised.฀
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฀฀
Activity฀2:฀Goodwill฀–฀full฀IFRS฀v฀IFRS฀for฀SMEs฀ ฀
Kion฀ Co฀ acquired฀ 70%฀ of฀ the฀ ordinary฀ shares฀ and฀ 30%฀ of฀ the฀ preference฀ shares฀ of฀ Piger฀ Co฀ on฀฀
1฀September฀20X6.฀Kion฀Co฀paid฀$3,460,000฀to฀acquire฀the฀total฀investment฀in฀Piger฀Co,฀of฀which฀
$2,950,000฀related฀to฀the฀ordinary฀shares.฀The฀fair฀value฀of฀Piger฀Co’s฀identifiable฀net฀assets฀was฀
assessed฀ as฀ $3,100,000฀ at฀ the฀ date฀ of฀ acquisition.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interest฀ in฀
Piger฀Co฀was฀assessed฀to฀be฀$1,000,000.฀The฀goodwill฀is฀expected฀to฀have฀an฀indefinite฀useful฀life.฀
Required฀
Explain,฀ using฀ calculations฀ to฀ illustrate฀ your฀ answer,฀ how฀ the฀ goodwill฀ in฀ Piger฀ Co฀ would฀ be฀
calculated฀if฀Kion฀Co฀prepares฀its฀financial฀statements฀for฀the฀year฀to฀31฀December฀20X6฀using฀the฀
IFRS฀for฀SMEs.฀
Chapter฀18฀Section฀2฀of฀the฀Supplementary฀Reading฀includes฀discussion฀on฀the฀likely฀consequences฀
of฀adopting฀the฀IFRS฀for฀SMEs.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
Activity฀3:฀Accounting฀under฀the฀IFRS฀for฀SMEs฀ ฀
Smerk฀ is฀ a฀ private฀ pharmaceuticals฀ company฀ that฀ meets฀ the฀ definition฀ of฀ an฀ SME฀ under฀ national฀
legislation฀and฀wishes฀to฀comply฀with฀the฀IFRS฀for฀SMEs฀for฀the฀year฀ended฀31฀December฀20X6฀(with฀
one฀ year฀ of฀ comparative฀ data).฀ The฀ directors฀ are฀ seeking฀ advice฀ on฀ how฀ to฀ address฀ the฀ following฀
accounting฀issues.฀The฀entity฀currently฀prepares฀its฀financial฀statements฀under฀full฀IFRSs.฀
(a)฀ Smerk฀ has฀ significant฀ amounts฀ of฀ capitalised฀ development฀ expenditure฀ in฀ its฀ financial฀
statements,฀ $3.2m฀ at฀ 31฀ December฀ 20X5฀ ($2.8m฀ at฀ 31฀ December฀ 20X4),฀ relating฀ to฀
investigation฀ of฀ new฀ pharmaceutical฀ products.฀ The฀ amount฀ has฀ continued฀ to฀ rise฀ during฀ the฀
current฀ year฀ even฀ after฀ the฀ amortisation฀ commenced฀ relating฀ to฀ some฀ products฀ that฀ began฀
commercial฀production.฀
(b)฀ Smerk฀purchased฀a฀controlling฀interest฀(60%)฀of฀the฀shares฀of฀a฀quoted฀company฀in฀a฀similar฀
line฀of฀business,฀Rock,฀on฀1฀July฀20X6.฀Smerk฀paid฀$7.7m฀to฀acquire฀the฀investment฀in฀Rock฀
and฀the฀fair฀value฀of฀Rock's฀identifiable฀net฀assets฀has฀been฀calculated฀as฀$9.5m฀at฀the฀date฀of฀
acquisition.฀ The฀ value฀ on฀ the฀ stock฀ market฀ of฀ the฀ non-controlling฀ interests฀ that฀ Smerk฀ did฀ not฀
purchase฀was฀$4.9m.฀The฀directors฀do฀not฀feel฀in฀a฀position฀to฀estimate฀reliably฀the฀useful฀life฀
of฀ the฀ goodwill฀ due฀ to฀ the฀ nature฀ of฀ the฀ business฀ acquired,฀ but฀ expect฀ it฀ to฀ be฀ at฀ least฀฀
15–20฀years.฀
(c)฀ Smerk฀ purchased฀ some฀ properties฀ for฀ $1.7m฀ on฀ 1฀ January฀ 20X6฀ and฀ designated฀ them฀ as฀
investment฀ properties฀ under฀ the฀ cost฀ model.฀ No฀ depreciation฀ was฀ charged฀ as฀ a฀ real฀ estate฀
agent฀valued฀the฀properties฀at฀$1.9m฀at฀the฀year฀end.฀
Required฀
Discuss฀how฀the฀above฀transactions฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Smerk฀for฀the฀
year฀ended฀31฀December฀20X6,฀with฀reference฀to฀the฀IFRS฀for฀SMEs.฀
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฀
฀ Reporting฀requirements฀of฀
฀ small฀and฀
฀ medium-sized฀entities฀
฀
฀
฀
1.฀ IFRS฀for฀small฀and฀฀
medium-sized฀entities฀ 3. Simplifications฀under฀the฀IFRS฀for฀
฀ Applies฀to฀SMEs฀that:฀ SMEs฀
฀ –฀฀ Do฀not฀have฀public฀ ฀ Presentation:฀
accountability,฀and฀ ฀ Combined฀SPL฀and฀SOCIE฀permitted฀(if฀
฀ –฀ Publish฀general฀purpose฀ no฀OCI฀and฀no฀equity฀changes฀other฀
financial฀statements฀ than฀dividends฀&฀PPA)฀
฀ No฀size฀test฀ Revenue฀recognition:฀
฀ Practical฀exemptions฀available฀on฀ ฀ Goods:฀when฀risks฀and฀rewards฀
transition฀to฀the฀IFRS฀for฀SMEs฀ transferred฀
฀ Services:฀stage฀of฀completion฀basis฀
฀ Intangibles฀&฀goodwill฀always฀amortised฀
2.฀ Omissions฀and฀differences from฀full฀IFRS฀under฀ (useful฀life฀cannot฀exceed฀10฀years฀if฀
the฀IFRS฀for฀SMEs฀ cannot฀be฀established฀reliably)฀
Financial฀instruments:฀ Separate฀financial฀statements฀of฀
฀ 'Basic'฀debt฀instruments:฀ parent:฀
฀ –฀ Returns฀fixed,฀variable฀or฀combination฀of฀positive฀fixed฀ ฀ Investment฀in฀subsidiary,฀associate฀or฀
and฀variable฀ joint฀venture฀at฀cost฀or฀FVTP/L฀or฀equity฀
฀ –฀ No฀contractual฀provision฀to฀lose฀principal/interest฀ method฀
฀ –฀ Prepayment฀not฀contingent฀on฀future฀events฀
Group฀financial฀statements:฀
฀ –฀ Returns฀not฀conditional฀(other฀than฀re฀variable฀
฀ Investment฀in฀associate฀or฀joint฀venture฀at฀
rate/prepayment฀option฀above)฀
cost฀or฀FVTP/L฀or฀equity฀method฀
฀ ฀ Amortised฀cost฀
฀ NCI฀in฀goodwill฀at฀%฀net฀assets฀not฀FV฀
฀ Investments฀in฀shares฀(excl฀convertible฀pref฀shares฀and฀
puttable฀shares):฀
฀ ฀ Fair฀value฀(FV)฀through฀P/L฀(or฀cost฀less฀impairment฀if฀FV฀
cannot฀be฀measured฀reliably)฀
฀ All฀other฀financial฀instruments:฀
฀ ฀ FV฀through฀P/L฀
Non-current฀assets:฀
฀ Revaluation฀model฀not฀permitted฀for฀intangibles฀฀
฀ Internally฀generated฀research฀&฀development฀expensed฀
฀ Investment฀property฀held฀at฀FV฀through฀P/L฀
฀ Government฀grants฀recognised฀in฀P/L฀when฀conditions฀met,฀or฀
(if฀no฀conditions)฀when฀receivable฀฀
฀ Borrowing฀costs฀expensed฀
Defined฀benefit฀pension฀plans:฀
฀ Simplified฀calculation฀of฀defined฀benefit฀obligations฀permitted฀
฀ Actuarial฀gains/losses฀on฀defined฀benefit฀pension฀plans฀
recognised฀in฀P/L฀or฀OCI฀
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฀฀
1.฀ IFRS฀for฀small฀and฀medium-sized฀entities฀
฀ ฀ The฀IFRS฀for฀SMEs฀applies฀to฀small฀and฀medium-sized฀entities.฀It฀was฀developed฀to฀address฀
the฀issues฀in฀trying฀to฀apply฀full฀IFRS฀to฀these฀entities.฀฀฀
฀ ฀ The฀IFRS฀for฀SMEs฀is฀intended฀to฀apply฀to฀entities฀that฀do฀not฀have฀public฀
accountability฀and฀publish฀general฀purpose฀financial฀statements฀for฀external฀
users.฀฀
฀ ฀ It฀retains฀the฀core฀principles฀of฀'full'฀IFRSs฀
2.฀ Key฀differences฀in฀accounting฀treatment฀between฀full฀IFRS฀and฀the฀IFRS฀for฀
SMEs฀
฀ Omissions฀and฀differences฀in฀accounting฀treatments฀allowable฀under฀the฀IFRS฀for฀SMEs:฀
฀ ฀ Omissions฀–฀EPS,฀interim฀financial฀reporting,฀segmental฀reporting฀and฀assets฀held฀for฀sale฀
are฀omitted฀due฀to฀a฀lack฀of฀relevance฀or฀the฀cost฀of฀applying฀the฀requirements฀exceeding฀
the฀benefits.฀Additionally,฀EPS฀and฀segmental฀reporting฀only฀apply฀to฀listed฀companies,฀
which฀precludes฀SMEs.฀
฀ ฀ Differences฀in฀accounting฀treatment฀–฀accounting฀policy฀choices฀relating฀to฀investment฀
property,฀intangible฀assets,฀government฀grants,฀borrowing฀costs,฀development฀costs,฀pension฀
scheme฀actuarial฀gains฀and฀losses฀and฀financial฀instruments฀are฀not฀available฀under฀the฀IFRS฀
for฀SMEs฀
3.฀ Simplifications฀introduced฀by฀the฀IFRS฀for฀SMEs฀฀
฀ ฀ There฀are฀several฀standards฀which฀have฀been฀simplified฀before฀being฀included฀in฀the฀IFRS฀
for฀SMEs฀in฀order฀to฀reduce฀the฀reporting฀burden.฀฀
฀ ฀ The฀simplifications฀are฀in฀the฀areas:฀presentation฀and฀disclosure;฀revenue,฀intangible฀assets,฀
separate฀financial฀statements฀of฀investors฀and฀consolidated฀financial฀statements฀
462฀

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Now฀try฀the฀following฀question฀from฀the฀Further฀question฀practice฀bank:฀฀
Q24฀Small฀and฀Medium-sized฀entities฀
ACCA฀issued฀detailed฀guidance฀in฀the฀form฀of฀a฀technical฀article฀on฀the฀IFRS฀for฀SMEs฀฀
resources/p2/technical-articles/ifrs-for-smes.html฀
and฀also:฀
www.accaglobal.com/uk/en/member/discover/cpd-articles/corporate-reporting/holt-apr16.html
Deloitte฀issued฀concise฀guidance฀in฀addition฀to฀its฀usual฀IAS฀Plus฀summaries:฀
www.iasplus.com/en/binary/iasplus/0907ifrsforsmes.pdf฀
฀
฀ 463฀

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฀฀
464฀

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฀
฀
฀
The฀impact฀of฀changes
฀
฀
฀
and฀potential฀changes
฀
฀
in฀accounting
฀
฀
฀
฀ regulation
฀
฀ Syllabus฀
reference฀no.฀
Discuss฀and฀apply฀the฀accounting฀implications฀of฀the฀first฀time฀adoption฀of฀new฀ F1(a)฀
accounting฀standards.฀
Identify฀issues฀and฀deficiencies฀which฀have฀led฀to฀proposed฀changes฀to฀an฀ F1(b)฀
accounting฀standard.฀
Discuss฀the฀impact฀of฀current฀issues฀in฀corporate฀reporting฀including:฀ F1(c)฀
(i)฀ The฀revision฀of฀the฀Conceptual฀Framework฀
(ii)฀ The฀IASB’s฀Principles฀of฀Disclosure฀Initiative฀
(iii)฀ Materiality฀in฀the฀context฀of฀financial฀reporting฀
(iv)฀ Primary฀financial฀statements฀
(v)฀ Management฀commentary฀
(vi)฀ Developments฀in฀sustainability฀reporting฀
Exam฀context฀
The฀ Strategic฀ Business฀ Reporting฀ (SBR)฀ exam฀ doesn't฀ just฀ test฀ financial฀ reporting฀ standards฀ as฀ they฀
are,฀but฀how฀and฀why฀they฀are฀changing,฀particularly฀in฀discussion฀questions.฀฀
Current฀ issues฀ may฀ come฀ up฀ in฀ the฀ context฀ of฀ a฀ question฀ requiring฀ advice.฀ For฀ example,฀ in฀ the฀
scenario฀ question฀ involving฀ groups,฀ you฀ might฀ have฀ to฀ explain฀ the฀ difference฀ that฀ the฀ proposed฀
changes฀will฀make.฀
The฀ current฀ issues฀ element฀ of฀ the฀ syllabus฀ (syllabus฀ area฀ F)฀ may฀ be฀ examined฀ in฀ Section฀ A฀ or฀ B฀฀
but฀ will฀ not฀ be฀ a฀ full฀ question;฀ it฀ is฀ more฀ likely฀ to฀ form฀ part฀ of฀ another฀ question.
฀ 465฀

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฀฀
฀
฀
฀ The฀impact฀of฀changes฀and฀
฀ potential฀changes฀in฀
฀ accounting฀regulation฀
฀
฀ ฀
1.฀ International฀ 4.฀฀ First-time฀

convergence฀ adoption฀of฀a฀
and฀national฀ body฀of฀new฀
influences฀ accounting฀
standards฀
2.฀ Current฀projects฀ 3.฀ Other฀issues฀
466฀

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19:฀The฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀
1฀ International฀convergence฀and฀national฀influences฀
1.1฀ The฀global฀move฀towards฀IFRSs฀
The฀ International฀ Accounting฀ Standards฀ Committee฀ (IASC)฀ was฀ originally฀ set฀ up฀ in฀ 1973฀ and฀
restructured฀as฀the฀International฀Accounting฀Standards฀Board฀(IASB)฀in฀2001.฀
Key฀developments฀in฀the฀adoption฀of฀IFRSs฀globally฀include:฀
(a)฀ European฀Union฀regulation฀(effective฀from฀January฀2005):฀requires฀all฀EU฀companies฀listed฀on฀
a฀ regulated฀ market฀ to฀ prepare฀ their฀ consolidated฀ financial฀ statements฀ in฀ accordance฀ with฀
IFRSs.฀It฀also฀gives฀each฀member฀state฀the฀option฀to฀require฀or฀permit฀the฀use฀of฀IFRSs฀for฀the฀
separate฀ financial฀ statements฀ of฀ listed฀ companies฀ and฀ for฀ the฀ separate฀ and฀ consolidated฀
financial฀statements฀of฀non-listed฀companies.฀
(b)฀ US฀Securities฀and฀Exchange฀Commission฀(SEC)฀(November฀2007):฀allows฀non-US฀companies฀
listed฀ on฀ a฀ US฀ stock฀ exchange฀ to฀ report฀ under฀ IFRSs฀ without฀ the฀ need฀ to฀ prepare฀ a฀
reconciliation฀to฀US฀GAAP.฀
(c)฀ International฀ Organization฀ of฀ Securities฀ Commissions฀ (IOSCO)฀ (2000,฀ 2013฀ and฀ 2016):฀
IOSCO฀recommends฀the฀use฀of฀IFRSs฀to฀its฀membership฀of฀over฀120฀securities฀regulators,฀and฀
cooperates฀ in฀ the฀ development฀ and฀ consistent฀ application฀ of฀ IFRSs฀ to฀ promote฀ and฀ facilitate฀
transparency฀within฀capital฀markets.฀
1.2฀ Dialogue฀with฀other฀key฀standard฀setters฀
The฀ IASB฀ maintains฀ a฀ policy฀ of฀ dialogue฀ with฀ other฀ key฀ standard฀ setters฀ around฀ the฀ world,฀ in฀ the฀
interest฀of฀harmonising฀standards฀across฀the฀globe.฀
Past฀projects฀have฀seen฀significant฀convergence฀of฀standards฀with฀regimes฀not฀using฀IFRSs฀such฀as฀the฀
USA฀and฀China.฀
1.3฀ Influence฀of฀national฀regulators฀
The฀ IASB฀ cannot฀ mandate฀ the฀ use฀ of฀ IFRSs.฀ It฀ is฀ up฀ to฀ national฀ or฀ regional฀ regulators฀ to฀ require฀ or฀
permit฀the฀use฀of฀IFRSs.฀
Alternatively฀some฀regimes฀(eg฀the฀USA)฀elect฀to฀converge฀with฀IFRSs฀without฀full฀adoption.฀
For฀ some฀ regimes,฀ particularly฀ those฀ without฀ a฀ major฀ stock฀ exchange,฀ the฀ IFRS฀ for฀ SMEs฀ has฀ been฀
adopted฀as฀the฀national฀financial฀reporting฀system.฀
1.4฀ Convergence฀in฀the฀UK฀
The฀current฀financial฀reporting฀framework฀came฀into฀effect฀in฀2015฀in฀the฀UK฀and฀Ireland.฀The฀UK's฀
Financial฀Reporting฀Council฀(FRC)฀has฀published฀six฀standards:฀
฀ FRS฀100฀Application฀of฀Financial฀Reporting฀Requirements฀which฀sets฀out฀the฀overall฀reporting฀
framework฀
฀ FRS฀ 101฀ Reduced฀ Disclosure฀ Framework฀ which฀ permits฀ disclosure฀ exemptions฀ from฀ the฀
requirements฀of฀EU-adopted฀IFRSs฀for฀certain฀qualifying฀entities฀฀
฀ FRS฀ 102฀ The฀ Financial฀Reporting฀ Standard฀ applicable฀ in฀ the฀ UK฀ and฀ Republic฀ of฀ Ireland฀
which฀ultimately฀replaced฀all฀existing฀FRSs,฀SSAPs฀and฀UITF฀abstracts฀฀
฀ FRS฀103฀Insurance฀Contracts฀which฀consolidates฀existing฀financial฀reporting฀requirements฀for฀
insurance฀contracts฀฀
฀ FRS฀104฀Interim฀Financial฀Reporting฀which฀specifies฀the฀requirements฀(adapted฀from฀IAS฀34)฀
for฀interim฀financial฀reports฀
฀ FRS฀105฀The฀Financial฀Reporting฀Standard฀applicable฀to฀the฀Micro-entities฀Regime฀which฀is฀
applicable฀to฀the฀smallest฀entities.฀
฀ 467฀

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฀฀
The฀options฀available฀for฀preparing฀financial฀statements฀are฀summarised฀below.฀
FRS฀102฀ FRS฀102฀ EU-

Section฀ (and฀FRS฀ adopted฀
Type฀ FRS฀105฀ 1A฀ 103)฀ FRS฀101฀ IFRS฀
Entities฀eligible฀for฀micro-
 ฀ ฀ ฀ ฀
entities฀regime฀
Entities฀eligible฀for฀small฀
฀ ฀ ฀ ฀ ฀
companies฀regime฀
Entities฀not฀micro฀or฀small฀฀
and฀not฀required฀to฀apply฀฀ ฀ ฀ ฀ ฀
EU-adopted฀IFRS฀
The฀most฀important฀of฀these฀is฀FRS฀102,฀which฀introduces฀a฀single฀standard฀based฀on฀IFRS฀for฀Small฀
and฀Medium-sized฀Entities฀(see฀above).฀The฀IFRS฀for฀SMEs฀was฀covered฀in฀Chapter฀18.฀
2฀ Current฀projects฀
The฀following฀examinable฀current฀projects฀are฀being฀undertaken฀by฀the฀IASB,฀although฀bear฀in฀mind฀
that฀current฀issues฀could฀be฀examined฀in฀the฀context฀of฀any฀examinable฀topic.฀
New฀and฀revised฀standards฀
(a)฀ IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀฀
Better฀fit฀with฀ IFRS฀15฀introduced฀a฀five฀step฀approach฀to฀revenue฀recognition.฀Revenue฀is฀recognised฀when฀
Framework฀ (or฀as)฀a฀performance฀obligation฀is฀satisfied.฀
See฀Chapter฀1฀The฀financial฀reporting฀framework.฀฀
(b)฀ IFRS฀16฀Leases฀
IFRS฀ 16฀ brings฀ all฀ leases฀ onto฀ the฀ statement฀ of฀ financial฀ position฀ of฀ lessees฀ (with฀ limited฀
Less฀arbitrary/฀
subjective฀ exceptions฀for฀short-term฀leases฀and฀leases฀of฀low฀value฀assets).฀฀
See฀Chapter฀8฀Leases.฀
(c)฀ IAS฀1฀Presentation฀of฀Financial฀Statements฀
More฀scope฀for฀
Amended฀as฀a฀result฀of฀the฀IASB's฀Disclosure฀Initiative.฀
judgement฀
See฀below.฀ Of฀these฀EDs฀and฀Discussion฀Papers,฀only฀the฀
EDs฀on฀the฀Conceptual฀Framework฀and฀
(d)฀ IAS฀7฀Statement฀of฀Cash฀Flows฀ materiality฀are฀specifically฀mentioned฀in฀the฀
Examinable฀Documents฀list.฀Learning฀outcome฀
Amended฀as฀a฀result฀of฀the฀IASB's฀Disclosure฀Initiative.฀฀ F1(c)(ii)฀also฀mentions฀principles฀of฀disclosure฀
More฀
as฀an฀examinable฀current฀issue.฀The฀other฀EDs฀
transparent฀ See฀below.฀ are฀included฀for฀completeness.฀
Exposure฀Drafts฀(ED),฀Discussion฀Papers฀and฀other฀current฀issues฀
(a)฀ ED/2017/2฀Improvements฀to฀IFRS฀8฀Operating฀Segments฀(Proposed฀amendments฀
to฀IFRS฀8฀and฀IAS฀34)฀
In฀ March฀ 2017,฀ the฀ IASB฀ published฀ an฀ ED฀ Improvements฀ to฀ IFRS฀ 8฀ Operating฀ Segments฀
(Proposed฀ amendments฀ to฀ IFRS฀ 8฀ and฀ IAS฀ 34).฀ This฀ was฀ driven฀ by฀ a฀ post-implementation฀
review฀ which฀ concluded฀ that,฀ while฀ IFRS฀ 8฀ was฀ working฀ satisfactorily฀ in฀ general,฀ certain฀
improvements฀were฀needed.฀These฀related฀to:฀
฀ Description฀of฀the฀chief฀operating฀decision฀maker฀
฀ Identification฀of฀reportable฀segments฀
฀ Additional฀segment฀information฀
฀ Description฀of฀reconciling฀items฀
฀ Change฀in฀the฀composition฀of฀an฀entity's฀reportable฀segments฀
468฀

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(b)฀ ED/2017/4฀Property,฀ Plant฀ and฀ Equipment฀ —฀ Proceeds฀ before฀ Intended฀ Use฀

(Proposed฀amendments฀to฀IAS฀16)฀
฀ The฀ IASB฀ issued฀ an฀ ED฀ of฀ proposed฀ changes฀ to฀ IAS฀ 16฀ in฀ June฀ 2017.฀ The฀ changes฀ would฀
prohibit฀entities฀from฀deducting฀proceeds฀from฀selling฀items฀produced฀while฀bringing฀an฀item฀
of฀PPE฀to฀normal฀operating฀manner฀from฀the฀cost฀of฀the฀item;฀instead,฀these฀amounts฀should฀be฀
recognised฀in฀profit฀or฀loss.฀
(c)฀ ED/2016/1฀ Definition฀ of฀ a฀ Business฀ and฀ Accounting฀ for฀ Previously฀ Held฀
Interests฀(Proposed฀amendments฀to฀IFRS฀3฀and฀IFRS฀11)฀
฀ This฀ED฀proposes฀amendments฀to฀IFRS฀3฀and฀IFRS฀11฀to฀clarify:฀
(i)฀ The฀definition฀of฀a฀business฀฀
(ii)฀ The฀ accounting฀ for฀ previously฀ held฀ interests฀ in฀ the฀ assets฀ and฀ liabilities฀ of฀ a฀ joint฀
operation฀in฀transactions฀in฀which฀an฀investor฀obtains฀control฀or฀joint฀control฀of฀a฀joint฀
operation฀that฀meets฀the฀definition฀of฀a฀business.฀
See฀Chapter฀19฀Section฀4฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀this฀ED.฀This฀is฀available฀
in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
(d)฀ ED/2015/1฀Classification฀of฀Liabilities฀–฀Proposed฀amendments฀to฀IAS฀1฀฀
See฀below.฀
(e)฀ ED/2015/3฀Conceptual฀Framework฀for฀Financial฀Reporting฀฀
This฀covers฀proposed฀revisions฀to฀the฀Conceptual฀Framework฀to฀fill฀gaps,฀update฀guidance฀and฀
clarify฀ areas.฀ Key฀ changes฀ include฀ new฀ recognition฀ and฀ derecognition฀ principles฀ and฀
principles฀for฀recognition฀in฀profit฀or฀loss฀vs฀other฀comprehensive฀income.฀
See฀฀Chapter฀1฀The฀financial฀reporting฀framework.฀
Tutorial฀note฀
The฀ Conceptual฀ Framework฀ is฀ mentioned฀ on฀ many฀ occasions฀ during฀ this฀ course,฀ and฀ the฀ SBR฀
examining฀ team฀ see฀ it฀ an฀ important฀ topic.฀ Many฀ IASs฀ and฀ IFRSs฀ were฀ based฀ on฀ the฀ Conceptual฀
Framework฀but฀ some฀ are฀ inconsistent฀ with฀ it,฀ as฀ has฀ been฀ discussed฀ in฀ various฀ chapters฀ in฀ the฀ SBR฀
Workbook.฀In฀the฀context฀of฀current฀developments,฀the฀Conceptual฀Framework฀is฀now฀a฀current฀issue,฀
as฀is฀shown฀by฀the฀publication฀of฀an฀ED.฀฀
(f)฀ ED/2015/8฀ Draft฀ IFRS฀ Practice฀ Statement:฀ Application฀ of฀ Materiality฀ to฀
Financial฀Statements฀฀
See฀below.฀
(g)฀ DP/2017/1฀Disclosure฀Initiative฀–฀Principles฀of฀Disclosure฀฀
See฀below.฀
2.1฀ ED/2015/1฀Classification฀of฀Liabilities฀–฀Proposed฀amendments฀to฀
IAS฀1฀฀
This฀ED฀aims฀to฀clarify฀that฀the฀classification฀of฀liabilities฀as฀current฀or฀non-current฀should฀be฀based฀on฀
the฀entity's฀rights฀at฀the฀end฀of฀the฀reporting฀period.฀
Under฀the฀proposals,฀an฀entity฀classifies฀a฀liability฀as฀current฀when:฀
(a)฀ It฀expects฀to฀settle฀the฀liability฀in฀its฀normal฀operating฀cycle;฀฀
(b)฀ It฀holds฀the฀liability฀primarily฀for฀the฀purpose฀of฀trading;฀
(c)฀ The฀liability฀is฀due฀to฀be฀settled฀within฀12฀months฀after฀the฀reporting฀date;฀or฀
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lOMoARcPSD|6256454
฀฀
(d)฀ It฀does฀not฀have฀a฀ right฀ at฀ the฀ end฀ of฀ the฀ reporting฀ period฀to฀defer฀settlement฀of฀the฀
liability฀for฀at฀least฀12฀months฀after฀the฀reporting฀date.'฀
Used฀to฀say฀'unconditional฀
All฀other฀liabilities฀are฀then฀classified฀as฀non-current.฀ right'฀
Prior฀to฀the฀ED,฀an฀unconditional฀right฀to฀defer฀settlement฀for฀at฀least฀12฀months฀was฀required฀in฀
order฀ to฀ classify฀ a฀ liability฀ as฀ non-current;฀ however,฀ in฀ the฀ real฀ world฀ such฀ rights฀ are฀ rarely฀
unconditional฀because฀they฀often฀depend฀on฀compliance฀in฀the฀future฀with฀loan฀covenants.฀
The฀ED฀also฀clarifies฀that฀'settlement'฀of฀a฀liability฀refers฀to฀'the฀transfer฀to฀the฀counterparty฀of฀cash,฀
equity฀instruments,฀other฀assets฀or฀services฀that฀results฀in฀the฀extinguishment฀of฀the฀liability.'฀
(ED/2015/1:฀para.฀69(d),฀73)฀
2.2฀ ED/2015/8฀Draft฀IFRS฀Practice฀Statement:฀Application฀of฀
Materiality฀to฀Financial฀Statements฀(October฀2015)฀
This฀draft฀practice฀statement฀was฀issued฀as฀part฀of฀the฀Disclosure฀Initiative฀(see฀below).฀฀
The฀ statement฀ was฀ developed฀ in฀ response฀ to฀ concerns฀ with฀ the฀ level฀ of฀ uncertainty฀ over฀ the฀
application฀ of฀ the฀ concept฀ of฀ materiality,฀ which฀ can฀ result฀ in฀ excessive฀ disclosure฀ of฀ immaterial฀
information฀ while฀ important฀ information฀ can฀ be฀ obscured฀ or฀ even฀ missed฀ out฀ of฀ the฀ financial฀
statements.฀
It฀ provides฀ non-mandatory฀ guidance฀ to฀ assist฀ with฀ the฀ application฀ of฀ the฀ concept฀ of฀
materiality฀to฀financial฀statements฀prepared฀in฀accordance฀with฀IFRSs.฀
Material฀(IAS฀1):฀omissions฀or฀misstatements฀of฀items฀are฀material฀if฀they฀could,฀individually฀
or฀collectively,฀influence฀the฀economic฀decisions฀that฀users฀make฀on฀the฀basis฀of฀financial฀
Key฀term฀
statements.฀฀Materiality฀depends฀on฀the฀size฀and฀nature฀of฀the฀omission฀or฀misstatement฀judged฀in฀
the฀surrounding฀circumstances.฀The฀size฀or฀nature฀of฀the฀item,฀or฀a฀combination฀of฀both,฀could฀be฀the฀
determining฀factor.฀฀ ฀
(IAS฀1:฀para.฀7)฀
The฀statement฀is฀divided฀into฀the฀following฀key฀areas:฀
(a)฀ General฀characteristics฀of฀materiality,฀including:฀
(i)฀ The฀pervasiveness฀of฀the฀concept฀in฀IFRSs;฀
(ii)฀ The฀importance฀of฀management's฀use฀of฀judgement;฀
(iii)฀ Who฀ the฀ primary฀ users฀ of฀ the฀ financial฀ statements฀ are฀ and฀ the฀ type฀ of฀ decisions฀ they฀
make฀based฀on฀those฀financial฀statements;฀
(iv)฀ The฀need฀for฀a฀quantitative฀and฀qualitative฀assessment฀when฀applying฀the฀concept;฀and฀
(v)฀ The฀ need฀ to฀ assess฀ whether฀ information฀ is฀ material,฀ both฀ individually฀ and฀ collectively฀
with฀other฀information.฀
(b)฀ Application฀ of฀ materiality฀ when฀ making฀ decisions฀ about฀ presenting฀ and฀ disclosing฀
information,฀in฀particular:฀
(i)฀ The฀objective฀of฀the฀financial฀statements฀and฀how฀it฀relates฀to฀materiality฀decisions;฀
(ii)฀ How฀to฀deal฀with฀immaterial฀information;฀
(iii)฀ When฀to฀aggregate฀and฀disaggregate฀information;฀and฀
(iv)฀ Making฀ judgements฀ about฀ materiality฀ in฀ the฀ context฀ of฀ the฀ face฀ of฀ the฀ financial฀
statements,฀notes฀to฀the฀financial฀statements,฀the฀complete฀set฀of฀financial฀statements฀(ie฀
the฀financial฀statements฀as฀a฀whole)฀and฀interim฀reports.฀
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(c)฀ Application฀ of฀ materiality฀ when฀ recognising฀ and฀ measuring฀ information.฀ Guidance฀ is฀
given฀on:฀
(i)฀ Consideration฀of฀materiality฀in฀internal฀record฀keeping;฀and฀
(ii)฀ Use฀of฀rounding฀(eg฀to฀the฀nearest฀$1,000)฀in฀the฀financial฀statements.฀
(d)฀ Assessment฀ of฀ whether฀ omissions฀ and฀ misstatements฀ of฀ information฀ are฀ material฀ to฀
the฀financial฀statements.฀Guidance฀is฀given฀on:฀
(i)฀ Assessing฀whether฀misstatements฀are฀material;฀
(ii)฀ Current฀period฀misstatements฀versus฀prior฀period฀errors;฀and฀
(iii)฀ Dealing฀with฀misstatements฀made฀intentionally฀to฀mislead.฀
฀
Tutorial฀note฀
Note฀that฀the฀practice฀statement฀was฀published฀in฀final฀form฀as฀Making฀Materiality฀Judgements฀in฀
September฀2017,฀but฀as฀this฀is฀after฀the฀cut-off฀date฀for฀examinable฀documents฀for฀the฀SBR฀exam,฀the฀
ED฀is฀still฀examinable฀from฀September฀2018.฀฀
2.3฀ DP/2017/1฀Disclosure฀Initiative฀–฀Principles฀of฀Disclosure฀
This฀Discussion฀Paper฀was฀published฀in฀March฀2017฀as฀part฀of฀the฀Disclosure฀Initiative฀(see฀below).฀฀
3฀ Other฀issues฀ Both฀the฀management฀commentary and฀the฀International฀<IR>฀

Framework฀are฀ways฀of฀addressing฀areas฀that฀traditional฀financial฀
statements฀do฀not฀cover.฀
3.1฀ Management฀commentary฀฀
Some฀of฀the฀limitations฀of฀financial฀statements฀may฀be฀addressed฀by฀a฀management฀commentary.฀The฀
IASB฀has฀issued฀a฀practice฀statement฀on฀a฀management฀commentary฀to฀supplement฀and฀complement฀
the฀financial฀statements.฀This฀is฀covered฀in฀Chapter฀17฀Interpreting฀financial฀statements฀for฀different฀
stakeholders.฀
3.2฀ Developments฀in฀sustainability฀reporting฀
The฀ main฀ document฀ addressing฀ sustainability฀ reporting฀ is฀ the฀ International฀ <IR>฀ Framework฀
(International฀ Integrated฀ Reporting฀ Framework).฀ Integrated฀ reporting฀ is฀ concerned฀ with฀ conveying฀ a฀
wider฀message฀on฀organisational฀performance.฀It฀is฀fundamentally฀concerned฀with฀reporting฀on฀the฀
value฀ created฀ by฀ the฀ organisation's฀ resources.฀ This฀ is฀ also฀ covered฀ in฀ Chapter฀ 17฀ Interpreting฀
financial฀statements฀for฀different฀stakeholders.฀
3.3฀ Disclosure฀Initiative฀
The฀IASB's฀Disclosure฀Initiative,฀which฀began฀in฀2013,฀is฀a฀series฀of฀short฀and฀medium฀term฀projects฀
and฀ ongoing฀ activities฀ to฀ explore฀ how฀ presentation฀ and฀ disclosure฀ principles฀ in฀ existing฀
standards฀can฀be฀improved.฀
The฀ Disclosure฀ Initiative฀ is฀ intended฀ to฀ complement฀ the฀ work฀ being฀ done฀ on฀ the฀
Conceptual฀Framework฀project฀(covered฀in฀Chapter฀1฀The฀financial฀reporting฀framework).฀฀
The฀Disclosure฀Initiative฀project฀is฀made฀up฀of฀a฀number฀of฀separate฀topics.฀฀
Amendments฀to฀IAS฀1฀
These฀2014฀amendments฀aim฀to฀ensure฀that฀entities฀are฀able฀to฀use฀judgement฀when฀presenting฀their฀
financial฀reports,฀as฀the฀wording฀of฀some฀of฀the฀requirements฀in฀IAS฀1฀had฀in฀some฀cases฀been฀read฀
to฀prevent฀the฀use฀of฀judgement.฀They฀cover:฀
(a)฀ Materiality฀
(b)฀ Statement฀of฀financial฀position฀and฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
(c)฀ Notes฀
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฀฀
Amendments฀to฀IAS฀7฀
In฀2016,฀the฀IASB฀published฀amendments฀to฀IAS฀7฀intended฀to฀improve฀information฀provided฀to฀users฀
of฀ financial฀ statements฀ about฀ an฀ entity's฀ financing฀ activities.฀ The฀ amendments฀ require฀ disclosure฀ of฀
changes฀ in฀ liabilities฀ arising฀ from฀ financing฀ activities฀ and฀ recommend฀ a฀ reconciliation฀ of฀ liabilities฀
relating฀to฀financing฀activities.฀
See฀Chapter฀19฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀the฀amendments฀to฀IAS฀1฀
and฀IAS฀7.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀
Materiality฀
Although฀Discussion฀Papers฀are฀not฀usually฀
See฀above.฀ tested฀in฀detail,฀this฀one฀is฀specifically฀listed฀
in฀learning฀outcome฀F1(c).฀
Principles฀of฀Disclosure฀
In฀March฀2017,฀the฀IASB฀published฀a฀Discussion฀Paper฀Disclosure฀Initiative฀–฀Principles฀of฀Disclosure.฀
This฀ sets฀ out฀ the฀ IASB's฀ preliminary฀ views฀ on฀ disclosure฀ principles฀ that฀ should฀ be฀ included฀ in฀ a฀
general฀disclosure฀standard฀or฀in฀non-mandatory฀guidance฀on฀the฀topic.฀
The฀Discussion฀Paper฀is฀divided฀into฀eight฀sections.฀
Section฀ Topic฀
1฀ Overview฀of฀the฀'disclosure฀problem'฀and฀the฀objective฀of฀this฀project฀
The฀IASB฀identified฀three฀main฀aspects฀to฀the฀'disclosure฀problem':฀
฀ Not฀enough฀relevant฀information,฀resulting฀in฀inappropriate฀investing/lending฀
decisions฀
฀ Irrelevant฀information,฀obscuring฀relevant฀information฀and฀hindering฀
understandability฀
฀ Ineffective฀communication,฀also฀reducing฀understandability฀
(IASB,฀2017:฀para.฀IN฀9)฀
2฀ Principles฀of฀effective฀communication฀
There฀are฀seven฀principles:฀
฀ Entity฀specific฀
฀ Clear฀and฀simple฀
฀ Organised฀to฀highlight฀important฀matters฀
฀ Linked฀to฀related฀information฀
฀ Free฀from฀unnecessary฀duplication฀
฀ Comparable฀
฀ In฀an฀appropriate฀format฀
฀
(IASB,฀2017:฀para.฀2.6)฀
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Section฀ Topic฀
3฀ Roles฀of฀the฀primary฀financial฀statements฀and฀the฀notes฀
Primary฀financial฀statements฀are฀statements฀of:฀฀
฀฀ Financial฀position฀฀ Role:฀to฀provide฀a฀structured฀and฀
comparable฀summary฀of฀an฀entity’s฀
฀฀ Financial฀performance฀฀ recognised฀assets,฀liabilities,฀equity,฀
฀฀ Changes฀in฀equity฀฀ income฀and฀expenses.฀
฀฀ Cash฀flows฀
Notes฀ Role:฀to฀explain฀and฀supplement฀
the฀primary฀financial฀statements.฀
(IASB,฀2017:฀para.฀3.20฀–฀3.26)฀฀
4฀ Location฀of฀information฀
Information฀needed฀to฀comply฀with฀IFRS฀can฀be฀provided฀outside฀the฀financial฀
statements,฀but฀within฀the฀annual฀report,฀provided฀that:฀
฀ The฀annual฀report฀is฀more฀understandable฀
฀ The฀financial฀statements฀are฀understandable฀
฀ The฀information฀is฀faithfully฀represented,฀clearly฀identified฀and฀cross-referenced฀
Information฀labelled฀as฀'non-IFRS'฀can฀be฀placed฀inside฀the฀financial฀statements฀if฀it฀is:฀
฀ Listed,฀together฀with฀a฀statement฀of฀compliance฀with฀IFRSs฀
฀ Identified฀as฀not฀in฀accordance฀with฀IFRSs฀and,฀if฀applicable,฀as฀unaudited฀
฀ Accompanied฀by฀an฀explanation฀of฀why฀it฀is฀useful฀
(IASB,฀2017:฀para.฀4.5฀to฀4.25)฀
5฀ Use฀of฀performance฀measures฀in฀the฀financial฀statements฀
Many฀entities฀use฀'non-IFRS'฀performance฀measures.฀฀
The฀IASB's฀view฀is฀that฀the฀presentation฀of฀an฀EBITDA฀subtotal฀using฀the฀nature฀of฀
expense฀method฀and฀the฀presentation฀of฀an฀EBIT฀subtotal฀under฀both฀a฀nature฀of฀
expense฀method฀and฀a฀function฀of฀expense฀method฀comply฀with฀IFRSs฀if฀such฀subtotals฀
are฀relevant฀to฀an฀understanding฀of฀the฀financial฀statements.฀
Performance฀measures฀should฀be฀fairly฀presented,฀that฀is:฀
฀ No฀more฀prominent฀than฀IFRS฀information฀
฀ Reconciled฀to฀IFRS฀measures฀
฀ Clearly฀labelled,฀and฀relevance฀explained฀
฀ Neutral฀and฀consistently฀measured฀and฀presented฀over฀time฀
฀ Accompanied฀by฀comparatives฀
(IASB,฀2017:฀para.฀5.21)฀
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฀฀
Section฀ Topic฀
6฀ Disclosure฀of฀accounting฀policies฀
There฀are฀three฀categories฀of฀accounting฀policies,฀and฀the฀level฀of฀disclosure฀depends฀
on฀the฀category.฀Only฀accounting฀policies฀in฀Categories฀1฀and฀2฀must฀be฀disclosed,฀
but฀those฀in฀Category฀3฀may฀be฀disclosed.฀
Category฀1฀—฀always฀necessary฀to฀understand฀the฀financial฀statements฀฀
This฀is฀the฀case฀when฀the฀accounting฀policy:฀
฀ Relates฀to฀material฀items,฀transactions฀or฀events;฀
฀ Is฀selected฀from฀alternatives฀in฀IFRSs;฀
฀ Reflects฀a฀change฀from฀a฀previous฀period;฀
฀ Is฀developed฀by฀the฀entity฀in฀the฀absence฀of฀specific฀requirements;฀and/or฀
฀ Requires฀use฀of฀significant฀judgements฀or฀assumptions.฀
Category฀2฀—฀not฀in฀Category฀1฀but฀necessary฀to฀understand฀the฀
financial฀statements.฀This฀is฀the฀case฀when฀the฀accounting฀policy฀is฀not฀in฀฀
Category฀1฀but฀relates฀to฀material฀items,฀transactions฀or฀events.฀
Category฀3฀—฀not฀in฀Categories฀1฀and฀2฀but฀is฀used฀in฀preparing฀the฀
financial฀statements.฀This฀is฀the฀case฀for฀all฀other฀accounting฀policies฀used฀in฀
preparing฀the฀financial฀statements.฀
฀
(IASB,฀2017:฀para.฀6.12)฀
7฀ Centralised฀disclosure฀objectives฀
This฀section฀proposes฀developing฀a฀central฀set฀of฀disclosure฀objectives฀that฀consider฀the฀
objective฀of฀financial฀statements฀and฀the฀role฀of฀the฀notes.฀These฀would฀be฀used฀by฀the฀
IASB฀as฀a฀basis฀for฀developing฀disclosure฀objectives฀and฀requirements฀in฀standards฀that฀
are฀more฀unified฀and฀better฀linked฀to฀the฀overall฀objective.฀
฀ Method฀A฀would฀focus฀on฀the฀different฀types฀of฀information฀disclosed฀about฀an฀
entity’s฀assets,฀liabilities,฀equity,฀income฀and฀expenses฀
฀ Method฀B฀would฀focus฀on฀information฀about฀an฀entity’s฀activities฀
฀
(IASB,฀2017:฀฀para.฀7.9,฀7.22)฀
8฀ New฀Zealand฀Accounting฀Standards฀Board฀staff's฀approach฀to฀drafting฀
disclosure฀requirements฀in฀IFRSs฀
The฀main฀features฀of฀this฀approach฀are:฀
฀ An฀overall฀disclosure฀objective฀for฀each฀standard฀with฀sub-objectives฀for฀each฀
type฀of฀information฀required฀
฀ A฀two-tier฀approach฀that฀would฀see฀the฀amount฀of฀information฀provided฀depend฀
on฀the฀relative฀importance฀of฀an฀item฀or฀transaction฀to฀the฀reporting฀entity฀฀
฀ Greater฀emphasis฀on฀the฀need฀to฀exercise฀judgement,฀and฀less฀prescriptive฀
wording฀in฀disclosure฀requirements฀
(IASB,฀2017:฀para.฀7.19)฀
(DP/2017/1฀Disclosure฀Initiative฀–฀Principles฀of฀Disclosure)฀
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Activity฀1:฀Disclosure฀ ฀
฀
(a)฀ Red฀Co฀discloses฀the฀following฀information฀relating฀to฀employees฀in฀its฀financial฀statements:฀
(i)฀ Its฀full฀commitment฀to฀equal฀opportunities฀
(ii)฀ Its฀investment฀in฀the฀training฀of฀staff฀
(iii)฀ The฀number฀of฀employees฀injured฀at฀work฀each฀year฀
The฀company฀wishes฀to฀enhance฀disclosure฀in฀these฀areas,฀but฀is฀unsure฀as฀to฀what฀the฀benefits฀
would฀be.฀The฀directors฀are฀particularly฀concerned฀that฀the฀disclosures฀on฀management฀of฀the฀
workforce฀have฀no฀current฀value฀to฀the฀stakeholders฀of฀the฀company.฀
฀ Required฀ ฀
฀ Discuss฀the฀general฀nature฀of฀the฀current฀information฀disclosed฀by฀companies฀concerning฀their฀
employees฀and฀how฀the฀link฀between฀the฀company฀performance฀and฀its฀employees฀could฀be฀
made฀more฀visible.฀฀ (6฀marks)฀
(b)฀ Briefly฀ explain,฀ with฀ reference฀ to฀ the฀ IASB's฀ Disclosure฀ Initiative฀ –฀ Principles฀ of฀ Disclosure฀
Discussion฀ Paper,฀ whether฀ the฀ information฀ in฀ part฀ (a)฀ could฀ be฀ disclosed฀ within฀ the฀ financial฀
statements.฀฀ (2฀marks)฀
Professional฀marks฀will฀be฀awarded฀in฀this฀activity฀for฀the฀clarity฀and฀quality฀of฀the฀presentation฀and฀
discussion.฀ ฀฀(2฀marks)฀
3.4฀ Profit฀or฀loss฀versus฀other฀comprehensive฀income฀
There฀has฀been฀disagreement฀as฀to฀which฀items฀should฀appear฀in฀profit฀or฀loss,฀and฀which฀in฀other฀
comprehensive฀income฀(OCI).฀The฀issue฀of฀reclassification฀has฀also฀been฀controversial.฀฀
Key฀points:฀
(a)฀ Changes฀resulting฀from฀primary฀performance฀are฀reported฀in฀profit฀or฀loss.฀
(b)฀ Investors฀focus฀on฀profit฀or฀loss฀rather฀than฀OCI.฀
(c)฀ It฀ is฀ not฀ true฀ that฀ only฀ realised฀ gains฀ are฀ included฀ in฀ profit฀ or฀ loss฀ and฀ that฀ only฀ unrealised฀
gains฀and฀losses฀are฀included฀in฀OCI.฀
(d)฀ OCI฀has฀been฀used฀as฀a฀'dumping฀ground'.฀
(e)฀ The฀Conceptual฀Framework฀ED฀proposes฀a฀profit฀or฀loss฀total฀or฀subtotal฀that฀also฀results,฀or฀
could฀result,฀in฀some฀items฀of฀income฀or฀expense฀being฀recycled฀and฀limiting฀the฀use฀of฀OCI.฀
3.5฀ Debt฀versus฀equity฀distinction฀
The฀distinction฀between฀debt฀and฀equity฀is฀not฀always฀easy฀to฀make.฀฀
Key฀points:฀
(a)฀ Classification฀is฀based฀on฀principles฀not฀perceptions฀of฀users.฀
(b)฀ If฀dividends฀are฀non-discretionary,฀redemption฀is฀at฀the฀option฀of฀the฀holder฀and฀the฀instrument฀
has฀a฀limited฀life,฀generally฀the฀instrument฀is฀a฀liability.฀
(c)฀ If฀dividends฀are฀discretionary,฀the฀shares฀are฀non-redeemable฀or฀there฀is฀no฀liquidation฀date,฀
generally฀this฀is฀an฀equity฀instrument.฀฀
(d)฀ It฀ must฀ first฀ be฀ established฀ that฀ the฀ instrument฀ is฀ not฀ a฀ liability฀ before฀ it฀ can฀ be฀ classified฀ as฀
equity.฀
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฀฀
(e)฀ A฀financial฀instrument฀can฀be฀classified฀as฀an฀equity฀instrument฀only฀if฀there฀is฀no฀obligation฀to฀
deliver฀cash฀or฀other฀financial฀assets.฀
(f)฀ A฀contract฀that฀will฀be฀settled฀by฀the฀entity฀delivering฀(or฀receiving)฀a฀fixed฀number฀of฀its฀own฀
equity฀instruments฀in฀exchange฀for฀a฀fixed฀amount฀of฀cash฀or฀other฀financial฀asset฀is฀an฀equity฀
instrument.฀
(g)฀ Classification฀as฀a฀liability฀increases฀gearing,฀whereas฀classification฀as฀equity฀reduces฀it.฀
(h)฀ Loan฀covenants฀may฀be฀affected.฀
(IAS฀32:฀paras.฀11,฀AG฀27)฀
The฀ debt฀ versus฀ equity฀ distinction฀ is฀ discussed฀ in฀ the฀ context฀ of฀ the฀ Conceptual฀ Framework฀ ED฀ in฀
Chapter฀7฀Financial฀instruments.฀
See฀Chapter฀19฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀the฀profit฀or฀loss/OCI฀
split฀and฀the฀debt/equity฀distinction.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀
Activity฀2:฀Debt฀versus฀equity฀ ฀
The฀directors฀of฀Scott,฀on฀becoming฀directors,฀are฀required฀to฀invest฀a฀fixed฀agreed฀sum฀of฀money฀in฀
a฀special฀class฀of฀$1฀ordinary฀shares฀that฀only฀directors฀hold.฀Dividend฀payments฀on฀the฀shares฀are฀
discretionary฀ and฀ are฀ ratified฀ at฀ the฀ annual฀ general฀ meeting฀ of฀ the฀ company.฀ When฀ a฀ director's฀
service฀contract฀expires,฀Scott฀is฀required฀to฀repurchase฀the฀shares฀at฀their฀nominal฀value.฀
Required฀
Explain฀how฀the฀above฀item฀should฀be฀classified฀in฀the฀financial฀statements฀of฀Scott.฀
Activity฀3:฀Discussion฀question฀ ฀
(a)฀ A฀ key฀ element฀ of฀ the฀ preparation฀ of฀ financial฀ statements฀ is฀ the฀ development฀ of฀ an฀ entity’s฀
accounting฀policies฀under฀IFRSs฀and฀the฀use฀of฀estimation฀techniques฀where฀the฀measurement฀
basis฀warrants฀it.฀An฀entity฀can฀choose฀its฀accounting฀policies฀on฀initial฀adoption฀of฀IFRSs,฀but฀
changes฀ in฀ accounting฀ policies฀ can฀ only฀ be฀ made฀ where฀ required฀ by฀ an฀ IFRS฀ or฀ where฀ the฀
changes฀ result฀ in฀ reliable฀ and฀ more฀ relevant฀ information.฀ Accounting฀ elections฀ are฀ also฀
permitted฀ for฀ certain฀ individual฀ items.฀ Estimation฀ techniques฀ are฀ often฀ used฀ as฀ part฀ of฀ the฀฀
year฀end฀accounting฀process฀and฀can฀also฀have฀a฀significant฀effect฀on฀the฀financial฀statements.฀
The฀financial฀statements฀of฀stock฀market฀listed฀entities฀come฀under฀closer฀scrutiny฀than฀those฀of฀
private฀companies฀and฀more฀reliance฀may฀be฀placed฀on฀the฀figures฀included฀in฀them.฀
฀ Required฀
฀ Discuss฀how฀accounting฀policies,฀elections฀and฀estimation฀techniques฀may฀be฀used฀to฀achieve฀
particular฀accounting฀effects฀in฀the฀financial฀statements฀of฀stock฀market฀listed฀entities.฀
(b)฀ Herron฀ plc,฀ a฀ stock฀ market฀ listed฀ company฀ in฀ the฀ retail฀ industry,฀ has฀ decided฀ to฀ change฀ its฀
accounting฀policy฀with฀respect฀to฀inventories.฀฀Its฀previous฀policy฀until฀31฀December฀20X2฀was฀
to฀measure฀inventories฀on฀the฀first-in฀first-out฀basis;฀however,฀due฀to฀a฀change฀in฀circumstances฀
(higher฀ turnover฀ of฀ inventories),฀ Herron's฀ management฀ has฀ decided฀ to฀ measure฀ them฀ on฀ the฀
weighted฀average฀basis฀effective฀from฀the฀year฀ended฀31฀December฀20X3.฀
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The฀effects฀on฀inventory฀valuation฀are฀as฀follows:฀
฀ 31.12.X1฀ 31.12.X2฀ 31.12.X3฀฀
฀ $m฀ $m฀ $m฀
Weighted฀average฀valuation฀ 27฀ 32฀ 30฀
First-in฀first-out฀valuation฀ 31฀ 37฀ 33฀
Required฀
Discuss฀ the฀ effect฀ of฀ the฀ above฀ change฀ in฀ the฀ financial฀ statements฀ for฀ the฀ year฀ ended฀฀
31฀December฀20X3฀as฀well฀as฀the฀validity฀of฀the฀change.฀
4฀฀First-time฀adoption฀of฀a฀body฀of฀new฀accounting฀standards฀
The฀adoption฀of฀a฀new฀body฀of฀accounting฀standards฀will฀inevitably฀have฀a฀significant฀effect฀on฀the฀
accounting฀treatments฀used฀by฀an฀entity฀and฀on฀the฀related฀systems฀ and฀ procedures.฀In฀2005฀
many฀countries฀adopted฀IFRSs฀for฀the฀first฀time฀and฀over฀the฀next฀few฀years฀other฀countries฀are฀likely฀
to฀do฀the฀same.฀
IFRS฀1฀First-time฀Adoption฀of฀International฀Financial฀Reporting฀Standards฀was฀issued฀to฀ensure฀that฀an฀
entity's฀first฀IFRS฀financial฀statements฀contain฀high฀quality฀information฀that:฀
(a)฀ Is฀transparent฀for฀users฀and฀comparable฀over฀all฀periods฀presented;฀
(b)฀ Provides฀a฀suitable฀starting฀point฀for฀accounting฀under฀IFRSs;฀and฀
(c)฀ Can฀be฀generated฀at฀a฀cost฀that฀does฀not฀exceed฀the฀benefits฀to฀users.฀
4.1฀ IFRS฀1฀First-time฀Adoption฀of฀International฀Financial฀Reporting฀
Standards฀
General฀principles฀
An฀entity฀applies฀IFRS฀1฀in฀its฀first฀IFRS฀financial฀statements.฀
An฀entity's฀first฀IFRS฀financial฀statements฀are฀the฀first฀annual฀financial฀statements฀in฀which฀the฀entity฀
adopts฀IFRSs฀by฀an฀explicit฀and฀unreserved฀statement฀of฀compliance฀with฀IFRSs.฀
Any฀other฀financial฀statements฀(including฀fully฀compliant฀financial฀statements฀that฀did฀not฀state฀so)฀are฀
not฀the฀first฀set฀of฀financial฀statements฀under฀IFRSs.฀
Opening฀IFRS฀statement฀of฀financial฀position฀
An฀ entity฀ prepares฀ and฀ presents฀ an฀ opening฀ IFRS฀ statement฀ of฀ financial฀ position฀ at฀ the฀ date฀ of฀
transition฀to฀IFRSs฀as฀a฀starting฀point฀for฀IFRS฀accounting.฀
Generally,฀ this฀ will฀ be฀ the฀ beginning฀ of฀ the฀ earliest฀ comparative฀ period฀ shown฀ (ie฀ full฀
retrospective฀application).฀Given฀that฀the฀entity฀is฀applying฀a฀change฀in฀accounting฀policy฀on฀adoption฀
of฀ IFRSs,฀ IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements฀ requires฀ the฀ presentation฀ of฀ at฀ least฀ three฀
statements฀of฀financial฀position฀(and฀two฀of฀each฀of฀the฀other฀statements)฀(IFRS฀1:฀para.฀21).฀฀
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lOMoARcPSD|6256454
฀฀
Illustration฀1฀
฀ Comparative฀year฀ First฀year฀of฀adoption฀
฀ 1.1.X0฀ 31.12.X0฀ 31.12.X1฀

฀
฀ Transition฀
฀ date฀
Preparation฀ of฀ an฀ opening฀ IFRS฀ statement฀ of฀ financial฀ position฀ typically฀ involves฀ adjusting฀ the฀
amounts฀reported฀at฀the฀same฀date฀under฀previous฀GAAP.฀
All฀ adjustments฀ are฀ recognised฀ directly฀ in฀ retained฀ earnings฀ (or,฀ if฀ appropriate,฀ another฀
category฀of฀equity)฀not฀in฀profit฀or฀loss.฀
Estimates฀
Estimates฀in฀the฀opening฀IFRS฀statement฀of฀financial฀position฀must฀be฀consistent฀with฀estimates฀made฀
at฀the฀same฀date฀under฀previous฀GAAP฀even฀if฀further฀information฀is฀now฀available฀(in฀order฀
to฀comply฀with฀IAS฀10)฀(IFRS฀1:฀para.฀IG฀3).฀฀
Transition฀process฀
(a)฀ Accounting฀policies฀
The฀ entity฀ should฀ select฀ accounting฀ policies฀ that฀ comply฀ with฀ IFRSs฀ effective฀ at฀ the฀ end฀ of฀
the฀first฀IFRS฀reporting฀period.฀
These฀ accounting฀ policies฀ are฀ used฀ in฀ the฀ opening฀ IFRS฀ statement฀ of฀ financial฀ position฀ and฀
throughout฀all฀periods฀presented.฀The฀entity฀does฀not฀apply฀different฀versions฀of฀IFRSs฀effective฀
at฀earlier฀dates.฀
(b)฀ Derecognition฀of฀assets฀and฀liabilities฀
Previous฀ GAAP฀ statement฀ of฀ financial฀ position฀ may฀ contain฀ items฀ that฀ do฀ not฀ qualify฀ for฀
recognition฀under฀IFRSs.฀฀
For฀example,฀IFRSs฀do฀not฀permit฀capitalisation฀of฀research,฀staff฀training฀and฀relocation฀costs.฀
(c)฀ Recognition฀of฀new฀assets฀and฀liabilities฀
New฀assets฀and฀liabilities฀may฀need฀to฀be฀recognised.฀
For฀ example,฀ deferred฀ tax฀ balances฀ and฀ certain฀ provisions฀ such฀ as฀ environmental฀ and฀
decommissioning฀costs.฀
(d)฀ Reclassification฀of฀assets฀and฀liabilities฀
For฀ example,฀ compound฀ financial฀ instruments฀ need฀ to฀ be฀ split฀ into฀ their฀ liability฀ and฀ equity฀
components.฀
(e)฀ Measurement฀
Value฀at฀which฀asset฀or฀liability฀is฀measured฀may฀differ฀under฀IFRSs.฀
For฀example,฀discounting฀of฀deferred฀tax฀assets/liabilities฀not฀allowed฀under฀IFRSs.฀
(IFRS฀1:฀para.฀7–10)฀
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Main฀exemptions฀from฀applying฀IFRSs฀in฀the฀opening฀IFRS฀statement฀of฀financial฀
position฀
(a)฀ Deemed฀cost฀
Fair฀value฀may฀be฀used฀as฀deemed฀cost฀at฀date฀of฀transition฀to฀IFRSs฀for:฀
(i)฀ Property,฀plant฀and฀equipment฀
(ii)฀ Investment฀properties฀(where฀using฀the฀cost฀model)฀
(iii)฀ Intangible฀assets฀(which฀meet฀the฀IAS฀38฀recognition฀and฀revaluation฀criteria)฀
A฀previous฀GAAP฀revaluation฀(at฀or฀before฀the฀date฀of฀transition฀to฀IFRSs)฀may฀also฀be฀used฀
as฀deemed฀cost฀at฀the฀date฀of฀the฀revaluation.฀
Further,฀ an฀ entity฀ may฀ use฀ an฀ 'event-driven'฀ valuation฀ (eg฀ a฀ valuation฀ for฀ an฀ initial฀ public฀
offering)฀before฀or฀ after฀the฀date฀of฀transition฀to฀IFRSs฀(providing฀it฀is฀before฀the฀first฀IFRS฀
year฀end)฀as฀deemed฀cost฀at฀the฀date฀of฀measurement฀(with฀a฀corresponding฀adjustment฀
to฀equity).฀
(b)฀ Business฀combinations฀
For฀business฀combinations฀prior฀to฀the฀date฀of฀transition฀to฀IFRSs:฀
(i)฀ The฀same฀classification฀(acquisition฀or฀uniting฀of฀interests)฀is฀retained฀as฀under฀previous฀
GAAP.฀
(ii)฀ For฀items฀requiring฀a฀cost฀measure฀for฀IFRSs,฀the฀carrying฀amount฀at฀the฀date฀of฀the฀
business฀ combination฀ is฀ treated฀ as฀ deemed฀ cost฀ and฀ IFRS฀ rules฀ are฀ applied฀ from฀
thereon.฀
(iii)฀ Items฀ requiring฀ a฀ fair฀ value฀ measure฀ for฀ IFRSs฀ are฀ revalued฀ at฀ the฀ date฀ of฀ transition฀ to฀
IFRSs.฀
(iv)฀ The฀ carrying฀ amount฀ of฀ goodwill฀ at฀ the฀ date฀ of฀ transition฀ to฀ IFRSs฀ is฀ the฀ amount฀ as฀
reported฀under฀previous฀GAAP.฀
However,฀ if฀ any฀ business฀ combination฀ prior฀ to฀ the฀ date฀ of฀ transition฀ to฀ IFRSs฀ is฀ restated฀ to฀
comply฀with฀IFRS฀3,฀all฀later฀acquisitions฀must฀be฀restated฀as฀well.฀
(c)฀ Borrowing฀costs฀
(i)฀ Borrowing฀costs฀need฀only฀be฀capitalised฀for฀assets฀where฀the฀commencement฀date฀for฀
capitalisation฀is฀on฀or฀after฀the฀date฀of฀transition฀to฀IFRSs.฀
(d)฀ Cumulative฀translation฀differences฀on฀foreign฀operations฀
(i)฀ Translation฀differences฀(which฀must฀be฀included฀in฀a฀separate฀translation฀reserve฀under฀
IFRSs)฀ may฀ be฀ deemed฀ zero฀ at฀ the฀ date฀ of฀ transition฀ to฀ IFRSs.฀ IAS฀ 21฀ is฀ applied฀ from฀
then฀on.฀
(e)฀ Adoption฀of฀IFRSs฀by฀subsidiaries,฀associates฀and฀joint฀ventures฀
If฀ a฀ subsidiary,฀ associate฀ or฀ joint฀ venture฀ adopts฀ IFRSs฀ later฀ than฀ its฀ parent,฀ it฀ measures฀ its฀
assets฀and฀liabilities:฀
(i)฀ Either:฀At฀the฀amount฀that฀would฀be฀included฀in฀the฀parent's฀financial฀statements,฀based฀
on฀the฀parent's฀date฀of฀transition;฀
(ii)฀ Or:฀ At฀ the฀ amount฀ based฀ on฀ the฀ subsidiary฀ (associate฀ or฀ joint฀ venture's)฀ date฀ of฀
transition.฀
(IFRS฀1:฀Appendix฀B)฀
฀ 479฀

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฀฀
Disclosure฀
(a)฀ A฀ reconciliation฀ of฀ previous฀ GAAP฀ equity฀ to฀ IFRS฀ equity฀ is฀ required฀ at฀ the฀ date฀ of฀
transition฀ to฀ IFRSs฀ and฀ for฀ the฀ most฀ recent฀ financial฀ statements฀ presented฀ under฀ previous฀
GAAP.฀
(b)฀ A฀ reconciliation฀ of฀ total฀ comprehensive฀ income฀ under฀ previous฀ GAAP฀ to฀ total฀
comprehensive฀income฀using฀IFRS฀is฀required฀for฀the฀most฀recent฀financial฀statements฀presented฀
under฀previous฀GAAP.฀
4.2฀ Practical฀issues฀
The฀implementation฀of฀the฀change฀to฀IFRS฀is฀likely฀to฀entail฀careful฀management฀in฀most฀companies.฀
Here฀are฀some฀of฀the฀change฀management฀considerations฀that฀should฀be฀addressed:฀
฀ Accurate฀assessment฀of฀the฀task฀involved฀
฀ Proper฀planning฀
฀ Human฀resource฀management฀
฀ Training฀฀
฀ Monitoring฀and฀accountability฀
฀ Physical฀resourcing฀
฀ Process฀review฀
฀ Follow฀up฀
See฀Chapter฀19฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀more฀detail฀on฀these฀practical฀issues.฀
Activity฀4:฀First-time฀adoption฀of฀IFRS฀ ฀
Europa฀is฀a฀listed฀company฀incorporated฀in฀Molvania.฀It฀will฀adopt฀International฀Financial฀Reporting฀
Standards฀(IFRSs)฀for฀the฀first฀time฀in฀its฀financial฀statements฀for฀the฀year฀ended฀31฀December฀20X8.฀
The฀ directors฀ of฀ Europa฀ are฀ unclear฀ as฀ to฀ the฀ impact฀ of฀ IFRS฀ 1฀ First-time฀ Adoption฀ of฀ International฀
Financial฀Reporting฀Standards.฀
In฀ its฀ previous฀ financial฀ statements฀ for฀ 31฀ December฀ 20X6฀ and฀ 20X7,฀ which฀ were฀ prepared฀ under฀
local฀GAAP,฀the฀company:฀
(a)฀ Made฀a฀number฀of฀routine฀accounting฀estimates,฀including฀accrued฀expenses฀and฀provisions;฀
and฀
(b)฀ Did฀not฀recognise฀a฀provision฀for฀a฀court฀case฀arising฀from฀events฀that฀occurred฀in฀September฀
20X7.฀ When฀ the฀ court฀ case฀ was฀ concluded฀ on฀ 30฀ June฀ 20X8,฀ Europa฀ was฀ required฀ to฀ pay฀
$10฀ million฀ and฀ paid฀ this฀ on฀ 10฀ July฀ 20X8,฀ after฀ the฀ 20X7฀ financial฀ statements฀ were฀
authorised฀for฀issue.฀
In฀ the฀ opinion฀ of฀ the฀ directors,฀ the฀ company's฀ estimates฀ of฀ accrued฀ expenses฀ and฀ provisions฀ under฀
local฀GAAP฀were฀made฀on฀a฀basis฀consistent฀with฀IFRSs.฀
Required฀
(a)฀ Advise฀the฀directors฀of฀Europa฀on฀the฀procedure฀for฀preparing฀IFRS฀financial฀statements฀for฀the฀
first฀time฀(as฀required฀by฀IFRS฀1).฀
(b)฀ Discuss฀how฀the฀matters฀above฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Europa฀for฀
the฀year฀ended฀31฀December฀20X8.฀
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Tutorial฀note฀
Skills฀Checkpoint฀5฀looks฀at฀the฀skill฀of฀creating฀effective฀discussion,฀which฀is฀particularly฀relevant฀to฀
the฀topics฀covered฀in฀this฀chapter.฀
Ethics฀note฀
Current฀issues฀are฀a฀key฀part฀of฀the฀SBR฀exam,฀and฀will฀be฀tested฀at฀every฀sitting.฀The฀ethical฀
dilemma฀tested฀will฀clearly฀depend฀on฀the฀current฀issue฀itself.฀However,฀it฀can฀safely฀be฀assumed฀that฀
it฀will฀frequently฀concern฀someone฀in฀authority,฀such฀as฀a฀managing฀director฀wishing฀to฀present฀the฀
financial฀statements฀in฀a฀more฀favourable฀light.฀฀
The฀IASB฀often฀makes฀changes฀to฀IFRSs฀precisely฀to฀avoid฀the฀ethical฀dilemmas฀that฀result฀from฀
manipulation฀of฀ambiguities.฀The฀predecessor฀of฀IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀฀
was฀less฀precise฀and฀so฀the฀key฀figure฀of฀revenue฀was฀subject฀to฀manipulation.฀฀
Some฀of฀the฀topics฀in฀this฀chapter฀that฀could฀give฀rise฀to฀ethical฀dilemmas฀include฀debt฀versus฀equity฀
(a฀financial฀instrument฀with฀characteristics฀of฀both฀could฀be฀classified฀as฀equity฀for฀a฀favourable฀
impact฀on฀gearing)฀and฀'hiding'฀items฀in฀other฀comprehensive฀income฀(although฀scope฀for฀this฀is฀
narrower฀than฀formerly).฀Disclosure฀could฀also฀give฀rise฀to฀ethical฀issues;฀too฀little฀disclosure฀can฀
mislead,฀but฀so฀can฀too฀much,฀because฀important฀items฀are฀buried฀in฀the฀clutter.฀The฀IASB's฀
Disclosure฀Initiative฀aims฀to฀address฀this฀very฀issue.฀฀฀
฀ 481฀

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฀฀
฀ ฀
The฀impact฀of฀changes฀and฀
potential฀changes฀in฀
accounting฀regulation฀
1.฀ International฀ 2.฀ Current฀projects฀ 3.฀ Other฀issues฀

convergence฀and฀ Main฀current฀issues฀(see฀relevant฀
฀ Management฀commentary฀
national฀influences฀ chapter):฀
aims to supplement฀and฀
International฀Accounting฀Standards฀ ฀ Leases฀(IFRS฀16)฀ complement฀the฀financial฀
Board฀(IASB)฀(restructured฀2001)฀ ฀ Conceptual฀framework฀(ED)฀ statements.฀Covered฀in฀
฀ Revenue฀recognition฀(IFRS฀15)฀ interpretation฀chapter.
฀ European฀Union฀Regulation฀
(2005):฀IFRSs฀required฀for฀ Other฀current฀issues:฀ ฀ Sustainability:฀in฀
consolidated฀FS฀of฀listed฀entities฀ ฀ ED/2015/1฀Classification฀of฀ interpretation฀chapter.฀
in฀EU฀ liabilities:฀  Disclosure฀Initiative:฀short฀
฀ US฀Securities฀and฀Exchange฀ ฀ Current฀liability฀(all฀others฀non- and฀medium฀term฀projects฀
Commission฀(SEC)฀(2007):฀ current)฀when฀entity:฀ to฀improve฀presentation฀
allows฀non-US฀companies฀listed฀ and฀disclosure฀principles฀
(a)฀ Expects฀to฀settle฀the฀liability฀in฀its฀
on฀a฀US฀stock฀exchange฀to฀use฀ in฀existing฀standards฀
normal฀operating฀cycle;฀
IFRSs฀ Covers฀(so฀far):
(b)฀ Holds฀the฀liability฀primarily฀for฀
฀ International฀Organization฀of฀ the฀purpose฀of฀trading;฀ –฀ Principles฀of฀disclosure
Securities฀Commissions฀ –฀ Materiality฀
(c)฀ Is฀due฀to฀settle฀the฀liability฀within฀
(IOSCO)):฀recommends฀use฀of฀ –฀ Amendments฀to฀IAS฀1฀
12฀months฀of฀the฀period฀end;฀or฀
IFRSs฀to฀member฀exchanges฀and฀ –฀ Amendments฀to฀IAS฀7
cooperates฀in฀development฀of฀ (d)฀ Does฀not฀have฀a฀right฀at฀the฀
IFRSs฀ end฀of฀the฀reporting฀
period*฀to฀defer฀settlement฀
Dialogue฀with฀other฀key฀standard฀
beyond฀12฀months฀
setters฀not฀using฀IFRSs฀
฀ *฀no฀longer฀'unconditional'฀right฀
฀ USA฀ as฀such฀rights฀are฀rare฀in฀real฀
฀ China฀ life฀
฀ Japan฀
฀ ED/2015/8฀Draft฀IFRS฀Practice฀
Influence฀of฀national฀regulators฀ Statement:฀Application฀of฀Materiality฀
฀ IASB฀cannot฀mandate฀use฀of฀ to฀FS:฀
IFRSs฀ ฀ Non-mandatory฀guidance฀on฀
฀ Adoption฀depends฀on฀ application฀of฀materiality฀concept฀
national/regional฀regulators฀ ฀ Covers:฀
฀ Some฀regimes฀have฀adopted฀the฀ –฀ Characteristics฀of฀materiality฀
IFRS฀for฀SMEs฀as฀national฀ –฀ Application฀of฀materiality฀in฀
financial฀reporting฀system฀(often฀ presentation฀and฀disclosure฀
where฀no฀major฀stock฀exchange)
–฀ Application฀of฀materiality฀in฀
recognition฀and฀measurement฀
–฀ Assessment฀of฀whether฀omissions฀
and฀misstatements฀are฀material฀
฀
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฀ The฀impact฀of฀changes฀and฀
฀ potential฀changes฀in฀
฀ accounting฀regulation฀
฀
฀
฀
฀ ฀
4.฀ ฀IFRS฀1฀First-time฀Adoption฀of฀IFRSs฀ Transition฀process฀
฀ Definition฀ –฀ Select฀accounting฀
฀ –฀ First฀IFRS฀financial฀statements฀are฀the฀first฀฀annual฀financial฀statements฀in฀
policies฀under฀IFRSs฀
which฀the฀entity฀adopts฀IFRSs฀by฀an฀explicit฀and฀unreserved฀statement฀of฀ –฀ Derecognise฀
compliance฀with฀IFRSs฀ assets/liabilities฀not฀
฀ Apply฀IFRSs฀from฀beginning฀of฀earliest฀comparative฀period฀shown฀=฀date฀of฀ recognised฀under฀IFRSs฀
transition฀to฀IFRSs฀ –฀ Recognise฀IFRSs฀
฀ Prepare฀opening฀IFRSs฀SOFP฀at฀date฀of฀transition฀฀฀ assets/liabilities฀not฀
all฀adjustments฀from฀previous฀GAAP฀recognised฀in฀equity฀first฀year฀of฀adoption฀ recognised฀under฀
฀ 1.1.X1฀ 31.12.X1฀ 31.12.X2฀ previous฀GAAP฀
฀ date฀of฀ reporting฀ –฀ Reclassify฀assets฀and฀
฀ transition฀ date฀ liabilities฀(eg฀compound฀
financial฀instruments)฀
฀ Use฀IFRSs฀effective฀at฀reporting฀date฀for฀all฀periods฀฀
presented฀ –฀ Remeasure฀to฀IFRSs฀
฀ Estimates฀are฀made฀as฀at฀same฀date฀as฀under฀previous฀GAAP฀even฀if฀more฀ value฀(where฀necessary)฀
information฀is฀now฀available฀ ฀
฀ Reconciliations฀required:฀
฀ –฀equity฀at฀date฀of฀transition฀and฀last฀previous฀GAAP฀year฀end฀
–฀TCI฀for฀last฀annual฀financial฀statements฀
Main฀exemptions฀
Deemed฀cost฀
฀ Fair฀value/previous฀GAAP/'event-driven'฀valuation฀can฀be฀used฀as฀deemed฀
cost฀for:฀
–฀PPE฀
–฀Investment฀properties฀
฀ –฀Intangible฀assets฀
Business฀combinations฀
฀ For฀business฀combinations฀prior฀to฀date฀of฀transition฀to฀IFRSs:฀
฀ –฀ Same฀classification฀(acquisition/uniting฀of฀interests)฀as฀previous฀GAAP฀
฀ –฀ Items฀requiring฀cost฀measure฀under฀IFRSs฀฀use฀previous฀GAAP฀value฀at฀
date฀of฀business฀combination฀and฀apply฀IFRSs฀thereafter฀
฀ –฀ Items฀requiring฀FV฀measure฀under฀IFRSs฀฀revalue฀at฀date฀of฀transition฀to฀
IFRSs฀
฀ –฀ Goodwill฀฀use฀previous฀GAAP฀figure฀
฀ If฀any฀business฀combination฀is฀restated฀all฀later฀acquisitions฀must฀be฀restated฀as฀
well฀
Borrowing฀costs฀
฀ Can฀capitalise฀for฀projects฀only฀commencing฀on/after฀date฀of฀transition฀to฀
IFRSs฀
Cumulative฀translation฀differences฀of฀foreign฀operations฀
฀ Can฀be฀deemed฀to฀be฀zero฀
Assets/liabilities฀of฀subsidiaries,฀associates฀and฀JVs฀
฀ If฀adopt฀IFRSs฀later฀than฀parent,฀can฀use฀values฀based฀
on฀parent's฀or฀own฀date฀of฀transition฀
*฀ all฀exemptions฀apply฀at฀date฀of฀transition฀to฀IFRSs฀only฀except฀where฀stated฀
฀ 483฀

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฀฀
1.฀ International฀convergence฀and฀national฀influences฀
฀ ฀ International฀convergence฀has฀gained฀pace฀recently฀with฀a฀number฀of฀countries฀switching฀
or฀having฀switched฀to฀IFRSs.฀The฀EU฀adopted฀IFRSs฀for฀the฀consolidated฀financial฀
statements฀of฀quoted฀companies฀in฀2005.฀
฀ ฀ Now฀the฀IASB฀is฀working฀with฀other฀major฀accounting฀standard฀setters฀to฀work฀
towards฀a฀harmonised฀global฀GAAP.฀
฀ ฀ It฀is฀up฀to฀national฀or฀regional฀regulators฀to฀require฀or฀permit฀use฀of฀IFRSs.฀Some฀
regimes฀choose฀convergence฀over฀full฀adoption฀and฀others฀adopt฀the฀IFRS฀for฀Small฀and฀
Medium-sized฀Entities฀as฀the฀national฀reporting฀system.฀
2.฀ Current฀projects฀
฀ ฀ The฀IASB฀has฀a฀number฀of฀projects฀underway.฀These฀could฀form฀the฀basis฀of฀a฀discussion฀
question฀or฀part฀of฀a฀question฀in฀the฀exam.฀
฀
฀
฀
฀
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Now฀try฀the฀following฀question฀from฀the฀Further฀question฀practice฀bank:฀
Q25฀Taupe฀฀
A฀useful฀article฀on฀integrated฀reporting,฀focusing฀on฀a฀company's฀relationship฀with฀stakeholders,฀can฀be฀
found฀here.฀
Deloitte's฀IAS฀Plus฀Projects฀page฀contains฀a฀good฀summary฀of฀the฀latest฀current฀developments.฀Once฀you฀
have฀an฀overview฀of฀the฀proposed/recent฀changes,฀you฀can฀drill฀down฀for฀more฀detail฀and฀฀follow฀the฀
relevant฀links฀to฀the฀IASB's฀website฀
www.iasplus.com/en/projects฀
A฀good฀source฀of฀information฀about฀current฀issues฀is฀PwC's฀IFRS฀News,฀which฀manages฀to฀provide฀a฀
good฀amount฀of฀detail฀in฀a฀user-friendly฀format.฀
www.pwc.com/us/en/cfodirect/publications/ifrs-news.html฀
฀
฀
฀ 485฀

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฀฀
486฀

lOMoARcPSD|6256454
฀ ฀
฀
Creating฀effective฀discussion
฀
฀
฀
฀
aging information
Man
An
sw
er
pl
t
en
manag ime
Resolving
an
em
Approaching
t
nin
ethical issues Exam success skills
Good
reporting issues
uirereq rpretation
SBR skills
e m e nts
discussion Applying good
req of rprineteation
consolidation
m eunirts
techniques
discussion
E
of t inteect
an
e c p re
c rr
Performing
r re Co
d
ti v
e
se w ri
nt tin
Co
ati g
on
l
E cient numerica
analysis
฀
Introduction฀
More฀marks฀in฀your฀Strategic฀Business฀Reporting฀(SBR)฀exam฀will฀relate฀to฀written฀answers฀than฀
numerical฀answers.฀It฀is฀very฀tempting฀to฀only฀practise฀numerical฀questions฀as฀they฀are฀easy฀to฀
mark฀because฀the฀answer฀is฀right฀or฀wrong฀whereas฀written฀questions฀are฀more฀subjective฀and฀฀
a฀range฀of฀different฀answers฀will฀be฀given฀credit.฀Even฀when฀attempting฀written฀questions,฀it฀is฀
tempting฀to฀write฀a฀brief฀answer฀plan฀and฀then฀look฀at฀the฀answer฀rather฀than฀writing฀a฀full฀
answer฀to฀plan.฀Unless฀you฀practise฀written฀questions฀in฀full฀to฀time,฀you฀will฀never฀
acquire฀the฀necessary฀skills฀to฀tackle฀discussion฀questions.฀
You฀will฀not฀pass฀the฀SBR฀exam฀on฀calculations฀alone.฀Therefore,฀it฀is฀essential฀to฀be฀
armed฀with฀the฀skills฀required฀to฀answer฀written฀requirements.฀This฀is฀what฀Skills฀Checkpoint฀5฀
will฀focus฀on,฀with฀a฀particular฀emphasis฀on฀Section฀B฀of฀the฀exam฀which฀could฀feature฀an฀
essay-based฀question฀from฀any฀aspect฀of฀the฀syllabus.฀
฀ ฀
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฀฀
Skills฀Checkpoint฀5:฀Creating฀effective฀discussion฀
SBR฀Skill:฀Creative฀effective฀discussion฀
The฀ basic฀ five฀ steps฀ adopted฀ in฀ Skills฀ Checkpoints฀ 1–4฀ should฀ also฀ be฀ used฀ in฀
discussion฀ questions.฀ These฀ steps฀ will฀ be฀ tailored฀ more฀ specifically฀ to฀ discussion฀
questions฀as฀the฀question฀is฀tackled.฀
Note฀ that฀ Steps฀ 2฀ and฀ 4฀ are฀ particularly฀ important฀ for฀ discussion฀ questions.฀ You฀ will฀
definitely฀ need฀ to฀ spend฀ a฀ third฀ of฀ your฀ time฀ reading฀ and฀ planning.฀ Brainstorming฀
ideas฀at฀the฀planning฀stage฀to฀create฀a฀comprehensive฀answer฀plan฀will฀be฀the฀key฀to฀
success฀in฀this฀style฀of฀question.฀฀
STEP฀1:
Work฀out฀the฀time฀per฀requirement฀(1.95฀minutes฀a฀mark).
STEP฀2:฀
Read฀and฀analyse฀the฀requirement(s).฀
STEP฀3:
Read฀and฀analyse฀the฀scenario.
STEP฀4:
Prepare฀an฀answer฀plan.
STEP฀5:
Write฀up฀your฀answer.
฀
฀
฀
฀
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In฀this฀question,฀we฀will฀focus฀on฀the฀following฀exam฀success฀skills฀and฀in฀particular:฀
฀ Good฀ time฀ management.฀ The฀ exam฀ will฀ be฀ time฀ pressured฀ and฀ you฀ will฀
need฀ to฀ manage฀ it฀ carefully฀ to฀ ensure฀ that฀ you฀ can฀ make฀ a฀ good฀ attempt฀ at฀
every฀part฀of฀every฀question.฀You฀will฀have฀3฀hours฀and฀15฀minutes฀in฀the฀exam,฀
which฀ works฀ out฀ at฀ 1.95฀ minutes฀ a฀ mark.฀ The฀ following฀ question฀ is฀ worth฀ 20฀
marks฀ so฀ you฀ should฀ allow฀ 39฀ minutes.฀ In฀ Skills฀ Checkpoints฀ 1–3,฀ our฀ advice฀
was฀ to฀ allow฀ a฀ third฀ to฀ a฀ quarter฀ of฀ your฀ time฀ for฀ reading฀ and฀ planning.฀
However,฀ discussion฀ questions฀ require฀ deep฀ thinking฀ at฀ the฀ planning฀ stage฀ to฀
generate฀ sufficient฀ points฀ to฀ score฀ a฀ pass฀ so฀ it฀ is฀ recommended฀ that฀ you฀
dedicate฀ a฀ third฀ of฀ your฀ time฀ to฀ reading฀ and฀ planning฀ (here,฀ 13฀ minutes)฀ and฀
the฀remainder฀for฀writing฀up฀your฀answer฀(here,฀26฀minutes).฀
฀ Correct฀interpretation฀of฀the฀requirements.฀The฀likely฀verb฀in฀this฀type฀of฀
question฀ is฀ 'discuss'.฀ This฀ is฀ defined฀ by฀ the฀ ACCA฀ as฀ 'Consider฀ and฀
debate/argue฀about฀the฀pros฀and฀cons฀of฀an฀issue.฀Examine฀in฀detail฀by฀using฀
arguments฀ in฀ favour฀ or฀ against'.฀ With฀ this฀ type฀ of฀ requirement,฀ the฀ key฀ is฀ to฀
produce฀ a฀ balanced฀ answer฀ beginning฀ with฀ a฀ brief฀ introduction฀ and฀ ending฀
with฀ a฀ conclusion฀ containing฀ your฀ opinion฀ which฀ should฀ be฀ supported฀ by฀ the฀
points฀in฀the฀main฀body฀of฀your฀answer.฀
฀ Answer฀ planning.฀ By฀ now฀ you฀ are฀ likely฀ to฀ have฀ a฀ preferred฀ style฀ for฀ your฀
answer฀plan.฀For฀a฀discussion฀question,฀annotating฀the฀question฀paper฀is฀likely฀
to฀be฀insufficient.฀It฀would฀be฀better฀to฀draw฀up฀a฀separate฀answer฀plan฀in฀the฀
format฀of฀your฀choosing฀(eg฀a฀mind฀map฀or฀bullet-pointed฀lists).฀฀
฀ Effective฀ writing฀ and฀ presentation.฀ This฀ is฀ particularly฀ important฀ in฀
discussion฀ questions.฀ Use฀ headings฀ and฀ sub-headings฀ in฀ your฀ answer,฀
underlined฀ with฀ a฀ ruler,฀ and฀ write฀ in฀ full฀ sentences,฀ ensuring฀ your฀ style฀ is฀
professional.฀To฀achieve฀the฀necessary฀depth฀of฀discussion฀and฀to฀explain฀your฀
points,฀it฀is฀recommended฀that฀you฀include฀illustrative฀examples฀in฀your฀answer.฀
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฀฀
Skill฀Activity฀
question,฀ so฀ at฀ 1.95฀ minutes฀ a฀ mark,฀ it฀ should฀ take฀ 39฀ minutes.฀
Approximately฀ a฀ third฀ of฀ your฀ time฀ should฀ be฀ spent฀ reading฀
(requirement฀then฀scenario)฀and฀planning฀(13฀minutes)฀and฀two-thirds฀
of฀ your฀ time฀ writing฀ up฀ the฀ answer฀ (26฀ minutes).฀ Then฀ the฀ planning฀
and฀writing฀time฀should฀be฀split฀in฀proportion฀to฀the฀mark฀allocation฀of฀
the฀two฀parts฀of฀the฀question฀(65%฀on฀part฀(a)฀and฀35%฀on฀part฀(b)).฀
฀
Required฀
(a)฀฀ Discuss฀ how฀ the฀ changes฀ in฀ accounting฀ practices฀ on฀ transition฀ to฀ IFRSs฀ and฀
choice฀in฀the฀application฀of฀individual฀IFRSs฀could฀lead฀to฀inconsistency฀between฀
the฀financial฀statements฀of฀companies.฀฀ (13฀marks)฀
(b)฀฀ Discuss฀how฀management's฀judgement฀and฀the฀financial฀reporting฀infrastructure฀
of฀ a฀ country฀ can฀ have฀ a฀ significant฀ impact฀ on฀ financial฀ statements฀ prepared฀
under฀IFRS.฀฀ (7฀marks)฀
฀฀ ฀ (Total฀=฀20฀marks)฀
฀
STEP 2฀ Read฀ the฀ requirement฀ for฀ the฀ following฀ question฀ and฀ analyse฀ it.฀
฀ Highlight฀or฀number฀up฀each฀sub-requirement,฀identify฀the฀verb(s)฀and฀
ask฀yourself฀what฀each฀sub-requirement฀means.฀
฀
Verb฀–฀refer฀
฀
to฀ACCA฀ Sub-requirement฀1
฀ definition฀
Required฀
(a)฀฀ Discuss฀ how฀ the฀ changes฀ in฀ accounting฀ practices฀ on฀ transition฀ to฀ IFRSs฀ and฀
choice฀in฀the฀application฀of฀individual฀IFRSs฀could฀lead฀to฀inconsistency฀between฀
the฀financial฀statements฀of฀companies.฀฀ (13฀marks)฀
฀
฀
Sub-requirement฀2฀ Sub-requirement฀1 Sub-requirement฀2฀
฀
฀
(b)฀฀ Discuss฀how฀management's฀judgement฀and฀the฀financial฀reporting฀infrastructure฀
of฀ a฀ country฀ can฀ have฀ a฀ significant฀ impact฀ on฀ financial฀ statements฀ prepared฀
under฀IFRS.฀฀ (7฀marks)฀
฀฀ ฀ (Total฀=฀20฀marks)฀
฀ Verb฀–฀refer฀
to฀ACCA฀
฀ definition฀
฀
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Your฀ verb฀ is฀ 'discuss'.฀ This฀ is฀ defined฀ by฀ the฀ ACCA฀ as฀ 'Consider฀ and฀ debate/argue฀
about฀the฀pros฀and฀cons฀of฀an฀issue.฀Examine฀in฀detail฀by฀using฀arguments฀in฀favour฀or฀
against'.฀
Here฀is฀a฀table฀to฀help฀you฀understand฀each฀sub-requirement:฀
Part฀of฀ Sub-requirement฀ What฀does฀it฀mean?฀

question฀
(a)฀ (1)฀Discuss฀how฀ This฀is฀a฀very฀practical฀requirement.฀You฀need฀to฀

changes฀in฀ view฀this฀requirement฀from฀the฀point฀of฀view฀of฀a฀
accounting฀ company฀adopting฀IFRS฀for฀the฀first฀time฀and฀
practices฀on฀ come฀up฀with฀the฀challenges฀it฀would฀face฀–฀but฀
transition฀to฀IFRSs฀ be฀careful฀not฀to฀just฀list฀generic฀problems฀of฀first฀
could฀lead฀to฀ time฀adoption฀as฀your฀points฀must฀be฀specifically฀
inconsistency฀ tailored฀to฀issues฀causing฀inconsistency฀between฀
between฀financial฀ financial฀statements฀of฀different฀companies.฀
statements฀of฀ Remember฀that฀IFRS฀1฀First-time฀Adoption฀of฀
companies.฀ International฀Financial฀Reporting฀Standards฀
provides฀guidance฀to฀companies฀adopting฀IFRS฀
for฀the฀first฀time.฀
(2)฀Discuss฀how฀ The฀key฀here฀is฀to฀mentally฀run฀through฀the฀SBR฀
choice฀in฀the฀ syllabus฀trying฀to฀identify฀IASs฀or฀IFRSs฀with฀
application฀of฀ choices฀in฀accounting฀treatments.฀You฀do฀not฀
individual฀IFRSs฀ need฀to฀know฀the฀IAS฀or฀IFRS฀number,฀just฀the฀
could฀lead฀to฀ accounting฀treatment฀within฀them.฀No฀specific฀
inconsistency฀ marks฀will฀be฀available฀for฀the฀IAS฀or฀IFRS฀
between฀financial฀ number฀in฀the฀ACCA฀marking฀guide;฀however,฀if฀
statements฀of฀ you฀happen฀to฀remember฀it,฀add฀it฀into฀your฀
companies.฀ answer฀for฀increased฀credibility.฀฀
Including฀examples฀of฀areas฀of฀choice฀from฀
examinable฀IFRSs฀is฀key฀to฀passing฀this฀sub-
requirement฀but฀make฀sure฀you฀explain฀why฀
choice฀leads฀to฀inconsistency.฀
(b)฀ (1)฀Discuss฀how฀ The฀approach฀here฀is฀similar฀to฀areas฀of฀choice฀in฀

management's฀ sub-requirement฀2฀of฀part฀(a).฀You฀should฀
judgement฀can฀ consider฀the฀examinable฀documents฀for฀SBR฀to฀
have฀a฀significant฀ identify฀subjective฀areas฀of฀an฀IAS฀or฀IFRS฀that฀
impact฀on฀financial฀ require฀management฀judgement.฀Including฀these฀
statements฀prepared฀ examples฀will฀help฀you฀generate฀enough฀points฀฀
under฀IFRS.฀ to฀pass.฀You฀should฀also฀assess฀the฀level฀of฀
impact฀these฀areas฀have฀on฀financial฀statements฀
prepared฀under฀IFRS.฀As฀well฀as฀specific฀
examples฀of฀IAS฀or฀IFRS,฀you฀should฀address฀฀
the฀general฀characteristics฀of฀IFRS฀leading฀to฀the฀
need฀for฀judgement.฀
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฀฀
฀ (2)฀Discuss฀how฀the฀ Think฀about฀how฀an฀infrastructure฀could฀vary฀from฀
financial฀reporting฀ country฀to฀country.฀Consider฀the฀regulatory฀
infrastructure฀of฀a฀ framework,฀the฀staff฀involved฀in฀preparing฀
company฀can฀have฀a฀ financial฀statements,฀the฀existence฀of฀an฀active฀
significant฀impact฀on฀ market฀and฀standards฀of฀corporate฀governance฀
financial฀statements฀ and฀audit.฀
prepared฀under฀IFRS.฀
Now฀read฀the฀scenario.฀You฀will฀notice฀that฀the฀scenario฀for฀an฀essay-
STEP 3฀
฀ style฀ question฀ is฀ typically฀ shorter฀ than฀ it฀ is฀ for฀ a฀ case-study฀ style฀
question.฀ However,฀ read฀ it฀ carefully,฀ as฀ it฀ is฀ likely฀ to฀ provide฀ some฀
inspiration฀for฀you฀to฀generate฀points฀in฀your฀answer.฀
฀
Challenge฀of฀
adopting฀more฀
Question฀–฀Implementing฀IFRS฀(20฀marks)฀ complex฀
accounting฀
The฀ transition฀ to฀ International฀ Financial฀ Reporting฀ Standards฀ (IFRSs)฀ standards฀than฀
local฀GAAP฀฀
involves฀ major฀ change฀ for฀ companies฀ as฀ IFRSs฀ introduce฀ significant฀ (a)฀Sub-
requirement฀(1)
changes฀in฀accounting฀practices฀that฀were฀often฀not฀required฀
by฀ national฀ generally฀ accepted฀ accounting฀ practice.฀ It฀ is฀
important฀ that฀ the฀ interpretation฀ and฀ application฀ of฀ IFRSs฀ is฀ consistent฀
from฀ country฀ to฀ country.฀ IFRSs฀ are฀ partly฀ based฀ on฀ rules,฀ and฀ partly฀ on฀
principles฀and฀management's฀judgement.฀Judgement฀ is฀ more฀ likely฀
Ability฀of฀ to฀ be฀ better฀ used฀ when฀ it฀ is฀ based฀ on฀ experience฀ of฀ IFRSs฀
preparers฀of฀
accounts฀within฀ within฀a฀sound฀financial฀reporting฀infrastructure.฀It฀is฀hoped฀that฀national฀
financial฀reporting฀
infrastructure฀will฀ differences฀in฀accounting฀will฀be฀eliminated฀and฀financial฀statements฀will฀
have฀significant฀
impact฀ be฀consistent฀and฀comparable฀worldwide.฀
(b)฀Sub-
requirement฀(2)฀
Required฀
(a)฀฀ Discuss฀ how฀ the฀ changes฀ in฀ accounting฀ practices฀ on฀ transition฀ to฀
IFRSs฀and฀choice฀in฀the฀application฀of฀individual฀IFRSs฀could฀lead฀
to฀inconsistency฀between฀the฀financial฀statements฀of฀companies.฀฀ (13฀marks)฀
(b)฀฀ Discuss฀how฀management's฀judgement฀and฀the฀financial฀reporting฀
infrastructure฀ of฀ a฀ country฀ can฀ have฀ a฀ significant฀ impact฀ on฀
financial฀statements฀prepared฀under฀IFRS.฀฀ (7฀marks)฀
฀ ฀(Total฀=฀20฀marks)฀
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STEP 4฀ Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀requirements฀as฀
฀ headings.฀ Try฀ and฀ come฀ up฀ with฀ separate฀ points฀ for฀ each฀ sub-
requirement.฀You฀will฀be฀awarded฀1฀mark฀per฀point฀so฀in฀order฀to฀
achieve฀ a฀ comfortable฀ pass,฀ you฀ should฀ aim฀ to฀ generate฀ at฀ least฀
10฀points฀for฀part฀(a)฀(spread฀across฀the฀two฀sub-requirements)฀and฀
at฀ least฀ 5฀ points฀ for฀ part฀ (b)฀ (again฀ spread฀ across฀ the฀ two฀ sub-
requirements).฀
Plan฀for฀part฀(a)฀
How฀changes฀in฀accounting฀practices฀and฀choice฀of฀application฀in฀
individual฀IFRSs฀on฀transition฀to฀IFRS฀could฀lead฀to฀inconsistency฀
between฀companies฀
Changes฀in฀accounting฀practices฀ ฀ Choice฀of฀application฀in฀
individual฀IFRSs฀
฀ Challenge฀for฀preparers฀and฀users฀ ฀ ฀ Inventory:฀FIFO฀or฀weighted฀
฀ Legislation฀regarding฀presentation฀ ฀ average฀
฀ Concepts฀and฀interpretation฀of฀IFRS฀ ฀ PPE/intangibles:฀cost฀or฀
฀
compared฀to฀local฀GAAP฀ revaluation฀model฀
฀ Inconsistency฀of฀timing฀ ฀ PPE:฀depreciation฀method฀
฀ Different฀exemptions฀taken฀ ฀ Investment฀property:฀cost฀or฀fair฀
value฀model฀
฀
฀ Grants฀related฀to฀assets:฀deferred฀
income฀or฀net฀off฀cost฀of฀asset฀
฀ Full฀or฀partial฀goodwill฀method฀
฀ Investment฀to฀associate฀step฀
acquistion:฀measure฀original฀
investment฀at฀cost฀or฀fair฀value฀
฀ Translate฀impairment฀of฀goodwill฀฀
in฀foreign฀subsidiary฀at฀average฀
or฀closing฀rate฀
฀ Cash฀flows:฀direct฀or฀indirect฀
method฀of฀cash฀flows;฀choice฀of฀
heading฀for฀some฀items฀
฀
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฀฀
Plan฀for฀part฀(b)฀
How฀management฀judgement฀and฀financial฀reporting฀infrastructure฀can฀
have฀significant฀impact฀on฀financial฀statements฀prepared฀under฀IFRS฀฀
Management฀judgement฀ ฀ Financial฀reporting฀
infrastructure฀
฀ Revenue:฀identify฀separate฀ ฀ ฀ Need฀for฀robust฀regulatory฀
performance฀obligations,฀allocate฀ ฀ framework฀
transaction฀price,฀determining฀ ฀ Trained฀and฀qualified฀staff฀
when฀satisfied฀ ฀
฀ Availability฀and฀transparency฀of฀
฀ Determining฀useful฀life฀of฀non- market฀information฀
current฀assets฀
฀ High฀standards฀of฀corporate฀
฀ Determining฀whether฀pension฀plan฀ governance฀and฀audit฀
is฀defined฀benefit฀or฀defined฀
฀
contribution฀
฀ Provisions:฀whether฀an฀obligation฀
exists,฀likelihood฀of฀outflow฀and฀
best฀estimate฀of฀amount฀
฀ Classification฀of฀financial฀
instruments฀for฀measurement฀
purposes฀
฀ Whether฀an฀investment฀is฀a฀
financial฀asset,฀associate,฀joint฀
venture฀or฀subsidiary฀
฀ Whether฀the฀IFRS฀5฀'held฀for฀sale'฀
or฀'discontinued฀operation'฀criteria฀
have฀been฀met฀
฀ Determining฀the฀functional฀currency฀
฀ General฀issues:฀volume฀of฀rules,฀
issues฀addressed฀for฀first฀time,฀
complexity฀of฀IFRS,฀choice฀in฀IFRS,฀
selection฀of฀valuation฀method฀
฀
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฀ headings฀and฀sub-requirements฀as฀sub-headings.฀Create฀a฀separate฀
sub-heading฀for฀each฀key฀paragraph฀in฀the฀scenario.฀
In฀a฀discussion฀style฀question,฀the฀structure฀should฀be฀as฀follows:฀
(a) A฀brief฀introduction฀
(b) The฀ main฀ body฀ of฀ your฀ answer฀ –฀ this฀ should฀ be฀ balanced,฀
bringing฀out฀both฀positive฀and฀negative฀aspects,฀with฀all฀points฀
fully฀explained,฀using฀examples฀to฀illustrate฀your฀points฀
(c) A฀ conclusion฀ with฀ your฀ opinion฀ that฀ is฀ supported฀ by฀ the฀
arguments฀in฀the฀main฀body฀of฀your฀answer฀
The฀approach฀for฀part฀(a)฀sub-requirement฀1฀should฀be:฀
 Identify฀a฀problem฀
 Explain฀ the฀ problem฀ in฀ the฀ context฀ of฀ consistency฀ between฀
 Illustrate฀your฀point฀with฀an฀example฀
The฀approach฀for฀part฀(a)฀sub-requirement฀2฀should฀be:฀
 Give฀examples฀of฀areas฀of฀choice฀within฀IFRSs฀
 You฀do฀not฀need฀to฀name฀the฀IAS฀or฀IFRS฀but฀you฀do฀need฀to฀
explain฀the฀choice฀in฀accounting฀treatment฀
 Cover฀ general฀ characteristics฀ of฀ IFRS฀ (as฀ well฀ as฀ specific฀
examples฀above)฀
The฀approach฀for฀part฀(b)฀sub-requirement฀1฀should฀be:฀
 Give฀examples฀of฀areas฀of฀judgement฀within฀IFRSs฀
 You฀do฀not฀need฀to฀name฀the฀IAS฀or฀IFRS฀but฀you฀do฀need฀to฀
explain฀the฀area฀of฀judgement฀
 Cover฀ general฀ characteristics฀ of฀ IFRS฀ (as฀ well฀ as฀ specific฀
examples฀above)฀
Finally,฀for฀part฀(b)฀sub-requirement฀2:฀
 Think฀ about฀ the฀ financial฀ reporting฀ infrastructure฀ of฀ your฀
country฀to฀generate฀ideas฀
 Your฀points฀should฀be฀practical฀
฀
฀ ฀
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฀฀
Use฀of฀key฀words฀
in฀requirement฀as฀
Suggested฀solution฀ heading฀
(a)฀ How฀ changes฀ in฀ accounting฀ practices฀ on฀ transition฀ to฀

IFRSs฀and฀choice฀in฀application฀of฀individual฀IFRSs฀could฀
lead฀to฀inconsistency฀between฀companies฀
Adoption฀ of฀ IFRS฀ for฀ the฀ first฀ time฀ is฀ like฀ to฀ result฀ in฀ inconsistency฀
Need฀a฀short฀
introduction฀for฀a฀
between฀ financial฀ statements฀ of฀ different฀ companies.฀ This฀ is฀
discussion฀question฀
explained฀further฀below.฀฀
Sub-heading฀for฀each฀
Change฀in฀accounting฀practices฀ sub-requirement฀
The฀challenge฀
Implementation฀ of฀ International฀ Financial฀ Reporting฀ Standards฀

entails฀a฀great฀deal฀of฀work฀for฀many฀companies,฀particularly฀
Identify฀problem฀ those฀in฀countries฀where฀local฀GAAP฀has฀not฀been฀so฀onerous.฀For฀
example,฀ many฀ jurisdictions฀ will฀ not฀ have฀ had฀ such฀ detailed฀ rules฀ Illustrate฀your฀
point฀with฀an฀
about฀ recognition,฀ measurement฀ and฀ presentation฀ of฀ financial฀ example฀
instruments,฀ and฀ many฀ will฀ have฀ had฀ no฀ rules฀ at฀ all฀ about฀ share-
based฀payment.฀
A฀ challenge฀ for฀ preparers฀ of฀ financial฀ statements฀ is฀ also฀ a฀

challenge฀ for฀ users.฀ When฀ financial฀ statements฀ become฀ far฀
Explain฀problem฀in฀
context฀of฀consistency฀ more฀complex฀under฀IFRS฀than฀they฀were฀under฀local฀GAAP,฀users฀
of฀financial฀statements฀
may฀ find฀ them฀ hard฀ to฀ understand,฀ and฀ consequently฀ of฀ little฀
relevance.฀
Presentation฀
Many฀ developed฀ countries฀ have฀ legislation฀ requiring฀ set฀ formats฀

Identify฀problem฀
and฀layouts฀for฀financial฀statements.฀For฀example,฀in฀the฀UK฀there฀
Illustrate฀your฀
is฀ the฀ Companies฀ Act฀ 2006.฀ IFRS฀ demands฀ that฀ presentation฀ is฀ in฀ point฀with฀an฀
example฀
accordance฀ with฀ IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements,฀ but฀
this฀ standard฀ allows฀ alternative฀ forms฀ of฀ presentation.฀ In฀ choosing฀
Explain฀problem฀in฀
context฀of฀consistency฀ between฀ alternatives,฀ countries฀ tend฀ to฀ adopt฀ the฀ format฀
of฀financial฀
statements฀ that฀is฀closest฀to฀local฀GAAP,฀even฀if฀this฀is฀not฀necessarily฀the฀
best฀ format.฀ For฀ example,฀ UK฀ companies฀ are฀ likely฀ to฀ adopt฀ the฀
two-statement฀ format฀ for฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income,฀because฀this฀is฀closest฀to฀the฀old฀profit฀and฀
loss฀account฀and฀statement฀of฀total฀recognised฀gains฀and฀losses.฀
฀ ฀
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Concepts฀and฀interpretation฀
Although฀later฀IASs฀and฀IFRSs฀are฀based฀to฀an฀extent฀on฀the฀IASB฀
Conceptual฀ Framework,฀ there฀ is฀ no฀ consistent฀ set฀ of฀
principles฀ underlying฀ them.฀ The฀ Conceptual฀ Framework฀ itself฀ is฀
being฀ revised,฀ and฀ there฀ is฀ controversy฀ over฀ the฀ direction฀ the฀ Explain฀problem฀
in฀context฀of฀
revision฀ should฀ take.฀ Consequently,฀ preparers฀ of฀ accounts฀ are฀ consistency฀of฀
financial฀
likely฀to฀think฀in฀terms฀of฀the฀conceptual฀frameworks฀–฀if฀any฀–฀that฀ statements฀
they฀ have฀ used฀ in฀ developing฀ local฀ GAAP,฀ and฀ these฀ may฀ be฀
different฀ from฀ that฀ of฀ the฀ IASB.฀ German฀ accounts,฀ for฀ example,฀
Illustrate฀your฀
have฀traditionally฀been฀aimed฀at฀the฀tax฀authorities.฀฀ point฀with฀an฀
example฀
Where฀IFRSs฀themselves฀give฀clear฀guidance,฀this฀may฀not฀matter,฀
but฀where฀there฀is฀uncertainty,฀preparers฀of฀accounts฀will฀fall฀back฀
on฀their฀traditional฀conceptual฀thinking.฀
Inconsistency฀of฀timing฀and฀exemptions฀taken฀
IFRSs฀ have฀ provision฀ for฀ early฀ adoption,฀ and฀ this฀ can฀ affect฀
comparability,฀ although฀ impact฀ of฀ a฀ new฀ standard฀ must฀ be฀
disclosed฀under฀IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀
Estimates฀ and฀ Errors.฀ Further,฀ IFRS฀ 1฀ First-time฀ Adoption฀ of฀
International฀ Financial฀ Reporting฀ Standards฀ permits฀ a฀ number฀ of฀
Explain฀
exemptions฀ during฀ the฀ periods฀ of฀ transition฀ to฀ IFRS.฀ This฀ gives฀ problem฀in฀
context฀of฀
scope฀ for฀ manipulation฀ if฀ exemptions฀ are฀ 'cherry-picked'฀ to฀ consistency฀of฀
financial฀
produce฀a฀favourable฀picture.฀ statements฀
Choice฀of฀application฀of฀individual฀IFRSs฀฀
A฀comprehensive฀list฀of฀
examples฀has฀been฀
included฀here฀but฀you฀ Although฀ many฀ so-called฀ 'allowed฀ alternatives'฀ have฀ been฀
only฀need฀about฀six฀
A฀discussion฀
points฀to฀be฀awarded฀ eliminated฀from฀IFRS฀in฀recent฀years,฀choice฀of฀treatment฀remains.฀ question฀requires฀
the฀marks฀available,฀
a฀balanced฀
and฀fewer฀to฀score฀a฀ An฀ example฀ of฀ the฀ elimination฀ of฀ allowed฀ alternatives฀ was฀ the฀ answer฀–฀positive฀
strong฀pass฀
aspects฀brought฀
introduction฀ of฀ IFRS฀ 11฀ Joint฀ Arrangements฀ which฀ required฀ joint฀ out฀here฀
ventures฀ to฀ be฀ equity-accounted,฀ whereas฀ previously฀ there฀ was฀ a฀

choice฀between฀equity฀accounting฀and฀proportional฀consolidation.฀
You฀do฀not฀need฀to฀
Examples฀where฀choices฀remain฀include:฀฀
know฀the฀IAS฀or฀IFRS฀
number฀but฀just฀the฀  IAS฀ 2฀ Inventories฀ allows฀ different฀ cost฀ formulae฀ for฀ large฀
rules฀or฀principles฀
within฀the฀accounting฀ numbers฀ of฀ inventory฀ that฀ are฀ largely฀ interchangeable฀ (for฀
standards.฀Note฀that฀
even฀though฀bullet- example,฀first-in฀first-out฀or฀weighted฀average).฀
points฀have฀been฀used,฀
the฀answer฀is฀still฀in฀full฀
sentences฀
฀ 497฀

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฀฀
 IAS฀ 16฀ Property,฀ Plant฀ and฀ Equipment฀ gives฀ a฀ choice฀ of฀

either฀the฀cost฀model฀or฀the฀revaluation฀model฀for฀a฀class฀of฀
property,฀ plant฀ or฀ equipment฀ as฀ well฀ as฀ a฀ choice฀ of฀
depreciation฀ method฀ (for฀ example,฀ straight-line,฀ diminishing฀
balance฀or฀units฀of฀production฀method).฀
 IAS฀ 38฀ Intangible฀ Assets฀ also฀ offers฀ a฀ choice฀ between฀ the฀

cost฀and฀fair฀value฀models.฀
 IAS฀ 40฀ Investment฀ Property฀ similarly฀ requires฀ users฀ to฀ make฀

a฀ choice฀ between฀ the฀ cost฀ model฀ and฀ the฀ fair฀ value฀ model฀
when฀measuring฀investment฀property.฀
 IAS฀20฀Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀
Government฀Assistance฀allows฀grants฀related฀to฀assets฀to฀be฀
presented฀ in฀ the฀ statement฀ of฀ financial฀ position฀ either฀ as฀
deferred฀ income฀ or฀ deducted฀ in฀ arriving฀ at฀ the฀ carrying฀
amount฀of฀the฀asset.฀
 IFRS฀3฀Business฀Combinations฀allows฀non-controlling฀interests฀
at฀ acquisition฀ to฀ be฀ measured฀ either฀ at฀ fair฀ value฀ (the฀ full฀
goodwill฀ method)฀ or฀ at฀ the฀ proportionate฀ share฀ of฀ the฀ fair฀
value฀of฀identifiable฀net฀assets฀(the฀partial฀goodwill฀method).฀
 IFRS฀ 9฀ Financial฀ Instruments฀ provides฀ an฀ option,฀ in฀ certain฀

circumstances฀ (to฀ eliminate฀ or฀ reduce฀ an฀ accounting฀
mismatch),฀ to฀ designate฀ a฀ financial฀ asset฀ that฀ would฀
otherwise฀ be฀ categorised฀ as฀ fair฀ value฀ through฀ other฀
comprehensive฀ income฀ or฀ amortised฀ cost฀ as฀ fair฀ value฀
through฀ profit฀ or฀ loss.฀ In฀ the฀ case฀ of฀ investments฀ in฀ equity฀
instruments฀ that฀ are฀ not฀ held฀ for฀ trading,฀ an฀ irrevocable฀
election฀ may฀ be฀ made฀ to฀ treat฀ as฀ fair฀ value฀ through฀ other฀
comprehensive฀ income฀ where฀ they฀ would฀ otherwise฀ be฀
categorised฀as฀fair฀value฀through฀profit฀or฀loss.฀
 Neither฀ IFRS฀ 3฀ Business฀ Combinations฀ nor฀ IAS฀ 28฀

Investments฀ in฀ Associates฀ and฀ Joint฀ Ventures฀ specifically฀
cover฀an฀investment฀to฀associate฀step฀acquisition.฀Therefore,฀
in฀measuring฀the฀'cost฀of฀the฀associate'฀in฀the฀'investment฀in฀
associate'฀ working,฀ an฀ entity฀ effectively฀ has฀ the฀ choice฀ of฀
following฀ the฀ IFRS฀ 3฀ principles฀ to฀ remeasure฀ the฀ original฀
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lOMoARcPSD|6256454
investment฀ to฀ fair฀ value฀ at฀ the฀ date฀ significant฀ influence฀ is฀
achieved฀or฀of฀following฀the฀IAS฀28฀principles฀to฀record฀the฀
original฀investment฀at฀cost.฀
 Under฀ IAS฀ 21฀ The฀ Effects฀ of฀ Changes฀ in฀ Foreign฀ Exchange฀
Rates,฀ impairment฀ of฀ goodwill฀ in฀ a฀ foreign฀ subsidiary฀ may฀
be฀translated฀either฀at฀the฀average฀rate฀or฀the฀closing฀rate.฀
 IAS฀ 7฀ Statement฀ of฀ Cash฀ Flows฀ allows฀ the฀ use฀ of฀ the฀ direct฀
or฀the฀indirect฀method฀in฀the฀preparation฀of฀a฀cash฀flow฀from฀
operations฀figure.฀Also,฀there฀is฀a฀choice฀over฀where฀certain฀
items฀ may฀ be฀ presented฀ in฀ the฀ statement฀ of฀ cash฀ flows฀ (for฀
example,฀dividends฀paid฀may฀be฀classified฀as฀an฀'operating'฀
or฀'financing'฀cash฀flow).฀
Your฀discussion฀
should฀end฀with฀a฀ It฀ could฀ be฀ argued฀ that฀ choice฀ is฀ a฀ good฀ thing,฀ as฀ companies฀
conclusion฀
summarising฀the฀ should฀ be฀ able฀ to฀ select฀ the฀ treatment฀ that฀ most฀ fairly฀ reflects฀ the฀
points฀in฀the฀main฀
body฀of฀your฀ underlying฀reality.฀However,฀in฀the฀context฀of฀change฀to฀IFRS,฀there฀
answer฀
is฀a฀danger฀that฀companies฀will฀ choose฀ the฀ alternative฀ that฀
closely฀ matches฀ the฀ approach฀ followed฀ under฀ local฀
GAAP,฀or฀the฀one฀that฀is฀easier฀to฀implement,฀regardless฀
of฀whether฀this฀is฀the฀best฀choice.฀
฀(b)฀ Impact฀ of฀ management฀ judgement฀ and฀ the฀ financial฀

reporting฀infrastructure฀on฀IFRS฀financial฀statements฀
฀ Management฀ judgement฀ and฀ the฀ financial฀ reporting฀ infrastructure฀ Start฀your฀

discussion฀
can฀ have฀ a฀ significant฀ impact฀ on฀ IFRS฀ financial฀ statements,฀ as฀ with฀a฀brief฀
introduction฀
explained฀below.฀
Impact฀on฀management฀judgement฀
In฀ recent฀ standards,฀ areas฀ of฀ judgement฀ leading฀ to฀ inconsistency฀ A฀discussion฀
question฀
between฀entities฀have฀been฀reduced.฀An฀example฀of฀this฀is฀IFRS฀16฀ requires฀a฀
balanced฀
Leases฀removing฀the฀judgement฀required฀in฀its฀predecessor,฀IAS฀17฀ answer฀–฀
positive฀
Leases,฀ of฀ whether฀ a฀ lease฀ should฀ be฀ classified฀ as฀ an฀ operating฀ aspects฀
brought฀out฀
lease฀ (and฀ not฀ recorded฀ in฀ the฀ lessee's฀ statement฀ of฀ financial฀ here฀
position)฀or฀a฀finance฀lease฀(and฀recorded฀in฀the฀lessee's฀statement฀
of฀ financial฀ position).฀ Under฀ IFRS฀ 16,฀ this฀ area฀ of฀ judgement฀ has฀
been฀ eliminated,฀ all฀ leases฀ (with฀ limited฀ exemptions)฀ now฀ being฀
required฀ to฀ be฀ recorded฀ in฀ the฀ lessee's฀ statement฀ of฀ financial฀
position.฀
฀ 499฀

lOMoARcPSD|6256454
฀฀
However,฀ management฀ judgement฀ is฀ still฀ required฀ in฀ many฀

accounting฀ standards฀ which฀ makes฀ the฀ financial฀ statements฀ more฀
vulnerable฀ to฀ manipulation฀ and฀ reduces฀ comparability฀ between฀
entities.฀Examples฀include:฀
You฀do฀not฀need฀  IFRS฀ 15฀ Revenue฀ from฀ Contracts฀ with฀ Customers฀ involves฀

to฀know฀the฀IAS฀or฀
IFRS฀number฀but฀ judgement฀ in฀ identifying฀ the฀ separate฀ performance฀
just฀the฀rules฀or฀
principles฀within฀ obligations฀in฀a฀contract,฀allocating฀the฀transaction฀price฀to฀
the฀accounting฀
standards.฀Note฀ those฀ performance฀ obligations฀ and฀ determining฀ when฀ the฀
that฀even฀though฀
bullet-points฀have฀ performance฀obligations฀have฀been฀satisfied.฀
been฀used,฀the฀
answer฀is฀still฀in฀
full฀sentences฀  IAS฀ 16฀ and฀ IAS฀ 38฀ both฀ require฀ judgement฀ in฀ determining฀
the฀useful฀life฀of฀non-current฀assets.฀
 IAS฀19฀Employee฀Benefits฀requires฀judgement฀in฀determining฀
when฀ a฀ pension฀ plan฀ is฀ a฀ defined฀ contribution฀ or฀ defined฀
benefit฀plan฀–฀some฀plans฀are฀complicated฀and฀effectively฀a฀
hybrid฀of฀the฀two฀so฀this฀can฀be฀hard฀to฀classify.฀
 IAS฀ 37฀ Provisions,฀ Contingent฀ Liabilities฀ and฀ Contingent฀

Asset฀ contains฀ many฀ areas฀ of฀ management฀ judgement฀ in฀
determining฀ whether฀ an฀ obligation฀ exists,฀ the฀ likelihood฀ for฀
the฀outflow฀or฀inflow฀and฀the฀best฀estimate฀of฀the฀amount.฀
 IFRS฀ 9฀ Financial฀ Instruments฀ requires฀ judgement฀ in฀

classifying฀ financial฀ assets฀ and฀ liabilities฀ for฀ measurement฀
purposes.฀
 IAS฀ 12฀ Income฀ Taxes฀ requires฀ judgement฀ in฀ assessing฀ the฀

recoverability฀of฀deferred฀tax฀assets.฀
 When฀ a฀ parent฀ company฀ invests฀ in฀ another฀ entity,฀

judgement฀ is฀ required฀ to฀ determine฀ whether฀ it฀ is฀ an฀
investment,฀associate,฀joint฀venture฀or฀subsidiary.฀
 IFRS฀ 5฀ Non-current฀ Assets฀ Held฀ for฀ Sale฀ and฀ Discontinued฀

Operations฀ requires฀ judgement฀ in฀ determining฀ whether฀ the฀
held฀for฀sale฀and฀discontinued฀operations฀criteria฀have฀been฀
met.฀
 IAS฀ 21฀ requires฀ judgement฀ in฀ determining฀ the฀ functional฀

currency฀of฀an฀overseas฀subsidiary.฀
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The฀ extent฀ of฀ the฀ impact฀ of฀ judgement฀ will฀ vary฀ on฀ transition฀ to฀
IFRS,฀ depending฀ on฀ how฀ developed฀ local฀ GAAP฀ was฀ before฀ the฀
transition.฀ However,฀ in฀ general฀ it฀ is฀ likely฀ that฀ management฀
judgement฀ will฀ have฀ a฀ greater฀ impact฀ on฀ financial฀
statements฀prepared฀under฀IFRS฀than฀under฀local฀GAAP.฀The฀main฀
Be฀careful฀that฀your฀ reasons฀for฀this฀are฀as฀follows:฀
answer฀is฀not฀just฀a฀
long฀list฀of฀specific฀
examples.฀You฀need฀ (a)฀ The฀ volume฀ of฀ rules฀ and฀ number฀ of฀ areas฀ addressed฀ by฀
to฀make฀some฀
general฀points฀too฀ IFRS฀is฀likely฀to฀be฀greater฀than฀that฀under฀local฀GAAP.฀
which฀are฀applicable฀
to฀all฀IFRSs฀ (b)฀ Many฀issues฀are฀perhaps฀addressed฀ for฀ the฀ first฀ time,฀
for฀example฀share-based฀payment.฀
(c)฀ IFRSs฀are฀likely฀to฀be฀more฀complex฀than฀local฀standards.฀
(d)฀ IFRSs฀ allow฀ choice฀ in฀ many฀ cases,฀ which฀ leads฀ to฀
subjectivity.฀
(e)฀ Selection฀ of฀ valuation฀ method฀ requires฀ judgement,฀ and฀

many฀ IFRSs฀ leave฀ the฀ choice฀ of฀ method฀ open.฀ This฀ affects฀
areas฀ such฀ as฀ pensions,฀ impairment,฀ intangible฀ assets฀
acquired฀ in฀ business฀ combinations,฀ onerous฀ contracts฀ and฀
share-based฀payment.฀
Financial฀reporting฀infrastructure฀
As฀well฀as฀sound฀management฀judgement,฀implementation฀of฀IFRS฀
requires฀ a฀ sound฀ financial฀ reporting฀ infrastructure.฀ Key฀ aspects฀ of฀
this฀include฀the฀following:฀
฀(a)฀ A฀ robust฀ regulatory฀ framework.฀ For฀ IFRSs฀ to฀ be฀

Each฀point฀has฀its฀
own฀heading฀ successful,฀they฀must฀be฀rigorously฀enforced.฀
followed฀by฀a฀full฀
sentence฀
containing฀an฀ (b)฀ Trained฀ and฀ qualified฀ staff.฀ Many฀ preparers฀ of฀
explanation฀
financial฀ statements฀ will฀ have฀ been฀ trained฀ in฀ local฀ GAAP฀
and฀ not฀ be฀ familiar฀ with฀ the฀ principles฀ underlying฀ IFRS,฀ let฀
alone฀ the฀ detail.฀ Some฀ professional฀ bodies฀ provide฀
conversion฀ qualifications฀ –฀ for฀ example,฀ the฀ ACCA's฀
Diploma฀ in฀ International฀ Financial฀ Reporting฀ –฀ but฀ the฀
availability฀of฀such฀qualifications฀and฀courses฀may฀vary฀from฀
country฀to฀country.฀
฀ 501฀

lOMoARcPSD|6256454
฀฀
(c)฀ Availability฀ and฀ transparency฀ of฀ market฀

information.฀ This฀ is฀ particularly฀ important฀ in฀ the฀
determination฀ of฀ fair฀ values,฀ which฀ are฀ such฀ a฀ key฀
component฀of฀many฀IFRSs.฀
(d)฀ High฀ standards฀ of฀ corporate฀ governance฀ and฀

audit.฀This฀is฀all฀the฀more฀important฀in฀the฀transition฀period,฀
especially฀where฀there฀is฀resistance฀to฀change.฀
Overall,฀ there฀ are฀ significant฀ advantages฀ to฀ the฀ widespread฀

adoption฀of฀IFRS,฀but฀if฀the฀transition฀is฀to฀continue฀to฀go฀well,฀there฀
must฀be฀a฀realistic฀assessment฀of฀potential฀challenges.฀
 Both฀parts฀of฀the฀question฀((a)฀and฀(b))฀have฀been฀addressed,฀each฀
with฀their฀own฀heading.฀
 Each฀sub-requirement฀has฀been฀answered,฀with฀its฀own฀sub-heading.฀
 There฀are฀at฀least฀20฀points฀in฀the฀answer฀to฀score฀the฀full฀20฀marks฀
available฀–฀however,฀you฀only฀need฀50%฀to฀pass฀so฀it฀is฀
recommended฀that฀you฀aim฀for฀at฀least฀a฀65%฀answer฀to฀allow฀for฀
a฀margin฀of฀error.฀
 This฀answer฀is฀longer฀than฀required฀and฀would฀not฀be฀achievable฀
in฀the฀time฀available.฀This฀is฀because฀it฀contains฀comprehensive฀
lists฀of฀examples฀of฀accounting฀standards฀where฀choice฀or฀
judgement฀exist฀–฀the฀aim฀of฀this฀is฀to฀be฀a฀learning฀exercise฀and฀
for฀you฀to฀be฀able฀to฀determine฀whether฀points฀you฀had฀generated฀
would฀be฀awarded฀marks.฀However,฀you฀only฀need฀about฀five฀
examples฀of฀each฀to฀score฀strong฀marks.฀
 The฀answer฀involves฀'discussion'฀–฀each฀part฀starts฀with฀a฀brief฀
introduction,฀followed฀by฀a฀balanced฀argument฀and฀finishing฀with฀
a฀conclusion฀with฀an฀opinion฀supported฀by฀the฀main฀body฀of฀the฀
answer.฀
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completed฀below฀for฀the฀Implementing฀IFRS฀activity฀to฀give฀you฀an฀idea฀of฀how฀to฀complete฀
the฀diagnostic.฀
Good฀time฀ Did฀you฀spend฀approximately฀a฀third฀of฀your฀time฀reading฀
management฀ and฀planning?฀
Did฀you฀spend฀approximately฀65%฀of฀your฀time฀on฀part฀(a)฀
and฀35%฀on฀part฀(b),฀per฀the฀split฀of฀marks฀in฀the฀question?฀
Did฀you฀answer฀both฀parts฀of฀the฀question฀and฀all฀four฀฀
sub-requirements?฀
Answer฀planning฀ Did฀you฀draw฀up฀a฀separate฀answer฀plan฀rather฀than฀just฀
annotating฀the฀question฀paper?฀
Did฀your฀answer฀plan฀address฀all฀sub-requirements?฀
Did฀you฀generate฀enough฀points฀to฀pass฀based฀on฀1฀mark฀
per฀point฀(you฀needed฀50%฀×฀20฀marks฀=฀10฀points฀to฀pass฀
but฀should฀have฀aimed฀for฀at฀least฀13฀points฀[a฀65%฀
answer]฀to฀allow฀a฀margin฀of฀safety)?฀
Correct฀interpretation฀ Did฀you฀understand฀what฀was฀meant฀by฀the฀verb฀'discuss'?฀
of฀requirements฀ Did฀you฀spot฀all฀four฀sub-requirements?฀
Did฀you฀understand฀what฀each฀sub-requirement฀was฀asking฀
for?฀
Effective฀writing฀and฀ Was฀your฀answer฀in฀discussion฀format฀(an฀introduction,฀the฀
presentation฀ main฀body฀of฀answer฀with฀a฀balanced฀approach฀covering฀
positive฀and฀negative฀aspects,฀a฀conclusion฀with฀your฀
opinion)?฀
Did฀you฀use฀the฀requirements฀and฀sub-requirements฀as฀
headings฀and฀sub-headings?฀
Did฀you฀add฀your฀own฀examples฀to฀illustrate฀your฀points?฀
Did฀your฀answer฀contain฀enough฀points฀to฀pass฀(based฀on฀
one฀point฀per฀mark)?฀
฀
฀
฀
฀ 503฀

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฀฀
Summary฀
In฀ the฀ SBR฀ exam,฀ discussion฀ will฀ feature฀ across฀ the฀ paper฀ with฀ the฀ majority฀ of฀ the฀
marks฀being฀available฀for฀written฀rather฀than฀numerical฀analysis.฀This฀Skills฀Checkpoint฀
should฀ help฀ with฀ your฀ approach฀ to฀ all฀ narrative฀ requirements,฀ and฀ in฀ particular,฀ an฀
essay-style฀question,฀should฀it฀feature฀in฀Section฀B.฀Make฀sure฀you฀practice฀discussion฀
questions฀in฀full,฀to฀time.฀The฀most฀important฀aspects฀to฀take฀away฀are:฀
 Spend฀ a฀ third฀ of฀ your฀ time฀ planning฀ and฀ generate฀ an฀ answer฀ plan฀ containing฀
sufficient฀points฀for฀a฀strong฀point฀(on฀the฀basis฀of฀one฀mark฀per฀point).฀
 Structure฀your฀answer฀with฀an฀introduction,฀the฀main฀body฀of฀your฀answer฀with฀a฀
balanced฀ argument,฀ finishing฀ with฀ a฀ conclusion฀ with฀ your฀ opinion฀ supported฀ by฀
the฀arguments฀in฀the฀main฀body฀of฀your฀answer.฀
 Use฀examples฀to฀illustrate฀your฀points.฀
 Do฀not฀overlook฀the฀scenario฀in฀the฀question฀–฀it฀is฀likely฀to฀provide฀you฀with฀some฀
ideas฀for฀your฀answer.฀
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Appendix฀1฀–฀Activity฀answers฀
Chapter฀1฀The฀financial฀reporting฀framework฀
Activity฀1:฀Revenue฀recognition฀
Step฀1:฀Identify฀the฀contract฀฀
Here฀ there฀ is฀ a฀ contract฀ between฀ two฀ parties฀ (Jost฀ and฀ Claire)฀ and฀ the฀ IFRS฀ 15฀ Revenue฀ from฀
Contracts฀with฀Customers฀criteria฀have฀been฀met:฀
(a)฀ Both฀parties฀have฀approved฀the฀contract฀orally฀(by฀telephone)฀as฀permitted฀by฀IFRS฀15,฀with฀a฀
written฀copy฀passed฀on฀to฀the฀customer.฀
(b)฀ Jost฀can฀identify฀each฀party's฀rights,฀as฀they฀are฀clearly฀agreed฀in฀the฀contract:฀
฀ Claire฀has฀right฀to฀the฀handset฀and฀24฀months฀of฀unlimited฀calls,฀texts฀and฀data฀
฀ Jost฀has฀right฀to฀receive฀$49฀a฀month฀for฀24฀months฀
(c)฀ Jost฀can฀also฀identify฀the฀payment฀terms฀($49฀a฀month฀for฀24฀months).฀฀฀
(d)฀ The฀ contract฀ has฀ commercial฀ substance฀ as฀ Jost's฀ cash฀ flows฀ will฀ change฀ as฀ a฀ result฀ of฀ the฀
contract฀in฀the฀form฀of฀income฀from฀the฀customer฀and฀costs฀of฀fulfilling฀the฀contract฀(providing฀
the฀handset,฀calls,฀texts฀and฀data).฀฀
(e)฀ It฀ is฀ probable฀ that฀ Jost฀ will฀ collect฀ the฀ consideration฀ as฀ Claire฀ has฀ successfully฀ passed฀ the฀
requisite฀credit฀check.฀
Step฀2:฀Identify฀the฀performance฀obligation(s)฀
Here฀ there฀ are฀ two฀ distinct฀ performance฀ obligations฀ in฀ the฀ form฀ of฀ promises฀ to฀ transfer฀ to฀ the฀
customer฀(Claire):฀
฀ A฀good฀(in฀the฀form฀of฀the฀handset);฀and฀
฀ A฀service฀(in฀the฀form฀of฀the฀unlimited฀minutes฀of฀calls,฀texts฀and฀data).฀
The฀unlimited฀minutes฀of฀calls,฀texts฀and฀data฀are฀bundled฀into฀one฀as฀in฀their฀own฀right,฀they฀are฀not฀
distinct;฀ie฀Jost฀does฀not฀sell฀the฀calls,฀texts฀and฀data฀as฀separate฀products.฀
Step฀3:฀Determine฀the฀transaction฀price฀฀
The฀ transaction฀ price฀ is฀ the฀ amount฀ to฀ which฀ Jost฀ expects฀ to฀ be฀ entitled.฀ Here฀ this฀ is฀ $1,176฀
(ie฀24฀months฀฀$49).฀
Step฀4:฀Allocate฀the฀transaction฀price฀to฀the฀performance฀obligations฀
The฀ transaction฀ price฀ must฀ be฀ allocated฀ to฀ each฀ performance฀ obligation฀ in฀ proportion฀ to฀ the฀
standalone฀selling฀price฀at฀the฀contract฀inception฀of฀each฀performance฀obligation:฀
Performance฀obligation Standalone฀selling฀price %฀of฀total Revenue฀
Handset฀ ฀$700฀ ฀53.8%฀ ฀$633฀
Calls,฀texts฀and฀data฀ ฀24฀฀$25฀=฀ ฀฀฀$600฀ ฀฀46.2%฀ ฀ ฀$543฀
Total฀ ฀$1,300฀ ฀100.0%฀ ฀$1,176฀
Step฀5:฀Recognise฀revenue฀when฀(or฀as)฀the฀performance฀obligations฀are฀satisfied฀
The฀ performance฀ obligation฀ in฀ relation฀ to฀ the฀ handset฀ is฀ its฀ delivery฀ to฀ the฀ customer,฀ Claire.฀
Therefore,฀Jost฀should฀recognise฀the฀$633฀revenue฀for฀the฀handset฀when฀it฀is฀delivered฀to฀Claire฀on฀฀
2฀January฀20X1.฀
The฀ performance฀ obligation฀ for฀ the฀ calls,฀ texts฀ and฀ data฀ is฀ the฀ provision฀ of฀ this฀ service฀ to฀ Claire฀
which฀ takes฀ place฀ over฀ the฀ 24฀ months฀ of฀ the฀ contract.฀ Therefore,฀ this฀ revenue฀ of฀ $543฀ should฀ be฀
spread฀over฀the฀24฀months฀at฀$22.625฀a฀month,฀with฀$271.50฀being฀recognised฀in฀the฀year฀ended฀
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฀฀
Chapter฀2฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀
Activity฀1:฀Ethical฀issues฀
(a)฀ Directors'฀remuneration฀
There฀is฀an฀argument฀that,฀as฀the฀directors฀should฀be฀acting฀as฀the฀agent฀for฀the฀stakeholders,฀
their฀ interests฀ should฀ be฀ aligned.฀ The฀ key฀ stakeholder,฀ the฀ shareholder,฀ is฀ interested฀ in฀
profitability฀and฀returns.฀By฀linking฀the฀remuneration฀of฀directors฀to฀profits฀and฀share฀price,฀it฀
will฀incentivise฀directors฀to฀try฀to฀maximise฀profits฀and฀share฀price,฀thus฀aligning฀their฀interests฀
with฀those฀of฀the฀stakeholders.฀
However,฀ bonuses฀ based฀ on฀ short-term฀ profits฀ could฀ encourage฀ directors฀ to฀ adopt฀ strategies฀
and฀ accounting฀ policies฀ which฀ maximise฀ profits฀ in฀ the฀ short฀ term฀ but฀ are฀ detrimental฀ to฀ the฀
company's฀profitability,฀liquidity฀and฀solvency฀in฀the฀long฀term.฀฀
Share-based฀payment฀with฀vesting฀periods฀and฀vesting฀conditions฀based฀on฀performance฀and฀
share฀price฀would฀be฀preferable฀to฀bonuses฀based฀on฀short-term฀profits,฀as฀they฀would฀ensure฀
that฀directors฀act฀with฀a฀longer฀term฀goal.฀However,฀there฀is฀still฀a฀danger฀that฀strategies฀and฀
accounting฀policies฀are฀manipulated฀to฀obtain฀maximum฀return฀on฀exercise.฀
On฀ the฀ other฀ hand,฀ if฀ remuneration฀ was฀ purely฀ cash฀ with฀ no฀ link฀ to฀ the฀ company's฀
performance,฀there฀would฀be฀a฀danger฀that฀the฀board฀of฀directors฀would฀not฀act฀in฀the฀best฀of฀
their฀ability฀to฀maximise฀return฀for฀the฀stakeholders.฀
(b)฀ Accounting฀policy฀for฀properties฀
IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements฀ requires฀ financial฀ statements฀ to฀ present฀ fairly฀ the฀
financial฀position,฀financial฀performance฀and฀cash฀flows฀of฀an฀entity.฀This฀fair฀presentation฀is฀
assumed฀ if฀ an฀ entity฀ complies฀ with฀ accounting฀ standards฀ and฀ the฀ IASB's฀ Conceptual฀
Framework.฀
IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀only฀allows฀a฀change฀
in฀ accounting฀ policy฀ where฀ required฀ by฀ a฀ standard฀ or฀ if฀ it฀ results฀ in฀ financial฀ statements฀
providing฀reliable฀and฀more฀relevant฀information.฀
The฀ACCA฀Code฀of฀Ethics฀and฀Conduct฀requires฀directors฀to฀act฀with฀integrity฀and฀professional฀
competence.฀Professional฀competence฀includes฀complying฀with฀accounting฀standards฀and฀the฀
Conceptual฀Framework.฀
If฀ the฀ Finance฀ Director฀ of฀ Kelshall฀ is฀ revising฀ the฀ accounting฀ policy฀ to฀ maximise฀ his฀
remuneration฀ rather฀ than฀ provide฀ reliable฀ and฀ more฀ relevant฀ financial฀ information,฀ then฀ he฀
could฀be฀considered฀to฀be฀acting฀unethically฀due฀to฀non-compliance฀with฀IAS฀1฀and฀IAS฀8.฀In฀
fact,฀ though,฀ the฀ cost฀ model฀ would฀ not฀ necessarily฀ lead฀ to฀ improved฀ profits฀ (and฀ improved฀
remuneration)฀ because฀ under฀ the฀ revaluation฀ model,฀ losses฀ are฀ first฀ written฀ off฀ to฀ the฀
revaluation฀surplus฀(and฀reported฀in฀other฀comprehensive฀income)฀then฀profit฀or฀loss฀so฀might฀
not฀ impact฀ profits฀ at฀ all.฀ ฀ Also,฀ even฀ under฀ the฀ cost฀ model,฀ assets฀ need฀ to฀ be฀ written฀ down฀
where฀there฀is฀evidence฀of฀an฀impairment.฀
If฀the฀motivation฀of฀the฀Finance฀Director฀is฀that฀the฀economic฀downturn฀is฀causing฀volatility฀in฀
market฀ value฀ of฀ properties฀ and฀ the฀ more฀ stable฀ cost฀ model฀ would฀ provide฀ a฀ truer฀ and฀ fairer฀
view,฀then฀he฀could฀possibly฀be฀considered฀to฀have฀acted฀ethically.฀
(c)฀ CEO's฀comment฀to฀the฀Finance฀Director฀
The฀ CEO฀ and฀ the฀ Finance฀ Director฀ are฀ both฀ bound฀ by฀ the฀ principles฀ of฀ the฀ ACCA฀ Code฀ of฀
Ethics฀ and฀ Conduct.฀ As฀ directors,฀ they฀ should฀ be฀ acting฀ in฀ the฀ best฀ interests฀ of฀ the฀
shareholders.฀
However,฀it฀appears฀as฀though฀the฀CEO฀is฀more฀concerned฀with฀self-interest฀and฀maximising฀
the฀gains฀on฀his฀share฀options฀by฀manipulating฀the฀share฀price.฀
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This฀pressure฀from฀the฀CEO฀is฀a฀threat฀to฀the฀integrity฀and฀objectivity฀of฀the฀Finance฀Director.฀
The฀Finance฀Director฀is฀in฀a฀difficult฀position฀ethically฀as฀he฀reports฀directly฀to฀the฀CEO฀and฀the฀
CEO฀has฀direct฀influence฀over฀his฀job฀security฀and฀remuneration.฀
The฀Finance฀Director฀could฀speak฀directly฀to฀the฀CEO฀and฀seek฀clarification฀of฀the฀intent฀of฀his฀
comments,฀ explaining฀ that฀ he฀ is฀ unable฀ to฀ change฀ Kelshall's฀ accounting฀ policies฀ just฀ to฀
maximise฀Kelshall's฀share฀price฀in฀the฀short฀term฀and฀that฀he฀is฀bound฀by฀the฀ACCA฀Code฀of฀
Ethics฀and฀Conduct฀to฀act฀with฀professional฀competence.฀฀However,฀if฀he฀felt฀under฀too฀much฀
pressure฀ from฀ the฀ CEO฀ to฀ speak฀ to฀ him฀ directly,฀ he฀ could฀ raise฀ his฀ concerns฀ with฀ the฀ non-
executive฀directors฀and/or฀the฀audit฀committee.฀
The฀ problem฀ here฀ is฀ that฀ the฀ threats฀ to฀ both฀ the฀ CEO's฀ and฀ the฀ Finance฀ Director's฀ objectivity฀
and฀ integrity฀ are฀ similar฀ so฀ there฀ is฀ a฀ danger฀ that฀ the฀ Finance฀ Director฀ reacts฀ to฀ the฀ CEO's฀
comments฀ by฀ changing฀ accounting฀ policies฀ to฀ maximise฀ profits฀ and฀ share฀ price฀ rather฀ than฀
acting฀ in฀ the฀ company's฀ and฀ stakeholders'฀ best฀ long-term฀ interests.฀ This฀ would฀ definitely฀
constitute฀unethical฀behaviour.฀
Activity฀2:฀Related฀parties฀(1)฀
Leoval฀ must฀ disclose฀ its฀ parent฀ (Cavelli)฀ and฀ ultimate฀ controlling฀ party฀ (the฀ Grassi฀ family).฀ This฀ is฀
irrespective฀of฀whether฀transactions฀have฀occurred฀with฀these฀related฀parties฀during฀the฀period.฀
The฀ company฀ in฀ which฀ Francesca฀ Cincetti฀ has฀ a฀ 23%฀ shareholding฀ is฀ related฀ to฀ Leoval฀ as฀ it฀ is฀
significantly฀influenced฀by฀close฀family฀of฀a฀person฀that฀controls฀Leoval.฀Consequently฀the฀sales,฀any฀
outstanding฀ balances฀ and฀ any฀ bad฀ or฀ doubtful฀ debts฀ must฀ be฀ disclosed฀ even฀ though฀ they฀ are฀ at฀
market฀ prices:฀ Leoval฀ might฀ lose฀ this฀ business฀ if฀ Francesca's฀ husband฀ was฀ not฀ a฀ shareholder฀ and฀
investors฀need฀to฀be฀aware฀of฀this.฀
The฀interest-free฀loans,฀although฀a฀benefit,฀are฀not฀a฀related฀party฀transaction฀in฀themselves;฀they฀are฀
part฀ of฀ the฀ remuneration฀ package฀ of฀ the฀ employees฀ and฀ would฀ be฀ accounted฀ for฀ under฀ IAS฀19฀
Employee฀ Benefits.฀ However,฀ if฀ the฀ employees฀ include฀ key฀ management฀ personnel,฀ the฀ transaction฀
and฀its฀cost฀must฀be฀disclosed฀as฀a฀related฀party฀transaction฀for฀them.฀
The฀ management฀ service฀ fee฀ is฀ a฀ transaction฀ with฀ the฀ controlling฀ party,฀ and฀ must฀ be฀ disclosed฀ in฀
Leoval's฀ own฀ financial฀ statements฀ (but฀ will฀ be฀ eliminated฀ and฀ therefore฀ not฀ require฀ disclosure฀ in฀ the฀
group฀ accounts);฀ it฀ will฀ be฀ particularly฀ important฀ information฀ for฀ the฀ 10%฀ non-controlling฀ interest฀
shareholders฀in฀Leoval.฀
Leoval฀is฀dependent฀on฀Piat฀in฀that฀it฀is฀a฀major฀customer,฀but฀this฀in฀itself,฀in฀the฀absence฀of฀any฀other฀
information฀suggesting฀otherwise,฀is฀not฀a฀related฀party฀issue.฀
Post-employment฀benefit฀plans฀are฀related฀parties฀under฀IAS฀24.฀Leoval฀has฀had฀no฀transactions฀with฀
the฀plan฀in฀the฀period฀requiring฀disclosure฀under฀IAS฀24,฀but฀recognises฀other฀income฀and฀expenses฀
relating฀to฀the฀plan฀in฀its฀financial฀statements.฀These฀are฀disclosed฀under฀IAS฀19฀Employee฀Benefits.฀
Activity฀3:฀Related฀parties฀(2)฀
(a)฀ IAS฀ 24฀ does฀ not฀ require฀ disclosure฀ of฀ transactions฀ between฀ companies฀ and฀ providers฀ of฀
finance฀in฀the฀ordinary฀course฀of฀business.฀As฀RP฀is฀a฀merchant฀bank,฀no฀disclosure฀is฀needed฀
in฀respect฀of฀the฀transaction฀between฀RP฀and฀AB.฀However,฀RP฀owns฀25%฀of฀the฀equity฀of฀AB฀
and฀it฀would฀seem฀significant฀influence฀exists฀(according฀to฀IAS฀28฀Investments฀in฀Associates฀
and฀Joint฀Ventures,฀greater฀than฀20%฀existing฀holding฀means฀significant฀influence฀
is฀ presumed)฀and฀therefore฀AB฀could฀be฀an฀associate฀of฀RP.฀IAS฀24฀regards฀associates฀as฀
related฀parties.฀
The฀ decision฀ as฀ to฀ associate฀ status฀ depends฀ upon฀ the฀ ability฀ of฀ RP฀ to฀ exercise฀ significant฀
influence฀especially฀as฀the฀other฀75%฀of฀votes฀are฀owned฀by฀the฀management฀of฀AB.฀
Merchant฀ banks฀ tend฀ to฀ regard฀ companies฀ which฀ would฀ qualify฀ for฀ associate฀ status฀ as฀ trade฀
investments฀since฀the฀relationship฀is฀designed฀to฀provide฀finance.฀
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IAS฀28฀presumes฀that฀a฀party฀owning฀or฀able฀to฀exercise฀control฀over฀20%฀of฀
voting฀ rights฀ is฀ a฀ related฀ party.฀So฀an฀investor฀with฀a฀25%฀holding฀and฀a฀director฀on฀
the฀ board฀ would฀ be฀ expected฀ to฀ have฀ significant฀ influence฀ over฀ operating฀ and฀ financial฀
policies฀in฀such฀a฀way฀as฀to฀inhibit฀the฀pursuit฀of฀separate฀interests.฀If฀it฀can฀be฀shown฀that฀this฀
is฀not฀the฀case,฀there฀is฀no฀related฀party฀relationship.฀
If฀it฀is฀decided฀that฀there฀is฀a฀related฀party฀situation฀then฀all฀material฀transactions฀should฀
be฀disclosed฀including฀management฀fees,฀interest,฀dividends฀and฀the฀terms฀of฀the฀
loan.฀
(b)฀ IAS฀ 24฀ does฀ not฀ require฀ intragroup฀ transactions฀ and฀ balances฀ eliminated฀ on฀
consolidation฀ to฀ be฀ disclosed.฀ IAS฀ 24฀ does฀ not฀ deal฀ with฀ the฀ situation฀ where฀ an฀
undertaking฀becomes,฀or฀ceases฀to฀be,฀a฀subsidiary฀during฀the฀year.฀
Best฀practice฀indicates฀that฀related฀party฀transactions฀should฀be฀disclosed฀for฀the฀period฀when฀
X฀ was฀ not฀ part฀ of฀ the฀ group.฀ Transactions฀ between฀ RP฀ and฀ X฀ should฀ be฀ disclosed฀ between฀฀
1฀July฀20X9฀and฀31฀October฀20X9฀but฀transactions฀prior฀to฀1฀July฀will฀have฀been฀eliminated฀
on฀consolidation.฀ ฀
There฀ is฀ no฀ related฀ party฀ relationship฀ between฀ RP฀ and฀ Z฀ since฀ it฀ is฀ a฀ normal฀ business฀
transaction฀ unless฀ either฀ party's฀ interests฀ have฀ been฀ influenced฀ or฀ controlled฀ in฀ some฀ way฀ by฀
the฀other฀party.฀
(c)฀ Employee฀retirement฀benefit฀schemes฀of฀the฀reporting฀entity฀are฀included฀in฀the฀IAS฀24฀
definition฀of฀related฀parties.฀
The฀contributions฀paid,฀the฀non-current฀asset฀transfer฀($10m)฀and฀the฀charge฀of฀administrative฀
costs฀($3m)฀must฀be฀disclosed.฀
The฀ pension฀ investment฀ manager฀ would฀ not฀ normally฀ be฀ considered฀ a฀ related฀
party.฀ However,฀ the฀manager฀is฀key฀ management฀ personnel฀ by฀virtue฀of฀his฀non-
executive฀directorship.฀
Directors฀are฀deemed฀to฀be฀related฀parties฀by฀IAS฀24,฀and฀the฀manager฀receives฀a฀$25,000฀
fee.฀ IAS฀ 24฀ requires฀ the฀ disclosure฀ of฀ compensation฀ paid฀ to฀ key฀ management฀
personnel฀ and฀ the฀ fee฀ falls฀ within฀ the฀ definition฀ of฀ compensation.฀ Therefore,฀ it฀ must฀ be฀
disclosed.฀
508฀

lOMoARcPSD|6256454
Activity฀4:฀Revising฀accounting฀policies฀and฀estimates฀
Unethical?฀ Revision฀to฀accounting฀policy฀or฀estimate฀and฀reason฀
฀ Increasing฀the฀useful฀life฀of฀an฀asset฀because฀large฀profits฀on฀disposal฀in฀recent฀
years฀indicate฀that฀the฀previous฀estimated฀life฀was฀too฀short฀
IAS฀16฀Property,฀Plant฀and฀Equipment฀requires฀the฀useful฀life฀of฀an฀
asset฀to฀be฀reviewed฀at฀least฀every฀financial฀year฀end฀(IAS฀16:฀฀
para.฀51)฀and,฀if฀expectations฀differ฀from฀previous฀estimates,฀the฀
change฀should฀be฀accounted฀for฀as฀a฀change฀in฀accounting฀estimate.฀
Here฀the฀previous฀profits฀on฀disposal฀indicate฀that฀depreciation฀in฀
prior฀years฀was฀too฀high฀and฀the฀useful฀life฀of฀the฀asset฀too฀short.฀
Therefore,฀the฀extension฀of฀the฀useful฀life฀of฀the฀asset฀is฀valid฀under฀
IAS฀16฀and฀is฀considered฀ethical.฀
Reducing฀the฀allowance฀for฀doubtful฀debts฀from฀5%฀to฀3%฀of฀trade฀receivables฀to฀
meet฀forecast฀profit฀targets฀
There฀is฀a฀self-interest฀threat฀here.฀A฀change฀in฀accounting฀estimate฀
฀ is฀only฀permitted฀where฀changes฀occur฀in฀the฀circumstances฀on฀
which฀the฀estimate฀is฀based.฀Here,฀there฀is฀no฀evidence฀that฀trade฀
receivables฀payment฀history฀has฀improved.฀Simply฀reducing฀the฀
allowance฀to฀meet฀profit฀targets฀would฀be฀considered฀unethical฀
behaviour.฀
Not฀equity฀accounting฀for฀an฀associate฀in฀the฀current฀year฀because฀the฀Finance฀
Director฀failed฀to฀realise฀a฀relationship฀of฀significant฀influence฀in฀the฀prior฀year฀
There฀is฀a฀self-review฀threat฀here฀because฀the฀Director฀appears฀not฀
฀ to฀be฀correcting฀the฀accounting฀treatment฀of฀the฀associate฀for฀fear฀of฀
flagging฀up฀his฀previous฀mistake.฀Also,฀not฀equity฀accounting฀an฀
associate฀contravenes฀the฀requirements฀of฀IAS฀28฀and฀brings฀into฀
question฀the฀Director's฀professional฀competence.฀This฀proposed฀
accounting฀treatment฀is฀therefore฀considered฀unethical.฀
Classifying฀redeemable฀preference฀shares฀as฀equity฀to฀meet฀the฀gearing฀and฀
interest฀cover฀loan฀covenants฀
This฀contravenes฀IAS฀32฀Financial฀Instruments:฀Presentation฀which฀
requires฀redeemable฀preference฀shares฀to฀be฀classified฀as฀a฀financial฀
฀ liability฀not฀equity฀as฀they฀contain฀an฀obligation฀to฀repay฀the฀
principal฀(IAS฀32:฀para.฀18).฀Therefore฀this฀proposed฀policy฀would฀
not฀demonstrate฀professional฀competence.฀Furthermore,฀the฀aim฀of฀
an฀accounting฀policy฀should฀be฀to฀present฀financial฀information฀that฀
is฀relevant฀and฀reliable฀(IAS฀8:฀para.฀10),฀not฀to฀meet฀loan฀
covenants.฀Therefore,฀this฀policy฀can฀be฀considered฀unethical.฀
Reclassifying฀an฀expense฀from฀cost฀of฀sales฀to฀administrative฀expenses฀to฀align฀the฀
entity's฀accounting฀policy฀to฀other฀entities฀operating฀in฀the฀same฀industry฀
฀ Under฀IAS฀8,฀it฀is฀valid฀for฀an฀entity฀to฀change฀its฀accounting฀policy฀
to฀make฀it฀consistent฀with฀accepted฀industry฀practice฀(as฀long฀as฀it฀
still฀complies฀with฀the฀relevant฀IFRS)฀(IAS฀8:฀para.฀12).฀Therefore,฀this฀
is฀an฀ethical฀proposal.฀
฀ 509฀

lOMoARcPSD|6256454
฀฀
Chapter฀3฀Non-current฀assets฀
Activity฀1:฀Impairment฀
On฀the฀basis฀of฀the฀original฀estimates,฀Shiplake's฀earth-moving฀plant฀was฀not฀impaired,฀the฀value฀in฀
use฀of฀$500,000฀being฀greater฀than฀its฀carrying฀amount.฀However฀due฀to฀the฀'dramatic'฀increase฀in฀
interest฀rates฀causing฀Shiplake's฀cost฀of฀capital,฀and฀therefore฀the฀discount฀rate,฀to฀increase,฀the฀value฀
in฀use฀of฀the฀plant฀will฀fall.฀There฀is฀insufficient฀information฀to฀be฀able฀to฀quantify฀this฀fall.฀If฀the฀new฀
discounted฀value฀is฀above฀the฀carrying฀amount฀$400,000฀there฀is฀still฀no฀impairment.฀If฀it฀is฀between฀
$245,000฀and฀$400,000,฀this฀will฀be฀the฀recoverable฀amount฀of฀the฀plant฀and฀it฀should฀be฀written฀
down฀to฀this฀value.฀As฀the฀plant฀can฀be฀sold฀for฀$250,000฀less฀selling฀costs฀of฀$5,000,฀$245,000฀is฀
the฀lowest฀amount฀that฀the฀plant฀should฀be฀written฀down฀to฀even฀if฀its฀revised฀value฀in฀use฀is฀below฀
this฀figure.
Activity฀2:฀Impairment฀of฀CGU฀
Where฀there฀are฀multiple฀cash-generating฀units,฀IAS฀36฀requires฀two฀levels฀of฀tests฀to฀be฀performed฀to฀
ensure฀that฀all฀impairment฀losses฀are฀identified฀and฀fairly฀allocated.฀First฀Divisions฀A฀and฀B฀are฀tested฀
individually฀ for฀ impairment.฀ In฀ this฀ instance,฀ both฀ are฀ impaired฀ and฀ the฀ impairment฀ losses฀ are฀
allocated฀first฀to฀any฀goodwill฀allocated฀to฀that฀unit฀and฀secondly฀to฀other฀non-current฀assets฀(within฀
the฀ scope฀ of฀ IAS฀ 36)฀ on฀ a฀ pro-rata฀ basis.฀ This฀ results฀ in฀ an฀ impairment฀ of฀ the฀ goodwill฀ of฀ both฀
divisions฀and฀an฀impairment฀of฀the฀property,฀plant฀and฀equipment฀in฀Division฀B฀only.฀
A฀ second฀ test฀ is฀ then฀ performed฀ over฀ the฀ whole฀ business฀ including฀ unallocated฀ goodwill฀ and฀
unallocated฀ corporate฀ assets฀ (the฀ head฀ office)฀ to฀ identify฀ if฀ those฀ items฀ which฀ are฀ not฀ a฀ cash-
generating฀unit฀in฀their฀own฀right฀(and฀therefore฀cannot฀be฀tested฀individually)฀have฀been฀impaired.฀
The฀additional฀impairment฀loss฀of฀$15m฀(W2)฀is฀ allocated฀first฀against฀the฀unallocated฀goodwill฀of฀
$10m,฀ eliminating฀ it,฀ and฀ then฀ to฀ the฀ unallocated฀ head฀ office฀ assets฀ reducing฀ them฀ to฀ $85m.฀
Divisions฀A฀and฀B฀have฀already฀been฀tested฀for฀impairment฀so฀no฀further฀impairment฀loss฀is฀allocated฀
to฀them฀or฀their฀goodwill฀as฀that฀would฀result฀in฀reporting฀them฀at฀below฀their฀recoverable฀amount.฀
Carrying฀amounts฀after฀impairment฀test฀
฀ Division฀ Division฀ Head฀ Unallocated฀฀ Total
฀ $m $m $m $m฀ $m
PPE฀780/(620฀–฀10)/(90฀–฀5)฀ 780 610 85 –฀ 1,475
Goodwill฀(60฀–฀20)/(30฀–฀30)/(10฀–฀10) 40 0 – 0฀ 40
Net฀current฀assets฀ ฀ 180 ฀ 110 ฀ 20 ฀–฀ ฀฀฀฀310
฀ 1,000 720 105 ฀0฀ ฀1,825
Workings฀
1฀ Test฀of฀individual฀CGUs฀
฀ Division฀A Division฀B
฀ $m $m
Carrying฀amount 1,020 760
Recoverable฀amount฀ (1,000) (720)
Impairment฀loss฀ ฀ ฀฀20 40
฀
Allocated฀to:฀
฀฀Goodwill฀ 20 30
฀฀Other฀assets฀in฀the฀scope฀of฀IAS฀36 ฀ – ฀10
฀ ฀20 ฀40
510฀

lOMoARcPSD|6256454
2฀ Test฀of฀group฀of฀CGUs฀
฀ $m
Revised฀carrying฀amount฀(1,000฀+฀720฀+฀110฀+฀10) 1,840
Recoverable฀amount฀ ฀(1,825)
Impairment฀loss฀ ฀ 15
฀
Allocated฀to:฀
฀฀Unallocated฀goodwill฀ 10
฀฀Other฀unallocated฀assets฀ ฀ 5
฀ ฀15
Activity฀3:฀Intangible฀assets฀
(a)฀ Costs฀ are฀ capitalised฀ from฀ 30฀ June฀ 20X8฀ onwards฀ (when฀ commercial฀ feasibility฀ and฀
technical฀ viability฀ were฀ demonstrated).฀ Hence฀ the฀ $3.5m฀ incurred฀ before฀ this฀ point฀ is฀
expensed.฀
The฀$3m฀incurred฀from฀1฀July฀to฀31฀December฀20X8฀is฀capitalised.฀Amortisation฀is฀charged฀
over฀the฀ten-year฀useful฀life,฀giving฀an฀annual฀charge฀of฀$300,000.฀
Amortisation฀is฀charged฀from฀when฀the฀process฀begins฀to฀be฀exploited฀commercially;฀here฀this฀
is฀1฀January฀20X9.฀Amortisation฀charged฀in฀the฀year-ended฀20X9฀is฀$300,000฀฀3/12฀=฀
$75,000.฀
The฀carrying฀amount฀is฀thus:฀
Cost฀ ฀3,000,000
Amortisation฀ ฀฀฀฀฀(75,000)
Carrying฀amount ฀2,925,000
฀(b)฀ The฀brand฀name฀is฀capitalised฀at฀its฀fair฀value฀of฀$10m.฀It฀is฀amortised฀over฀its฀useful฀life฀
of฀ 10฀ years,฀resulting฀in฀an฀expense฀of฀$1m.฀The฀carrying฀amount฀at฀the฀year฀end฀is฀thus฀
$9m.฀
In฀ accordance฀ with฀ IAS฀ 38,฀ no฀ asset฀ may฀ be฀ recognised฀ in฀ respect฀ of฀ the฀ employees'฀
expertise,฀as฀Lambda/Omicron฀does฀ not฀ exercise฀ 'control'฀ over฀them฀–฀they฀could฀leave฀
their฀ jobs.฀ The฀ amount฀ will฀ be฀ recognised฀ as฀ part฀ of฀ any฀ goodwill฀ on฀ acquisition฀ of฀
Omicron.฀
(c)฀ The฀ licence฀ is฀ initially฀ recognised฀ at฀ its฀ cost฀ of฀ $200,000.฀ Its฀ useful฀ life฀ is฀ five฀ years,฀ so฀
amortisation฀is฀charged฀of฀$200,000฀÷฀5฀฀6฀months฀=฀$20,000.฀The฀carrying฀amount฀is฀then฀
$180,000.฀
The฀asset฀is฀then฀reviewed฀for฀impairment.฀It฀is฀impaired฀if฀its฀carrying฀amount฀is฀higher฀than฀its฀
recoverable฀amount.฀This฀is฀the฀higher฀of฀value฀in฀use฀($185,000)฀and฀fair฀value฀less฀costs฀to฀
sell฀($175,000)฀–฀the฀higher฀being฀$185,000.฀Since฀the฀carrying฀amount฀is฀lower฀than฀this,฀it฀
is฀not฀impaired.฀
Activity฀4:฀Intangible฀assets฀and฀impairment฀
The฀treatment฀of฀the฀research฀and฀development฀costs฀in฀the฀year฀to฀31฀March฀20X1฀was฀correct฀due฀
to฀the฀element฀of฀uncertainty฀at฀the฀date.฀The฀development฀costs฀of฀$75,000฀written฀off฀in฀that฀same฀
period฀ should฀ not฀ be฀ capitalised฀ at฀ a฀ later฀ date฀ even฀ if฀ the฀ uncertainties฀ leading฀ to฀ its฀ original฀฀
write฀ off฀ are฀ favourably฀ resolved.฀ The฀ treatment฀ of฀ the฀ development฀ costs฀ in฀ the฀ year฀ to฀ 31฀ March฀
20X2฀is฀incorrect.฀The฀directors'฀decision฀to฀continue฀the฀development฀is฀logical฀as฀(at฀the฀time฀of฀the฀
decision)฀the฀future฀costs฀are฀estimated฀at฀only฀$10,000฀and฀the฀future฀revenues฀are฀expected฀to฀be฀
$150,000.฀ However,฀ at฀ 31฀ March฀ 20X2฀ the฀ unexpensed฀ development฀ costs฀ of฀ $80,000฀ are฀
expected฀to฀be฀recovered.฀Provided฀the฀other฀criteria฀in฀IAS฀38฀Intangible฀Assets฀are฀met,฀these฀costs฀
฀ 511฀

lOMoARcPSD|6256454
฀฀
of฀ $80,000฀ should฀ be฀ recognised฀ as฀ an฀ asset฀ in฀ the฀ statement฀ of฀ financial฀ position฀ and฀ amortised฀
across฀ the฀ expected฀ life฀ of฀ the฀ product฀ in฀ order฀ to฀ 'match'฀ the฀ development฀ costs฀ to฀ the฀ future฀
earnings฀of฀the฀new฀product.฀Thus฀the฀directors'฀logic฀of฀writing฀off฀the฀$80,000฀development฀cost฀at฀
31฀March฀20X2฀because฀of฀an฀expected฀overall฀loss฀is฀flawed.฀The฀directors฀do฀not฀have฀the฀choice฀
to฀write฀off฀the฀development฀expenditure.
Activity฀5:฀Investment฀property฀
The฀ apartments฀ are฀ leased฀ to฀ persons฀ who฀ are฀ under฀ contract฀ to฀ the฀ company.฀ Therefore฀ they฀
cannot฀ be฀ classified฀ as฀ investment฀ property.฀IAS฀40฀Investment฀Property฀specifically฀states฀
that฀ property฀ occupied฀ by฀ employees฀ is฀ not฀ investment฀ property.฀ The฀ apartments฀ must฀ be฀
treated฀as฀property,฀ plant฀ and฀ equipment,฀carried฀at฀cost฀or฀fair฀value฀and฀depreciated฀over฀
their฀useful฀lives.฀
Although฀the฀rent฀is฀below฀the฀market฀rate,฀the฀difference฀between฀the฀actual฀rent฀and฀the฀market฀rate฀
is฀ simply฀ income฀ foregone฀ (or฀ an฀ opportunity฀ cost).฀ In฀ order฀ to฀ recognise฀ the฀ difference฀ as฀ an฀
employee฀benefit฀cost฀it฀would฀also฀be฀necessary฀to฀gross฀ up฀ rental฀ income฀to฀the฀market฀rate.฀
The฀ financial฀ statements฀ would฀ not฀ present฀ fairly฀ the฀ financial฀ performance฀ of฀ the฀ company.฀
Therefore฀the฀company฀cannot฀recognise฀the฀difference฀as฀an฀employee฀benefit฀cost.฀
Activity฀6:฀Government฀grant฀
The฀basic฀principle฀of฀IAS฀20฀is฀that฀grants฀should฀be฀recognised฀as฀income฀in฀whichever฀periods฀the฀
costs฀they฀are฀intended฀to฀compensate฀occur.฀
(a)฀ There฀ are฀ no฀ conditions฀ attached฀ to฀ the฀ $6m,฀ so฀ there฀ are฀ no฀ costs฀ to฀ match฀ the฀ money฀ to.฀
Hence฀the฀$6m฀should฀be฀recognised฀as฀income฀straight฀away.฀
(b)฀ The฀$15m฀relates฀to฀the฀costs฀of฀the฀factory฀and฀should฀be฀matched฀to฀them.฀The฀costs฀occur฀
over฀the฀40฀year฀useful฀life,฀and฀IAS฀20฀allows฀the฀grant฀to฀be฀matched฀to฀them฀in฀two฀ways:฀
(i)฀ The฀ grant฀ could฀ be฀ used฀ to฀ reduce฀ the฀ cost฀ of฀ the฀ asset฀ and฀ subsequent฀ depreciation฀
charges.฀The฀cost฀would฀have฀been฀$60m฀with฀$0.5m฀depreciation฀(=฀$60m/40฀years฀
฀ 4/12฀ months),฀ but฀ this฀ would฀ be฀ reduced฀ by฀ the฀ grant฀ to฀ $45m฀ cost฀ less฀ $0.375m฀
depreciation฀(=฀$45m/40฀years฀฀4/12฀months)฀to฀a฀carrying฀amount฀of฀$44.625m.฀
(ii)฀ The฀ other฀ treatment฀ would฀ be฀ to฀ show฀ the฀ grant฀ separately฀ as฀ deferred฀ income,฀
matching฀ the฀ income฀ to฀ the฀ depreciation฀ of฀ the฀ factory.฀ The฀ factory฀ would฀ remain฀ at฀
$60m฀ cost฀ with฀ $0.5m฀ depreciation.฀ Income฀ of฀ $0.125m฀ (=฀ $15m/40฀ years฀ ฀
4/12฀months)฀would฀be฀recognised฀in฀the฀statement฀of฀profit฀or฀loss,฀with฀the฀remaining฀
$14.875m฀ being฀ shown฀ as฀ deferred฀ in฀ the฀ statement฀ of฀ financial฀ position.฀ Of฀ this,฀
$0.375m฀ would฀ be฀ shown฀ within฀ current฀ liabilities฀ as฀ it฀ would฀ be฀ released฀ during฀ the฀
next฀year฀(=฀$15m/40฀years),฀and฀the฀remaining฀$14.5m฀(=฀$14.875m฀–฀$0.375m)฀
would฀be฀in฀non-current฀liabilities.฀
(c)฀ The฀ question฀ here฀ is฀ how฀ likely฀ it฀ is฀ that฀ the฀ grant฀ will฀ have฀ to฀ be฀ repaid.฀ In฀ this฀ case,฀ it฀ is฀
possible฀ but฀ unlikely,฀ so฀ no฀ liability฀ needs฀ to฀ be฀ recognised฀ for฀ it฀ being฀ repaid.฀ The฀ grant฀
should฀therefore฀be฀treated฀as฀deferred฀income฀over฀the฀five฀years,฀of฀which฀$0.6m฀(=฀$9m/฀
5฀years฀฀4/12฀months)฀is฀recognised฀as฀income฀this฀year.฀The฀doubt฀over฀possible฀repayment฀
of฀the฀grant฀in฀future฀should฀then฀be฀disclosed฀as฀a฀contingent฀liability฀in฀line฀with฀IAS฀37,฀as฀
repayment฀is฀possible฀but฀not฀probable.฀
If฀ it฀ had฀ been฀ probable฀ that฀ the฀ $9m฀ would฀ have฀ to฀ be฀ repaid,฀ then฀ no฀ income฀ would฀ have฀
been฀ recognised฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ the฀ full฀ amount฀ would฀ be฀ shown฀ as฀ a฀
separate฀ liability฀ in฀ the฀ statement฀ of฀ financial฀ position,฀ reducing฀ the฀ amount฀ of฀ deferred฀
income.฀If฀there฀was฀not฀enough฀deferred฀income฀to฀make฀up฀the฀amount฀of฀the฀liability฀(eg฀if฀
some฀had฀already฀been฀recognised฀in฀the฀statement฀of฀profit฀or฀loss),฀then฀the฀deficit฀should฀be฀
charged฀to฀the฀statement฀of฀profit฀or฀loss฀as฀an฀expense.฀
512฀

lOMoARcPSD|6256454
Activity฀7:฀Borrowing฀costs฀
120 80
Capitalisation฀rate฀=฀weighted฀average฀rate฀=฀(10%฀฀ )฀+฀(9.5%฀฀ )฀=฀9.8%฀
120 + 80 120 + 80
Borrowing฀costs฀ =฀($30m฀฀9.8%)฀+฀($20m฀฀9.8%฀฀3/12)฀
฀ =฀$3.43m฀
Chapter฀4฀Employee฀benefits฀
Activity฀1:฀Short-term฀benefits฀(1)฀
Plyman฀Co฀expects฀to฀pay฀an฀additional฀12฀days฀of฀sick฀pay฀as฀a฀result฀of฀the฀unused฀entitlement฀that฀
has฀accumulated฀at฀31฀December฀20X8,฀ie฀1½฀days฀฀8฀employees.฀Plyman฀Co฀should฀recognise฀a฀
liability฀equal฀to฀12฀days฀of฀sick฀pay.฀
Activity฀2:฀Short-term฀benefits฀(2)฀
An฀accrual฀should฀be฀made฀under฀IAS฀19฀Employee฀Benefits฀for฀the฀holiday฀entitlement฀that฀can฀be฀
carried฀forward฀to฀the฀following฀year.฀This฀is฀because฀the฀employees฀have฀worked฀additional฀days฀in฀
the฀ current฀ period฀ (generating฀ additional฀ economic฀ benefits฀ for฀ the฀ company),฀ but฀ will฀ work฀ fewer฀
days฀in฀the฀following฀period฀when฀the฀salary฀for฀those฀days฀is฀paid.฀฀An฀accrual฀is฀therefore฀required฀
to฀match฀costs฀and฀revenues฀and฀apply฀the฀accruals฀concept.฀
DEBIT฀฀฀ P/L฀($42m฀฀94%฀฀4฀days/255฀days)฀ ฀ $619,294฀
CREDIT฀ Accruals฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $619,294฀
Activity฀3:฀Defined฀contribution฀plans฀
Salaries฀ ฀$10,500,000฀
Bonus฀ ฀$฀฀3,000,000฀
฀ ฀$13,500,000  5%฀=฀$675,000฀
DEBIT฀ P/L฀ $675,000฀
CREDIT฀ Cash฀ ฀ $510,000฀
CREDIT฀ Accruals฀ $165,000฀
Activity฀4:฀Defined฀benefit฀plans฀
Notes฀to฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
1฀ Defined฀benefit฀expense฀recognised฀in฀profit฀or฀loss฀
฀ ฀$m฀
Current฀service฀cost฀ 76฀
Past฀service฀cost 40฀
Net฀interest฀cost฀(from฀SOFP฀obligation฀and฀asset฀notes:฀58฀– 52) ฀ ฀฀฀฀6฀
฀ ฀122฀
2฀ Other฀comprehensive฀income฀(items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss):฀
฀ ฀$m฀
Actuarial฀gain/(loss)฀on฀defined฀benefit฀obligation฀ ฀฀฀฀(16)฀
Return฀on฀plan฀assets฀(excluding฀amounts฀in฀net฀interest)฀ ฀฀34฀
฀ ฀฀18฀
฀ 513฀

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฀฀
Notes฀to฀the฀statement฀of฀financial฀position฀
1฀ Net฀defined฀benefit฀liability฀recognised฀in฀the฀statement฀of฀financial฀position฀
฀ ฀31.12.X7฀ ฀31.12.X6฀
฀ ฀$m฀ ฀$m฀
Present฀value฀of฀defined฀benefit฀obligation฀ ฀ 1,222฀ ฀฀1,120฀
Fair฀value฀of฀plan฀assets฀ ฀(1,132)฀ ฀(1,040)฀
Net฀liability฀ ฀ 90฀ ฀฀฀฀฀฀฀80฀
2฀ Changes฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation฀
฀ ฀$m฀
Opening฀defined฀benefit฀obligation฀ ฀1,120฀
Interest฀on฀obligation฀[(1,120฀฀5%)฀+฀(40฀ 5%)]฀ ฀58฀
Current฀service฀cost฀ ฀76฀
Past฀service฀cost ฀40฀
Benefits฀paid฀ ฀(88)฀
(Gain)/loss฀on฀remeasurement฀recognised฀in฀OCI฀ ฀ ฀฀฀฀฀16฀
฀฀(balancing฀figure)฀
Closing฀defined฀benefit฀obligation฀ ฀1,222฀
3฀ Changes฀in฀the฀fair฀value฀of฀plan฀assets฀
฀ ฀$m฀
Opening฀fair฀value฀of฀plan฀assets฀ ฀1,040฀
Interest฀on฀plan฀assets฀(1,040฀฀5%) 52
Contributions฀ ฀94฀
Benefits฀paid฀ ฀(88)
Gain/(loss)฀on฀remeasurement฀recognised฀in฀OCI฀ ฀฀฀฀฀฀34฀
฀฀(balancing฀figure)฀
Closing฀fair฀value฀of฀plan฀assets฀ ฀1,132฀
Chapter฀5฀Provisions,฀contingencies฀and฀events฀after฀the฀
Activity฀1:฀Restructuring฀
Plan฀1:฀
A฀provision฀ for฀ restructuring฀should฀be฀recognised฀in฀respect฀of฀the฀closure฀of฀the฀factories฀in฀
accordance฀with฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets.฀The฀plan฀has฀been฀
communicated฀to฀the฀relevant฀employees฀(those฀who฀will฀be฀made฀redundant)฀and฀factories฀have฀
already฀ been฀ identified.฀ A฀ provision฀ should฀ only฀ be฀ recognised฀ for฀ directly฀ attributable฀
costs฀that฀will฀not฀benefit฀ongoing฀activities฀of฀the฀entity.฀Thus,฀a฀provision฀should฀be฀recognised฀for฀
the฀redundancy฀costs฀and฀the฀lease฀termination฀costs,฀but฀none฀for฀the฀retraining฀costs:฀
฀ $m฀
Redundancy฀costs฀ ฀9฀
Retraining฀ ฀–฀
Lease฀termination฀costs ฀ ฀฀5฀
Liability฀ 14฀
DEBIT฀ Profit฀or฀loss฀(retained฀earnings) $14m ฀

CREDIT฀ Current฀liabilities฀ $14m฀
514฀

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Plan฀2:฀
No฀ provision฀ should฀ be฀ recognised฀ for฀ the฀ reorganisation฀ of฀ the฀ finance฀ and฀ IT฀
department.฀Since฀the฀reorganisation฀is฀not฀due฀to฀start฀for฀two฀years,฀the฀plan฀may฀change,฀and฀
so฀ a฀ valid฀ expectation฀ that฀ management฀ is฀ committed฀ to฀ the฀ plan฀ has฀ not฀ been฀
raised.฀ As฀ regards฀ any฀ provision฀ for฀ redundancy,฀ individuals฀ have฀ not฀ been฀ identified฀ and฀
communicated฀with,฀and฀so฀no฀provision฀should฀be฀made฀at฀31฀May฀20X3฀for฀redundancy฀costs.฀฀฀
Activity฀2:฀Environmental฀provisions฀
(a)฀ At฀31฀December฀20X3฀
At฀ 31฀ December฀ 20X3,฀ a฀ provision฀ should฀ be฀ recognised฀ for฀ the฀ dismantling฀ costs฀ of฀ the฀
structures฀already฀built฀and฀restoration฀of฀the฀environment฀where฀access฀roads฀to฀the฀site฀have฀
been฀built.฀This฀is฀because฀the฀construction฀of฀the฀access฀roads฀and฀structures,฀combined฀with฀
the฀requirement฀under฀the฀operating฀licence฀to฀restore฀the฀site฀and฀remove฀the฀access฀roads,฀
create฀an฀obligating฀event฀at฀the฀end฀of฀the฀period.฀As฀the฀time฀value฀of฀money฀is฀material,฀the฀
20
amount฀must฀be฀discounted฀resulting฀in฀a฀provision฀of฀$2.145฀million฀($10m฀฀1/1.08 ).฀
As฀ undertaking฀ this฀ obligation฀ gives฀ rise฀ to฀ future฀ economic฀ benefits฀ (from฀ selling฀ limestone),฀
the฀amount฀of฀the฀provision฀should฀be฀included฀in฀the฀initial฀measurement฀of฀the฀assets฀relating฀
to฀the฀quarry฀as฀at฀31฀December฀20X3:฀
Non-current฀assets $m฀
Quarry฀structures฀and฀access฀roads฀at฀cost ฀
฀ Construction฀cost฀ 50.0฀
20
฀ Provision฀for฀dismantling฀and฀restoration฀costs฀($10m฀ 1/1.08 ) ฀฀฀2.145
฀ ฀52.145
(b)฀ Year฀ended฀31฀December฀20X4฀
The฀overall฀cost฀of฀the฀quarry฀structures฀and฀access฀roads฀(including฀the฀discounted฀provision)฀
would฀ be฀ depreciated฀ over฀ the฀ quarry's฀ 20฀ year฀ life฀ resulting฀ in฀ a฀ charge฀ for฀ the฀ year฀ of฀
$52.145m/20฀=฀$2.607m฀recognised฀in฀profit฀or฀loss฀and฀a฀carrying฀amount฀of฀$52.145m฀–฀
$2.607m฀=฀$49.538m.฀
The฀ provision฀ would฀ begin฀ to฀ be฀ compounded฀ resulting฀ in฀ an฀ interest฀ charge฀ of฀ $2.145m฀ ฀
8%฀=฀$0.172m฀in฀profit฀or฀loss.฀
The฀ obligation฀ to฀ rectify฀ damage฀ to฀ the฀ environment฀ incurred฀ through฀ extraction฀ of฀ limestone฀
arises฀as฀the฀quarry฀is฀operated,฀requiring฀a฀new฀provision฀and฀a฀charge฀to฀profit฀or฀loss฀of฀
19
$0.116m฀($500,000฀฀1/1.08 )฀in฀20X4.฀
Therefore฀ the฀ outstanding฀ provision฀ in฀ the฀ statement฀ of฀ financial฀ position฀ as฀ at฀ 31฀ December฀
20X4฀is฀made฀up฀as฀follows:฀
฀ $m฀
Provision฀for฀dismantling฀and฀restoration฀costs฀b/d 2.145
Interest฀($2.145m฀฀8%)฀ 0.172
19
New฀provision฀for฀restoration฀costs฀at฀year฀end฀prices฀($500,000฀ 1/1.08 ) ฀0.116
฀ ฀
Provision฀for฀dismantling฀and฀restoration฀costs฀c/d฀at฀31฀December฀20X4฀ ฀2.433
The฀overall฀charge฀to฀profit฀or฀loss฀for฀the฀year฀is:฀
฀ $m฀
Depreciation฀ 2.607
New฀provision฀for฀restoration฀costs 0.116
Finance฀costs฀ ฀ 0.172
Provision฀for฀dismantling฀and฀restoration฀costs฀c/d฀at฀31฀December฀20X4฀ ฀2.895
฀ 515฀

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฀฀
Any฀change฀in฀the฀expected฀present฀value฀of฀the฀provision฀would฀be฀made฀as฀an฀adjustment฀to฀
the฀provision฀and฀to฀the฀asset฀value฀(affecting฀future฀depreciation฀charges).฀
Activity฀3:฀IAS฀37฀and฀IAS฀10฀
(a)฀ Under฀the฀principles฀of฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets,฀a฀provision฀
should฀be฀made฀for฀the฀probable฀damages฀payable฀to฀the฀customer.฀
The฀amount฀provided฀should฀be฀the฀amount฀Delta฀would฀rationally฀pay฀to฀settle฀the฀obligation฀
at฀ the฀ end฀ of฀ the฀ reporting฀ period.฀ Ignoring฀ discounting,฀ this฀ is฀ $1m.฀ This฀ amount฀ should฀ be฀
credited฀to฀liabilities฀and฀debited฀to฀profit฀or฀loss.฀
Under฀ the฀ principles฀ of฀ IAS฀ 37฀ the฀ potential฀ amount฀ receivable฀ from฀ the฀ supplier฀ is฀ a฀
contingent฀ asset.฀ Contingent฀ assets฀ should฀ not฀ be฀ recognised฀ but฀ should฀ be฀ disclosed฀ where฀
there฀ is฀ a฀ probable฀ future฀ receipt฀ of฀ economic฀ benefits฀ –฀ this฀ is฀ the฀ case฀ for฀ the฀ $800,000฀
potentially฀receivable฀from฀the฀supplier.฀
(b)฀ The฀event฀causing฀the฀damage฀to฀the฀inventory฀occurred฀after฀the฀end฀of฀the฀reporting฀period.฀
Under฀the฀principles฀of฀IAS฀10฀Events฀after฀the฀Reporting฀Period฀this฀is฀a฀non-adjusting฀event฀as฀
it฀does฀not฀affect฀conditions฀at฀the฀end฀of฀the฀reporting฀period.฀฀
Non-adjusting฀ events฀ are฀ not฀ recognised฀ in฀ the฀ financial฀ statements,฀ but฀ are฀ disclosed฀ where฀
their฀effect฀is฀material.฀
Chapter฀6฀Income฀taxes฀
Activity฀1:฀Fair฀value฀adjustments฀
A฀taxable฀temporary฀difference฀arises฀for฀the฀group฀because฀on฀consolidation฀the฀carrying฀amount฀of฀
the฀equipment฀has฀increased฀(to฀its฀fair฀value),฀but฀its฀tax฀base฀has฀not฀changed.฀The฀deferred฀tax฀on฀
the฀fair฀value฀adjustment฀is฀calculated฀as:฀
฀ $m
Carrying฀amount฀(in฀group฀financial฀statements) 54
฀Tax฀base฀฀ ฀(50)
฀Temporary฀difference฀ 4
฀Deferred฀tax฀liability฀(4฀฀25%)฀ (1)
The฀deferred฀tax฀of฀$1m฀is฀debited฀to฀goodwill,฀reducing฀the฀fair฀value฀adjustment฀(and฀net฀assets฀at฀
acquisition)฀and฀increasing฀goodwill.฀
Activity฀2:฀Unrealised฀profit฀on฀intragroup฀trading฀
The฀ transaction฀ generated฀ unrealised฀ group฀ profits฀ of฀ $16,000฀ ($80,000฀ –฀ $64,000),฀ which฀ are฀
eliminated฀ on฀ consolidation.฀ In฀ the฀ consolidated฀ financial฀ statements฀ the฀ carrying฀ amount฀ of฀ the฀
unsold฀inventory฀is฀$64,000฀($80,000฀carrying฀amount฀–฀$16,000฀unrealised฀profit).฀฀
The฀tax฀base฀of฀the฀unsold฀inventory฀is฀$80,000,฀being฀the฀cost฀of฀the฀inventories฀to฀Omega.฀
Deferred฀tax฀calculation฀฀
฀ $฀฀฀฀฀฀฀
Use Omega's tax
Carrying฀amount฀(in฀the฀group฀financial฀statements) 64,000฀ rate as Omega will
get the tax relief in
Tax฀base฀(cost฀of฀inventories฀to฀Omega)฀ ฀(80,000)฀ the future when the
inventories are sold
Temporary฀difference฀(group฀unrealised฀profit)฀ ฀(16,000)฀ outside of the group
Deferred฀tax฀asset฀(16,000฀฀25%฀(Omega's฀tax฀rate)) ฀฀฀ 4,000฀
516฀

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In฀the฀consolidated฀financial฀statements฀a฀deferred฀tax฀asset฀of฀$4,000฀should฀be฀recognised:฀
DEBIT฀฀ Deferred฀tax฀asset฀(in฀consolidated฀statement฀of฀financial฀position)฀ $4,000฀
CREDIT฀ Deferred฀tax฀(in฀consolidated฀statement฀of฀profit฀or฀loss)฀ ฀ ฀ ฀ $4,000฀฀
Activity฀3:฀Tax฀losses฀
Baller฀ Group฀ has฀ unrelieved฀ tax฀ losses฀ of฀ $38m.฀ This฀ amount฀ will฀ be฀ available฀ for฀ offset฀ against฀
profits฀ for฀ the฀ year฀ ending฀ 31฀ December฀ 20X5฀ ($21m).฀ Because฀ of฀ the฀ uncertainty฀ about฀ the฀
availability฀of฀taxable฀profits฀in฀20X6,฀no฀deferred฀tax฀asset฀can฀be฀recognised฀for฀any฀losses฀which฀
may฀be฀offset฀against฀this฀amount.฀Therefore,฀a฀deferred฀tax฀asset฀may฀be฀recognised฀for฀the฀losses฀
to฀be฀offset฀against฀taxable฀profits฀in฀20X5฀only:฀$21฀฀20%฀=฀$4.2m.฀
Activity฀4:฀Deferred฀tax฀comprehensive฀question฀
(a)฀ (i)฀ Fair฀ value฀ adjustments฀ are฀ treated฀ in฀ a฀ similar฀ way฀ to฀ temporary฀ differences฀ on฀
revaluations฀ in฀ the฀ entity's฀ own฀ accounts.฀ A฀ deferred฀ tax฀ liability฀ is฀ recognised฀ under฀
IAS฀12฀ even฀ though฀ the฀ directors฀ have฀ no฀ intention฀ of฀ selling฀ the฀ property฀ as฀ it฀ will฀
generate฀ taxable฀ income฀ in฀ excess฀ of฀ depreciation฀ allowed฀ for฀ tax฀ purposes.฀ The฀
temporary฀ difference฀ is฀ $1m฀ ($32m฀ –฀ $31m),฀ resulting฀ in฀ a฀ deferred฀ tax฀ liability฀ of฀
$0.25m฀ ($1m฀ ฀ 25%).฀ This฀ is฀ debited฀ to฀ goodwill,฀ reducing฀ the฀ fair฀ value฀ adjustment฀
(and฀net฀assets฀at฀acquisition)฀and฀increasing฀goodwill.฀
(ii)฀ Provisions฀ for฀ unrealised฀ profits฀ are฀ temporary฀ differences฀ which฀ create฀ deferred฀ tax฀
assets฀ and฀ the฀ deferred฀ tax฀ is฀ provided฀ at฀ the฀ receiving฀ company's฀ rate฀ of฀ tax.฀ A฀
deferred฀tax฀asset฀would฀arise฀of฀(3.6฀×฀2/6฀)฀×฀30%฀=฀$360,000.฀
(b)฀ (i)฀ The฀unrealised฀gains฀are฀temporary฀differences฀which฀will฀reverse฀when฀the฀investments฀
are฀sold.฀Therefore฀a฀deferred฀tax฀liability฀needs฀to฀be฀created฀of฀($8m฀฀25%)฀=฀$2m.฀
(ii)฀ The฀ allowance฀ is฀ a฀ temporary฀ difference฀ which฀ will฀ reverse฀ when฀ the฀ currently฀
unidentified฀ loans฀ go฀ bad.฀ The฀ entity฀ will฀ then฀ be฀ entitled฀ to฀ tax฀ relief.฀ A฀ deferred฀ tax฀
asset฀of฀($2m฀at฀25%)฀=฀$500,000฀should฀be฀created.฀
(c)฀ No฀deferred฀tax฀liability฀is฀required฀for฀the฀additional฀tax฀payable฀of฀$2m฀as฀Nyman฀controls฀
the฀dividend฀policy฀of฀Winsten฀and฀does฀not฀intend฀to฀remit฀the฀earnings฀to฀its฀own฀tax฀regime฀
in฀the฀foreseeable฀future.฀
(d)฀ Nyman's฀ unrelieved฀ trading฀ losses฀ can฀ only฀ be฀ recognised฀ as฀ a฀ deferred฀ tax฀ asset฀ to฀ the฀
extent฀they฀are฀considered฀to฀be฀recoverable.฀In฀assessing฀the฀recoverability฀there฀needs฀to฀be฀
evidence฀that฀there฀will฀be฀suitable฀taxable฀profits฀from฀which฀the฀losses฀can฀be฀deducted฀in฀
the฀ future.฀ To฀ the฀ extent฀ Nyman฀ itself฀ has฀ a฀ deferred฀ tax฀ liability฀ for฀ future฀ taxable฀ trading฀
profits฀(eg฀accelerated฀tax฀depreciation)฀then฀an฀asset฀could฀be฀recognised.฀฀
Chapter฀7฀Financial฀instruments฀
Activity฀1:฀Derecognition฀
(a)฀ AB฀ should฀ derecognise฀ the฀ asset฀ as฀ it฀ only฀ has฀ an฀ option฀ (rather฀ than฀ an฀ obligation)฀ to฀
purchase.฀
(b)฀ EF฀should฀not฀derecognise฀the฀asset฀as฀it฀has฀retained฀substantially฀all฀the฀risks฀and฀rewards฀of฀
ownership.฀The฀stock฀should฀be฀retained฀in฀its฀books฀even฀though฀the฀legal฀title฀is฀temporarily฀
transferred.฀
฀ 517฀

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฀฀
Activity฀2:฀Measurement฀of฀financial฀assets฀
(a)฀ Loan฀to฀employee฀
This฀is฀an฀investment฀in฀debt฀where฀the฀business฀model฀is฀to฀collect฀the฀contractual฀cash฀flows.฀฀
It฀should฀be฀initially฀measured฀at฀fair฀value฀plus฀transaction฀costs฀(none฀here).฀However,฀as฀this฀
is฀an฀interest฀free฀loan,฀the฀cash฀paid฀is฀not฀equivalent฀to฀the฀initial฀fair฀value.฀Therefore,฀the฀
initial฀fair฀value฀is฀calculated฀as฀the฀present฀value฀of฀future฀cash฀flows฀discounted฀at฀the฀market฀
rate฀on฀interest฀of฀an฀equivalent฀loan:฀
1
$10,000฀฀ =฀$9,070฀
2
1.05
The฀loan฀should฀be฀subsequently฀measured฀at฀amortised฀cost:฀
฀ $ ฀
Fair฀value฀on฀1฀January฀20X1฀ ฀ 9,070฀
Effective฀interest฀income฀(9,070฀ 5%)฀ ฀ 454฀
Coupon฀received฀(10,000฀฀0%)฀ ฀ ฀฀฀฀(0)฀
Amortised฀cost฀at฀31฀December฀20X1฀ ฀ 9,524฀
Finance฀income฀of฀$454฀should฀be฀recorded฀in฀profit฀or฀loss฀for฀the฀year฀ended฀31฀December฀
20X1฀ and฀ the฀ amortised฀ cost฀ of฀ $9,524฀ in฀ the฀ statement฀ of฀ financial฀ position฀ as฀ at฀฀
(b)฀ Loan฀notes฀
These฀loan฀notes฀are฀an฀investment฀in฀debt฀instruments฀where฀the฀business฀model฀is฀to฀collect฀
the฀contractual฀cash฀flows฀(which฀are฀solely฀principal฀and฀interest)฀and฀to฀sell฀financial฀assets.฀
This฀ is฀ because฀ Wharton฀ will฀ make฀ decisions฀ on฀ an฀ ongoing฀ basis฀ about฀ whether฀ collecting฀
contractual฀cash฀flows฀or฀selling฀financial฀assets฀will฀maximise฀the฀return฀on฀the฀portfolio฀until฀
the฀need฀arises฀for฀the฀invested฀cash.฀
Therefore,฀ they฀ should฀ be฀ measured฀ initially฀ at฀ fair฀ value฀ plus฀ transaction฀ costs:฀ $45,450฀
([$50,000฀฀90%]฀+฀$450).฀
Subsequently,฀the฀loan฀notes฀should฀be฀held฀at฀fair฀value฀through฀other฀comprehensive฀income฀
under฀IFRS฀9.฀However,฀the฀interest฀revenue฀must฀still฀be฀shown฀in฀profit฀or฀loss.฀฀
฀ ฀$฀฀฀฀฀฀
Fair฀value฀on฀1฀January฀20X1฀((50,000฀ 90%)฀+฀450))฀ ฀45,450฀
Effective฀interest฀income฀(45,450฀ 5.6%)฀ ฀2,545฀
Coupon฀received฀(50,000฀฀3%)฀ ฀ (1,500)฀
฀ ฀46,495฀
Revaluation฀gain฀(to฀other฀comprehensive฀income)฀[bal.฀figure]฀ ฀฀4,505฀
Fair฀value฀at฀31฀December฀20X1฀ ฀51,000฀
Consequently,฀ $2,545฀ of฀ finance฀ income฀ will฀ be฀ recognised฀ in฀ profit฀ or฀ loss฀ for฀ the฀ year,฀
$4,505฀ revaluation฀ gain฀ recognised฀ in฀ other฀ comprehensive฀ income฀ and฀ there฀ will฀ be฀ a฀
$51,000฀loan฀note฀asset฀in฀the฀statement฀of฀financial฀position.฀
518฀

lOMoARcPSD|6256454
Activity฀3:฀Measurement฀of฀financial฀liabilities฀
(a)฀ Bank฀Loan฀
A฀ bank฀ loan฀ would฀ normally฀ be฀ initially฀ measured฀ at฀ fair฀ value฀ less฀ transaction฀ costs฀ and฀
subsequently฀at฀amortised฀cost.฀
In฀ the฀ case฀ of฀ Johnson,฀ the฀ initial฀ measurement฀ at฀ fair฀ value฀ less฀ transaction฀ costs฀ on฀
31฀December฀ 20X1฀ would฀ result฀ in฀ a฀ financial฀ liability฀ $8,850,000฀ ($9,000,000฀ –฀
$150,000).฀
Subsequent฀ measurement฀ would฀ then฀ be฀ at฀ amortised฀ cost.฀ An฀ effective฀ interest฀ rate฀ would฀
then฀need฀to฀be฀calculated฀to฀incorporate฀the฀5%฀interest฀and฀the฀$150,000฀transaction฀costs.฀
This฀effective฀interest฀would฀be฀recognised฀as฀an฀expense฀in฀profit฀or฀loss฀from฀the฀year฀ended฀
However,฀IFRS฀9฀offers฀an฀option฀to฀designate฀a฀financial฀liability฀on฀initial฀recognition฀as฀'at฀
fair฀value฀through฀profit฀or฀loss'฀in฀order฀to฀eliminate฀or฀significantly฀reduce฀a฀measurement฀or฀
recognition฀inconsistency฀(an฀'accounting฀mismatch').฀฀฀
This฀ option฀ is฀ available฀ to฀ Johnson฀ here฀ because฀ the฀ bank฀ loan฀ is฀ being฀ used฀ specifically฀ to฀
finance฀the฀purchase฀of฀investment฀properties.฀Under฀the฀accounting฀policy฀of฀Johnson,฀these฀
investment฀properties฀will฀be฀measured฀at฀fair฀value฀with฀gains฀or฀losses฀recognised฀in฀profit฀or฀
loss.฀Therefore,฀if฀the฀loan฀were฀measured฀at฀amortised฀cost,฀there฀would฀be฀a฀measurement฀
inconsistency.฀ To฀ eliminate฀ this฀ accounting฀ mismatch,฀ Johnson฀ may฀ choose฀ to฀ designate฀ the฀
bank฀loan฀on฀initial฀recognition฀on฀31฀December฀20X1฀as฀'at฀fair฀value฀through฀profit฀or฀loss'.฀
If฀this฀option฀is฀chosen,฀the฀loan฀will฀be฀initially฀recognised฀at฀its฀fair฀value฀of฀$9,000,000฀and฀
the฀transaction฀costs฀of฀$150,000฀will฀be฀expensed฀through฀profit฀or฀loss.฀฀Subsequently,฀the฀
loan฀will฀be฀measured฀at฀fair฀value฀with฀any฀gains฀or฀losses฀being฀recognised฀in฀profit฀or฀loss,฀
in฀line฀with฀the฀accounting฀treatment฀of฀the฀investment฀properties฀it฀was฀used฀to฀finance.฀
(b)฀ Forward฀contract฀
A฀ forward฀ contract฀ not฀ held฀ for฀ delivery฀ of฀ the฀ entity's฀ expected฀ physical฀ purchase,฀ sale฀ or฀
usage฀ requirements฀ (which฀ would฀ be฀ outside฀ the฀ scope฀ of฀ IFRS฀ 9)฀ and฀ not฀ held฀ for฀ hedging฀
purposes฀is฀accounted฀for฀at฀fair฀value฀through฀profit฀or฀loss.฀
The฀fair฀value฀of฀a฀forward฀contract฀at฀inception฀is฀zero.฀
The฀fair฀value฀of฀the฀contract฀at฀the฀year฀end฀is:฀
฀ ฀$฀฀฀฀฀฀฀
Market฀price฀of฀forward฀contract฀at฀year฀end฀for฀delivery฀on฀30฀April฀ ฀5,000฀
Johnson's฀forward฀price฀ ฀(6,000)฀
Loss฀ ฀(1,000)฀
A฀financial฀liability฀of฀$1,000฀is฀therefore฀recognised฀with฀a฀corresponding฀charge฀of฀$1,000฀
to฀profit฀or฀loss.฀
Activity฀4:฀Impairment฀of฀financial฀assets฀
On฀1฀January฀20X5,฀ABC฀Bank฀should฀recognise฀an฀allowance฀for฀credit฀losses฀of฀$75,000฀(15%฀฀
$500,000),฀being฀the฀12฀month฀expected฀credit฀losses.฀Per฀IFRS฀9,฀this฀is฀calculated฀by฀multiplying฀
the฀probability฀of฀default฀in฀the฀next฀12฀months฀(15%)฀by฀the฀lifetime฀credit฀losses฀that฀would฀result฀
from฀the฀default฀($500,000).฀A฀corresponding฀expense฀of฀$75,000฀should฀be฀recognised฀in฀profit฀or฀
loss.฀ The฀ allowance฀ will฀ be฀ presented฀ set฀ off฀ against฀ the฀ loan฀ assets฀ in฀ the฀ statement฀ of฀ financial฀
positon.฀
฀ 519฀

lOMoARcPSD|6256454
฀฀
During฀ the฀ year฀ ended฀ 31฀ December฀ 20X5,฀ an฀ interest฀ cost฀ of฀ $2,250฀ ($75,000฀ ฀ 3%)฀ must฀ be฀
recognised฀ on฀ the฀ brought฀ forward฀ allowance฀ with฀ a฀ corresponding฀ increase฀ in฀ the฀ allowance฀ to฀
unwind฀one฀year฀of฀discounting.฀
Interest฀revenue฀of฀$380,000฀($10,000,000฀฀3.8%)฀should฀also฀be฀recognised฀in฀profit฀or฀loss฀for฀
the฀ year฀ ended฀ 31฀ December฀ 20X5.฀ This฀ is฀ calculated฀ on฀ the฀ gross฀ carrying฀ amount฀ of฀
$10,000,000.฀The฀interest฀rate฀of฀3.8%฀is฀the฀LIBOR฀of฀1.8%฀plus฀2%฀per฀the฀loan฀agreement.฀
The฀gross฀carrying฀amount฀of฀the฀loans฀at฀31฀December฀20X5฀is:฀
฀ ฀$ ฀
1฀January฀20X5฀ ฀ 10,000,000 ฀
Interest฀(3.8%฀฀$10,000,000)฀ ฀ 380,000 ฀
Cash฀received฀ ฀฀฀฀(400,000)฀
31฀December฀20X5฀gross฀carrying฀amount฀ ฀฀9,980,000฀
However,฀ by฀ 31฀ December฀ 20X5,฀ due฀ to฀ the฀ economic฀ recession฀ and฀ the฀ existence฀ of฀ objective฀
evidence฀of฀impairment฀in฀the฀form฀of฀late฀payment฀by฀customers,฀Stage฀3฀has฀now฀been฀reached.฀฀
Therefore,฀the฀revised฀lifetime฀expected฀credit฀losses฀of฀$800,000฀should฀now฀be฀recognised฀in฀full.฀฀
The฀allowance฀must฀be฀increased฀from฀$77,250฀($75,000฀+฀interest฀of฀$2,250)฀to฀$800,000฀which฀
will฀result฀in฀an฀extra฀charge฀of฀$722,750฀to฀profit฀or฀loss.฀
In฀ the฀ year฀ ended฀ 31฀ December฀ 20X6,฀ as฀ Stage฀ 3฀ has฀ been฀ reached,฀ interest฀ revenue฀ will฀ be฀
calculated฀ on฀ the฀ carrying฀ amount฀ net฀ of฀ the฀ allowance฀ for฀ credit฀ losses฀ of฀ $9,180,000฀
($9,980,000฀–฀$800,000).฀฀Conversely,฀if฀the฀loans฀were฀still฀at฀Stage฀1฀or฀Stage฀2,฀interest฀income฀
and฀ interest฀ cost฀ would฀ have฀ been฀ calculated฀ on฀ the฀ gross฀ carrying฀ amounts฀ of฀ $9,980,000฀ and฀
$800,000฀respectively.฀
Activity฀5:฀Cash฀flow฀hedge฀
Given฀ that฀ OneAir฀ is฀ hedging฀ the฀ volatility฀ of฀ the฀ future฀ cash฀ outflow฀ to฀ purchase฀ fuel,฀ the฀ forward฀
contract฀is฀accounted฀for฀as฀a฀cash฀flow฀hedge,฀assuming฀all฀the฀criteria฀for฀hedge฀accounting฀are฀
met฀(ie฀hedging฀relationship฀consists฀of฀eligible฀items,฀designation฀and฀documentation฀at฀inception฀as฀
a฀cash฀flow฀hedge฀and฀hedge฀effectiveness฀criteria฀are฀met).฀
At฀ inception,฀ no฀ entries฀ are฀ required฀ as฀ the฀ fair฀ value฀ of฀ a฀ forward฀ contract฀ at฀ inception฀ is฀ zero.฀฀
However,฀the฀existence฀of฀the฀hedge฀is฀disclosed฀under฀IFRS฀7฀Financial฀Instruments:฀Disclosures.฀
31฀December฀20X1฀
At฀the฀year฀end฀the฀forward฀contract฀must฀be฀valued฀at฀its฀fair฀value฀as฀follows:฀
฀ ฀$m฀
Market฀price฀of฀forward฀contract฀for฀delivery฀on฀31฀March฀(28m฀ $2.16)฀ ฀60.48฀
OneAir's฀forward฀price฀(28m฀฀$2.04)฀ ฀(57.12)฀
฀฀ Cumulative฀gain฀ ฀฀฀฀3.36฀
The฀gain฀is฀recognised฀in฀other฀comprehensive฀income฀('items฀that฀may฀be฀reclassified฀subsequently฀
to฀profit฀or฀loss')฀as฀the฀cash฀flow฀has฀not฀yet฀occurred:฀
฀ $m฀ $m฀
DEBIT฀฀ Forward฀contract฀(Financial฀asset฀in฀SOFP)฀ 3.36฀
CREDIT฀ Other฀comprehensive฀income฀ 3.36฀
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31฀March฀20X2฀
At฀ 31฀ March฀ 20X2,฀ the฀ purchase฀ of฀ 30m฀ gallons฀ of฀ fuel฀ at฀ the฀ market฀ price฀ of฀ $2.19฀ per฀ gallon฀
results฀in฀a฀charge฀to฀cost฀of฀sales฀of฀(30m฀฀$2.19)฀$65.70m.฀
At฀this฀point฀the฀forward฀contract฀is฀settled฀net฀in฀cash฀at฀its฀fair฀value฀on฀that฀date,฀calculated฀in฀the฀
same฀way฀as฀before:฀
฀ ฀$m
Market฀price฀of฀forward฀contract฀for฀delivery฀on฀31฀March฀(28m฀ $2.19฀spot฀rate)฀ ฀ 61.32 ฀
OneAir's฀forward฀price฀(28m฀฀$2.04)฀ ฀(57.12)฀
฀ Cumulative฀gain฀=฀cash฀settlement฀ ฀฀฀฀฀฀฀4.20฀
This฀results฀in฀a฀further฀gain฀of฀$0.84m฀($4.2m฀–฀$3.36m)฀in฀20X2฀which฀is฀credited฀to฀profit฀or฀loss฀
as฀it฀is฀a฀realised฀profit:฀
฀ $m฀ $m฀฀฀
DEBIT฀฀ Cash฀ 4.20 ฀
CREDIT฀ Forward฀contract฀at฀carrying฀amount 3.36฀
CREDIT฀ Profit฀or฀loss฀(4.20฀–฀3.36)฀ 0.84฀
The฀overall฀gain฀of฀$4.20m฀on฀the฀forward฀contract฀has฀compensated฀for฀(hedged)฀the฀increase฀in฀
price฀of฀fuel.฀
The฀gain฀of฀$3.36m฀previously฀recognised฀in฀other฀comprehensive฀income฀is฀transferred฀to฀profit฀or฀
loss฀as฀the฀cash฀flow฀has฀now฀affected฀profit฀or฀loss:฀
฀ $m฀ $m฀฀฀
DEBIT฀ Other฀comprehensive฀income฀ 3.36 ฀
CREDIT฀ Profit฀or฀loss฀ 3.36฀
The฀overall฀effect฀on฀profit฀or฀loss฀is:฀
฀ $m฀
Profit฀or฀loss฀(extract)฀
Cost฀of฀sales฀ ฀฀(65.70)฀
Profit฀on฀forward฀contract:฀ ฀0.84฀
฀฀In฀current฀period฀ ฀ 3.36฀
฀฀Reclassified฀from฀other฀comprehensive฀income ฀฀(61.50)฀
Without฀hedging฀the฀company฀would฀have฀suffered฀the฀cost฀at฀market฀rates฀on฀31฀March฀20X2฀of฀
$65.70m.฀
Chapter฀8฀Leases฀
Activity฀1:฀Lessee฀accounting฀
On฀the฀commencement฀date,฀Lassie฀plc฀recognises฀a฀lease฀liability฀of฀$690,000฀for฀the฀present฀value฀
of฀lease฀payments฀not฀paid฀at฀the฀1฀January฀20X1฀commencement฀date.฀
A฀ right-of-use฀ asset฀ of฀ $890,000฀ is฀ recognised฀ comprising฀ the฀ amount฀ initially฀ recognised฀ as฀ the฀
lease฀liability฀$690,000฀plus฀$200,000฀payment฀made฀on฀the฀commencement฀date.฀
The฀right-of-use฀asset฀is฀depreciated฀over฀5฀years.฀Its฀carrying฀amount฀at฀31฀December฀20X1฀(before฀
adjustment฀for฀reassessment฀of฀the฀lease฀liability฀is฀$712,000฀($890,000฀–฀($890,000/5฀years)).฀
The฀carrying฀amount฀of฀the฀lease฀liability฀at฀the฀end฀of฀the฀first฀year฀(before฀reassessment฀of฀the฀lease฀
liability)฀ is฀ (Working)฀ $732,780.฀ On฀ that฀ date,฀ the฀ future฀ lease฀ payments฀ are฀ revised฀ by฀ 2%.฀ The฀
lease฀liability฀is฀therefore฀revised฀to฀$747,300.฀
The฀ difference฀ of฀ $14,520฀ adjusts฀ the฀ carrying฀ amount฀ of฀ the฀ right-of-use฀ asset,฀ increasing฀ it฀ to฀
$726,520.฀฀This฀will฀be฀depreciated฀over฀the฀remaining฀useful฀life฀of฀the฀asset฀of฀4฀years฀from฀20X2.฀
฀ 521฀

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฀฀
Working:฀Lease฀liability฀
฀ $
b/d฀at฀1฀January฀20X1 690,000
Interest฀(690,000฀฀6.2%)฀ ฀ 42,780฀
c/d฀at฀31฀December฀20X1฀(before฀remeasurement)฀ ฀ 732,780฀
Remeasurement฀ ฀ 14,520฀
c/d฀at฀31฀December฀20X1฀ ฀747,300฀
Activity฀2:฀Deferred฀tax฀
Lease฀accounting฀
A฀right-of-use฀asset฀of฀$24.4m฀should฀be฀recognised฀in฀Heggie's฀financial฀statements.฀This฀comprises฀
the฀$24m฀present฀value฀of฀lease฀payments฀not฀paid฀at฀the฀1฀January฀20X1฀commencement฀date฀plus฀
the฀'initial฀direct฀costs'฀incurred฀in฀setting฀up฀the฀lease฀of฀$0.4m.฀
The฀asset฀should฀be฀depreciated฀from฀the฀commencement฀date฀(1฀January฀20X1)฀to฀the฀earlier฀of฀the฀
end฀ of฀ the฀ asset's฀ useful฀ life฀ (4฀ years)฀ and฀ the฀ end฀ of฀ the฀ lease฀ term฀ (5฀ years)฀ unless฀ the฀ legal฀ title฀
reverts฀to฀the฀lessee฀at฀the฀end฀of฀the฀lease฀term.฀Here,฀as฀the฀legal฀title฀remains฀with฀the฀lessor,฀the฀
asset฀ should฀ be฀ depreciated฀ over฀ 4฀ years,฀ giving฀ an฀ annual฀ depreciation฀ charge฀ of฀ $6.1m฀
($24.4m/4฀years)฀and฀a฀carrying฀amount฀of฀$18.3m฀at฀31฀December฀20X1.฀
A฀ lease฀ liability฀ should฀ initially฀ be฀ recognised฀ on฀ 1฀ January฀ 20X1฀ at฀ the฀ present฀ value฀ of฀ lease฀
payments฀ not฀ paid฀ at฀ the฀ commencement฀ date.฀ This฀ amounts฀ to฀ $24m.฀ An฀ annual฀ finance฀ cost฀ of฀
8%฀of฀the฀carrying฀amount฀should฀be฀recognised฀in฀profit฀or฀loss฀and฀added฀to฀the฀liability.฀The฀first฀
lease฀instalment฀on฀31฀December฀20X1฀is฀then฀deducted฀from฀the฀liability,฀giving฀a฀carrying฀amount฀
of฀(Working)฀$19.9m฀at฀31฀December฀20X1.฀
Deferred฀tax฀
The฀ carrying฀ amount฀ in฀ the฀ financial฀ statements฀ will฀ be฀ the฀ net฀ of฀ the฀ right-of-use฀ asset฀ and฀ lease฀
liability.฀
As฀tax฀relief฀is฀granted฀on฀a฀cash฀basis,฀ie฀when฀lease฀payments฀and฀set-up฀costs฀are฀paid,฀the฀tax฀
base฀is฀zero,฀giving฀rise฀to฀a฀temporary฀difference.฀
This฀results฀in฀a฀deferred฀tax฀asset฀and฀additional฀credit฀to฀tax฀in฀profit฀or฀loss฀of฀$0.3m฀(see฀below).฀
The฀ tax฀ deduction฀ is฀ based฀ on฀ the฀ lease฀ rental฀ and฀ set-up฀ costs฀ which฀ is฀ lower฀ than฀ the฀ combined฀
depreciation฀expense฀and฀finance฀cost.฀The฀future฀tax฀saving฀of฀$0.3m฀on฀the฀additional฀accounting฀
deduction฀is฀recognised฀now฀in฀order฀to฀apply฀the฀accruals฀concept.฀
Computation฀
฀ $m $m฀
Carrying฀amount:฀ ฀
฀ Right-of-use฀asset฀($24.4m฀–฀($24.4m/4 years)) 18.3 ฀
฀ Lease฀liability฀(W1)฀ ฀ (19.9) ฀
฀ (1.6)฀
Tax฀base฀ ฀ ฀0.0฀฀
Temporary฀difference฀ ฀(1.6)฀
฀ ฀
Deferred฀tax฀asset฀(20%)฀ ฀ 0.3฀
522฀

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Working:฀Lease฀liability฀
฀ $m ฀
b/d฀at฀1฀January฀20X1 24 ฀
Interest฀(24฀฀8%)฀ ฀1.9 ฀
Instalment฀in฀arrears฀ ฀ (6.0) ฀
c/d฀at฀31฀December฀20X1฀ ฀19.9 ฀
Activity฀3:฀Lessor฀accounting฀
The฀arrangement฀is฀a฀finance฀lease,฀as฀the฀lessee฀uses฀the฀asset฀for฀all฀of฀its฀economic฀life฀and฀the฀
present฀value฀of฀lease฀payments฀is฀substantially฀all฀of฀the฀fair฀value฀of฀the฀asset฀of฀$25.9฀million.฀
Able฀Leasing฀Co฀recognises฀a฀lease฀receivable฀on฀1฀January฀20X5,฀the฀commencement฀date฀of฀the฀
lease,฀equal฀to:฀
฀ ฀$m฀
Present฀value฀of฀lease฀payments฀receivable ฀25.9฀
8
Present฀value฀of฀unguaranteed฀residual฀value฀(3m฀–฀2m฀=฀1m฀฀1/1.062 )฀ ฀฀฀0.6฀
฀ ฀26.5฀
In฀ the฀ year฀ ended฀ 31฀ December฀ 20X5,฀ Able฀ Leasing฀ Co฀ recognises฀ interest฀ income฀ of฀ (Working)฀฀
$1.6฀million฀and฀a฀lease฀receivable฀of฀(Working)฀$24.1฀million฀at฀31฀December฀20X5.฀
Working:฀Lease฀receivable฀
฀ $m ฀
b/d฀at฀1฀January฀20X5 26.5 ฀
Interest฀at฀6.2%฀(26.5฀ 6.2%)฀ ฀ 1.6 ฀
Lease฀payment฀ ฀ (4.0)฀ ฀
c/d฀at฀31฀December฀20X5฀ ฀24.1 ฀
Chapter฀9฀Share-based฀payment฀
Activity฀1:฀Equity-settled฀share-based฀payment฀
20X5฀ ฀$฀฀฀฀฀฀
Equity฀b/d฀ ฀ 0฀
฀Profit฀or฀loss฀expense ฀212,500฀
Equity฀c/d฀((500฀–฀75)฀฀100฀฀$15฀ 1/3)฀ ฀฀212,500฀

DEBIT฀ Expenses฀ $212,500฀
CREDIT฀฀ Equity฀ ฀ $212,500฀
20X6฀ ฀$฀฀฀฀฀฀
฀Equity฀b/d฀ ฀212,500฀
Equity฀c/d฀((500฀–฀60)฀฀100฀฀$15฀ 2/3)฀ ฀฀440,000฀

CREDIT฀฀ Equity฀ ฀ ฀ $227,500฀
฀ 523฀

lOMoARcPSD|6256454
฀฀
20X7฀ ฀$฀฀฀฀฀฀
Equity฀b/d฀ ฀440,000฀
Equity฀c/d฀(443฀฀100฀฀$15)฀ ฀664,500฀
CREDIT฀฀ Equity฀ ฀ ฀ $224,500฀
Activity฀2:฀Cash-settled฀share-based฀payment฀
฀ ฀$฀฀฀฀฀฀
฀Liability฀b/d฀ ฀0฀
฀฀Profit฀or฀loss฀expense฀ ฀ 156,000 ฀
฀Liability฀c/d฀((500฀–฀110)฀฀100฀฀$8.00฀ ½)฀ ฀156,000฀
฀ ฀
฀ ฀$฀฀฀฀฀฀
฀Liability฀b/d฀ ฀156,000฀
฀฀Profit฀or฀loss฀expense฀ ฀180,000฀
฀Less฀cash฀paid฀on฀exercise฀of฀SARs฀by฀employees฀(100฀ 100฀ $8.10)฀ ฀฀(81,000)฀
฀Liability฀c/d฀(300฀฀100฀฀$8.50)฀ ฀255,000฀
฀ ฀
฀ ฀$฀฀฀฀฀฀
฀Liability฀b/d฀ ฀255,000฀
฀฀Profit฀or฀loss฀expense฀ ฀฀฀15,000฀
฀Less฀cash฀paid฀on฀exercise฀of฀SARs฀by฀employees฀(300฀ 100฀ $9.00)฀ ฀(270,000)฀
฀Liability฀c/d฀ ฀–฀฀฀฀฀฀฀฀฀฀฀฀฀–฀
Activity฀3:฀Choice฀of฀settlement฀฀
The฀right฀granted฀to฀the฀director฀represents฀a฀share-based฀payment฀with฀a฀choice฀of฀settlement฀where฀
the฀ counterparty฀ has฀ the฀ choice.฀ Consequently,฀ a฀ compound฀ financial฀ instrument฀ has฀ in฀ substance฀
been฀issued฀and฀it฀needs฀to฀be฀broken฀down฀into฀its฀equity฀(equity-settled)฀and฀liability฀(cash-settled)฀
components.฀The฀equity-settled฀component฀is฀measured฀as฀a฀residual,฀consistent฀with฀the฀definition฀of฀
equity,฀by฀comparing,฀at฀grant฀date,฀the฀fair฀value฀of฀the฀shares฀alternative฀and฀the฀cash฀alternative.฀
The฀ accounting฀ entry฀ on฀ the฀ grant฀ date฀ (30฀ September฀ 20X3)฀ would฀ therefore฀ be฀ as฀ follows฀ (all฀
figures฀from฀(Working)):฀
DEBIT฀฀฀ Profit฀or฀loss฀–฀remuneration฀expense฀ ฀ $108,000฀
CREDIT฀฀ Liability฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $104,000฀
CREDIT฀฀ Equity฀฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $4,000฀
The฀ equity฀ component฀ is฀ not฀ subsequently฀ revalued฀ (consistent฀ with฀ the฀ treatment฀ of฀ equity-settled฀
share-based฀ payment),฀ but฀ the฀ liability฀ component฀ will฀ need฀ to฀ be฀ adjusted฀ for฀ any฀ changes฀ in฀ the฀
fair฀value฀of฀the฀cash฀alternative฀up฀to฀the฀settlement฀date฀(30฀September฀20X4).฀
The฀post-year฀end฀change฀in฀the฀share฀price฀(which฀will฀affect฀the฀cash-settled฀share-based฀payment)฀
is฀a฀non-adjusting฀event฀after฀the฀reporting฀period,฀as฀it฀relates฀to฀conditions฀that฀arose฀after฀the฀year฀
end.฀ The฀ liability฀ is฀ not฀ therefore฀ adjusted฀ for฀ this,฀ but฀ the฀ difference฀ (20,000฀ ฀ $0.20฀ =฀ $4,000)฀
524฀

lOMoARcPSD|6256454
would฀be฀disclosed฀if฀considered฀material.฀This฀is฀unlikely฀here,฀but฀may฀be฀considered฀material฀due฀
to฀the฀fact฀that฀it฀is฀a฀transaction฀with฀a฀member฀of฀key฀management฀personnel.฀
At฀the฀settlement฀date฀the฀liability฀element฀of฀the฀share-based฀payment฀will฀be฀re-measured฀to฀its฀fair฀
value฀ at฀ that฀ date฀ and฀ the฀ method฀ of฀ settlement฀ chosen฀ by฀ the฀ director฀ will฀ then฀ determine฀ the฀
accounting฀treatment฀(payment฀of฀the฀liability฀or฀transfer฀to฀share฀capital/share฀premium).฀
Working:฀Fair฀value฀of฀equity฀component฀ ฀$฀฀฀฀
฀ Fair฀value฀of฀the฀shares฀alternative฀at฀grant฀date฀(24,000฀shares฀ ฀฀
฀ ฀$4.50)฀ 108,000฀
฀ Fair฀value฀of฀the฀cash฀alternative฀at฀grant฀date฀(20,000฀phantom฀ ฀
shares฀฀$5.20)฀ ฀(104,000)฀
฀ Fair฀value฀of฀the฀equity฀component฀of฀the฀compound฀instrument ฀฀฀฀฀฀4,000฀
฀ ฀
It฀can฀be฀seen฀that฀where฀the฀right฀to฀the฀shares฀alternative฀is฀more฀valuable฀than฀the฀right฀to฀a฀cash฀
alternative,฀at฀the฀grant฀date฀the฀equity฀component฀then฀has฀a฀value฀of฀the฀residual฀amount,฀not฀the฀
full฀ amount฀ of฀ the฀ shares฀ alternative,฀ as฀ the฀ director฀ must฀ surrender฀ the฀ cash฀ alternative฀ in฀ order฀ to฀
accept฀the฀shares฀alternative;฀he฀cannot฀accept฀both.฀
Activity฀4:฀Performance฀conditions฀(other฀than฀market฀conditions)฀
Kingsley฀ has฀ granted฀ an฀ equity-settled฀ share-based฀ payment฀ with฀ attached฀ performance฀ conditions฀
(that฀are฀not฀market฀conditions).฀The฀performance฀conditions฀mean฀that฀the฀vesting฀period฀is฀variable,฀
so฀calculations฀should฀be฀based฀on฀on฀the฀most฀likely฀outcome฀expected฀at฀each฀year฀end.฀฀฀฀
Year฀1฀
In฀the฀first฀year,฀Kingsley's฀earnings฀increased฀by฀14%฀and฀so฀the฀performance฀condition฀for฀year฀1฀
(an฀increase฀of฀18%)฀was฀not฀met.฀Therefore฀the฀shares฀do฀not฀vest฀in฀year฀1.฀Kingsley฀expects฀the฀
earnings฀will฀continue฀to฀increase฀at฀a฀similar฀rate฀in฀year฀2,฀and฀so฀expects฀the฀shares฀to฀vest฀at฀the฀
end฀of฀year฀2.฀Therefore฀at฀the฀end฀of฀year฀1,฀we฀can฀assume฀a฀vesting฀period฀of฀2฀years.฀฀
฀ ฀ $฀฀฀฀฀฀฀
2.฀Then฀work฀out฀the฀
Equity฀b/d฀ expense฀as฀the฀ ฀0฀
balancing฀figure฀
Equity฀c/d฀[(500฀–฀30฀–฀30)฀฀100฀฀$30฀฀½]฀ ฀660,000฀
฀ ฀ Assuming฀a฀2฀year฀
1.฀Calculate฀
vesting฀period฀
equity฀carried฀
down฀ ฀
Year฀2฀
At฀the฀end฀of฀year฀2,฀the฀earnings฀only฀increased฀by฀10%,฀which฀gives฀an฀average฀earnings฀rate฀of฀
12%฀((14%฀+฀10%)/2฀years).฀Therefore฀the฀shares฀do฀not฀vest.฀Kingsley฀expects฀the฀growth฀rate฀to฀
be฀at฀least฀6%฀in฀year฀3฀giving฀an฀average฀of฀at฀least฀10%฀over฀3฀years,฀and฀therefore฀expects฀the฀
vesting฀ condition฀ to฀ be฀ met฀ at฀ the฀ end฀ of฀ year฀ 3.฀ The฀ vesting฀ period฀ is฀ now฀ assumed฀ to฀ be฀ three฀
years.฀
฀ Year฀2฀of฀3฀year฀
(revised)฀vesting฀
฀ ฀ period฀ $฀฀฀฀฀฀฀
Equity฀b/d฀ ฀ 660,000฀
Equity฀c/d฀[(500฀–฀30฀–฀28฀–฀25)฀฀100฀฀$30฀฀2/3]฀ ฀834,000฀
฀ 525฀

lOMoARcPSD|6256454
฀฀
Year฀3฀
In฀year฀3,฀the฀average฀increase฀in฀earnings฀is฀10.67%฀per฀year,฀so฀the฀performance฀condition฀is฀met฀
and฀the฀shares฀vest.฀฀฀
฀ ฀ ฀ $฀฀฀฀฀฀฀
Equity฀b/d฀ ฀ ฀฀834,000฀
฀Profit฀or฀loss฀expense฀ ฀฀฀฀423,000฀
Equity฀c/d฀[(500฀–฀30฀–฀28฀–฀23)฀฀100฀฀$30]฀ ฀1,257,000฀
฀ Actual฀number฀of฀employees฀
฀ who฀received฀shares฀
The฀equity฀balance฀of฀$1,257,000฀can฀be฀transferred฀to฀share฀capital฀and฀share฀premium฀on฀issue฀
of฀the฀shares.฀฀
Summary฀of฀expense฀and฀equity฀balance฀
฀ Expense Equity฀
(per฀SOFP)฀
฀ $ ฀฀฀฀ $฀฀฀฀฀฀฀
Year฀1฀ 660,000 660,000฀
Year฀2฀ 174,000 834,000฀
Year฀3฀ 423,000 1,257,000฀
Activity฀5:฀Cancellation฀of฀share฀options฀
(a)฀ Original฀options฀were฀cancelled฀and฀compensation฀paid฀
At฀ 1฀ January฀ 20X2,฀ the฀ original฀ equity฀ instruments฀ are฀ one-third฀ vested฀ so฀ $4.5m฀ ((1,000฀ –฀
100)฀฀3,000฀฀$5฀฀1/3)฀of฀the฀grant฀date฀fair฀value฀has฀already฀been฀charged฀to฀profit฀or฀
loss฀and฀recognised฀in฀equity.฀
Cancellation฀ is฀ treated฀ as฀ an฀ acceleration฀ of฀ vesting฀ so฀ the฀ amount฀ that฀ would฀ have฀ been฀
charged฀ over฀ the฀ remaining฀ two฀ year฀ vesting฀ period฀ is฀ recognised฀ immediately฀ in฀ profit฀ or฀
loss:฀
฀ ฀฀฀฀$m฀
Equity฀b/d฀at฀1฀January฀20X2฀ ฀4.5฀
฀P/L฀charge฀ ฀฀฀9.0฀
Equity฀c/d฀at฀1฀January฀20X2฀((1,000฀– 100฀=฀900*)฀ 3,000฀ $5) ฀13.5฀
DEBIT฀฀฀ Profit฀or฀loss฀฀ ฀ ฀ $9.0m฀
CREDIT฀฀ Equity฀฀ ฀ ฀ ฀ ฀ ฀ $9.0m฀
The฀settlement฀made฀is฀treated฀as฀a฀repurchase฀of฀an฀equity฀interest.฀The฀amount฀representing฀
the฀ repurchase฀ of฀ equity฀ instruments฀ granted฀ (measured฀ at฀ the฀ date฀ of฀ the฀ cancellation)฀ is฀
charged฀directly฀to฀equity฀and฀the฀excess฀to฀profit฀or฀loss:฀
DEBIT฀฀ ฀ Equity฀(900฀฀3,000฀฀$1)฀ $2.7m฀
DEBIT฀฀ ฀ Profit฀or฀loss฀(remainder)฀ ฀ $1.3m฀
CREDIT฀฀฀ Cash฀ ฀ ฀ ฀ ฀ ฀ ฀ $4m฀
Note:฀
*IFRS฀2฀paragraph฀28(a)฀is฀unclear฀as฀to฀the฀number฀of฀employees฀that฀should฀be฀used฀in฀this฀
calculation.฀ Interpretative฀ guidance฀ issued฀ by฀ Ernst฀ &฀ Young฀ (Accounting฀ for฀ share-based฀
payments฀under฀IFRS฀2฀–฀the฀essential฀guide,฀April฀2015:฀p.฀17)฀indicates฀that฀actual฀number฀
of฀employees฀in฀service฀at฀the฀date฀of฀the฀cancellation฀(ie฀975฀employees฀here)฀could฀be฀used฀
in฀the฀calculation฀instead.฀฀
526฀

lOMoARcPSD|6256454
(b)฀ Original฀options฀cancelled฀and฀replaced฀with฀new฀options฀
The฀ replacement฀ share฀ options฀ are฀ treated฀ as฀ a฀ modification฀ of฀ the฀ original฀ grant.฀ Therefore฀
the฀excess฀of฀the฀fair฀value฀of฀the฀new฀options฀over฀the฀fair฀value฀of฀the฀cancelled฀options฀is฀
charged฀to฀profit฀or฀loss฀over฀the฀new฀vesting฀period.฀
This฀amount฀is฀calculated฀as฀follows:฀
฀ ฀ $฀
Fair฀value฀of฀replacement฀equity฀instruments฀at฀1฀January฀20X2฀ 7฀
Less:฀ net฀fair฀value฀of฀cancelled฀equity฀instruments฀at฀1฀January฀20X2฀
฀ ($1฀fair฀value฀as฀no฀payment฀made฀to฀employees฀on฀cancellation)฀ ฀(1)฀
฀ ฀฀ ฀6฀
The฀ original฀ fair฀ value฀ continues฀ to฀ be฀ charged฀ over฀ the฀ remainder฀ of฀ the฀ original฀ vesting฀
period,฀consistent฀with฀the฀treatment฀of฀modified฀instruments฀in฀IFRS฀2฀para.฀B43(a).฀
The฀charge฀recognised฀in฀profit฀or฀loss฀in฀20X2฀is฀calculated฀as฀follows:฀
฀ $m฀
Equity฀b/d฀at฀1฀January฀20X2฀(see฀(a)) ฀4.5฀
฀P/L฀charge฀ ฀฀฀9.26฀
Equity฀c/d฀at฀31฀December฀20X2฀ ฀
[((975฀–฀35฀–฀40฀–฀40฀=฀860**)฀฀3,000฀฀$5฀฀2/3)฀+฀฀ ฀13.76฀
฀ (860**฀฀3,000฀฀$6฀฀1/3)]฀
DEBIT฀฀฀ Profit฀or฀loss฀฀ $9.26m฀
CREDIT฀฀฀ Equity฀฀ ฀ ฀ ฀ $9.26m฀
Note:฀
**฀ Based฀ on฀ the฀ number฀ of฀ employees฀ whose฀ awards฀ are฀ finally฀ expected฀ to฀ vest฀ for฀ both฀
elements฀
Activity฀6:฀Deferred฀tax฀implications฀of฀share-based฀payment฀
฀ 31.12.X2 31.12.X3฀
฀ $ ฀฀฀฀ $฀฀฀฀฀฀
Carrying฀amount฀of฀share-based฀payment฀expense 0 0฀
Less฀tax฀base฀of฀share-based฀payment฀expense฀ ฀
(5,000฀฀$1.2฀฀½)/(5,000฀฀$3.40)฀ (3,000)฀ ฀(3,000)฀
Temporary฀difference฀ (3,000) ฀(17,000)฀
Deferred฀tax฀asset฀@฀30%฀ 900 ฀5,100฀
Deferred฀tax฀(CR฀P/L)฀(5,100฀–฀900฀–฀(Working)฀600) 900 3,600฀
Deferred฀tax฀(CR฀Equity)฀(Working)฀ 0 600฀
On฀exercise,฀the฀deferred฀tax฀asset฀is฀replaced฀by฀a฀current฀tax฀one.฀฀The฀double฀entry฀is:฀
DEBIT฀฀ Deferred฀tax฀(P/L)฀ 4,500฀

DEBIT฀฀฀ Deferred฀tax฀(equity)฀ 600฀ reversal
CREDIT฀฀ Deferred฀tax฀asset฀ ฀ 5,100฀
DEBIT฀฀฀ Current฀tax฀asset฀ 5,100฀
CREDIT฀฀ Current฀tax฀(P/L)฀ ฀ 4,500฀
CREDIT฀฀ Current฀tax฀(equity)฀ ฀ 600฀
Working:฀Excess฀deferred฀tax฀asset฀
฀ $ ฀฀฀฀ $฀฀฀฀฀฀
Accounting฀expense฀recognised฀(5,000฀ $3฀ ½)/(5,000฀ $3) 7,500 15,000฀
Tax฀deduction฀ (3,000) ฀(3,000)฀
Excess฀temporary฀difference฀ ฀฀฀ ฀฀฀0 ฀(2,000)฀
Excess฀deferred฀tax฀asset฀to฀equity฀@฀30% 0 600฀
฀ 527฀

lOMoARcPSD|6256454
฀฀
Chapter฀10฀Basic฀groups฀
Activity฀1:฀Control฀
Power฀over฀the฀investee฀to฀direct฀relevant฀activities฀
The฀ absolute฀ size฀ of฀ Edwards'฀ shareholding฀ in฀ Hope฀ (40%)฀ and฀ the฀ relative฀ size฀ of฀ the฀ other฀
shareholdings฀alone฀are฀not฀conclusive฀in฀determining฀whether฀Edwards฀has฀rights฀sufficient฀to฀give฀it฀
power.฀
However,฀the฀shareholder฀agreement฀which฀grants฀Edwards฀the฀right฀to฀appoint,฀remove฀and฀set฀the฀
remuneration฀ of฀ management฀ responsible฀ for฀ the฀ key฀ business฀ decisions฀ of฀ Hope฀ gives฀ Edwards฀
power฀to฀direct฀the฀relevant฀activities฀of฀Hope.฀
This฀ is฀ supported฀ by฀ the฀ fact฀ that฀ a฀ two-thirds฀ majority฀ is฀ required฀ to฀ change฀ the฀ shareholder฀
agreement฀and,฀as฀Edwards฀owns฀more฀than฀one-third฀of฀the฀voting฀rights,฀the฀other฀shareholders฀will฀
be฀unable฀to฀change฀the฀agreement฀whilst฀Edwards฀owns฀40%.฀
Exposure฀or฀rights฀to฀variable฀returns฀of฀the฀investee฀
As฀Edwards฀owns฀a฀40%฀shareholding฀in฀Hope,฀it฀will฀be฀entitled฀to฀receive฀a฀dividend.฀The฀amount฀
of฀this฀dividend฀will฀vary฀according฀to฀Hope's฀performance฀and฀Hope's฀dividend฀policy.฀Therefore,฀
Edwards฀has฀exposure฀to฀the฀variable฀returns฀of฀Hope.฀
Ability฀to฀use฀power฀over฀the฀investee฀
The฀ fact฀ that฀ Edwards฀ might฀ not฀ exercise฀ the฀ right฀ to฀ appoint,฀ remove฀ and฀ set฀ the฀ remuneration฀ of฀
Hope's฀management฀should฀not฀be฀considered฀when฀determining฀whether฀Edwards฀has฀power฀over฀
Hope.฀ ฀ It฀ is฀ just฀ the฀ ability฀ to฀ use฀ the฀ power฀ which฀ is฀ required฀ and฀ this฀ ability฀ comes฀ from฀ the฀
shareholder฀agreement.฀
Conclusion฀
The฀ IFRS฀ 10฀ definition฀ of฀ control฀ has฀ been฀ met.฀ Edwards฀ controls฀ Hope฀ and฀ therefore฀ Edwards฀
should฀consolidate฀Hope฀as฀a฀subsidiary฀in฀its฀group฀financial฀statements.฀
528฀

lOMoARcPSD|6256454
Activity฀2:฀Consolidated฀statement฀of฀financial฀position฀
BROWN฀GROUP฀
฀ (a) (b)฀
฀ ฀ $'000฀฀฀฀ ฀ $'000฀฀ ฀
Property,฀plant฀and฀equipment฀(2,300฀+฀1,900)฀ ฀4,200฀ ฀4,200฀
Goodwill฀(W2)฀ ฀ 360฀ ฀฀฀฀216฀
฀ ฀4,560฀ ฀4,416฀
Current฀assets฀(3,340฀+฀1,790฀–฀10฀(W5))฀ ฀5,120฀ ฀5,120฀
฀ ฀9,680฀ ฀9,536฀
Share฀capital฀ ฀1,000฀ ฀1,000฀
Retained฀earnings฀(W3)฀ ฀4,300฀ ฀4,300฀
฀ ฀5,300฀ ฀5,300฀
Non-controlling฀interests (W4)฀ ฀1,060฀ ฀฀฀฀916฀
฀ 6,360฀฀ 6,216฀฀
Non-current฀liabilities฀(350฀+฀290)฀ 640฀ ฀640฀
Current฀liabilities฀(1,580฀+฀1,100)฀ 2,680฀ ฀฀2,680฀
฀ 9,680฀฀ ฀9,536฀
Workings฀
฀ Brown฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀1.1.X6฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀60%฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀Harris฀฀฀฀฀฀Pre-acquisition฀retained฀earnings฀=฀$300,000฀
2฀ Goodwill฀
฀ Part฀(a)฀ Part฀(b)฀
฀ ฀฀$'000฀ ฀฀$'000฀ ฀฀$'000฀ ฀฀$'000฀
Consideration฀transferred฀ ฀720฀ ฀ ฀720
Non-controlling฀interests฀฀ ฀480฀ ฀(800฀฀40%)฀ ฀320
Fair฀value฀of฀net฀assets฀at฀acquisition:฀ ฀
฀ Share฀capital฀ ฀500฀ ฀500฀
฀ Retained฀earnings฀ ฀300฀ ฀300฀
฀ ฀(800)฀ ฀ ฀(800)฀
฀ ฀400฀ ฀฀฀ ฀240฀
Less฀impairment฀losses฀to฀date฀(10%)฀ ฀(40)฀ ฀ ฀฀฀(24)฀
฀ ฀ 360 ฀ ฀ ฀฀216฀
฀
฀
฀ 529฀

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฀฀
฀ Brown฀ Harris
฀ ฀฀฀ $'000฀ ฀฀฀ $'000 ฀
At฀the฀year฀end฀ ฀฀ 3,430฀ 1,800
Provision฀for฀unrealised฀profit฀(W5) ฀ (10)
At฀acquisition฀฀ ฀ ฀฀ (300)
฀ ฀ ฀฀1,490฀
Share฀of฀Harris's฀post-acquisition฀retained฀earnings: ฀
฀ (1,490฀฀60%)฀ ฀฀894฀
Less฀impairment฀loss฀on฀goodwill: ฀
฀ Part฀(a)฀(40฀(W2)฀฀60%)/Part฀(b)฀(24฀(W2)) ฀฀ (24) ฀
฀ 4,300฀
4฀ Non-controlling฀interests฀(NCI)฀
฀ Part฀(a)฀ Part฀(b)
฀ ฀฀$'000฀ ฀฀$'000฀
NCI฀at฀acquisition฀(fair฀value)([500฀+฀300]฀ 40%)฀ ฀480฀ ฀320
NCI฀share฀of฀post-acquisition฀retained฀earnings฀ ฀596฀ ฀596฀
฀฀ (1,490฀(W3)฀ 40%)฀ ฀
NCI฀share฀of฀impairment฀losses฀(40฀(W2)฀ 40%)฀ ฀ (16)฀ ฀฀฀฀฀฀–฀
฀ ฀1,060฀ ฀916฀
5฀ Provision฀for฀unrealised฀profit฀(PUP)฀
Harris฀sells฀to฀Brown฀
PUP฀=฀$200,000฀฀¼฀in฀inventory฀฀25/125฀mark-up฀=฀$10,000฀
DEBIT฀ Harris's฀retained฀earnings฀ ฀ $10,000฀
CREDIT฀฀ Inventories฀ ฀ ฀ ฀ $10,000฀
Activity฀3:฀Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀
CONSTANCE฀GROUP฀
฀ $'000฀
Revenue฀(5,000฀+฀[4,200฀฀9/12]฀–฀300฀(W4))฀ 7,850฀
Cost฀of฀sales฀(4,100฀+฀[3,500฀฀9/12] – 300฀(W4)฀+฀40฀(W4))฀ ฀ (6,465) ฀
Gross฀profit฀ ฀ 1,385 ฀
Distribution฀and฀administration฀expenses฀(320฀+฀[180  9/12] + 10 (W2))฀ ฀฀฀฀(465)฀
Profit฀before฀tax฀ ฀920฀
Income฀tax฀expense฀(190฀+฀[160฀฀9/12])฀ ฀฀฀฀(310)฀
PROFIT฀FOR฀THE฀YEAR฀ 610฀
฀ Gains฀on฀property฀revaluation฀(net฀of฀tax)฀(60฀+฀[40฀ 9/12]) ฀฀฀฀฀฀฀90฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀700฀
฀ ฀
530฀

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฀ $'000฀
฀฀Owners฀of฀the฀parent฀(610฀–฀44)฀ 566฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀44฀
฀ ฀610฀
Total฀comprehensive฀income฀attributable฀to:฀ ฀
฀฀Owners฀of฀the฀parent฀(700฀–฀50)฀ 650฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀50฀
฀ ฀700฀
Workings฀
฀ Constance฀
1.4.X5* 80%
Spicer฀
*This฀is฀a฀mid-year฀acquisition฀–฀Spicer฀should฀be฀consolidated฀for฀9฀months฀
2฀ Non-controlling฀interests฀
฀ ฀฀฀฀PFY฀ ฀฀฀฀TCI฀
$'000฀ $'000฀
Per฀question฀(360฀฀9/12)/(400฀ 9/12)฀ ฀270฀ ฀300฀
Impairment฀loss฀on฀goodwill฀(W3)฀ ฀(10)฀ ฀(10)฀
PUP฀(W4)฀ ฀฀(40)฀ ฀฀(40)฀
฀ 220 250฀
NCI฀share฀ ฀฀ 20%฀ ฀฀ 20%฀
฀ ฀ 44฀ ฀ 50฀
3฀ Impairment฀of฀goodwill฀
Impairment฀of฀goodwill฀for฀the฀year฀=฀$100,000฀goodwill฀฀10%฀impairment฀=฀$10,000฀
Add฀$10,000฀to฀'administration฀expenses'฀and฀deduct฀from฀PFY/TCI฀in฀NCI฀working฀(as฀full฀
goodwill฀method฀adopted฀here)฀
4฀ Intra-group฀trading฀
Spicer฀sells฀to฀Constance฀
฀ Intra-group฀revenue฀and฀cost฀of฀sales:฀
Cancel฀$300,000฀out฀of฀revenue฀and฀cost฀of฀sales฀
฀ PUP฀=฀$300,000฀฀2/3฀in฀inventories฀฀25/125฀mark-up฀=฀$40,000฀
Increase฀cost฀of฀sales฀by฀$40,000฀and฀reduce฀PFY/TCI฀in฀NCI฀working฀(as฀subsidiary฀is฀the฀
seller)฀
฀ 531฀

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฀฀
Activity฀4:฀Fair฀value฀of฀consideration฀transferred฀
The฀following฀amount฀will฀be฀recognised฀as฀'consideration฀transferred'฀for฀the฀purposes฀of฀calculating฀
goodwill฀on฀the฀purchase฀of฀Pol฀on฀1฀January฀20X1:฀
฀ ฀$m฀
Cash฀ ฀160.0฀
Deferred฀consideration฀(120฀฀1/1.052)฀ ฀108.8฀
Contingent฀consideration฀(at฀fair฀value)฀ ฀฀฀54.0฀
฀ ฀322.8฀
The฀ $5m฀ due฀ diligence฀ fees฀ are฀ transaction฀ costs฀ which฀ are฀ expensed฀ in฀ the฀ books฀ of฀ Pau฀ under฀฀
IFRS฀3฀so฀as฀not฀to฀distort฀the฀fair฀values฀used฀in฀the฀goodwill฀calculation.฀
The฀ deferred฀ consideration฀ is฀ initially฀ measured฀ at฀ present฀ value.฀ Interest฀ is฀ then฀ applied฀ over฀ the฀
period฀to฀payment฀(31฀December฀20X2).฀This฀results฀in฀an฀interest฀charge฀of฀$5.4m฀($108.8m฀฀5%)฀
in฀the฀year฀to฀31฀December฀20X1฀which฀is฀charged฀to฀profit฀or฀loss.฀
The฀ contingent฀ consideration฀ is฀ measured฀ at฀ its฀ fair฀ value,฀ and฀ as฀ it฀ is฀ a฀ liability,฀ it฀ must฀ be฀
remeasured฀at฀each฀year฀end฀and฀at฀the฀date฀of฀payment.฀฀By฀31฀December฀20X1,฀the฀fair฀value฀of฀
the฀ consideration฀ has฀ risen฀ to฀ $65m.฀ The฀ increase฀ of฀ $11m฀ is฀ charged฀ to฀ profit฀ or฀ loss.฀ This฀ is฀
because,฀even฀though฀the฀change฀is฀within฀the฀measurement฀period฀(one฀year฀from฀acquisition฀date),฀
it฀is฀a฀result฀of฀a฀change฀in฀expected฀profits,฀which฀is฀a฀post-acquisition฀event,฀rather฀than฀additional฀
information฀regarding฀fair฀value฀at฀the฀date฀of฀acquisition.฀
Activity฀5:฀Consolidation฀with฀associate฀
BAILEY฀GROUP฀
฀ $m
Property,฀plant฀and฀equipment฀(2,300฀+฀1,900฀+฀(W7) 60) 4,260
Goodwill฀(W2)฀ 110
Investment฀in฀associate฀(W3)฀ ฀฀฀฀243
฀ ฀4,613
Current฀assets฀(3,115฀+฀1,790฀–฀(W8)฀20) ฀฀4,885
Total฀assets฀ ฀฀9,498
Equity฀attributable฀to฀owners฀of฀the฀parent
Share฀capital฀ 1,000
Reserves฀(W4)฀ ฀฀4,216
฀ 5,216
Non-controlling฀interests (W5)฀ ฀฀฀฀฀962
฀ ฀6,178
Non-current฀liabilities฀(350฀+฀290)฀ 640฀
Current฀liabilities฀(1,580฀+฀1,100)฀ ฀฀2,680
Total฀equity฀and฀liabilities฀ ฀฀9,498
฀
฀
532฀

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BAILEY฀GROUP฀
฀ $m
Revenue฀(5,000฀+฀4,200฀–฀(W8)฀200)฀ 9,000
Cost฀of฀sales฀(4,100฀+฀3,500฀+฀(W7)฀10฀– (W8)฀200฀+฀(W8) 20) ฀(7,430)
Gross฀profit฀ 1,570
Distribution฀costs฀and฀administrative฀expenses฀(320฀+฀175฀+฀(W2)฀15) (510)
Share฀of฀profit฀of฀associate฀(110฀×฀30%฀× 8/12) ฀฀฀฀฀฀฀22
Profit฀before฀tax฀ 1,082
Income฀tax฀expense฀(240฀+฀170)฀ ฀฀฀฀(410)
PROFIT฀FOR฀THE฀YEAR ฀฀฀฀฀672
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss
฀ Gains฀on฀property฀revaluation฀(net฀of฀deferred฀tax)฀(50฀+฀20) 70
฀ Share฀of฀gain฀on฀property฀revaluation of฀associate฀(10฀× 30%฀× 8/12) ฀฀฀฀฀฀฀฀฀฀2
Other฀comprehensive฀income,฀net฀of฀tax ฀฀฀฀฀฀฀฀72
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀744
฀
฀฀Owners฀of฀the฀parent (β)฀ 548
฀฀Non-controlling฀interests฀(W6)฀ ฀ ฀฀฀฀124
฀ ฀฀฀฀฀672
฀
Total฀comprehensive฀income฀attributable฀to:฀
฀฀Owners฀of฀the฀parent (β)฀ 612
฀฀Non-controlling฀interests฀(W6)฀ ฀฀฀฀฀฀132฀
฀ ฀฀฀฀฀744
Workings฀
฀ Bailey฀
฀ ฀1.1.X6฀(4฀years฀ago)฀ 1.5.X9฀(current฀year)฀
300 72
฀ ฀ ฀=฀60%฀ ฀฀฀ ฀=฀30%฀
500 240
฀ Hill฀ Campbell฀
฀ ฀ Pre-acq'n฀reserves฀ $440m฀ ฀ $270m฀
฀
฀ 533฀

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฀฀
2฀ Goodwill฀(Hill)฀
฀ $m $m฀
Consideration฀transferred฀ 720฀
Non-controlling฀interests฀(at฀fair฀value) ฀฀450฀
฀ ฀
Fair฀value฀of฀net฀assets฀at฀acquisition ฀
Share฀capital฀ 500 ฀
Reserves฀ 440 ฀
Fair฀value฀adjustment฀(W7)฀ ฀100 ฀
฀ ฀ (1,040)฀
฀ 130฀
Impairment฀losses฀to฀date฀ ฀ ฀฀฀(20)฀
฀ ฀ ฀฀110฀
Note:฀add฀impairment฀loss฀for฀year฀of฀$15m฀to฀administrative฀expenses฀
3฀ Investment฀in฀associate฀(Campbell)฀
฀ $m฀
Cost฀of฀associate 225฀
Share฀of฀post฀acquisition฀reserves฀(W4) 18฀
Less฀impairment฀losses฀to฀date฀ ฀ ฀฀฀(0)฀
฀ ฀฀243฀
4฀ Reserves฀
฀ Bailey Hill Campbell
฀ $m $m $m฀
At฀year฀end฀ 3,430 1,800 330฀
Fair฀value฀movement฀(W7)฀ (40)฀ ฀
Provision฀for฀unrealised฀profit฀(W8) (20)฀ ฀
Pre-acquisition฀ ฀ (440)฀ ฀฀(270)฀
฀ ฀1,300 ฀฀฀฀฀60฀
Group฀share฀post฀acquisition฀reserves: ฀
฀฀Hill฀(1,300฀×฀60%)฀ 780 ฀
฀฀Campbell฀(60฀×฀30%)฀ 18 ฀
Impairment฀losses: ฀
฀฀Hill฀((W2)฀20฀×฀60%)฀ (12) ฀
฀฀Campbell฀(W3) ฀ (0) ฀
฀ ฀4,216 ฀
฀ $m฀
NCI฀at฀acquisition฀(W2)฀ 450฀
NCI฀share฀of฀post฀acquisition฀reserves฀((W4)฀1,300฀×฀40%) 520฀
NCI฀share฀of฀impairment฀losses฀((W2)฀20฀×฀40%) ฀฀฀฀(8)฀
฀ ฀962฀
534฀

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฀ PFY TCI฀
฀ $m $m฀
Hill's฀PFY/TCI฀per฀question฀ 355 375฀
Fair฀value฀adjustment฀movement฀(W7) (10) (10)฀
Provision฀for฀unrealised฀profit฀(W8) (20) (20)฀
Impairment฀loss฀on฀goodwill฀for฀year฀(W2) (15) ฀(15)฀
฀ ฀310 ฀330฀
×฀NCI฀share฀฀ ×฀40% ×฀40%฀
฀ =฀124 =฀132฀
7฀ Fair฀value฀adjustment฀(Hill)฀
฀ At฀acquisition Movement฀ Year฀end
1.1.X6฀ X6,฀X7,฀X8,฀X9฀ 31.12.X9฀
฀ $m $m $m฀
Property,฀plant฀and฀equipment฀ 100 *(40) 60฀
฀ (W2)฀(1,040฀–฀500฀–฀440)฀
฀ ฀
฀ Goodwill฀(W2) Reserves฀(W4)฀ Add฀to฀PPE
Add฀1฀year฀to฀
cost฀of฀sales฀
*฀additional฀depreciation฀=฀100฀ 4/10฀=฀40 ฀
8฀ Intragroup฀trading฀(Hill฀sells฀to฀Bailey)฀
Cancel฀intragroup฀revenue฀and฀cost฀of฀sales:฀
DEBIT฀฀ Revenue฀ $200m฀
CREDIT฀฀ Cost฀of฀sales฀ ฀ ฀ $200m฀
Cancel฀unrealised฀profit฀on฀goods฀left฀in฀inventories฀at฀year฀end:฀
=฀$200m฀×฀1/4฀in฀inventories฀×฀40%/100%฀margin฀=฀$20m฀
DEBIT฀฀ Hill's฀reserves/Hill's฀cost฀of฀sales฀ $20m฀(affects฀NCI฀in฀SPLOCI)฀
CREDIT฀฀ Inventories฀ ฀ ฀ $20m฀
฀
฀ 535฀

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฀฀
Chapter฀11฀Changes฀in฀group฀structures:฀step฀acquisitions฀
Activity฀1:฀Associate฀to฀subsidiary฀acquisition฀
(a)฀ PEACE฀GROUP฀฀
CONSOLIDATED฀ STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀
INCOME฀FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X2฀
฀ ฀$'000฀
Revenue฀(10,200฀+฀(4,000฀฀3/12))฀ ฀11,200฀
Cost฀of฀sales฀and฀expenses฀(9,000฀+฀(3,600฀ 3/12)฀+฀(W6)฀30)฀ ฀฀(9,930)฀
Gain฀on฀remeasurement฀of฀associate฀(W4)฀ ฀฀฀฀380฀
Share฀of฀profit฀of฀associate฀(320฀ 9/12฀ 25%)฀ ฀฀฀฀฀฀฀฀60฀
Profit฀before฀tax฀ ฀1,710฀
Income฀tax฀expense฀(360฀+฀(80฀ 3/12))฀ ฀฀฀฀฀(380)฀
Profit฀for฀the฀year฀ ฀1,330฀
฀ Gains฀on฀property฀revaluation,฀net฀of฀tax฀(240฀+฀(80฀ 3/12))฀ ฀฀฀฀260฀
฀ Share฀of฀gain฀on฀property฀revaluation฀of฀associate฀(80฀ 9/12฀ 25%)฀ ฀ ฀฀฀฀฀฀฀15 ฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀ ฀฀฀฀฀฀275฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀1,605฀
฀ ฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀20฀
฀ ฀฀฀1,330฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀28฀
฀ ฀฀฀1,605฀
(b)฀ PEACE฀GROUP฀
฀ ฀$'000฀
Non-current฀assets ฀
Property,฀plant฀and฀equipment฀(38,650฀+฀7,600)฀ ฀ 46,250 ฀
Goodwill฀(W5)฀ ฀ ฀฀2,540 ฀
Other฀intangible฀assets฀(W3)฀ ฀฀฀฀฀฀570฀฀฀
฀ ฀49,360฀
Current฀assets฀(12,700฀+฀2,200)฀ ฀14,900฀
฀ ฀64,260฀
Share฀capital฀ ฀ 10,200 ฀
Retained฀earnings (W6)฀ ฀40,842฀
฀ ฀51,042฀
Non-controlling฀interests฀(W7)฀ ฀฀฀4,668฀
฀ ฀55,710฀
Liabilities฀(7,450฀+฀1,100)฀ ฀฀฀8,550฀
฀ ฀64,260฀
536฀

lOMoARcPSD|6256454
Workings฀
Peace฀
฀ 1.1.X1฀ 25%฀(Retained฀earnings฀=฀$5.8m)฀
฀ 30.9.X2฀ 35%฀(Retained฀earnings฀=฀$7.8m)฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 60%฀
฀ Miel฀
฀ Timeline฀
1.1.X2฀ 30.9.X2 31.12.X2฀
SPLOCI฀
Associate฀–฀Equity฀account฀ 9/12 Consolidate฀
฀3/12฀
Had฀25%฀associate฀ Acquired 35% Consol.฀in฀

25%฀+฀35%฀฀ SOFP฀with฀
=฀60%฀subsidiary฀ 40%฀NCI฀
฀ PFY TCI฀
฀ ฀฀ $'000 ฀ ฀฀ $'000 ฀
Per฀question฀(PFY฀320฀฀3/12)฀(TCI฀400฀ 3/12) 80 100฀
Fair฀value฀movement฀in฀year฀(W3)฀ ฀฀(30)฀ ฀฀(30)฀
฀ 50 ฀฀70฀
฀฀฀40%฀ 20 ฀฀28฀
3฀ Fair฀value฀adjustments฀
Measured฀at฀date฀control฀achieved฀(only) ฀
฀ At฀acquisition Movement฀ At฀year฀end
฀ 30.9.X2 31.12.X2
฀ $'000 $'000 $'000
Brands฀(9,200฀– (800฀+฀7,800)) 600 (30)*฀฀฀ 570
*$600,000/5฀years฀฀3/12 Goodwill฀(W5) Expenses Intangibles

/reserves฀(W6)
4฀ Gain฀on฀remeasurement฀of฀25%฀associate฀
฀ ฀$'000฀
฀Fair฀value฀at฀date฀control฀obtained฀(800,000฀ 25%฀ $14.50)฀ ฀2,900฀
฀Carrying฀amount฀of฀associate฀฀ ฀
฀(2,020฀cost฀+฀([7,800฀–฀5,800]฀×฀25%)฀share฀of฀post-acquisition฀reserves)฀ ฀ ฀(2,520) ฀
฀ ฀฀฀฀฀฀฀380฀
฀ 537฀

lOMoARcPSD|6256454
฀฀
5฀ Goodwill฀
฀ ฀$'000฀ ฀$'000฀
฀Consideration฀transferred฀(for฀35%)฀ ฀4,200฀
฀FV฀of฀previously฀held฀investment฀(800,000฀฀25%฀฀$14.50)฀ 2,900฀
฀Non-controlling฀interests฀(800,000฀ 40%฀ $14.50)฀ ฀4,640฀
฀Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition:
฀Share฀capital฀ ฀800฀
฀Retained฀earnings ฀ ฀ 7,800 ฀
฀Fair฀value฀adjustments฀(W3)฀ ฀ 600฀
฀ ฀ ฀(9,200)฀
฀ ฀ ฀฀2,540฀
฀ Peace Miel Miel฀
฀ 25%฀ 60%฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
฀At฀year฀end/date฀control฀obtained฀ ฀ 39,920 ฀ ฀7,800฀ ฀7,900฀
฀Fair฀value฀movement฀(W3)฀ ฀(30)฀
฀Gain฀on฀remeasurement฀of฀associate (W4) ฀380฀ ฀
฀At฀acquisition฀฀ ฀(5,800)฀ ฀(7,800)฀
฀ ฀2,000฀ ฀70฀
฀Group฀share฀of฀post-acquisition฀retained฀earnings:฀ ฀
฀฀฀Miel฀ ฀–฀25%฀(2,000฀฀25%)฀ ฀500฀ ฀
฀฀฀฀ ฀–฀60%฀(70฀฀60%)฀ ฀ 42฀ ฀
฀ ฀40,842฀ ฀
฀ ฀$'000฀ ฀
฀NCI฀at฀acquisition฀(W2)฀ ฀4,640฀ ฀
฀NCI฀share฀of฀reserves฀post฀control:฀ ฀
฀฀฀Miel฀–฀40%฀((W6)฀70฀฀40%)฀ ฀ ฀฀28฀ ฀
฀ ฀4,668฀ ฀
฀ ฀
Activity฀2:฀Subsidiary฀to฀subsidiary฀acquisition฀(SOFP)฀
(a)฀ Goodwill฀
฀ ฀฀฀฀$m฀
฀Consideration฀transferred฀(for฀60%)฀ 300฀
฀Non-controlling฀interests฀(at฀fair฀value)฀ 200฀
฀Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition฀ ฀ (460)฀
฀ ฀ ฀฀40฀
฀
538฀

lOMoARcPSD|6256454
(b)฀ Consolidated฀retained฀earnings฀
฀ Denning Heggie฀
฀ ฀$m฀ ฀$m฀
At฀year฀end฀ 530 240฀
Adjustment฀to฀equity฀(W2)฀ (18) ฀
At฀acquisition฀ (180)฀
฀ 60฀
Group฀share฀of฀post-acquisition฀retained฀earnings: ฀
฀฀(60฀฀60%)฀ ฀36 ฀
฀ ฀548฀ ฀
(c)฀ Non-controlling฀interests฀
฀ ฀ $m
฀NCI฀at฀acquisition฀ ฀ 200
฀NCI฀share฀of฀post-acquisition฀reserves฀up฀to฀step฀acquisition฀฀฀ ฀
฀฀ (40%฀฀60฀(part฀(b))฀ ฀ ฀฀฀24
฀NCI฀at฀date฀of฀step฀acquisition฀ ฀ 224
฀Decrease฀in฀NCI฀on฀date฀of฀step฀acquisition฀(224฀ 20%/40%) ฀ ฀((112)฀
฀NCI฀at฀year฀end ฀112฀
Workings฀
฀ ฀ ฀ ฀ Denning฀
฀ ฀ ฀ ฀ ฀ 1.1.X2฀ ฀ 60%฀฀ (Retained฀earnings฀=฀$180m)฀

฀ ฀ ฀ ฀ ฀ 31.12.X3฀ ฀ 20%฀ (Retained฀earnings฀=฀$240m)฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 80%฀
฀ ฀ ฀ ฀ Heggie฀
2฀ Adjustment฀to฀equity฀on฀acquisition฀of฀additional฀20%฀of฀Heggie฀
฀ ฀$m฀
฀Fair฀value฀of฀consideration฀paid฀ (130)
฀Decrease฀in฀NCI฀(224฀(part฀(c))฀ 20%/40%)฀ ฀฀112฀
฀ ฀฀(18)฀
Tutorial฀note฀
Goodwill฀is฀only฀calculated฀once,฀on฀the฀date฀control฀is฀achieved.฀Here฀this฀is฀on฀1฀January฀20X2฀
when฀Denning฀acquired฀60%฀of฀Heggie.฀In฀the฀goodwill฀working,฀you฀did฀not฀need฀to฀break฀the฀net฀
assets฀down฀into฀share฀capital฀and฀reserves฀as฀the฀fair฀value฀of฀net฀assets฀was฀given.฀No฀additional฀
goodwill฀is฀calculated฀on฀the฀acquisition฀of฀the฀extra฀20%฀because฀in฀substance฀there฀has฀been฀no฀
acquisition,฀since฀Heggie฀remains฀a฀subsidiary.฀
In฀the฀consolidated฀retained฀earnings฀working,฀60%฀has฀been฀used฀to฀calculate฀the฀group฀share฀of฀
Heggie's฀post-acquisition฀reserves฀because฀the฀additional฀20%฀was฀not฀acquired฀until฀the฀last฀day฀of฀
the฀year฀(31฀December฀20X3).฀
฀ 539฀

lOMoARcPSD|6256454
฀฀
Activity฀3:฀Subsidiary฀to฀subsidiary฀acquisition฀(SPLOCI)฀
฀ $m฀
Revenue฀(2,500฀+฀1,500)฀ ฀ 4,000฀
Cost฀of฀sales฀and฀expenses฀(1,900฀+฀1,200) ฀(3,100)฀
Profit฀before฀tax฀ ฀ 900฀
Income฀tax฀expense฀(180฀+฀90)฀ ฀฀฀฀(270)฀
Profit฀for฀the฀year฀ ฀ 630฀
฀ Gains฀on฀property฀revaluation,฀net฀of฀tax (80฀+฀30) ฀฀฀฀฀110฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀740฀
฀ ฀
฀฀Owners฀of฀the฀parent (630฀–฀70)฀ 560฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀70฀
฀ ฀฀฀฀฀630฀
฀฀Owners฀of฀the฀parent (740฀–฀80)฀ 660฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀80฀
฀ ฀฀฀฀฀740฀
Workings฀
฀฀฀฀฀฀฀฀฀฀Gaze฀
฀ ฀ ฀ ฀ ฀ ฀ 1.1.X3฀ 60%฀฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ 1.5.X5฀ 10%฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 80%฀
฀ ฀ ฀ ฀ ฀฀฀
฀฀Trek฀
2฀ Non-controlling฀interests฀฀
฀ Profit฀for฀the฀year฀
฀ 1.1.X5 1.5.X5฀ ฀
–฀30.4.X5 –฀31.12.X5฀
฀ ฀$m฀ ฀$m฀ ฀
฀Per฀question฀(PFY฀210฀฀4/12)฀(TCI฀210฀ 8/12)฀ ฀70 ฀฀฀140฀ ฀
฀฀NCI%฀ ฀ ฀40% ฀ ฀ ฀฀฀฀฀30%฀฀ ฀
฀฀ =฀28 =฀42฀ ฀
70
540฀

lOMoARcPSD|6256454
฀ Total฀comprehensive฀income฀
฀ 1.1.X5 1.5.X5฀
–฀30.4.X5฀ –฀31.12.X5฀
฀ ฀$m฀ ฀$m฀
฀ $m ฀$m฀
฀Per฀question฀(PFY฀240฀×฀4/12)฀(TCI฀240฀×฀8/12) ฀80 160฀
฀฀NCI%฀ ฀฀฀฀฀฀฀ 40%฀ ฀฀฀30%฀
฀฀ =฀32 =฀48฀
80฀
Tutorial฀note฀
As฀Trek฀was฀a฀subsidiary฀for฀the฀full฀year,฀no฀pro-rating฀is฀required฀and฀a฀full฀year฀of฀Trek's฀income฀
and฀expenses฀have฀been฀consolidated฀on฀a฀line฀by฀line฀basis.฀
However,฀as฀the฀group฀shareholding฀in฀the฀subsidiary฀changed฀partway฀through฀the฀year,฀the฀฀
non-controlling฀interest฀(NCI)฀percentage฀also฀changed.฀Therefore,฀profit฀for฀the฀year฀and฀total฀
comprehensive฀income฀must฀be฀pro-rated฀then฀the฀relevant฀percentages฀applied฀when฀calculating฀
NCI.฀
Note฀that฀there฀is฀no฀gain฀or฀loss฀on฀remeasurement฀of฀the฀previously฀held฀investment฀because฀no฀
accounting฀boundary฀has฀been฀crossed.฀Instead฀an฀adjustment฀to฀equity฀would฀be฀recorded฀in฀the฀
consolidated฀statement฀of฀financial฀position.฀
Activity฀4:฀Exam฀standard฀(part฀of฀a฀question฀worth฀10฀marks)฀
Explanation฀
Prior฀ to฀ the฀ acquisition฀ of฀ the฀ additional฀ 5%฀ stake,฀ Robe฀ controlled฀ Dock฀ through฀ its฀ 80%฀
shareholding,฀making฀Dock฀a฀subsidiary฀of฀Robe,฀with฀a฀20%฀non-controlling฀interest฀(NCI).฀On฀the฀
purchase฀ of฀ the฀ additional฀ 5%,฀ Robe's฀ controlling฀ interest฀ in฀ its฀ subsidiary฀ increased฀ to฀ 85%฀ whilst฀
NCI฀fell฀to฀15%.฀As฀Dock฀remains฀a฀subsidiary,฀no฀'accounting฀boundary'฀has฀been฀crossed฀and,฀in฀
substance,฀no฀acquisition฀has฀taken฀place.฀Therefore,฀the฀group฀accountant฀was฀wrong฀to฀record฀the฀
difference฀between฀the฀consideration฀paid฀and฀the฀decrease฀in฀NCI฀in฀profit฀or฀loss.฀This฀means฀that฀
this฀difference฀of฀$3฀million฀($10฀million฀–฀$7฀million)฀needs฀to฀be฀reversed฀from฀profit฀or฀loss.฀
Instead,฀since฀Robe฀is฀buying฀shares฀from฀the฀NCI,฀this฀should฀be฀treated฀as฀a฀transaction฀between฀
group฀ shareholders฀ and฀ recorded฀ in฀ equity.฀ The฀ difference฀ between฀ the฀ consideration฀ paid฀ for฀ the฀
additional฀5%฀and฀the฀decrease฀in฀non-controlling฀interests฀should฀be฀recorded฀in฀group฀equity฀and฀
attributed฀to฀the฀parent.฀
The฀group฀accountant฀has฀correctly฀recorded฀a฀decrease฀in฀non-controlling฀interests฀but฀at฀the฀wrong฀
amount,฀as฀he฀has฀calculated฀the฀decrease฀as฀the฀percentage฀of฀net฀assets฀purchased.฀This฀does฀not฀
take฀into฀account฀the฀fact฀that฀the฀full฀goodwill฀method฀has฀been฀selected฀for฀Dock;฀therefore,฀the฀NCI฀
at฀disposal฀will฀also฀include฀an฀element฀of฀goodwill.฀The฀decrease฀in฀NCI฀must฀be฀adjusted฀to฀take฀
into฀ account฀ the฀ goodwill฀ attributable฀ to฀ the฀ NCI.฀ This฀ results฀ in฀ a฀ further฀ decrease฀ in฀ NCI฀ of฀฀
$1฀ million฀ (being฀ the฀ $8฀ million฀ decrease฀ in฀ NCI฀ that฀ the฀ group฀ accountant฀ should฀ have฀ recorded฀
less฀the฀$7฀million฀he฀actually฀recognised).฀
Since฀ the฀ decrease฀ in฀ equity฀ was฀ incorrect,฀ the฀ difference฀ between฀ the฀ consideration฀ paid฀ and฀
decrease฀ in฀ NCI฀ was฀ also฀ incorrect.฀ An฀ adjustment฀ to฀ equity฀ of฀ $2฀ million฀ rather฀ than฀ a฀ loss฀ of฀฀
$3฀million฀in฀profit฀or฀loss฀should฀have฀been฀recorded.฀฀
฀ 541฀

lOMoARcPSD|6256454
฀฀
Calculations฀
Decrease฀in฀NCI฀
%฀purchased
NCI฀at฀date฀of฀step฀acquisition฀฀ ฀
NCI%฀before฀step฀acquisition
5%
=฀$32฀million฀฀ ฀
20%
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
=฀$8฀million฀
Adjustment฀to฀equity฀
฀ ฀$m฀
฀Fair฀value฀of฀consideration฀paid฀ (10)฀
฀Decrease฀in฀NCI฀($32m฀×฀5%/20%)฀ ฀฀8฀฀
฀Adjustment฀to฀equity฀ ฀฀(2)฀
Correcting฀entry฀
The฀correcting฀entry฀to฀record฀the฀further฀decrease฀in฀NCI,฀reverse฀the฀original฀entry฀in฀profit฀or฀loss฀
and฀record฀the฀correct฀adjustment฀to฀equity฀is฀as฀follows:฀
DEBIT฀฀ Group฀retained฀earnings฀ ฀ $2฀million฀
DEBIT฀฀ Non-controlling฀interests฀ ฀ $1฀million฀
CREDIT฀ Profit฀or฀loss฀฀฀ ฀ ฀ ฀ ฀ $3฀million฀
฀฀฀฀฀฀฀฀฀฀Robe฀
฀ ฀ ฀ ฀ ฀ ฀ 1.6.X6฀ 80%฀฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ 31.5.X9฀ 5%฀ ฀
฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 85%฀
฀ ฀ ฀ ฀ ฀฀฀
฀฀Dock฀
Chapter฀12฀Changes฀in฀group฀structures:฀disposals฀and฀
group฀reorganisations฀
Activity฀1:฀Subsidiary฀to฀associate฀disposal฀
(a)฀ Explanation฀of฀accounting฀treatment฀
On฀ 1฀ January฀ 20X2,฀ Amber฀ purchased฀ an฀ 80%฀ stake฀ in฀ Byrne,฀ giving฀ Amber฀ control฀ and฀
making฀ Byrne฀ a฀ subsidiary.฀ However,฀ on฀ 30฀ September฀ 20X6,฀ Amber฀ sold฀ a฀ 50%฀ stake฀ in฀
Byrne฀ (200,000/400,000฀ shares),฀ leaving฀ a฀ 30%฀ stake฀ remaining,฀ giving฀ Amber฀ only฀
significant฀ influence฀ and฀ resulting฀ in฀ Byrne฀ becoming฀ an฀ associate.฀ As฀ the฀ control฀ boundary฀
was฀crossed,฀in฀substance,฀Amber฀'sold'฀an฀80%฀subsidiary฀and฀'purchased'฀a฀30%฀associate.฀
This฀means฀that฀Amber฀must฀deconsolidate฀the฀80%฀subsidiary฀(net฀assets,฀goodwill฀and฀non-
controlling฀ interests),฀ a฀ group฀ profit฀ on฀ disposal฀ be฀ recognised฀ and฀ the฀ remaining฀ 30%฀
investment฀ in฀ Byrne฀ must฀ be฀ remeasured฀ to฀ its฀ fair฀ value฀ on฀ the฀ date฀ control฀ was฀ lost฀ (30฀
September฀20X6).฀
In฀the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income,฀Byrne฀should฀
be฀ consolidated฀ and฀ non-controlling฀ interests฀ of฀ 20%฀ recognised฀ for฀ the฀ nine฀ months฀ that฀ it฀
was฀ a฀ subsidiary฀ (1฀ January฀ 20X6–30฀ September฀ 20X6),฀ pro-rating฀ income฀ and฀ expenses฀
accordingly.฀For฀the฀three฀months฀it฀was฀an฀associate,฀Byrne฀should฀be฀equity฀accounted฀for฀
542฀

lOMoARcPSD|6256454
(3/12฀฀profit฀for฀year฀฀30%฀and฀3/12฀฀other฀comprehensive฀income฀฀30%).฀The฀group฀
profit฀or฀loss฀on฀disposal฀should฀be฀reported฀in฀profit฀or฀loss฀above฀the฀tax฀line.฀
In฀the฀consolidated฀statement฀of฀financial฀position,฀Byrne฀should฀be฀equity฀accounted฀for฀with฀
the฀ fair฀ value฀ of฀ the฀ remaining฀ 30%฀ investment฀ at฀ the฀ date฀ control฀ was฀ lost฀ (30฀ September฀
20X6)฀becoming฀the฀'cost฀of฀the฀associate'฀in฀the฀'investment฀in฀associate'฀working.฀
(b)฀ Group฀profit฀on฀disposal฀
฀ ฀$'000฀ ฀$'000฀
฀Fair฀value฀of฀consideration฀received฀ ฀1,250฀
฀Fair฀value฀of฀30%฀investment฀retained฀(2,000฀ 30%/80%)฀ ฀750฀
฀Less:฀ share฀of฀consolidated฀carrying฀amount฀when฀control฀lost฀ ฀
฀฀ net฀assets฀[1,680฀–฀(160฀ 3/12)] 1,640 ฀
฀฀ Goodwill฀(W4)฀ ฀ 340฀ ฀
฀฀ Less฀non-controlling฀interests฀(W5) ฀ (396)฀ ฀
฀ ฀(1,584)฀
฀ ฀฀฀฀฀416฀
Workings฀
฀ Amber฀
1.1.X2฀฀ Purchased฀320,000/400,000฀shares฀ =฀ 80%฀

30.9.X6฀ Sold฀200,000/400,000฀shares฀ =฀ ฀ (50%) ฀
฀ 30%฀
฀ Byrne฀฀ ฀฀Pre-acquisition฀reserves฀$760,000฀
1.1.X6 30.9.X6฀ 31.12.X6
SPLOCI฀
Subsidiary฀– 9/12 Associate฀–฀3/12
Held฀320,000฀ Sells฀200,000฀shares฀ Equity฀

shares฀ =฀50%฀of฀Byrne฀ account฀in฀
=฀80%฀of฀Byrne฀ SOFP฀
Group฀gain฀on฀disposal฀
(30%฀left)฀
Re-measure฀30%฀remaining฀to฀
fair฀value฀
2฀ Goodwill฀฀
฀ ฀$'000฀ ฀$'000฀
฀Consideration฀transferred฀(2,000฀– 800)฀ ฀ ฀1,200฀
฀Non-controlling฀interests฀(at฀fair฀value)฀ ฀ ฀300฀
฀Less:฀ fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition฀ ฀ ฀
฀ share฀capital฀ ฀400฀ ฀
฀ reserves฀ ฀760฀ ฀
฀ ฀ ฀ (1,160) ฀
฀ ฀ ฀ ฀฀฀฀340 ฀
฀ 543฀

lOMoARcPSD|6256454
฀฀
฀ ฀$'000฀
NCI฀at฀acquisition฀(W4)฀ ฀300฀
NCI฀share฀of฀post-acquisition฀reserves฀([1,240*฀– 760]  20%) ฀฀฀96฀
฀ ฀396฀
(c)฀ Investment฀in฀associate฀as฀at฀31฀December฀20X6฀
Working:฀Investment฀in฀associate฀
฀ ฀฀$'000฀
Cost฀=฀Fair฀value฀at฀date฀control฀lost฀(W3)฀ ฀750฀
Share฀of฀post-acquisition฀retained฀reserves฀([1,280฀– 1,240*]  30%)฀ ฀฀฀฀12฀
฀ ฀762฀
*฀ Reserves฀at฀the฀date฀of฀loss฀of฀control฀(30฀September฀20X6)฀were฀given฀in฀the฀question฀but฀
they฀could฀also฀have฀been฀calculated฀as฀follows:฀
฀ ฀฀$'000฀
฀Reserves฀at฀year฀end฀(per฀Byrne's฀SOFP)฀ ฀1,280฀
฀Less฀share฀of฀total฀comprehensive฀income฀from฀1.10.X6–31.12.X6฀
฀฀฀฀฀฀฀฀(160฀฀3/12)฀ ฀฀฀฀฀฀(40)฀
฀Reserves฀at฀date฀of฀loss฀of฀control ฀1,240฀
Activity฀2:฀Exam฀standard฀(part฀of฀a฀question฀worth฀10฀marks)฀
Explanation฀
The฀ Finance฀ Director฀ has฀ calculated฀ the฀ group฀ profit฀ on฀ disposal฀ incorrectly.฀ Prior฀ to฀ the฀ disposal,฀
Nest฀was฀a฀60%฀subsidiary.฀After฀selling฀a฀50%฀stake,฀Vail฀is฀left฀with฀a฀10%฀simple฀investment฀in฀
Nest฀with฀no฀significant฀influence฀or฀control.฀In฀substance,฀Vail฀has฀'sold'฀a฀60%฀subsidiary,฀so฀Nest฀
should฀be฀deconsolidated฀and฀a฀group฀profit฀or฀loss฀on฀disposal฀recognised.฀On฀the฀same฀date,฀in฀
substance,฀ Nest฀ has฀ 'purchased'฀ a฀ 10%฀ investment,฀ so฀ this฀ remaining฀ investment฀ should฀ be฀
remeasured฀to฀its฀fair฀value฀at฀the฀date฀control฀was฀lost฀(31฀December฀20X5).฀฀
The฀Finance฀Director฀was฀correct฀to฀calculate฀a฀group฀profit฀on฀disposal฀but฀he฀made฀three฀errors฀in฀
his฀calculation.฀Firstly,฀he฀has฀deconsolidated฀the฀portion฀of฀net฀assets฀sold฀(50%)฀rather฀than฀100%฀
of฀ net฀ assets฀ and฀ a฀ 40%฀ non-controlling฀ interest.฀ As฀ Nest฀ is฀ no฀ longer฀ a฀ subsidiary,฀ it฀ should฀ have฀
been฀fully฀deconsolidated.฀Secondly,฀he฀has฀forgotten฀to฀deconsolidate฀goodwill.฀Thirdly,฀he฀did฀not฀
remeasure฀the฀remaining฀10%฀investment฀to฀fair฀value.฀
The฀ corrected฀ group฀ loss฀ on฀ disposal฀ calculation฀ is฀ shown฀ below.฀ The฀ correction฀ results฀ in฀ the฀
Finance฀Director's฀profit฀of฀$10฀million฀becoming฀a฀loss฀of฀$4฀million.฀
Calculation฀
Group฀profit฀or฀loss฀on฀disposal฀฀
฀ ฀฀฀฀$m฀ $m฀
฀Fair฀value฀of฀consideration฀received฀(for฀50%฀sold)฀ ฀75฀
฀Fair฀value฀of฀10%฀investment฀retained฀฀ 15฀
฀Less:฀ share฀of฀consolidated฀carrying฀amount฀when฀control฀lost฀ ฀
฀฀ net฀assets฀฀ V฀130 ฀
฀฀ Goodwill฀(W2)฀ ฀ ฀16฀ ฀
฀฀ Less฀non-controlling฀interests฀(W3) ฀ ฀ (52)฀ ฀
฀ ฀(94)฀
Group฀loss฀on฀disposal ฀ (4)฀
544฀

lOMoARcPSD|6256454
Workings฀
฀
Vail฀
฀
฀ 1.1.X5 60% Subsidiary฀

31.12.X5฀ ฀ Sell฀ ฀ (50%) ฀
฀
฀ 10%฀ Investment฀
฀
฀ Nest฀
฀
2฀ Goodwill฀฀
฀ ฀$m฀
฀Consideration฀transferred฀฀ ฀80฀
฀Non-controlling฀interests฀(100฀฀40%)฀ ฀40฀
฀Less฀fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition฀ ฀(100)฀
฀ ฀฀฀฀20฀
฀Impairment฀ ฀฀฀฀฀(4)฀
฀ ฀฀฀฀16฀
฀ ฀$m฀
฀NCI฀at฀acquisition฀(100฀฀40%)฀ ฀40฀
฀NCI฀share฀of฀post-acquisition฀reserves฀((130฀– 100)*฀ 40%) ฀ 12฀
฀ 52
*Post-acquisition฀reserves฀can฀be฀calculated฀as฀the฀difference฀between฀net฀assets฀at฀disposal฀and฀net฀
assets฀at฀acquisition.฀This฀is฀because฀net฀assets฀equal฀equity฀and,฀provided฀there฀has฀been฀no฀share฀
issue฀ since฀ acquisition,฀ the฀ movement฀ in฀ equity฀ and฀ net฀ assets฀ is฀ solely฀ due฀ to฀ the฀ movement฀ in฀
reserves.฀
Activity฀3:฀Subsidiary฀to฀subsidiary฀disposal฀
(a) Non-controlling฀interest฀
฀ ฀ $m฀
฀NCI฀at฀acquisition฀ ฀ 190฀
฀NCI฀share฀of฀post-acquisition฀retained฀earnings฀to฀disposal฀฀ ฀
฀฀ (20%฀฀[450฀– 300])฀ ฀ 30฀
฀NCI฀share฀of฀post-acquisition฀other฀components฀of฀equity฀to฀disposal ฀ ฀
฀ (20%฀฀[30฀–฀10])฀ ฀ ฀฀฀฀฀4฀
฀NCI฀at฀date฀of฀disposal฀ ฀ 224฀
฀Increase฀in฀NCI฀on฀date฀of฀disposal฀(224฀ 5%/20%) ฀ ฀ ฀฀56฀
฀NCI฀at฀year฀end ฀280฀
฀ 545฀

lOMoARcPSD|6256454
฀฀
฀ ฀$m฀
฀Fair฀value฀of฀consideration฀received฀ 60
฀Increase฀in฀NCI฀฀ ฀(56)฀
฀ ฀฀฀฀฀4
Workings฀
฀ Trail฀
฀
฀ 1.12.X0 80%
30.11.X1฀ ฀ Sell฀ ฀(5%)฀
฀
฀ ฀ ฀ ฀ 75%฀
฀
Dial฀
Chapter฀13฀Non-current฀assets฀held฀for฀sale฀and฀
discontinued฀operations฀
Activity฀1:฀Discontinued฀operation฀
TITAN฀GROUP฀
฀ ฀$m฀
Continuing฀operations฀ ฀
Revenue฀(450฀+฀265฀+฀(182฀฀9/12))฀ ฀6851.5฀
Cost฀of฀sales฀(288฀+฀152฀+฀(106฀฀9/12))฀ ฀(519.5)฀
Gross฀profit฀ ฀332.0฀
Operating฀expenses฀(71฀+฀45฀+฀(22฀฀9/12))฀ ฀(132.5)฀
Finance฀costs฀(5฀+฀3฀+฀(2฀฀9/12))฀ ฀฀฀฀฀(9.5)฀
Profit฀before฀tax฀ ฀190.0฀
Income฀tax฀expense฀(17฀+฀13฀+฀(10฀฀9/12))฀ ฀฀฀(37.5)฀
Profit฀for฀the฀year฀from฀continuing฀operations฀ ฀฀152.5฀
Profit฀for฀the฀year฀from฀discontinued฀operations ((42฀ 3/12)฀– (W3)฀6.8)฀ ฀ ฀฀฀฀3.7฀
Profit฀for฀the฀year฀ ฀ 156.2 ฀
Gain฀on฀property฀revaluation,฀net฀of฀tax (16฀+฀9฀+฀(6฀ 9/12))฀ ฀฀฀29.5฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀185.7฀
฀ ฀
฀฀Owners฀of฀the฀parent฀(β)฀ ฀149.9฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀6.3฀
546฀

lOMoARcPSD|6256454
฀ ฀$m฀
฀ ฀156.2฀
฀฀Owners฀of฀the฀parent฀(β)฀ ฀178.5฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀7.2฀
฀ ฀185.7฀
Workings฀
Titan฀
฀ ฀ ฀ ฀
฀ 100%฀ ฀ 80%฀
฀
฀ Cronus฀ ฀ Rhea฀
฀
Timeline฀
฀
1.1.X5฀ 1.10.X5 31.12.X5
฀
฀
SPLOCI฀
Titan฀(parent)฀– all฀year
฀
฀ Cronus฀–฀all฀year฀
฀
Rhea฀฀3/12฀
฀ (discontinued)฀
2฀ Non-controlling฀interests฀(Rhea)฀
฀ ฀฀$m฀ ฀฀$m฀
Per฀question฀(42฀฀9/12)/(48฀฀9/12)฀ ฀฀31.5฀ ฀฀36.0
฀ ฀฀ 20%฀ ฀฀ 20%฀
฀ ฀฀6.3฀ ฀฀7.2
3฀ Impairment฀losses฀(Rhea)฀
฀ ฀$m฀
'Notional'*฀goodwill฀(38฀฀100%/80%)฀ ฀47.5฀
Carrying฀amount฀of฀net฀assets฀(320฀+฀(48฀ 9/12))฀ ฀ 356.0฀
฀ ฀403.5฀
Fair฀value฀less฀costs฀to฀sell฀ ฀(395.0)
Impairment฀loss:฀gross฀ ฀ 8.5฀
Impairment฀loss฀recognised:฀all฀allocated฀to฀goodwill฀ ฀
฀฀฀(8.5฀฀80%)฀ ฀ 6.8฀
฀ 547฀

lOMoARcPSD|6256454
฀฀
*Where฀the฀partial฀goodwill฀method฀is฀used฀part฀of฀the฀calculation฀of฀the฀recoverable฀amount฀
of฀the฀CGU฀relates฀to฀the฀unrecognised฀non-controlling฀interest฀share฀of฀the฀goodwill.฀
For฀ the฀ purpose฀ of฀ calculating฀ the฀ impairment฀ loss,฀ the฀ carrying฀ amount฀ of฀ the฀ CGU฀ is฀
therefore฀ notionally฀ adjusted฀ to฀ include฀ the฀ non-controlling฀ interests฀ in฀ the฀ goodwill฀ by฀
grossing฀it฀up.฀
The฀ resulting฀ impairment฀ loss฀ calculated฀ is฀ only฀ recognised฀ to฀ the฀ extent฀ of฀ the฀ parent's฀
share.฀
This฀adjustment฀is฀not฀required฀where฀non-controlling฀interests฀are฀measured฀at฀fair฀value฀at฀
acquisition.฀
Chapter฀14฀Joint฀arrangements฀and฀group฀disclosures฀
Activity฀1:฀Joint฀arrangement฀
The฀relationship฀between฀the฀three฀parties฀qualifies฀as฀a฀joint฀arrangement฀as฀decisions฀have฀to฀be฀
made฀ unanimously.฀ It฀ appears฀ that฀ each฀ party฀ has฀ direct฀ rights฀ to฀ the฀ assets฀ of฀ the฀ arrangement,฀
illustrated฀by฀the฀ownership฀of฀coal฀inventories.฀Similarly,฀each฀party฀has฀obligations฀for฀the฀liabilities฀
as฀all฀costs฀are฀shared฀in฀the฀same฀proportions฀as฀the฀income.฀Consequently,฀the฀arrangement฀should฀
be฀accounted฀for฀as฀a฀joint฀operation.฀
Total฀revenue฀earned฀by฀the฀operation฀in฀the฀period฀is฀$118.92m฀((460,000฀฀$120)฀+฀(540,000฀฀
$118)).฀ ABM's฀ share฀ of฀ this฀ revenue฀ recognised฀ in฀ its฀ own฀ financial฀ statements฀ is฀ 40%,฀ ie฀
$47,568,000.฀ The฀ remainder฀ of฀ the฀ revenue฀ ABM฀ collects฀ of฀ $7,632,000฀ ((460,000฀ ฀ $120)฀ –฀
$47,568,000)฀ is฀ recognised฀ as฀ a฀ liability฀ (in฀ the฀ joint฀ operation฀ account),฀ representing฀ amounts฀
owed฀to฀the฀national฀government.฀
ABM฀ will฀ record฀ the฀ machinery฀ it฀ purchased฀ in฀ full฀ in฀ its฀ own฀ financial฀ statements.฀ 40%฀ of฀ the฀
depreciation฀will฀be฀charged฀to฀cost฀of฀sales฀and฀the฀remainder฀recognised฀as฀a฀receivable฀balance฀
(in฀the฀joint฀operation฀account).฀The฀same฀treatment฀will฀apply฀to฀other฀joint฀costs฀incurred฀by฀ABM.฀
ABM฀ is฀ also฀ required฀ to฀ recognise฀ a฀ 40%฀ share฀ of฀ costs฀ incurred฀ by฀ the฀ other฀ operators฀ and฀ a฀
corresponding฀liability฀(in฀the฀joint฀operation฀account).฀
Chapter฀15฀Foreign฀transactions฀and฀entities฀
Activity฀1:฀Functional฀currency฀principles฀
฀ ฀ DEBIT ฀฀ CREDIT฀
฀ ฀ ฀$฀฀฀฀ ฀฀$฀฀฀฀฀
31.10.X8฀ Purchases฀(129,000฀@฀9.50) 13,579 ฀
฀ Payables฀ 13,579฀
฀ ฀ ฀
31.12.X8฀ Payables฀(Working)฀ 679 ฀
฀ Profit฀or฀loss฀–฀exchange฀gains 679฀
฀ ฀ ฀
31.01.X9฀ Payables฀ 12,900 ฀
฀ Profit฀or฀loss฀–฀exchange฀losses฀ 399 ฀
฀ Cash฀(129,000฀@฀9.7)฀ 13,299฀
Working:฀Exchange฀difference฀on฀payables฀
฀ ฀$฀฀฀฀฀
฀Payables฀as฀at฀31.12.X8฀(129,000฀@10)฀ ฀12,900฀
฀Payables฀as฀previously฀recorded฀ ฀13,579฀
฀Exchange฀gain฀ ฀฀฀฀฀฀679฀
548฀

lOMoARcPSD|6256454
Activity฀2:฀Foreign฀operation฀
BENNIE฀GROUP฀
฀ ฀$'000฀
Property,฀plant฀and฀equipment฀(5,705฀+฀(W2)฀910)฀ ฀6,615.0฀
Goodwill฀(W4)฀ ฀฀฀฀฀฀780.3฀
฀ ฀฀฀฀7,395.3฀
Current฀assets฀(2,222฀+฀(W2)฀700)฀ ฀฀฀2,922.0฀
฀ ฀10,317.3฀
฀ ฀
Share฀capital฀ ฀1,700.0฀
Retained฀earnings฀(W5)฀ ฀฀฀5,186.6฀
Other฀components฀of฀equity฀–฀translation฀reserve฀(W8)฀ ฀฀฀฀฀฀537.8฀
฀ 7,424.4฀
Non-controlling฀interests (W6)฀ ฀ ฀฀฀฀฀357.9฀
฀ ฀฀฀7,782.3฀
Current฀liabilities฀(2,035฀+฀(W2)฀500)฀ ฀฀฀2,535.0฀
฀ ฀10,317.3฀
CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
FOR฀YEAR฀ENDED฀31฀DECEMBER฀20X2฀
฀ ฀$'000฀
Revenue฀(9,840฀+฀(W3)฀1,720)฀ ฀11,560฀
Cost฀of฀sales฀(5,870฀+฀(W3)฀960)฀ ฀(6,830)฀
Operating฀expenses฀(2,380฀+฀(W3)฀420)฀ ฀(2,800)฀
Goodwill฀impairment฀loss฀(W4)฀ ฀฀฀(220)฀
Income฀tax฀expense฀(530฀+฀(W3)฀100)฀ ฀฀฀(630)฀
Profit฀for฀the฀year฀ ฀1,080฀
Items฀that฀may฀subsequently฀be฀reclassified฀to฀profit฀or฀loss ฀
฀ Exchange฀differences฀on฀translating฀foreign฀operations฀(W9)฀ ฀ ฀฀฀403.1฀
Total฀comprehensive฀income฀for฀the฀year ฀1,483.1฀
฀ ฀
฀Profit฀attributable฀to:฀ ฀
฀฀฀Owners฀of฀the฀parent฀(β)฀ ฀1,076฀
฀฀฀Non-controlling฀interests฀(W7)฀ ฀฀฀฀฀฀฀฀4฀
฀ ฀1,080฀
฀Total฀comprehensive฀income฀attributable฀to:฀ ฀
฀฀฀Owners฀of฀the฀parent฀(β)฀ ฀1,398.5฀
฀฀฀Non-controlling฀interests฀(W7)฀ ฀฀฀฀฀฀84.6฀
฀ ฀1,483.1฀
฀ 549฀

lOMoARcPSD|6256454
฀฀
Workings฀
1฀ Group฀structure฀฀
฀ Bennie฀
฀
฀ 1.1.X1฀ ฀ 80%฀
฀
฀ ฀ Pre-acquisition฀ret'd฀earnings฀5,280,000฀Jens฀
฀ Jennie฀
2฀ Translation฀of฀Jennie฀–฀Statement฀of฀financial฀position฀
฀ ฀J'000฀ ฀Rate฀ ฀$'000฀
Property,฀plant฀and฀equipment฀ ฀7,280฀ ฀ 8฀ ฀910฀
Current฀assets฀ ฀ 5,600฀ ฀ 8฀ ฀฀฀฀700฀
฀ ฀12,880฀ ฀1,610฀
฀ ฀
Share฀capital฀ ฀1,200฀ ฀12฀ ฀ 100 ฀
Pre-acq'n฀ret'd฀earnings฀ ฀5,280฀ ฀12฀ ฀440฀
Post-acq'n฀ret'd฀earnings฀–฀20X1฀profit฀ ฀ 2,860฀ ฀11฀ ฀260฀
฀ –฀20X1฀dividends฀ ฀ (1,380)฀ ฀10฀ ฀(138)฀ 662฀
฀ –฀20X2฀profit฀ ฀ 2,040฀ ฀8.5฀ ฀240฀
฀ –฀20X2฀dividends฀ ฀ (1,120)฀ ฀ 8฀ ฀(140)฀
Exchange฀differences฀on฀net฀assets฀ ฀ ฀ ฀BAL฀ ฀฀฀฀348฀
฀ ฀8,880฀ ฀1,110฀
Current฀liabilities฀ ฀ 4,000฀ ฀ 8฀ ฀฀฀฀500฀
฀ ฀12,880฀ ฀1,610฀
3฀ Translation฀of฀Jennie฀–฀Statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀ ฀J'000฀ ฀Rate฀ ฀$'000฀
Revenue฀ ฀14,620฀ ฀8.5฀ ฀1,720฀
Cost฀of฀sales฀ ฀ (8,160)฀ ฀8.5฀ ฀฀(960)฀
Gross฀profit฀ ฀6,460฀ ฀760฀
Operating฀expenses฀ ฀ (3,570)฀ ฀8.5฀ ฀฀฀(420)฀
Profit฀before฀tax฀ ฀2,890฀ ฀340฀
Income฀tax฀expense฀ ฀ (850)฀ ฀8.5฀ ฀฀฀(100)฀
Profit฀for฀the฀year฀ ฀ 2,040฀ ฀฀฀240฀
฀
฀
550฀

lOMoARcPSD|6256454
4฀ Goodwill฀
฀ ฀J'000฀ ฀J'000฀ Rate฀ ฀$'000฀
฀Consideration฀transferred฀(993฀ 12)฀ ฀ 11,916 ฀ 12฀ ฀993.0฀
฀Non-controlling฀interests฀(at฀fair฀value)฀ ฀2,676฀ 12฀ ฀223.0฀
฀ ฀ ฀
฀Less:฀ fair฀value฀of฀net฀assets฀at฀acquisition฀ ฀ ฀
฀฀ share฀capital฀ ฀1,200฀ ฀ ฀
฀฀ retained฀earnings฀ ฀5,280฀ ฀ ฀
฀ ฀(6,480)฀ 12฀ ฀(540.0)฀
฀Goodwill฀at฀acquisition฀ ฀8,112฀ 12฀ ฀676.0฀
฀Impairment฀losses฀20X1฀ (0) ฀ ฀(0)฀
฀Exchange฀gain/(loss)฀20X1฀ ฀฀฀– β฀ ฀135.2฀
฀Goodwill฀at฀31฀December฀20X1฀ ฀ 8,112 ฀ 10฀ ฀811.2฀
฀Impairment฀losses฀20X2฀฀ (1,870) 8.5*฀ ฀(220.0)฀
฀Exchange฀gain/(loss)฀20X2฀ ฀฀฀– β฀ ฀189.1฀
฀Goodwill฀at฀year฀end฀ ฀6,242฀ 8฀ ฀780.3฀
฀ *As฀there฀is฀no฀explicit฀rule,฀either฀average฀rate฀(as฀here)฀or฀closing฀rate฀could฀be฀used฀
฀ ฀Bennie฀ Jennie฀
฀ ฀$'000฀ ฀$'000฀
Retained฀earnings฀at฀year฀end฀(W2)฀ ฀5,185.0฀ 662฀
Retained฀earnings฀at฀acquisition฀(W2)฀ ฀ ฀(440)฀
฀ ฀ 222
Group฀share฀of฀post-acquisition฀retained฀earnings (222  80%) 177.6฀
Less฀group฀share฀of฀impairment฀losses฀to฀date฀(W4)฀(220  80%)฀ ฀฀฀(176.0)฀
฀ ฀5,186.6฀
฀ ฀$'000฀
NCI฀at฀acquisition฀(W4)฀ ฀223.0฀
NCI฀share฀of฀post-acquisition฀retained฀earnings฀of฀Jennie฀((W5)฀222฀ 20%)฀ ฀44.4฀
NCI฀share฀of฀exchange฀differences฀on฀net฀assets฀((W2)฀348฀ 20%)฀ ฀69.6฀
NCI฀share฀of฀exchange฀differences฀on฀goodwill฀[((W4)฀135.2฀+฀189.1)฀฀20%]฀ ฀ 64.9฀
Less฀NCI฀share฀of฀impairment฀losses฀(W4)฀(220  20%)฀ ฀ (44.0)
฀ ฀357.9฀
฀ ฀฀$'000฀ ฀฀$'000฀
Profit฀for฀the฀year฀(W3)฀ ฀฀240฀ ฀฀240.0฀
Impairment฀losses฀(W4)฀ ฀฀(220)฀ ฀฀(220.0)฀
Other฀comprehensive฀income:฀exchange฀differences฀(W9)฀ ฀ ฀฀ –฀ ฀฀฀403.1฀
฀ ฀฀ 20฀ ฀฀฀423.1฀
฀ ฀฀ 20%฀ ฀฀฀20%฀
฀ ฀฀ 4฀ ฀฀฀฀฀84.6฀
฀
฀ 551฀

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฀฀
8฀ Consolidated฀translation฀reserve฀
฀ ฀$'000฀
Exchange฀differences฀on฀net฀assets ((W2)฀348฀ 80%) ฀278.4
Exchange฀differences฀on฀goodwill฀[((W4)฀135.2฀+฀189.1)  80%] ฀259.4
฀ ฀537.8
฀ ฀$'000฀
On฀translation฀of฀net฀assets฀of฀Jennie
Closing฀net฀assets฀as฀translated฀(at฀CR)฀(W2)฀ ฀1,110.0฀
Opening฀net฀assets฀as฀translated฀at฀the฀time฀(at฀OR)฀(7,960/10)฀ ฀฀฀(796.0)฀
฀ ฀314.0฀
Less฀retained฀profit฀as฀translated฀(PFY฀– dividends)฀((W3)฀240฀– J1,120/8)฀ ฀฀฀(100.0)฀
฀ ฀฀฀฀214.0฀
On฀goodwill฀(W4)฀ ฀฀฀฀189.1฀
฀ ฀฀฀฀403.1฀
Activity฀3:฀Ethics฀
If฀ Jenkin฀ were฀ to฀ sell฀ the฀ shares฀ profitably฀ a฀ gain฀ would฀ arise฀ in฀ its฀ individual฀ financial฀ statements฀
which฀would฀boost฀retained฀earnings.฀However,฀if฀only฀5%฀of฀the฀equity฀shares฀in฀Rankin฀were฀sold,฀
it฀would฀still฀hold฀55%฀of฀the฀equity฀and฀presumably฀control฀would฀not฀be฀lost.฀The฀IASB฀views฀this฀as฀
an฀equity฀transaction฀(ie฀transactions฀with฀owners฀in฀their฀capacity฀as฀owners)฀(IFRS฀10:฀para.฀23).฀
This฀ means฀ that฀ the฀ relevant฀ proportion฀ of฀ the฀ exchange฀ differences฀ should฀ be฀ re-attributed฀ to฀ the฀
non-controlling฀interest฀rather฀than฀to฀the฀retained฀earnings฀(IAS฀21:฀para.฀48C)฀(and฀not฀reclassified฀
to฀ profit฀ or฀ loss฀ because฀ control฀ has฀ not฀ been฀ lost).฀ The฀ directors฀ appear฀ to฀ be฀ motivated฀ by฀ their฀
desire฀to฀maximise฀the฀balance฀on฀the฀group฀retained฀earnings.฀It฀would฀appear฀that฀the฀directors'฀
actions฀ are฀ unethical฀ by฀ overstating฀ the฀ group's฀ interest฀ in฀ Rankin฀ at฀ the฀ expense฀ of฀ the฀ non-
controlling฀interest.฀
The฀ purpose฀ of฀ financial฀ statements฀ is฀ to฀ present฀ a฀ fair฀ representation฀ of฀ the฀ company's฀ financial฀
position,฀financial฀performance฀and฀cash฀flows฀(IAS฀1:฀para.฀15)฀and฀if฀the฀financial฀statements฀are฀
deliberately฀ falsified,฀ then฀ this฀ could฀ be฀ deemed฀ unethical.฀ Accountants฀ have฀ a฀ social฀ and฀ ethical฀
responsibility฀to฀issue฀financial฀statements฀which฀do฀not฀mislead฀the฀public.฀฀
Any฀manipulation฀of฀the฀accounts฀will฀harm฀the฀credibility฀of฀the฀profession฀since฀the฀public฀assume฀
that฀ professional฀ accountants฀ will฀ act฀ in฀ an฀ ethical฀ capacity.฀ The฀ directors฀ should฀ be฀ reminded฀ that฀
professional฀ ethics฀ are฀ an฀ integral฀ part฀ of฀ the฀ profession฀ and฀ that฀ they฀ must฀ adhere฀ to฀ ethical฀
guidelines฀ such฀ as฀ ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct.฀ Deliberate฀ falsification฀ of฀ the฀ financial฀
statements฀ would฀ contravene฀ the฀ guiding฀ principles฀ of฀ integrity,฀ objectivity฀ and฀ professional฀
behaviour.฀ The฀ directors'฀ intended฀ action฀ appears฀ to฀ be฀ in฀ direct฀ conflict฀ with฀ the฀ code฀ by฀
deliberating฀overstating฀the฀parent฀company's฀ownership฀interest฀in฀the฀group฀in฀order฀to฀maximise฀
potential฀investment฀in฀Jenkin.฀
Stakeholders฀ are฀ becoming฀ increasingly฀ reactive฀ to฀ the฀ ethical฀ stance฀ of฀ an฀ entity.฀ Deliberate฀
falsification฀ would฀ potentially฀ harm฀ the฀ reputation฀ of฀ Jenkin฀ and฀ could฀ lead฀ to฀ severe,฀ long-term฀
disadvantages฀ in฀ the฀ market฀ place.฀ The฀ directors'฀ intended฀ action฀ will฀ therefore฀ not฀ be฀ in฀ the฀ best฀
interests฀ of฀ the฀ stakeholders฀ in฀ the฀ business.฀ There฀ can฀ be฀ no฀ justification฀ for฀ the฀ deliberate฀
falsification฀of฀an฀entity's฀financial฀statements.฀
552฀

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Chapter฀16฀Group฀statements฀of฀cash฀flows฀
Activity฀1:฀Dividend฀paid฀to฀non-controlling฀interests฀
Non-controlling฀interests฀
฀ ฀$'000฀
฀b/d฀ ฀99฀
฀NCI฀share฀of฀total฀comprehensive฀income฀ ฀฀฀฀฀6฀
฀ ฀105฀
฀Dividends฀paid฀to฀NCI฀(balancing฀figure)฀ ฀฀฀฀(3)฀
฀c/d฀ ฀102฀
Activity฀2:฀Dividend฀received฀from฀associate฀
Investment฀in฀associate฀
฀ ฀฀$'000฀
b/d฀ ฀฀88฀
Group฀share฀of฀associate's฀profit฀for฀the฀year฀ ฀฀7฀
Group฀share฀of฀associate's฀OCI฀(gain฀on฀property฀revaluation)฀฀ ฀฀3฀
Acquisition฀of฀associate ฀฀12฀
฀ ฀110฀
Dividends฀received฀from฀associate฀(balancing฀figure)฀ ฀฀฀(16)฀
c/d฀ ฀฀94฀
EXTRACT฀FROM฀STATEMENT฀OF฀CASH฀FLOW฀(OPERATING฀ACTIVITIES)฀
฀ $'000฀
Profit฀before฀tax฀ 67฀
฀฀Share฀of฀profit฀of฀associate฀ (7)฀
Activity฀3:฀Consolidated฀statement฀of฀cash฀flows฀
P฀GROUP฀
STATEMENT฀OF฀CASH฀FLOWS฀FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X8฀
฀ ฀$'000฀ ฀$'000฀
Cash฀flows฀from฀operating฀activities฀ ฀ ฀
Profit฀before฀tax฀ ฀ 4,800 ฀ ฀
฀฀฀Depreciation฀ ฀2,200฀ ฀
฀฀฀Impairment฀loss฀(W1)฀ 180฀ ฀
฀฀฀Share฀of฀profit฀of฀associate฀ (800)฀ ฀
฀฀฀Foreign฀exchange฀gain฀(W5)฀ ฀ (30)฀ ฀
฀ ฀6,350฀ ฀
฀฀฀Increase฀in฀inventories฀(W4)฀ ฀(800)฀ ฀
฀฀฀Increase฀in฀trade฀receivables฀(W4)฀ ฀(600)฀ ฀
฀฀฀Increase฀in฀trade฀payables฀(W4)฀ ฀ 300฀ ฀
Income฀taxes฀paid฀(W3)฀ ฀(1,100)฀ ฀
Net฀cash฀from฀operating฀activities฀ 4,150฀
฀ 553฀

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฀฀
฀ ฀$'000฀ ฀$'000฀
Acquisition฀of฀subsidiary฀net฀of฀cash฀acquired฀(1,300฀– 100)฀ ฀(1,200)฀ ฀
Purchase฀of฀property,฀plant฀and฀equipment฀(W1)฀฀ ฀(2,440)฀ ฀
Dividends฀received฀from฀associate฀(W1)฀ ฀ 260฀ ฀
Net฀cash฀used฀in฀investing฀activities฀ ฀(3,380)฀
฀ ฀ ฀
Cash฀flows฀from฀financing฀activities฀ ฀ ฀
Proceeds฀from฀issuance฀of฀share฀capital฀(W2)฀ ฀940฀ ฀
Dividends฀paid฀to฀owners฀of฀the฀parent฀(W2) (360) ฀
Dividends฀paid฀to฀non-controlling฀interests฀(W2)฀ ฀ (50)฀ ฀
Net฀cash฀from฀financing฀activities฀ ฀฀฀฀530฀
฀ ฀
Net฀increase฀in฀cash฀and฀cash฀equivalents฀ ฀1,300฀
Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀the฀year ฀ ฀1,500฀
Cash฀and฀cash฀equivalents฀at฀the฀end฀of฀the฀year฀ ฀2,800฀
Workings฀
1฀ Assets฀
฀ PPE Goodwill Associate
฀ ฀ $'000 ฀ $'000฀ $'000฀
b/d฀ 41,700 1,400 3,100
SPLOCI฀ 1,000 980฀(800฀+฀180)฀
Depreciation฀฀ (2,200)
Impairment฀ (180)฀β฀
Acquisition฀of฀subsidiary฀ 1,900 720*
Non-cash฀additions฀(W5)฀ 30
Cash฀paid/(rec'd)฀β฀ ฀฀2,440฀ ฀ ฀฀(260)฀
c/d฀ ฀44,870 ฀1,940 ฀3,820
฀ ฀
*Goodwill฀on฀acquisition฀of฀subsidiary:฀ ฀
฀ ฀$'000฀
฀ Consideration฀transferred฀((200฀฀$8.50)฀+฀ ฀3,000฀
฀ 1,300)฀
฀ NCI฀ ฀320฀
฀ Less฀fair฀value฀of฀net฀assets฀at฀acquisition฀ ฀(2,600) ฀
฀ ฀ ฀฀720฀
2฀ Equity฀
฀ ฀ Share฀capital/ Retained NCI
฀ premium earnings
฀ ฀ $'000 $'000 $'000
b/d฀ (5,000฀+฀9,000) 29,700 1,700
฀ 14,000฀
SPLOCI฀ 3,440 190
Acquisition฀of฀subsidiary฀ (W1) 1,700 320
฀ ฀
Cash฀(paid)/rec'd฀β฀ ฀฀ ฀฀฀฀฀940฀ ฀฀฀฀฀(360)฀ ฀฀฀฀฀(50)฀
c/d฀ (5,300฀+฀11,340) ฀32,780 ฀2,160
฀ ฀16,640฀
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lOMoARcPSD|6256454
3฀ Liabilities฀
฀ ฀ Tax฀payable
฀ ฀ $'000
b/d฀ (2,100฀+฀500)฀ 2,600
SPLOCI฀(1,200฀+฀250)฀ 1,450
฀
Cash฀(paid)/rec'd฀β฀ ฀฀ (1,100)฀
c/d฀ (2,350฀+฀600)฀ 2,950
฀ Inventories฀ Trade฀ Trade฀
receivables payables
฀ $'000 $'000 $'000
b/d฀ ฀ 8,100 7,600 ฀ 9,400
Acquisition฀of฀subsidiary฀ 700 300 400
Increase/(decrease)฀β฀ ฀฀฀800฀ ฀฀฀600฀ ฀฀฀฀฀300฀
c/d฀ ฀ ฀9,600 ฀8,500 ฀10,100
5฀ Foreign฀transaction฀
Transactions฀recorded฀on:฀ $'000฀ $'000฀
(1)฀30฀Sep฀฀ DEBIT฀฀ Property,฀plant฀&฀equipment฀(1,080/4)฀ 270฀
฀ CREDIT฀ Payables฀ ฀ ฀ 270฀
(2)฀30฀Nov฀ DEBIT฀฀ Payables฀(1,080/4)฀ 270฀
฀ CREDIT฀฀ Cash฀(1,080/4.5)฀ ฀ ฀ 240฀
฀ CREDIT฀฀ P/L฀ 30฀
The฀exchange฀gain฀created฀a฀cash฀saving฀on฀settlement฀that฀reduced฀the฀actual฀cash฀paid฀to฀
acquire฀property,฀plant฀and฀equipment฀and฀it฀is฀therefore฀shown฀separately฀in฀Working฀1฀as฀a฀
non-cash฀increase฀in฀property,฀plant฀and฀equipment.฀
Activity฀4:฀Analysis฀฀
Cash฀from฀operating฀activities฀
The฀ operating฀ activities฀ section฀ of฀ Horwich's฀ statement฀ of฀ cash฀ flows฀ shows฀ that฀ the฀ business฀ is฀ not฀
only฀profitable,฀but฀is฀generating฀healthy฀inflows฀of฀cash฀from฀its฀main฀operations.฀฀
A฀significant฀proportion฀of฀the฀cash฀generated฀from฀operations฀is฀utilised฀in฀paying฀tax฀and฀paying฀
interest฀ on฀ borrowings.฀ The฀ amount฀ needed฀ to฀ pay฀ interest฀ in฀ future฀ may฀ increase฀ as฀ the฀ company฀
appears฀to฀be฀increasing฀its฀borrowings฀to฀fund฀its฀expansion.฀
The฀ adjustments฀ to฀ profit฀ show฀ that฀ receivables,฀ inventories฀ and฀ payables฀ are฀ all฀ increasing.฀ This฀
trend฀may฀reflect฀the฀expansion฀of฀the฀business฀but฀working฀capital฀management฀must฀be฀reviewed฀
carefully฀ to฀ ensure฀ that฀ cash฀ is฀ collected฀ promptly฀ from฀ receivables฀ so฀ that฀ the฀ company฀ is฀ able฀ to฀
meet฀its฀obligations฀to฀pay฀its฀suppliers฀and฀maintain฀good฀trading฀relationships.฀
Cash฀from฀investing฀activities฀
The฀ two฀ main฀ investing฀ outflows฀ in฀ the฀ year฀ were฀ the฀ net฀ cash฀ payment฀ of฀ $800,000฀ to฀ acquire฀ a฀
new฀subsidiary฀and฀the฀payment฀of฀$340,000฀to฀acquire฀new฀property,฀plant฀and฀equipment.฀These฀
are฀a฀clear฀reflection฀of฀the฀strategy฀of฀expansion฀and฀may฀lead฀to฀increased฀profits฀and฀cash฀flows฀
from฀operations฀in฀future฀years.฀This฀section฀also฀reflects฀cash฀received฀from฀the฀sale฀of฀equipment฀of฀
$70,000฀ and฀ the฀ operating฀ cash฀ flows฀ section฀ shows฀ that฀ this฀ equipment฀ was฀ sold฀ at฀ a฀ loss.฀ This฀
suggests฀ that฀ the฀ company฀ may฀ have฀ acquired฀ the฀ new฀ equipment฀ to฀ replace฀ assets฀ that฀ were฀ old฀
and฀inefficient.฀฀
฀ 555฀

lOMoARcPSD|6256454
฀฀
Another฀significant฀inflow฀in฀this฀section฀is฀an฀amount฀of฀$150,000฀from฀the฀sale฀of฀investments.฀It฀is฀
likely฀ that฀ this฀ was฀ done฀ to฀ help฀ finance฀ the฀ acquisition฀ and฀ expansion.฀ This฀ type฀ of฀ cash฀ flow฀ is฀
unlikely฀ to฀ recur฀ in฀ future฀ and฀ also฀ means฀ that฀ the฀ other฀ inflows฀ in฀ this฀ section,฀ the฀ interest฀ and฀
dividends฀received,฀are฀likely฀to฀cease฀or฀be฀reduced฀in฀future.฀
Cash฀from฀financing฀activities฀
The฀company฀has฀raised฀new฀finance฀totalling฀$600,000,฀which฀has฀probably฀been฀applied฀to฀the฀
acquisition฀ and฀ expansion.฀ The฀ new฀ finance฀ may฀ have฀ had฀ a฀ detrimental฀ effect฀ on฀ the฀ company's฀
gearing.฀The฀increased฀borrowings฀will฀mean฀that฀future฀interest฀expenses฀will฀increase฀which฀could฀
threaten฀profitability฀in฀the฀future฀if฀the฀expansion฀does฀not฀create฀immediate฀increases฀in฀operating฀
profits.฀
This฀ section฀ also฀ includes฀ the฀ largest฀ single฀ cash฀ flow,฀ a฀ dividend฀ payment฀ of฀ $1,000,000.฀ This฀
appears฀to฀be฀a฀very฀high฀payout฀(70%฀of฀the฀cash฀generated฀from฀operating฀activities)฀and฀raises฀
the฀question฀as฀to฀why฀the฀company฀has฀taken฀on฀additional฀borrowings฀rather฀than฀retaining฀more฀
profits฀ to฀ invest฀ in฀ the฀ expansion.฀ On฀ the฀ other฀ hand,฀ it฀ may฀ indicate฀ that฀ management฀ are฀ very฀
confident฀that฀the฀expanded฀business฀will฀generate฀returns฀that฀will฀easily฀cover฀the฀additional฀interest฀
costs฀and฀allow฀this฀level฀of฀dividend฀payment฀to฀continue฀in฀future.฀
Conclusion฀
The฀ expansion฀ appears฀ to฀ have฀ been฀ very฀ successful฀ both฀ in฀ terms฀ of฀ profitability฀ and฀ cash฀ flow.฀
Management฀ must฀ just฀ be฀ careful฀ not฀ to฀ pay฀ excessive฀ dividends฀ in฀ the฀ future฀ at฀ the฀ cost฀ of฀
reinvesting฀in฀the฀business.฀
556฀

lOMoARcPSD|6256454
Chapter฀17฀Interpret฀financial฀statements฀for฀different฀ (there฀are฀many฀
reasons฀you฀could฀
stakeholders฀ have฀chosen฀–฀these฀
are฀just฀examples)฀
Activity฀1:฀Stakeholders฀
Group฀ Reason฀ Further฀reason฀
Management฀ Management฀are฀often฀set฀ Management฀may฀use฀financial฀

performance฀targets฀and฀use฀the฀ statements฀to฀aid฀them฀in฀important฀
financial฀statements฀to฀compare฀ strategic฀decisions.฀฀
company฀performance฀to฀the฀targets฀
set,฀with฀a฀view฀to฀achieving฀bonuses.฀
Employees฀ Employees฀are฀concerned฀with฀job฀ Employees฀want฀to฀feel฀proud฀of฀the฀

stability฀and฀may฀use฀corporate฀ company฀that฀they฀work฀for฀and฀
reports฀to฀better฀understand฀the฀future฀ positive฀financial฀statements฀can฀
prospects฀of฀their฀employer.฀ indicate฀a฀job฀well฀done.฀
Present฀and฀ Existing฀investors฀will฀assess฀whether฀ Investors฀will฀want฀to฀understand฀

potential฀ their฀investment฀is฀sound฀and฀ more฀about฀the฀types฀of฀products฀the฀
investors฀ generates฀acceptable฀returns.฀ company฀is฀involved฀in฀(the฀segment฀
Potential฀investors฀will฀use฀the฀ report฀will฀help฀with฀this)฀and฀the฀
financial฀statements฀to฀help฀them฀ way฀in฀which฀the฀company฀does฀
decide฀whether฀or฀not฀to฀buy฀shares฀ business,฀which฀will฀help฀them฀make฀
in฀that฀company.฀ ethical฀investment฀decisions.฀
Lenders฀and฀ Lenders฀and฀suppliers฀are฀concerned฀ Lenders฀and฀suppliers฀will฀be฀

suppliers฀ with฀the฀credit฀worthiness฀of฀an฀entity฀ interested฀in฀the฀future฀direction฀of฀a฀
and฀the฀likelihood฀that฀they฀will฀be฀ business฀to฀help฀them฀plan฀whether฀
repaid฀amounts฀owing.฀ it฀is฀likely฀that฀they฀will฀continue฀to฀
฀ be฀a฀business฀partner฀of฀the฀entity฀
going฀forward.฀
Customers฀ Consumers฀may฀want฀to฀know฀that฀ Customers฀typically฀want฀to฀feel฀that฀

products฀and฀services฀provided฀by฀an฀ they฀are฀getting฀good฀value฀for฀
entity฀are฀consistent฀with฀their฀ethical฀ money฀in฀the฀products฀and฀services฀
and฀moral฀expectations.฀ they฀buy.฀
Two฀further฀examples฀of฀stakeholders฀are฀shown฀below฀(these฀are฀just฀two฀
examples฀of฀many฀different฀stakeholder฀groups฀that฀could฀have฀been฀selected)฀
Government฀ The฀government฀often฀uses฀financial฀ The฀government฀uses฀financial฀

statements฀to฀ensure฀that฀the฀company฀ statements฀to฀collect฀information฀and฀
฀
is฀paying฀a฀reasonable฀amount฀of฀tax฀ statistics฀on฀different฀industries฀to฀
relative฀to฀the฀profits฀that฀it฀earns.฀ help฀inform฀policy฀making.฀
The฀local฀ The฀local฀community฀may฀wish฀to฀ The฀local฀community฀may฀be฀

community฀ know฀about฀local฀employment฀ interested฀in฀the฀company's฀social฀
opportunities.฀ and฀environmental฀credentials฀such฀
as฀how฀well฀employees฀are฀treated฀
and฀the฀company's฀environmental฀
footprint.฀
฀ 557฀

lOMoARcPSD|6256454
฀฀
Activity฀2:฀Liquidity฀analysis฀
(a)฀ Relevant฀liquidity฀ratios:฀
20X7฀ 20X6฀
Current฀ratio฀ 430฀+฀3,860฀+฀12 445฀+฀2,510฀+฀37
=฀ ฀=฀0.87:1฀ =฀ ฀=฀1.02:1฀
4,660฀+฀280 2,890฀+฀40
Acid฀test฀ratio฀ 3,860฀+฀12 2,510฀+฀37
=฀ ฀=฀0.78:1฀ =฀ ฀=฀0.87:1฀
4,660฀+฀280 2,890฀+฀40
Receivables฀collection฀ =฀3,860/32,785฀฀365฀=฀43฀ =฀2,510/31,390฀฀365฀=฀29฀
period฀ ฀ days฀ ฀ days฀
(b)฀ Analysis฀from฀Wheels's฀perspective฀
Has฀liquidity฀improved฀or฀deteriorated?฀
STEP 1฀
The฀ liquidity฀ position฀ has฀ deteriorated฀ in฀ the฀ current฀ year.฀ The฀ entity฀ has฀ a฀
net฀current฀liability฀position฀in฀the฀current฀year,฀mainly฀due฀to฀the฀increase฀in฀
payables฀ being฀ greater฀ than฀ the฀ increase฀ in฀ receivables.฀ The฀ current฀ and฀
acid฀ test฀ ratios฀ both฀ indicate฀ insufficient฀ current฀ assets฀ to฀ cover฀ current฀
liabilities฀and฀the฀fact฀that฀the฀entity฀is฀funding฀working฀capital฀using฀a฀bank฀
overdraft฀which฀is฀nearing฀its฀limit฀is฀of฀concern.฀
Why฀has฀the฀liquidity฀improved฀or฀deteriorated?฀
STEP 2฀
The฀new฀contract฀with฀the฀department฀store฀is฀likely฀to฀be฀at฀least฀part฀of฀the฀
cause฀of฀the฀increase฀in฀the฀receivables฀collection฀period.฀The฀increase฀from฀
29฀ to฀ 43฀ days฀ is฀ the฀ equivalent฀ of฀ approximately฀ $1,258,000฀ of฀ cash฀
([43฀days฀–฀29฀days]/365฀days฀×฀revenue฀of฀$32,785,000)฀being฀tied฀up฀
in฀receivables฀which฀is฀likely฀to฀be฀the฀reason฀for฀declining฀liquidity.฀฀฀
The฀ contract฀ also฀ appears฀ to฀ be฀ having฀ a฀ knock-on฀ effect฀ on฀ the฀ payables฀
balance฀which฀has฀increased฀significantly฀in฀the฀period,฀presumably฀due฀to฀
increased฀purchases฀to฀satisfy฀the฀demand฀on฀this฀contract฀and฀perhaps฀due฀
to฀ a฀ delay฀ in฀ making฀ payments฀ due฀ to฀ the฀ increased฀ receivables฀ collection฀
period.฀ Wheels฀ should฀ be฀ careful฀ not฀ to฀ significantly฀ exceed฀ credit฀ terms฀
offered฀by฀suppliers฀as฀this฀may฀impact฀on฀the฀continuity฀of฀supply.฀
Conclusion฀
STEP 3฀
It฀ is฀ recommended฀ that฀ Wheels฀ contacts฀ its฀ bank฀ to฀ renegotiate฀ the฀
bank฀ overdraft฀ as฀ it฀ is฀ likely฀ to฀ breach฀ the฀ overdraft฀ limit฀ in฀ the฀ near฀
future.฀It฀should฀also฀consider฀renegotiating฀credit฀terms฀with฀key฀suppliers.฀
Activity฀3:฀Ratio฀analysis฀
Analysis฀
Size฀
The฀ revenue฀ figures฀ indicate฀ the฀ respective฀ size฀ of฀ the฀ companies.฀ Both฀ of฀ the฀ potential฀ targets฀ are฀
smaller฀than฀LOP.฀Entity฀B฀is฀larger฀than฀entity฀A.฀
Margins฀
Both฀ of฀ the฀ potential฀ target฀ entities฀ appear฀ to฀ be฀ less฀ efficient฀ than฀ LOP฀ in฀ respect฀ of฀ generating฀
profits.฀฀
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Entity฀ A฀ has฀ a฀ much฀ stronger฀ gross฀ profit฀ margin฀ than฀ entity฀ B.฀ There฀ may฀ be฀ less฀ competitive฀
pressure฀on฀pricing฀in฀its฀markets,฀or฀it฀may฀face฀lower฀costs฀for฀materials฀and฀labour.฀฀
Comparing฀ their฀ net฀ profit฀ margins,฀ entity฀ B฀ appears฀ stronger.฀ This฀ could฀ be฀ due฀ to฀ the฀ effect฀ of฀
interest฀ charges฀ on฀ the฀ profits฀ of฀ entity฀ A,฀ which฀ has฀ higher฀ gearing,฀ but฀ could฀ also฀ be฀ due฀ to฀ the฀
fixed฀ elements฀ of฀ operating฀ expenses฀ having฀ less฀ impact฀ on฀ the฀ profits฀ of฀ the฀ larger฀ company.฀ The฀
larger฀company฀is฀in฀a฀better฀position฀to฀benefit฀from฀economies฀of฀scale.฀
Gearing฀
Entity฀A฀has฀significantly฀higher฀gearing฀than฀either฀entity฀B฀or฀LOP.฀This฀is฀probably฀because฀of฀the฀
low฀ rate฀ of฀ interest฀ available฀ in฀ Frontland฀ (5%).฀ High฀ gearing฀ is฀ quite฀ usual฀ in฀ the฀ construction฀
industry฀ as฀ debt฀ finance฀ is฀ needed฀ to฀ fund฀ heavy฀ investment฀ in฀ assets.฀ These฀ assets฀ then฀ provide฀
security฀for฀the฀entity's฀borrowings,฀making฀it฀easier฀to฀raise฀finance.฀
The฀ higher฀ gearing฀ makes฀ entity฀ A฀ a฀ riskier฀ investment฀ than฀ entity฀ B.฀ Interest฀ commitments฀ must฀ be฀
paid฀ irrespective฀ of฀ trading฀ conditions฀ and฀ profitability,฀ unlike฀ equity฀ dividends฀ which฀ are฀
discretionary.฀Also,฀if฀the฀borrowings฀are฀at฀variable฀rates,฀there฀is฀a฀risk฀that฀increases฀in฀the฀interest฀
rates฀could฀damage฀profits฀in฀future.฀
P/E฀ratio฀
The฀higher฀P/E฀ratio฀of฀entity฀B฀suggests฀that฀investors฀have฀more฀confidence฀in฀entity฀B฀than฀entity฀A.฀
However,฀both฀entities฀have฀lower฀P/E฀ratios฀than฀LOP฀so฀if฀LOP฀wishes฀to฀maintain฀or฀improve฀its฀
P/E฀ratio,฀it฀might฀wish฀to฀seek฀an฀alternative฀target.฀
Impact฀on฀indicators฀of฀LOP฀
Revenue฀
Entity฀B฀would฀have฀the฀more฀significant฀effect฀on฀LOP's฀revenue,฀increasing฀it฀by฀60%.฀
Gross฀margin฀
Both฀entities฀would฀decrease฀the฀overall฀gross฀margin฀of฀LOP.฀Entity฀A฀would฀have฀only฀a฀marginal฀
effect,฀ but฀ in฀ combination฀ with฀ entity฀ B฀ it฀ would฀ result฀ in฀ a฀ gross฀ margin฀ of฀ 24%฀ (the฀ total฀ gross฀
margins฀of฀LOP฀and฀B฀((28%฀×฀500)฀+฀(17%฀×฀300))฀over฀the฀combined฀revenue฀of฀$800m).฀
Net฀margin฀
Both฀entities฀would฀have฀an฀adverse฀effect฀on฀LOP's฀net฀profit฀margin.฀Here฀entity฀A฀would฀have฀the฀
more฀significant฀effect,฀reducing฀the฀net฀margin฀to฀14%฀(the฀total฀net฀margins฀of฀LOP฀and฀A฀((16%฀×฀
500)฀+฀(9%฀฀160))฀over฀the฀combined฀revenue฀of฀$660m).฀
Gearing฀
Entity฀ A฀ would฀ increase฀ LOP's฀ gearing฀ and฀ risk฀ exposure.฀ Entity฀ B฀ would฀ decrease฀ LOP's฀ gearing฀
and฀risk฀exposure.฀฀
However,฀investing฀in฀entity฀A฀would฀decrease฀the฀average฀rates฀of฀interest฀suffered฀by฀the฀group฀as฀
a฀whole.฀
P/E฀ratio฀
It฀ would฀ appear฀ that฀ both฀ entities฀ would฀ be฀ likely฀ to฀ decrease฀ the฀ P/E฀ ratio฀ of฀ LOP฀ although฀ this฀
would฀depend฀on฀the฀market's฀view฀of฀the฀benefits฀of฀the฀respective฀purchases฀and฀the฀consequent฀
change฀in฀price฀post฀purchase.฀
Conclusion฀
Both฀entities฀would฀have฀an฀adverse฀effect฀on฀the฀financial฀indicators฀of฀LOP,฀so฀it฀may฀be฀wiser฀not฀
to฀invest฀in฀either฀of฀them.฀
If฀ LOP฀ wishes฀ to฀ expand฀ in฀ size,฀ is฀ most฀ interested฀ in฀ profitability฀ in฀ terms฀ of฀ the฀ 'bottom฀ line'฀ net฀
profit,฀and฀is฀risk฀averse,฀then฀entity฀B฀is฀the฀more฀attractive฀proposition.฀
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฀฀
Activity฀4:฀EPS฀manipulation฀
Management฀ could฀ use฀ the฀ treatment฀ of฀ prior฀ period฀ errors฀ to฀ purposefully฀ manipulate฀
earnings.฀฀For฀example,฀management฀could฀understate฀a฀warranty฀provision฀by฀$1m฀in฀the฀current฀
year฀ in฀ order฀ to฀ meet฀ profit฀ targets.฀ ฀ They฀ know฀ that฀ when฀ the฀ matter฀ is฀ corrected฀ next฀ year฀ (as฀ a฀
prior฀ period฀ error),฀ it฀ will฀ be฀ 'hidden'฀ in฀ retained฀ earnings฀ rather฀ than฀ being฀ reflected฀ in฀
reported฀profit฀or฀loss฀of฀that฀period.฀฀
Although฀comparatives฀ must฀ be฀ restated฀with฀the฀correct฀provision฀and฀expense,฀the฀focus฀of฀
stakeholders฀is฀likely฀to฀be฀on฀the฀current฀year฀rather฀than฀the฀prior฀year.฀฀
Management฀do฀have฀to฀disclose฀ information฀about฀the฀prior฀period฀error฀(including฀the฀nature฀
and฀amount)฀but฀this฀will฀feature฀in฀a฀note฀to฀the฀accounts฀and฀it฀might฀go฀unnoticed฀by฀users฀of฀the฀
Adjustments฀to฀the฀financial฀statements฀due฀to฀correction฀or฀errors฀and฀inconsistencies฀would฀not฀be฀
favourably฀ viewed฀ by฀ investors฀ who฀ would฀ be฀ concerned฀ about฀ the฀ quality฀ of฀ earnings.฀
Unless฀ the฀ notes฀ to฀ the฀ accounts฀ are฀ carefully฀ scrutinised,฀ investors฀ may฀ be฀ unaware฀ that฀ an฀ error฀
took฀place.฀฀
Any฀ earnings฀ manipulation฀ will฀ have฀ an฀ impact฀ on฀ EPS,฀ and฀ managers฀ will฀ normally฀ want฀ to฀
positively฀ impact฀ earnings฀ in฀ order฀ to฀ report฀ better฀ EPS฀ to฀ boost฀ investor฀ confidence,฀ increase฀ the฀
share฀price฀and฀achieve฀bonus฀targets.฀The฀potential฀for฀manipulation฀means฀the฀EPS฀ratio฀needs฀to฀
be฀viewed฀with฀caution.฀
Activity฀5:฀Non-financial฀measures฀
Perspective฀ Measure฀ Why?฀
Customer฀฀ Number฀of฀times฀customer฀fails฀ Indicates฀potential฀loss฀of฀

to฀make฀a฀booking฀due฀to฀ customers฀
website฀crash฀or฀busy฀phone฀
lines฀
Internal฀ Number฀of฀take-offs฀on฀time฀ Measures฀efficiency฀of฀process฀
Innovation฀&฀learning฀ Number฀of฀new฀destinations฀ Attracts฀more฀customers฀to฀

airline฀
Activity฀6:฀Integrated฀reporting฀
User's฀perspective฀
The฀ International฀ <IR>฀ Framework฀ does฀ not฀ define฀ value฀ creation฀ from฀ one฀ user's฀ perspective.฀ This฀
has฀the฀advantage฀of฀creating฀a฀broad฀report฀but฀may฀be฀of฀limited฀value฀to฀stakeholders฀who฀often฀
have฀a฀fairly฀narrow฀focus฀eg฀investors฀who฀want฀to฀maximise฀their฀wealth.฀
Credibility฀
The฀ International฀ <IR>฀ Framework฀ does฀ not฀ require฀ those฀ charged฀ with฀ governance฀ to฀ state฀ their฀
responsibilities฀ which฀ may฀ potentially฀ undermine฀ the฀ credibility฀ of฀ the฀ integrated฀ report฀ and฀ impair฀
the฀reliance฀that฀can฀be฀placed฀on฀the฀report.฀
Disclosures฀
It฀can฀be฀hard฀to฀quantify฀the฀different฀capitals฀and฀<IR>฀permits฀qualitative฀disclosures฀where฀it฀is฀not฀
possible฀ to฀ make฀ quantitative฀ disclosures.฀ This฀ can฀ reduce฀ comparability฀ of฀ integrated฀ reports฀
between฀entities.฀
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Format฀of฀the฀report฀
Whilst฀ there฀ are฀ recommended฀ content฀ elements฀ and฀ guiding฀ principles,฀ the฀ exact฀ format฀ of฀ an฀
integrated฀report฀will฀vary,฀making฀it฀difficult฀to฀for฀stakeholders฀compare฀reports฀of฀different฀entities฀
or฀across฀periods.฀
Information฀about฀the฀future฀
Disclosing฀ information฀ about฀ the฀ future฀ inevitably฀ involves฀ uncertainties฀ that฀ cannot฀ be฀ eliminated฀
which฀ means฀ that฀ stakeholder฀ decisions฀ may฀ be฀ based฀ on฀ future฀ events,฀ which฀ might฀ turn฀ out฀
differently฀from฀what฀was฀expected.฀
Aggregation฀and฀disaggregation฀
The฀levels฀of฀aggregation฀should฀be฀appropriate฀to฀the฀circumstances฀of฀the฀organisation.฀Whilst฀that฀
improves฀ the฀ relevance฀ of฀ the฀ information฀ for฀ that฀ particular฀ company,฀ for฀ a฀ stakeholder฀ trying฀ to฀
choose฀between฀different฀entities,฀this฀significantly฀reduces฀comparability.฀
Time฀frames฀
The฀time฀frames฀for฀short,฀medium฀and฀long฀term฀will฀tend฀to฀differ฀by฀industry฀or฀sector.฀Consistency฀
within฀the฀industry฀will฀assist฀stakeholders฀choosing฀between฀companies฀in฀the฀same฀industry฀but฀will฀
make฀comparison฀of฀entities฀from฀different฀industries฀more฀challenging.฀
Materiality฀
The฀ International฀ <IR>฀ Framework฀ requires฀ disclosure฀ of฀ material฀ matters.฀ Assessing฀ materiality฀
requires฀ significant฀ judgement฀ and฀ is฀ likely฀ to฀ vary฀ between฀ entities฀ making฀ comparability฀ more฀
difficult฀for฀stakeholders.฀
Activity฀7:฀Identifying฀reportable฀segments฀
At฀31฀December฀20X5฀four฀of฀the฀six฀operating฀segments฀are฀reportable฀operating฀segments:฀
฀ The฀Chemicals฀(which฀comprises฀the฀two฀sub-groups฀of฀Europe฀and฀the฀rest฀of฀the฀world)฀and฀
Pharmaceuticals฀wholesale฀segments฀meet฀the฀definition฀on฀all฀size฀criteria.฀
฀ The฀Hair฀care฀segment฀is฀separately฀reported฀due฀to฀its฀profitability฀being฀greater฀than฀10%฀of฀
total฀segments฀in฀profit฀(4/29).฀
฀ The฀Body฀care฀segment฀also฀meets฀the฀size฀criteria฀(both฀revenue฀and฀profits฀exceed฀the฀size฀
criteria)฀ and฀ requires฀ disclosure฀ under฀ IFRS฀ 8฀ despite฀ being฀ disposed฀ of฀ during฀ the฀ period.฀
Also฀note฀that฀the฀fact฀that฀it฀does฀not฀make฀a฀majority฀of฀its฀sales฀externally฀does฀not฀prevent฀
separate฀ disclosure฀ under฀ IFRS฀ 8.฀ The฀ sale฀ of฀ the฀ operations฀ may฀ meet฀ the฀ criteria฀ to฀ be฀
reported฀as฀a฀discontinued฀operation฀under฀IFRS฀5฀which฀will฀require฀additional฀disclosures.฀
Reporting฀ the฀ above฀ four฀ operating฀ segments฀ accounts฀ for฀ 84%฀ of฀ external฀ revenue฀ being฀
reported;฀hence฀the฀requirement฀to฀report฀at฀least฀75%฀of฀external฀revenue฀has฀been฀satisfied.฀
The฀Pharmaceuticals฀retail฀segment฀represents฀9.2%฀of฀revenue;฀the฀loss฀is฀6.9%฀of฀the฀'control฀
number'฀ of฀ –฀ in฀ this฀ case฀ –฀ operating฀ segments฀ in฀ profit฀ (2/29)฀ and฀ 8.9%฀ of฀ total฀ assets฀
(30/336)฀ (before฀ the฀ addition฀ of฀ the฀ new฀ Hair฀ care฀ operations/sale฀ of฀ the฀ Body฀ care฀
segment,฀ and฀ 9.6%฀ (30/(336฀ –฀ 54฀ +฀ 32฀ =฀ 314))฀ after).฀ Consequently,฀ it฀ is฀ not฀ separately฀
reportable.฀ Although฀ it฀ falls฀ below฀ the฀ 10%฀ thresholds฀ it฀ can฀ still฀ be฀ reported฀ as฀ a฀ separate฀
operating฀segment฀if฀management฀believe฀that฀information฀about฀the฀segment฀would฀be฀useful฀
to฀users฀of฀the฀financial฀statements.฀Otherwise฀it฀would฀be฀disclosed฀in฀an฀'All฀other฀segments'฀
column.฀
The฀ Cosmetics฀ segment฀ represents฀ 6.3%฀ of฀ revenue,฀ 6.9%฀ of฀ operating฀ segments฀ in฀ profit฀
(2/29)฀ and฀ 5.4%฀ (18/336)฀ of฀ total฀ assets฀ (before฀ the฀ addition฀ of฀ the฀ new฀ Hair฀ care฀
operations/sale฀of฀the฀Body฀care฀segment,฀and฀5.7%฀(18/(336฀–฀54฀+฀32฀=฀314))฀after).฀It฀
can฀ also฀ be฀ reported฀ separately฀ if฀ management฀ believe฀ the฀ information฀ would฀ be฀ useful฀ to฀
users.฀Otherwise฀it฀would฀also฀be฀disclosed฀in฀an฀'All฀other฀segments'฀column.฀
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฀฀
After฀ the฀ sale฀ of฀ the฀ Body฀ care฀ segment,฀ the฀ new฀ Chinese฀ business฀ increases฀ the฀ size฀ of฀ the฀
Hair฀ care฀ segment฀ which฀ still฀ remains฀ reportable.฀ However,฀ the฀ business฀ itself฀ represents฀
10.2%฀of฀revised฀total฀operating฀segment฀assets฀(32/(336฀–฀54฀+฀32฀=฀314)),฀and฀may฀justify฀
separate฀reporting฀as฀a฀different฀operating฀segment฀if฀management฀considers฀that฀the฀nature฀
of฀ its฀ product฀ type฀ (mass฀ market฀ rather฀ than฀ 'high฀ end')฀ and฀ distribution฀ (retail฀ versus฀
wholesale)฀differ฀sufficiently฀from฀the฀'traditional'฀Hair฀care฀products฀the฀group฀manufactures.฀
Activity฀8:฀IFRS฀8฀disclosures฀
A฀segment฀report฀can฀be฀useful฀in฀providing฀information฀to฀investors฀to฀assist฀them฀in฀decision-making฀
(to฀ buy฀ or฀ sell฀ shares).฀ However,฀ there฀ are฀ some฀ limitations฀ to฀ its฀ usefulness.฀ The฀ benefits฀ and฀
limitations,฀using฀JH's฀segment฀report฀as฀an฀illustration,฀are฀outlined฀below.฀
Benefits฀
Risk฀and฀return฀
Large฀ publicly฀ traded฀ entities฀ typically฀ offer฀ many฀ different฀ types฀ of฀ products฀ or฀ services฀ to฀ their฀
customer,฀each฀of฀which฀results฀in฀very฀different฀types฀of฀risks฀and฀returns.฀In฀the฀case฀of฀JH,฀the฀three฀
main฀ markets฀ are฀ food,฀ personal฀ care฀ and฀ home฀ care.฀ For฀ example,฀ as฀ food฀ has฀ a฀ short฀ shelf-life,฀
inventory฀obsolescence฀is฀going฀to฀be฀a฀much฀more฀significant฀risk฀than฀for฀personal฀care฀and฀home฀
care฀products.฀
Informed฀investment฀decision฀
If฀ an฀ investor฀ were฀ only฀ able฀ to฀ view฀ the฀ full฀ financial฀ statements฀ of฀ JH,฀ they฀ would฀ not฀ be฀ able฀ to฀
make฀an฀assessment฀of฀how฀the฀different฀parts฀of฀the฀business฀are฀performing฀and฀so฀could฀not฀make฀
a฀fully฀informed฀investment฀decision.฀For฀example,฀they฀would฀not฀know฀that฀personal฀care฀products฀
are฀making฀a฀profit฀margin฀of฀under฀half฀that฀of฀food฀(3%฀versus฀7.8%).฀
Assess฀management฀strategy฀and฀different฀prospects฀of฀each฀segment฀
Disaggregation฀into฀operating฀segments฀allows฀investors฀to฀use฀the฀segment฀report฀to:฀
฀ Assess฀ management's฀ strategy฀ and฀ effectiveness฀ –฀ for฀ example,฀ whether฀ the฀ most฀ profitable฀
product฀ accounts฀ for฀ the฀ largest฀ proportion฀ of฀ sales,฀ (in฀ JH,฀ food฀ has฀ the฀ highest฀ margin฀ at฀
7.8%฀and฀accounts฀for฀more฀than฀half฀of฀sales,฀demonstrating฀sound฀management฀judgement);฀
฀ Assess฀the฀different฀rates฀of฀profitability,฀opportunities฀for฀growth,฀future฀prospects฀and฀degrees฀
of฀ risk฀ of฀ each฀ different฀ business฀ activity.฀ For฀ example,฀ whether฀ the฀ segment฀ has฀ recently฀
invested฀in฀assets฀for฀future฀growth฀(in฀JH,฀all฀three฀segments฀have฀invested฀in฀assets฀in฀the฀year฀
and,฀overall,฀home฀care฀has฀the฀highest฀asset฀to฀revenue฀ratio,฀either฀implying฀a฀more฀capital-
intensive฀manufacturing฀process฀or฀the฀greatest฀potential฀for฀future฀growth฀and฀perhaps฀newer,฀
more฀efficient฀assets).฀
Limitations฀
Comparability฀with฀other฀entities฀
Segments฀ are฀ determined฀ under฀ IFRS฀ 8฀ on฀ the฀ basis฀ of฀ internal฀ reporting฀ to฀ the฀ chief฀ operating฀
decision฀ maker.฀ JH's฀ three฀ segments฀ are฀ food,฀ personal฀ care฀ and฀ home฀ care.฀ However,฀ JH's฀
competitors฀are฀unlikely฀to฀structure฀their฀business฀or฀report฀to฀the฀board฀in฀exactly฀the฀same฀way฀as฀
JH.฀ This฀ could฀ make฀ the฀ investment฀ decision฀ very฀ difficult฀ due฀ to฀ the฀ lack฀ of฀ comparability฀ of฀
reportable฀segments฀between฀entities.฀
Unallocated฀amounts฀
Where฀it฀is฀not฀possible฀to฀allocate฀an฀expense,฀asset฀or฀liability฀to฀a฀specific฀segment,฀the฀amounts฀
are฀ reported฀ as฀ unallocated฀ in฀ the฀ reconciliation฀ of฀ reportable฀ segments฀ to฀ the฀ entity's฀ full฀ financial฀
statements.฀฀฀
Here฀JH฀has฀$5m฀of฀unallocated฀expenses.฀If฀these฀were฀allocated฀to฀specific฀segments,฀they฀could฀
turn฀ personal฀ care฀ or฀ home฀ care's฀ reported฀ profit฀ into฀ a฀ loss฀ or฀ reduce฀ food's฀ profit฀ by฀ a฀ third.฀฀
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Therefore,฀comparison฀of฀the฀different฀segments฀without฀taking฀into฀account฀these฀unallocated฀items฀
would฀be฀misleading.฀
Equally฀ 15%฀ of฀ JH's฀ group฀ liabilities฀ are฀ unallocated.฀ If฀ these฀ had฀ been฀ allocated฀ to฀ a฀ specific฀
segment,฀they฀would฀more฀than฀double฀personal฀care's฀liabilities฀and฀significantly฀increase฀the฀other฀
two฀segments'฀liabilities.฀There฀is฀a฀danger฀that฀users฀believe฀that฀the฀total฀reported฀segment฀liabilities฀
show฀the฀complete฀liabilities฀of฀the฀JH฀group.฀
Therefore,฀ where฀ these฀ unallocated฀ amounts฀ are฀ significant,฀ the฀ figures฀ by฀ segment฀ could฀ be฀
misleading฀and฀could฀result฀in฀an฀ill-informed฀investment฀decision.฀฀
Reconciliations฀
IFRS฀ 8฀ Operating฀ Segments฀ only฀ requires฀ reconciliation฀ of฀ segment฀ revenues,฀ profit฀ or฀ loss,฀ assets฀
and฀liabilities฀(and฀for฀any฀material฀items฀separately฀disclosed)฀to฀the฀total฀entity's฀figures.฀
Therefore,฀it฀is฀not฀possible฀to฀see฀all฀the฀reasons฀for฀the฀differences฀in฀the฀statement฀of฀profit฀or฀loss฀
and฀other฀comprehensive฀income฀and฀statement฀of฀financial฀position฀between฀the฀reported฀segment฀
figures฀and฀the฀total฀entity฀figures.฀
In฀JH's฀case,฀it฀is฀not฀possible฀to฀see฀any฀unallocated฀expenses,฀interest฀or฀depreciation.฀฀Therefore฀
investors฀are฀not฀presented฀with฀the฀full฀picture.฀
Allocation฀between฀segments฀
Management฀ judgement฀ is฀ required฀ in฀ allocating฀ income,฀ expenses,฀ assets฀ and฀ liabilities฀ to฀ the฀
different฀segments.฀฀In฀some฀instances,฀such฀as฀interest฀revenue฀and฀interest฀expense฀where฀treasury฀
and฀ financing฀ decisions฀ are฀ likely฀ to฀ be฀ made฀ centrally฀ rather฀ than฀ by฀ division,฀ it฀ could฀ be฀ very฀
difficult฀to฀allocate฀these฀items.฀Equally,฀central฀expenses,฀assets฀and฀liabilities฀(such฀as฀those฀relating฀
to฀head฀office)฀could฀be฀hard฀to฀allocate.฀This฀leaves฀scope฀for฀errors,฀manipulation฀and฀bias.฀
In฀ JH's฀ case,฀ both฀ interest฀ revenue฀ and฀ interest฀ expense฀ are฀ individually฀ greater฀ than฀ total฀ segment฀
profit฀so฀incorrect฀allocation฀could฀mislead฀an฀investor฀into฀making฀an฀ill-informed฀decision.฀฀฀
Intersegment฀items฀
The฀cancellation฀of฀intersegment฀revenue,฀assets฀and฀liabilities฀is฀clearly฀shown฀in฀the฀reconciliation฀
of฀ the฀ segment฀ revenue,฀ profit฀ or฀ loss,฀ assets฀ and฀ liabilities฀ to฀ the฀ total฀ entity's.฀ However,฀ it฀ is฀ not฀
possible฀to฀see฀the฀cancellation฀of฀intersegment฀expenses฀or฀interest.฀
This฀ could฀ confuse฀ investors฀ as฀ they฀ cannot฀ see฀ the฀ full฀ impact฀ of฀ intersegment฀ cancellations฀ on฀ the฀
group฀accounts.฀For฀example,฀in฀JH's฀segment฀report,฀the฀cancellation฀of฀$2m฀intersegment฀revenue฀
is฀clearly฀shown฀but฀the฀corresponding฀cancellation฀of฀intersegment฀expense฀is฀not฀disclosed.฀
Understandability฀
The฀ disclosure฀ requirements฀ of฀ IFRS฀ 8฀ Operating฀ Segments฀ are฀ quite฀ onerous฀ as฀ illustrated฀ by฀ the฀
level฀of฀detail฀in฀JH's฀segment฀report.฀There฀is฀a฀danger฀of฀'information฀overload',฀overwhelming฀the฀
investor฀with฀the฀end฀result฀of฀the฀segment฀report฀being฀ignored฀altogether.฀
Disclosure฀requirements฀
The฀nature฀and฀quantify฀of฀information฀required฀to฀be฀disclosed฀by฀IFRS฀8฀depends฀on฀the฀content฀of฀
internal฀ management฀ reports฀ reviewed฀ by฀ the฀ chief฀ operating฀ decision฀ maker.฀ This฀ will฀ vary฀ from฀
company฀ to฀ company,฀ making฀ it฀ hard฀ for฀ an฀ investor฀ to฀ compare฀ the฀ performance฀ of฀ different฀
entities.฀
In฀the฀case฀of฀JH,฀a฀significant฀amount฀of฀information฀is฀reported฀internally฀and฀therefore฀disclosed.฀
However,฀ IFRS฀ 8฀ only฀ requires฀ as฀ a฀ minimum฀ for฀ an฀ entity฀ to฀ report฀ a฀ measure฀ of฀ profit฀ or฀ loss฀ for฀
each฀ reportable฀ segment.฀ If฀ this฀ were฀ the฀ only฀ disclosure,฀ it฀ would฀ be฀ very฀ hard฀ to฀ make฀ an฀
investment฀decision.฀
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฀฀
Reportable฀segments฀
IFRS฀8฀only฀requires฀segments฀to฀be฀reported฀on฀separately฀if฀they฀meet฀certain฀criteria฀(at฀least฀10%฀
of฀revenue;฀or฀at฀least฀10%฀of฀the฀higher฀of฀the฀combined฀reported฀profit฀or฀loss;฀or฀at฀least฀10%฀of฀
assets).฀As฀long฀as฀at฀least฀75%฀of฀external฀revenue฀is฀reported฀on,฀the฀remaining฀segments฀may฀be฀
aggregated.฀
Here,฀JH฀has฀combined฀the฀segments฀that฀have฀not฀met฀the฀10%฀threshold฀into฀'All฀others'฀which฀is฀
not฀helpful฀to฀investors฀as฀they฀will฀not฀know฀which฀products฀or฀services฀are฀included฀in฀this฀category.฀
Chapter฀18฀Reporting฀requirements฀of฀small฀and฀medium-
sized฀entities฀
Activity฀1:฀Intangible฀assets฀–฀IFRS฀for฀SMEs฀v฀full฀IFRS฀
(a)฀ (i)฀ Under฀full฀IFRS,฀Diamond฀Co฀has฀an฀accounting฀policy฀choice.฀฀It฀could฀account฀for฀the฀
licence฀ at฀ cost฀ less฀ accumulated฀ amortisation฀ which฀ would฀ give฀ a฀ carrying฀ amount฀ of฀
($2.6m฀–฀($2.6m/10))฀$2.34m฀at฀the฀end฀of฀the฀year.฀Or,฀as฀the฀licence฀has฀an฀active฀
market,฀it฀could฀account฀for฀it฀at฀fair฀value฀of฀$2.8m฀at฀the฀end฀of฀the฀year฀which฀would฀
generate฀a฀revaluation฀surplus฀of฀($2.8m฀–฀$2.34m)฀$0.46m.฀฀
(ii)฀ Under฀ IFRS฀ for฀ SMEs,฀ intangible฀ assets฀ must฀ be฀ carried฀ at฀ cost฀ less฀ accumulated฀
amortisation,฀hence฀there฀is฀no฀accounting฀policy฀choice฀and฀the฀carrying฀value฀of฀the฀
licence฀would฀be฀$2.34m฀as฀calculated฀above.฀
(b)฀ Diamond฀Co's฀assets฀would฀have฀a฀higher฀value฀under฀the฀fair฀value฀method฀permitted฀under฀
IAS฀ 38.฀ ฀ As฀ such,฀ Diamond฀ Co฀ would฀ report฀ a฀ lower฀ return฀ on฀ assets฀ than฀ if฀ the฀ cost฀ less฀
accumulated฀amortisation฀method฀is฀applied.฀฀
Activity฀2:฀Goodwill฀–฀full฀IFRS฀v฀IFRS฀for฀SMEs฀฀
Tutorial฀note.฀฀
You฀need฀to฀remember฀the฀following฀when฀accounting฀for฀goodwill฀under฀IFRS฀for฀SMEs:฀
(a)฀ NCI฀must฀be฀valued฀based฀on฀its฀share฀of฀net฀assets฀
(b)฀ If฀ management฀ are฀ unable฀ to฀ estimate฀ reliably฀ the฀ useful฀ life฀ of฀ goodwill,฀ then฀ it฀ should฀ be฀
amortised฀over฀a฀maximum฀life฀of฀10฀years฀
Goodwill฀at฀the฀date฀of฀acquisition฀would฀be฀calculated฀as฀follows:฀฀
IFRS฀for฀SMEs฀ ฀
$'000฀ Ignore฀preference฀
Consideration฀ 2,950฀ share฀info฀
NCI฀at฀share฀of฀net฀assets฀฀
(30%฀฀$3,100฀net)฀ 930 NCI฀has฀to฀be฀at฀share฀of฀
net฀assets฀
3,880฀
Fair฀value฀of฀net฀assets฀and฀liabilities฀ 3,100฀
Goodwill฀ 780฀
The฀assessment฀that฀goodwill฀has฀an฀indefinite฀useful฀life฀is฀not฀relevant฀as฀all฀intangible฀assets฀must฀
be฀amortised.฀The฀maximum฀amortisation฀period฀of฀10฀years฀is฀applied฀in฀this฀case฀(pro-rata).฀
Amortisation฀=฀$780k/10฀฀4/12฀=฀$26k฀for฀the฀period฀expensed฀to฀profit฀or฀loss฀
The฀carrying฀value฀of฀goodwill฀at฀31฀December฀20X6฀is฀($780k฀–฀$26k)฀$754k.฀
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Activity฀3:฀Accounting฀under฀IFRS฀for฀SMEs฀
(a)฀฀ Development฀expenditure฀
IFRS฀ for฀ SMEs฀ requires฀ small฀ and฀ medium-sized฀ entities฀ that฀ adopt฀ it฀ to฀ expense฀ all฀ internal฀
research฀and฀development฀costs฀as฀incurred฀(unless฀they฀form฀part฀of฀the฀cost฀of฀another฀asset฀
that฀ meets฀ the฀ recognition฀ criteria฀ in฀ the฀ IFRS).฀ The฀ adjustment฀ on฀ transition฀ to฀ the฀ IFRS฀ for฀
SMEs฀must฀be฀made฀at฀the฀beginning฀of฀the฀comparable฀period฀(1฀January฀20X5)฀as฀a฀prior฀
period฀adjustment.฀Thus฀the฀expenditure฀of฀$2.8m฀on฀research฀and฀development฀should฀all฀be฀
written฀off฀directly฀to฀retained฀earnings.฀Any฀amounts฀incurred฀during฀20X5฀and฀20X6฀must฀be฀
expensed฀in฀those฀years'฀financial฀statements฀and฀any฀amortisation฀charged฀to฀profit฀or฀loss฀in฀
those฀years฀will฀need฀to฀be฀eliminated.฀
(b)฀ Acquisition฀of฀Rock฀
IFRS฀for฀SMEs฀requires฀goodwill฀to฀be฀recognised฀as฀an฀asset฀at฀its฀cost,฀being฀the฀excess฀of฀
the฀cost฀of฀the฀business฀combination฀over฀the฀acquirer's฀interest฀in฀the฀net฀fair฀value฀of฀the฀
identifiable฀assets฀less฀liabilities฀and฀contingent฀liabilities.฀Non-controlling฀interests฀at฀the฀date฀
of฀ acquisition฀ must฀ therefore฀ be฀ measured฀ at฀ the฀ proportionate฀ share฀ of฀ the฀ fair฀ value฀ of฀ the฀
identifiable฀net฀assets฀of฀the฀subsidiary฀acquired฀(ie฀the฀'partial'฀goodwill฀method).฀
After฀initial฀recognition฀the฀acquirer฀is฀required฀to฀amortise฀goodwill฀over฀its฀useful฀life฀under฀
IFRS฀ for฀ SMEs.฀ If฀ the฀ useful฀ life฀ of฀ goodwill฀ cannot฀ be฀ established฀ reliably,฀ then฀ it฀ cannot฀
exceed฀ten฀years฀(ten฀years฀used฀here฀as฀the฀directors฀anticipate฀a฀longer฀period).฀
Goodwill฀will฀be฀calculated฀as:฀
฀ $m
Consideration฀transferred฀ 7.7
Non-controlling฀interests฀(at฀%FVNA:฀9.5฀ 40%) 3.8
฀
Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition ฀(9.5)
฀ 2.0
Amortisation฀(2.0/10฀years฀฀6/12) ฀(0.1)
฀ 1.9
The฀amortisation฀of฀$0.1m฀must฀be฀charged฀to฀profit฀or฀loss฀in฀20X6.฀
(c)฀ Investment฀properties฀
Investment฀ properties฀ must฀ be฀ held฀ at฀ fair฀ value฀ through฀ profit฀ or฀ loss฀ under฀ IFRS฀ for฀ SMEs฀
provided฀the฀fair฀value฀can฀be฀measured฀without฀undue฀cost฀or฀effort.฀This฀appears฀to฀be฀the฀
case฀ here,฀ given฀ that฀ an฀ estate฀ agent฀ valuation฀ is฀ available.฀ Consequently฀ a฀ gain฀ of฀ $0.2m฀
($1.9m฀–฀$1.7m)฀will฀be฀reported฀in฀Smerk's฀profit฀or฀loss฀for฀the฀year.฀
Chapter฀19฀The฀impact฀of฀changes฀and฀potential฀changes฀in฀
accounting฀regulation฀ This฀is฀an฀open฀ended฀question,฀so฀
credit฀would฀be฀given฀for฀a฀variety฀
of฀valid,฀clearly฀argued฀points.฀฀
Activity฀1:฀Disclosure฀
(a)฀ Although฀ many฀ large฀ companies฀ disclose฀ information฀ about฀ their฀ employees,฀ the฀ type฀ and฀
level฀ of฀ disclosure฀ varies.฀ In฀ some฀ countries฀ there฀ are฀ legal฀ requirements฀ to฀ disclose฀
information฀such฀as฀employee฀numbers,฀policies฀relating฀to฀equal฀opportunities,฀information฀on฀
disabled฀ employees฀ and฀ staff฀ remuneration.฀ Companies฀ often฀ adopt฀ a฀ 'checklist'฀ approach,฀
often฀disclosing฀only฀the฀minimum฀amount฀of฀information฀required.฀Other฀companies฀may฀be฀
more฀ proactive.฀ In฀ practice,฀ publishing฀ information฀ about฀ how฀ companies'฀ human฀ capital฀ is฀
managed฀ can฀ enhance฀ the฀ reputation฀ of฀ a฀ company฀ and฀ help฀ it฀ to฀ recruit฀ and฀ retain฀ high฀
quality฀staff.฀
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฀฀
The฀company฀wishes฀to฀help฀stakeholders฀understand฀the฀link฀between฀its฀performance฀and฀the฀
way฀that฀it฀manages฀its฀employees.฀As฀well฀as฀information฀on฀equal฀opportunities฀and฀health฀
and฀safety฀at฀work฀it฀could฀disclose฀the฀following:฀
(i)฀ A฀ description฀ of฀ the฀ company's฀ policies฀ relating฀ to฀ the฀ recruitment,฀ retention฀ and฀
motivation฀of฀employees;฀
(ii)฀ Employee฀ numbers฀ and฀ other฀ appropriate฀ information฀ about฀ the฀ composition฀ of฀ the฀
workforce;฀
(iii)฀ Details฀of฀staff฀remuneration;฀
(iv)฀ Details฀of฀amounts฀invested฀in฀training฀and฀developing฀employees฀and฀also฀descriptions฀
of฀the฀company's฀policies฀and฀practices฀in฀this฀area;฀and฀
(v)฀ A฀description฀of฀the฀way฀in฀which฀the฀company฀ensures฀management฀succession.฀
Information฀should฀be฀provided฀consistently฀from฀period฀to฀period฀and฀should฀be฀comparable฀
with฀ previous฀ periods.฀ This฀ means฀ that฀ the฀ company฀ will฀ need฀ to฀ develop฀ key฀ performance฀
indicators.฀
The฀ most฀ obvious฀ vehicle฀ for฀ these฀ disclosures฀ is฀ the฀ management฀ commentary฀ as฀ this฀ is฀
management's฀ analysis฀ of฀ the฀ key฀ factors฀ and฀ risks฀ affecting฀ the฀ company's฀ performance.฀
Many฀companies฀also฀publish฀separate฀social฀or฀employee฀reports,฀which฀can฀be฀targeted฀at฀
particular฀ stakeholder฀ groups,฀ such฀ as฀ investors฀ or฀ current฀ and฀ potential฀ employees฀ and฀ the฀
general฀public.฀
(b)฀ The฀Discussion฀Paper฀Disclosure฀Initiative฀–฀Principles฀of฀Disclosure฀sets฀out฀the฀IASB's฀view฀that฀
information฀labelled฀as฀'non-IFRS'฀can฀be฀placed฀inside฀the฀financial฀statements,฀but฀only฀under฀
certain฀conditions:฀
฀ It฀is฀listed,฀together฀with฀a฀statement฀of฀compliance฀with฀IFRSs฀
฀ It฀is฀identified฀as฀not฀in฀accordance฀with฀IFRSs฀and,฀if฀applicable,฀as฀unaudited฀
฀ It฀is฀accompanied฀by฀explanation฀of฀why฀it฀is฀useful฀
(IASB,฀2017:฀para.฀4.25)฀
The฀information฀could฀certainly฀be฀useful,฀but฀it฀is฀too฀far฀removed฀from฀financial฀reporting฀to฀
meet฀the฀other฀conditions.฀The฀management฀commentary฀would฀be฀a฀more฀appropriate฀place฀
for฀such฀disclosures.฀
Activity฀2:฀Debt฀vs฀equity฀
Most฀ordinary฀shares฀are฀treated฀as฀equity฀as฀they฀do฀not฀contain฀a฀contractual฀obligation฀to฀deliver฀
cash.฀
However,฀ in฀ the฀ case฀ of฀ the฀ directors'฀ shares,฀ a฀ contractual฀ obligation฀ to฀ deliver฀ cash฀ exists฀ on฀ a฀
specific฀date฀as฀the฀shares฀are฀redeemable฀at฀the฀end฀of฀the฀service฀contract.฀฀
The฀redemption฀is฀not฀discretionary,฀and฀Scott฀has฀no฀right฀to฀avoid฀it.฀The฀mandatory฀nature฀of฀the฀
repayment฀makes฀this฀capital฀a฀financial฀liability.฀The฀financial฀liability฀will฀initially฀be฀recognised฀at฀
its฀ fair฀ value,฀ ie฀ the฀ present฀ value฀ of฀ the฀ payment฀ at฀ the฀ end฀ of฀ the฀ service฀ contract.฀ It฀ will฀ be฀
subsequently฀measured฀at฀amortised฀cost฀and฀effective฀interest฀will฀be฀applied฀over฀the฀period฀of฀the฀
service฀contract.฀
Dividend฀ payments฀ on฀ the฀ shares฀ are฀ discretionary฀ as฀ they฀ must฀ be฀ ratified฀ at฀ the฀ annual฀ general฀
meeting.฀ Therefore,฀ no฀ liability฀ should฀ be฀ recognised฀ for฀ any฀ dividend฀ until฀ it฀ is฀ ratified.฀ When฀
recognised,฀the฀classification฀of฀the฀dividend฀should฀be฀consistent฀with฀the฀classification฀of฀the฀shares฀
and฀therefore฀any฀dividends฀are฀classified฀as฀a฀finance฀cost฀rather฀than฀as฀a฀deduction฀from฀retained฀
earnings.฀
(IAS฀32:฀paras.฀11,฀AG฀27)฀
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Activity฀3:฀Discussion฀question฀
(a)฀ Accounting฀policies฀
Accounting฀ policies฀ are฀ defined฀ by฀ IAS฀ 8฀ Accounting฀ Policies,฀ Changes฀ in฀ Accounting฀
Estimates฀and฀Errors฀as฀'the฀specific฀principles,฀bases,฀conventions,฀rules฀and฀practices฀applied฀
by฀an฀entity฀in฀preparing฀and฀presenting฀financial฀statements'฀(IAS฀8:฀para.฀5).฀
The฀selection฀of฀accounting฀policies฀is฀important฀in฀providing฀consistency฀and฀comparability฀in฀
the฀ financial฀ statements.฀ ฀ IAS฀ 8฀ allows฀ an฀ entity฀ to฀ choose฀ the฀ most฀ appropriate฀ accounting฀
policy฀ from฀ a฀ limited฀ range฀ of฀ scenarios฀ such฀ as฀ the฀ cost฀ model฀ or฀ revaluation฀ model฀ for฀
tangible฀and฀intangible฀assets,฀the฀cost฀model฀or฀fair฀value฀model฀for฀investment฀properties฀or฀
the฀cost฀of฀interchangeable฀inventories.฀
Judgement฀ in฀ the฀ development฀ of฀ accounting฀ policies฀ is฀ permitted฀ by฀ IAS฀ 8฀ where฀ an฀ IFRS฀
does฀not฀cover฀a฀particular฀transaction,฀providing฀management฀considers฀the฀requirements฀of฀
similar฀ and฀ related฀ issues฀ in฀ other฀ IFRSs฀ and฀ the฀ Conceptual฀ Framework฀ for฀ Financial฀
Reporting's฀ definitions฀ of฀ elements฀ of฀ the฀ financial฀ statements,฀ recognition฀ criteria฀ and฀
measurement฀concepts.฀
The฀choice฀of฀accounting฀policies฀can฀have฀a฀very฀significant฀effect฀on฀the฀financial฀statements.฀
For฀ example,฀ an฀ entity฀ which฀ chooses฀ to฀ revalue฀ its฀ non-current฀ assets฀ generally฀ has฀ a฀ lower฀
return฀on฀capital฀employed฀versus฀a฀similar฀entity฀which฀does฀not,฀due฀to฀the฀diluting฀effect฀of฀
higher฀capital฀employed฀on฀the฀ratio.฀
Elections฀
In฀addition฀to฀the฀use฀of฀accounting฀policies,฀an฀entity฀is฀permitted฀to฀make฀certain฀elections฀on฀
application฀of฀certain฀standards฀to฀individual฀items.฀
For฀ example,฀ under฀ IFRS฀ 3฀ Business฀ Combinations฀ an฀ entity฀ can฀ choose฀ whether฀ to฀ measure฀
the฀non-controlling฀interests฀in฀an฀acquired฀subsidiary฀at฀the฀date฀of฀acquisition฀at฀fair฀value฀or฀
at฀ the฀ proportionate฀ share฀ of฀ the฀ fair฀ value฀ of฀ the฀ acquiree's฀ identifiable฀ net฀ assets฀ (IFRS฀ 3:฀
para.฀19).฀The฀former฀will฀result฀in฀a฀higher฀goodwill฀figure,฀boosting฀the฀value฀of฀the฀group฀
statement฀ of฀ financial฀ position,฀ but฀ also฀ higher฀ recognised฀ impairment฀ losses฀ should฀ an฀
impairment฀arise฀in฀the฀annual฀impairment฀tests฀required฀for฀goodwill.฀
Another฀ example฀ is฀ the฀ election฀ permitted฀ in฀ IFRS฀ 9฀ Financial฀ Instruments฀ which฀ allows฀ an฀
entity฀ to฀ choose฀ whether฀ to฀ measure฀ investments฀ in฀ equity฀ instruments฀ not฀ held฀ for฀ trading฀ at฀
fair฀value฀through฀other฀comprehensive฀income฀rather฀than฀the฀default฀fair฀value฀through฀profit฀
or฀loss฀(IFRS฀9:฀para.฀5.7.5).฀฀This฀may฀increase฀or฀reduce฀profit฀or฀loss฀depending฀on฀whether฀
those฀instruments฀have฀subsequent฀losses฀or฀gains,฀but,฀perhaps฀more฀importantly,฀reduces฀the฀
volatility฀ of฀ profit฀ or฀ loss฀ by฀ recognising฀ those฀ gains฀ and฀ losses฀ in฀ other฀ comprehensive฀
income.฀
Estimation฀techniques฀
Estimation฀techniques฀differ฀from฀accounting฀policies฀and฀elections฀in฀that฀there฀is฀not฀a฀limited฀
range฀ of฀ techniques฀ permitted,฀ but,฀ rather,฀ an฀ entity฀ develops฀ an฀ appropriate฀ estimation฀
technique฀ relevant฀ to฀ the฀ different฀ figures฀ in฀ its฀ financial฀ statements฀ which฀ are฀ affected฀ by฀
uncertainty.฀
Examples฀ of฀ estimation฀ techniques฀ that฀ can฀ affect฀ the฀ view฀ given฀ by฀ the฀ financial฀ statements฀
include:฀
฀ Measurement฀of฀provisions฀฀
฀ Measurement฀of฀inventory฀write-downs฀to฀net฀realisable฀value฀
฀ Estimation฀of฀the฀useful฀life฀and฀method฀of฀depreciation฀of฀non-current฀assets฀
฀ The฀ discount฀ rate฀ used฀ in฀ an฀ impairment฀ test฀ affecting฀ value฀ in฀ use฀ and฀ recoverable฀
amount฀(and฀therefore฀impairment฀losses฀recognised)฀
฀ Inconsistent฀application฀from฀period฀to฀period฀of฀any฀of฀the฀above฀
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฀฀
Accounting฀effects฀
Achieving฀an฀'accounting฀effect'฀can฀refer฀to฀all฀manner฀of฀effects฀in฀the฀financial฀statements.฀
Often฀this฀is฀considered฀management฀specifically฀of฀profit฀or฀revenues.฀However,฀achieving฀an฀
accounting฀ effect฀ could฀ include฀ maintaining฀ desired฀ ratios,฀ such฀ as฀ those฀ required฀ to฀ meet฀
return฀ or฀ liquidity฀ expectations,฀ to฀ meet฀ loan฀ covenant฀ restrictions,฀ or฀ simply฀ eliminating฀
volatility฀from฀profits.฀
Achieving฀an฀accounting฀effect฀is฀not฀necessarily฀unethical฀or฀unwise.฀A฀key฀issue฀is฀whether฀
achieving฀a฀particular฀accounting฀effect฀is฀considered฀manipulation฀of฀the฀financial฀statements฀
rather฀than฀reflecting฀valid฀business฀decisions,฀and฀this฀depends฀on฀its฀objective.฀
For฀ example,฀ entering฀ into฀ a฀ hedging฀ arrangement฀ removes฀ volatility฀ from฀ profit,฀ and฀ is฀ a฀
sound฀ business฀ decision;฀ there฀ is฀ no฀ ethical฀ issue฀ in฀ doing฀ so,฀ and฀ the฀ entity's฀ accounting฀
merely฀ needs฀ to฀ ensure฀ that฀ the฀ substance฀ of฀ the฀ business฀ arrangement฀ is฀ reflected฀ in฀ the฀
On฀the฀other฀hand,฀a฀change฀in฀accounting฀policy฀or฀estimation฀technique฀applied฀simply฀with฀
the฀ objective฀ of฀ boosting฀ profits฀ (such฀ as฀ switching฀ to฀ the฀ fair฀ value฀ model฀ of฀ investment฀
properties฀when฀market฀values฀start฀to฀rise)฀could฀be฀considered฀unethical฀if฀the฀entity฀cannot฀
adequately฀justify฀why฀it฀did฀not฀use฀that฀model฀before฀when฀prices฀were฀falling.฀
The฀financial฀statements฀of฀stock฀market฀listed฀entities฀come฀under฀closer฀scrutiny฀than฀those฀of฀
private฀entities,฀particularly฀from฀large฀powerful฀institutional฀investors.฀They฀are฀also฀audited.฀
This฀makes฀it฀more฀difficult฀for฀management฀to฀knowingly฀manipulate฀the฀financial฀statements.฀
Nevertheless,฀more฀complex฀ways฀have฀been฀developed฀over฀the฀years฀to฀achieve฀accounting฀
effects.฀ A฀ famous฀ example฀ is฀ the฀ Enron฀ case฀ where฀ the฀ company฀ had฀ many฀ unconsolidated฀
structured฀ entities฀ such฀ that฀ the฀ level฀ of฀ gearing฀ of฀ the฀ group฀ was฀ not฀ apparent.฀ When฀ this฀
became฀ apparent,฀ it฀ led฀ to฀ the฀ ultimate฀ downfall฀ of฀ not฀ only฀ the฀ company฀ itself,฀ but฀ also฀ a฀
global฀ auditing฀ firm,฀ Arthur฀ Andersen.฀ The฀ IASB฀ is฀ responsive฀ to฀ such฀ events฀ and฀ issued฀
IFRS฀12฀ Disclosure฀ of฀ Interests฀ in฀ Other฀ Entities,฀ which฀ explicitly฀ requires฀ disclosures฀ of฀
unconsolidated฀structured฀entities฀and฀of฀the฀decision-making฀process฀that฀resulted฀in฀them฀not฀
being฀consolidated฀(IFRS฀12:฀para.฀24).฀
Another฀example฀is฀the฀Tesco฀scandal฀of฀2014฀where฀Tesco's฀interim฀profits฀were฀overstated฀
by฀ £263฀ million฀ as฀ a฀ result฀ of฀ early฀ overzealous฀ recognition฀ of฀ commissions฀ from฀ suppliers.฀฀
The฀issue฀of฀IFRS฀15฀Revenue฀from฀Contracts฀from฀Customers,฀whilst฀already฀issued฀(but฀not฀yet฀
effective)฀when฀this฀scandal฀arose,฀tightens฀up฀the฀approach฀to฀revenue฀recognition.฀
(b)฀ Inventory฀valuation฀
The฀ effect฀ of฀ the฀ change฀ to฀ inventory฀ valuation฀ is฀ to฀ increase฀ profits฀ for฀ the฀ year฀ ended฀฀
31฀December฀20X3:฀
฀ 20X3 20X2฀ ฀
฀ $m $m฀ ฀
Change฀to฀opening฀inventories฀ (32฀– 37) 5 4฀ (27฀–฀31)฀
Change฀to฀closing฀inventories฀ (30฀– 33)฀ (3)฀
฀ ฀ (5)
฀ ฀ (32฀–฀37)฀
฀ ฀ 2฀ ฀(1)฀ ฀
The฀ effect฀ on฀ profits฀ for฀ 20X3฀ is฀ mitigated฀ to฀ only฀ $2฀ million฀ because฀ it฀ is฀ the฀ difference฀
between฀the฀opening฀and฀closing฀balances฀on฀inventories฀that฀affects฀profit.฀฀Inventories฀in฀the฀
statement฀of฀financial฀position฀will฀reduce฀by฀$3฀million฀as฀a฀result฀of฀the฀change.฀
The฀ effect฀ on฀ the฀ comparative฀ period฀ 20X2฀ is฀ to฀ reduce฀ profits฀ by฀ $1฀ million฀ (and฀ closing฀
inventories฀by฀$5฀million).฀฀The฀change฀in฀accounting฀policy฀would฀also฀be฀reflected฀in฀a฀prior฀
period฀ adjustment฀ to฀ opening฀ retained฀ earnings฀ at฀ 1฀ January฀ 20X2฀ of฀ $4฀ million฀ in฀ the฀
statement฀of฀changes฀in฀equity.฀
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As฀there฀has฀been฀no฀change฀to฀the฀standard฀for฀inventories฀(IAS฀2),฀IAS฀8฀only฀permits฀such฀a฀
change฀to฀be฀made฀where฀it฀provides฀reliable฀and฀more฀relevant฀information.฀In฀this฀case,฀any฀
change฀should฀represent฀a฀change฀to฀the฀underlying฀circumstances.฀
Management฀have฀stated฀that฀the฀change฀is฀due฀to฀'high฀turnover฀of฀inventories'฀which฀is฀not฀
necessarily฀a฀valid฀reason฀for฀a฀change.฀A฀change฀should฀only฀be฀made฀if฀it฀is฀more฀reflective฀
of฀ the฀ reality฀ of฀ the฀ current฀ asset฀ valuations฀ in฀ the฀ statement฀ of฀ financial฀ position.฀ Also,฀
inventories฀ need฀ to฀ be฀ measured฀ on฀ a฀ line-by-line฀ basis,฀ and฀ it฀ may฀ be฀ that฀ a฀ different฀ cost฀
formula฀ for฀ inventories฀ is฀ relevant฀ for฀ different฀ lines,฀ such฀ as฀ a฀ first-in฀ first-out฀ approach฀ for฀
perishable฀items฀and฀weighted฀average฀approach฀for฀other฀items.฀
If฀the฀change฀can฀be฀justified,฀disclosure฀of฀the฀effect฀of฀the฀change฀on฀the฀financial฀statements฀
for฀20X3฀and฀20X2฀will฀need฀to฀be฀made,฀as฀well฀as฀the฀reason฀why฀management฀believes฀
the฀changes฀to฀be฀appropriate.฀
Activity฀4:฀First-time฀adoption฀of฀IFRS฀
(a)฀ Europa's฀first฀IFRS฀financial฀statements฀will฀be฀for฀the฀year฀ended฀31฀December฀20X8.฀฀IFRS฀1฀
requires฀that฀at฀least฀one฀year's฀comparative฀figures฀are฀presented฀and฀therefore฀the฀date฀of฀
transition฀ to฀ IFRSs฀ is฀ the฀ beginning฀ of฀ business฀ on฀ 1฀ January฀ 20X7฀ (or฀ close฀ of฀ business฀ on฀฀
31฀December฀20X6).฀
Therefore฀the฀procedure฀for฀adopting฀IFRSs฀will฀be฀as฀follows฀(IFRS฀1:฀para.฀10):฀
(i)฀ Identify฀accounting฀policies฀that฀comply฀with฀IFRSs฀effective฀at฀31฀December฀20X8฀(the฀
reporting฀date฀for฀the฀first฀IFRS฀financial฀statements).฀
(ii)฀ Restate฀ the฀ opening฀ statement฀ of฀ financial฀ position฀ at฀ 1฀ January฀ 20X7฀ (the฀ date฀ of฀
transition)฀using฀these฀IFRSs฀retrospectively,฀by:฀
(1)฀ Recognising฀all฀assets฀and฀liabilities฀whose฀recognition฀is฀required฀by฀IFRSs฀
(2)฀ Not฀ recognising฀ items฀ as฀ assets฀ or฀ liabilities฀ if฀ IFRSs฀ do฀ not฀ permit฀ such฀
recognition฀
(3)฀ Reclassifying฀ items฀ that฀ were฀ recognised฀ under฀ previous฀ GAAP฀ as฀ one฀ type฀ of฀
asset,฀liability฀or฀component฀of฀equity,฀but฀are฀a฀different฀type฀of฀asset,฀liability฀or฀
component฀of฀equity฀under฀IFRSs฀
(4)฀ Measuring฀all฀recognised฀assets฀and฀liabilities฀in฀accordance฀with฀IFRSs.฀
The฀company฀will฀almost฀certainly฀need฀to฀change฀some฀of฀its฀accounting฀policies฀and฀
adjust฀some฀of฀the฀amounts฀that฀it฀reported฀previously฀at฀the฀same฀dates฀using฀previous฀
GAAP.฀It฀should฀recognise฀these฀adjustments฀directly฀in฀retained฀earnings฀(ie฀in฀equity).฀
(iii)฀ Explain฀the฀effect฀of฀the฀transition฀from฀previous฀GAAP฀to฀IFRSs,฀by฀disclosing:฀
(1)฀ A฀reconciliation฀of฀equity฀reported฀under฀previous฀GAAP฀to฀equity฀under฀IFRSs฀at฀
the฀date฀of฀transition฀(1฀January฀20X7)฀and฀at฀the฀last฀previous฀GAAP฀reporting฀
date฀(31฀December฀20X7);฀and฀
(2)฀ A฀ reconciliation฀ of฀ the฀ total฀ comprehensive฀ income฀ reported฀ under฀ previous฀
GAAP฀ (or฀ profit฀ or฀ loss฀ if฀ total฀ comprehensive฀ income฀ was฀ not฀ previously฀
reported)฀to฀total฀comprehensive฀income฀reported฀under฀IFRSs฀for฀the฀last฀period฀
presented฀under฀previous฀GAAP.฀
If฀Europa฀presented฀a฀statement฀of฀cash฀flows฀under฀previous฀GAAP,฀it฀should฀also฀explain฀any฀
material฀adjustments฀to฀the฀statement฀of฀cash฀flows.฀
Although฀ the฀ general฀ rule฀ is฀ that฀ all฀ IFRSs฀ should฀ be฀ applied฀ retrospectively,฀ a฀ number฀ of฀
exemptions฀ are฀ available.฀ These฀ are฀ intended฀ to฀ cover฀ cases฀ in฀ which฀ the฀ cost฀ of฀ complying฀
fully฀ with฀ a฀ particular฀ requirement฀ would฀ outweigh฀ the฀ benefits฀ to฀ users฀ of฀ the฀ financial฀
statements.฀Europa฀may฀choose฀to฀take฀advantage฀of฀any฀or฀all฀of฀the฀exemptions.฀
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฀฀
(b)฀ (i)฀ Accounting฀estimates฀

Estimates฀under฀IFRSs฀at฀the฀date฀of฀transition฀must฀be฀consistent฀with฀those฀made฀at฀the฀
same฀ date฀ under฀ previous฀ GAAP฀ (after฀ adjustments฀ to฀ reflect฀ any฀ difference฀ in฀
accounting฀ policies).฀ The฀ only฀ exception฀ to฀ this฀ is฀ if฀ the฀ company฀ has฀ subsequently฀
discovered฀that฀these฀estimates฀were฀in฀error.฀This฀is฀not฀the฀case฀here฀and฀therefore฀the฀
estimates฀are฀not฀adjusted฀in฀the฀first฀IFRS฀financial฀statements.฀
(ii)฀ Court฀case฀
The฀treatment฀of฀this฀depends฀on฀the฀reason฀that฀Europa฀did฀not฀recognise฀a฀provision฀
under฀previous฀GAAP฀at฀31฀December฀20X7.฀
If฀the฀requirements฀of฀previous฀GAAP฀were฀consistent฀with฀IAS฀37฀Provisions,฀Contingent฀
Liabilities฀ and฀ Contingent฀ Assets,฀ presumably฀ the฀ directors฀ concluded฀ that฀ an฀ outflow฀ of฀
economic฀benefit฀was฀not฀probable฀and฀that฀the฀recognition฀criteria฀were฀not฀met.฀฀In฀this฀
case,฀Europa's฀assumptions฀under฀IFRSs฀are฀consistent฀with฀its฀previous฀assumptions฀under฀
previous฀ GAAP.฀ Europa฀ does฀ not฀ recognise฀ a฀ provision฀ at฀ 31฀ December฀ 20X7฀ and฀
accounts฀for฀the฀payment฀in฀the฀year฀ended฀31฀December฀20X8.฀
If฀ the฀ requirements฀ of฀ previous฀ GAAP฀ were฀ not฀ consistent฀ with฀ IAS฀ 37,฀ Europa฀ must฀
determine฀ whether฀ it฀ had฀ a฀ present฀ obligation฀ at฀ 31฀ December฀ 20X7.฀ The฀ directors฀
should฀ take฀ account฀ of฀ all฀ available฀ evidence,฀ including฀ any฀ additional฀ evidence฀
provided฀ by฀ events฀ after฀ the฀ reporting฀ period฀ up฀ to฀ the฀ date฀ the฀ 20X7฀ financial฀
statements฀ were฀ authorised฀ for฀ issue฀ in฀ accordance฀ with฀ IAS฀ 10฀ Events฀ after฀ the฀
Reporting฀Period.฀
The฀outcome฀of฀the฀court฀case฀confirms฀that฀Europa฀had฀a฀liability฀in฀September฀20X7฀(when฀
the฀events฀that฀resulted฀in฀the฀case฀occurred),฀but฀this฀event฀occurred฀after฀the฀20X7฀financial฀
statements฀were฀authorised฀for฀issue.฀Based฀on฀this฀alone,฀the฀company฀would฀not฀recognise฀a฀
provision฀at฀31฀December฀20X7฀and฀the฀$10m฀cost฀of฀the฀court฀case฀would฀be฀recognised฀in฀
the฀ 20X8฀ financial฀ statements.฀ If฀ the฀ company's฀ lawyers฀ had฀ advised฀ Europa฀ that฀ it฀ was฀
probable฀ that฀ they฀ would฀ be฀ found฀ guilty฀ and฀ suggested฀ the฀ expected฀ settlement฀ amount฀
before฀the฀financial฀statements฀were฀authorised฀for฀issue,฀the฀provision฀would฀be฀recognised฀in฀
the฀20X7฀financial฀statements฀reporting฀under฀IFRSs฀for฀that฀amount.฀
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฀
฀
฀
฀
฀
The฀financial
reporting฀framework
฀
฀
฀
Supplementary฀reading
฀
฀
฀
฀
฀
฀
฀
฀
฀ ฀
฀ 571฀

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Appendix฀2฀–฀Supplementary฀reading฀฀
1฀International฀Financial฀Reporting฀Standards฀(IFRSs)฀
1.1฀Current฀examinable฀documents฀
The฀documents฀listed฀as฀being฀examinable฀are฀the฀latest฀that฀were฀issued฀before฀1฀September฀2017,฀
and฀will฀be฀examinable฀from฀September฀2018฀to฀June฀2019.฀฀
The฀ ACCA฀ Study฀ Guide฀ offers฀ more฀ detailed฀ guidance฀ on฀ the฀ depth฀ and฀ level฀ at฀ which฀ the฀
examinable฀ documents฀ will฀ be฀ examined.฀ The฀ relevant฀ learning฀ outcomes฀ are฀ reproduced฀ at฀ the฀
beginning฀of฀each฀Workbook฀chapter.฀฀
฀ Title฀
IAS฀1฀ Presentation฀of฀Financial฀Statements฀
IAS฀2฀ Inventories฀
IAS฀7฀ Statement฀of฀Cash฀Flows฀
IAS฀8฀ Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀
IAS฀10฀ Events฀after฀the฀Reporting฀Period฀
IAS฀12฀ Income฀Taxes฀
IAS฀16฀ Property,฀Plant฀and฀Equipment฀
IAS฀19฀ Employee฀Benefits฀
IAS฀20฀ Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀Government฀Assistance฀
IAS฀21฀ The฀Effects฀of฀Changes฀in฀Foreign฀Exchange฀Rates฀
IAS฀23฀ Borrowing฀Costs฀
IAS฀24฀ Related฀Party฀Disclosures฀
IAS฀27฀฀ Separate฀Financial฀Statements฀
IAS฀28฀ Investments฀in฀Associates฀and฀Joint฀Ventures฀
IAS฀32฀ Financial฀Instruments:฀Presentation฀
IAS฀33฀ Earnings฀per฀Share฀
IAS฀34฀ Interim฀Financial฀Reporting฀
IAS฀36฀ Impairment฀of฀Assets฀
IAS฀37฀ Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀
IAS฀38฀ Intangible฀Assets฀
IAS฀40฀ Investment฀Property฀
IAS฀41฀฀ Agriculture฀
IFRS฀1฀ First-time฀Adoption฀of฀International฀Financial฀Reporting฀Standards฀
IFRS฀2฀ Share-based฀Payment฀
IFRS฀3฀ Business฀Combinations฀
IFRS฀5฀ Non-current฀Assets฀Held฀for฀Sale฀and฀Discontinued฀Operations฀
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฀ Title฀
IFRS฀7฀ Financial฀Instruments:฀Disclosures฀
IFRS฀8฀ Operating฀Segments฀
IFRS฀9฀ Financial฀Instruments฀
IFRS฀10฀฀ Consolidated฀Financial฀Statements฀
IFRS฀11฀ Joint฀Arrangements฀
IFRS฀12฀ Disclosure฀of฀Interests฀in฀Other฀Entities฀
IFRS฀13฀฀ Fair฀Value฀Measurement฀
IFRS฀15฀ Revenue฀from฀Contracts฀with฀Customers฀
IFRS฀16฀ Leases฀
IFRS฀for฀SMEs฀ IFRS฀for฀Small฀and฀Medium-sized฀Entities฀
฀ Conceptual฀Framework฀for฀Financial฀Reporting฀
IFRS฀Practice฀ Management฀Commentary฀
Statement฀
ED/2015/3฀ Conceptual฀Framework฀for฀Financial฀Reporting฀
ED/2015/8฀ Draft฀IFRS฀Practice฀Statement฀–฀Application฀of฀Materiality฀to฀Financial฀Statements฀
2฀Conceptual฀framework฀
2.1฀The฀importance฀of฀a฀conceptual฀framework฀
A฀ conceptual฀ framework,฀ in฀ the฀ field฀ we฀ are฀ concerned฀ with,฀ is฀ a฀ statement฀ of฀ generally฀
accepted฀ theoretical฀ principles฀ which฀ form฀ the฀ frame฀ of฀ reference฀ for฀ financial฀ reporting.฀ These฀
theoretical฀ principles฀ provide฀ the฀ basis฀ for฀ the฀ development฀ of฀ new฀ accounting฀ standards฀ and฀ the฀
evaluation฀of฀those฀already฀in฀existence.฀
The฀financial฀reporting฀process฀is฀concerned฀with฀providing฀information฀that฀is฀useful฀in฀the฀business฀
and฀economic฀decision-making฀process.฀Therefore฀a฀conceptual฀framework฀will฀form฀the฀theoretical฀
basis฀for฀determining฀which฀events฀should฀be฀accounted฀for,฀how฀they฀should฀be฀measured฀and฀how฀
they฀should฀be฀communicated฀to฀the฀user.฀฀
Although฀ it฀ is฀ theoretical฀ in฀ nature,฀ a฀ conceptual฀ framework฀ for฀ financial฀ reporting฀ has฀ highly฀
practical฀final฀aims.฀
The฀ danger฀ of฀ not฀ having฀ a฀ conceptual฀ framework฀ is฀ demonstrated฀ in฀ the฀ way฀ some฀
countries'฀ standards฀ have฀ developed฀ over฀ recent฀ years;฀ standards฀ tend฀ to฀ be฀ produced฀ in฀ a฀
haphazard฀ and฀ fire-fighting฀ approach.฀ Where฀ an฀ agreed฀ framework฀ exists,฀ the฀ standard-
setting฀body฀acts฀as฀an฀architect฀or฀designer,฀rather฀than฀a฀fire-fighter,฀building฀accounting฀rules฀on฀
the฀foundation฀of฀sound,฀agreed฀basic฀principles.฀
The฀ lack฀ of฀ a฀ conceptual฀ framework฀ also฀ means฀ that฀ fundamental฀ principles฀ are฀ tackled฀ more฀ than฀
once฀in฀different฀standards,฀thereby฀producing฀contradictions฀and฀inconsistencies฀in฀basic฀concepts,฀
such฀ as฀ those฀ of฀ prudence฀ and฀ matching.฀ This฀ leads฀ to฀ ambiguity฀ and฀ it฀ affects฀ the฀ true฀ and฀ fair฀
concept฀of฀financial฀reporting.฀
Another฀ problem฀ with฀ the฀ lack฀ of฀ a฀ conceptual฀ framework฀ has฀ become฀ apparent฀ in฀ the฀ USA.฀ The฀
large฀ number฀ of฀ highly฀ detailed฀ standards฀ produced฀ by฀ the฀ Financial฀ Accounting฀ Standards฀ Board฀
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(FASB)฀ created฀ a฀ financial฀ reporting฀ environment฀ governed฀ by฀ specific฀ rules฀ rather฀ than฀ general฀
principles.฀ The฀ FASB฀ is฀ in฀ the฀ early฀ deliberations฀ of฀ moving฀ towards฀ a฀ more฀ principles฀ based฀
approach฀(FASB,฀2017).฀฀฀฀
A฀ conceptual฀ framework฀ can฀ also฀ bolster฀ standard฀ setters฀ against฀ political฀ pressure฀ from฀ various฀
'lobby฀ groups'฀ and฀ interested฀ parties.฀ Such฀ pressure฀ would฀ only฀ prevail฀ if฀ it฀ was฀ acceptable฀ under฀
the฀conceptual฀framework.฀฀
2.1.1฀Advantages฀of฀a฀conceptual฀framework฀
The฀advantages฀arising฀from฀using฀a฀conceptual฀framework฀may฀be฀summarised฀as฀follows:฀
(a)฀ The฀ situation฀ is฀ avoided฀ whereby฀ standards฀ are฀ being฀ developed฀ on฀ a฀ piecemeal฀ basis,฀
where฀a฀particular฀accounting฀problem฀is฀recognised฀as฀having฀emerged,฀and฀resources฀were฀
then฀channelled฀into฀standardising฀accounting฀practice฀in฀that฀area,฀without฀regard฀to฀whether฀
that฀ particular฀ issue฀ was฀ necessarily฀ the฀ most฀ important฀ issue฀ remaining฀ at฀ that฀ time฀ without฀
standardisation.฀
(b)฀ As฀ stated฀ above,฀ the฀ development฀ of฀ certain฀ standards฀ (particularly฀ national฀ standards)฀ has฀
been฀ subject฀ to฀ considerable฀ political฀ interference฀ from฀ interested฀ parties.฀ Where฀ there฀ is฀ a฀
conflict฀of฀interest฀between฀user฀groups฀on฀which฀policies฀to฀choose,฀policies฀deriving฀from฀a฀
conceptual฀ framework฀ will฀ be฀ less฀ open฀ to฀ criticism฀ that฀ the฀ standard-setter฀ buckled฀ to฀
external฀pressure.฀
2.1.2฀Disadvantages฀of฀a฀conceptual฀framework฀
A฀counter-argument฀might฀be฀as฀follows:฀
(a)฀ Financial฀ statements฀ are฀ intended฀ for฀ a฀ variety฀ of฀ users,฀ and฀ it฀ is฀ not฀ certain฀ that฀ a฀ single฀
conceptual฀framework฀can฀be฀devised฀which฀will฀suit฀all฀users.฀
(b)฀ Given฀ the฀ diversity฀ of฀ user฀ requirements,฀ there฀ may฀ be฀ a฀ need฀ for฀ a฀ variety฀ of฀ accounting฀
standards,฀each฀produced฀for฀a฀different฀purpose฀(and฀with฀different฀concepts฀as฀a฀basis).฀
(c)฀ It฀is฀not฀clear฀that฀a฀conceptual฀framework฀makes฀the฀task฀of฀preparing฀and฀then฀implementing฀
standards฀any฀easier฀than฀without฀a฀framework.฀
2.2฀The฀IASB฀Conceptual฀Framework฀
The฀ original฀ IASB฀ Framework฀ for฀ the฀ Preparation฀ and฀ Presentation฀ of฀ Financial฀ Statements฀ was฀
produced฀in฀1989฀and฀is฀gradually฀being฀replaced฀by฀the฀new฀Conceptual฀Framework฀for฀Financial฀
Reporting.฀This฀is฀the฀result฀of฀an฀IASB/FASB฀joint฀project฀and฀is฀being฀carried฀out฀in฀phases.฀The฀first฀
phase,฀ comprising฀ Chapters฀ 1฀ and฀ 3,฀ was฀ published฀ in฀ September฀ 2010.฀ Chapter฀ 2฀ entitled฀ 'The฀
reporting฀ entity'฀ has฀ not฀ yet฀ been฀ published.฀ The฀ current฀ version฀ of฀ the฀ Conceptual฀ Framework฀
includes฀the฀remaining฀chapters฀of฀the฀1989฀Framework฀as฀Chapter฀4.฀
The฀Conceptual฀Framework฀for฀Financial฀Reporting฀is฀currently฀as฀follows:฀
Chapter฀1:฀The฀objective฀of฀general฀purpose฀financial฀reporting฀
Chapter฀2:฀The฀reporting฀entity฀(to฀be฀issued)฀
Chapter฀3:฀Qualitative฀characteristics฀of฀useful฀financial฀information฀
Chapter฀4:฀Remaining฀text฀of฀the฀1989฀Framework฀for฀the฀Preparation฀and฀Presentation฀of฀Financial฀
Statements:฀
฀ Underlying฀assumption฀
฀ The฀elements฀of฀financial฀statements฀
฀ Recognition฀of฀the฀elements฀of฀financial฀statements฀
฀ Measurement฀of฀the฀elements฀of฀financial฀statements฀
฀ Concepts฀of฀capital฀and฀capital฀maintenance฀
We฀will฀now฀look฀at฀some฀of฀these฀sections฀in฀more฀detail.฀
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2.2.1฀Introduction฀to฀the฀Conceptual฀Framework฀
The฀Introduction฀provides฀a฀list฀of฀the฀purposes฀of฀the฀Conceptual฀Framework:฀
(a)฀ To฀assist฀the฀Board฀in฀the฀development฀of฀future฀IFRSs฀and฀in฀its฀review฀of฀existing฀IFRSs.฀
(b)฀ To฀assist฀the฀Board฀in฀promoting฀harmonisation฀of฀regulations,฀accounting฀standards฀and฀
procedures฀ relating฀ to฀ the฀ presentation฀ of฀ financial฀ statements฀ by฀ providing฀ a฀ basis฀ for฀
reducing฀the฀number฀of฀alternative฀accounting฀treatments฀permitted฀by฀IFRSs.฀
(c)฀ To฀assist฀national฀standard-setting฀bodies฀in฀developing฀national฀standards.฀
(d)฀ To฀assist฀preparers฀of฀financial฀statements฀in฀applying฀IFRSs฀and฀in฀dealing฀with฀topics฀
that฀have฀yet฀to฀form฀the฀subject฀of฀an฀IFRS.฀
(e)฀ To฀ assist฀ auditors฀ in฀ forming฀ an฀ opinion฀ as฀ to฀ whether฀ financial฀ statements฀ comply฀ with฀
IFRSs.฀
(f)฀ To฀ assist฀ users฀ of฀ financial฀ statements฀ in฀ interpreting฀ the฀ information฀ contained฀ in฀
financial฀statements฀prepared฀in฀compliance฀with฀IFRSs.฀
(g)฀ To฀ provide฀ those฀ who฀ are฀ interested฀ in฀ the฀ work฀ of฀ the฀ IASB฀ with฀ information฀ about฀ its฀
approach฀to฀the฀formulation฀of฀IFRSs.฀
The฀Conceptual฀Framework฀is฀not฀an฀IFRS฀and฀so฀does฀not฀overrule฀any฀individual฀IFRS.฀In฀the฀(rare)฀
case฀ of฀ conflict฀ between฀ an฀ IFRS฀ and฀ the฀ Conceptual฀ Framework,฀ the฀ IFRS฀ will฀ prevail.฀
(Conceptual฀Framework:฀Introduction)฀
2.2.2฀Chapter฀1:฀The฀objective฀of฀general฀purpose฀financial฀reporting฀
The฀Conceptual฀Framework฀states฀that:฀
'The฀ objective฀ of฀ general฀ purpose฀ financial฀ reporting฀ is฀ to฀ provide฀ financial฀ information฀ about฀ the฀
reporting฀entity฀that฀is฀useful฀to฀existing฀and฀potential฀investors,฀lenders฀and฀other฀creditors฀in฀making฀
decisions฀about฀providing฀resources฀to฀the฀entity.'฀(Conceptual฀Framework:฀para.฀OB2)฀
These฀users฀need฀information฀about:฀
฀ The฀economic฀resources฀of฀the฀entity;฀
฀ The฀claims฀against฀the฀entity;฀and฀
฀ Changes฀in฀the฀entity's฀economic฀resources฀and฀claims.฀
Information฀ about฀ the฀ entity's฀ economic฀ resources฀ and฀ the฀ claims฀ against฀ it฀ helps฀ users฀ to฀
assess฀the฀entity's฀liquidity฀and฀solvency฀and฀its฀likely฀needs฀for฀additional฀financing.฀฀
Information฀ about฀ a฀ reporting฀ entity's฀ financial฀ performance฀ (the฀ changes฀ in฀ its฀ economic฀
resources฀ and฀ claims)฀ helps฀ users฀ to฀ understand฀ the฀ return฀ that฀ the฀ entity฀ has฀ produced฀ on฀ its฀
economic฀resources.฀This฀is฀an฀indicator฀of฀how฀efficiently฀and฀effectively฀management฀has฀used฀the฀
resources฀of฀the฀entity฀and฀is฀helpful฀in฀predicting฀future฀returns.฀฀
The฀Conceptual฀Framework฀makes฀it฀clear฀that฀this฀information฀should฀be฀prepared฀on฀an฀accruals฀
basis.฀(Conceptual฀Framework:฀para.฀OB17)฀
Information฀about฀a฀reporting฀entity's฀cash฀flows฀during฀a฀period฀also฀helps฀users฀assess฀the฀entity's฀
ability฀to฀generate฀future฀net฀cash฀inflows฀and฀gives฀users฀a฀better฀understanding฀of฀its฀operations.฀฀
2.2.3฀Chapter฀3:฀Qualitative฀characteristics฀of฀useful฀financial฀information฀
Qualitative฀characteristics฀are฀attributes฀that฀make฀financial฀information฀useful฀to฀users.฀
Chapter฀ 3฀ distinguishes฀ between฀ fundamental฀ and฀ enhancing฀ qualitative฀ characteristics,฀ for฀
analysis฀ purposes.฀ Fundamental฀ qualitative฀ characteristics฀ distinguish฀ useful฀ financial฀ reporting฀
information฀from฀information฀that฀is฀not฀useful฀or฀is฀misleading.฀Enhancing฀qualitative฀characteristics฀
distinguish฀more฀useful฀information฀from฀less฀useful฀information.฀
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Fundamental฀qualitative฀characteristics฀
The฀two฀fundamental฀qualitative฀characteristics฀are:฀
(a)฀ Relevance:฀ Relevant฀ information฀ has฀ predictive฀ value฀ or฀ confirmatory฀ value,฀ or฀ both.฀ It฀ is฀
capable฀of฀making฀a฀difference฀in฀the฀decisions฀made฀by฀users.฀
The฀relevance฀of฀information฀is฀affected฀by฀its฀nature฀and฀its฀materiality.฀
(b)฀ Faithful฀representation:฀Information฀must฀be฀complete,฀neutral฀and฀free฀from฀error฀
(replacing฀'reliability').฀
Financial฀ reports฀ represent฀ economic฀ phenomena฀ in฀ words฀ and฀ numbers.฀ To฀ be฀ useful,฀
financial฀ information฀ must฀ not฀ only฀ represent฀ relevant฀ phenomena฀ but฀ must฀ faithfully฀
represent฀the฀phenomena฀that฀it฀purports฀to฀represent.฀
A฀complete฀depiction฀includes฀all฀information฀necessary฀for฀a฀user฀to฀understand฀the฀phenomenon฀
being฀depicted,฀including฀all฀necessary฀descriptions฀and฀explanations.฀
A฀ neutral฀ depiction฀ is฀ without฀ bias฀ in฀ the฀ selection฀ or฀ presentation฀ of฀ financial฀ information.฀ This฀
means฀ that฀ information฀ must฀ not฀ be฀ manipulated฀ in฀ any฀ way฀ in฀ order฀ to฀ influence฀ the฀ decisions฀ of฀
users.฀
Free฀from฀error฀means฀there฀are฀no฀errors฀or฀omissions฀in฀the฀description฀of฀the฀phenomenon฀and฀
no฀ errors฀ made฀ in฀ the฀ process฀ by฀ which฀ the฀ financial฀ information฀ was฀ produced.฀ It฀ does฀ not฀ mean฀
that฀no฀inaccuracies฀can฀arise,฀particularly฀where฀estimates฀have฀to฀be฀made.฀฀
(Conceptual฀Framework:฀paras.฀QC฀5–18)฀
Substance฀over฀form฀
This฀is฀not฀ a฀ separate฀ qualitative฀ characteristic฀under฀the฀Conceptual฀Framework.฀The฀IASB฀
says฀that฀to฀do฀so฀would฀be฀redundant฀because฀it฀is฀implied฀in฀faithful฀representation.฀Faithful฀
representation฀of฀a฀transaction฀is฀only฀possible฀if฀it฀is฀accounted฀for฀according฀to฀its฀substance฀and฀
economic฀reality฀(Conceptual฀Framework:฀para.฀BC3.19).฀
Materiality฀
IFRSs฀apply฀to฀material฀items.฀฀
Material:฀information฀is฀material฀if฀omitting฀it฀or฀misstating฀it฀could฀influence฀decisions฀that฀users฀
make฀on฀the฀basis฀of฀financial฀information฀about฀a฀specific฀reporting฀entity.฀(Conceptual฀Framework:฀
Key฀term฀
para.฀QC11)฀
Materiality฀is฀an฀entity-specific฀aspect฀of฀relevance฀based฀on฀the฀nature฀or฀magnitude฀(or฀both)฀of฀the฀
items฀ to฀ which฀ the฀ information฀ relates฀ in฀ the฀ context฀ of฀ an฀ individual฀ entity's฀ financial฀ report.฀
Information฀may฀be฀judged฀relevant฀simply฀because฀of฀its฀nature฀(eg฀remuneration฀of฀management).฀
In฀other฀cases,฀both฀the฀nature฀and฀materiality฀of฀the฀information฀are฀important.฀Materiality฀is฀not฀a฀
qualitative฀ characteristic฀ itself฀ (like฀ relevance฀ or฀ faithful฀ representation)฀ because฀ it฀ is฀ merely฀ a฀
threshold฀or฀cut-off฀point.฀
The฀IASB฀is฀working฀on฀materiality฀in฀a฀current฀project฀and฀in฀2017฀issued฀a฀draft฀practice฀statement.฀
This฀is฀discussed฀in฀Chapter฀19.฀The฀IASB฀is฀focusing฀on฀how฀materiality฀is฀applied฀in฀practice.฀
Enhancing฀qualitative฀characteristics฀
These฀are฀found฀in฀Conceptual฀Framework:฀paras.฀QC19–QC32.฀
Comparability฀
'Comparability฀ is฀ the฀ qualitative฀ characteristic฀ that฀ enables฀ users฀ to฀ identify฀ and฀ understand฀
similarities฀in,฀and฀differences฀among,฀items'฀(Conceptual฀Framework:฀QC21).฀'Information฀about฀a฀
reporting฀entity฀is฀more฀useful฀if฀it฀can฀be฀compared฀with฀similar฀information฀about฀other฀entities฀and฀
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with฀ similar฀ information฀ about฀ the฀ same฀ entity฀ for฀ another฀ period฀ or฀ another฀ date.'฀ (Conceptual฀
Framework:฀para.฀QC20)฀
'Consistency,฀ although฀ related฀ to฀ comparability,฀ is฀ not฀ the฀ same.฀ [It]฀ refers฀ to฀ the฀ use฀ of฀ the฀
same฀methods฀for฀the฀same฀items฀[ie฀consistency฀of฀treatment]฀either฀from฀period฀to฀period฀within฀a฀
reporting฀entity฀or฀in฀a฀single฀period฀across฀entities.'฀(Conceptual฀Framework:฀para.฀QC22)฀
The฀ disclosure฀ of฀ accounting฀ policies฀ is฀ particularly฀ important฀ here.฀ Users฀ must฀ be฀ able฀ to฀
distinguish฀between฀different฀accounting฀policies฀in฀order฀to฀be฀able฀to฀make฀a฀valid฀comparison฀of฀
similar฀items฀in฀the฀accounts฀of฀different฀entities.฀
'Comparability฀is฀not฀[the฀same฀as]฀uniformity'฀(Conceptual฀Framework:฀para.฀QC23).฀Entities฀
should฀change฀accounting฀policies฀if฀those฀policies฀become฀inappropriate.฀
Corresponding฀information฀for฀preceding฀periods฀should฀be฀shown฀to฀enable฀comparison฀over฀
time.฀
Verifiability฀
'Verifiability฀ helps฀ assure฀ users฀ that฀ information฀ faithfully฀ represents฀ the฀ economic฀ phenomena฀ it฀
purports฀to฀represent.฀[It]฀means฀that฀different฀knowledgeable฀and฀independent฀observers฀could฀reach฀
consensus฀[…]฀that฀a฀particular฀depiction฀is฀a฀faithful฀representation.'฀(Conceptual฀Framework:฀para.฀
QC26)฀
Timeliness฀
Information฀may฀become฀less฀useful฀if฀there฀is฀a฀delay฀in฀reporting฀it.฀There฀is฀a฀balance฀between฀
timeliness฀and฀the฀provision฀of฀reliable฀information.฀
If฀information฀is฀reported฀on฀a฀timely฀basis฀when฀not฀all฀aspects฀of฀the฀transaction฀are฀known,฀it฀may฀
not฀be฀complete฀or฀free฀from฀error.฀
Conversely,฀ if฀ every฀ detail฀ of฀ a฀ transaction฀ is฀ known,฀ it฀ may฀ be฀ too฀ late฀ to฀ publish฀ the฀ information฀
because฀ it฀ has฀ become฀ irrelevant.฀ The฀ overriding฀ consideration฀ is฀ how฀ best฀ to฀ satisfy฀ the฀ economic฀
decision-making฀needs฀of฀the฀users฀(Conceptual฀Framework:฀para.฀QC29).฀
Understandability฀
'Financial฀reports฀are฀prepared฀for฀users฀who฀have฀a฀reasonable฀knowledge฀of฀business฀and฀
economic฀ activities฀ and฀ who฀ review฀ and฀ analyse฀ the฀ information฀ diligently.'฀ (Conceptual฀
Framework:฀ para.฀ QC32)฀ Some฀ phenomena฀ are฀ inherently฀ complex฀ and฀ cannot฀ be฀ made฀ easy฀ to฀
understand.฀ Excluding฀ information฀ on฀ those฀ phenomena฀ might฀ make฀ the฀ information฀ easier฀ to฀
understand,฀ but฀ without฀ it฀ those฀ reports฀ would฀ be฀ incomplete฀ and฀ therefore฀ misleading.฀ Therefore฀
matters฀ should฀ not฀ be฀ left฀ out฀ of฀ financial฀ statements฀ simply฀ due฀ to฀ their฀ difficulty฀ as:฀ 'Even฀ well-
informed฀ and฀ diligent฀ users฀ may฀ sometimes฀ need฀ the฀ aid฀ of฀ an฀ adviser฀ to฀ understand฀ information฀
about฀complex฀economic฀phenomena.'฀(Conceptual฀Framework:฀para.฀QC32)฀
The฀cost฀constraint฀on฀useful฀financial฀reporting฀
This฀is฀a฀'pervasive฀constraint',฀not฀a฀qualitative฀characteristic฀(Conceptual฀Framework:฀para.฀QC35).฀
When฀information฀is฀provided,฀its฀benefits฀must฀exceed฀the฀costs฀of฀obtaining฀and฀presenting฀it.฀This฀
is฀ a฀ subjective฀ area฀ and฀ there฀ are฀ other฀ difficulties:฀ others,฀ not฀ the฀ intended฀ users,฀ may฀ gain฀ a฀
benefit;฀also฀the฀cost฀may฀be฀paid฀by฀someone฀other฀than฀the฀users.฀It฀is฀therefore฀difficult฀to฀apply฀a฀
cost–benefit฀analysis,฀but฀preparers฀and฀users฀should฀be฀aware฀of฀the฀constraint.฀
2.2.4฀Underlying฀assumption฀
The฀Conceptual฀Framework฀identifies฀one฀underlying฀assumption฀–฀going฀concern.฀
The฀financial฀statements฀are฀normally฀prepared฀on฀the฀assumption฀that฀an฀entity฀is฀a฀going฀concern฀
and฀will฀continue฀in฀operation฀for฀the฀foreseeable฀future.฀Hence,฀it฀is฀assumed฀that฀the฀entity฀has฀
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neither฀the฀intention฀nor฀the฀need฀to฀liquidate฀or฀curtail฀materially฀the฀scale฀of฀its฀operations;฀if฀such฀
an฀intention฀or฀need฀exists,฀the฀financial฀statements฀may฀have฀to฀be฀prepared฀on฀a฀different฀basis฀
and,฀if฀so,฀the฀basis฀used฀is฀disclosed฀(Conceptual฀Framework:฀para.฀4.1).฀
When฀preparing฀the฀financial฀statements,฀management฀is฀required฀to฀make฀an฀assessment฀
of฀ the฀ entity's฀ ability฀ to฀ continue฀ as฀ a฀ going฀ concern,฀ taking฀ into฀ account฀ all฀ available฀ information฀
about฀the฀future.฀This฀assessment฀must฀cover฀at฀least฀12฀months฀from฀the฀end฀of฀the฀reporting฀
period฀(IAS฀1:฀para.฀26).฀
Not฀a฀going฀concern฀
An฀entity฀may฀no฀longer฀be฀a฀going฀concern฀for฀various฀reasons;฀for฀example:฀
฀ Recurring฀operating฀losses฀
฀ Negative฀cash฀flow฀from฀operating฀activities฀
฀ Default฀on฀loan฀agreements฀
฀ Loss฀of฀key฀management฀personnel,฀customers฀or฀suppliers฀
฀ Non-compliance฀with฀regulatory฀requirements฀
฀ Emergence฀of฀dominant฀competition฀
฀ Technological฀changes฀
฀ Uninsured฀natural฀disasters฀
Where฀management฀believes฀that฀the฀entity฀is฀not฀ a฀ going฀ concern฀(ie฀it฀intends฀to฀liquidate฀the฀
entity฀or฀to฀cease฀trading,฀or฀has฀no฀realistic฀alternative฀but฀to฀do฀so),฀IAS฀1฀Presentation฀of฀Financial฀
Statements฀ requires฀ the฀ financial฀ statements฀ to฀ be฀ prepared฀ on฀ a฀ non-going฀ concern฀ basis฀ with฀
disclosure฀of฀the฀basis฀on฀which฀the฀financial฀statements฀have฀been฀prepared฀(IAS฀1:฀para.฀25).฀
Practically,฀ if฀ the฀ entity฀ will฀ not฀ be฀ a฀ going฀ concern,฀ IFRS฀ 5฀ Non-current฀ Assets฀ Held฀ for฀ Sale฀ and฀
Discontinued฀Operations฀would฀need฀to฀be฀applied฀and฀an฀entity's฀assets฀written฀down฀to฀their฀fair฀
values฀less฀costs฀to฀sell฀if฀lower฀than฀carrying฀amount฀(IFRS฀5:฀para.฀15).฀
Material฀uncertainties฀
There฀may฀be฀material฀ uncertainties฀over฀an฀entity's฀ability฀to฀continue฀as฀a฀going฀concern;฀for฀
example:฀
฀ Uncertainty฀over฀future฀finance฀
฀ Uncertainty฀over฀the฀outcome฀of฀a฀court฀case฀against฀the฀company฀
IAS฀1฀requires฀an฀entity฀to฀disclose฀material฀uncertainties฀that฀may฀ cast฀ doubt฀upon฀the฀entity's฀
ability฀to฀continue฀as฀a฀going฀concern฀(IAS฀1:฀para.฀25).฀
2.2.5฀The฀elements฀of฀financial฀statements฀
The฀Conceptual฀Framework฀lays฀out฀these฀elements฀as฀follows.฀
Elements฀of฀
financial฀statements
Measurement฀of฀ Measurement฀of฀฀
financial฀position฀in฀ performance฀in฀฀
Statement฀of฀financial฀position Statement฀of฀profit฀or฀loss฀
and฀other฀comprehensive฀
income฀
Assets
Liabilities฀
Income
Equity฀
Expenses
฀
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A฀process฀of฀sub-classification฀then฀takes฀place฀for฀presentation฀in฀the฀financial฀statements,฀eg฀
assets฀are฀classified฀by฀their฀nature฀or฀function฀in฀the฀business฀to฀show฀information฀in฀the฀best฀way฀for฀
users฀to฀take฀economic฀decisions.฀
Financial฀position฀
฀ Asset:฀a฀resource฀controlled฀by฀the฀entity฀as฀a฀result฀of฀past฀events฀and฀from฀which฀future฀
economic฀benefits฀are฀expected฀to฀flow฀to฀the฀entity.฀
Key฀term฀
฀ Liability:฀a฀present฀obligation฀of฀the฀entity฀arising฀from฀past฀events,฀the฀settlement฀of฀which฀is฀
expected฀to฀result฀in฀an฀outflow฀from฀the฀entity฀of฀resources฀embodying฀economic฀benefits.฀
฀ Equity:฀the฀residual฀interest฀in฀the฀assets฀of฀the฀entity฀after฀deducting฀all฀its฀liabilities.฀
฀ ฀ (Conceptual฀Framework:฀para.฀4.4)฀
These฀definitions฀are฀important,฀but฀they฀do฀not฀cover฀the฀criteria฀for฀recognition฀of฀any฀of฀these฀
items,฀ which฀ are฀ discussed฀ in฀ the฀ next฀ section฀ of฀ this฀ chapter.฀ This฀ means฀ that฀ the฀ definitions฀ may฀
include฀items฀which฀would฀not฀actually฀be฀recognised฀in฀the฀statement฀of฀financial฀position฀because฀
they฀fail฀to฀satisfy฀recognition฀criteria,฀particularly฀the฀probable฀flow฀of฀any฀economic฀benefit฀
to฀or฀from฀the฀business.฀
Whether฀ an฀ item฀ satisfies฀ any฀ of฀ the฀ definitions฀ above฀ will฀ depend฀ on฀ the฀ substance฀ and฀
economic฀reality฀of฀the฀transaction,฀not฀merely฀its฀legal฀form.฀฀
Assets฀
Future฀economic฀benefit:฀the฀potential฀to฀contribute,฀directly฀or฀indirectly,฀to฀the฀flow฀of฀cash฀and฀
cash฀equivalents฀to฀the฀entity.฀The฀potential฀may฀be฀a฀productive฀one฀that฀is฀part฀of฀the฀operating฀
Key฀term฀
activities฀of฀the฀entity.฀It฀may฀also฀take฀the฀form฀of฀convertibility฀into฀cash฀or฀cash฀equivalents฀or฀a฀
capability฀to฀reduce฀cash฀outflows,฀such฀as฀when฀an฀alternative฀manufacturing฀process฀lowers฀the฀
cost฀of฀production.฀
฀ (Conceptual฀Framework:฀para.฀4.8)฀
Assets฀are฀usually฀employed฀to฀produce฀goods฀or฀services฀for฀customers;฀customers฀will฀then฀pay฀for฀
these.฀ Cash฀ itself฀ renders฀ a฀ service฀ to฀ the฀ entity฀ due฀ to฀ its฀ command฀ over฀ other฀ resources.฀
(Conceptual฀Framework:฀para.฀4.9)฀
The฀existence฀of฀an฀asset,฀particularly฀in฀terms฀of฀control,฀is฀not฀reliant฀on฀(Conceptual฀Framework:฀
para.฀4.11–4.12):฀
(a)฀ Physical฀form฀(hence฀patents฀and฀copyrights);฀nor฀
(b)฀ Legal฀rights฀(hence฀leases).฀
Transactions฀or฀events฀in฀the฀past฀give฀rise฀to฀assets;฀those฀expected฀to฀occur฀in฀the฀future฀do฀not฀in฀
themselves฀give฀rise฀to฀assets.฀For฀example,฀an฀intention฀to฀purchase฀a฀non-current฀asset฀does฀not,฀in฀
itself,฀meet฀the฀definition฀of฀an฀asset฀(Conceptual฀Framework:฀para.฀4.13).฀
Liabilities฀
An฀essential฀characteristic฀of฀a฀liability฀is฀that฀the฀entity฀has฀a฀present฀obligation.฀
Obligation:฀a฀duty฀or฀responsibility฀to฀act฀or฀perform฀in฀a฀certain฀way.฀Obligations฀may฀be฀legally฀
enforceable฀as฀a฀consequence฀of฀a฀binding฀contract฀or฀statutory฀requirement฀[…]฀Obligations฀also฀
Key฀term฀
arise,฀however,฀from฀normal฀business฀practice,฀custom฀and฀a฀desire฀to฀maintain฀good฀business฀
relations฀or฀act฀in฀an฀equitable฀manner.฀
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It฀ is฀ important฀ to฀ distinguish฀ between฀ a฀ present฀ obligation฀ and฀ a฀ future฀ commitment.฀ A฀
management฀ decision฀ to฀ purchase฀ assets฀ in฀ the฀ future฀ does฀ not,฀ in฀ itself,฀ give฀ rise฀ to฀ a฀ present฀
obligation฀(Conceptual฀Framework:฀para฀4.16).฀
Settlement฀of฀a฀present฀obligation฀will฀involve฀the฀entity฀giving฀up฀resources฀embodying฀economic฀
benefits฀in฀order฀to฀satisfy฀the฀claim฀of฀the฀other฀party.฀This฀may฀be฀done฀in฀various฀ways,฀not฀just฀by฀
payment฀of฀cash฀(Conceptual฀Framework:฀para฀4.17).฀
Liabilities฀must฀arise฀from฀past฀transactions฀or฀events.฀In฀the฀case฀of,฀say,฀recognition฀of฀future฀
rebates฀to฀customers฀based฀on฀annual฀purchases,฀the฀sale฀of฀goods฀in฀the฀past฀is฀the฀transaction฀that฀
gives฀rise฀to฀the฀liability฀(Conceptual฀Framework:฀para.฀4.18).฀
Equity฀
Equity฀ is฀ defined฀ above฀ as฀ a฀ residual,฀ but฀ it฀ may฀ be฀ sub-classified฀ in฀ the฀ statement฀ of฀ financial฀
position.฀ This฀ will฀ indicate฀ legal฀ or฀ other฀ restrictions฀ on฀ the฀ ability฀ of฀ the฀ entity฀ to฀ distribute฀ or฀
otherwise฀ apply฀ its฀ equity.฀ Some฀ reserves฀ are฀ required฀ by฀ statute฀ or฀ other฀ law,฀ eg฀ for฀ the฀ future฀
protection฀ of฀ creditors.฀ The฀ amount฀ shown฀ for฀ equity฀ depends฀ on฀ the฀ measurement฀ of฀ assets฀
and฀ liabilities.฀ It฀ has฀ nothing฀ to฀ do฀ with฀ the฀ market฀ value฀ of฀ the฀ entity's฀ shares.฀ (Conceptual฀
Framework:฀para.฀4.20)฀
Performance฀
Profit฀is฀used฀as฀a฀measure฀ of฀ performance,฀or฀as฀a฀basis฀for฀other฀measures฀(eg฀earnings฀per฀
share).฀ It฀ depends฀ directly฀ on฀ the฀ measurement฀ of฀ income฀ and฀ expenses,฀ which฀ in฀ turn฀ depend฀ (in฀
part)฀ on฀ the฀ concepts฀ of฀ capital฀ and฀ capital฀ maintenance฀ adopted.฀ (Conceptual฀ Framework:฀ para.฀
4.24)฀
The฀elements฀of฀income฀and฀expense฀are฀therefore฀defined฀as฀follows:฀
฀ Income:฀increases฀in฀economic฀benefits฀during฀the฀accounting฀period฀in฀the฀form฀of฀inflows฀or฀
enhancements฀of฀assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀increases฀in฀equity,฀other฀than฀
Key฀term฀
those฀relating฀to฀contributions฀from฀equity฀participants.฀
฀ Expenses:฀decreases฀in฀economic฀benefits฀during฀the฀accounting฀period฀in฀the฀form฀of฀
outflows฀or฀depletions฀of฀assets฀or฀incurrences฀of฀liabilities฀that฀result฀in฀decreases฀in฀equity,฀
other฀than฀those฀relating฀to฀distributions฀to฀equity฀participants.฀
Income฀and฀expenses฀can฀be฀presented฀in฀different฀ways฀in฀the฀statement฀of฀profit฀or฀loss฀and฀
other฀ comprehensive฀ income,฀ to฀ provide฀ information฀ relevant฀ for฀ economic฀ decision-making.฀ For฀
example,฀ income฀ and฀ expenses฀ which฀ relate฀ to฀ continuing฀ operations฀ are฀ distinguished฀ from฀ the฀
results฀of฀discontinued฀operations฀(Conceptual฀Framework:฀para฀4.27).฀฀
Income฀
Both฀revenue฀and฀gains฀are฀included฀in฀the฀definition฀of฀income.฀Revenue฀arises฀in฀the฀course฀of฀
ordinary฀activities฀of฀an฀entity฀(Conceptual฀Framework:฀para.฀4.29).฀
Gains:฀increases฀in฀economic฀benefits.฀As฀such฀they฀are฀no฀different฀in฀nature฀from฀revenue.฀
Key฀term฀ ฀ (Conceptual฀Framework:฀para.฀4.30)฀
For฀example,฀gains฀arise฀on฀the฀disposal฀of฀non-current฀assets฀and฀on฀the฀revaluation฀of฀marketable฀
securities฀(unrealised฀gain)฀(Conceptual฀Framework:฀para.฀4.31).฀฀
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Expenses฀
Expenses฀ are฀ include฀ those฀ incurred฀ in฀ the฀ ordinary฀ course฀ of฀ business.฀ They฀ also฀ include฀ losses,฀
such฀as฀those฀that฀may฀arise฀on฀the฀disposal฀of฀non-current฀assets฀or฀the฀fall฀in฀value฀of฀an฀investment฀
(unrealised฀losses)฀(Conceptual฀Framework:฀para.฀4.35).฀
Losses:฀decreases฀in฀economic฀benefits.฀As฀such฀they฀are฀no฀different฀in฀nature฀from฀other฀expenses.฀
Key฀term฀ ฀ (Conceptual฀Framework:฀para.฀4.34)฀
2.2.6฀Recognition฀of฀the฀elements฀of฀financial฀statements฀
Recognition:฀the฀process฀of฀incorporating฀in฀the฀statement฀of฀financial฀position฀or฀statement฀of฀profit฀or฀
loss฀and฀other฀comprehensive฀income฀an฀item฀that฀meets฀the฀definition฀of฀an฀element฀and฀satisfies฀the฀
Key฀term฀
following฀criteria฀for฀recognition:฀
(a)฀ It฀is฀probable฀that฀any฀future฀economic฀benefit฀associated฀with฀the฀item฀will฀flow฀to฀or฀from฀the฀
entity;฀and฀
(b)฀ The฀item฀has฀a฀cost฀or฀value฀that฀can฀be฀measured฀with฀reliability.฀
฀ ฀ (Conceptual฀Framework:฀paras.฀4.37–4.38)฀
Probability฀of฀future฀economic฀benefits฀
Probability฀ here฀ means฀ the฀ degree฀ of฀ uncertainty฀ that฀ the฀ future฀ economic฀ benefits฀ associated฀
with฀an฀item฀will฀flow฀to฀or฀from฀the฀entity.฀This฀must฀be฀judged฀on฀the฀basis฀of฀the฀characteristics฀
of฀ the฀ entity's฀ environment฀ and฀ the฀ evidence฀ available฀ when฀ the฀ financial฀ statements฀ are฀
prepared฀(Conceptual฀Framework:฀para.฀4.40).฀
Reliability฀of฀measurement฀
The฀ cost฀ or฀ value฀ of฀ an฀ item,฀ in฀ many฀ cases,฀ must฀ be฀ estimated.฀ The฀ Conceptual฀ Framework฀
states,฀ however,฀ that฀ 'the฀ use฀ of฀ reasonable฀ estimates฀ is฀ an฀ essential฀ part฀ of฀ the฀ preparation฀ of฀
financial฀statements฀and฀does฀not฀undermine฀their฀reliability'.฀Where฀no฀reasonable฀estimate฀can฀be฀
made,฀the฀item฀should฀not฀be฀recognised,฀although฀its฀existence฀should฀be฀disclosed฀in฀the฀notes,฀or฀
other฀explanatory฀material฀(Conceptual฀Framework:฀para.฀4.41).฀
Items฀ may฀ still฀ qualify฀ for฀ recognition฀ at฀ a฀ later฀ date฀ due฀ to฀ changes฀ in฀ circumstances฀ or฀
subsequent฀events฀(Conceptual฀Framework:฀para.฀4.42).฀
2.2.7฀Measurement฀of฀the฀elements฀of฀financial฀statements฀
Measurement:฀the฀process฀of฀determining฀the฀monetary฀amounts฀at฀which฀the฀elements฀of฀the฀
financial฀statements฀are฀to฀be฀recognised฀and฀carried฀in฀the฀statement฀of฀financial฀position฀and฀
Key฀term฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income.฀
To฀ measure฀ the฀ elements฀ in฀ the฀ financial฀ statements,฀ the฀ entity฀ should฀ select฀ an฀ appropriate฀
measurement฀basis.฀There฀are฀four฀measurement฀bases฀defined฀in฀the฀Conceptual฀Framework.฀฀
Historical฀cost:฀assets฀are฀recorded฀at฀the฀amount฀of฀cash฀or฀cash฀equivalents฀paid฀or฀the฀fair฀
value฀of฀the฀consideration฀given฀to฀acquire฀them฀at฀the฀time฀of฀their฀acquisition.฀Liabilities฀are฀
Key฀term฀
recorded฀at฀the฀amount฀of฀proceeds฀received฀in฀exchange฀for฀the฀obligation,฀or฀in฀some฀
circumstances฀(for฀example,฀income฀taxes),฀at฀the฀amounts฀of฀cash฀or฀cash฀equivalents฀expected฀to฀
be฀paid฀to฀satisfy฀the฀liability฀in฀the฀normal฀course฀of฀business.฀
Current฀cost:฀assets฀are฀carried฀at฀the฀amount฀of฀cash฀or฀cash฀equivalents฀that฀would฀have฀to฀be฀
paid฀if฀the฀same฀or฀an฀equivalent฀asset฀was฀acquired฀currently.฀
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Liabilities฀are฀carried฀at฀the฀undiscounted฀amount฀of฀cash฀or฀cash฀equivalents฀that฀would฀be฀required฀
to฀settle฀the฀obligation฀currently.฀
Realisable฀(settlement)฀value:฀the฀amount฀of฀cash฀or฀cash฀equivalents฀that฀could฀currently฀be฀
obtained฀by฀selling฀an฀asset฀in฀an฀orderly฀disposal.฀
Liabilities฀are฀carried฀at฀the฀undiscounted฀amount฀of฀cash฀or฀cash฀equivalents฀expected฀to฀be฀paid฀to฀
satisfy฀the฀liabilities฀in฀the฀normal฀course฀of฀business.฀
Present฀value:฀a฀current฀estimate฀of฀the฀present฀discounted฀value฀of฀the฀future฀net฀cash฀flows฀in฀the฀
normal฀course฀of฀business.฀
(Conceptual฀Framework:฀para.฀4.55)฀
Historical฀cost฀is฀the฀most฀commonly฀adopted฀measurement฀basis,฀but฀this฀is฀usually฀combined฀with฀
other฀ bases,฀ eg฀ inventories฀ are฀ carried฀ at฀ the฀ lower฀ of฀ cost฀ and฀ net฀ realisable฀ value฀ (Conceptual฀
Framework:฀para.฀4.56).฀
Recent฀ standards฀ use฀ the฀ concept฀ of฀ fair฀ value,฀ which฀ is฀ defined฀ by฀ IFRS฀ 13฀ Fair฀ Value฀
Measurement฀as฀'the฀price฀that฀would฀be฀received฀to฀sell฀an฀asset฀or฀paid฀to฀transfer฀a฀liability฀in฀an฀
orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date'฀(IFRS฀13:฀Appendix฀A).฀
2.2.8฀Concepts฀of฀capital฀and฀capital฀maintenance฀
What฀is฀profit?฀
Capital฀at฀end฀of฀year฀ X
Add฀back:฀distributions฀during฀the฀year X
Less:฀capital฀injected฀during฀the฀year฀ (X)
฀฀฀฀฀฀฀฀capital฀at฀beginning฀of฀year฀ ฀฀(X)฀
=฀Excess฀capital฀(ie฀profit)฀ ฀ X฀
The฀ concept฀ of฀ 'profit'฀ earned฀ will฀ therefore฀ vary฀ depending฀ on฀ the฀ capital฀ maintenance฀ concept฀
adopted฀(ie฀opening฀capital฀must฀be฀maintained฀and฀any฀excess฀by฀the฀end฀of฀the฀period฀represents฀
profit).฀
Capital฀maintenance฀
The฀concept฀of฀capital฀maintenance฀is฀concerned฀with฀how฀an฀entity฀defines฀the฀capital฀that฀it฀seeks฀
to฀ maintain.฀ It฀ provides฀ the฀ linkage฀ between฀ the฀ concepts฀ of฀ capital฀ and฀ the฀ concepts฀ of฀ profit฀
because฀it฀provides฀the฀point฀of฀reference฀by฀which฀profit฀is฀measured฀(Conceptual฀Framework:฀para.฀
4.59).฀
There฀are฀two฀views฀of฀capital.฀
(a)฀ Financial฀capital฀–฀a฀fund฀attributable฀to฀shareholders,฀represented฀by฀share฀capital฀and฀
reserves.฀฀
The฀objective฀of฀financial฀capital฀maintenance฀is฀to฀maintain฀shareholders'฀wealth฀either฀
in฀nominal฀terms฀or฀in฀real฀terms,฀ie฀maintaining฀the฀monetary฀value฀of฀capital฀and฀reserves.฀
Profit฀is฀only฀earned฀if,฀after฀excluding฀dividends฀and฀owner-contributions,฀the฀financial฀value฀
of฀ closing฀ net฀ assets฀ is฀ greater฀ than฀ the฀ financial฀ value฀ of฀ opening฀ net฀ assets฀ (Conceptual฀
Framework:฀para.฀4.59).฀฀
(b)฀฀ Operating/physical฀ capital฀ –฀operating฀capital฀is฀represented฀by฀non-current฀assets฀plus฀
inventories฀plus฀monetary฀working฀capital.฀฀
The฀ objective฀ of฀ operating/physical฀ capital฀ maintenance฀ is฀ to฀ maintain฀ the฀ operating฀
capacity฀ of฀ the฀ business฀ in฀ terms฀ of฀ the฀ assets฀ available฀ to฀ it,฀ including฀ both฀ physical฀
assets฀and฀monetary฀working฀capital฀(monetary฀current฀assets฀less฀monetary฀current฀liabilities).฀
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Profit฀ is฀ only฀ earned฀ if,฀ after฀ excluding฀ dividends฀ and฀ owner-contributions,฀ the฀ physical฀
productive฀capacity฀of฀the฀entity฀at฀the฀end฀of฀the฀reporting฀period฀is฀greater฀than฀it฀was฀at฀the฀
beginning฀of฀the฀reporting฀period฀(Conceptual฀Framework:฀para.฀4.59).฀฀
2.3฀Exposure฀Draft฀ED/2015/3:฀Conceptual฀Framework฀for฀Financial฀
Reporting฀
In฀ May฀ 2015,฀ the฀ IASB฀ issued฀ an฀ exposure฀ draft:฀ Conceptual฀ Framework฀ for฀ Financial฀ Reporting.฀
The฀exposure฀draft฀(ED)฀is฀the฀latest฀document฀in฀a฀project฀that฀has฀been฀ongoing฀since฀2004.฀The฀
ED฀proposes฀comprehensive฀changes฀to฀the฀Conceptual฀Framework,฀notably:฀
฀ Revisions฀to฀the฀definitions฀of฀elements฀in฀the฀financial฀statements฀
฀ Guidance฀on฀derecognition฀
฀ Discussions฀on฀measurement฀bases฀
฀ Principles฀for฀including฀items฀in฀other฀comprehensive฀income฀(OCI)฀
฀ High-level฀concepts฀for฀presentation฀and฀disclosure฀
The฀ ED฀ follows฀ a฀ 2013฀ discussion฀ paper฀ covering฀ all฀ aspects฀ of฀ the฀ framework฀ project,฀ and฀ was฀
published฀at฀the฀same฀time฀as฀another฀ED฀covering฀references฀to฀the฀Conceptual฀Framework฀in฀other฀
IASB฀pronouncements฀(not฀on฀your฀examinable฀documents฀list).฀
2.3.1฀Background฀and฀approach฀
While฀the฀existing฀Conceptual฀Framework฀was฀found฀to฀be฀useful฀in฀helping฀the฀IASB฀with฀its฀stated฀
mission฀ to฀ 'develop฀ Standards฀ that฀ bring฀ transparency,฀ accountability฀ and฀ efficiency฀ to฀ financial฀
markets฀ around฀ the฀ world',฀ it฀ was฀ also฀ found฀ to฀ be฀ lacking฀ in฀ the฀ following฀ respects฀ (ED/2015/3:฀
Summary):฀
Problem฀ Solution฀
There฀are฀some฀gaps฀in฀the฀current฀Conceptual฀Framework,฀such฀as฀ Fill฀gaps฀
insufficient฀guidance฀on฀presentation฀and฀disclosure.฀
Parts฀of฀the฀existing฀Conceptual฀Framework฀are฀out฀of฀date.฀An฀example฀is฀ Update฀
the฀guidance฀on฀when฀assets฀and฀liabilities฀should฀be฀recognised.฀
Some฀of฀the฀guidance฀is฀unclear;฀for฀example฀regarding฀the฀role฀of฀ Clarify฀
measurement฀uncertainty฀in฀deciding฀how฀to฀measure฀assets,฀liabilities,฀income฀
or฀expenses.฀
2.3.2฀Structure฀
The฀ED฀proposes฀that฀the฀revised฀Conceptual฀Framework฀is฀structured฀as฀follows:฀
Chapter฀ Topic฀
฀ Introduction฀
1฀ The฀objective฀of฀general฀purpose฀financial฀reporting฀
2฀ Qualitative฀characteristics฀of฀useful฀financial฀information฀
3฀ Financial฀statements฀and฀the฀reporting฀entity฀
4฀ The฀elements฀of฀financial฀statements฀
5฀ Recognition฀and฀derecognition฀
6฀ Measurement฀
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Chapter฀ Topic฀
7฀ Presentation฀and฀disclosure฀
8฀ Concepts฀of฀capital฀and฀capital฀maintenance฀
Appendix฀A฀ Cash-flow-based฀measurement฀techniques฀
Appendix฀B฀ Glossary฀
2.3.3฀Introduction฀
The฀ED's฀introduction฀to฀the฀Conceptual฀Framework฀states฀that฀its฀purpose฀is฀to:฀
(a)฀ Assist฀ the฀ International฀ Accounting฀ Standards฀ Board฀ (IASB)฀ to฀ develop฀ standards฀ that฀
are฀based฀on฀consistent฀concepts;฀
(b)฀ Assist฀ preparers฀ to฀ develop฀ consistent฀ accounting฀ policies฀ when฀ no฀ standard฀
applies฀ to฀ a฀ particular฀ transaction฀ or฀ event,฀ or฀ when฀ a฀ standard฀ allows฀ a฀ choice฀ of฀
accounting฀policy;฀and฀฀
(c)฀ Assist฀others฀[all฀parties]฀to฀understand฀and฀interpret฀the฀standards.฀
(ED/2015/3:฀para.฀IN1)฀
The฀ Conceptual฀ Framework฀ is฀ not฀ an฀ IFRS,฀ nor฀ does฀ it฀ override฀ any฀ specific฀ IFRS.฀ If฀ the฀
IASB฀ decides฀ to฀ issue฀ a฀ new฀ or฀ revised฀ pronouncement฀ that฀ is฀ in฀ conflict฀ with฀ the฀ Conceptual฀
Framework,฀the฀IASB฀will฀highlight฀the฀fact฀and฀explain฀the฀reasons฀for฀the฀departure.฀
2.3.4฀Chapter฀1:฀The฀objective฀of฀general฀purpose฀financial฀reporting฀
This฀ chapter฀ (ED/2015/3:฀ paras.฀ 1.2,฀ 1.12),฀ together฀ with฀ Chapter฀ 2,฀ was฀ finalised฀ in฀ the฀ 2010฀
version฀of฀the฀Conceptual฀Framework,฀and฀so฀there฀are฀only฀limited฀changes฀from฀that฀version.฀฀
The฀main฀change฀is฀that฀more฀emphasis฀is฀placed฀on฀the฀importance฀of฀providing฀information฀needed฀
to฀assess฀management's฀stewardship฀of฀an฀entity's฀resources.฀฀
2.3.5฀Chapter฀2:฀Qualitative฀characteristics฀of฀useful฀financial฀information฀
This฀ Chapter,฀ together฀ with฀ Chapter฀ 1,฀ was฀ finalised฀ in฀ the฀ 2010฀ version฀ of฀ the฀ Conceptual฀
Framework,฀and฀so฀there฀are฀generally฀only฀limited฀changes฀from฀that฀version.฀However,฀one฀change฀
that฀could฀be฀regarded฀as฀important฀is฀the฀introduction฀of฀an฀explicit฀ reference฀ to฀ the฀ idea฀ of฀
prudence.฀ Prudence฀ is฀ described฀ as฀ 'the฀ exercise฀ of฀ caution฀ when฀ making฀ judgements฀
under฀conditions฀of฀uncertainty'฀(ED/2015/3:฀para.฀2.18).฀It฀is฀explicitly฀stated฀that฀prudence฀
is฀ important฀ in฀ achieving฀ neutrality,฀ and฀ therefore฀ in฀ achieving฀ faithful฀ representation฀
(ED/2015/3:฀para.฀2.18).฀Prudence฀had฀been฀removed฀from฀the฀Conceptual฀Framework฀in฀2010.฀฀
The฀IASB฀has฀further฀clarified฀that฀prudence฀works฀both฀ways:฀assets฀and฀liabilities฀should฀be฀neither฀
overstated฀nor฀understated.฀
Another฀ key฀ change฀ is฀ to฀ the฀ explanation฀ of฀ faithful฀ representation฀ (ED/2015/3:฀ para.฀ 2.19).฀ The฀
chapter฀ contains฀ a฀ proposed฀ addition฀ that฀ would฀ clarify฀ that฀ faithful฀ representation฀ means฀
representation฀ of฀ the฀ substance฀ of฀ an฀ economic฀ phenomenon฀ instead฀ of฀
representation฀of฀merely฀its฀legal฀form.฀
2.3.6฀Chapter฀3:฀Financial฀statements฀and฀the฀reporting฀entity฀
This฀chapter฀is฀not฀in฀the฀current฀version฀of฀the฀Conceptual฀Framework,฀and฀is฀based฀on฀the฀feedback฀
received฀on฀a฀2010฀Exposure฀Draft฀on฀the฀topic.฀฀
The฀ED฀states฀the฀objective฀of฀financial฀statements฀as฀being฀to฀provide฀information฀about฀an฀entity's฀
assets,฀liabilities,฀equity,฀income฀and฀expenses฀that฀is฀useful฀to฀financial฀statements฀users฀in฀assessing฀
the฀prospects฀for฀future฀net฀cash฀inflows฀to฀the฀entity฀and฀in฀assessing฀management's฀stewardship฀of฀
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the฀ entity's฀ resources.฀ It฀ then฀ sets฀ out฀ the฀ going฀ concern฀ assumption,฀ which฀ is฀ unchanged฀ from฀ the฀
current฀version.฀
Definition฀of฀the฀reporting฀entity฀฀
A฀ reporting฀ entity฀ is฀ 'an฀ entity฀ that฀ chooses,฀ or฀ is฀ required,฀ to฀ prepare฀ general฀ purpose฀ financial฀
statements'฀(ED/2015/3:฀para.฀3.11).฀However,฀the฀definition฀is฀not฀confined฀to฀legal฀entities฀only.฀
A฀reporting฀entity฀could฀be฀a฀group฀of฀entities,฀or฀it฀could฀be฀just฀a฀part฀of฀an฀entity฀(ED/2015/3:฀
para.฀3.12).฀฀฀
Boundary฀of฀the฀reporting฀entity฀
The฀ED฀proposes฀to฀determine฀the฀boundary฀of฀a฀reporting฀entity฀that฀has฀one฀or฀more฀subsidiaries฀
on฀the฀basis฀of฀control.฀The฀boundary฀can฀be฀determined฀by฀either฀direct฀control,฀which฀results฀in฀
unconsolidated฀ or฀ individual฀ financial฀ statements฀ or฀ by฀ direct฀ and฀ indirect฀ control,฀ which฀
results฀in฀consolidated฀financial฀statements฀(ED/2015/3:฀paras.฀3.13–3.16).฀฀฀
The฀IASB฀has฀produced฀the฀following฀diagram฀(IASB,฀Snapshot:฀Conceptual฀Framework฀for฀Financial฀
Reporting,฀p10),฀to฀show฀the฀approach:฀
Reporting entity
direct
direct and Parent
control
indirect
control
Subsidiary
consolidated financial statements unconsolidated financial statements ฀

Consolidated฀ financial฀ statements,฀ according฀ to฀ the฀ ED,฀ are฀ generally฀ more฀ likely฀ to฀ provide฀ useful฀
information฀ to฀ users฀ than฀ unconsolidated฀ financial฀ statements.฀ If฀ an฀ entity฀ prepares฀ both,฀ the฀
unconsolidated฀ financial฀ statements฀ must฀ disclose฀ how฀ users฀ may฀ obtain฀ the฀ consolidated฀ financial฀
statements.฀฀
2.3.7฀Chapter฀4:฀The฀elements฀of฀financial฀statements฀
The฀elements฀of฀financial฀statements฀are,฀as฀in฀the฀existing฀Conceptual฀Framework,฀assets,฀liabilities,฀
equity,฀income฀and฀expenses.฀However,฀the฀definitions฀have฀been฀modified.฀
The฀current฀definitions฀of฀assets฀and฀liabilities฀require฀a฀probable฀expectation฀of฀future฀economic฀
benefits฀ or฀ resource฀ inflow/outflow.฀ The฀ IASB฀ argues฀ that฀ the฀ definitions฀ of฀ assets฀ and฀ liabilities฀
should฀not฀ require฀an฀ expected฀ or฀ probable฀ inflow฀ or฀ outflow฀as฀it฀should฀be฀sufficient฀
that฀ a฀ resource฀ or฀ obligation฀ can฀ produce฀ or฀ result฀ in฀ a฀ transfer฀ of฀ economic฀ benefits.฀ The฀ new฀
definitions฀place฀more฀emphasis฀on฀the฀fact฀that฀an฀asset฀is฀a฀resource฀and฀a฀liability฀is฀an฀obligation฀
(IASB,฀ Snapshot:฀ Conceptual฀ Framework฀ for฀ Financial฀ Reporting,฀ p5).฀ In฀ addition,฀ the฀ notion฀ of฀
probability฀will฀be฀removed฀from฀the฀definitions.฀
The฀proposed฀definitions฀are฀฀
 'An฀ asset฀is฀a฀present฀economic฀resource฀controlled฀by฀the฀entity฀as฀a฀result฀of฀past฀events.'฀
(ED/2015/3:฀para.฀4.4)฀
 'A฀liability฀is฀a฀present฀obligation฀of฀the฀entity฀to฀transfer฀an฀economic฀resource฀as฀a฀result฀of฀
past฀events.'฀(ED/2015/3:฀para.฀4.4)฀
 'An฀ economic฀ resource฀ is฀ a฀ right฀ that฀ has฀ the฀ potential฀ to฀ produce฀ economic฀ benefits.'฀
(ED/2015/3:฀para.฀4.4)฀
 '[A]฀present฀obligation฀[is฀an฀obligation]฀to฀transfer฀economic฀resources฀[that]:฀
(a)฀ The฀entity฀has฀no฀practical฀ability฀to฀avoid฀…;฀฀and฀
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(b)฀ …has฀arisen฀from฀[a]฀past฀event…฀[(ie฀economic฀benefits฀already฀received฀or฀activities฀
already฀conducted).]฀(ED/2015/3:฀para.฀4.31)฀
For฀ the฀ definitions฀ of฀ both฀ assets฀ and฀ liabilities,฀ the฀ IASB฀ decided฀ not฀ to฀ retain฀ the฀ notion฀ of฀ an฀
'expected฀ inflow฀ or฀ outflow฀ of฀ resources'฀ in฀ acknowledgement฀ of฀ concerns฀ about฀ varied฀
interpretations฀of฀the฀term฀'expected'฀and฀the฀notion฀of฀a฀threshold฀level฀of฀probability.฀
Equity฀continues฀to฀be฀defined฀as฀'the฀residual฀interest฀in฀the฀assets฀of฀the฀entity฀after฀deducting฀all฀
its฀ liabilities'฀ (ED/2015/3:฀ para.฀ 4.4).฀ It฀ should฀ be฀ noted฀ that฀ while฀ the฀ 2013฀ Discussion฀
Paper฀addressed฀problems฀that฀arise฀in฀classifying฀instruments฀with฀characteristics฀
of฀ both฀ liabilities฀ and฀ equity,฀ the฀ ED฀ does฀ not฀ do฀ so.฀Exploring฀those฀problems฀has฀been฀
transferred฀to฀the฀IASB's฀research฀project฀on฀financial฀instruments฀with฀the฀characteristics฀of฀equity.฀
Income฀and฀expenses฀are฀defined฀in฀the฀ED฀as฀follows:฀฀
'Income฀is฀increases฀in฀assets฀or฀decreases฀in฀liabilities฀that฀result฀in฀increases฀in฀equity,฀other฀than฀
those฀relating฀to฀contributions฀from฀holders฀of฀equity฀claims'฀(ED/2015/3:฀para.฀4.4).฀
'Expenses฀are฀decreases฀in฀assets฀or฀increases฀in฀liabilities฀that฀result฀in฀decreases฀in฀equity,฀other฀
than฀those฀relating฀to฀distributions฀to฀holders฀of฀equity฀claims'฀(ED/2015/3:฀para.฀4.4).฀
2.3.8฀Chapter฀5:฀Recognition฀and฀derecognition฀
Recognition฀
Recognition฀is฀the฀process฀ of฀ capturing฀ an฀ element฀for฀inclusion฀in฀the฀statement฀of฀financial฀
position฀or฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀(ED/2015/3:฀para.฀5.2).฀The฀
ED฀states฀that฀'only฀items฀that฀meet฀the฀definition฀of฀an฀asset,฀a฀liability฀or฀equity฀are฀recognised฀in฀
the฀statement฀of฀financial฀position,฀and฀only฀items฀that฀meet฀the฀definition฀of฀income฀or฀expenses฀are฀
to฀be฀recognised฀in฀the฀statement(s)฀of฀financial฀performance'฀(ED/2015/3:฀para.฀5.7).฀฀
The฀ ED฀ requires฀ that฀ recognition฀ criteria,฀ based฀ on฀ the฀ qualitative฀ characteristics฀ of฀ useful฀
financial฀information,฀must฀be฀met.฀The฀recognition฀criteria฀are฀as฀follows฀฀
'An฀entity฀recognises฀an฀asset฀or฀liability฀…฀if฀such฀recognition฀provides฀users฀of฀the฀financial฀
statements฀with:฀
(a)฀ Relevant฀information฀about฀the฀asset฀or฀liability…;฀
(b)฀ A฀ faithful฀ representation฀ of฀ the฀ asset฀ or฀ liability฀ and฀ of฀ any฀ income฀ and฀
expenses…;฀and฀
(c)฀ Information฀ that฀ results฀ in฀ benefits฀ exceeding฀ the฀ cost฀ of฀ providing฀ that฀
information…'฀
(ED/2015/3:฀para.฀5.9)฀
If฀it฀is฀not฀certain฀whether฀an฀asset฀or฀liability฀exists,฀or฀there฀is฀only฀a฀low฀probability฀of฀
inflows/outflows฀associated฀with฀the฀asset/liability,฀then฀these฀criteria฀may฀not฀be฀met.฀Additionally,฀
sometimes฀the฀level฀of฀uncertainty฀in฀measuring฀the฀asset/liability฀means฀that฀the฀information฀
provided฀will฀not฀be฀relevant฀to฀users,฀in฀which฀case฀the฀asset฀or฀liability฀will฀not฀be฀recognised฀
(ED/2015/3:฀para.฀5.13).฀฀
Whether฀the฀information฀provided฀is฀useful฀to฀users฀depends฀on฀the฀item฀and฀the฀specific฀facts฀and฀
circumstances.฀Entities฀may฀also฀be฀required฀to฀exercise฀ judgement,฀and฀recognition฀may฀vary,฀
depending฀on฀the฀IFRS฀being฀applied฀(ED/2015/3:฀para.฀5.14).฀
Derecognition฀
Guidance฀ on฀ derecognition฀ is฀ new฀ to฀ this฀ proposed฀ version฀ of฀ the฀ Conceptual฀ Framework.฀ The฀
guidance฀ is฀ driven฀ by฀ the฀ requirement฀ of฀ faithful฀ representation.฀ A฀ faithful฀
representation฀must฀be฀provided฀of:฀
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'(a)฀ The฀assets฀and฀liabilities฀retained฀after฀a฀transaction฀or฀other฀event฀that฀led฀to฀
derecognition;฀and฀
(b)฀ The฀ change฀ in฀ the฀ entity's฀ assets฀ and฀ liabilities฀ as฀ a฀ result฀ of฀ that฀
transaction฀or฀other฀event.'฀(ED/2015/3:฀para.฀5.26).฀฀฀
Decisions฀about฀derecognition฀are฀generally฀straightforward.฀However,฀in฀some฀cases฀the฀two฀aims฀
described฀above฀conflict฀with฀each฀other,฀making฀the฀decisions฀more฀difficult.฀The฀discussion฀in฀the฀
Exposure฀Draft฀focuses฀on฀these฀cases.฀฀
2.3.9฀Chapter฀6:฀Measurement฀
The฀ guidance฀ on฀ measurement฀ is฀ an฀ example฀ of฀ filling฀ in฀ gaps฀ present฀ in฀ the฀ existing฀ Conceptual฀
Framework.฀ While฀ developing฀ the฀ ED,฀ the฀ IASB฀ considered฀ whether฀ the฀ Conceptual฀ Framework฀
should฀ advocate฀ the฀ use฀ of฀ a฀ single฀ measurement฀ basis.฀ Considering฀ the฀ different฀ assets฀ and฀
liabilities฀being฀measured,฀relevance฀and฀the฀cost฀constraint,฀the฀Board฀eventually฀concluded฀that฀a฀
multiple฀measurement฀approach฀is฀more฀appropriate.฀
The฀ED฀covers฀the฀following฀(ED/2015/3:฀paras.฀6.4–6.47):฀
(a)฀ A฀description฀of฀various฀measurement฀bases,฀the฀information฀that฀these฀measurement฀
bases฀provide฀and฀their฀advantages฀and฀disadvantages.฀The฀measurement฀bases฀are฀historical฀
cost฀and฀current฀value฀measures฀(fair฀value฀and฀value฀in฀use/fulfilment฀value);฀
(b)฀ Factors฀to฀consider฀when฀selecting฀a฀measurement฀basis฀(cost฀constraint,฀relevance,฀faithful฀
representation,฀ enhancing฀ qualitative฀ characteristics,฀ and฀ factors฀ specific฀ to฀ initial฀
measurement);฀
(c)฀ Situations฀ when฀ more฀ than฀ one฀ measurement฀ basis฀ provides฀ relevant฀ information.฀
Consideration฀ of฀ the฀ objective฀ of฀ financial฀ reporting,฀ the฀ qualitative฀ characteristics฀ of฀ useful฀
financial฀ information฀ and฀ the฀ cost฀ constraint฀ are฀ likely฀ to฀ result฀ in฀ the฀ selection฀ of฀ different฀
measurement฀bases฀for฀different฀assets,฀liabilities฀and฀items฀of฀income฀and฀expense;฀and฀
(d)฀ Measurement฀of฀equity.฀
Appendix฀ A฀ of฀ the฀ ED฀ supplements฀ this฀ chapter,฀ and฀ describes฀ cash-flow-based฀ measurement฀
techniques฀ for฀ cases฀ when฀ a฀ measure฀ determined฀ using฀ a฀ measurement฀ basis฀ cannot฀ be฀ observed฀
(ED/2015/3:฀paras.฀A1–A10).฀
2.3.10฀Chapter฀7:฀Presentation฀and฀disclosure฀
This฀ chapter฀ discusses฀ concepts฀ that฀ determine฀ what฀ information฀ is฀ included฀ in฀ the฀ financial฀
statements฀ and฀ how฀ that฀ information฀ should฀ be฀ presented฀ and฀ disclosed.฀ These฀ concepts฀ are฀
intended฀to฀guide฀the฀IASB฀in฀setting฀presentation฀and฀disclosure฀requirements฀in฀individual฀standards฀
and฀to฀guide฀entities฀in฀providing฀information฀in฀financial฀statements.฀
Concepts฀and฀principles฀discussed฀in฀the฀ED฀
The฀ED฀discusses฀the฀following฀issues฀(ED/2015/3:฀paras.฀7.16–7.18):฀฀
(a)฀ The฀ balance฀ between฀ entities'฀ flexibility฀ to฀ provide฀ relevant฀ information฀ that฀ faithfully฀
represents฀the฀entity's฀assets฀and฀liabilities฀and฀the฀transactions฀and฀other฀events฀of฀the฀period,฀
and฀comparability฀among฀entities฀and฀across฀reporting฀periods.฀฀
(b)฀ Entity-specific฀ information฀ is฀ more฀ useful฀ than฀ boilerplate฀ language฀ for฀ efficient฀ and฀ effective฀
communication.฀฀
(c)฀ Duplication฀ of฀ information฀ in฀ various฀ sections฀ of฀ the฀ financial฀ statements฀ is฀ unnecessary฀ and฀
makes฀financial฀statements฀less฀understandable.฀
Profit฀or฀loss฀and฀OCI฀฀
This฀ part฀ of฀ the฀ ED฀ (ED/2015/3:฀ paras.฀ 7.19–7.27)฀ discusses฀ presentation฀ disclosure฀ in฀ the฀
statement฀of฀financial฀performance,฀and฀provides฀conceptual฀guidance฀on฀whether฀to฀present฀income฀
and฀expenses฀in฀profit฀or฀loss฀or฀in฀OCI.฀
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Both฀profit฀or฀loss฀and฀other฀comprehensive฀income฀would฀be฀retained฀and฀marked฀by฀subtotals฀or฀
totals.฀฀
The฀ED฀states฀that฀'the฀purpose฀of฀the฀statement฀of฀profit฀or฀loss฀is฀to฀depict฀the฀return฀an฀entity฀has฀
made฀ on฀ its฀ economic฀ resources฀ during฀ the฀ period฀ and฀ to฀ provide฀ information฀ that฀ is฀ helpful฀ in฀
assessing฀future฀cash฀flows฀and฀…฀management's฀stewardship฀of฀the฀entity's฀resources'฀(ED/2015/3฀
para.฀7.20).฀By฀default,฀therefore,฀all฀income฀and฀expense฀will฀be฀shown฀in฀profit฀or฀loss฀
unless฀relating฀to฀the฀remeasurement฀of฀assets฀and฀liabilities฀–฀these฀would฀normally฀be฀
shown฀in฀OCI.฀฀
The฀ED฀presumes฀that฀items฀recognised฀in฀OCI฀will฀be฀reclassified฀to฀profit฀or฀loss฀in฀a฀later฀period.฀
The฀'later฀period'฀is฀based฀on฀when฀that฀reclassification฀will฀provide฀relevant฀information฀to฀users.฀If฀it฀
isn't฀clear฀when฀this฀'later฀period'฀should฀be,฀then฀that฀is฀an฀indication฀that฀perhaps฀the฀item฀shouldn't฀
be฀included฀in฀OCI฀in฀the฀first฀place฀(ED/2015/3฀paras.฀7.27–7.27).฀฀
2.3.11฀Chapter฀8:฀Concepts฀of฀capital฀and฀capital฀maintenance฀
This฀ chapter฀ comprises฀ material฀ carried฀ forward฀ from฀ Chapter฀ 4฀ of฀ the฀ existing฀ Conceptual฀
Framework฀with฀minor฀changes฀for฀consistency฀of฀terminology.฀
3฀IAS฀1฀Presentation฀of฀Financial฀Statements฀
Below฀are฀current฀IAS฀1฀formats฀for฀the฀statement฀of฀financial฀position,฀statement฀of฀changes฀in฀equity฀
and฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀(IAS฀1:฀Illustrative฀Guidance฀Part฀1).฀
3.1฀Format฀of฀the฀statement฀of฀financial฀position฀
XYZ฀GROUP฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀฀
฀ ฀20X7฀ ฀20X6฀
Assets฀ ฀$'000฀ ฀$'000฀฀
Property,฀plant฀and฀equipment฀ ฀350,700฀ ฀ 360,020 ฀
Goodwill฀ ฀80,800฀ ฀91,200฀
Other฀intangible฀assets฀ ฀227,470฀ ฀227,470฀
Investments฀in฀associates฀ ฀100,150฀ ฀110,770฀
Investments฀in฀equity฀instruments฀ ฀142,500 156,000฀
฀ ฀901,620 945,460฀
Current฀assets฀ ฀
Inventories฀ ฀135,230฀ ฀ 132,500 ฀
Other฀current฀assets฀฀ ฀25,650฀ ฀12,540฀
Cash฀and฀cash฀equivalents฀ 312,400 ฀ 322,900 ฀
฀ 564,880 ฀ 578,740฀
Total฀assets฀ ฀1,466,500฀ ฀1,524,200฀
฀ ฀
Share฀capital฀ ฀650,000฀ ฀ 600,000 ฀
Retained฀earnings฀ ฀243,500฀ ฀ 161,700 ฀
Other฀components฀of฀equity฀ ฀฀ 10,200 ฀฀฀21,200฀
฀ ฀903,700฀ ฀782,900฀
Non-controlling฀interests ฀฀ 70,050 ฀฀฀48,600฀
Total฀equity฀ ฀973,750 ฀831,500฀
฀ ฀
588฀

lOMoARcPSD|6256454
฀ ฀20X7฀ ฀20X6฀
Non-current฀liabilities฀ ฀
Long-term฀borrowings฀ ฀120,000฀ ฀ 160,000 ฀
Deferred฀tax฀ ฀28,800฀ ฀26,040฀
Long-term฀provisions ฀฀28,850 ฀฀฀52,240฀
Total฀non-current฀liabilities฀ ฀177,650 ฀238,280฀
Current฀liabilities฀ ฀
Trade฀and฀other฀payables฀ ฀115,100฀ ฀187,620฀
Short-term฀borrowings฀ ฀150,000฀ ฀200,000฀
Current฀portion฀of฀long-term฀borrowings฀ ฀10,000฀ ฀20,000฀
Current฀tax฀payable฀ ฀35,000฀ ฀42,000฀
Short-term฀provisions ฀฀฀฀฀5,000 ฀฀฀฀฀4,800฀
Total฀current฀liabilities฀ 315,100 ฀454,420฀
Total฀liabilities฀ 492,750 692,700฀
Total฀equity฀and฀liabilities฀ ฀1,466,500฀ ฀ 1,524,200 ฀
3.2฀Format฀of฀the฀statement฀of฀changes฀in฀equity฀
XYZ฀GROUP฀
STATEMENT฀OF฀CHANGES฀IN฀EQUITY฀FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X7฀
฀ Translation฀ Investments Cash฀
Share฀ Retained฀ of฀foreign in฀equity flow฀ Revaluation Total฀
capital฀ earnings฀ operations฀ instruments hedges฀ surplus฀ Total฀ NCI฀ equity฀
Balance฀at฀฀ $'000฀ $'000฀ $'000฀ $'000฀ $'000฀ $'000฀ $'000฀ $'000฀ $'000฀
1฀January฀ 600,000฀ 118,100฀ (4,000) 1,600 2,000 – 717,700฀ 29,800฀ 747,500
20X6฀
฀
Changes฀in฀ ฀ ฀ ฀ ฀
accounting฀ ฀ ฀ ฀ ฀
policy฀ –฀ 400฀ – – – – 400฀ 100฀ 500
Restated฀฀ ฀ ฀ ฀ ฀
balance฀ 600,000฀ 118,500฀ (4,000) 1,600 2,000 – 718,100฀ 29,900฀ 748,000
Changes฀฀ ฀ ฀ ฀ ฀
in฀equity฀ ฀ ฀ ฀ ฀
for฀20X6฀ ฀ ฀ ฀ ฀
฀ ฀ ฀ ฀ ฀
Dividends฀ –฀ (10,000)฀ – – – – (10,000)฀ –฀ (10,000)
฀
Total฀฀ ฀ ฀ ฀ ฀
comprehensive฀ ฀ ฀ ฀ ฀
income฀for฀the฀ ฀ ฀ ฀ ฀
year฀ –฀ 53,200฀ 6,400 16,000 (2,400) 1,600 74,800฀ 18,700฀ 93,500
Balance฀at฀ ฀ ฀ ฀ ฀
31฀December฀ ฀ ฀ ฀ ฀
20X6฀ 600,000฀ 161,700฀ 2,400 17,600 (400) 1,600 782,900฀ 48,600฀ 831,500
Changes฀in฀฀ ฀ ฀ ฀ ฀
equity฀for฀฀ ฀ ฀ ฀ ฀
20X7฀ ฀ ฀ ฀ ฀
Issue฀of฀share฀฀ ฀ ฀ ฀ ฀
capital฀ 50,000฀ –฀ – – – – 50,000฀ –฀ 50,000
฀ ฀ ฀ ฀ ฀
Dividends฀ –฀ (15,000)฀ – – – – (15,000)฀ –฀ (15,000)
Total฀฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
comprehensive฀ ฀ ฀ ฀ ฀
income฀for฀the฀฀ ฀ ฀ ฀ ฀
year฀ –฀ 96,600฀ 3,200 (14,400) (400) 800 85,800฀ 21,450฀ 107,250
Transfer฀to฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀
retained฀฀ ฀ ฀ ฀ ฀
earnings฀ –฀ 200฀ – – – (200) –฀ –฀ –
Balance฀at฀฀ ฀ ฀ ฀ ฀
31฀December฀฀ ฀ ฀ ฀ ฀
20X7฀ 650,000฀ 243,500฀ 5,600 3,200 (800) 2,200 903,700฀ 70,050฀ 973,750
฀ 589฀

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3.3฀Format฀of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀
Note.฀This฀example฀illustrates฀the฀classification฀of฀expenses฀within฀profit฀or฀loss฀by฀function.฀The฀
important฀aspect฀to฀focus฀on฀is฀the฀treatment฀of฀other฀comprehensive฀income฀(IAS฀1:฀IG).฀
XYZ฀GROUP฀
฀ 20X7 ฀20X6
฀ $'000 ฀$'000
Revenue฀฀ ฀ 390,000฀฀ ฀฀355,000฀
Cost฀of฀sales฀ ฀฀(245,000)฀฀ ฀฀(230,000)฀
Gross฀profit฀฀ ฀ 145,000฀฀ ฀฀125,000฀
Other฀income฀฀ ฀ 20,667฀฀ ฀฀11,300฀
Distribution฀costs฀฀ ฀ (9,000)฀ ฀฀(8,700)฀
Administrative฀expenses฀ ฀ (20,000)฀฀ ฀฀(21,000)฀
Other฀expenses฀฀ ฀ (2,100)฀ ฀฀(1,200)฀
Finance฀costs฀฀ ฀ (8,000)฀฀ ฀฀฀(7,500)฀
Share฀of฀profit฀of฀associates฀ ฀ 35,100฀ ฀฀฀฀30,100฀
Profit฀before฀tax฀฀ ฀฀161,667฀฀ ฀฀128,000฀
Income฀tax฀expense฀฀ ฀฀฀฀(40,417)฀ ฀฀฀(32,000)฀
Profit฀for฀the฀year฀from฀continuing฀operations฀ ฀ 121,250฀฀ ฀฀96,000฀
Loss฀for฀the฀year฀from฀discontinued฀operations ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀–฀ ฀฀฀(30,500)฀
Profit฀for฀the฀year฀฀ ฀฀฀121,250฀฀ ฀฀฀฀65,500฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss:
Gains฀on฀property฀revaluation฀ ฀ 933฀฀ ฀฀3,367฀
Investments฀in฀equity฀instruments฀ ฀ (24,000)฀ ฀฀26,667฀
Remeasurements฀of฀defined฀benefit฀pension฀plans฀ ฀ (667)฀ ฀฀1,333฀
Share฀of฀other฀comprehensive฀income฀of฀associates ฀ 400฀ ฀฀(700)฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified ฀฀฀฀฀฀5,834฀ ฀฀฀฀(7,667)฀
฀ ฀฀(17,500)฀ ฀฀23,000฀
Items฀that฀may฀be฀reclassified฀subsequently฀to฀profit or฀loss:
Exchange฀differences฀on฀translating฀foreign฀operations ฀ 5,334฀฀ ฀฀10,667฀
Cash฀flow฀hedges฀ ฀ (667)฀฀ ฀฀฀(4,000)฀
Income฀tax฀relating฀to฀items฀that฀may฀be฀reclassified ฀฀฀฀฀(1,167)฀ ฀฀฀฀(1,667)฀
฀ ฀฀฀฀฀฀3,500฀ ฀฀฀฀฀5,000฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀฀ ฀฀฀(14,000)฀ ฀฀฀28,000฀
Total฀comprehensive฀income฀for฀the฀year฀฀ ฀฀107,250฀฀ ฀฀฀93,500฀
Profit฀attributable฀to:฀฀ ฀ ฀
฀฀฀฀Owners฀of฀the฀parent฀฀ ฀ 97,000฀฀ ฀฀52,400฀
฀฀฀฀Non-controlling฀interests฀฀ ฀฀฀฀24,250฀฀ ฀฀฀13,100฀
฀ ฀฀121,250฀ ฀฀฀65,500฀
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lOMoARcPSD|6256454
฀ 20X7 ฀20X6
฀ $'000 ฀$'000
Total฀comprehensive฀income฀attributable฀to:฀ ฀ ฀
฀฀฀฀Owners฀of฀the฀parent฀฀ ฀ 85,800฀ ฀ ฀ ฀74,800 ฀
฀฀฀฀Non-controlling฀interests฀ ฀฀฀฀ 21,450 ฀ ฀฀฀18,700฀
฀ ฀฀107,250฀ ฀฀฀93,500฀
฀
฀Earnings฀per฀share฀($)฀
฀Basic฀and฀diluted฀ ฀ 0.46฀฀ ฀฀0.30
Alternatively,฀items฀could฀be฀presented฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀
income฀net฀of฀tax฀(with฀the฀breakdown฀disclosed฀in฀a฀note).฀
3.4฀Presentation฀of฀items฀of฀OCI฀
IAS฀1฀para.฀82A฀deals฀with฀the฀presentation฀of฀items฀contained฀in฀OCI฀and฀their฀classification฀within฀
OCI.฀
3.4.1฀The฀issue฀
The฀blurring฀of฀distinctions฀between฀different฀items฀in฀OCI฀is฀the฀result฀of฀an฀underlying฀general฀
lack฀of฀agreement฀among฀users฀and฀preparers฀about฀which฀items฀should฀be฀presented฀in฀
OCI฀and฀which฀should฀be฀part฀of฀the฀profit฀or฀loss฀section.฀For฀instance,฀a฀common฀misunderstanding฀
is฀that฀the฀split฀between฀profit฀or฀loss฀and฀OCI฀is฀on฀the฀basis฀of฀realised฀versus฀unrealised฀gains.฀This฀
is฀not,฀and฀has฀never฀been,฀the฀case.฀฀
This฀lack฀of฀a฀consistent฀basis฀for฀determining฀how฀items฀should฀be฀presented฀led฀to฀the฀somewhat฀
inconsistent฀use฀of฀OCI฀in฀financial฀statements.฀
3.4.2฀Current฀rules฀
Entities฀ are฀ required฀ to฀ group฀ items฀ presented฀ in฀ OCI฀ on฀ the฀ basis฀ of฀ whether฀ they฀ would฀ be฀
reclassified฀to฀(recycled฀through)฀profit฀or฀loss฀at฀a฀later฀date,฀when฀specified฀conditions฀are฀met฀
(IAS฀1:฀para.฀82A).฀
3.5฀Other฀aspects฀of฀IAS฀1฀
You฀should฀note฀the฀following฀further฀aspects฀of฀IAS฀1.฀
3.5.1฀Fair฀presentation฀
Guidance฀ is฀ provided฀ on฀ the฀ meaning฀ of฀ present฀ fairly:฀ '[represent฀ faithfully]฀ …the฀ effects฀ of฀
transactions฀and฀other฀events…in฀accordance฀with฀the฀definitions฀and฀recognition฀criteria฀for฀assets,฀
liabilities,฀income฀and฀expenses฀as฀set฀out฀in฀the฀[Conceptual]฀Framework'฀(IAS฀1:฀para.฀15).฀
Fair฀ presentation฀ is฀ achieved฀ if฀ IFRSs฀ are฀ appropriately฀ applied฀ and฀ additional฀ disclosure฀ is฀ given฀
when฀it฀is฀necessary฀(IAS฀1:฀para.฀15).฀
However,฀ very฀ rarely,฀ management฀ may฀ come฀ to฀ the฀ conclusion฀ that฀ complying฀ with฀ an฀ IFRS฀
requirement฀would฀be฀'so฀misleading฀that฀it฀would฀conflict฀with฀the฀objective฀of฀financial฀statements฀
set฀out฀in฀the฀Framework'฀(IAS฀1:฀para.฀19).฀If฀so,฀and฀if฀local฀laws฀and฀regulations฀permit,฀the฀entity฀
can฀depart฀from฀that฀IFRS฀requirement,฀as฀long฀it฀'disclos[es]:฀฀฀
(a)฀ That฀ management฀ has฀ concluded฀ that฀ the฀ financial฀ statements฀ present฀ fairly฀ the฀ entity's฀
financial฀position,฀financial฀performance฀and฀cash฀flows;฀
(b)฀ That฀ it฀ has฀ complied฀ with฀ applicable฀ IFRSs฀ except฀ that฀ it฀ has฀ departed฀ from฀ a฀ particular฀
requirement฀to฀achieve฀a฀fair฀presentation;฀
(c)฀ [Full฀details฀of฀the฀departure];฀and฀
฀ 591฀

lOMoARcPSD|6256454
(d)฀ …฀the฀financial฀effect฀of฀the฀departure฀on฀each฀item฀in฀the฀financial฀statements฀that฀would฀have฀
been฀reported฀in฀complying฀with฀the฀requirement.'฀
(IAS฀1:฀para.฀20)฀
However,฀when฀local฀law฀prohibits฀departure฀from฀the฀requirement,฀then฀the฀entity฀should฀make฀
disclosures฀which฀will฀reduce฀the฀perceived฀misleading฀effects฀of฀complying.฀These฀include฀the฀details฀
of฀ why฀ management฀ believe฀ it฀ to฀ be฀ misleading฀ and฀ adjustments฀ showing฀ what฀ they฀ believe฀ is฀
necessary฀to฀fairly฀present฀the฀information฀(IAS฀1:฀para.฀23).฀฀฀
3.5.2฀Non-current฀vs฀current฀
An฀ entity฀ must฀ present฀ current฀ and฀ non-current฀ assets,฀ and฀ current฀ and฀ non-current฀
liabilities,฀ as฀ separate฀ classifications฀ in฀ the฀ statement฀ of฀ financial฀ position.฀ A฀ presentation฀
based฀on฀liquidity฀should฀only฀be฀used฀where฀it฀provides฀more฀relevant฀and฀reliable฀information,฀in฀
which฀ case,฀ all฀ assets฀ and฀ liabilities฀ shall฀ be฀ presented฀ broadly฀ in฀ order฀ of฀ liquidity฀ (IAS฀ 1:฀
para.฀60).฀
A฀ financial฀ liability฀ due฀ to฀ be฀ settled฀ within฀ 12฀ months฀ of฀ the฀ year฀ end฀ date฀ should฀ be฀
classified฀ as฀ a฀ current฀ liability,฀ even฀ if฀ the฀ original฀ term฀ was฀ for฀ more฀ than฀ 12฀ months,฀ and฀ an฀
agreement฀ to฀ refinance,฀ or฀ to฀ reschedule฀ payments,฀ on฀ a฀ long-term฀ basis฀ is฀ completed฀ after฀ the฀
reporting฀period฀and฀before฀the฀financial฀statements฀are฀authorised฀for฀issue฀(IAS฀1:฀para.฀72).฀
฀ ฀ ฀ ฀
฀ ฀
Year฀end฀ Agreement฀to฀ Date฀financial฀ Settlement฀date฀

refinance฀on฀long- statements฀ <12฀months฀after฀
term฀basis฀ authorised฀for฀issue฀ year฀end฀
A฀ long-term฀ loan฀ that฀ becomes฀ payable฀ on฀ demand฀ because฀ the฀ entity฀ breached฀ a฀
condition฀of฀its฀loan฀agreement฀should฀be฀classified฀as฀current฀at฀the฀year฀end฀even฀if฀the฀lender฀
has฀agreed฀after฀the฀year฀end,฀and฀before฀the฀financial฀statements฀are฀authorised฀for฀issue,฀
not฀to฀demand฀payment฀as฀a฀consequence฀of฀the฀breach฀(IAS฀1:฀para.฀74).฀
฀ ฀
฀ ฀
Condition฀of฀loan฀ Year฀end฀ Lender฀agrees฀not฀to฀ Date฀financial฀

agreement฀ enforce฀payment฀ statements฀approved฀
breached.฀Long-term฀ resulting฀from฀ for฀issue฀
liability฀becomes฀ breach฀
payable฀on฀demand฀
However,฀if฀the฀lender฀has฀agreed฀by฀the฀year฀end฀to฀provide฀a฀period฀of฀grace฀ending฀at฀
least฀12฀months฀after฀the฀year฀end฀within฀which฀the฀entity฀can฀rectify฀the฀breach฀and฀during฀
that฀time฀the฀lender฀cannot฀demand฀immediate฀repayment,฀the฀liability฀is฀classified฀as฀non-current฀
(IAS฀1:฀para.฀75).฀
3.5.3฀Judgements฀made฀and฀measurement฀uncertainty฀
An฀ entity฀ must฀ disclose,฀ in฀ the฀ summary฀ of฀ significant฀ accounting฀ policies฀ and/or฀ other฀ notes,฀ the฀
judgements฀ made฀by฀management฀in฀applying฀ the฀accounting฀ policies฀ that฀have฀the฀most฀
significant฀ effect฀ on฀ the฀ amounts฀ of฀ items฀ recognised฀ in฀ the฀ financial฀ statements฀ (IAS฀ 1:฀
para.฀117).฀
An฀ entity฀ must฀ disclose฀ in฀ the฀ notes฀ information฀ regarding฀ key฀ assumptions฀ about฀ the฀ future,฀
and฀ other฀ major฀ sources฀ of฀ measurement฀ (estimation)฀ uncertainty,฀ that฀ have฀ a฀ significant฀
risk฀of฀causing฀a฀material฀adjustment฀to฀the฀carrying฀amounts฀of฀assets฀and฀liabilities฀within฀the฀
next฀financial฀year฀(IAS฀1:฀para.฀125).฀
592฀

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4฀IFRS฀15฀examples฀
Illustration฀1฀
Identifying฀separate฀performance฀obligations฀
Office฀Solutions,฀a฀limited฀company,฀has฀developed฀a฀communications฀software฀package฀called฀
CommSoft.฀Office฀Solutions฀has฀entered฀into฀a฀contract฀with฀Logisticity฀to฀supply฀the฀following:฀
(a)฀ Licence฀to฀use฀CommSoft฀฀
(b)฀ Installation฀service฀–฀this฀may฀require฀an฀upgrade฀to฀the฀computer฀operating฀system,฀but฀the฀
software฀package฀does฀not฀need฀to฀be฀customised฀฀
(c)฀ Technical฀support฀for฀three฀years฀
(d)฀ Three฀years฀of฀updates฀for฀CommSoft฀
Office฀Solutions฀is฀not฀the฀only฀company฀able฀to฀install฀CommSoft,฀and฀the฀technical฀support฀can฀also฀
be฀provided฀by฀other฀companies.฀The฀software฀can฀function฀without฀the฀updates฀and฀technical฀
support.฀฀
Required฀
Explain฀whether฀the฀goods฀or฀services฀provided฀to฀Logisticity฀are฀distinct฀in฀accordance฀with฀IFRS฀15฀
Revenue฀from฀Contracts฀with฀Customers.฀฀
Solution฀
CommSoft฀was฀delivered฀before฀the฀other฀goods฀or฀services฀and฀remains฀functional฀without฀the฀
updates฀and฀the฀technical฀support.฀It฀may฀be฀concluded฀that฀Logisticity฀can฀benefit฀from฀each฀of฀the฀
goods฀and฀services฀either฀on฀their฀own฀or฀together฀with฀the฀other฀goods฀and฀services฀that฀are฀readily฀
available.฀
The฀promises฀to฀transfer฀each฀good฀and฀service฀to฀the฀customer฀are฀separately฀identifiable.฀In฀
particular,฀the฀installation฀service฀does฀not฀significantly฀modify฀the฀software฀itself฀and,฀as฀such,฀the฀
software฀and฀the฀installation฀service฀are฀separate฀outputs฀promised฀by฀Office฀Solutions฀rather฀than฀
inputs฀used฀to฀produce฀a฀combined฀output.฀
In฀conclusion,฀the฀goods฀and฀services฀are฀distinct฀and฀amount฀to฀four฀performance฀obligations฀in฀the฀
contract฀under฀IFRS฀15,฀and฀revenue฀from฀each฀would฀be฀recognised฀as฀each฀performance฀
obligation฀is฀satisfied.฀
Illustration฀2฀
Determining฀transaction฀price฀
Taplop฀supplies฀laptop฀computers฀to฀large฀businesses.฀On฀1฀October฀20X5,฀Taplop฀entered฀into฀a฀
contract฀with฀TrillCo,฀under฀which฀TrillCo฀was฀to฀purchase฀laptops฀at฀$500฀per฀unit.฀The฀contract฀
states฀that฀if฀TrillCo฀purchases฀more฀than฀500฀laptops฀in฀12฀months฀of฀the฀contract,฀the฀price฀per฀unit฀
is฀reduced฀retrospectively฀to฀$450฀per฀unit.฀Taplop's฀year฀end฀is฀31฀December.฀
(a)฀ As฀at฀31฀December฀20X5,฀TrillCo฀had฀bought฀70฀laptops฀from฀Taplop.฀Taplop฀therefore฀
estimated฀that฀TrillCo's฀purchases฀would฀not฀exceed฀500฀in฀the฀12฀months฀to฀30฀September฀
20X6,฀and฀would฀therefore฀not฀be฀entitled฀to฀the฀volume฀discount.฀฀
(b)฀ During฀the฀quarter฀ended฀31฀March฀20X6,฀TrillCo฀expanded฀rapidly,฀and฀purchased฀an฀
additional฀250฀laptops฀from฀Taplop.฀Taplop฀then฀estimated฀that฀TrillCo's฀purchases฀would฀
exceed฀the฀threshold฀for฀the฀volume฀discount฀for฀the฀12฀months฀to฀30฀September฀20X6.฀
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Required฀
Calculate฀the฀revenue฀Taplop฀would฀recognise฀in:฀
(a)฀ The฀quarter฀ended฀31฀December฀20X5฀
(b)฀ The฀quarter฀ended฀31฀March฀20X6.฀
Solution฀
(a)฀ Applying฀the฀requirements฀of฀IFRS฀15฀to฀TrillCo's฀purchasing฀pattern฀at฀31฀December฀20X5,฀
Taplop฀should฀conclude฀that฀it฀was฀highly฀probable฀that฀a฀significant฀reversal฀in฀the฀cumulative฀
amount฀of฀revenue฀recognised฀($500฀per฀laptop)฀would฀not฀occur฀when฀the฀uncertainty฀was฀
resolved,฀that฀is฀when฀the฀total฀amount฀of฀purchases฀was฀known.฀Consequently,฀Taplop฀should฀
recognise฀revenue฀of฀70฀×฀$500฀=฀$35,000฀for฀the฀first฀quarter฀ended฀31฀December฀20X5.฀
(b)฀ In฀the฀quarter฀ended฀31฀March฀20X6,฀TrillCo's฀purchasing฀pattern฀changed฀such฀that฀it฀
would฀be฀legitimate฀for฀Taplop฀to฀conclude฀that฀TrillCo's฀purchases฀would฀exceed฀the฀
threshold฀for฀the฀volume฀discount฀in฀12฀months฀to฀30฀September฀20X6,฀and฀therefore฀that฀it฀
was฀appropriate฀to฀reduce฀the฀price฀to฀$450฀per฀laptop.฀Taplop฀should฀therefore฀recognise฀
revenue฀of฀$109,000฀for฀the฀quarter฀ended฀31฀March฀20X6.฀The฀amount฀is฀calculated฀
as฀from฀$112,500฀(250฀laptops฀×฀$450)฀less฀the฀change฀in฀transaction฀price฀of฀$3,500฀
(70฀laptops฀×฀$50฀price฀reduction)฀for฀the฀reduction฀of฀the฀price฀of฀the฀laptops฀sold฀in฀the฀
quarter฀ended฀31฀December฀20X5.฀
Illustration฀3฀
Principal฀vs฀agent฀considerations฀
This฀example฀is฀adapted฀from฀the฀standard฀(IFRS฀15:฀illustrative฀example฀45)฀
Fancy฀Goods฀Co฀(FG)฀operates฀a฀website฀that฀enables฀customers฀to฀purchase฀goods฀from฀a฀range฀of฀
suppliers.฀The฀suppliers฀set฀the฀price฀that฀is฀to฀be฀charged฀and฀deliver฀directly฀to฀the฀customers,฀who฀
have฀paid฀in฀advance.฀FG's฀website฀facilitates฀payment฀by฀customers฀and฀the฀entity฀is฀entitled฀to฀
commission฀of฀5%฀of฀the฀sales฀price.฀
FG฀has฀no฀further฀obligation฀to฀the฀customer฀after฀arranging฀for฀the฀products฀to฀be฀supplied.฀
Required฀
Discuss฀whether฀FG฀is฀a฀principal฀or฀an฀agent.฀฀
Solution฀
The฀following฀points฀are฀relevant:฀
฀ The฀supplier฀is฀primarily฀responsible฀for฀fulfilling฀a฀customer฀order฀rather฀than฀FG;฀FG฀is฀not฀
obliged฀to฀provide฀goods฀if฀the฀supplier฀fails฀to฀deliver฀to฀the฀customer.฀
฀ FG฀does฀not฀have฀inventory฀risk฀at฀any฀time,฀as฀it฀does฀not฀deal฀with฀inventories฀at฀all.฀
฀ FG฀does฀not฀establish฀prices.฀
FG฀is฀therefore฀acting฀as฀an฀agent฀and฀should฀recognise฀revenue฀equal฀to฀the฀amounts฀received฀as฀
commission.฀
Activity฀1:฀Revenue฀recognition฀ ฀ ฀
Caravans฀ Deluxe฀ is฀ a฀ retailer฀ of฀ caravans,฀ dormer฀ vans฀ and฀ mobile฀ homes,฀ with฀ a฀ year฀ end฀ of฀
31฀July.฀It฀is฀having฀trouble฀selling฀one฀model฀–฀the฀$30,000฀Mini-Lux฀–฀and฀so฀is฀offering฀incentives฀
for฀customers฀who฀buy฀this฀model฀before฀31฀May฀20X7:฀
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(a)฀ Customers฀buying฀this฀model฀before฀31฀May฀20X7฀will฀receive฀a฀period฀of฀interest฀free฀credit,฀
provided฀ they฀ pay฀ a฀ non-refundable฀ deposit฀ of฀ $3,000,฀ an฀ instalment฀ of฀ $15,000฀ on฀
1฀August฀20X7฀and฀the฀balance฀of฀$12,000฀on฀31฀July฀20X9.฀
(b)฀ A฀year's฀service฀plan฀for฀the฀caravan,฀normally฀worth฀$1,500,฀is฀included฀free฀in฀the฀price฀of฀
the฀caravan.฀
On฀ 1฀ May฀ 20X7,฀ a฀ customer฀ agrees฀ to฀ buy฀ a฀ Mini-Lux฀ caravan,฀ paying฀ the฀ deposit฀ of฀ $3,000.฀
Delivery฀is฀arranged฀for฀1฀August฀20X7.฀
As฀the฀sale฀has฀now฀been฀made,฀the฀Managing฀Director฀of฀Caravans฀Deluxe฀wishes฀to฀recognise฀the฀
full฀sale฀price฀of฀the฀caravan,฀$30,000,฀in฀the฀accounts฀for฀the฀year฀ended฀31฀July฀20X7.฀
Required฀
Show฀how฀the฀transaction฀is฀treated฀for฀the฀years฀ended฀31฀July฀20X7฀and฀31฀July฀20X8.฀Assume฀a฀
10%฀discount฀rate.฀Show฀the฀journal฀entries฀for฀this฀treatment.฀
Solution฀
฀ 595฀

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฀ Activity฀answers฀
Activity฀1:฀Revenue฀recognition฀
The฀Managing฀Director฀wishes฀to฀recognise฀the฀sale฀as฀early฀as฀possible.฀However,฀following฀
IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers,฀revenue฀from฀the฀sale฀should฀only฀be฀recognised฀
when฀the฀performance฀obligations฀in฀the฀contract฀have฀been฀satisfied.฀฀
Performance฀obligations฀in฀the฀contract฀
The฀contract฀contains฀a฀promise฀to฀deliver฀the฀caravan฀and฀a฀promise฀to฀deliver฀additional฀services฀
free฀ of฀ charge.฀ These฀ are฀ distinct฀ promises฀ and฀ therefore฀ the฀ contract฀ contains฀ two฀ performance฀
obligations.฀
Transaction฀price฀
The฀transaction฀price฀is฀made฀up฀of฀three฀elements.฀
A฀ significant฀ financing฀ component฀ must฀ be฀ considered฀ where฀ consideration฀ is฀ received฀ more฀ than฀
12฀months฀ before฀ or฀ after฀ the฀ date฀ on฀ which฀ revenue฀ is฀ recognised฀ (being฀ the฀ delivery฀ date,฀
1฀August฀ 20X7).฀ Therefore,฀ the฀ payment฀ on฀ 31฀ July฀ 20X9฀ must฀ be฀ discounted฀ to฀ present฀ value฀ at฀
1฀August฀20X7.฀
฀ $฀฀฀฀฀
Deposit฀ 3,000฀
Payment฀on฀1฀August฀20X7฀(the฀delivery฀date) 15,000฀
2
Payment฀on฀31฀July฀20X9฀($12,000/1.1 ) ฀฀฀9,917฀
฀ ฀27,917฀
Allocation฀to฀performance฀obligations฀
The฀transaction฀price฀is฀allocated฀based฀on฀stand-alone฀selling฀prices:฀
Caravan฀ $27,917฀฀30,000/31,500฀ $26,588฀
Free฀servicing฀ $27,917฀฀1,500/31,500฀ $1,329฀
Recognition฀of฀revenue฀
The฀two฀performance฀obligations฀are฀satisfied฀at฀different฀points฀in฀time:฀the฀delivery฀of฀the฀caravan฀
on฀1฀August฀20X7,฀and฀the฀servicing฀over฀the฀year฀to฀31฀July฀20X8.฀Therefore,฀the฀revenue฀for฀the฀
caravan฀ is฀ recognised฀ on฀ 1฀ August฀ 20X7,฀ and฀ the฀ revenue฀ for฀ the฀ servicing฀ recognised฀ over฀ the฀
following฀year.฀
Year฀ended฀31฀July฀20X7฀
Journal฀entries฀are฀as฀follows:฀
1฀May฀20X7฀
The฀receipt฀of฀cash฀in฀the฀form฀of฀the฀$3,000฀deposit฀is฀recognised฀on฀receipt฀as฀a฀contract฀liability฀
(deferred฀income)฀in฀the฀statement฀of฀financial฀position฀by:฀
DEBIT฀ Bank฀ $3,000฀
CREDIT฀ Contract฀liability฀(deferred฀income)฀ ฀ $3,000฀
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Journal฀entries฀are฀as฀follows:฀
1฀August฀20X7฀
Revenue฀is฀recognised฀together฀with฀payment฀of฀the฀$15,000.฀The฀contract฀liability฀is฀transferred฀to฀
revenue:฀
DEBIT฀ Contract฀liability฀ $3,000฀
DEBIT฀ Receivable฀ $8,588฀
Interest฀accrued฀on฀receivable฀for฀period฀1฀August฀20X7฀–฀31฀July฀20X8:฀
DEBIT฀ Receivable฀(8,588฀฀10%)฀ $859฀
CREDIT฀ Interest฀income฀ ฀ $859฀
Satisfaction฀of฀performance฀obligation฀for฀servicing฀on฀31฀July฀20X8:฀
DEBIT฀ Receivable฀(1,329฀฀1.1)฀ $1,462฀
(needs฀to฀be฀recognised฀compounded฀up฀one฀year฀as฀was฀previously฀measured฀at฀1฀August฀20X7)฀
Tutorial฀note฀
Here฀are฀the฀entries฀for฀the฀final฀year฀of฀the฀contract฀(proving฀that฀the฀receivable฀is฀fully฀eliminated).฀
Interest฀accrued฀on฀receivable฀for฀period฀1฀August฀20X8฀–฀31฀July฀20X9:฀
DEBIT฀ Receivable฀฀
((8,588฀+฀859฀+฀1,462฀=฀10,909)฀฀10%)฀ $1,091฀
CREDIT฀ Interest฀income฀ ฀ $1,091฀
Cash฀receipt฀on฀31฀July฀20X9:฀
CREDIT฀ Receivable฀ ฀ $12,000฀
This฀eliminates฀the฀remaining฀receivable฀of฀$12,000฀(10,909฀+฀1,091)฀
฀ 597฀

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598฀

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฀
฀
฀
฀
฀
฀
฀
Professional฀and
฀ ethical฀duty฀of฀the
฀
฀
accountant
฀Supplementary฀reading
฀
฀ 599฀
฀

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Appendix฀2฀–฀Supplementary฀reading฀
1฀Influences฀on฀ethics฀
1.1฀Individual฀influences฀฀
1.1.1฀Age฀and฀gender฀
Although฀ some฀ evidence฀ suggests฀ that฀ the฀ ways฀ in฀ which฀ men฀ and฀ women฀ respond฀ to฀ ethical฀
dilemmas฀ may฀ differ,฀ empirical฀ studies฀ do฀ not฀ clearly฀ show฀ whether฀ men฀ or฀ women฀ can฀ be฀
considered฀ as฀ more฀ ethical.฀ Similarly,฀ although฀ different฀ age฀ groups฀ have฀ been฀ influenced฀ by฀
different฀experiences,฀again฀empirical฀evidence฀does฀not฀suggest฀that฀certain฀age฀groups฀are฀more฀
moral฀than฀others.฀
1.1.2฀National฀and฀cultural฀beliefs฀
By฀contrast฀national฀and฀cultural฀beliefs฀seem฀to฀have฀a฀significant฀effect฀on฀ethical฀beliefs,฀shaping฀
what฀individuals฀regard฀as฀acceptable฀business฀issues.฀
1.1.3฀Education฀and฀employment฀
There฀ does฀ appear฀ to฀ be฀ some฀ differences฀ in฀ ethical฀ decision-making฀ between฀ those฀ with฀ different฀
educational฀and฀professional฀experiences.฀
1.1.4฀Psychological฀factors฀฀
Psychological฀factors฀are฀concerned฀with฀the฀ways฀in฀which฀people฀think,฀and฀hence฀decide฀what฀
is฀ the฀ morally฀ right฀ or฀ wrong฀ course฀ of฀ action.฀ Discussion฀ has฀ centred฀ on฀ cognitive฀
moral฀development฀฀(see฀1.2.2)฀and฀locus฀of฀control.฀
1.1.5฀Locus฀of฀control฀฀
The฀locus฀of฀control฀is฀how฀much฀influence฀individuals฀believe฀they฀have฀over฀the฀course฀of฀
their฀ own฀ lives.฀ Individuals฀ with฀ a฀ high฀ internal฀ locus฀ believe฀ that฀ they฀ can฀ shape฀ their฀ own฀ lives฀
significantly,฀ whereas฀ those฀ with฀ external฀ locus฀ believe฀ that฀ their฀ lives฀ will฀ be฀ shaped฀ by฀
circumstances฀or฀luck.฀฀
1.1.6฀Personal฀integrity฀
Integrity฀ can฀ be฀ defined฀ as฀ adhering฀ to฀ moral฀ principles฀ or฀ values.฀ Its฀ ethical฀ consequences฀ are฀
potentially฀ very฀ significant,฀ for฀ example฀ in฀ deciding฀ whether฀ to฀ whistleblow฀ on฀ questionable฀
practice฀at฀work,฀despite฀pressure฀from฀colleagues฀or฀superiors฀or฀negative฀consequences฀of฀doing฀
so.฀ However,฀ evidence฀ of฀ its฀ importance฀ is฀ limited฀ because฀ strangely฀ it฀ has฀ not฀ been฀ included฀ in฀
many฀ethical฀decision฀models.฀
1.1.7฀Moral฀imagination฀฀
Moral฀ imagination฀ is฀ the฀ level฀ of฀ awareness฀ individuals฀ have฀ about฀ the฀ variety฀ of฀ moral฀
consequences฀of฀what฀they฀do,฀how฀creatively฀they฀reflect฀on฀ethical฀dilemmas.฀The฀consequences฀of฀
having฀a฀wide฀moral฀imagination฀could฀be฀an฀ability฀to฀see฀beyond฀the฀conventional฀organisational฀
responses฀to฀moral฀difficulties,฀and฀formulate฀different฀solutions.฀Again,฀there฀is฀little฀research฀on฀this฀
subject,฀ but฀ differing฀ levels฀ of฀ moral฀ imagination฀ would฀ seem฀ to฀ be฀ a฀ plausible฀ reason฀ why฀
individuals฀with฀the฀same฀work฀background฀view฀moral฀problems฀in฀different฀ways.฀
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฀
1.2฀Situational฀influences฀฀
The฀reason฀for฀considering฀situational฀influences฀on฀moral฀decision-making฀is฀that฀individuals฀appear฀
to฀ have฀ 'multiple฀ ethical฀ selves'฀ –฀ they฀ make฀ different฀ decisions฀ in฀ different฀ circumstances.฀ These฀
circumstances฀might฀include:฀
(a)฀ Issue-related฀factors฀–฀nature฀of฀issue฀and฀how฀it฀is฀viewed฀in฀the฀organisation฀
(b)฀ Context-related฀factors฀–฀expectations฀&฀demands฀that฀will฀be฀placed฀on฀people฀working฀in฀an฀
organisation฀ (eg฀ systems฀ of฀ reward,฀ authority,฀ bureaucracy,฀ work฀ roles,฀ organisational฀
culture).฀
1.2.1฀Should฀you฀consider฀the฀consequences฀of฀your฀actions฀when฀making฀ethical฀
฀ decisions?฀
One฀view฀is฀that฀society฀is฀best฀served฀by฀everyone฀following฀certain฀ethical฀rules,฀and฀obeying฀them฀
no฀matter฀what฀the฀results฀are.฀The฀argument฀is฀that฀people฀will฀undermine฀society฀if฀they฀disobey฀the฀
ethical฀rules,฀even฀if฀they฀do฀so฀with฀the฀intention฀of฀avoiding฀adverse฀consequences.฀This฀viewpoint,฀
known฀as฀deontological฀ethics,฀was฀developed฀by฀Kant.฀
The฀opposing฀viewpoint฀is฀that฀you฀cannot฀divorce฀an฀action฀from฀its฀consequences,฀and฀when฀taking฀
ethical฀decisions฀you฀must฀take฀account฀of฀what฀the฀consequences฀will฀be.฀This฀viewpoint฀is฀known฀as฀
teleological฀ethics.฀If฀you฀take฀this฀viewpoint,฀that฀implies฀that฀you฀have฀to฀define฀what฀the฀best฀
possible฀consequences฀are.฀The฀different฀variations฀of฀the฀teleological฀viewpoint฀try฀to฀do฀this.฀
1.2.2฀What฀thought฀processes฀do฀people฀use฀when฀making฀ethical฀decisions?฀฀
What฀the฀theories฀are฀aiming฀to฀do฀is฀to฀complete฀the฀following฀sentence:฀
'You฀should฀act฀ethically฀because฀…'฀
Kohlberg฀ (1981)฀ supplied฀ various฀ examples฀ of฀ thought฀ processes,฀ depending฀ on฀ the฀ degree฀ of฀
ethical฀development฀of฀the฀individual.฀฀
฀ People฀who฀are฀less฀ethically฀developed฀may฀think:฀'You฀should฀act฀ethically฀because฀you'll฀be฀
punished฀if฀you฀don't.'฀
฀ People฀ who฀ have฀ more฀ advanced฀ ethical฀ development฀ may฀ think:฀ 'You฀ should฀ act฀ ethically฀
because฀your฀country's฀laws฀say฀you฀should.'฀
฀ People฀at฀the฀highest฀level฀of฀ethical฀development฀may฀think:฀'You฀should฀act฀ethically฀because฀
it's฀always฀right฀to฀do฀so,฀no฀matter฀what฀the฀consequences฀and฀costs฀are฀to฀you฀personally.'฀
2฀Social฀responsibility฀and฀businesses฀
Arguably,฀institutions฀like฀hospitals,฀schools฀and฀so฀forth฀exist฀because฀health฀care฀and฀education฀are฀
seen฀to฀be฀desirable฀social฀objectives฀by฀government฀at฀large,฀if฀they฀can฀be฀afforded.฀
However,฀ where฀ does฀ this฀ leave฀ businesses?฀ How฀ far฀ is฀ it฀ reasonable,฀ or฀ even฀ appropriate,฀ for฀
businesses฀ to฀ exercise฀ 'social฀ responsibility'฀ by฀ giving฀ to฀ charities,฀ voluntarily฀ imposing฀ strict฀
environmental฀objectives฀on฀themselves฀and฀so฀forth?฀
One฀ school฀ of฀ thought฀ would฀ argue฀ that฀ the฀ management฀ of฀ a฀ business฀ has฀ only฀ one฀
social฀responsibility,฀which฀is฀to฀maximise฀wealth฀for฀its฀shareholders.฀There฀are฀two฀
reasons฀to฀support฀this฀argument.฀
(a)฀ If฀ the฀ business฀ is฀ owned฀ by฀ the฀ shareholders฀ the฀ assets฀ of฀ the฀ company฀ are,฀ ultimately,฀ the฀
shareholders'฀ property.฀ Management฀ has฀ no฀ moral฀ right฀ to฀ dispose฀ of฀ business฀ assets฀ (like฀
cash)฀ on฀ non-business฀ objectives,฀ as฀ this฀ has฀ the฀ effect฀ of฀ reducing฀ the฀ return฀ available฀ to฀
shareholders.฀ The฀ shareholders฀ might,฀ for฀ example,฀ disagree฀ with฀ management's฀ choice฀ of฀
beneficiary.฀Anyhow,฀it฀is฀for฀the฀shareholders฀to฀determine฀how฀their฀money฀should฀be฀spent.฀
฀ 601฀

lOMoARcPSD|6256454
(b)฀ A฀second฀justification฀for฀this฀view฀is฀that฀management's฀job฀is฀to฀maximise฀wealth,฀as฀this฀is฀
the฀best฀way฀that฀society฀can฀benefit฀from฀a฀business's฀activities.฀
(i)฀ Maximising฀wealth฀has฀the฀effect฀of฀increasing฀the฀tax฀revenues฀available฀to฀the฀State฀to฀
disburse฀on฀socially฀desirable฀objectives.฀
(ii)฀ Maximising฀wealth฀for฀the฀few฀is฀sometimes฀held฀to฀have฀a฀'trickle฀down'฀effect฀on฀the฀
disadvantaged฀members฀of฀society.฀
(iii)฀ Many฀company฀shares฀are฀owned฀by฀pension฀funds,฀whose฀ultimate฀beneficiaries฀may฀
not฀be฀the฀wealthy฀anyway.฀
This฀argument฀rests฀on฀certain฀assumptions.฀
(a)฀ The฀first฀assumption฀is,฀in฀effect,฀the฀opposite฀of฀the฀stakeholder฀view.฀In฀other฀words,฀it฀is฀held฀
that฀the฀rights฀of฀legal฀ownership฀are฀paramount฀over฀all฀other฀interests฀in฀a฀business:฀while฀
other฀ stakeholders฀ have฀ an฀ interest,฀ they฀ have฀ few฀ legal฀ or฀ moral฀ rights฀ over฀ the฀ wealth฀
created.฀
(b)฀ The฀second฀assumption฀is฀that฀a฀business's฀only฀relationship฀with฀the฀wider฀social฀environment฀
is฀an฀economic฀one.฀After฀all,฀that฀is฀what฀businesses฀exist฀for,฀and฀any฀other฀activities฀are฀the฀
role฀of฀the฀State.฀
(c)฀ The฀ defining฀ purpose฀ of฀ business฀ organisations฀ is฀ the฀ maximisation฀ of฀ the฀ wealth฀ of฀ their฀
owners.฀
3฀Managing฀ethics฀within฀organisations฀
Two฀possible฀approaches฀can฀be฀identified฀with฀regard฀to฀managing฀ethics฀within฀organisation.฀
3.1฀Compliance-based฀approach฀
A฀compliance-based฀approach฀is฀primarily฀designed฀to฀ensure฀that฀the฀company฀acts฀within฀the฀letter฀
of฀ the฀ law,฀ and฀ that฀ violations฀ are฀ prevented,฀ detected฀ and฀ punished.฀ Some฀ organisations,฀ faced฀
with฀the฀legal฀consequences฀of฀unethical฀behaviour฀take฀legal฀precautions฀such฀as฀those฀below:฀
฀ Compliance฀procedures฀
฀ Audits฀of฀contracts฀
฀ Systems฀for฀employees฀to฀inform฀superiors฀about฀criminal฀misconduct฀without฀fear฀of฀retribution฀
฀ Disciplinary฀procedures฀
Corporate฀ compliance฀ is฀ limited฀ in฀ that฀ it฀ refers฀ only฀ to฀ the฀ law,฀ but฀ legal฀ compliance฀ is฀ not฀ an฀
adequate฀means฀for฀addressing฀the฀full฀range฀of฀ethical฀issues฀that฀arise฀every฀day฀(Paine,฀1994).฀฀
An฀example฀of฀the฀difference฀between฀the฀legality฀and฀ethicality฀of฀a฀practice฀is฀the฀sale฀in฀some฀
countries฀ of฀ defective฀ products฀ without฀ appropriate฀ warnings.฀ Paine฀ (1994)฀ highlights฀ that฀
'companies฀ engaged฀ in฀ international฀ business฀ often฀ discover฀ that฀ conduct฀ that฀ infringes฀ on฀
recognised฀standards฀of฀human฀rights฀and฀decency฀is฀legally฀permissible฀in฀some฀jurisdictions.'฀
The฀ compliance฀ approach฀ also฀ overemphasises฀ the฀ threat฀ of฀ detection฀ and฀ punishment฀ in฀ order฀ to฀
channel฀ appropriate฀ behaviour.฀ Arguably,฀ some฀ employers฀ view฀ compliance฀ programmes฀ as฀ an฀
insurance฀ policy฀ for฀ senior฀ management,฀ who฀ can฀ cover฀ the฀ tracks฀ of฀ their฀ arbitrary฀ management฀
practices.฀ After฀ all,฀ some฀ performance฀ targets฀ are฀ impossible฀ to฀ achieve฀ without฀ cutting฀ corners:฀
managers฀ can฀ escape฀ responsibility฀ by฀ blaming฀ the฀ employee฀ for฀ not฀ following฀ the฀ compliance฀
programme,฀when฀to฀do฀so฀would฀have฀meant฀a฀failure฀to฀reach฀target.฀
Furthermore,฀mere฀compliance฀with฀the฀law฀is฀no฀guide฀to฀exemplary฀behaviour.฀
3.2฀Integrity-based฀programmes฀
It฀should฀be฀clear฀to฀you฀from฀the฀following฀quotation฀that฀an฀integrity-based฀approach฀to฀ethics฀treats฀
ethics฀as฀an฀issue฀of฀organisation฀culture.฀
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฀
'An฀ integrity-based฀ approach฀ combines฀ a฀ concern฀ for฀ the฀ law฀ with฀ an฀ emphasis฀ on฀
managerial฀ responsibility฀ for฀ ethical฀ behaviour.฀ Integrity฀ strategies฀ strive฀ to฀ define฀
companies'฀guiding฀values,฀aspirations฀and฀patterns฀of฀thought฀and฀conduct.฀When฀integrated฀
into฀the฀day-to-day฀operations฀of฀an฀organisation,฀such฀strategies฀can฀help฀prevent฀damaging฀
ethical฀ lapses,฀ while฀ tapping฀ into฀ powerful฀ human฀ impulses฀ for฀ moral฀ thought฀ and฀ action.'฀
(Paine,฀1994)฀
Ethics฀management฀therefore฀has฀several฀tasks:฀
฀ To฀define฀and฀give฀life฀to฀an฀organisation's฀defining฀values฀
฀ To฀create฀an฀environment฀that฀supports฀ethically฀sound฀behaviour฀
฀ To฀instil฀a฀sense฀of฀shared฀accountability฀amongst฀employees฀
Activity฀1:฀Ethical฀issues฀ ฀
Briefly฀explain฀the฀main฀ethical฀issues฀that฀are฀involved฀in฀the฀following฀situations.฀
(a)฀ Dealing฀with฀a฀repressive฀authoritarian฀government฀abroad฀
(b)฀ An฀aggressive฀advertising฀campaign฀
(c)฀ Employee฀redundancies฀฀
(d)฀ Payments฀or฀gifts฀to฀officials฀who฀have฀the฀power฀to฀help฀or฀hinder฀the฀payees'฀operations฀฀
฀ 603฀

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Activity฀answer฀
(a)฀ Dealing฀ with฀ repressive฀ authoritarian฀ governments฀ can฀ be฀ supported฀ on฀ the฀ grounds฀ that฀ it฀
contributes฀ to฀ economic฀ growth฀ and฀ prosperity฀ and฀ all฀ the฀ benefits฀ they฀ bring฀ to฀
society฀ in฀ both฀ countries฀ concerned.฀ This฀ is฀ a฀ consequentialist฀ argument.฀ It฀ can฀ also฀ be฀
opposed฀ on฀ consequentialist฀ grounds฀ as฀ contributing฀ to฀ the฀ continuation฀ of฀ the฀
regime,฀and฀on฀deontological฀grounds฀as฀fundamentally฀repugnant.฀
(b)฀ Honesty฀ in฀ advertising฀ is฀ an฀ important฀ problem.฀ Many฀ products฀ are฀ promoted฀ exclusively฀ on฀
image.฀Deliberately฀creating฀the฀impression฀that฀purchasing฀a฀particular฀product฀will฀enhance฀
the฀ happiness,฀ success฀ and฀ appeal฀ of฀ the฀ buyer฀ can฀ be฀ attacked฀ as฀ dishonest.฀ It฀ can฀ be฀
defended฀on฀the฀grounds฀that฀the฀supplier฀is฀actually฀selling฀a฀fantasy฀or฀dream฀rather฀
than฀a฀physical฀article.฀
(c)฀ Dealings฀ with฀ employees฀ are฀ coloured฀ by฀ the฀ opposing฀ views฀ of฀ corporate฀
responsibility฀and฀individual฀rights.฀The฀idea฀of฀a฀job฀as฀property฀to฀be฀defended฀has฀
now฀disappeared฀from฀labour฀relations฀in฀many฀countries,฀but฀corporate฀decisions฀that฀lead฀to฀
redundancies฀ are฀ still฀ deplored.฀ This฀ is฀ because฀ of฀ the฀ obvious฀ impact฀ of฀ sudden฀
unemployment฀ on฀ aspirations฀ and฀ living฀ standards,฀ even฀ when฀ the฀ employment฀
market฀is฀buoyant.฀Nevertheless฀businesses฀have฀to฀consider฀the฀cost฀of฀employing฀labour฀as฀
well฀as฀its฀productive฀capacity.฀฀
(d)฀ The฀main฀problems฀with฀payments฀or฀gifts฀to฀officials฀are฀making฀distinction฀between฀those฀that฀
should฀never฀be฀made,฀and฀those฀that฀can฀be฀made฀in฀certain฀cultural฀circumstances.฀
(i)฀ Extortion.฀Foreign฀officials฀have฀been฀known฀to฀threaten฀companies฀with฀the฀complete฀
closure฀of฀their฀local฀operations฀unless฀suitable฀payments฀are฀made.฀
(ii)฀ Bribery.฀This฀is฀payments฀for฀services฀to฀which฀a฀company฀is฀not฀legally฀entitled.฀There฀
are฀ some฀ fine฀ distinctions฀ to฀ be฀ drawn;฀ for฀ example,฀ some฀ managers฀ regard฀ political฀
contributions฀as฀bribery.฀
(iii)฀ Grease฀money.฀Multinational฀companies฀are฀sometimes฀unable฀to฀obtain฀services฀to฀
which฀ they฀ are฀ legally฀ entitled฀ because฀ of฀ deliberate฀ stalling฀ by฀ local฀ officials.฀ Cash฀
payments฀to฀the฀right฀people฀may฀then฀be฀enough฀to฀oil฀the฀machinery฀of฀bureaucracy.฀
(iv)฀ Gifts.฀ In฀ some฀ cultures฀ (such฀ as฀ Japan)฀ gifts฀ are฀ regarded฀ as฀ an฀ essential฀ part฀ of฀
civilised฀ negotiation,฀ even฀ in฀ circumstances฀ where฀ to฀ other฀ cultures฀ they฀ might฀ appear฀
ethically฀dubious.฀Managers฀operating฀in฀such฀a฀culture฀may฀feel฀at฀liberty฀to฀adopt฀the฀
local฀customs.฀฀
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฀
฀
Non-current฀assets
฀
฀ Supplementary฀reading
฀
฀
฀ 605฀
฀

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1฀฀Property,฀plant฀and฀equipment฀(IAS฀16)฀
1.1฀Revision฀activities฀
Use฀these฀revision฀activities฀to฀test฀your฀knowledge฀of฀IAS฀16.฀฀
Activity฀1:฀Revaluation฀surplus฀ ฀
Binkie฀Co฀has฀an฀item฀of฀land฀carried฀in฀its฀books฀at฀$13,000.฀Two฀years฀ago฀a฀slump฀in฀land฀
values฀led฀the฀company฀to฀reduce฀the฀carrying฀value฀from฀$15,000.฀This฀was฀taken฀as฀an฀expense฀in฀
profit฀or฀loss฀for฀the฀year.฀There฀has฀been฀a฀surge฀in฀land฀prices฀in฀the฀current฀year,฀however,฀and฀
the฀land฀is฀now฀worth฀$20,000.฀
Required฀
What฀is฀the฀double฀entry฀to฀account฀for฀the฀revaluation?฀฀
Activity฀2:฀Revaluation฀decrease฀ ฀
Binkie฀Co฀has฀an฀item฀of฀land฀carried฀in฀its฀books.฀The฀original฀cost฀was฀$15,000,฀revalued฀
upwards฀to฀$20,000฀two฀years฀ago.฀The฀value฀has฀now฀fallen฀to฀$13,000.฀
Required฀
What฀is฀the฀double฀entry฀to฀account฀for฀the฀revaluation฀decrease?฀
Activity฀3:฀Revaluation฀and฀depreciation฀ ฀
Crinckle฀Co฀bought฀an฀asset฀for฀$10,000฀at฀the฀beginning฀of฀20X6.฀It฀had฀a฀useful฀life฀of฀five฀years.฀
On฀1฀January฀20X8฀the฀asset฀was฀revalued฀to฀$12,000.฀The฀expected฀useful฀life฀has฀remained฀
unchanged฀(ie฀three฀years฀remain).฀Crinckle฀Co฀has฀an฀accounting฀policy฀to฀transfer฀permitted฀
amounts฀from฀the฀revaluation฀surplus฀to฀retained฀earnings฀in฀accordance฀with฀IAS฀16.฀฀
Required฀
Explain฀how฀Crinckle฀Co฀should฀account฀for฀the฀asset฀for฀the฀remainder฀of฀its฀useful฀life.฀฀
Activity฀4:฀Self-constructed฀asset฀ ฀
Omega฀ is฀ a฀ listed฀ company฀ which฀ prepares฀ financial฀ statements฀ in฀ accordance฀ with฀ International฀
Financial฀Reporting฀Standards฀(IFRS).฀
On฀1฀October฀20X2,฀Omega฀purchased฀some฀land฀for฀$10m฀(including฀legal฀costs฀of฀$1m)฀in฀order฀
to฀construct฀a฀new฀factory.฀Construction฀work฀commenced฀on฀1฀November฀20X2.฀Omega฀incurred฀
the฀following฀costs฀in฀connection฀with฀its฀construction:฀
฀ Preparation฀and฀levelling฀of฀the฀land฀–฀$300,000฀
฀ Purchase฀of฀materials฀for฀the฀construction฀–฀$6.08m฀in฀total฀
฀ Employment฀costs฀of฀the฀construction฀workers฀–฀$200,000฀per฀month฀
฀ Overhead฀costs฀incurred฀directly฀on฀the฀construction฀of฀the฀factory฀–฀$100,000฀per฀month฀
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฀
3:฀Non-current฀assets
฀ Ongoing฀overhead฀costs฀allocated฀to฀the฀construction฀project฀using฀Omega's฀normal฀overhead฀
allocation฀model฀–฀$50,000฀per฀month฀
฀ Income฀ received฀ during฀ the฀ temporary฀ use฀ of฀ the฀ factory฀ premises฀ as฀ a฀ car฀ park฀ during฀ the฀
construction฀period฀–฀$50,000฀
฀ Costs฀of฀relocating฀employees฀to฀work฀at฀the฀new฀factory฀–฀$300,000฀
฀ Costs฀of฀the฀opening฀ceremony฀on฀31฀July฀20X3฀–฀$150,000฀
The฀factory฀was฀completed฀on฀31฀May฀20X3฀and฀production฀began฀on฀1฀August฀20X3.฀The฀overall฀
useful฀life฀of฀the฀factory฀building฀was฀estimated฀at฀40฀years฀from฀the฀date฀of฀completion.฀However,฀it฀
is฀estimated฀that฀the฀roof฀will฀need฀to฀be฀replaced฀20฀years฀after฀the฀date฀of฀completion฀and฀that฀the฀
cost฀of฀replacing฀the฀roof฀at฀current฀prices฀would฀be฀30%฀of฀the฀total฀cost฀of฀the฀building.฀At฀the฀end฀
of฀ the฀ 40-year฀ period฀ Omega฀ has฀ a฀ legally฀ enforceable฀ obligation฀ to฀ demolish฀ the฀ factory฀ and฀
restore฀the฀site฀to฀its฀original฀condition.฀The฀directors฀estimate฀that฀the฀cost฀of฀demolition฀in฀40฀years'฀
time฀ (based฀ on฀ prices฀ prevailing฀ at฀ that฀ time)฀ will฀ be฀ $20m.฀ An฀ annual฀ risk฀ adjusted฀ discount฀ rate฀
which฀is฀appropriate฀to฀this฀project฀is฀8%.฀The฀present฀value฀of฀$1฀payable฀in฀40฀years'฀time฀at฀an฀
annual฀discount฀rate฀of฀8%฀is฀4.6฀cents.฀
The฀ construction฀ of฀ the฀ factory฀ was฀ partly฀ financed฀ by฀ a฀ loan฀ of฀ $17.5m฀ taken฀ out฀ on฀ 1฀ October฀
20X2.฀ The฀ loan฀ was฀ at฀ an฀ annual฀ rate฀ of฀ interest฀ of฀ 6%.฀ During฀ the฀ period฀ 1฀ October฀ 20X2฀ to฀
28฀February฀ 20X3฀ (when฀ the฀ loan฀ proceeds฀ had฀ been฀ fully฀ utilised฀ to฀ finance฀ the฀ construction),฀
Omega฀received฀investment฀income฀of฀$100,000฀on฀the฀temporary฀investment฀of฀the฀proceeds.฀
Required฀
Compute฀ the฀ carrying฀ amount฀ of฀ the฀ factory฀ in฀ the฀ statement฀ of฀ financial฀ position฀ of฀ Omega฀ at฀
30฀September฀ 20X3.฀ You฀ should฀ explain฀ your฀ treatment฀ of฀ all฀ the฀ amounts฀ referred฀ to฀ in฀ your฀
answer.฀
1.2฀Componentisation฀of฀assets฀฀
Large฀ and฀ complex฀ assets฀ are฀ often฀ made฀ up฀ of฀ a฀ number฀ of฀ components฀ of฀ smaller฀ assets฀ which฀
each฀have฀different฀useful฀lives฀and฀wear฀out฀at฀different฀rates.฀For฀example฀a฀building฀may฀have฀a฀
useful฀life฀of฀50฀years฀but฀the฀lift฀within฀that฀building฀may฀be฀expected฀to฀last฀for฀15฀years.฀IAS฀16฀
requires฀that฀the฀component฀parts฀of฀such฀assets฀are฀capitalised฀and฀depreciated฀separately.฀฀
Parts฀of฀some฀items฀of฀property,฀plant฀and฀equipment฀may฀require฀replacement฀at฀regular฀intervals,฀
often฀as฀a฀legal฀requirement.฀IAS฀16฀gives฀examples฀of฀a฀furnace฀which฀may฀require฀relining฀after฀a฀
specified฀ number฀ of฀ hours฀ or฀ aircraft฀ interiors฀ which฀ may฀ require฀ replacement฀ several฀ times฀ during฀
the฀life฀of฀the฀aircraft.฀
The฀cost฀of฀the฀replacement฀parts฀should฀be฀recognised฀in฀full฀when฀it฀is฀incurred฀and฀added฀to฀the฀
carrying฀amount฀of฀the฀asset.฀It฀should฀be฀depreciated฀over฀its฀useful฀life,฀which฀may฀be฀different฀from฀
the฀useful฀life฀of฀the฀other฀components฀of฀the฀asset.฀The฀carrying฀amount฀of฀the฀item฀being฀replaced,฀
such฀as฀the฀old฀furnace฀lining,฀should฀be฀derecognised฀when฀the฀replacement฀takes฀place฀(IAS฀16:฀
para.฀13).฀
฀ 607฀

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Componentisation฀of฀complex฀assets฀
An฀aircraft฀is฀considered฀to฀have฀the฀following฀components.
฀ Cost Useful฀life฀
฀ $'000 ฀
Fuselage฀ ฀฀20,000 20฀years฀
Undercarriage฀ ฀฀฀฀5,000 500฀landings
Engines฀ ฀฀฀฀8,000 1,600฀flying฀hours
Depreciation฀at฀the฀end฀of฀the฀first฀year,฀in฀which฀150฀flights฀totalling฀400฀hours฀were฀made,฀
would฀then฀be:฀
฀ ฀฀฀฀$'000฀
Fuselage฀ ฀฀฀฀฀1,000฀
Undercarriage฀(5,000฀฀150/500)฀ ฀฀฀฀฀1,500฀
Engines฀(8,000฀฀400/1,600)฀ ฀2,000฀
฀ ฀4,500฀
฀
฀
1.3฀Reconditioning/overhauls฀฀
Where฀an฀asset฀requires฀regular฀reconditioning/overhauls฀in฀order฀to฀continue฀to฀operate,฀the฀cost฀of฀
the฀ overhaul฀ is฀ treated฀ as฀ an฀ additional฀ component฀ and฀ depreciated฀ over฀ the฀ period฀ to฀ the฀ next฀
overhaul฀(IAS฀16:฀para.฀14).฀
For฀example,฀assume฀that฀in฀the฀case฀of฀the฀aircraft฀in฀Illustration฀1฀above,฀an฀overhaul฀was฀required฀
at฀ the฀ end฀ of฀ year฀ 3฀ and฀ every฀ third฀ year฀ thereafter฀ at฀ a฀ cost฀ of฀ $1.2m฀ per฀ overhaul.฀ The฀ $1.2m฀
would฀ be฀ capitalised฀ as฀ a฀ separate฀ component฀ and฀ depreciated฀ over฀ the฀ useful฀ life฀ of฀ 3฀years฀
($400,000฀per฀annum).฀฀
1.4฀Residual฀value฀฀
Residual฀value:฀the฀estimated฀amount฀that฀an฀entity฀would฀currently฀obtain฀from฀disposal฀of฀the฀
asset,฀after฀deducting฀the฀estimated฀costs฀of฀disposal,฀if฀the฀asset฀were฀already฀of฀the฀age฀and฀in฀the฀
Key฀term฀
condition฀expected฀at฀the฀end฀of฀its฀useful฀life.฀
The฀ residual฀ value฀ of฀ an฀ asset฀ must฀ be฀ reviewed฀ at฀ least฀ at฀ each฀ financial฀ year฀ end฀ (IAS฀ 16:฀
para.฀51).฀The฀revised฀estimate฀should฀be฀based฀on฀the฀market฀price฀of฀the฀asset฀at฀that฀date.฀If฀the฀
revised฀residual฀value฀is฀significantly฀different,฀the฀change฀should฀be฀accounted฀for฀prospectively฀as฀
an฀adjustment฀to฀future฀depreciation฀(IAS฀16:฀para.฀51).฀฀฀
The฀residual฀value฀is฀based฀on฀the฀current฀amount฀that฀could฀be฀obtained฀for฀the฀disposal฀of฀the฀
asset,฀ not฀ the฀ amount฀ that฀ is฀ expected฀ to฀ be฀ obtained฀ at฀ the฀ end฀ of฀ its฀ useful฀ life.฀ This฀ means฀ that฀
future฀expected฀increases฀or฀decreases฀in฀the฀residual฀value,฀other฀than฀for฀wear฀and฀tear,฀will฀not฀be฀
taken฀into฀account.฀฀
2฀Impairment฀of฀assets฀(IAS฀36)฀
Use฀these฀revision฀activities฀to฀test฀your฀knowledge฀of฀IAS฀36.฀฀
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฀
Activity฀5:฀Impairment฀loss฀(1)฀ ฀
A฀ company฀ has฀ acquired฀ another฀ business฀ for฀ $4.5m:฀ tangible฀ assets฀ are฀ valued฀ at฀ $4.0m฀ and฀
goodwill฀at฀$0.5m.฀
An฀asset฀with฀a฀carrying฀value฀of฀$1m฀is฀destroyed฀in฀a฀terrorist฀attack.฀The฀asset฀was฀not฀insured.฀
The฀ loss฀ of฀ the฀ asset,฀ without฀ insurance,฀ has฀ prompted฀ the฀ company฀ to฀ estimate฀ whether฀ there฀ has฀
been฀an฀impairment฀of฀assets฀in฀the฀acquired฀business฀and฀what฀the฀amount฀of฀any฀such฀loss฀is.฀The฀
recoverable฀amount฀of฀the฀business฀is฀measured฀at฀$3.1m.฀
Discuss฀how฀the฀impairment฀loss฀should฀be฀treated฀in฀the฀financial฀statements.฀
The฀ Antimony฀ Company฀ acquired฀ its฀ head฀ office฀ on฀ 1฀ January฀ 20W8฀ at฀ a฀ cost฀ of฀ $5฀ million฀
(excluding฀land).฀Antimony's฀policy฀is฀to฀depreciate฀property฀on฀a฀straight-line฀basis฀over฀50฀years฀
with฀a฀zero฀residual฀value.฀
On฀31฀December฀20X2฀(after฀five฀years฀of฀ownership)฀Antimony฀revalued฀the฀non-land฀element฀of฀its฀
head฀office฀to฀$8฀million.฀Antimony฀does฀not฀transfer฀annual฀amounts฀out฀of฀revaluation฀reserves฀as฀
assets฀ are฀ used:฀ this฀ is฀ in฀ accordance฀ with฀ the฀ permitted฀ treatment฀ in฀ IAS฀ 16฀ Property,฀ Plant฀ and฀
Equipment.฀
In฀January฀20X8฀localised฀flooding฀occurred฀and฀the฀recoverable฀amount฀of฀the฀non-land฀element฀of฀
the฀head฀office฀property฀fell฀to฀$2.9฀million.฀
Required฀
What฀ impairment฀ charge฀ should฀ be฀ recognised฀ in฀ the฀ profit฀ or฀ loss฀ of฀ Antimony฀ arising฀ from฀ the฀
impairment฀review฀in฀January฀20X8฀according฀to฀IAS฀36฀Impairment฀of฀Assets?฀
An฀ entity฀ has฀ a฀ single฀ manufacturing฀ plant฀ which฀ has฀ a฀ carrying฀ amount฀ of฀ $749,000.฀ A฀ new฀
government฀ elected฀ in฀ the฀ country฀ passes฀ legislation฀ significantly฀ restricting฀ exports฀ of฀ the฀ product฀
produced฀by฀the฀plant.฀As฀a฀result,฀and฀for฀the฀foreseeable฀future,฀the฀entity's฀production฀will฀be฀cut฀
by฀ 40%.฀ Cash฀ flow฀ forecasts฀ have฀ been฀ prepared฀ derived฀ from฀ the฀ most฀ recent฀ financial฀
budgets/forecasts฀for฀the฀next฀five฀years฀approved฀by฀management฀(excluding฀the฀effects฀of฀general฀
price฀inflation):฀
Year฀ 1฀ 2 3 4 5฀
฀ $'000฀ $'000 $'000 $'000฀ $'000
Future฀cash฀flows฀ 230฀ 211 157 104฀ 233
(including฀
disposal฀
proceeds)฀
If฀the฀plant฀was฀sold฀now฀it฀would฀realise฀$550,000,฀net฀of฀selling฀costs.฀
The฀entity฀estimates฀the฀pre-tax฀discount฀rate฀specific฀to฀the฀plant฀to฀be฀15%,฀excluding฀the฀effects฀of฀
general฀price฀inflation.฀
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Required฀
Calculate฀the฀recoverable฀amount฀of฀the฀plant฀and฀any฀impairment฀loss.฀
Note.฀Present฀value฀(PV)฀factors฀at฀15%฀are฀as฀follows.฀
Year PV฀factor฀@ 15%
1฀ 0.86957
2฀ 0.75614
3฀ 0.65752
4฀ 0.57175
5฀ 0.49718
Activity฀8:฀Reversal฀of฀impairment฀loss฀฀฀ ฀
A฀ cash฀ generating฀ unit฀ comprising฀ a฀ factory,฀ plant฀ and฀ equipment฀ etc฀ and฀ associated฀ purchased฀
goodwill฀ becomes฀ impaired฀ because฀ the฀ product฀ it฀ makes฀ is฀ overtaken฀ by฀ a฀ technologically฀ more฀
advanced฀model฀produced฀by฀a฀competitor.฀The฀recoverable฀amount฀of฀the฀cash฀generating฀unit฀falls฀
to฀$60m,฀resulting฀in฀an฀impairment฀loss฀of฀$80m,฀allocated฀as฀follows:฀
฀ Carrying฀amounts Carrying฀amounts฀
฀ before฀impairment after฀impairment฀
฀ ฀$m฀ ฀$m฀
฀Goodwill฀ ฀40฀ ฀–฀
฀Patent฀(with฀no฀market฀value)฀ ฀20฀ ฀–฀
฀Tangible฀long-term฀assets฀ ฀฀฀80฀ ฀฀60฀
฀Total฀ ฀140฀ ฀฀60฀
After฀ three฀ years,฀ the฀ entity฀ makes฀ a฀ technological฀ breakthrough฀ of฀ its฀ own,฀ and฀ the฀ recoverable฀
amount฀of฀the฀cash฀generating฀unit฀increases฀to฀$90m.฀The฀carrying฀amount฀of฀the฀tangible฀long-term฀
assets฀had฀the฀impairment฀not฀occurred฀would฀have฀been฀$70m.฀
Required฀
Calculate฀ the฀ reversal฀ of฀ the฀ impairment฀ loss฀ and฀ explain฀ how฀ it฀ should฀ be฀ treated฀ in฀ the฀ financial฀
statements.฀
3฀Intangible฀assets฀(IAS฀38)฀
3.1฀Revision฀of฀the฀detail฀of฀the฀definition฀of฀intangible฀assets฀
An฀intangible฀asset฀is฀an฀identifiable฀non-monetary฀asset฀without฀physical฀substance.฀The฀asset฀must฀
be:฀
(a)฀ Controlled฀by฀the฀entity฀as฀a฀result฀of฀events฀in฀the฀past;฀and฀
(b)฀ Something฀from฀which฀the฀entity฀expects฀future฀economic฀benefits฀to฀flow.฀
(IAS฀38:฀para.฀8)฀
3.1.1฀Intangible฀asset:฀must฀be฀identifiable฀
An฀ intangible฀ asset฀ must฀ be฀ identifiable฀ in฀ order฀ to฀ distinguish฀ it฀ from฀ goodwill.฀ With฀ non-physical฀
items,฀there฀may฀be฀a฀problem฀with฀'identifiability'฀(IAS฀38:฀para.฀12):฀
(a)฀ If฀an฀intangible฀asset฀is฀acquired฀separately฀through฀purchase,฀there฀may฀be฀a฀transfer฀
of฀a฀legal฀right฀that฀would฀help฀to฀make฀an฀asset฀identifiable.฀
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฀
(b)฀ An฀ intangible฀ asset฀ may฀ be฀ identifiable฀ if฀ it฀ is฀ separable,฀ ie฀ if฀ it฀ could฀ be฀ rented฀ or฀ sold฀
separately.฀However,฀'separability'฀is฀not฀an฀essential฀feature฀of฀an฀intangible฀asset.฀
3.1.2฀Intangible฀asset:฀control฀by฀the฀entity฀
Another฀ element฀ of฀ the฀ definition฀ of฀ an฀ intangible฀ asset฀ is฀ that฀ it฀ must฀ be฀ under฀ the฀ control฀ of฀ the฀
entity฀ as฀ a฀ result฀ of฀ a฀ past฀ event.฀ The฀ entity฀ must฀ therefore฀ be฀ able฀ to฀ enjoy฀ the฀ future฀ economic฀
benefits฀from฀the฀asset,฀and฀prevent฀the฀access฀of฀others฀to฀those฀benefits.฀A฀legally฀enforceable฀
right฀is฀evidence฀of฀such฀control,฀but฀is฀not฀always฀a฀necessary฀condition฀(IAS฀38:฀paras.฀13–19).฀
(a)฀ Control฀over฀technical฀knowledge฀or฀know-how฀only฀exists฀if฀it฀is฀protected฀by฀a฀legal฀
right.฀
(b)฀ The฀skill฀of฀employees,฀arising฀out฀of฀the฀benefits฀of฀training฀costs,฀are฀most฀unlikely฀to฀be฀
recognisable฀as฀an฀intangible฀asset,฀because฀an฀entity฀does฀not฀control฀the฀future฀actions฀of฀its฀
staff.฀
(c)฀ Similarly,฀ market฀ share฀ and฀ customer฀ loyalty฀ cannot฀ normally฀ be฀ intangible฀ assets,฀
since฀an฀entity฀cannot฀control฀the฀actions฀of฀its฀customers.฀
3.2฀Revision:฀accounting฀under฀the฀revaluation฀model฀
Where฀an฀intangible฀asset฀is฀revalued฀upwards฀to฀a฀fair฀value,฀the฀amount฀of฀the฀revaluation฀should฀
be฀credited฀directly฀to฀equity฀under฀the฀heading฀of฀a฀revaluation฀surplus฀(IAS฀38:฀para.฀85).฀
However,฀if฀a฀revaluation฀surplus฀is฀a฀reversal฀of฀a฀revaluation฀decrease฀that฀was฀previously฀
charged฀against฀income,฀the฀increase฀can฀be฀recognised฀as฀income.฀
Where฀ the฀ carrying฀ amount฀ of฀ an฀ intangible฀ asset฀ is฀ revalued฀ downwards,฀ the฀ amount฀ of฀ the฀
downward฀revaluation฀should฀be฀charged฀as฀an฀expense฀against฀income,฀unless฀the฀asset฀has฀
previously฀ been฀ revalued฀ upwards.฀ A฀ revaluation฀ decrease฀ should฀ be฀ first฀ charged฀ against฀ any฀
previous฀revaluation฀surplus฀in฀respect฀of฀that฀asset฀(IAS฀38:฀para.฀86).฀
Illustration฀2฀
Downward฀valuation฀
An฀intangible฀asset฀is฀measured฀by฀a฀company฀at฀fair฀value.฀The฀asset฀was฀revalued฀upwards฀by฀
$400฀in฀20X3,฀and฀there฀is฀a฀revaluation฀surplus฀of฀$400฀in฀the฀statement฀of฀financial฀position.฀At฀
the฀end฀of฀20X4,฀the฀asset฀is฀revalued฀again,฀and฀a฀revaluation฀deficit฀of฀$500฀arises.฀
The฀revaluation฀deficit฀of฀$500฀can฀first฀be฀set฀against฀the฀revaluation฀surplus฀of฀$400.฀The฀
revaluation฀surplus฀will฀be฀reduced฀to฀0฀and฀a฀charge฀of฀$100฀made฀as฀an฀expense฀in฀20X4.฀
When฀the฀revaluation฀model฀is฀used,฀and฀an฀intangible฀asset฀is฀revalued฀upwards,฀the฀cumulative฀
revaluation฀surplus฀may฀be฀transferred฀to฀retained฀earnings฀when฀the฀surplus฀is฀eventually฀
realised.฀The฀surplus฀would฀be฀realised฀when฀the฀asset฀is฀disposed฀of.฀However,฀the฀surplus฀may฀also฀
be฀realised฀over฀time฀as฀the฀asset฀is฀used฀by฀the฀entity.฀The฀amount฀of฀the฀surplus฀realised฀each฀
year฀is฀the฀difference฀between฀the฀amortisation฀charge฀for฀the฀asset฀based฀on฀the฀revalued฀amount฀of฀
the฀asset,฀and฀the฀amortisation฀that฀would฀be฀charged฀on฀the฀basis฀of฀the฀asset's฀historical฀cost.฀The฀
realised฀surplus฀in฀such฀case฀should฀be฀transferred฀from฀revaluation฀surplus฀directly฀to฀retained฀
earnings,฀and฀should฀not฀be฀taken฀through฀profit฀or฀loss฀for฀the฀year.฀
3.3฀Revision฀of฀useful฀life฀of฀intangible฀assets฀
An฀entity฀should฀assess฀the฀useful฀life฀of฀an฀intangible฀asset,฀which฀may฀be฀finite฀or฀indefinite.฀
An฀intangible฀asset฀has฀an฀indefinite฀useful฀life฀when฀there฀is฀no฀foreseeable฀limit฀to฀the฀period฀
over฀which฀the฀asset฀is฀expected฀to฀generate฀net฀cash฀inflows฀for฀the฀entity฀(IAS฀38:฀para.฀88).฀
Many฀factors฀are฀considered฀in฀determining฀the฀useful฀life฀of฀an฀intangible฀asset,฀including:฀expected฀
usage;฀ typical฀ product฀ life฀ cycles;฀ technical,฀ technological,฀ commercial฀ or฀ other฀ types฀ of฀
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obsolescence;฀the฀stability฀of฀the฀industry;฀expected฀actions฀by฀competitors;฀the฀level฀of฀maintenance฀
expenditure฀required;฀and฀legal฀or฀similar฀limits฀on฀the฀use฀of฀the฀asset,฀such฀as฀the฀expiry฀dates฀of฀
related฀ leases.฀ Computer฀ software฀ and฀ many฀ other฀ intangible฀ assets฀ normally฀ have฀ short฀ lives฀
because฀ they฀ are฀ susceptible฀ to฀ technological฀ obsolescence.฀ However,฀ uncertainty฀ does฀ not฀ justify฀
choosing฀a฀life฀that฀is฀unrealistically฀short.฀฀
The฀ useful฀ life฀ of฀ an฀ intangible฀ asset฀ that฀ arises฀ from฀ contractual฀ or฀ other฀ legal฀ rights฀ should฀
not฀ exceed฀ the฀ period฀ of฀ the฀ rights,฀ but฀ may฀ be฀ shorter฀ depending฀ on฀ the฀ period฀ over฀ which฀ the฀
entity฀expects฀to฀use฀the฀asset.฀
3.4฀Further฀detail:฀acceptable฀methods฀of฀amortisation฀
There฀ is฀ a฀ rebuttable฀ presumption฀ that฀ amortisation฀ methods฀ that฀ are฀ based฀ on฀
revenue฀ generated฀ by฀ an฀ activity฀ that฀ includes฀ the฀ use฀ of฀ an฀ intangible฀ asset฀ are฀
inappropriate.฀ The฀ revenue฀ generated฀ by฀ an฀ activity฀ that฀ includes฀ the฀ use฀ of฀ an฀ asset฀ generally฀
reflects฀ factors฀ other฀ than฀ the฀ consumption฀ of฀ the฀ economic฀ benefits฀ of฀ the฀
intangible฀asset.฀For฀example,฀revenue฀is฀affected฀by฀other฀inputs฀and฀processes,฀selling฀activities฀
and฀ changes฀ in฀ sales฀ volumes฀ and฀ prices.฀ The฀ price฀ component฀ of฀ revenue฀ may฀ be฀ affected฀ by฀
inflation,฀which฀has฀no฀bearing฀upon฀the฀way฀in฀which฀an฀asset฀is฀consumed.฀
The฀presumption฀may฀be฀rebutted฀under฀the฀following฀conditions.฀
(a)฀ Where฀ the฀ intangible฀ asset฀ is฀ expressed฀ as฀ a฀ measure฀ of฀ revenue,฀ that฀ is฀ the฀
predominant฀ limiting฀ factor฀ that฀ is฀ inherent฀ in฀ an฀ intangible฀ asset฀ is฀ the฀ achievement฀ of฀ a฀
revenue฀threshold;฀or฀
(b)฀ When฀ it฀ can฀ be฀ demonstrated฀ that฀ revenue฀ and฀ the฀ consumption฀ of฀ the฀ economic฀
benefits฀of฀the฀intangible฀asset฀are฀highly฀correlated.฀
An฀example฀of฀(a)฀might฀be฀the฀right฀to฀operate฀a฀toll฀road,฀if฀this฀right฀were฀based฀on฀a฀fixed฀total฀
amount฀ of฀ revenue฀ to฀ be฀ generated฀ from฀ cumulative฀ tolls฀ charged.฀ A฀ contract฀ could,฀ for฀ example฀
allow฀ operation฀ of฀ the฀ toll฀ road฀ until฀ the฀ cumulative฀ amount฀ of฀ tolls฀ generated฀ from฀ operating฀ the฀
road฀ reaches฀ $100฀ million.฀ Revenue฀ would฀ in฀ this฀ case฀ be฀ established฀ as฀ the฀ predominant฀ limiting฀
factor฀in฀the฀contract฀for฀the฀use฀of฀the฀intangible฀asset,฀so฀the฀revenue฀that฀is฀to฀be฀generated฀might฀
be฀ an฀ appropriate฀ basis฀ for฀ amortising฀ the฀ intangible฀ asset,฀ provided฀ that฀ the฀ contract฀ specifies฀ a฀
fixed฀total฀amount฀of฀revenue฀to฀be฀generated฀on฀which฀amortisation฀is฀to฀be฀determined.฀
Activity฀9:฀Intangible฀asset฀ ฀
Prochain,฀a฀public฀limited฀company,฀operates฀in฀the฀fashion฀industry฀and฀has฀a฀financial฀year฀end฀of฀
31฀May฀20X6.฀Prochain฀started฀developing฀its฀own฀sports฀clothing฀brand฀'Pro'.฀The฀expenditure฀in฀
the฀period฀to฀31฀May฀20X6฀was฀as฀follows:฀
Period฀from฀฀ Expenditure฀type฀฀ ฀$m฀
1฀June฀20X5฀–฀31฀August฀20X5฀฀ Research฀as฀to฀the฀extent฀of฀the฀market฀฀ ฀ 3฀
1฀September฀20X5฀–฀30฀November฀ Prototype฀clothing฀and฀goods฀design฀฀ ฀ 4฀
20X5฀฀
1฀December฀20X5฀–฀31฀January฀ Employee฀costs฀in฀refinement฀of฀products฀฀ ฀ 2฀
20X6฀฀
1฀February฀20X6฀–฀30฀April฀20X6฀฀ Development฀work฀undertaken฀to฀finalise฀design฀of฀ ฀5฀
product
1฀May฀20X6฀–฀31฀May฀20X6฀฀ Production฀and฀launch฀of฀products฀฀ ฀ ฀6฀
฀ ฀ ฀20฀
The฀ costs฀ of฀ the฀ production฀ and฀ launch฀ of฀ the฀ products฀ include฀ the฀ cost฀ of฀ upgrading฀ the฀ existing฀
machinery฀ ($3฀ million),฀ market฀ research฀ costs฀ ($2฀ million)฀ and฀ staff฀ training฀ costs฀ ($1฀ million).฀
Currently฀an฀intangible฀asset฀of฀$20฀million฀is฀shown฀in฀the฀financial฀statements฀for฀the฀year฀ended฀
31฀May฀20X6.฀ ฀
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฀
Required฀
Discuss฀how฀the฀above฀item฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Prochain฀for฀the฀year฀
ended฀31฀May฀20X6฀under฀International฀Financial฀Reporting฀Standards.฀
4฀Investment฀property฀
4.1฀Decision฀tree฀
The฀ decision฀ tree฀ below฀ summarises฀ which฀ IFRS/IAS฀ apply฀ to฀ various฀ kinds฀ of฀ property.฀ Learn฀ this฀
decision฀ tree฀ –฀ it฀ will฀ help฀ you฀ tackle฀ most฀ of฀ the฀ property฀ problems฀ you฀ are฀ likely฀ to฀ meet฀ in฀ the฀
exam.฀
Start
Is฀the฀property Yes
held฀for฀sale฀in
Use฀IAS฀2
the฀ordinary฀course
of฀business?
No
Use฀IAS฀16฀or
Is฀the฀property IFRS฀16
Yes
(cost฀model฀
owner-occupied? or฀revaluation฀
model)
No
The฀property
is฀an
investment
property
Use฀IAS฀16฀or
IFRS฀16
(cost฀model)
Which฀model฀is Cost฀model
with฀disclosure
chosen฀for฀all from฀IAS฀40
investment
properties?
Fair฀value฀model
Use฀IAS฀40
(Amended฀and฀updated฀from฀IAS฀40฀(issued฀in฀2000):฀Appendix฀A)฀
฀
Try฀the฀following฀activity฀to฀consolidate฀your฀knowledge.฀฀
Activity฀10:฀Investment฀property฀ ฀
You฀ have฀ been฀ asked฀ to฀ assist฀ the฀ Financial฀ Accountant฀ of฀ Myriad฀ in฀ preparing฀ the฀ company's฀
financial฀statements฀for฀the฀year฀to฀30฀September฀20X3.฀The฀Financial฀Accountant฀has฀asked฀for฀your฀
advice฀in฀the฀following฀matters:฀
Myriad฀owns฀several฀properties฀which฀are฀revalued฀each฀year.฀Three฀of฀its฀properties฀are฀rented฀out฀
under฀annual฀contracts.฀Details฀of฀these฀properties฀and฀their฀valuations฀are:฀
฀ Market฀value฀@฀ Market฀value฀@฀
Property฀type/life฀ Cost฀ 30฀September฀20X2฀฀ 30฀September฀20X3฀
฀ $'000 $'000 $'000฀
A฀freehold฀50฀years฀ 150 240 200฀
B฀freehold฀50฀years฀ 120 180 145฀
C฀freehold฀15฀years฀ 120 140 150฀
All฀three฀properties฀were฀acquired฀on฀1฀October฀20X1.฀Myriad's฀policy฀is฀to฀carry฀all฀non-investment฀
properties฀ at฀ cost.฀ Annual฀ amortisation,฀ where฀ appropriate,฀ is฀ based฀ on฀ the฀ carrying฀ amount฀ of฀
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assets฀at฀the฀beginning฀of฀the฀relevant฀period.฀Property฀A฀is฀let฀to฀a฀subsidiary฀of฀Myriad฀on฀normal฀
commercial฀terms.฀The฀other฀properties฀are฀let฀on฀normal฀commercial฀terms฀to฀companies฀not฀related฀
to฀Myriad.฀
Myriad฀ adopts฀ the฀ fair฀ value฀ model฀ of฀ accounting฀ for฀ investment฀ properties฀ in฀ IAS฀ 40฀ Investment฀
Property,฀and฀the฀cost฀model฀for฀owner-occupied฀properties฀in฀IAS฀16฀Property,฀Plant฀and฀Equipment.฀
Required฀
(a)฀ Describe฀ the฀ possible฀ accounting฀ treatments฀ for฀ investment฀ properties฀ under฀ IAS฀ 40฀ and฀
explain฀why฀they฀may฀require฀a฀different฀accounting฀treatment฀to฀owner-occupied฀properties.฀ ฀
(b)฀ Prepare฀ extracts฀ of฀ the฀ consolidated฀ financial฀ statements฀ of฀ Myriad฀ for฀ the฀ year฀ to฀
30฀September฀20X3฀in฀respect฀of฀the฀above฀properties฀assuming฀the฀company฀adopts฀the฀fair฀
value฀method฀in฀IAS฀40.฀
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฀
Activity฀answers฀
Activity฀1:฀Revaluation฀surplus฀
The฀double฀entry฀to฀account฀for฀the฀revaluation฀is:฀
DEBIT฀ Asset฀value฀(statement฀of฀financial฀position)฀ $7,000฀
CREDIT฀ Profit฀or฀loss฀for฀the฀year฀ ฀ $2,000฀
CREDIT฀ Revaluation฀surplus฀ ฀ $5,000฀
Activity฀2:฀Revaluation฀decrease฀
The฀double฀entry฀to฀account฀for฀the฀revaluation฀decrease฀is:฀฀
DEBIT฀ Revaluation฀surplus฀ $5,000฀
DEBIT฀ Profit฀or฀loss฀for฀the฀year฀ $2,000฀
CREDIT฀ Asset฀value฀(statement฀of฀financial฀position)฀ ฀ $7,000฀
Activity฀3:฀revaluation฀and฀depreciation฀
On฀1฀January฀20X8฀the฀carrying฀value฀of฀the฀asset฀is฀$10,000฀–฀(2฀฀$10,000฀฀5)฀=฀$6,000.฀
For฀the฀revaluation:฀
DEBIT฀ Asset฀value฀(statement฀of฀financial฀position)฀ $6,000฀
CREDIT฀ Revaluation฀surplus฀ ฀ $6,000฀
The฀depreciation฀for฀the฀next฀three฀years฀will฀be฀$12,000฀฀3฀=฀$4,000,฀compared฀to฀depreciation฀
on฀cost฀of฀$10,000฀฀5฀=฀$2,000.฀So฀each฀year,฀the฀extra฀$2,000฀can฀be฀treated฀as฀part฀of฀the฀
surplus฀which฀has฀become฀realised:฀
DEBIT฀ Revaluation฀surplus฀ $2,000฀
CREDIT฀ Retained฀earnings฀ ฀ $2,000฀
This฀is฀a฀movement฀on฀owners'฀equity฀only,฀not฀through฀profit฀or฀loss.฀
Activity฀4:฀Self-constructed฀asset฀
Computation฀of฀the฀cost฀of฀the฀factory฀
Description฀ Included฀in฀PPE Explanation
฀ $'000
Purchase฀of฀land฀ 10,000 Both฀the฀purchase฀of฀the฀land฀and฀the฀
associated฀legal฀costs฀are฀direct฀costs฀
of฀constructing฀the฀factory฀
Preparation฀and฀levelling฀ 300 A฀direct฀cost฀of฀constructing฀the฀factory
Materials฀ 6,080 A฀direct฀cost฀of฀constructing฀the฀factory
Employment฀costs฀of฀construction฀ 1,400 A฀direct฀cost฀of฀constructing฀the฀factory฀
workers฀ for฀a฀seven-month฀period฀
Direct฀overhead฀costs฀ 700 A฀direct฀cost฀of฀constructing฀the฀factory฀
for฀a฀seven-month฀period฀
Allocated฀overhead฀costs฀ Nil Not฀a฀direct฀cost฀of฀construction฀
Income฀from฀use฀as฀a฀car฀park฀ Nil Not฀essential฀to฀the฀construction฀so฀
recognised฀directly฀in฀profit฀or฀loss฀
Relocation฀costs฀ Nil Not฀a฀direct฀cost฀of฀construction฀
Opening฀ceremony฀ Nil Not฀a฀direct฀cost฀of฀construction฀
Finance฀costs฀ 700 Capitalise฀the฀interest฀cost฀incurred฀in฀an฀
eight-month฀period฀(purchase฀of฀land฀
would฀trigger฀off฀capitalisation)฀
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Investment฀income฀on฀temporary฀
investment฀of฀the฀loan฀proceeds฀ (100) Must฀offset฀against฀the฀amount฀
capitalised฀
Demolition฀cost฀recognised฀as฀a฀ 920 Where฀an฀obligation฀must฀recognise฀as฀
provision฀ part฀of฀the฀initial฀cost฀
฀ ฀฀฀฀฀฀฀฀฀฀
Total฀ ฀20,000฀
Computation฀of฀accumulated฀
depreciation฀
Total฀depreciable฀amount฀ ฀10,000฀ All฀of฀the฀net฀finance฀cost฀of฀600฀(700฀–฀
100)฀has฀been฀allocated฀to฀the฀
depreciable฀amount.฀Also฀acceptable฀to฀
reduce฀by฀allocating฀a฀portion฀to฀the฀
non-depreciable฀land฀element฀
Depreciation฀must฀be฀in฀two฀parts฀ Principle
Depreciation฀of฀roof฀component฀ ฀50฀ 10,000฀×฀30%฀×฀1/20฀×฀4/12฀
Depreciation฀of฀remainder฀ ฀฀฀฀฀฀฀฀58฀ 10,000฀×฀70%฀×฀1/40฀×฀4/12฀
Total฀depreciation฀ ฀฀฀฀฀฀108฀
Computation฀of฀carrying฀
amount฀
฀ ฀19,892฀ 20,000฀– 108฀
Activity฀5:฀Impairment฀loss฀
The฀recoverable฀amount฀of฀the฀business฀(a฀single฀cash฀generating฀unit)฀is฀measured฀as฀$3.1m.฀There฀
has฀consequently฀been฀an฀impairment฀loss฀of฀$1.4m฀($4.5m฀–฀$3.1m).฀
The฀impairment฀loss฀will฀be฀recognised฀in฀profit฀or฀loss.฀The฀loss฀will฀be฀allocated฀between฀the฀assets฀
in฀the฀cash฀generating฀unit฀as฀follows:฀
(a)฀ A฀loss฀of฀$1m฀can฀be฀attributed฀directly฀to฀the฀uninsured฀asset฀that฀has฀been฀destroyed.฀
(b)฀ The฀remaining฀loss฀of฀$0.4m฀should฀be฀allocated฀to฀goodwill.฀
The฀carrying฀value฀of฀the฀assets฀will฀now฀be฀$3m฀for฀tangible฀assets฀and฀$0.1m฀for฀goodwill.฀
Activity฀6:฀Impairment฀loss฀(2)฀
$0.7฀million฀
IAS฀ 36:฀ paras.฀ 60฀ and฀ 61฀ (also฀ IAS฀ 16:฀ para.฀ 40)฀ require฀ that฀ an฀ impairment฀ that฀ reverses฀ a฀
previous฀revaluation฀should฀be฀recognised฀through฀other฀comprehensive฀income฀to฀the฀extent฀of฀the฀
amount฀in฀the฀revaluation฀surplus฀for฀that฀same฀asset.฀Any฀remaining฀amount฀is฀recognised฀through฀
profit฀or฀loss.฀Thus:฀
(a)฀ The฀carrying฀amount฀at฀31฀December฀20X2฀is฀45/50฀฀$5.0m฀=฀$4.5m.฀
(b)฀ The฀revaluation฀reserve฀created฀is฀$3.5m฀(ie฀$8.0m฀–฀$4.5m).฀
(c)฀ The฀carrying฀amount฀at฀31฀December฀20X7฀is฀40/45฀฀$8.0m฀=฀$7.1m.฀
(d)฀ The฀recoverable฀amount฀at฀31฀December฀20X7฀is฀$2.9m.฀
(e)฀ The฀total฀impairment฀charge฀is฀$4.2m฀(ie฀$7.1m฀–฀$2.9m).฀
(f)฀ Of฀ this,฀ $3.5m฀ is฀ a฀ reversal฀ of฀ the฀ revaluation฀ reserve,฀ so฀ only฀ $0.7฀ million฀ is฀ recognised฀
through฀profit฀or฀loss.฀
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฀
Activity฀7:฀Impairment฀loss฀(3)฀
The฀fair฀value฀less฀costs฀of฀disposal฀of฀the฀plant฀is฀below฀its฀carrying฀amount฀so฀it฀may฀be฀impaired.฀It฀
is฀now฀necessary฀to฀find฀the฀value฀in฀use฀in฀order฀to฀determine฀whether฀an฀impairment฀has฀occurred฀
and฀to฀quantify฀any฀impairment฀loss.฀
Year฀ Future฀cash฀flows฀ PV฀factor฀at฀ Discounted฀future฀
15%฀ cash฀flows฀
฀ ฀$'000฀ ฀$'000฀
1฀ ฀230฀ 0.86957฀ ฀200฀
2฀ ฀211฀ 0.75614฀ ฀160฀
3฀ ฀157฀ 0.65752฀ ฀103฀
4฀ ฀104฀ 0.57175฀ ฀59฀
5฀ ฀233฀ 0.49718฀ ฀ 116 ฀
฀ ฀ ฀ 638 ฀
To฀calculate฀the฀impairment฀loss,฀compare฀the฀carrying฀amount฀of฀$749,000฀with฀the฀higher฀of฀value฀
in฀use฀($638,000)฀and฀fair฀value฀less฀costs฀of฀disposal฀($550,000).฀The฀impairment฀loss฀is฀therefore฀
$749,000฀–฀$638,000฀=฀$111,000.฀
Activity฀8:฀Reversal฀of฀impairment฀loss฀฀฀
The฀reversal฀of฀the฀impairment฀loss฀is฀recognised฀to฀the฀extent฀that฀it฀increases฀the฀carrying฀amount฀of฀
the฀tangible฀non-current฀assets฀to฀what฀it฀would฀have฀been฀had฀the฀impairment฀not฀taken฀place;฀ie฀a฀
reversal฀ of฀ the฀ impairment฀ loss฀ of฀ $10m฀ is฀ recognised฀ and฀ the฀ tangible฀ non-current฀ assets฀ written฀
back฀ to฀ $70m.฀ Reversal฀ of฀ the฀ impairment฀ is฀ not฀ recognised฀ in฀ relation฀ to฀ the฀ goodwill฀ and฀ patent฀
because฀ the฀ effect฀ of฀ the฀ external฀ event฀ that฀ caused฀ the฀ original฀ impairment฀ has฀ not฀ reversed฀ –฀ the฀
original฀product฀is฀still฀overtaken฀by฀a฀more฀advanced฀model.฀
Activity฀9:฀Intangible฀assets฀
IAS฀ 38฀ Intangible฀ Assets฀ divides฀ a฀ development฀ project฀ into฀ a฀ research฀ phase฀ and฀ a฀ development฀
phase.฀In฀the฀research฀phase฀of฀a฀project,฀an฀entity฀cannot฀yet฀demonstrate฀that฀the฀expenditure฀will฀
generate฀ probable฀ future฀ economic฀ benefits.฀ Therefore฀ expenditure฀ on฀ research฀ must฀ be฀
recognised฀as฀an฀expense฀when฀it฀occurs.฀
Development฀expenditure฀is฀capitalised฀when฀an฀entity฀demonstrates฀all฀the฀following.฀
(a)฀ The฀technical฀feasibility฀of฀completing฀the฀project฀
(b)฀ Its฀intention฀to฀complete฀the฀asset฀and฀use฀or฀sell฀it฀
(c)฀ Its฀ability฀to฀use฀or฀sell฀the฀asset฀
(d)฀ That฀the฀asset฀will฀generate฀probable฀future฀economic฀benefits฀
(e)฀ The฀availability฀of฀adequate฀technical,฀financial฀and฀other฀resources฀to฀complete฀the฀
development฀and฀to฀use฀or฀sell฀it฀
(f)฀ Its฀ability฀to฀reliably฀measure฀the฀expenditure฀attributable฀to฀the฀asset.฀
Assuming฀ that฀ all฀ these฀ criteria฀ are฀ met,฀ the฀ cost฀ of฀ the฀ development฀ should฀ comprise฀ all฀ directly฀
attributable฀ costs฀ necessary฀ to฀ create฀ the฀ asset฀ and฀ to฀ make฀ it฀ capable฀ of฀ operating฀ in฀
the฀ manner฀ intended฀ by฀ management.฀ Directly฀ attributable฀ costs฀ do฀ not฀ include฀ selling฀
or฀ administrative฀ costs,฀ or฀ training฀ costs฀ or฀ market฀ research.฀ The฀ cost฀ of฀ upgrading฀
existing฀ machinery฀ can฀ be฀ recognised฀ as฀ property,฀ plant฀ and฀ equipment.฀ Therefore฀ the฀
expenditure฀on฀the฀project฀should฀be฀treated฀as฀follows:฀
฀ 617฀

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฀ Recognised฀in฀statement฀
of฀financial฀position฀
฀ ฀Property,฀
฀ ฀Intangible฀ ฀plant฀and฀
฀ Expense฀(P/L)฀ ฀assets฀ ฀equipment฀
฀ ฀$m฀ ฀$m฀ ฀$m฀
Research฀ ฀ 3฀ ฀
Prototype฀design฀ ฀4฀ ฀
Employee฀costs฀ ฀ 2฀ ฀
Development฀work฀ ฀ 5฀ ฀
Upgrading฀machinery฀ ฀3฀
Market฀research฀ ฀ 2฀ ฀
Training฀ ฀ 1฀ ฀ ฀฀฀฀ ฀฀฀฀
฀ ฀ 6฀ ฀11฀ ฀ 3฀
Prochain฀should฀recognise฀$11฀million฀as฀an฀intangible฀asset.฀
Activity฀10:฀Investment฀property฀
(a)฀ An฀entity฀may฀own฀land฀or฀a฀building฀as฀an฀investment฀rather฀than฀for฀use฀in฀the฀business;฀
in฀other฀words,฀to฀earn฀rentals฀or฀capital฀appreciation฀or฀both.฀Such฀properties฀are฀
not฀used฀in฀the฀production฀or฀supply฀of฀goods฀and฀services,฀or฀for฀administrative฀purposes,฀nor฀
are฀they฀held฀for฀sale฀in฀the฀ordinary฀course฀of฀business.฀As฀they฀are฀held฀for฀investment฀for฀
eventual฀disposal,฀it฀is฀often฀considered฀that฀the฀ current฀values฀of฀the฀investments฀and฀the฀
changes฀in฀them฀are฀more฀important฀than฀their฀original฀costs.฀
IAS฀ 40฀ Investment฀ Property฀ governs฀ their฀ accounting฀ treatment.฀ With฀ regard฀ to฀ measurement฀
subsequent฀to฀initial฀recognition,฀it฀requires฀an฀entity฀to฀choose฀between฀two฀models,฀the฀cost฀
model฀and฀the฀fair฀value฀model.฀Whatever฀policy฀it฀chooses฀should฀be฀applied฀to฀all฀
of฀its฀investment฀property.฀
Cost฀model฀
The฀cost฀model฀is฀the฀same฀as฀the฀cost฀model฀in฀IAS฀16.฀Investment฀property฀should฀be฀
measured฀at฀depreciated฀cost,฀less฀any฀accumulated฀impairment฀losses.฀An฀entity฀that฀chooses฀
the฀cost฀model฀should฀disclose฀the฀fair฀value฀of฀its฀investment฀property.฀
Fair฀value฀model฀
After฀ initial฀ recognition,฀ an฀ entity฀ that฀ chooses฀ the฀ fair฀ value฀ model฀ should฀ measure฀ all฀ of฀ its฀
investment฀ property฀ at฀ fair฀ value฀ (determined฀ in฀ accordance฀ with฀ IFRS฀ 13฀ Fair฀ Value฀
Measurement),฀except฀in฀the฀extremely฀rare฀cases฀where฀this฀cannot฀be฀measured฀reliably.฀
In฀ such฀ cases฀ it฀ should฀ apply฀ the฀ cost฀ model฀ from฀ the฀ beginning.฀ If฀ the฀ property฀ has฀ been฀
revalued฀ at฀ one฀ point฀ in฀ time฀ the฀ revaluation฀ model฀ should฀ always฀ be฀ used,฀ even฀ if฀ market฀
transactions฀become฀less฀frequent฀or฀market฀prices฀become฀less฀readily฀available.฀
A฀gain฀or฀loss฀arising฀from฀a฀change฀in฀the฀fair฀value฀of฀an฀investment฀property฀should฀be฀
included฀in฀net฀profit฀or฀loss฀for฀the฀period฀in฀which฀it฀arises.฀The฀fair฀value฀of฀investment฀
property฀should฀reflect฀the฀actual฀market฀state฀and฀circumstances฀as฀at฀the฀reporting฀date,฀not฀
at฀either฀a฀past฀or฀future฀date.฀
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฀
(b)฀ MYRIAD฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀30฀SEPTEMBER฀20X3฀
(Extracts)฀
฀ Cost/ Accumulated฀ Carrying
฀ valuation depreciation฀ value
฀ $'000 $'000฀ $'000
Property,฀plant฀&฀equipment:฀A฀cost฀(2฀years 150 6฀ 144
dep'n)฀
Investment฀properties:฀ B฀revaluation 145 –฀ 145
฀ ฀ C฀revaluation 150 –฀ 150
MYRIAD฀
CONSOLIDATED฀STATEMENT฀OF฀PROFIT฀OR฀LOSS฀FOR฀THE฀YEAR฀TO฀30฀SEPTEMBER฀20X3฀
(Extract)฀
฀ $'000
Depreciation:฀Property฀A฀(150/5฀years) 3
Deficit฀in฀fair฀value฀of฀Property฀B฀(180฀– 145) (35)
Surplus฀in฀fair฀value฀of฀Property฀C฀(140฀– 150) 10
The฀question฀asks฀for฀the฀consolidated฀financial฀statements฀of฀Myriad.฀Property฀A฀is฀let฀to฀a฀
subsidiary฀ of฀ Myriad,฀ so฀ in฀ the฀ consolidated฀ financial฀ treatments฀ it฀ would฀ be฀ treated฀ as฀ an฀
owner-occupied฀property฀using฀the฀cost฀model.฀Its฀fair฀value฀($200,000)฀would฀be฀shown฀in฀
the฀entity฀financial฀statements,฀where฀it฀would฀be฀treated฀as฀an฀investment฀property.฀
฀ ฀
฀ 619฀

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620฀

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฀
฀
฀
฀
฀
฀
฀
฀
฀
Employee฀benefits
฀
฀
฀
฀ 621฀
฀

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1฀Concepts฀and฀principles฀
1.1฀The฀conceptual฀nature฀of฀employee฀benefit฀costs฀
When฀a฀company฀or฀other฀entity฀employs฀a฀new฀worker,฀that฀worker฀will฀be฀offered฀a฀package฀of฀
pay฀ and฀ benefits.฀Some฀of฀these฀will฀be฀short-term฀and฀the฀employee฀will฀receive฀the฀benefit฀at฀
about฀ the฀ same฀ time฀ as฀ they฀ earn฀ it;฀ for฀ example฀ basic฀ pay,฀ overtime฀ and฀ so฀ on.฀ Other฀ employee฀
benefits฀are฀deferred,฀however,฀the฀main฀example฀being฀retirement฀benefits฀(ie฀a฀pension).฀
The฀cost฀of฀these฀deferred฀employee฀benefits฀to฀the฀employer฀can฀be฀viewed฀in฀various฀ways.฀They฀
could฀be฀described฀as฀deferred฀salary฀to฀the฀employee.฀Alternatively,฀they฀are฀a฀deduction฀from฀
the฀ employee's฀ true฀ gross฀ salary,฀ used฀ as฀ a฀ tax-efficient฀ means฀ of฀ saving.฀ In฀ some฀ countries,฀ tax฀
efficiency฀arises฀on฀retirement฀benefit฀contributions฀because฀they฀are฀not฀taxed฀on฀the฀employee,฀but฀
they฀are฀allowed฀as฀a฀deduction฀from฀taxable฀profits฀of฀the฀employer.฀
1.2฀Accounting฀for฀employee฀benefit฀costs฀
Accounting฀for฀short-term฀employee฀benefit฀costs฀tends฀to฀be฀quite฀straightforward,฀because฀
they฀ are฀ simply฀ recognised฀ as฀ an฀ expense฀ in฀ the฀ employer's฀ financial฀ statements฀ of฀ the฀ current฀
period.฀
Accounting฀for฀the฀cost฀of฀deferred฀employee฀benefits฀is฀much฀more฀difficult.฀This฀is฀because฀of฀
the฀large฀amounts฀involved,฀as฀well฀as฀the฀long฀time฀scale,฀complicated฀estimates฀and฀uncertainties.฀
In฀ the฀ past,฀ entities฀ accounted฀ for฀ these฀ benefits฀ simply฀ by฀ charging฀ profit฀ or฀ loss฀ (the฀ income฀
statements)฀ of฀ the฀ employing฀ entity฀ on฀ the฀ basis฀ of฀ actual฀ payments฀ made.฀ This฀ led฀ to฀ substantial฀
variations฀in฀reported฀profits฀of฀these฀entities฀and฀disclosure฀of฀information฀on฀these฀costs฀was฀usually฀
sparse.฀฀
2฀Defined฀benefit,฀defined฀contribution฀and฀multi-employer฀
plans฀
2.1฀Defined฀benefit฀and฀defined฀contribution฀plans฀
IAS฀19฀para.฀8฀sets฀out฀the฀following฀definitions฀relating฀to฀classification฀of฀plans.฀
Defined฀contribution฀plans:฀post-employment฀benefit฀plans฀under฀which฀an฀entity฀pays฀fixed฀
Key฀term฀
Defined฀benefit฀plans:฀post-employment฀benefit฀plans฀other฀than฀defined฀contribution฀plans.฀
There฀are฀two฀types฀or฀categories฀of฀post-employment฀benefit฀plan,฀as฀given฀in฀the฀definitions฀above฀
(IAS฀19:฀paras.฀26–30).฀
(a)฀ Defined฀ contribution฀ plans.฀ With฀ such฀ plans,฀ the฀ employer฀ (and฀ possibly฀ current฀
employees฀ too)฀ pay฀ regular฀ contributions฀ into฀ the฀ plan฀ of฀ a฀ given฀ or฀ 'defined'฀ amount฀ each฀
year.฀ The฀ contributions฀ are฀ invested,฀ and฀ the฀ size฀ of฀ the฀ post-employment฀ benefits฀ paid฀ to฀
former฀ employees฀ depends฀ on฀ how฀ well฀ or฀ how฀ badly฀ the฀ plan's฀ investments฀ perform.฀ If฀ the฀
investments฀perform฀well,฀the฀plan฀will฀be฀able฀to฀afford฀higher฀benefits฀than฀if฀the฀investments฀
performed฀less฀well.฀
(b)฀ Defined฀ benefit฀ plans.฀ With฀ these฀ plans,฀ the฀ size฀ of฀ the฀ post-employment฀ benefits฀ is฀
determined฀ in฀ advance;฀ ie฀ the฀ benefits฀ are฀ 'defined'.฀ The฀ employer฀ (and฀ possibly฀ current฀
employees฀too)฀pay฀contributions฀into฀the฀plan,฀and฀the฀contributions฀are฀invested.฀The฀size฀of฀
the฀contributions฀is฀set฀at฀an฀amount฀that฀is฀expected฀to฀earn฀enough฀investment฀returns฀to฀meet฀
the฀obligation฀to฀pay฀the฀post-employment฀benefits.฀If,฀however,฀it฀becomes฀apparent฀that฀the฀
assets฀ in฀ the฀ fund฀ are฀ insufficient,฀ the฀ employer฀ will฀ be฀ required฀ to฀ make฀ additional฀
622฀

lOMoARcPSD|6256454
contributions฀into฀the฀plan฀to฀make฀up฀the฀expected฀shortfall.฀On฀the฀other฀hand,฀if฀the฀fund's฀
assets฀appear฀to฀be฀larger฀than฀they฀need฀to฀be,฀and฀in฀excess฀of฀what฀is฀required฀to฀pay฀the฀
post-employment฀ benefits,฀ the฀ employer฀ may฀ be฀ allowed฀ to฀ take฀ a฀ 'contribution฀ holiday'฀ (ie฀
stop฀paying฀in฀contributions฀for฀a฀while).฀
It฀is฀important฀to฀make฀a฀clear฀distinction฀between฀the฀following.฀
฀ Funding฀a฀defined฀benefit฀plan,฀ie฀paying฀contributions฀into฀the฀plan฀฀
฀ Accounting฀for฀the฀cost฀of฀funding฀a฀defined฀benefit฀plan฀
The฀key฀difference฀between฀the฀two฀types฀of฀plan฀is฀the฀nature฀of฀the฀'promise'฀made฀by฀the฀entity฀to฀
the฀employees฀in฀the฀plan:฀
(a)฀ Under฀ a฀ defined฀ contribution฀ plan,฀ the฀ 'promise'฀ is฀ to฀ pay฀ the฀ agreed฀ amount฀ of฀
contributions.฀ Once฀ this฀ is฀ done,฀ the฀ entity฀ has฀ no฀ further฀ liability฀ and฀ no฀ exposure฀ to฀ risks฀
related฀to฀the฀performance฀of฀the฀assets฀held฀in฀the฀plan.฀
(b)฀ Under฀a฀defined฀benefit฀plan,฀the฀'promise'฀is฀to฀pay฀the฀amount฀of฀benefits฀agreed฀under฀
the฀plan.฀The฀entity฀is฀taking฀on฀a฀far฀more฀uncertain฀liability฀that฀may฀change฀in฀the฀future฀as฀
a฀result฀of฀many฀variables฀and฀has฀continuing฀exposure฀to฀risks฀related฀to฀the฀performance฀of฀
assets฀ held฀ in฀ the฀ plan.฀ In฀ simple฀ terms,฀ if฀ the฀ plan฀ assets฀ are฀ insufficient฀ to฀ meet฀ the฀ plan฀
liabilities฀to฀pay฀pensions฀in฀future,฀the฀entity฀will฀have฀to฀make฀up฀any฀deficit.฀
2.2฀Multi-employer฀plans฀
Multi-employer฀plans฀are฀defined฀contribution฀plans฀(other฀than฀State฀plans)฀or฀defined฀benefit฀
plans฀(other฀than฀State฀plans)฀that:฀
Key฀term฀
(a)฀ Pool฀the฀assets฀contributed฀by฀various฀entities฀that฀are฀not฀under฀common฀control;฀and฀
(b)฀ Use฀those฀assets฀to฀provide฀benefits฀to฀employees฀of฀more฀than฀one฀entity,฀on฀the฀basis฀that฀
contribution฀and฀benefit฀levels฀are฀determined฀without฀regard฀to฀the฀identity฀of฀the฀entity฀that฀
employs฀the฀employees฀concerned.฀฀
(IAS฀19:฀para.฀8)฀
IAS฀19฀(IAS฀19:฀paras.฀32–39)฀requires฀an฀entity฀to฀classify฀such฀a฀plan฀as฀a฀defined฀contribution฀
plan฀or฀a฀defined฀benefit฀plan,฀depending฀on฀its฀terms฀(including฀any฀constructive฀obligation฀beyond฀
those฀terms).฀
For฀ a฀ multi-employer฀ plan฀ that฀ is฀ a฀ defined฀ benefit฀ plan,฀ the฀ entity฀ should฀ account฀ for฀ its฀
proportionate฀share฀of฀the฀defined฀benefit฀obligation,฀plan฀assets฀and฀cost฀associated฀with฀the฀plan฀
in฀the฀same฀way฀as฀for฀any฀other฀defined฀benefit฀plan฀and฀make฀full฀disclosure.฀
When฀there฀is฀insufficient฀information฀to฀use฀defined฀benefit฀accounting,฀then฀the฀multi-employer฀
plan฀should฀be฀accounted฀for฀as฀a฀defined฀contribution฀plan฀and฀additional฀disclosures฀made฀(that฀
the฀plan฀is฀in฀fact฀a฀defined฀benefit฀plan฀and฀information฀about฀any฀known฀surplus฀or฀deficit).฀
3฀'Asset฀Ceiling'฀test฀
The฀following฀illustration฀shows฀how฀the฀'Asset฀Ceiling'฀test฀is฀performed.฀
Defined฀benefit฀plan฀calculations฀
Clement฀operates฀a฀defined฀benefit฀pension฀scheme฀for฀its฀employees.฀At฀1฀January฀20X1฀the฀present฀
value฀of฀the฀defined฀benefit฀obligation฀was฀$5฀million฀and฀the฀fair฀value฀of฀the฀plan฀assets฀was฀
$5.7฀million.฀Equivalent฀values฀at฀31฀December฀20X1฀were฀$5.94฀million฀and฀$7.1฀million.฀
฀ 623฀

lOMoARcPSD|6256454
For฀the฀year฀ended฀31฀December฀20X1:฀
฀ Current฀service฀cost฀was฀$1.5฀million฀
฀ The฀interest฀rate฀applicable฀to฀the฀net฀defined฀benefit฀asset฀was฀3%฀
฀ Contributions฀of฀$2฀million฀were฀made฀to฀the฀plan฀
฀ $800,000฀was฀paid฀out฀to฀former฀employees฀of฀Clement฀
The฀present฀value฀of฀future฀economic฀benefits฀in฀relation฀to฀the฀plan฀is฀$1.1฀million.฀
Required฀
Calculate฀the฀amount฀of฀remeasurement฀to฀be฀recognised฀in฀other฀comprehensive฀income฀in฀the฀year฀
Solution฀
฀ ฀Net฀defined฀
Obligation฀ Assets฀ benefit฀asset฀
$'000฀ $'000฀ $'000฀
At฀1฀January฀20X1฀ ฀5,000฀ ฀5,700฀ ฀฀฀700฀
Current฀service฀cost฀ ฀1,500฀ ฀
Contributions฀ ฀2,000฀ ฀
Payments฀ ฀(800)฀ ฀(800)฀ ฀
Interest฀(3%฀฀5m)/(3%฀฀5.7m)฀ ฀฀฀฀฀฀฀฀฀฀฀฀150฀ ฀฀฀฀฀171฀ ฀
฀ ฀5,850฀ ฀7,071฀ ฀
Remeasurements฀(β)฀ ฀ ฀฀฀฀90฀ ฀ ฀฀฀฀29฀ ฀
At฀31฀December฀20X1฀ ฀5,940฀ ฀7,100฀ ฀1,160฀
Remeasurement฀due฀to฀asset฀ceiling฀ ฀฀฀฀฀(60)฀
Asset฀ceiling฀ ฀1,100฀
Therefore,฀the฀total฀remeasurement฀amount฀recognised฀in฀other฀comprehensive฀income฀is:฀
฀ $'000฀
Remeasurement฀loss฀on฀obligation฀ ฀90฀
Remeasurement฀gain฀on฀assets฀ ฀(29)฀
Remeasurement฀loss฀due฀to฀asset฀ceiling฀ ฀฀฀60฀
Net฀remeasurement฀loss฀ ฀121฀
฀
฀
4฀Contributions฀and฀benefits฀paid฀other฀than฀at฀the฀end฀of฀
the฀period฀
In฀most฀exam฀questions฀you฀will฀be฀told฀that฀contributions฀and฀benefits฀will฀be฀paid฀at฀the฀end฀of฀the฀
accounting฀ period.฀ Occasionally฀ this฀ may฀ not฀ be฀ the฀ case.฀ The฀ following฀ illustration฀ shows฀ how฀ to฀
deal฀with฀a฀situation฀where฀the฀payments฀are฀made฀at฀different฀times.฀฀
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Contributions฀and฀benefits฀paid฀other฀than฀at฀the฀end฀of฀the฀period฀
Jett฀Co฀has฀a฀defined฀benefit฀pension฀plan.฀฀
Required฀
Using฀the฀information฀below,฀prepare฀extracts฀from฀the฀statement฀of฀financial฀position฀and฀the฀
statement฀of฀comprehensive฀income฀of฀Jett฀Co,฀together฀with฀a฀reconciliation฀of฀plan฀movements฀for฀
the฀year฀ended฀31฀January฀20X8.฀Ignore฀taxation.฀
(a)฀ The฀plan฀assets฀were฀$4.1m฀on฀1฀February฀20X7฀and฀plan฀liabilities฀at฀this฀date฀were฀
฀ $4.8m.฀
(b)฀ The฀company฀paid฀a฀contribution฀of฀$680,000฀in฀a฀lump฀sum฀on฀1฀February฀20X7.฀
(c)฀ Benefits฀paid฀to฀former฀employees,฀which฀amounted฀to฀$440,000,฀were฀paid฀in฀two฀equal฀
฀ amounts฀on฀31฀July฀20X7฀and฀31฀January฀20X8.฀
(d)฀ The฀yield฀on฀high฀quality฀corporate฀bonds฀was฀6%฀and฀the฀actual฀return฀on฀plan฀assets฀was฀
฀ $282,000.฀
(e)฀ Current฀service฀cost฀can฀be฀calculated฀as฀4.2%฀of฀wages฀and฀salaries฀in฀the฀current฀year.฀฀
฀ The฀wages฀and฀salaries฀expense฀is฀$5,900,000.฀
(f)฀ The฀actuary฀valued฀the฀plan฀liabilities฀at฀31฀January฀20X8฀as฀$4.95.฀
(6฀marks)฀
Solution฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀(Extract)฀
฀฀ $'000฀
Non-current฀liabilities฀ ฀฀
Defined฀benefit฀pension฀obligations฀(4,950฀–฀4,622)฀ 328฀
฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extract)฀
฀ ฀$'000฀
Charged฀to฀profit฀or฀loss฀ ฀
Current฀service฀cost฀ 248฀
Net฀interest฀on฀net฀defined฀benefit฀liability฀(281฀– 280)฀ ฀฀฀฀1฀1฀฀
฀ 249฀
Loss฀on฀remeasurement฀of฀obligation฀ (61)฀
Gain฀on฀remeasurement฀of฀plan฀assets฀(excluding฀amounts฀in฀net฀ 2฀
interest)฀
฀ ฀
฀ $'000฀
Reconciliation฀of฀pension฀plan฀movement ฀
Plan฀deficit฀at฀1฀Feb฀20X7฀(4,100฀–฀4,800)฀ ฀ (700)฀
Company฀contributions฀ ฀680฀
Profit฀or฀loss฀total฀ ฀ (249)฀
Other฀comprehensive฀income฀total฀(61 – 2)฀ ฀ ฀(59)฀฀
Plan฀deficit฀at฀31฀Jan฀20X8฀(4,950฀–฀฀4,622)฀ ฀ (328)฀
฀
฀
฀ 625฀

lOMoARcPSD|6256454
฀ ฀$'000฀
฀Changes฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation ฀
฀Defined฀benefit฀obligation฀at฀1฀Feb฀20X7฀ ฀4,800฀
฀Interest฀cost฀(4,800฀×฀6%฀×฀6/12)฀+฀((4,800฀– 220)฀×฀6%฀×฀6/12)฀ ฀281฀
฀Pensions฀paid฀ ฀(440)฀
฀Current฀service฀cost฀($5,900฀×฀4.2%)฀ ฀248฀
฀Remeasurement฀loss฀through฀OCI฀(bal.฀fig.)฀ ฀ ฀฀฀฀61฀
฀Defined฀benefit฀obligation฀at฀31฀Jan฀20X8 ฀ 4,950 ฀
฀
Tutorial฀note:฀Interest฀cost฀
As฀benefits฀are฀paid฀in฀two฀equal฀payments,฀we฀must฀pro-rate฀the฀interest฀cost฀calculation฀
to฀take฀account฀of฀the฀timing฀of฀the฀payment฀on฀31฀July฀20X7.฀(The฀benefits฀paid฀on฀the฀
last฀day฀of฀the฀year฀do฀not฀impact฀on฀the฀interest฀cost)฀฀
฀฀
฀ ฀$'000฀
฀Changes฀in฀the฀fair฀value฀of฀plan฀assets ฀
฀Fair฀value฀of฀plan฀assets฀at฀1฀Feb฀20X7฀ ฀4,100฀
฀Contributions฀ ฀680฀
฀Pensions฀paid฀ ฀(440)฀
฀Interest฀income฀on฀plan฀assets฀((4,100 + 680)฀×฀6%฀×฀6/12)฀+฀ ฀280฀
(4,100฀+฀680฀–฀220)฀×฀6%฀×฀6/12)฀
฀Remeasurement฀gain฀through฀OCI฀(282฀– 280)฀ ฀ ฀ ฀฀฀2฀
฀Fair฀value฀of฀plan฀assets฀at฀31฀Jan฀20X8฀(bal.฀fig.) ฀4,622฀
฀
Tutorial฀note:฀Interest฀income฀
Interest฀income฀on฀plan฀assets฀must฀be฀adjusted฀for:฀
Contributions฀–฀paid฀at฀the฀beginning฀of฀the฀year฀so฀added฀to฀the฀opening฀asset฀balance฀
Benefits฀–฀paid฀in฀equal฀instalments,฀so฀we฀must฀pro-rate฀to฀take฀account฀of฀the฀timing฀of฀
the฀payment฀on฀31฀July฀20X7฀
฀
฀
626฀

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฀
฀
฀
฀
Provisions,฀contingencies
฀
฀
฀
฀
and฀events฀after฀the
฀
฀ reporting฀period
฀
฀
฀
฀
฀
฀
฀ ฀
฀ 627฀
฀

lOMoARcPSD|6256454
1฀Provisions฀
1.1฀Revision฀of฀the฀detail฀of฀the฀recognition฀and฀measurement฀of฀
provisions฀
You฀ have฀ covered฀ the฀ detail฀ of฀ IAS฀ 37฀ Provisions,฀ Contingent฀ Liabilities฀ and฀ Contingent฀ Assets฀ in฀
your฀ earlier฀ studies฀ in฀ Financial฀ Reporting.฀ However,฀ the฀ detail฀ is฀ examinable฀ in฀ the฀ Strategic฀
Business฀Reporting฀(SBR)฀examination฀so฀you฀should฀make฀sure฀you฀revise฀it.฀Attempting฀the฀activities฀
below฀will฀help฀you฀to฀consolidate฀your฀knowledge.฀฀฀
1.1.1฀Recognition฀฀
A฀provision฀is฀recognised฀when:฀
(a)฀ An฀entity฀has฀a฀present฀obligation฀(legal฀or฀constructive)฀as฀a฀result฀of฀a฀past฀event;฀
(b)฀ It฀ is฀ probable฀ that฀ an฀ outflow฀ of฀ resources฀ embodying฀ economic฀ benefits฀ will฀ be฀
required฀to฀settle฀the฀obligation;฀and฀
(c)฀ A฀reliable฀estimate฀can฀be฀made฀of฀the฀amount฀of฀the฀obligation.฀
1.1.2฀Present฀obligation฀
An฀obligation฀can฀either฀be฀legal฀or฀constructive.฀
A฀legal฀obligation฀is฀one฀that฀derives฀from฀a฀contract,฀legislation฀or฀any฀other฀operation฀of฀law.฀
A฀constructive฀obligation฀is฀an฀obligation฀that฀derives฀from฀an฀entity's฀actions฀where:฀
฀ By฀an฀established฀pattern฀of฀past฀practice,฀published฀policies฀or฀a฀sufficiently฀specific฀current฀
statement฀the฀entity฀has฀indicated฀to฀other฀parties฀that฀it฀will฀accept฀certain฀responsibilities;฀and฀
฀ As฀a฀result,฀the฀entity฀has฀created฀a฀valid฀expectation฀on฀the฀part฀of฀those฀other฀parties฀that฀it฀
will฀discharge฀those฀responsibilities.฀(IAS฀37:฀para.฀10)฀
Activity฀1:฀Obligation฀ ฀
Explain฀in฀which฀of฀the฀following฀circumstances฀an฀obligation฀exists.฀
(a)฀ On฀13฀December฀20X9฀the฀board฀of฀an฀entity฀decided฀to฀close฀down฀a฀division.฀The฀reporting฀
date฀ of฀ the฀ company฀ is฀ 31฀ December.฀ Before฀ 31฀ December฀ 20X9฀ the฀ decision฀ was฀ not฀
communicated฀ to฀ any฀ of฀ those฀ affected฀ and฀ no฀ other฀ steps฀ were฀ taken฀ to฀ implement฀ the฀
decision.฀
(b)฀ The฀details฀are฀as฀above;฀however฀the฀board฀agreed฀a฀detailed฀closure฀plan฀on฀20฀December฀
20X9฀and฀details฀were฀given฀to฀customers฀and฀employees฀immediately.฀
(c)฀ At฀its฀reporting฀date฀a฀company฀is฀obliged฀to฀incur฀clean-up฀costs฀for฀environmental฀damage฀
that฀has฀already฀been฀caused.฀
(d)฀ At฀ its฀ reporting฀ date,฀ a฀ company฀ intends฀ to฀ carry฀ out฀ future฀ expenditure฀ to฀ operate฀ in฀ a฀
particular฀way฀in฀the฀future.฀
1.1.3฀฀Probable฀transfer฀of฀economic฀benefits฀
A฀transfer฀of฀economic฀benefits฀is฀regarded฀as฀'probable'฀if฀the฀event฀is฀more฀likely฀than฀not฀to฀
occur฀ (IAS฀ 37:฀ para.฀ 23–24).฀ This฀ appears฀ to฀ indicate฀ a฀ probability฀ of฀ more฀ than฀ 50%.฀ However,฀
where฀there฀is฀a฀number฀of฀similar฀obligations฀the฀probability฀should฀be฀based฀on฀a฀consideration฀of฀
the฀population฀as฀a฀whole,฀rather฀than฀one฀single฀item.฀
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lOMoARcPSD|6256454
Illustration฀1฀
Transfer฀of฀economic฀benefits฀
If฀a฀company฀has฀entered฀into฀a฀warranty฀obligation฀then฀the฀probability฀of฀an฀outflow฀of฀resources฀
embodying฀economic฀benefits฀(transfer฀of฀economic฀benefits)฀may฀well฀be฀extremely฀small฀in฀respect฀
of฀one฀specific฀item.฀However,฀when฀considering฀the฀population฀as฀a฀whole฀the฀probability฀of฀some฀
transfer฀of฀economic฀benefits฀is฀quite฀likely฀to฀be฀much฀higher.฀If฀there฀is฀a฀greater฀than฀50%฀
probability฀of฀some฀transfer฀of฀economic฀benefits฀then฀a฀provision฀should฀be฀made฀for฀the฀
expected฀amount.฀
1.2฀Disclosure฀'let฀out'฀
IAS฀ 37฀ permits฀ reporting฀ entities฀ to฀ avoid฀ disclosure฀ requirements฀ relating฀ to฀ provisions,฀ contingent฀
liabilities฀and฀contingent฀assets฀if฀they฀would฀be฀expected฀to฀seriously฀prejudice฀the฀position฀of฀
the฀entity฀in฀dispute฀with฀other฀parties฀(IAS฀37:฀para.฀92).฀However,฀this฀should฀only฀be฀employed฀in฀
extremely฀ rare฀ cases.฀ Details฀ of฀ the฀ general฀ nature฀ of฀ the฀ provision/contingencies฀ must฀ still฀ be฀
provided,฀together฀with฀an฀explanation฀of฀why฀it฀has฀not฀been฀disclosed.฀
1.3฀IAS฀37฀decision฀tree฀
The฀decision฀tree฀below฀summarises฀the฀main฀recognition฀requirements฀of฀IAS฀37฀for฀provisions฀and฀
contingent฀liabilities.฀฀
l
l l
l
l
l
l l
l l ฀฀
(IAS฀37:฀Imple฀mentation฀guidance฀B)฀
฀
฀ 629฀

lOMoARcPSD|6256454
Activity฀2:฀Recognition฀of฀provisions฀ ฀
Warren฀Co฀gives฀warranties฀at฀the฀time฀of฀sale฀to฀purchasers฀of฀its฀products.฀Under฀the฀terms฀of฀the฀
warranty฀ the฀ manufacturer฀ undertakes฀ to฀ make฀ good,฀ by฀ repair฀ or฀ replacement,฀ manufacturing฀
defects฀that฀become฀apparent฀within฀a฀period฀of฀three฀years฀from฀the฀year฀end.฀Should฀a฀provision฀
be฀recognised?฀
Activity฀3:฀Recognition฀and฀measurement฀of฀provisions฀(1)฀ ฀
After฀a฀wedding฀in฀20X8฀ten฀people฀died,฀possibly฀as฀a฀result฀of฀food฀poisoning฀from฀products฀sold฀
by฀Callow฀Co.฀Legal฀proceedings฀are฀started฀seeking฀damages฀from฀Callow฀but฀it฀disputes฀liability.฀
Up฀to฀the฀date฀of฀approval฀of฀the฀financial฀statements฀for฀the฀year฀to฀31฀December฀20X8,฀Callow's฀
lawyers฀advise฀that฀it฀is฀probable฀that฀it฀will฀not฀be฀found฀liable.฀However,฀when฀Callow฀prepares฀the฀
financial฀ statements฀ for฀ the฀ year฀ to฀ 31฀ December฀ 20X9฀ its฀ lawyers฀ advise฀ that,฀ owing฀ to฀
developments฀in฀the฀case,฀it฀is฀probable฀that฀it฀will฀be฀found฀liable.฀
What฀is฀the฀required฀accounting฀treatment:฀
(a)฀ At฀31฀December฀20X8?฀
(b)฀ At฀31฀December฀20X9?฀
Activity฀4:฀Recognition฀and฀measurement฀of฀provisions฀(2)฀ ฀
฀
(1)฀ Proviso฀ Co฀ (Proviso)฀ issued฀ a฀ one฀ year฀ guarantee฀ for฀ faulty฀ workmanship฀ on฀ an฀ item฀ of฀
specialist฀ equipment฀ that฀ it฀ delivered฀ to฀ its฀ customer.฀ During฀ the฀ year,฀ the฀ customer฀ began฀
taking฀ legal฀ action฀ against฀ Proviso฀ for฀ refusing฀ to฀ replace฀ or฀ repair฀ the฀ item฀ of฀ equipment฀
within฀ the฀ guarantee฀ period.฀ Proviso฀ believes฀ the฀ fault฀ is฀ not฀ covered฀ by฀ the฀ guarantee,฀ but฀
instead฀has฀arisen฀because฀the฀customer฀has฀not฀followed฀the฀operating฀instructions.฀
At฀the฀end฀of฀the฀reporting฀period,฀the฀company's฀lawyer฀advised฀Proviso฀that฀it฀is฀more฀likely฀
than฀ not฀ that฀ it฀ will฀ be฀ found฀ liable.฀ This฀ would฀ result฀ in฀ Proviso฀ being฀ forced฀ to฀ replace฀ or฀
repair฀the฀equipment฀as฀well฀as฀pay฀a฀$10,000฀fine.฀฀฀
Based฀ on฀ past฀ experience฀ with฀ similar฀ items฀ of฀ equipment,฀ Proviso฀ estimates฀ that฀ there฀ is฀ a฀
70%฀ chance฀ that฀ the฀ central฀ core฀ of฀ the฀ equipment฀ would฀ need฀ to฀ be฀ replaced฀ at฀ a฀ cost฀ of฀
$40,000฀and฀a฀30%฀chance฀that฀the฀core฀could฀instead฀be฀repaired฀at฀a฀cost฀of฀$15,000.฀
(2)฀ Proviso฀also฀manufactures฀small฀items฀of฀equipment฀which฀are฀sold฀with฀a฀one฀year฀warranty฀
guarantee.฀ 12,000฀ items฀ of฀ this฀ type฀ were฀ sold฀ during฀ the฀ year.฀ Based฀ on฀ past฀ experience,฀
5%฀ of฀ items฀ sold฀ are฀ returned฀ for฀ repair฀ or฀ replacement.฀ One-third฀ of฀ the฀ items฀ returned฀ are฀
able฀ to฀ be฀ repaired฀ at฀ a฀ cost฀ of฀ $50,฀ while฀ the฀ remaining฀ two-thirds฀ are฀ scrapped฀ and฀
replaced฀at฀a฀cost฀of฀$150.฀฀
Required฀
Discuss฀the฀accounting฀treatment฀of฀these฀issues฀in฀the฀financial฀statements฀of฀Proviso฀at฀the฀end฀of฀the฀
reporting฀period.฀฀
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2฀IAS฀10฀Events฀after฀the฀Reporting฀Period฀
2.1฀Examples฀of฀events฀after฀the฀reporting฀period฀
The฀table฀below฀provides฀examples฀of฀adjusting฀and฀non-adjusting฀events.฀Look฀out฀for฀these฀events฀
in฀your฀SBR฀exam.฀฀
Adjusting฀events฀ Non-adjusting฀events฀
The฀settlement฀of฀a฀court฀case฀that฀was฀ongoing฀ Acquisitions฀or฀disposals฀of฀subsidiaries฀
at฀the฀reporting฀date฀ Announcement฀of฀a฀plan฀to฀discontinue฀an฀
The฀receipt฀of฀information฀indicating฀that฀an฀ operation฀or฀restructure฀operations฀
asset฀was฀impaired฀at฀the฀reporting฀date฀ The฀purchase฀or฀disposal฀of฀assets฀
The฀determination฀of฀the฀proceeds฀of฀assets฀sold฀ The฀destruction฀of฀an฀asset฀through฀accident฀
or฀cost฀of฀assets฀bought฀before฀the฀reporting฀date฀
Ordinary฀share฀transactions฀including฀the฀issue฀
The฀determination฀of฀a฀bonus฀payment฀if฀there฀ of฀shares฀฀
was฀a฀constructive฀obligation฀to฀pay฀it฀at฀the฀
Changes฀in฀asset฀prices,฀foreign฀exchange฀rates฀
reporting฀date฀
or฀tax฀rates฀
The฀discovery฀of฀fraud฀or฀errors฀resulting฀in฀
The฀commencement฀of฀litigation฀arising฀from฀an฀
incorrect฀financial฀statements฀
event฀after฀the฀reporting฀period฀
Declaration฀of฀dividends฀after฀the฀end฀of฀the฀
฀
3฀Exam฀standard฀activity฀
The฀next฀activity฀is฀similar฀to฀what฀you฀could฀expect฀to฀feature฀on฀provisions฀in฀the฀SBR฀exam฀as฀part฀
of฀a฀scenario฀question.฀Attempt฀the฀activity฀on฀your฀own,฀then฀review฀your฀answer฀against฀the฀answer฀
at฀the฀end฀of฀the฀chapter.฀฀
Activity฀5฀ ฀
Omega฀is฀an฀entity฀that฀prepares฀financial฀statements฀to฀31฀March฀each฀year.฀On฀1฀July฀20X9฀the฀
directors฀ decided฀ to฀ terminate฀ production฀ at฀ one฀ of฀ the฀ company's฀ divisions.฀ This฀ decision฀ was฀
publicly฀ announced฀ on฀ 31฀ July฀ 20X9.฀ The฀ activities฀ of฀ the฀ division฀ were฀ gradually฀ reduced฀ from฀
1฀October฀20X9฀and฀closure฀is฀expected฀to฀be฀complete฀by฀31฀March฀20Y0.฀At฀31฀July฀20X9฀the฀
directors฀prepared฀the฀following฀estimates฀of฀the฀financial฀implications฀of฀the฀closure฀as฀follows:฀
(i)฀ Redundancy฀ costs฀ were฀ initially฀ estimated฀ at฀ $2m.฀ Further฀ expenditure฀ of฀ $800,000฀ will฀ be฀
necessary฀ to฀ retrain฀ employees฀ who฀ will฀ be฀ affected฀ by฀ the฀ closure฀ but฀ will฀ remain฀ with฀
Omega฀ in฀ different฀ divisions.฀ This฀ retraining฀ will฀ begin฀ in฀ early฀ January฀ 20Y0.฀ The฀ latest฀
estimates฀are฀that฀redundancy฀costs฀will฀be฀$1.9m,฀with฀retraining฀costs฀of฀$850,000.฀
(ii)฀ Plant฀and฀equipment฀having฀an฀expected฀carrying฀amount฀at฀30฀September฀20X9฀of฀$8m฀will฀
have฀a฀recoverable฀amount฀$1.5m.฀These฀estimates฀remain฀valid.฀
(iii)฀ The฀division฀is฀under฀contract฀to฀supply฀a฀customer฀for฀the฀next฀three฀years฀at฀a฀pre-determined฀
price.฀ It฀ will฀ be฀ necessary฀ to฀ pay฀ compensation฀ of฀ $600,000฀ to฀ this฀ customer.฀ The฀
compensation฀actually฀paid,฀on฀30฀November฀20X9,฀was฀$550,000.฀
(iv)฀ The฀ division฀ will฀ make฀ operating฀ losses฀ of฀ $300,000฀ per฀ month฀ in฀ the฀ last฀ three฀ months฀ of฀
20X9฀ and฀ $200,000฀ per฀ month฀ in฀ the฀ first฀ three฀ months฀ of฀ 20Y0.฀ This฀ estimate฀ proved฀
accurate฀for฀October฀and฀November฀20X9.฀
฀ 631฀

lOMoARcPSD|6256454
Required฀
Compute฀ and฀ discuss฀ the฀ amounts฀ that฀ will฀ be฀ included฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀for฀the฀year฀ended฀30฀September฀20X9฀in฀respect฀of฀the฀decision฀to฀close฀the฀
division.฀Where฀financial฀information฀provided฀above฀does฀not฀result฀in฀a฀charge฀to฀profit฀or฀loss,฀
you฀should฀explain฀why฀this฀is฀so.฀
฀
฀ ฀
632฀

lOMoARcPSD|6256454
Activity฀1:฀Obligation฀
(a)฀ There฀is฀no฀obligation฀at฀the฀reporting฀date฀as฀the฀decision฀has฀not฀been฀communicated.฀
(b)฀ A฀constructive฀obligation฀exists฀at฀the฀reporting฀date฀and฀therefore฀a฀provision฀is฀made฀in฀the฀
20X9฀financial฀statements฀assuming฀that฀the฀other฀recognition฀criteria฀are฀met.฀
(c)฀ A฀ legal฀ obligation฀ exists฀ and฀ therefore฀ a฀ provision฀ for฀ clean-up฀ costs฀ is฀ made฀ providing฀ that฀
the฀other฀recognition฀criteria฀are฀met.฀
(d)฀ No฀ present฀ obligation฀ exists฀ and฀ under฀ IAS฀ 37฀ no฀ provision฀ can฀ therefore฀ be฀ made.฀ This฀ is฀
because฀the฀entity฀could฀avoid฀the฀future฀expenditure฀by฀its฀future฀actions,฀maybe฀by฀changing฀
its฀method฀of฀operation.฀
Activity฀2:฀Recognition฀of฀provisions฀
Warren฀ Co฀ cannot฀ avoid฀ the฀ cost฀ of฀ repairing฀ or฀ replacing฀ all฀ items฀ of฀ product฀ that฀ manifest฀
manufacturing฀ defects฀ in฀ respect฀ of฀ which฀ warranties฀ are฀ given฀ before฀ the฀ end฀ of฀ the฀ reporting฀
period,฀and฀a฀provision฀for฀the฀cost฀of฀this฀should฀therefore฀be฀made.฀
Warren฀Co฀is฀obliged฀to฀repair฀or฀replace฀items฀that฀fail฀within฀the฀entire฀warranty฀period.฀Therefore,฀
in฀respect฀of฀this฀year's฀sales,฀the฀obligation฀provided฀for฀at฀the฀year฀end฀should฀be฀the฀cost฀of฀
making฀good฀items฀for฀which฀defects฀have฀been฀notified฀but฀not฀yet฀processed,฀plus฀an฀estimate฀of฀
costs฀ in฀ respect฀ of฀ the฀ other฀ items฀ sold฀ for฀ which฀ there฀ is฀ sufficient฀ evidence฀ that฀ manufacturing฀
defects฀will฀manifest฀themselves฀during฀their฀remaining฀periods฀of฀warranty฀cover.฀
Activity฀3:฀Recognition฀and฀measurement฀of฀provisions฀(1)฀
(a)฀ At฀31฀December฀20X8฀
On฀the฀basis฀of฀the฀evidence฀available฀when฀the฀financial฀statements฀were฀approved,฀there฀is฀
no฀obligation฀as฀a฀result฀of฀past฀events.฀No฀provision฀is฀recognised.฀The฀matter฀is฀disclosed฀as฀
a฀contingent฀liability฀unless฀the฀probability฀of฀any฀transfer฀is฀regarded฀as฀remote.฀
(b)฀ At฀31฀December฀20X9฀
On฀the฀basis฀of฀the฀evidence฀available,฀there฀is฀a฀present฀obligation.฀A฀transfer฀of฀economic฀
benefits฀in฀settlement฀is฀probable.฀
A฀ provision฀ is฀ recognised฀ for฀ the฀ best฀ estimate฀ of฀ the฀ amount฀ needed฀ to฀ settle฀ the฀ present฀
obligation฀
Activity฀4:฀Recognition฀and฀measurement฀of฀provisions฀(2)฀
Issue฀1฀฀
At฀ the฀ end฀ of฀ the฀ reporting฀ period,฀ Proviso฀ Co฀ disputes฀ liability฀ and฀ therefore฀ whether฀ a฀ present฀
obligation฀ exists.฀ However,฀ given฀ that฀ it฀ is฀ more฀ likely฀ than฀ not฀ that฀ Proviso฀ will฀ be฀ found฀ liable,฀ a฀
present฀obligation฀is฀assumed฀to฀exist.฀
Given฀that฀a฀single฀obligation฀is฀being฀measured,฀a฀provision฀of฀$50,000฀is฀made฀in฀the฀financial฀
statements฀for฀the฀most฀likely฀outcome,฀which฀is฀the฀payment฀of฀the฀fine฀($10,000)฀and฀replacement฀
of฀the฀central฀core฀($40,000).฀
฀ 633฀

lOMoARcPSD|6256454
Issue฀2฀
A฀present฀obligation฀exists฀at฀the฀end฀of฀the฀reporting฀period฀based฀on฀historical฀evidence฀of฀items฀
being฀repaired฀or฀replaced฀under฀the฀warranty฀guarantee฀agreement.฀
A฀ large฀ population฀ of฀ items฀ is฀ involved฀ so฀ expected฀ values฀ are฀ used฀ to฀ determine฀ the฀ provision.฀ A฀
provision฀ of฀ $70,000฀ (12,000฀ ฀ 5%฀ ฀ 1/3฀ ฀ $50)฀ +฀ (12,000฀ ฀ 5%฀ ฀ 2/3฀ ฀ $150)฀ should฀ be฀
recognised฀in฀the฀financial฀statements฀at฀the฀end฀of฀the฀reporting฀period.฀
Activity฀5:฀Restructuring฀provision฀(exam฀standard฀for฀8฀marks)฀
IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀states฀that฀a฀provision฀can฀be฀created฀
for฀restructuring฀where฀the฀entity:฀
฀ Has฀a฀detailed฀formal฀plan฀
฀ Has฀raised฀a฀valid฀expectation฀in฀those฀affected฀that฀it฀will฀carry฀out฀the฀restructuring฀
Omega฀ clearly฀ has฀ a฀ detailed฀ formal฀ plan,฀ and฀ has฀ publicly฀ announced฀ its฀ decision.฀ A฀ provision฀
should฀therefore฀be฀created.฀The฀following฀amounts฀will฀be฀included฀in฀its฀statement฀of฀profit฀or฀loss฀
for฀20X9:฀
(i)฀ Redundancy฀costs฀are฀provided฀for฀as฀they฀are฀necessarily฀entailed฀by฀the฀restructuring฀and฀do฀
not฀ relate฀ to฀ Omega's฀ ongoing฀ activities.฀ IAS฀ 37฀ requires฀ provisions฀ to฀ be฀ measured฀ at฀ the฀
best฀estimate฀of฀the฀expenditure฀required.฀This฀would฀qualify฀as฀an฀adjusting฀even฀in฀line฀with฀
IAS฀10฀Events฀after฀the฀Reporting฀Period.฀Profit฀is฀therefore฀reduced฀by฀$1.9m.฀
The฀$800,000฀required฀to฀retrain฀employees฀will฀not฀be฀provided฀for฀and฀will฀not฀affect฀profit,฀
as฀it฀relates฀to฀Omega's฀ongoing฀activities.฀
(ii)฀ Although฀not฀part฀of฀the฀restructuring,฀plant฀and฀equipment฀with฀a฀carrying฀amount฀of฀$8m฀but฀
a฀ recoverable฀ amount฀ of฀ $1.5m฀ are฀ clearly฀ impaired.฀ IAS฀ 36฀ Impairment฀ of฀ Assets฀ requires฀
that฀ they฀ be฀ restated฀ at฀ recoverable฀ amount฀ of฀ $1.5m,฀ resulting฀ in฀ the฀ recognition฀ of฀ an฀
impairment฀loss฀of฀$6.5m฀in฀profit฀and฀loss.฀
(iii)฀ The฀statement฀of฀profit฀or฀loss฀will฀recognise฀an฀expense฀of฀$550,000.฀In฀line฀with฀IAS฀10,฀this฀
would฀qualify฀as฀an฀adjusting฀even฀after฀the฀reporting฀period,฀which฀the฀financial฀statements฀
should฀reflect.฀
(iv)฀ IAS฀37฀does฀not฀permit฀a฀provision฀to฀include฀amounts฀in฀respect฀of฀future฀operating฀losses,฀as฀
they฀relate฀to฀the฀ongoing฀activities฀of฀the฀entity.฀There฀will฀be฀no฀charge฀to฀the฀statement฀of฀
profit฀ or฀ loss฀ in฀ respect฀ of฀ these฀ losses฀ for฀ the฀ year฀ ended฀ 30฀ September฀ 20X9.฀ Provisions฀
should฀only฀be฀made฀for฀events฀that฀took฀place฀in฀the฀past,฀whereas฀these฀expected฀losses฀take฀
place฀in฀the฀future.฀
฀
฀
634฀

lOMoARcPSD|6256454
฀
฀
฀
฀
฀
฀
Income฀taxes
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀ 635฀
฀

lOMoARcPSD|6256454
1฀Current฀tax฀
Activity฀1:฀Current฀tax฀ ฀
In฀ 20X8฀ Darton฀ Co฀ had฀ taxable฀ profits฀ of฀ $120,000.฀ In฀ the฀ previous฀ year฀ (20X7)฀ income฀ tax฀ on฀
20X7฀profits฀had฀been฀estimated฀as฀$30,000.฀The฀tax฀rate฀is฀33%.฀
Required฀
Calculate฀ tax฀ payable฀ and฀ the฀ charge฀ for฀ 20X8฀ if฀ the฀ tax฀ due฀ on฀ 20X7฀ profits฀ was฀ subsequently฀
agreed฀with฀the฀tax฀authorities฀as:฀
(a)฀ $35,000฀฀
(b)฀ $25,000฀
Any฀under-฀or฀over-payments฀are฀not฀settled฀until฀the฀following฀year's฀tax฀payment฀is฀due.฀
Activity฀2:฀Tax฀losses฀carried฀back฀ ฀
In฀ 20X7฀ Eramu฀ Co฀ paid฀ $50,000฀ in฀ tax฀ on฀ its฀ profits.฀ In฀ 20X8฀ the฀ company฀ made฀ tax฀ losses฀ of฀
$24,000.฀The฀local฀tax฀authority฀rules฀allow฀losses฀to฀be฀carried฀back฀to฀offset฀against฀current฀tax฀of฀
prior฀years.฀The฀tax฀rate฀is฀30%.฀
Required฀
Show฀the฀double฀entry฀required฀for฀tax฀in฀the฀20X8฀financial฀statements.฀฀
1.2฀Revision:฀measurement฀of฀current฀tax฀
Measurement฀ of฀ current฀ tax฀ liabilities฀ (assets)฀ for฀the฀ current฀ and฀ prior฀ periods฀ is฀ very฀ simple.฀ They฀
are฀ measured฀ at฀ the฀ amount฀ expected฀ to฀ be฀ paid฀ to฀ (recovered฀ from)฀ the฀ tax฀
authorities.฀The฀tax฀rates฀(and฀tax฀laws)฀used฀should฀be฀those฀enacted฀(or฀substantively฀enacted)฀
by฀the฀year฀end.฀
1.3฀Revision:฀recognition฀of฀current฀tax฀
Normally,฀current฀tax฀is฀recognised฀as฀income฀or฀expense฀and฀included฀in฀the฀net฀profit฀or฀loss฀for฀
the฀period,฀except฀in฀two฀cases฀(IAS฀12:฀paras.฀58,฀61A):฀
(a)฀ Tax฀arising฀from฀a฀business฀combination฀which฀is฀an฀acquisition฀is฀treated฀differently฀
(b)฀ Tax฀ arising฀ from฀ a฀ transaction฀ or฀ event฀ recognised฀ in฀ other฀ comprehensive฀ income฀ or฀
which฀is฀recognised฀directly฀in฀equity฀(in฀the฀same฀or฀a฀different฀period).฀
The฀rule฀in฀(b)฀is฀logical.฀If฀a฀transaction฀or฀event฀is฀charged฀or฀credited฀directly฀to฀equity,฀rather฀than฀
to฀profit฀or฀loss,฀then฀the฀related฀tax฀should฀be฀also.฀An฀example฀of฀such฀a฀situation฀is฀where,฀under฀
IAS฀ 8,฀ an฀ adjustment฀ is฀ made฀ to฀ the฀ opening฀ balance฀ of฀ retained฀ earnings฀ due฀ to฀ either฀ a฀
change฀ in฀ accounting฀ policy฀ that฀ is฀ applied฀ retrospectively,฀ or฀ to฀ the฀ correction฀ of฀ a฀ fundamental฀
error.฀
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1.4฀Revision:฀presentation฀
In฀the฀statement฀of฀financial฀position,฀tax฀assets฀and฀liabilities฀should฀be฀shown฀separately฀from฀
other฀assets฀and฀liabilities.฀
Current฀tax฀assets฀and฀liabilities฀can฀be฀offset,฀but฀this฀should฀happen฀only฀when฀certain฀conditions฀
apply฀(IAS฀12:฀para.฀71):฀
(a)฀ The฀entity฀has฀a฀legally฀enforceable฀right฀to฀set฀off฀the฀recognised฀amounts;฀and฀
(b)฀ The฀entity฀intends฀to฀settle฀the฀amounts฀on฀a฀net฀basis,฀or฀to฀realise฀the฀asset฀and฀settle฀the฀
liability฀at฀the฀same฀time.฀
The฀tax฀expense฀(income)฀related฀to฀the฀profit฀or฀loss฀for฀the฀year฀should฀be฀shown฀in฀the฀profit฀
or฀loss฀section฀of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income.฀
2฀ Deferred฀tax฀
2.1฀Tax฀base฀–฀revision฀
The฀tax฀base฀of฀an฀asset฀or฀liability:฀the฀amount฀attributed฀to฀that฀asset฀or฀liability฀for฀tax฀purposes.฀
฀ (IAS฀12:฀para.฀5)฀
Key฀term฀
We฀ can฀ expand฀ on฀ the฀ definition฀ given฀ above฀ by฀ stating฀ that฀ the฀ tax฀ base฀ of฀ an฀ asset฀ is฀ the฀
amount฀that฀will฀be฀deductible฀for฀tax฀purposes฀against฀any฀taxable฀economic฀benefits฀that฀will฀flow฀
to฀the฀entity฀when฀it฀recovers฀the฀carrying฀value฀of฀the฀asset.฀Where฀those฀economic฀benefits฀are฀not฀
taxable,฀the฀tax฀base฀of฀the฀asset฀is฀the฀same฀as฀its฀carrying฀amount.฀
Activity฀3:฀Tax฀base฀of฀assets฀ ฀
State฀the฀tax฀base฀of฀each฀of฀the฀following฀assets:฀
(a)฀ A฀ machine฀ cost฀ $10,000.฀ For฀ tax฀ purposes,฀ depreciation฀ of฀ $3,000฀ has฀ already฀ been฀
deducted฀in฀the฀current฀and฀prior฀periods฀and฀the฀remaining฀cost฀will฀be฀deductible฀in฀future฀
periods,฀ either฀ as฀ depreciation฀ or฀ through฀ a฀ deduction฀ on฀ disposal.฀ Revenue฀ generated฀ by฀
using฀ the฀ machine฀ is฀ taxable,฀ any฀ gain฀ on฀ disposal฀ of฀ the฀ machine฀ will฀ be฀ taxable฀ and฀ any฀
loss฀on฀disposal฀will฀be฀deductible฀for฀tax฀purposes.฀
(b)฀ Interest฀ receivable฀ has฀ a฀ carrying฀ amount฀ of฀ $1,000.฀ The฀ related฀ interest฀ revenue฀ will฀ be฀
taxed฀on฀a฀cash฀basis.฀
(c)฀ Trade฀receivables฀have฀a฀carrying฀amount฀of฀$10,000.฀The฀related฀revenue฀has฀already฀been฀
included฀in฀taxable฀profit฀(tax฀loss).฀
(d)฀ A฀loan฀receivable฀has฀a฀carrying฀amount฀of฀$1m.฀The฀repayment฀of฀the฀loan฀will฀have฀no฀tax฀
consequences.฀
(e)฀ Dividends฀receivable฀from฀a฀subsidiary฀have฀a฀carrying฀amount฀of฀$5,000.฀The฀dividends฀are฀not฀
taxable.฀ ฀
In฀ the฀ case฀ of฀ a฀ liability,฀ the฀ tax฀ base฀ will฀ be฀ its฀ carrying฀ amount,฀ less฀ any฀ amount฀ that฀ will฀ be฀
deducted฀ for฀ tax฀ purposes฀ in฀ relation฀ to฀ the฀ liability฀ in฀ future฀ periods.฀ For฀ revenue฀ received฀ in฀
advance,฀the฀tax฀base฀of฀the฀resulting฀liability฀is฀its฀carrying฀amount,฀less฀any฀amount฀of฀the฀revenue฀
that฀will฀not฀be฀taxable฀in฀future฀periods.฀
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Activity฀4:฀Tax฀base฀of฀liabilities฀ ฀
State฀the฀tax฀base฀of฀each฀of฀the฀following฀liabilities:฀
(a)฀ Current฀ liabilities฀ include฀ accrued฀ expenses฀ with฀ a฀ carrying฀ amount฀ of฀ $1,000.฀ The฀ related฀
expense฀will฀be฀deducted฀for฀tax฀purposes฀on฀a฀cash฀basis.฀
(b)฀ Current฀ liabilities฀ include฀ interest฀ revenue฀ received฀ in฀ advance,฀ with฀ a฀ carrying฀ amount฀ of฀
$10,000.฀The฀related฀interest฀revenue฀was฀taxed฀on฀a฀cash฀basis.฀
(c)฀ Current฀liabilities฀include฀accrued฀fines฀and฀penalties฀with฀a฀carrying฀amount฀of฀$100.฀Fines฀
and฀penalties฀are฀not฀deductible฀for฀tax฀purposes.฀
(d)฀ A฀loan฀payable฀has฀a฀carrying฀amount฀of฀$1m.฀The฀repayment฀of฀the฀loan฀will฀have฀no฀tax฀
consequences.฀
2.2฀Deferred฀tax฀liabilities฀
Taxable฀ temporary฀ differences฀ (amounts฀ taxable฀ in฀ the฀ future)฀ generate฀ a฀ deferred฀ tax฀
liability.฀
The฀following฀are฀examples฀of฀circumstances฀that฀give฀rise฀to฀taxable฀temporary฀differences.฀
Transactions฀that฀affect฀the฀statement฀of฀ Transactions฀that฀affect฀the฀statement฀
profit฀or฀loss฀and฀other฀comprehensive฀ of฀financial฀position฀
income฀
฀ Depreciation฀of฀an฀asset฀is฀not฀
฀ Interest฀revenue฀received฀in฀arrears฀and฀ deductible฀for฀tax฀purposes.฀No฀deduction฀
included฀in฀accounting฀profit฀on฀the฀basis฀of฀ will฀be฀available฀for฀tax฀purposes฀when฀the฀
time฀apportionment.฀It฀is฀included฀in฀taxable฀ asset฀is฀sold/scrapped.฀
profit,฀however,฀on฀a฀cash฀basis.฀
฀ A฀borrower฀records฀a฀loan฀at฀proceeds฀
฀ Sale฀of฀goods฀revenue฀is฀included฀in฀ received฀(amount฀due฀at฀maturity)฀less฀
accounting฀profit฀when฀the฀goods฀are฀ transaction฀costs.฀The฀carrying฀amount฀of฀the฀
delivered,฀but฀only฀included฀in฀taxable฀profit฀ loan฀is฀subsequently฀increased฀by฀
when฀cash฀is฀received.฀ amortisation฀of฀the฀transaction฀costs฀against฀
accounting฀profit.฀The฀transaction฀costs฀were,฀
฀ Depreciation฀of฀an฀asset฀may฀be฀
however,฀deducted฀for฀tax฀purposes฀in฀the฀
accelerated฀for฀tax฀purposes.฀When฀new฀
period฀when฀the฀loan฀was฀first฀recognised.฀
assets฀are฀purchased,฀allowances฀may฀be฀
available฀against฀taxable฀profits฀which฀ ฀ A฀loan฀payable฀is฀measured฀on฀initial฀
exceed฀the฀amount฀of฀depreciation฀ recognition฀at฀net฀proceeds฀(net฀of฀
chargeable฀on฀the฀assets฀in฀the฀financial฀ transaction฀costs).฀The฀transaction฀costs฀are฀
accounts฀for฀the฀year฀of฀purchase.฀ amortised฀to฀accounting฀profit฀over฀the฀life฀
of฀the฀loan.฀Those฀transaction฀costs฀are฀not฀
฀ Development฀costs฀which฀have฀been฀ deductible฀in฀determining฀the฀taxable฀profit฀
capitalised฀and฀will฀be฀amortised฀to฀profit฀or฀
of฀future,฀current฀or฀prior฀periods.฀
loss฀but฀were฀deducted฀in฀determining฀
taxable฀profit฀in฀the฀period฀in฀which฀they฀ ฀ The฀liability฀component฀of฀a฀compound฀
were฀incurred.฀ financial฀instrument฀(eg฀a฀convertible฀
bond)฀is฀measured฀at฀a฀discount฀to฀the฀
฀ Prepaid฀expenses฀have฀already฀been฀
amount฀repayable฀on฀maturity,฀after฀
deducted฀on฀a฀cash฀basis฀in฀determining฀the฀
assigning฀a฀portion฀of฀the฀cash฀proceeds฀to฀
taxable฀profit฀of฀the฀loss,฀but฀they฀were฀
the฀equity฀component฀(see฀IAS฀32).฀The฀
deducted฀in฀full฀from฀taxable฀profit฀in฀the฀
discount฀is฀not฀deductible฀in฀determining฀
period฀in฀which฀they฀were฀incurred.฀
taxable฀profit.฀
(IAS฀12:฀Illustrative฀Examples,฀paras.฀1–5)
(IAS฀12:฀Illustrative฀Examples,฀paras.฀6–9)฀
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฀ ฀฀
Fair฀value฀adjustments฀and฀revaluations฀
฀ Current฀ investments฀ or฀ financial฀ instruments฀ are฀ carried฀ at฀ fair฀ value.฀ This฀ exceeds฀ cost,฀ but฀ no฀
equivalent฀adjustment฀is฀made฀for฀tax฀purposes.฀
฀ Property,฀plant฀and฀equipment฀is฀revalued฀by฀an฀entity฀(under฀IAS฀16),฀but฀no฀equivalent฀adjustment฀
is฀made฀for฀tax฀purposes.฀This฀also฀applies฀to฀long-term฀investments.฀
(IAS฀12:฀para.฀20)฀
฀
2.2.1฀ Reasoning฀behind฀the฀recognition฀of฀deferred฀tax฀liabilities฀on฀taxable฀
temporary฀differences฀฀
(a)฀ When฀an฀asset฀is฀recognised,฀it฀is฀expected฀that฀its฀carrying฀amount฀will฀be฀recovered฀in฀
the฀form฀of฀economic฀benefits฀that฀flow฀to฀the฀entity฀in฀future฀periods.฀
(b)฀ If฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ is฀ greater฀ than฀ its฀ tax฀ base,฀ then฀ taxable฀ economic฀
benefits฀ will฀ also฀ be฀ greater฀ than฀ the฀ amount฀ that฀ will฀ be฀ allowed฀ as฀ a฀ deduction฀ for฀ tax฀
purposes.฀
(c)฀ The฀difference฀is฀therefore฀a฀taxable฀temporary฀difference฀and฀the฀obligation฀to฀pay฀the฀
resulting฀income฀taxes฀in฀future฀periods฀is฀a฀deferred฀tax฀liability.฀
(d)฀ As฀the฀entity฀recovers฀the฀carrying฀amount฀of฀the฀asset,฀the฀taxable฀temporary฀difference฀will฀
reverse฀and฀the฀entity฀will฀have฀taxable฀profit.฀
(e)฀ It฀ is฀ then฀ probable฀ that฀ economic฀ benefits฀ will฀ flow฀ from฀ the฀ entity฀ in฀ the฀ form฀ of฀ tax฀
payments,฀ and฀ so฀ the฀ recognition฀ of฀ all฀ deferred฀ tax฀ liabilities฀ (except฀ those฀ excluded฀
above)฀is฀required฀by฀IAS฀12.฀
Activity฀5:฀Property,฀plant฀and฀equipment฀ ฀ ฀
A฀ company฀ buys฀ an฀ item฀ of฀ equipment฀ on฀ 1฀ January฀ 20X1฀ for฀ $1,000,000.฀ It฀ has฀ a฀ useful฀ life฀ of฀฀
10฀years฀and฀an฀estimated฀residual฀value฀of฀$100,000.฀The฀equipment฀is฀depreciated฀on฀a฀straight-
line฀basis.฀For฀tax฀purposes,฀a฀tax฀expense฀can฀be฀claimed฀on฀a฀20%฀reducing฀balance฀basis.฀
The฀rate฀of฀income฀tax฀can฀be฀taken฀as฀30%.฀
Required฀
In฀respect฀of฀the฀above฀item฀of฀equipment,฀calculate฀the฀deferred฀tax฀charge/credit฀in฀the฀company's฀
profit฀ or฀ loss฀ for฀ the฀ year฀ to฀ 31฀ December฀ 20X2฀ and฀ the฀ deferred฀ tax฀ balance฀ in฀ the฀ statement฀ of฀
financial฀position฀at฀that฀date.฀฀
2.2.2฀Revaluation฀of฀assets฀
Under฀IAS฀16฀assets฀may฀be฀revalued.฀If฀the฀revaluation฀does฀not฀affect฀current฀taxable฀profits,฀the฀
tax฀ base฀ of฀ the฀ asset฀ is฀ not฀ adjusted.฀ Consequently,฀ the฀ taxable฀ flow฀ of฀ economic฀ benefits฀ to฀ the฀
entity฀ as฀ the฀ carrying฀ value฀ of฀ the฀ asset฀ is฀ recovered฀ will฀ differ฀ from฀ the฀ amount฀ that฀ will฀ be฀
deductible฀for฀tax฀purposes.฀The฀gain฀(or฀loss)฀between฀the฀carrying฀amount฀of฀a฀revalued฀asset฀and฀
its฀ tax฀ base฀ is฀ a฀ temporary฀ difference฀ and฀ gives฀ rise฀ to฀ a฀ deferred฀ tax฀ liability฀ (or฀ deferred฀
tax฀asset)฀(IAS฀12:฀para.฀20).฀฀
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Activity฀6:฀Revaluation฀of฀property,฀plant฀and฀equipment฀ ฀ ฀
A฀ company฀ purchased฀ some฀ land฀ on฀ 1฀ January฀ 20X7฀ for฀ $400,000.฀ On฀ 31฀ December฀ 20X8฀ the฀
land฀was฀revalued฀to฀$500,000.฀In฀the฀tax฀regime฀in฀which฀the฀company฀operates฀revaluations฀do฀
not฀affect฀either฀the฀tax฀base฀of฀the฀asset฀or฀taxable฀profits.฀
The฀income฀tax฀rate฀is฀30%.฀฀฀
Required฀
Prepare฀ the฀ accounting฀ entry฀ to฀ record฀ the฀ deferred฀ tax฀ in฀ relation฀ to฀ this฀ revaluation฀ for฀ the฀ year฀
2.2.3฀Development฀costs฀
Development฀costs฀are฀capitalised฀when฀the฀criteria฀in฀IAS฀38฀are฀met฀and฀are฀then฀amortised฀over฀
their฀useful฀life.฀฀
For฀tax฀purposes,฀development฀costs฀are฀often฀tax฀deductible฀on฀a฀cash฀paid฀basis,฀ie฀in฀the฀period฀
incurred.฀ In฀ such฀ cases,฀ the฀ tax฀ base฀ is฀ nil฀ because฀ the฀ costs฀ have฀ already฀ been฀ deducted฀ from฀
taxable฀profits.฀฀
A฀ taxable฀ temporary฀ difference฀ arises฀ equal฀ to฀ the฀ full฀ carrying฀ amount฀ of฀ the฀ development฀ costs,฀
resulting฀in฀a฀deferred฀tax฀liability.฀฀
Illustration฀1฀
Development฀costs฀
During฀the฀year฀ended฀31฀March฀20X4,฀Epsilon฀correctly฀capitalised฀development฀costs฀of฀$1.6m฀in฀
accordance฀with฀IAS฀38.฀The฀development฀project฀began฀to฀generate฀economic฀benefits฀for฀Epsilon฀
from฀1฀January฀20X4.฀The฀directors฀of฀Epsilon฀estimated฀that฀the฀project฀would฀generate฀economic฀
benefits฀for฀five฀years฀from฀that฀date.฀Amortisation฀is฀charged฀on฀a฀monthly฀pro-rata฀basis.฀The฀
development฀expenditure฀was฀fully฀deductible฀against฀taxable฀profits฀for฀the฀year฀ended฀31฀March฀
20X4฀and฀the฀rate฀of฀tax฀applicable฀is฀25%.฀฀
Required฀
Discuss฀the฀deferred฀tax฀implications฀of฀the฀above฀in฀the฀financial฀statements฀of฀Epsilon฀for฀the฀year฀
ended฀31฀March฀20X4.฀฀
Solution฀
Amortisation฀of฀the฀development฀costs฀over฀their฀useful฀life฀of฀5฀years฀should฀commence฀on฀1฀January฀
20X4.฀Therefore฀at฀31฀March฀20X4,฀the฀development฀costs฀have฀a฀carrying฀amount฀of฀$1.52m฀
($1.6m฀–฀($1.6m฀×฀1/5฀×฀3/12))฀in฀the฀financial฀statements.฀
The฀tax฀base฀of฀the฀development฀costs฀is฀nil฀since฀the฀relevant฀tax฀deduction฀has฀already฀been฀
claimed.฀
The฀deferred฀tax฀liability฀will฀be฀$380,000฀($1.52m฀×฀25%).฀฀
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Activity฀7:฀Development฀costs฀ ฀
Xander฀spent฀$500,000฀on฀development฀activities฀in฀the฀reporting฀period.฀This฀expenditure฀met฀the฀
recognition฀ criteria฀ of฀ IAS฀ 38฀ and฀ has฀ been฀ capitalised.฀ The฀ capitalised฀ costs฀ have฀ not฀ been฀
amortised฀ to฀ date.฀ For฀ tax฀ purposes,฀ 100%฀ tax฀ relief฀ is฀ provided฀ for฀ expenditure฀ on฀ research฀ and฀
development฀activities฀when฀the฀expenditure฀is฀incurred.฀The฀tax฀rate฀is฀30%.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀in฀Xander's฀financial฀statements฀at฀the฀
end฀of฀the฀reporting฀period.฀฀฀฀
2.2.4฀Impairment฀losses฀and฀inventory฀losses฀
If฀ an฀ item฀ of฀ property,฀ plant฀ or฀ equipment฀ suffers฀ an฀ impairment฀ loss,฀ the฀ carrying฀ amount฀ of฀ that฀
asset฀is฀reduced.฀฀
If฀tax฀relief฀on฀the฀loss฀is฀only฀granted฀when฀the฀asset฀is฀sold,฀the฀reduction฀in฀value฀of฀the฀asset฀is฀
ignored฀ for฀ tax฀ purposes฀ until฀ the฀ sale.฀ The฀ tax฀ base฀ of฀ the฀ asset฀ does฀ not฀ change,฀ resulting฀ in฀ a฀
deductible฀temporary฀difference฀and฀a฀deferred฀tax฀asset.฀฀
Similarly,฀ losses฀ on฀ inventory฀ that฀ are฀ not฀ tax฀ deductible฀ until฀ the฀ inventory฀ is฀ sold฀ generate฀ a฀
deferred฀tax฀asset.฀
2.2.5฀Taxable฀temporary฀differences฀arising฀in฀business฀combinations฀฀
IAS฀12฀gives฀examples฀of฀circumstances฀that฀give฀rise฀to฀taxable฀temporary฀differences฀in฀a฀business฀
combination฀(IAS฀12:฀IE,฀paras.฀12–17).฀
฀ The฀carrying฀amount฀of฀an฀asset฀is฀increased฀to฀fair฀value฀in฀a฀business฀combination฀
and฀no฀equivalent฀adjustment฀is฀made฀for฀tax฀purposes.฀
฀ Unrealised฀ losses฀ resulting฀ from฀ intragroup฀ transactions฀ are฀ eliminated฀ by฀
inclusion฀in฀the฀carrying฀amount฀of฀inventory฀or฀property,฀plant฀and฀equipment.฀
฀ Retained฀ earnings฀ of฀ subsidiaries,฀ branches,฀ associates฀ and฀ joint฀ ventures฀ are฀
included฀ in฀ consolidated฀ retained฀ earnings,฀ but฀ income฀ taxes฀ will฀ be฀ payable฀ if฀ the฀
profits฀are฀distributed฀to฀the฀reporting฀parent.฀
฀ Investments฀ in฀ foreign฀ subsidiaries,฀ branches฀ or฀ associates฀ or฀ interests฀ in฀ foreign฀ joint฀
ventures฀are฀affected฀by฀changes฀in฀foreign฀exchange฀rates.฀
฀ An฀ entity฀ accounts฀ in฀ its฀ own฀ currency฀ for฀ the฀ cost฀ of฀ the฀ non-monetary฀ assets฀ of฀ a฀
foreign฀ operation฀ that฀ is฀ integral฀ to฀ the฀ reporting฀ entity's฀ operations฀ but฀ the฀
taxable฀profit฀or฀tax฀loss฀of฀the฀foreign฀operation฀is฀determined฀in฀the฀foreign฀currency.฀
(Here฀ there฀ may฀ be฀ either฀ a฀ taxable฀ temporary฀ difference฀ or฀ a฀ deductible฀ temporary฀
difference.฀ Where฀ there฀ is฀ a฀ taxable฀ temporary฀ difference,฀ the฀ resulting฀ deferred฀ tax฀
liability฀ is฀ recognised,฀ because฀ it฀ relates฀ to฀ the฀ foreign฀ operation's฀ own฀ assets฀ and฀
liabilities,฀rather฀than฀to฀the฀reporting฀entity's฀investment฀in฀that฀foreign฀operation.฀The฀
deferred฀tax฀is฀charged฀to฀profit฀or฀loss.)฀
฀
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2.3฀Deferred฀tax฀assets฀
A฀ deferred฀ tax฀ asset฀ should฀ be฀ recognised฀ for฀ all฀ deductible฀ temporary฀ differences฀ to฀ the฀
extent฀ that฀ it฀ is฀ probable฀ that฀ taxable฀ profit฀ will฀ be฀ available฀ against฀ which฀ it฀ can฀ be฀
utilised.฀ This฀ is฀ an฀ application฀ of฀ prudence.฀ Examples฀ of฀ deductible฀ temporary฀ differences฀ given฀ in฀
IAS฀12฀are฀shown฀below.฀฀
Transactions฀that฀affect฀profit฀or฀loss฀฀
฀ Retirement฀ benefit฀ costs฀ (pension฀ costs)฀ are฀ deducted฀ from฀ accounting฀ profit฀ as฀
service฀is฀provided฀by฀the฀employee.฀They฀are฀not฀deducted฀in฀determining฀taxable฀profit฀
until฀ the฀ entity฀ pays฀ either฀ retirement฀ benefits฀ or฀ contributions฀ to฀ a฀ fund.฀ (This฀ may฀ also฀
apply฀to฀similar฀expenses.)฀
฀ Accumulated฀depreciation฀of฀an฀asset฀in฀the฀financial฀statements฀is฀greater฀than฀the฀
accumulated฀depreciation฀allowed฀for฀tax฀purposes฀up฀to฀the฀year฀end.฀
฀ The฀ cost฀ of฀ inventories฀sold฀ before฀ the฀ year฀ end฀ is฀ deducted฀ from฀ accounting฀ profit฀
when฀goods/services฀are฀delivered,฀but฀is฀deducted฀from฀taxable฀profit฀when฀the฀cash฀is฀
received.฀฀
฀ The฀ net฀ realisable฀ value฀ of฀ inventory,฀ or฀ the฀ recoverable฀ amount฀ of฀ an฀ item฀ of฀
property,฀plant฀and฀equipment฀falls฀and฀the฀carrying฀value฀is฀therefore฀reduced,฀but฀that฀
reduction฀is฀ignored฀for฀tax฀purposes฀until฀the฀asset฀is฀sold.฀
฀ Research฀costs฀(or฀organisation/other฀start-up฀costs)฀are฀recognised฀as฀an฀expense฀for฀
accounting฀purposes฀but฀are฀not฀deductible฀against฀taxable฀profits฀until฀a฀later฀period.฀
฀ Income฀is฀deferred฀in฀the฀statement฀of฀financial฀position,฀but฀has฀already฀been฀included฀
in฀taxable฀profit฀in฀current/prior฀periods.฀
฀ A฀ government฀ grant฀ is฀ included฀ in฀ the฀ statement฀ of฀ financial฀ position฀ as฀ deferred฀
income,฀but฀it฀will฀not฀be฀taxable฀in฀future฀periods.฀
฀ ฀ (IAS฀12:฀IE,฀B,฀paras.฀1–7)฀
฀
Fair฀value฀adjustments฀and฀revaluations฀
Current฀investments฀or฀financial฀instruments฀may฀be฀carried฀at฀fair฀value฀which฀is฀less฀than฀cost,฀
but฀no฀equivalent฀adjustment฀is฀made฀for฀tax฀purposes.฀
฀ (IAS฀12:฀IE,฀B,฀para.฀8)
฀
฀
2.3.1฀Reasoning฀behind฀the฀recognition฀of฀deferred฀tax฀assets฀on฀deductible฀
temporary฀differences฀฀
(a)฀ When฀a฀liability฀is฀recognised,฀it฀is฀assumed฀that฀its฀carrying฀amount฀will฀be฀settled฀in฀the฀
form฀of฀outflows฀of฀economic฀benefits฀from฀the฀entity฀in฀future฀periods.฀
(b)฀ When฀ these฀ resources฀ flow฀ from฀ the฀ entity,฀ part฀ or฀ all฀ may฀ be฀ deductible฀ in฀ determining฀
taxable฀profits฀of฀a฀period฀later฀than฀that฀in฀which฀the฀liability฀is฀recognised.฀
(c)฀ A฀temporary฀tax฀difference฀then฀exists฀between฀the฀carrying฀amount฀of฀the฀liability฀and฀
its฀tax฀base.฀
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(d)฀ A฀ deferred฀ tax฀ asset฀ therefore฀ arises,฀ representing฀ the฀ income฀ taxes฀ that฀ will฀ be฀
recoverable฀ in฀ future฀ periods฀ when฀ that฀ part฀ of฀ the฀ liability฀ is฀ allowed฀ as฀ a฀ deduction฀ from฀
taxable฀profit.฀
(e)฀ Similarly,฀ when฀ the฀ carrying฀ amount฀ of฀ an฀ asset฀ is฀ less฀ than฀ its฀ tax฀ base,฀ the฀ difference฀
gives฀ rise฀ to฀ a฀ deferred฀ tax฀ asset฀ in฀ respect฀ of฀ the฀ income฀ taxes฀ that฀ will฀ be฀ recoverable฀ in฀
future฀periods.฀
฀ ฀ (IAS฀12:฀paras.฀27–30)฀
Activity฀8:฀Deductible฀temporary฀differences฀ ฀
Pargatha฀Co฀recognises฀a฀liability฀of฀$10,000฀for฀accrued฀product฀warranty฀costs฀on฀31฀December฀
20X7.฀ These฀ product฀ warranty฀ costs฀ will฀ not฀ be฀ deductible฀ for฀ tax฀ purposes฀ until฀ the฀ entity฀ pays฀
claims.฀The฀tax฀rate฀is฀25%.฀
Required฀
State฀the฀deferred฀tax฀implications฀of฀this฀situation.฀
2.3.2฀Deductible฀temporary฀differences฀arising฀in฀business฀combinations฀
IAS฀12฀gives฀examples฀of฀circumstances฀that฀give฀rise฀to฀taxable฀temporary฀differences฀in฀a฀business฀
combination฀(IAS฀12:฀IE,฀paras.฀12–17).฀
฀ A฀liability฀is฀recognised฀at฀its฀fair฀value฀in฀a฀business฀combination,฀but฀none฀of฀
the฀related฀expense฀is฀deducted฀in฀determining฀taxable฀profit฀until฀a฀later฀period฀
฀ Unrealised฀profits฀resulting฀from฀intragroup฀transactions฀are฀eliminated฀from฀
the฀carrying฀amount฀of฀assets,฀such฀as฀inventory฀or฀property,฀plant฀or฀equipment,฀but฀no฀
equivalent฀adjustment฀is฀made฀for฀tax฀purposes฀
฀ Investments฀ in฀ foreign฀ subsidiaries,฀ branches฀ or฀ associates฀ or฀ interests฀ in฀ foreign฀ joint฀
ventures฀are฀affected฀by฀changes฀in฀foreign฀exchange฀rates฀
฀ A฀foreign฀operation฀accounts฀for฀its฀non-monetary฀assets฀in฀its฀own฀(functional)฀currency.฀
If฀ its฀ taxable฀ profit฀ or฀ loss฀ is฀ determined฀ in฀ a฀ different฀ currency฀ (under฀ the฀ presentation฀
currency฀ method)฀ changes฀ in฀ the฀ exchange฀ rate฀ result฀ in฀ temporary฀ differences.฀ The฀
resulting฀deferred฀tax฀is฀charged฀or฀credited฀to฀profit฀or฀loss.฀
฀ ฀ (IAS฀12:฀IE฀paras.฀9–13)฀
฀
3฀Recognition฀of฀deferred฀tax฀
Under฀IAS฀12,฀a฀deferred฀tax฀liability฀or฀asset฀is฀recognised฀for฀all฀taxable฀and฀deductible฀temporary฀
differences,฀unless฀they฀'arise฀from:฀
(a)฀ The฀initial฀recognition฀of฀goodwill;฀or฀
(b)฀ The฀initial฀recognition฀of฀an฀asset฀or฀liability฀in฀a฀transaction฀which฀
(i)฀ Is฀not฀a฀business฀combination฀
(ii)฀ At฀ the฀ time฀ of฀ the฀ transaction,฀ affects฀ neither฀ accounting฀ profit฀ nor฀ taxable฀
profit฀(taxable฀loss).'฀(IAS฀12:฀para.฀15)฀
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3.1฀Recognising฀deferred฀tax฀assets฀
Deferred฀tax฀assets฀are฀only฀recognised฀to฀the฀extent฀that฀it฀is฀probable฀that฀taxable฀profit฀will฀be฀
available฀against฀which฀the฀deductible฀temporary฀difference฀can฀be฀utilised.฀
It฀ is฀ assumed฀ that฀ enough฀ taxable฀ profit฀ will฀ be฀ available฀ if฀ there฀ are฀ sufficient฀ taxable฀
temporary฀ differences฀ which฀ can฀ be฀ offset,฀ in฀ accordance฀ with฀ tax฀ regulation,฀ against฀ the฀
available฀deductible฀temporary฀difference฀(IAS฀12:฀para.฀28).฀฀
If฀an฀entity฀has฀a฀history฀of฀recent฀losses,฀then฀this฀is฀evidence฀that฀future฀taxable฀profit฀may฀not฀
be฀available฀(see฀below).฀
3.1.1฀Unused฀tax฀losses฀and฀unused฀tax฀credits฀฀
An฀entity฀may฀have฀unused฀tax฀losses฀or฀credits฀(ie฀which฀it฀can฀offset฀against฀taxable฀profits)฀at฀the฀
end฀ of฀ a฀ period.฀ Should฀ a฀ deferred฀ tax฀ asset฀ be฀ recognised฀ in฀ relation฀ to฀ such฀ amounts?฀ IAS฀ 12฀
states฀that฀a฀deferred฀tax฀asset฀may฀be฀recognised฀in฀such฀circumstances฀'to฀the฀extent฀that฀it฀is฀
probable฀ future฀ taxable฀ profit฀ will฀ be฀ available฀ against฀ which฀ the฀ unused฀ tax฀
losses/credits฀can฀be฀utilised'฀(IAS฀12:฀para.฀34).฀
3.1.2฀Reassessment฀of฀unrecognised฀deferred฀tax฀assets฀฀฀
For฀ all฀ unrecognised฀ deferred฀ tax฀ assets,฀ at฀ each฀ year฀ end฀ an฀ entity฀ should฀ reassess฀ the฀
availability฀of฀future฀taxable฀profits฀and฀whether฀part฀or฀all฀of฀any฀unrecognised฀deferred฀tax฀
assets฀should฀now฀be฀recognised.฀This฀may฀be฀due฀to฀an฀improvement฀in฀trading฀conditions฀which฀is฀
expected฀to฀continue฀(IAS฀12:฀para.฀37).฀
3.1.3฀Recognition฀of฀deferred฀tax฀assets฀for฀unrealised฀losses฀฀
An฀amendment฀to฀IAS฀12฀was฀issued฀in฀January฀2016฀in฀order฀to฀clarify฀when฀a฀deferred฀tax฀asset฀
should฀be฀recognised฀for฀unrealised฀losses.฀฀
The฀ IASB฀ clarified฀ that฀ unrealised฀ losses฀ on฀ debt฀ instruments฀ measured฀ at฀ fair฀ value฀
and฀ measured฀ at฀ cost฀ for฀ tax฀ purposes฀ give฀ rise฀ to฀ a฀ deductible฀ temporary฀
difference฀ regardless฀ of฀ whether฀ the฀ debt฀ instrument's฀ holder฀ expects฀ to฀ recover฀ the฀ carrying฀
amount฀of฀the฀debt฀instrument฀by฀sale฀or฀by฀use.฀฀฀
This฀may฀seem฀to฀contradict฀the฀key฀requirement฀that฀an฀entity฀recognises฀deferred฀tax฀assets฀only฀if฀it฀
is฀probable฀that฀it฀will฀have฀future฀taxable฀profits.฀However,฀the฀amendment฀also฀addresses฀the฀issue฀
of฀what฀constitutes฀future฀taxable฀profits,฀and฀clarifies฀that:฀
(a)฀฀ The฀ carrying฀ amount฀ of฀ an฀ asset฀ does฀ not฀ limit฀ the฀ estimation฀ of฀ probable฀ future฀ taxable฀
profits.฀
(b)฀ Estimates฀ for฀ future฀ taxable฀ profits฀ exclude฀ tax฀ deductions฀ resulting฀ from฀ the฀ reversal฀ of฀
deductible฀temporary฀differences.฀฀
(c)฀ An฀entity฀assesses฀a฀deferred฀tax฀asset฀in฀combination฀with฀other฀deferred฀tax฀assets.฀Where฀
tax฀ law฀ restricts฀ the฀ utilisation฀ of฀ tax฀ losses,฀ an฀ entity฀ would฀ assess฀ a฀ deferred฀ tax฀ asset฀ in฀
combination฀with฀other฀deferred฀tax฀assets฀of฀the฀same฀type.฀
฀ ฀ (IAS฀12:฀para.฀29–29A)฀
Deferred฀tax฀assets฀on฀unrealised฀losses฀
(Adapted฀from฀IAS฀12:฀Illustrative฀Example฀7)฀
Humbert฀has฀a฀debt฀instrument฀with฀a฀nominal฀value฀of฀$2,000,000.฀The฀fair฀value฀of฀the฀financial฀
instrument฀at฀the฀company's฀year฀end฀of฀30฀June฀20X4฀is฀$1,800,000.฀Humbert฀has฀determined฀that฀
there฀is฀a฀deductible฀temporary฀difference฀of฀$200,000.฀Humbert฀intends฀to฀hold฀the฀instrument฀until฀
maturity฀on฀30฀June฀20X5,฀and฀expects฀that฀the฀$2,000,000฀will฀be฀paid฀in฀full.฀This฀means฀that฀the฀
deductible฀temporary฀difference฀will฀reverse฀in฀full.฀฀
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Humbert฀has,฀in฀addition,฀$60,000฀of฀taxable฀temporary฀differences฀that฀will฀also฀reverse฀in฀full฀in฀
20X5.฀The฀company฀expects฀the฀bottom฀line฀of฀its฀tax฀return฀to฀show฀a฀tax฀loss฀of฀$40,000.฀฀
Required฀
Discuss,฀with฀calculations,฀whether฀Humbert฀can฀recognise฀a฀deferred฀tax฀asset฀under฀IAS฀12฀Income฀
Taxes.฀
Solution฀
The฀first฀stage฀is฀to฀use฀the฀reversal฀of฀the฀taxable฀temporary฀difference฀to฀arrive฀at฀the฀amount฀to฀be฀
tested฀for฀recognition.฀฀
Under฀IAS฀12฀Humbert฀will฀first฀consider฀whether฀it฀has฀a฀tax฀liability฀from฀a฀taxable฀temporary฀
difference฀that฀will฀support฀the฀recognition฀of฀the฀tax฀asset:฀
฀ $'000
Deductible฀temporary฀difference฀ ฀200
Reversing฀taxable฀temporary฀difference ฀(60)
Remaining฀amount฀(recognition฀to฀be฀determined)฀ 140
฀
At฀least฀$60,000฀may฀be฀recognised฀as฀a฀deferred฀tax฀asset.฀฀
The฀next฀stage฀is฀to฀calculate฀the฀future฀taxable฀profit.฀Following฀the฀amendment,฀this฀is฀done฀using฀
a฀formula,฀the฀aim฀of฀which฀is฀to฀derive฀the฀amount฀of฀tax฀profit฀or฀loss฀before฀the฀reversal฀of฀any฀
temporary฀difference:฀
฀ $'000
Expected฀tax฀loss฀(per฀bottom฀line฀of฀tax฀return) (40)
Less฀reversing฀taxable฀temporary฀difference (60)
Add฀reversing฀deductible฀temporary฀difference 200
Taxable฀profit฀for฀recognition฀test฀ ฀100฀ ฀
Finally,฀the฀results฀of฀the฀above฀two฀steps฀should฀be฀added,฀and฀the฀tax฀calculated:฀
Humbert฀would฀recognise฀a฀deferred฀tax฀asset฀of฀($60,000฀+฀$100,000)฀×฀20%฀=฀$32,000.฀This฀
deferred฀tax฀asset฀would฀be฀recognised฀even฀though฀the฀company฀has฀an฀expected฀loss฀on฀its฀tax฀
return.฀
3.1.4฀Deferred฀tax฀assets฀of฀an฀acquired฀subsidiary฀฀
Deferred฀ tax฀ assets฀ of฀ a฀ subsidiary฀ may฀ not฀ satisfy฀ the฀ criteria฀ for฀ recognition฀ when฀ a฀ business฀
combination฀is฀initially฀accounted฀for฀but฀may฀be฀realised฀subsequently฀(IAS฀12:฀para.฀68).฀
These฀should฀be฀recognised฀as฀follows:฀
฀ If฀ recognised฀ within฀ 12฀ months฀ of฀ the฀ acquisition฀ date฀ and฀ resulting฀ from฀ new฀ information฀
about฀ circumstances฀ existing฀ at฀ the฀ acquisition฀ date,฀ the฀ credit฀ entry฀ should฀ be฀ made฀ to฀
goodwill.฀If฀the฀carrying฀amount฀of฀goodwill฀is฀reduced฀to฀zero,฀any฀further฀amounts฀should฀be฀
recognised฀in฀profit฀or฀loss.฀
฀ If฀ recognised฀ outside฀ the฀ 12฀ month฀ 'measurement฀ period',฀ or฀ not฀ resulting฀ from฀ new฀
information฀ about฀ circumstances฀ existing฀ at฀ the฀ acquisition฀ date,฀ the฀ credit฀ entry฀ should฀ be฀
made฀to฀profit฀or฀loss.฀
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Deferred฀tax฀assets฀of฀subsidiary฀
In฀20X2฀Jacko฀Co฀acquired฀a฀subsidiary,฀Jilly฀Co,฀which฀had฀deductible฀temporary฀differences฀of฀
$3m.฀The฀tax฀rate฀at฀the฀date฀of฀acquisition฀was฀30%.฀The฀resulting฀deferred฀tax฀asset฀of฀$0.9m฀
was฀not฀recognised฀as฀an฀identifiable฀asset฀in฀determining฀the฀goodwill฀of฀$5m฀resulting฀from฀the฀
business฀combination.฀Two฀years฀after฀the฀acquisition,฀Jacko฀Co฀decided฀that฀future฀taxable฀profit฀
would฀probably฀be฀sufficient฀for฀the฀entity฀to฀recover฀the฀benefit฀of฀all฀the฀deductible฀temporary฀
differences.฀
Required฀
(a)฀ State฀the฀accounting฀treatment฀of฀the฀subsequent฀recognition฀of฀the฀deferred฀tax฀asset฀in฀
20X4.฀
(b)฀ What฀would฀happen฀if฀the฀tax฀rate฀had฀risen฀to฀40%฀by฀20X4฀or฀decreased฀to฀20%?฀
Solution฀
(a)฀ The฀entity฀recognises฀a฀deferred฀tax฀asset฀of฀$0.9m฀($3m฀×฀30%)฀and,฀in฀profit฀or฀loss,฀
deferred฀tax฀income฀of฀$0.9m.฀Goodwill฀is฀not฀adjusted฀as฀the฀recognition฀does฀not฀arise฀
within฀the฀measurement฀period฀(ie฀within฀the฀12฀months฀following฀the฀acquisition).฀
(b)฀ If฀the฀tax฀rate฀rises฀to฀40%,฀the฀entity฀should฀recognise฀a฀deferred฀tax฀asset฀of฀$1.2m฀฀
($3m฀×฀40%)฀and,฀in฀profit฀or฀loss,฀deferred฀tax฀income฀of฀$1.2m.฀
฀ If฀the฀tax฀rate฀falls฀to฀20%,฀the฀entity฀should฀recognise฀a฀deferred฀tax฀asset฀of฀$0.6m฀฀
($3m฀×฀20%)฀and฀deferred฀tax฀income฀of฀$0.6m.฀
In฀both฀cases,฀the฀entity฀will฀also฀reduce฀the฀cost฀of฀goodwill฀by฀$0.9m฀and฀recognise฀an฀expense฀for฀
that฀amount฀in฀profit฀or฀loss.฀
3.1.5฀Deferred฀tax฀on฀the฀initial฀recognition฀of฀assets฀or฀liabilities฀฀
A฀temporary฀difference฀can฀arise฀on฀initial฀recognition฀of฀an฀asset฀or฀liability,฀eg฀if฀part฀or฀all฀of฀the฀
cost฀of฀an฀asset฀will฀not฀be฀deductible฀for฀tax฀purposes.฀The฀nature฀of฀the฀transaction฀which฀led฀
to฀ the฀ initial฀ recognition฀ of฀ the฀ asset฀ is฀ important฀ in฀ determining฀ the฀ method฀ of฀ accounting฀ for฀ such฀
temporary฀differences.฀
If฀ the฀ transaction฀ affects฀ either฀ accounting฀ profit฀ or฀ taxable฀ profit,฀ an฀ entity฀ will฀ recognise฀ any฀
deferred฀tax฀liability฀or฀asset.฀The฀resulting฀deferred฀tax฀expense฀or฀income฀will฀be฀recognised฀
in฀profit฀or฀loss.฀
Where฀a฀transaction฀affects฀neither฀accounting฀profit฀nor฀taxable฀profit,฀IAS฀12฀does฀not฀
permit฀recognition฀of฀a฀deferred฀tax฀asset฀or฀liability฀as฀it฀would฀make฀the฀financial฀statements฀less฀
transparent.฀฀
Illustration฀4฀
Initial฀recognition฀
Petros฀Co฀intends฀to฀use฀an฀asset฀which฀cost฀$10,000฀in฀20X7฀through฀its฀useful฀life฀of฀five฀years.฀
Its฀residual฀value฀will฀then฀be฀nil.฀The฀tax฀rate฀is฀40%.฀Any฀capital฀gain฀on฀disposal฀would฀not฀be฀
taxable฀(and฀any฀capital฀loss฀not฀deductible).฀Depreciation฀of฀the฀asset฀is฀not฀deductible฀for฀tax฀
purposes.฀
Required฀
State฀the฀deferred฀tax฀consequences฀in฀each฀of฀years฀20X7฀and฀20X8.฀
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Solution฀
In฀20X7,฀as฀it฀recovers฀the฀carrying฀amount฀of฀the฀asset,฀Petros฀Co฀will฀earn฀taxable฀income฀of฀
$10,000฀and฀pay฀tax฀of฀$4,000.฀The฀resulting฀deferred฀tax฀liability฀of฀$4,000฀would฀not฀be฀
recognised฀because฀it฀results฀from฀the฀initial฀recognition฀of฀the฀asset.฀
As฀at฀20X8,฀the฀carrying฀value฀of฀the฀asset฀is฀now฀$8,000.฀In฀earning฀taxable฀income฀of฀$8,000,฀
the฀entity฀will฀pay฀tax฀of฀$3,200.฀Again,฀the฀resulting฀deferred฀tax฀liability฀of฀$3,200฀is฀not฀
recognised,฀because฀it฀results฀from฀the฀initial฀recognition฀of฀the฀asset.฀
4฀Measurement฀of฀deferred฀tax฀
Deferred฀tax฀assets฀and฀liabilities฀are฀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฀
(or฀substantively฀enacted)฀by฀the฀end฀of฀the฀reporting฀period฀(IAS฀12:฀para.฀47).฀
4.1฀Change฀in฀tax฀rates฀
Where฀ the฀ corporate฀ rate฀ of฀ income฀ tax฀ fluctuates฀ from฀ one฀ year฀ to฀ another,฀ a฀ problem฀
arises฀in฀respect฀of฀the฀amount฀of฀deferred฀tax฀to฀be฀credited฀(debited)฀to฀profit฀or฀loss฀in฀later฀years.฀฀
IAS฀12฀requires฀deferred฀tax฀assets฀and฀liabilities฀to฀be฀measured฀at฀the฀tax฀rates฀expected฀to฀apply฀
in฀ the฀ period฀ when฀ the฀ asset฀ is฀ realised฀ or฀ liability฀ settled,฀ based฀ on฀ tax฀ rates฀ and฀ laws฀
enacted฀ (or฀ substantively฀ enacted)฀ at฀ the฀ year฀ end.฀ In฀ other฀ words,฀ IAS฀ 12฀ requires฀ the฀ liability฀
method฀ to฀ be฀ used.฀ The฀ liability฀ method฀ assumes฀ that฀ the฀ tax฀ effects฀ of฀ temporary฀ differences฀
should฀be฀regarded฀as฀amounts฀of฀tax฀ultimately฀due฀by฀or฀to฀the฀company.฀Therefore฀deferred฀tax฀
provisions฀are฀calculated฀at฀the฀rate฀at฀which฀it฀is฀estimated฀that฀tax฀will฀be฀paid฀(or฀recovered)฀when฀
the฀temporary฀differences฀reverse.฀ ฀
4.2฀Different฀rates฀of฀tax฀
In฀ some฀ countries฀ different฀ tax฀ rates฀ apply฀ to฀ different฀ levels฀ of฀ taxable฀ income.฀ In฀ such฀ cases,฀
deferred฀tax฀assets฀and฀liabilities฀should฀be฀measured฀using฀the฀average฀rates฀that฀are฀expected฀
to฀apply฀to฀the฀taxable฀profit฀(loss)฀of฀the฀periods฀in฀which฀the฀temporary฀differences฀are฀expected฀to฀
reverse฀(IAS฀12:฀para.฀49).฀
4.3฀Manner฀of฀recovery฀or฀settlement฀฀
In฀ some฀ jurisdictions,฀ the฀ way฀ in฀ which฀ an฀ entity฀ recovers฀ or฀ settles฀ the฀ carrying฀ amount฀ of฀ an฀
asset฀ or฀ liability฀ may฀ affect฀ the฀ tax฀ base฀ or฀ the฀ tax฀ rate฀ applying฀ when฀ the฀ carrying฀ amount฀ of฀ the฀
asset/liability฀is฀recovered/settled.฀฀
In฀such฀cases,฀the฀entity฀must฀consider฀the฀expected฀manner฀of฀recovery฀or฀settlement฀and฀measure฀
deferred฀tax฀using฀an฀appropriate฀tax฀rate฀and฀tax฀base฀(IAS฀12:฀para.฀51–51A).฀
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Manner฀of฀recovery฀or฀settlement฀
Richcard฀Co฀has฀an฀asset฀with฀a฀carrying฀amount฀of฀$10,000฀and฀a฀tax฀base฀of฀$6,000.฀If฀the฀asset฀
were฀sold,฀a฀tax฀rate฀of฀20%฀would฀apply.฀A฀tax฀rate฀of฀30%฀would฀apply฀to฀other฀income.฀
Required฀
State฀the฀deferred฀tax฀consequences฀if฀the฀entity:฀
(a)฀ Expects฀to฀sell฀the฀asset฀without฀further฀use.฀
(b)฀ Expects฀to฀retain฀the฀asset฀and฀recover฀its฀carrying฀amount฀through฀use.฀
Solution฀
(a)฀ A฀deferred฀tax฀liability฀is฀recognised฀of฀$(10,000฀–฀6,000)฀×฀20%฀=฀$800.฀
(b)฀ A฀deferred฀tax฀liability฀is฀recognised฀of฀$(10,000฀–฀6,000)฀×฀30%฀=฀$1,200.฀
฀
฀
฀
฀ ฀
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Activity฀1:฀Current฀tax฀
(a)฀ ฀
฀ ฀$฀฀฀฀฀
Tax฀due฀on฀20X8฀profits฀($120,000฀ 33%)฀ ฀39,600฀
Underpayment฀for฀20X7฀ ฀฀฀5,000฀
Tax฀charge฀and฀liability฀ ฀44,600฀
(b)฀ ฀
฀ ฀$฀฀฀฀฀
Tax฀due฀on฀20X8฀profits฀(as฀above)฀ ฀ 39,600 ฀
Overpayment฀for฀20X7฀ ฀ ฀(5,000) ฀
Tax฀charge฀and฀liability฀ ฀34,600฀
Alternatively,฀the฀rebate฀due฀could฀be฀shown฀separately฀as฀income฀in฀the฀statement฀of฀profit฀or฀loss฀
and฀ other฀ comprehensive฀ income฀ and฀ as฀ an฀ asset฀ in฀ the฀ statement฀ of฀ financial฀ position.฀ An฀ offset฀
approach฀like฀the฀above฀is,฀however,฀most฀likely.฀
Activity฀2:฀Tax฀losses฀carried฀back฀
Tax฀repayment฀due฀on฀tax฀losses฀=฀30%฀฀$24,000฀=฀$7,200.฀
The฀double฀entry฀will฀be:฀
DEBIT฀ Tax฀receivable฀(statement฀of฀financial฀position) $7,200฀ ฀
CREDIT฀ Tax฀repayment฀(statement฀of฀profit฀or฀loss฀and฀other฀ $7,200
฀ comprehensive฀income)฀
The฀tax฀receivable฀will฀be฀shown฀as฀an฀asset฀until฀the฀repayment฀is฀received฀from฀the฀tax฀authorities.฀
Activity฀3:฀Tax฀base฀of฀assets฀
(a)฀ The฀tax฀base฀of฀the฀machine฀is฀$7,000฀($10,000฀–฀$3,000).฀
(b)฀ The฀tax฀base฀of฀the฀interest฀receivable฀is฀nil.฀
(c)฀ The฀tax฀base฀of฀the฀trade฀receivables฀is฀$10,000.฀
(d)฀ The฀tax฀base฀of฀the฀loan฀is฀$1m.฀
(e)฀ The฀tax฀base฀of฀the฀dividend฀is฀$5,000.฀
In฀ the฀ case฀ of฀ (e),฀ in฀ substance฀ the฀ entire฀ carrying฀ amount฀ of฀ the฀ asset฀ is฀ deductible฀ against฀ the฀
economic฀ benefits.฀ There฀ is฀ no฀ taxable฀ temporary฀ difference.฀ An฀ alternative฀ analysis฀ is฀ that฀ the฀
accrued฀dividends฀receivable฀have฀a฀tax฀base฀of฀nil฀and฀a฀tax฀rate฀of฀nil฀is฀applied฀to฀the฀resulting฀
taxable฀temporary฀difference฀($5,000).฀Under฀both฀analyses,฀there฀is฀no฀deferred฀tax฀liability.฀
Activity฀4:฀Tax฀base฀of฀liabilities฀
(a)฀ The฀tax฀base฀of฀the฀accrued฀expenses฀is฀nil.฀
(b)฀ The฀tax฀base฀of฀the฀interest฀received฀in฀advance฀is฀nil.฀
(c)฀ The฀tax฀base฀of฀the฀accrued฀fines฀and฀penalties฀is฀$100.฀
(d)฀ The฀tax฀base฀of฀the฀loan฀is฀$1m.฀
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Activity฀5:฀Property,฀plant฀and฀equipment฀
Movement฀in฀the฀deferred฀tax฀liability฀for฀the฀year฀ended฀31฀December฀20X2฀
฀ ฀$'000฀
Deferred฀tax฀liability฀b/d฀ ฀33฀
Profit฀or฀loss฀charge฀ ฀21฀
Deferred฀tax฀liability฀c/d฀ ฀54฀
Workings฀
1฀ Deferred฀tax฀liability฀
฀ ฀ Deferred฀tax฀
Carrying฀ ฀ Temporary฀ liability฀@฀
amount฀ Tax฀base฀ differences฀ 30%฀
฀ $'000 $'000 $'000 $'000
฀20X1฀ ฀ ฀
฀Cost฀ ฀1,000฀ ฀1,000฀ ฀–฀ ฀–฀
฀Depreciation฀ (W2)฀ ฀฀฀(90)฀ (W3) ฀ (200)฀
฀c/d฀ ฀910฀ ฀800฀ ฀110฀ ฀(33)฀
฀20X2฀
฀b/d฀ ฀910฀ ฀800฀
฀Depreciation฀ ฀฀฀(90)฀ (W3) ฀(160)
฀c/d฀ ฀฀820฀ ฀ 640฀ ฀180฀ ฀(54)฀
2฀ Depreciation฀
$1,000,000฀cost฀–฀$100,000฀residual฀value฀/฀10฀years฀=฀$90,000฀per฀annum.฀
3฀ Tax฀depreciation฀
20X1:฀฀$1,000,000฀฀20%฀=฀$200,000฀
20X2:฀฀$800,000฀Carrying฀amount฀b/d฀฀20%฀=฀$160,000฀
Activity฀6:฀Revaluation฀of฀property,฀plant฀and฀equipment฀
DEBIT฀ Other฀comprehensive฀income฀(and฀revaluation฀surplus)฀ $30,000฀ ฀
CREDIT฀ Deferred฀tax฀liability฀ ฀ $30,000
Working:฀Deferred฀tax฀
฀ $฀
Carrying฀amount฀of฀asset฀ ฀500,000฀
Less฀tax฀base฀฀ ฀ (400,000)฀
Temporary฀difference฀ ฀100,000฀
Deferred฀tax฀(liability)฀(30%฀฀100,000)฀ ฀ (30,000)฀
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Activity฀7:฀Development฀costs฀
The฀tax฀base฀of฀the฀asset฀is฀nil฀because฀the฀research฀and฀development฀expenditure฀has฀already฀been฀
fully฀relieved.฀
The฀carrying฀amount฀of฀the฀asset฀is฀$500,000.฀
This฀exceeds฀tax฀base฀and฀therefore฀there฀is฀a฀taxable฀temporary฀difference฀of฀$500,000.฀
This฀results฀in฀a฀deferred฀tax฀liability฀of฀$150,000฀(500,000฀×฀30%).฀
(In฀other฀words,฀in฀order฀to฀recover฀the฀carrying฀amount฀of฀$500,000฀the฀entity฀must฀earn฀taxable฀
income฀of฀$500,000,฀but฀it฀will฀not฀be฀able฀to฀deduct฀any฀further฀amounts฀as฀a฀taxable฀expense.)฀
Activity฀8:฀Deductible฀temporary฀differences฀
The฀ tax฀ base฀ of฀ the฀ liability฀ is฀ nil฀ (carrying฀ amount฀ of฀ $10,000฀ less฀ the฀ amount฀ that฀ will฀ be฀
deductible฀for฀tax฀purposes฀in฀respect฀of฀the฀liability฀in฀future฀periods).฀
When฀the฀liability฀is฀settled฀for฀its฀carrying฀amount,฀the฀entity's฀future฀taxable฀profit฀will฀be฀reduced฀
by฀$10,000฀and฀so฀its฀future฀tax฀payments฀by฀$10,000฀฀25%฀=฀$2,500.฀
The฀ difference฀ of฀ $10,000฀ between฀ the฀ carrying฀ amount฀ ($10,000)฀ and฀ the฀ tax฀ base฀ (nil)฀ is฀ a฀
deductible฀ temporary฀ difference.฀ The฀ entity฀ should฀ therefore฀ recognise฀ a฀ deferred฀ tax฀ asset฀ of฀
$10,000฀฀25%฀=฀$2,500฀provided฀that฀it฀is฀probable฀that฀the฀entity฀will฀earn฀sufficient฀taxable฀
profits฀in฀future฀periods฀to฀benefit฀from฀a฀reduction฀in฀tax฀payments.฀
฀
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฀
฀
฀
฀
Financial฀instruments
฀
฀
฀
฀
฀
฀
฀
฀
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1฀Definitions฀
We฀should฀clarify฀some฀points฀arising฀from฀the฀financial฀instruments฀definitions:฀
(a)฀ A฀ 'contract'฀ need฀ not฀ be฀ in฀ writing,฀ but฀ it฀ must฀ comprise฀ an฀ agreement฀ that฀ has฀ 'clear฀
economic฀ consequences'฀ and฀ which฀ the฀ parties฀ to฀ it฀ cannot฀ avoid,฀ usually฀ because฀ the฀
agreement฀is฀enforceable฀in฀law.฀
(b)฀ Financial฀instruments฀include฀both฀of฀the฀following:฀
(i)฀ Primary฀instruments:฀eg฀receivables,฀payables฀and฀equity฀securities;฀and฀
(ii)฀ Derivative฀ instruments:฀ eg฀ financial฀ options,฀ futures฀ and฀ forwards,฀ interest฀ rate฀
swaps฀and฀currency฀swaps.฀
IAS฀32฀makes฀it฀clear฀that฀the฀following฀items฀are฀not฀financial฀instruments฀(IAS฀32:฀paras.฀AG9–12):฀
(a)฀ Physical฀ assets,฀ eg฀ inventories,฀ property,฀ plant฀ and฀ equipment,฀ leased฀ assets฀ and฀
intangible฀assets฀(patents,฀trademarks฀etc);฀
(b)฀ Prepaid฀ expenses,฀ deferred฀ revenue฀ and฀ most฀ warranty฀ obligations,฀ because฀
they฀result฀in฀the฀receipt/delivery฀of฀goods฀and฀services,฀rather฀than฀cash฀or฀financial฀assets฀
or฀liabilities;฀
(c)฀ Liabilities฀or฀assets฀that฀are฀not฀contractual฀in฀nature,฀eg฀income฀tax฀payable;฀and฀
(d)฀ Contractual฀ rights/obligations฀ that฀ do฀ not฀ involve฀ recognition฀ of฀ a฀ financial฀ asset,฀
eg฀operating฀leases฀for฀lessors฀as฀no฀receivable฀is฀recognised.฀
2฀฀Derecognition฀of฀financial฀assets฀and฀financial฀liabilities฀
The฀ existing฀ Conceptual฀ Framework฀ does฀ not฀ provide฀ any฀ guidance฀ on฀ derecognition฀ and฀ as฀ a฀
result,฀ there฀ are฀ inconsistent฀ approaches฀ to฀ derecognition฀ in฀ different฀ standards.฀ ED/2015/3฀
Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ does฀ provide฀ guidance฀ relating฀ to฀ derecognition,฀
based฀around฀faithful฀representation.฀The฀accounting฀requirements฀for฀derecognition฀aim฀to฀faithfully฀
represent฀the฀assets฀and฀liabilities฀retained฀after฀the฀transfer฀and฀the฀change฀in฀assets฀and฀liabilities฀
as฀a฀result฀of฀the฀transfer฀and฀detail฀is฀provided฀in฀the฀ED฀as฀to฀how฀these฀aims฀are฀achieved.฀There฀
are฀ no฀ planned฀ amendments฀ to฀ IFRS฀ 9฀ as฀ a฀ result฀ of฀ the฀ ED฀ and฀ therefore฀ it฀ appears฀ that฀ the฀
derecognition฀criteria฀in฀respect฀of฀financial฀assets฀and฀liabilities฀discussed฀below฀are฀consistent฀with฀
the฀ED.฀฀
2.1฀Derecognition฀of฀financial฀assets฀
Derecognition฀is฀the฀removal฀of฀a฀previously฀recognised฀financial฀instrument฀from฀an฀entity's฀statement฀
of฀financial฀position.฀
An฀entity฀should฀derecognise฀a฀financial฀asset฀when฀(IFRS฀9:฀para.฀3.2.3):฀
(a)฀ The฀contractual฀rights฀to฀the฀cash฀flows฀from฀the฀financial฀asset฀expire;฀or฀
(b)฀ The฀ entity฀ transfers฀ the฀ financial฀ asset฀ based฀ on฀ whether฀ the฀ entity฀ transfers฀
substantially฀ all฀ the฀ risks฀ and฀ rewards฀ of฀ ownership฀ of฀ the฀ financial฀ asset฀ to฀
another฀party.฀
IFRS฀9฀gives฀examples฀of฀where฀an฀entity฀has฀transferred฀substantially฀all฀the฀risks฀
and฀rewards฀of฀ownership.฀These฀include฀(IFRS฀9:฀para.฀B3.2.4):฀
(a)฀ An฀unconditional฀sale฀of฀a฀financial฀asset;฀and฀
(b)฀ A฀sale฀of฀a฀financial฀asset฀together฀with฀an฀option฀to฀repurchase฀the฀financial฀asset฀at฀its฀fair฀
value฀at฀the฀time฀of฀repurchase.฀
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The฀ standard฀ also฀ provides฀ examples฀ of฀ situations฀ where฀ the฀ risks฀ and฀ rewards฀ of฀
ownership฀have฀not฀been฀transferred฀(IFRS฀9:฀para.฀B3.2.5):฀
(a)฀ A฀sale฀and฀repurchase฀transaction฀where฀the฀repurchase฀price฀is฀a฀fixed฀price฀or฀the฀sale฀price฀
plus฀a฀lender's฀return;฀
(b)฀ A฀ sale฀ of฀ a฀ financial฀ asset฀ together฀ with฀ a฀ total฀ return฀ swap฀ that฀ transfers฀ the฀ market฀ risk฀
exposure฀back฀to฀the฀entity;฀and฀
(c)฀ A฀sale฀of฀short-term฀receivables฀in฀which฀the฀entity฀guarantees฀to฀compensate฀the฀transferee฀for฀
credit฀losses฀that฀are฀likely฀to฀occur.฀
It฀is฀possible฀for฀only฀part฀of฀a฀financial฀asset฀or฀liability฀to฀be฀derecognised.฀This฀is฀allowed฀if฀the฀
part฀comprises:฀
(a)฀ Only฀specifically฀identified฀cash฀flows;฀or฀
(b)฀ Only฀a฀fully฀proportionate฀(pro฀rata)฀share฀of฀the฀total฀or฀specifically฀identified฀cash฀flows.฀
For฀ example,฀ if฀ an฀ entity฀ holds฀ a฀ bond฀ it฀ has฀ the฀ right฀ to฀ two฀ separate฀ sets฀ of฀ cash฀ inflows:฀ those฀
relating฀to฀the฀principal฀and฀those฀relating฀to฀the฀interest.฀It฀could฀sell฀the฀right฀to฀receive฀the฀interest฀
to฀another฀party฀while฀retaining฀the฀right฀to฀receive฀the฀principal.฀
On฀derecognition,฀the฀amount฀to฀be฀included฀in฀profit฀or฀loss฀for฀the฀period฀is฀calculated฀as฀follows฀
(IFRS฀9:฀para.฀3.2.13):฀
฀ $฀ ฀$฀
Carrying฀amount฀(measured฀at฀the฀date฀of฀derecognition)฀allocated฀to฀the฀฀
฀ part฀derecognised฀ ฀ ฀X฀
Less฀consideration฀received฀for฀the฀part฀derecognised฀(including฀any฀
฀ new฀asset฀obtained฀less฀any฀new฀liability฀assumed)฀ ฀X฀
฀ ฀ ฀(X)฀
Difference฀to฀profit฀or฀loss฀ ฀ ฀฀X฀
The฀ following฀ flowchart,฀ taken฀ from฀ the฀ appendix฀ to฀ the฀ standard฀ (IFRS฀ 9:฀ Appendix฀ B,฀ para.฀
B3.2.1),฀will฀help฀you฀decide฀whether,฀and฀to฀what฀extent,฀a฀financial฀asset฀is฀derecognised.฀
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฀
Source:฀IFRS฀9฀Application฀Guidance฀
2.2฀Derecognition฀of฀financial฀liabilities฀
A฀financial฀liability฀is฀derecognised฀when฀it฀is฀extinguished฀–฀ie฀when฀the฀obligation฀specified฀in฀
the฀contract฀is฀discharged฀or฀cancelled฀or฀expires฀(IFRS฀9:฀para.฀3.3.1).฀฀
(a)฀ Where฀an฀existing฀borrower฀and฀lender฀of฀debt฀instruments฀exchange฀one฀financial฀instrument฀
for฀another฀with฀substantially฀different฀terms,฀this฀is฀accounted฀for฀as฀an฀extinguishment฀of฀the฀
original฀financial฀liability฀and฀the฀recognition฀of฀a฀new฀financial฀liability฀(IFRS฀9:฀para.฀3.3.2).฀
(b)฀ Similarly,฀a฀substantial฀modification฀of฀the฀terms฀of฀an฀existing฀financial฀liability฀or฀a฀part฀of฀it฀
is฀accounted฀for฀as฀an฀extinguishment฀of฀the฀original฀financial฀liability฀and฀the฀recognition฀of฀a฀
new฀financial฀liability฀(IFRS฀9:฀para.฀3.3.2).฀
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For฀this฀purpose,฀a฀'substantial฀modification'฀of฀the฀terms฀arises฀where฀the฀discounted฀present฀
value฀of฀cash฀flows฀under฀the฀new฀terms,฀discounted฀using฀the฀original฀effective฀interest฀rate,฀is฀
at฀ least฀ 10%฀ different฀ from฀ the฀ discounted฀ present฀ value฀ of฀ the฀ remaining฀ cash฀ flows฀ of฀ the฀
original฀financial฀liability฀(IFRS฀9:฀para.฀B3.3.6).฀
The฀ difference฀ between฀ the฀ carrying฀ amount฀ of฀ a฀ financial฀ liability฀ (or฀ part฀ of฀ a฀ financial฀ liability)฀
extinguished฀ or฀ transferred฀ to฀ another฀ party฀ and฀ the฀ consideration฀ paid,฀ including฀ any฀ non-cash฀
assets฀transferred฀or฀liabilities฀assumed,฀is฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀para.฀3.3.3).฀
฀
3฀Classification฀and฀measurement฀
3.1฀Classification฀and฀measurement฀of฀financial฀assets฀
3.1.1฀Initial฀measurement฀of฀financial฀assets฀
Financial฀ instruments฀ are฀ initially฀ measured฀ at฀ the฀ transaction฀ price;฀ that฀ is,฀ the฀ fair฀ value฀ of฀ the฀
consideration฀given฀(IFRS฀9:฀para.฀5.1.1).฀
An฀ exception฀ is฀ where฀ part฀ of฀ the฀ consideration฀ given฀ is฀ for฀ something฀ other฀ than฀ the฀ financial฀
asset.฀In฀this฀case฀the฀financial฀asset฀is฀initially฀measured฀at฀fair฀value฀evidenced฀by฀a฀quoted฀price฀in฀
an฀ active฀ market฀ for฀ an฀ identical฀ asset฀ (ie฀ an฀ IFRS฀ 13฀ level฀ 1฀ input)฀ or฀ based฀ on฀ a฀ valuation฀
technique฀ that฀ uses฀ only฀ data฀ from฀ observable฀ markets.฀ The฀ difference฀ between฀ the฀ fair฀ value฀ at฀
initial฀recognition฀and฀the฀transaction฀price฀is฀recognised฀as฀a฀gain฀or฀loss.฀฀
In฀ the฀ case฀ of฀ financial฀ assets฀ classified฀ as฀ measured฀ at฀ amortised฀ cost฀ or฀ at฀ fair฀ value฀
through฀ other฀ comprehensive฀ income,฀ transaction฀ costs฀ directly฀ attributable฀ to฀ the฀
acquisition฀of฀the฀financial฀asset฀are฀added฀to฀this฀amount.฀
3.1.2฀฀Subsequent฀measurement฀of฀financial฀assets฀
Under฀IFRS฀9,฀financial฀assets฀are฀measured฀subsequent฀to฀recognition฀either:฀
฀ At฀amortised฀cost,฀using฀the฀effective฀interest฀method;฀
฀ At฀fair฀value฀through฀other฀comprehensive฀income;฀
฀ At฀fair฀value฀through฀profit฀or฀loss.฀
Amortised฀cost฀of฀a฀financial฀asset฀or฀financial฀liability:฀the฀amount฀at฀which฀the฀financial฀asset฀or฀
liability฀is฀measured฀at฀initial฀recognition฀minus฀principal฀repayments,฀plus฀or฀minus฀the฀cumulative฀
Key฀term฀
amortisation฀using฀the฀effective฀interest฀method฀of฀any฀difference฀between฀that฀initial฀amount฀
and฀the฀maturity฀amount฀and,฀for฀financial฀assets,฀adjusted฀for฀any฀loss฀allowance.฀
Effective฀interest฀method:฀a฀method฀of฀calculating฀the฀amortised฀cost฀of฀a฀financial฀instrument฀
and฀of฀allocating฀the฀interest฀income฀or฀interest฀expense฀over฀the฀relevant฀period.฀
Effective฀interest฀rate:฀the฀rate฀that฀exactly฀discounts฀estimated฀future฀cash฀payments฀or฀receipts฀
through฀the฀expected฀life฀of฀the฀financial฀instrument฀to฀the฀net฀carrying฀amount฀of฀the฀financial฀asset฀
or฀liability.฀฀
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฀
SUBSEQUENT฀MEASUREMENT฀–฀FINANCIAL฀ASSETS฀
฀
฀
Amortised฀cost฀ Fair฀value฀through฀ Fair฀value฀through฀
฀ ฀ other฀comprehensive฀income฀ profit฀or฀loss฀
฀  Investments฀in฀debt฀  Investments฀in฀debt฀instruments฀  All฀other฀financial฀assets฀

instruments฀held฀within฀a฀ held฀within฀a฀business฀model฀to฀ (and฀any฀financial฀asset฀
฀ business฀model฀to฀collect฀ both฀collect฀contractual฀cash฀ if฀this฀would฀eliminate฀or฀
contractual฀cash฀flows฀ flows฀(solely฀principal฀&฀interest)฀ significantly฀reduce฀an฀
฀ (solely฀principal฀&฀ and฀sell฀ 'accounting฀mismatch')
interest)  Investments฀in฀equity฀instruments฀ ฀
฀ ฀ not฀held฀for฀trading฀(optional฀
irrevocable฀election฀on฀initial฀
฀ recognition)฀
฀ ฀
Basis฀of฀classification฀
The฀IFRS฀9฀classification฀is฀made฀on฀the฀basis฀of฀both฀(IFRS฀9:฀para.฀4.1.2):฀
(a)฀ The฀entity's฀business฀model฀for฀managing฀the฀financial฀assets;฀and฀
(b)฀ The฀contractual฀cash฀flow฀characteristics฀of฀the฀financial฀asset.฀
Investments฀in฀debt฀instruments฀at฀amortised฀cost฀
An฀ investment฀ in฀ a฀ debt฀ instrument฀ is฀ classified฀ as฀ measured฀ at฀ amortised฀ cost฀ where฀ (IFRS฀ 9:฀
para฀4.1.2):฀
(a)฀ The฀objective฀of฀the฀business฀model฀within฀which฀the฀asset฀is฀held฀is฀to฀hold฀assets฀in฀order฀to฀
collect฀contractual฀cash฀flows;฀and฀฀
(b)฀ The฀contractual฀terms฀of฀the฀financial฀asset฀give฀rise฀on฀specified฀dates฀to฀cash฀flows฀that฀are฀
solely฀payments฀of฀principal฀and฀interest฀on฀the฀principal฀outstanding.฀
Investments฀in฀debt฀instruments฀at฀fair฀value฀through฀other฀comprehensive฀income฀
An฀ investment฀ in฀ a฀ debt฀ instrument฀ is฀ classified฀ and฀ measured฀ at฀ fair฀ value฀ through฀ other฀
comprehensive฀income฀if฀it฀meets฀both฀the฀following฀criteria฀(IFRS฀9:฀para.฀4.1.2A):฀
(a)฀ The฀ financial฀ asset฀ is฀ held฀ within฀ a฀ business฀ model฀ whose฀ objective฀ is฀ achieved฀ by฀ both฀
collecting฀contractual฀cash฀flows฀and฀selling฀financial฀assets;฀and฀
solely฀payments฀of฀principal฀and฀interest฀on฀the฀principal฀amount฀outstanding.฀
Investments฀in฀equity฀instruments฀
Investments฀ in฀ equity฀ instruments฀ may฀ not฀ be฀ classified฀ as฀ measured฀ at฀ amortised฀ cost฀ and฀ must฀ be฀
measured฀ at฀ fair฀ value.฀ This฀ is฀ because฀ contractual฀ cash฀ flows฀ on฀ specified฀ dates฀ are฀ not฀ a฀
characteristic฀ of฀ equity฀ instruments.฀ However,฀ if฀ an฀ investment฀ in฀ an฀ equity฀ instrument฀ is฀ not฀ held฀
for฀ trading,฀an฀entity฀can฀make฀an฀irrevocable฀ election฀ at฀initial฀recognition฀to฀measure฀it฀at฀
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fair฀ value฀ through฀ other฀ comprehensive฀ income฀with฀only฀dividend฀income฀recognised฀in฀

profit฀or฀loss฀(IFRS฀9:฀para.฀5.7.5).฀
This฀is฀different฀from฀the฀treatment฀of฀investments฀in฀debt฀instruments,฀where฀the฀fair฀
value฀ through฀ other฀ comprehensive฀ income฀ classification฀ is฀ mandatory฀ for฀ assets฀
meeting฀the฀criteria,฀unless฀the฀fair฀value฀option฀through฀profit฀or฀loss฀option฀is฀chosen.฀
Fair฀value฀through฀profit฀or฀loss฀
All฀other฀financial฀assets฀must฀be฀measured฀at฀fair฀value฀through฀profit฀or฀loss฀ (IFRS฀9:฀
para.฀4.1.4).฀
Fair฀value฀through฀profit฀or฀loss฀option฀to฀avoid฀an฀'accounting฀mismatch'฀
Even฀if฀an฀instrument฀meets฀the฀above฀criteria฀for฀measurement฀at฀amortised฀cost฀or฀fair฀value฀through฀
other฀ comprehensive฀ income,฀ IFRS฀ 9฀ allows฀ such฀ financial฀ assets฀ to฀ be฀ designated,฀ at฀ initial฀
recognition,฀as฀being฀measured฀at฀fair฀value฀through฀profit฀or฀loss฀if฀a฀recognition฀
or฀ measurement฀ inconsistency฀ (an฀ 'accounting฀ mismatch')฀ would฀ otherwise฀ arise฀ from฀
measuring฀ assets฀ or฀ liabilities฀ or฀ recognising฀ the฀ gains฀ and฀ losses฀ on฀ them฀ on฀ different฀ bases฀
(IFRS฀9:฀para.฀4.1.5).฀
Illustration฀1฀
On฀1฀January฀20X1฀Abacus฀Co฀purchases฀a฀debt฀instrument฀for฀its฀fair฀value฀of฀$1,000.฀The฀debt฀
instrument฀is฀due฀to฀mature฀on฀31฀December฀20X5.฀The฀instrument฀has฀a฀principal฀amount฀of฀$1,250฀
and฀the฀instrument฀carries฀fixed฀interest฀at฀4.72%฀that฀is฀paid฀annually.฀(The฀effective฀interest฀rate฀is฀
10%.)฀
Abacus฀holds฀the฀investment฀in฀a฀portfolio฀of฀financial฀assets฀held฀to฀collect฀the฀contractual฀cash฀flows.฀
Required฀
How฀should฀Abacus฀Co฀account฀for฀the฀debt฀instrument฀over฀its฀five฀year฀term?฀
Solution฀
The฀debt฀instrument฀is฀measured฀at฀amortised฀cost฀as฀the฀business฀model฀is฀to฀collect฀the฀contractual฀
cash฀flows฀and฀the฀cash฀flows฀are฀solely฀payments฀of฀principal฀and฀interest฀on฀the฀principal฀amount฀
outstanding.฀
Abacus฀Co฀will฀receive฀interest฀of฀$59฀(1,250฀×฀4.72%)฀each฀year฀and฀$1,250฀when฀the฀instrument฀
matures.฀
Abacus฀must฀allocate฀the฀discount฀of฀$250฀and฀the฀interest฀receivable฀over฀the฀five฀year฀term฀at฀a฀
constant฀rate฀on฀the฀carrying฀amount฀of฀the฀debt.฀To฀do฀this,฀it฀must฀apply฀the฀effective฀interest฀rate฀of฀
10%.฀
The฀following฀table฀shows฀the฀allocation฀over฀the฀years:฀
Year฀ 20X1 20X2 20X3 20X4 20X5฀ ฀
฀ $฀ $ $ ฀ $ $฀ ฀
b/d฀ 1,000฀ 1,041 1,086 1,136 1,190฀
Effective฀ ฀ ฀
interest฀ 100฀ 104฀ 109฀ 113฀ 119฀
Cash฀ ฀ ฀
received฀ ฀ ฀฀฀฀(59)฀ ฀฀฀฀฀(59) ฀฀฀฀(59) ฀฀฀฀(59) (1,309)฀ (1,250฀+฀59)฀
c/d฀ ฀1,041฀ ฀1,086 1,136 1,190 ฀฀฀฀฀฀–฀
฀
Each฀year฀the฀carrying฀amount฀of฀the฀financial฀asset฀is฀increased฀by฀the฀interest฀income฀for฀the฀year฀
and฀reduced฀by฀the฀interest฀actually฀received฀during฀the฀year.฀
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3.1.3฀Financial฀assets฀measured฀at฀fair฀value฀
Where฀ a฀ financial฀ asset฀ is฀ classified฀ as฀ measured฀ at฀ fair฀ value,฀ fair฀ value฀ is฀ established฀ at฀ each฀
period฀end฀in฀accordance฀with฀IFRS฀13฀Fair฀Value฀Measurement.฀That฀standard฀requires฀that฀a฀fair฀
value฀hierarchy฀is฀applied฀with฀three฀levels฀of฀input฀(IFRS฀13:฀paras.฀76,฀81,฀86):฀
Level฀1฀inputs.฀Unadjusted฀quoted฀prices฀in฀active฀markets฀for฀identical฀assets฀or฀liabilities฀that฀the฀
entity฀can฀access฀at฀the฀measurement฀date.฀
Level฀2฀inputs.฀Inputs฀other฀than฀quoted฀prices฀included฀within฀Level฀1฀that฀are฀observable฀for฀the฀
asset฀ or฀ liability,฀ either฀ directly฀ or฀ indirectly.฀ These฀ may฀ include฀ quoted฀ prices฀ for฀ similar฀ assets฀ or฀
liabilities฀in฀active฀markets,฀or฀quoted฀prices฀for฀identical฀or฀similar฀assets฀and฀liabilities฀in฀markets฀
that฀are฀not฀active.฀
Level฀3฀inputs.฀Unobservable฀inputs฀for฀the฀asset฀or฀liability.฀
Any฀changes฀in฀fair฀value฀are฀normally฀recognised฀in฀profit฀or฀loss.฀฀
There฀are฀three฀exceptions฀to฀this฀rule฀(IFRS฀9:฀para฀5.7.1):฀
(a)฀ The฀asset฀is฀part฀of฀a฀hedging฀relationship.฀฀
(b)฀ The฀financial฀asset฀is฀an฀investment฀in฀an฀equity฀instrument฀not฀held฀for฀trading.฀In฀this฀
case฀the฀entity฀can฀make฀an฀irrevocable฀election฀to฀recognise฀changes฀in฀the฀fair฀value฀in฀
other฀comprehensive฀income.฀
(c)฀ It฀ is฀ a฀ financial฀ asset฀ measured฀ at฀ fair฀ value฀ through฀ other฀ comprehensive฀
income฀ because฀ it฀ is฀ a฀ financial฀ asset฀ held฀ within฀ a฀ business฀ model฀ whose฀ objective฀ is฀
achieved฀by฀both฀collecting฀contractual฀cash฀flows฀and฀selling฀financial฀assets.฀
Note฀that฀direct฀costs฀of฀acquisition฀are฀capitalised฀only฀in฀the฀case฀of฀a฀financial฀asset฀or฀financial฀
liability฀ not฀ held฀ at฀ fair฀ value฀ through฀ profit฀ or฀ loss.฀ If฀ the฀ asset฀ or฀ liability฀ is฀ held฀ at฀ fair฀ value฀
through฀profit฀or฀loss,฀the฀costs฀of฀acquisition฀are฀expensed.฀This฀means฀that฀in฀the฀case฀of฀financial฀
assets฀held฀at฀amortised฀cost,฀costs฀of฀acquisition฀are฀capitalised.฀They฀would฀be฀added฀
to฀the฀asset฀and฀deducted฀from฀the฀liability฀amount.฀Similarly,฀if฀an฀irrevocable฀election฀has฀been฀
made฀to฀take฀gains฀and฀losses฀on฀the฀financial฀asset฀to฀other฀comprehensive฀income,฀costs฀
of฀acquisition฀should฀be฀added฀to฀the฀purchase฀cost.฀
Illustration฀2฀
On฀8฀February฀20X8฀Orange฀Co฀acquires฀a฀quoted฀investment฀in฀the฀shares฀of฀Lemon฀Co฀with฀the฀
intention฀of฀holding฀it฀in฀the฀long฀term.฀The฀investment฀cost฀$850,000.฀At฀Orange฀Co's฀year฀end฀of฀
31฀March฀20X8,฀the฀market฀price฀of฀an฀identical฀investment฀is฀$900,000.฀How฀is฀the฀asset฀initially฀
and฀subsequently฀measured?฀
Orange฀Co฀has฀elected฀to฀recognise฀changes฀in฀the฀fair฀value฀of฀the฀equity฀investment฀in฀other฀
Solution฀
฀ The฀asset฀is฀initially฀recognised฀at฀the฀fair฀value฀of฀the฀consideration,฀being฀$850,000.฀
฀ At฀the฀period฀end฀it฀is฀re-measured฀to฀$900,000.฀
฀ This฀results฀in฀the฀recognition฀of฀$50,000฀in฀other฀comprehensive฀income.฀
Activity฀1:฀Investments฀in฀equity฀instruments฀ ฀
In฀ January฀ 20X6฀ Wolf฀ purchased฀ 10฀ million฀ $1฀ listed฀ equity฀ shares฀ in฀ Hall฀ at฀ a฀ price฀ of฀ $5฀ per฀
share.฀฀Transaction฀costs฀were฀$3m.฀Wolf's฀year฀end฀is฀30฀November.฀฀
At฀ 30฀ November฀ 20X6,฀ the฀ shares฀ in฀ Hall฀ were฀ trading฀ at฀ $6.50.฀ On฀ 31฀ October฀ 20X6฀ Wolf฀
received฀a฀dividend฀from฀Hall฀of฀20c฀per฀share.฀
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Required฀
Show฀ the฀ financial฀ statement฀ extracts฀ of฀ Wolf฀ at฀ 30฀ November฀ 20X6฀ relating฀ to฀ the฀ investment฀ in฀
Hall฀on฀the฀basis฀that:฀
(a)฀ The฀shares฀were฀bought฀for฀trading.฀
(b)฀ The฀ shares฀ were฀ bought฀ as฀ a฀ source฀ of฀ dividend฀ income฀ and฀ were฀ the฀ subject฀ of฀ an฀
irrevocable฀ election฀ at฀ initial฀ recognition฀ to฀ recognise฀ them฀ at฀ fair฀ value฀ through฀ other฀
3.2฀Re-classification฀of฀financial฀assets฀
Although฀ on฀ initial฀ recognition฀ financial฀ instruments฀ must฀ be฀ classified฀ in฀ accordance฀ with฀ the฀
requirements฀ of฀ IFRS฀ 9,฀ in฀ some฀ cases฀ they฀ may฀ be฀ subsequently฀ reclassified.฀ IFRS฀ 9฀ requires฀ that฀
when฀an฀entity฀changes฀its฀business฀model฀for฀managing฀financial฀assets,฀it฀should฀
reclassify฀all฀affected฀financial฀assets฀(IFRS฀9:฀para.฀4.4.1).฀
This฀ reclassification฀ applies฀ only฀ to฀ investments฀ in฀ debt฀ instruments,฀ as฀ investments฀ in฀ equity฀
instruments฀must฀be฀classified฀as฀measured฀at฀fair฀value฀(IFRS฀9:฀para.฀4.1.4).฀
Similarly,฀reclassification฀of฀financial฀liabilities฀is฀not฀permitted฀(IFRS฀9:฀para.฀4.4.2).฀
3.2.1฀Examples:฀Reclassification฀permitted฀
Reclassification฀ is฀ permitted฀ in฀ the฀ following฀ circumstances,฀ because฀ a฀ change฀ in฀ the฀
business฀model฀has฀taken฀place฀(IFRS฀9:฀para.฀B4.4.1):฀
(a)฀ An฀entity฀has฀a฀portfolio฀of฀commercial฀loans฀that฀it฀holds฀to฀sell฀in฀the฀short฀term.฀The฀entity฀
acquires฀a฀company฀that฀manages฀commercial฀loans฀and฀has฀a฀business฀model฀that฀holds฀the฀
loans฀ in฀ order฀ to฀ collect฀ the฀ contractual฀ cash฀ flows.฀ The฀ portfolio฀ of฀ commercial฀ loans฀ is฀ no฀
longer฀ for฀ sale,฀ and฀ the฀ portfolio฀ is฀ now฀ managed฀ together฀ with฀ the฀ acquired฀ commercial฀
loans฀and฀all฀are฀held฀to฀collect฀the฀contractual฀cash฀flows.฀
(b)฀ A฀ financial฀ services฀ firm฀ decides฀ to฀ shut฀ down฀ its฀ retail฀ mortgage฀ business.฀ That฀ business฀ no฀
longer฀accepts฀new฀business฀and฀the฀financial฀services฀firm฀is฀actively฀marketing฀its฀mortgage฀
loan฀portfolio฀for฀sale.฀
3.2.2฀Examples:฀Reclassification฀not฀permitted฀
Reclassification฀ is฀ not฀ permitted฀ in฀ the฀ following฀ circumstances,฀ because฀ a฀ change฀ in฀ the฀
business฀model฀has฀not฀taken฀place฀(IFRS฀9:฀para.฀B4.4.3):฀
(a)฀ A฀change฀in฀intention฀related฀to฀particular฀financial฀assets฀(even฀in฀circumstances฀of฀significant฀
changes฀in฀market฀conditions);฀
(b)฀ A฀temporary฀disappearance฀of฀a฀particular฀market฀for฀financial฀assets;฀or฀
(c)฀ A฀transfer฀of฀financial฀assets฀between฀parts฀of฀the฀entity฀with฀different฀business฀models.฀
3.2.3฀Gains฀and฀losses฀on฀reclassification฀of฀financial฀assets฀
If฀a฀financial฀asset฀is฀reclassified฀from฀amortised฀cost฀to฀fair฀value,฀any฀gain฀or฀loss฀arising฀
from฀a฀difference฀between฀the฀previous฀carrying฀amount฀and฀fair฀value฀is฀recognised฀in฀profit฀or฀
loss฀(IFRS฀9:฀para.฀5.6.2).฀
If฀ a฀ financial฀ asset฀ is฀ reclassified฀ from฀ fair฀ value฀ to฀ amortised฀ cost,฀ fair฀ value฀ at฀ the฀ date฀ of฀
reclassification฀becomes฀the฀new฀carrying฀amount฀(IFRS฀9:฀para.฀5.6.3).฀
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3.3฀Classification฀and฀measurement฀of฀financial฀liabilities฀
3.3.1฀฀Initial฀measurement฀of฀financial฀liabilities฀
IFRS฀9฀requires฀that฀financial฀liabilities฀are฀initially฀measured฀at฀transaction฀price,฀ie฀the฀fair฀value฀of฀
consideration฀ received฀ except฀ where฀ part฀ of฀ the฀ consideration฀ received฀ is฀ for฀ something฀ other฀ than฀
the฀financial฀liability.฀In฀this฀case฀the฀financial฀liability฀is฀initially฀measured฀at฀fair฀value฀measured฀as฀
for฀ financial฀ assets฀ (see฀ above).฀ Transaction฀ costs฀ are฀ deducted฀ from฀ this฀ amount฀ for฀ financial฀
liabilities฀classified฀as฀measured฀at฀amortised฀cost฀(IFRS฀9:฀para.฀5.5.1).฀฀
3.3.2฀฀Subsequent฀measurement฀of฀financial฀liabilities฀
After฀ initial฀ recognition,฀ all฀ financial฀ liabilities฀ should฀ be฀ measured฀ at฀ amortised฀ cost,฀ with฀ the฀
exception฀of฀(IFRS฀9:฀para.฀4.2.1):฀
฀ Financial฀liabilities฀at฀fair฀value฀through฀profit฀or฀loss฀(including฀most฀derivatives);฀
฀ Financial฀liabilities฀arising฀when฀transfer฀of฀financial฀asset฀does฀not฀qualify฀for฀derecognition;฀
and฀
฀ Financial฀ guarantee฀ contracts฀ and฀ commitments฀ to฀ provide฀ a฀ loan฀ at฀ a฀ below-market฀ interest฀
rate.฀
SUBSEQUENT฀MEASUREMENT฀–฀FINANCIAL฀LIABILITIES฀
Amortised฀cost฀ Fair฀value฀through฀ Other฀basis฀

profit฀or฀loss฀ ฀
 Most฀financial฀ ฀ Financial฀liabilities฀  Financial฀liability฀arising฀when฀

liabilities 'held฀for฀trading'฀ transfer฀of฀a฀financial฀asset฀does฀
฀ Designated฀at฀fair฀value฀ not฀qualify฀for฀derecognition฀
through฀profit฀or฀loss฀on฀ ฀ –฀ measure฀on฀same฀basis฀as฀
initial฀recognition฀ transferred฀financial฀asset฀(ie฀
฀ amortised฀cost฀or฀fair฀value)฀
฀ Financial฀guarantee฀contracts฀and฀
commitments฀to฀provide฀a฀loan฀at฀
below-market฀interest฀rate,฀
measured฀at฀higher฀of:฀
฀ –฀ impairment฀loss฀allowance;฀and฀
฀ –฀ amount฀initially฀recognised฀less฀
amounts฀amortised฀to฀P/L฀
(IFRS฀15)฀
A฀financial฀liability฀is฀classified฀at฀fair฀value฀through฀profit฀or฀loss฀if฀(IFRS฀9:฀Appendix฀B):฀
(a)฀ It฀is฀held฀for฀trading,฀ie:฀
(i)฀ Is฀ acquired฀ or฀ incurred฀ principally฀ for฀ the฀ purpose฀ of฀ selling฀ or฀ repurchasing฀ it฀ in฀ the฀
near฀term;฀
(ii)฀ On฀ initial฀ recognition฀ is฀ part฀ of฀ a฀ portfolio฀ of฀ identified฀ financial฀ instruments฀ that฀ are฀
managed฀ together฀ and฀ for฀ which฀ there฀ is฀ evidence฀ of฀ a฀ recent฀ actual฀ pattern฀ of฀ short-
term฀profit-taking;฀or฀
(iii)฀ Is฀ a฀ derivative฀ (except฀ for฀ a฀ derivative฀ that฀ is฀ a฀ financial฀ guarantee฀ contract฀ or฀ a฀
designated฀and฀effective฀hedging฀instrument).฀
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Or:฀
(b)฀ Upon฀ initial฀ recognition฀ it฀ is฀ irrevocably฀ designated฀ at฀ fair฀ value฀ through฀ profit฀ or฀
loss.฀ This฀ is฀ permitted฀ when฀ it฀ results฀ in฀ more฀ relevant฀ information฀ because฀ (IFRS฀ 9:฀
para.฀4.2.2):฀฀
(i)฀ It฀ eliminates฀ or฀ significantly฀ reduces฀ a฀ measurement฀ or฀ recognition฀ inconsistency฀
('accounting฀ mismatch')฀ that฀ would฀ otherwise฀ arise฀ from฀ measuring฀ assets฀ or฀ liabilities฀
or฀recognising฀the฀gains฀and฀losses฀on฀them฀on฀different฀bases;฀or฀
(ii)฀ It฀is฀a฀group฀of฀financial฀liabilities฀or฀financial฀assets฀and฀liabilities฀and฀its฀performance฀
is฀evaluated฀on฀a฀fair฀value฀basis,฀in฀accordance฀with฀a฀documented฀risk฀management฀
or฀investment฀strategy.฀
Note.฀Derivatives฀are฀always฀measured฀at฀fair฀value฀through฀profit฀or฀loss.฀
Financial฀liabilities฀measured฀at฀amortised฀cost฀
The฀definitions฀of฀amortised฀cost,฀effective฀interest฀method฀and฀effective฀interest฀rate฀that฀are฀used฀for฀
measurement฀of฀financial฀assets฀are฀also฀used฀for฀financial฀liabilities.฀
Illustration฀3฀
Galaxy฀Co฀issues฀a฀bond฀for฀$503,778฀on฀1฀January฀20X2.฀No฀interest฀is฀payable฀on฀the฀bond,฀
but฀it฀will฀be฀redeemed฀on฀31฀December฀20X4฀for฀$600,000.฀The฀effective฀interest฀rate฀of฀the฀
bond฀is฀6%.฀฀
Required฀
Calculate฀the฀charge฀to฀profit฀or฀loss฀of฀Galaxy฀Co฀for฀the฀year฀ended฀31฀December฀20X2฀and฀the฀
balance฀outstanding฀at฀31฀December฀20X2.฀
Solution฀
The฀bond฀is฀a฀'deep฀discount'฀bond฀and฀is฀a฀financial฀liability฀of฀Galaxy฀Co.฀It฀is฀measured฀at฀
amortised฀cost.฀Although฀there฀is฀no฀interest฀as฀such,฀the฀difference฀between฀the฀initial฀cost฀of฀the฀
bond฀and฀the฀price฀at฀which฀it฀will฀be฀redeemed฀is฀a฀finance฀cost.฀This฀must฀be฀allocated฀over฀the฀
term฀of฀the฀bond฀at฀a฀constant฀rate฀on฀the฀carrying฀amount.฀
The฀effective฀interest฀rate฀is฀6%.฀
The฀charge฀to฀profit฀or฀loss฀for฀the฀year฀is฀$30,226฀(503,778฀×฀6%).฀
The฀balance฀outstanding฀at฀31฀December฀20X2฀is฀$534,004฀(503,778฀+฀30,226).฀
Activity฀2:฀Financial฀liability฀at฀amortised฀cost฀ ฀
On฀1฀January฀20X3฀Deferred฀issued฀$600,000฀loan฀notes.฀Issue฀costs฀were฀$200.฀The฀loan฀notes฀
do฀not฀carry฀interest,฀but฀are฀redeemable฀at฀a฀premium฀of฀$152,389฀on฀31฀December฀20X4.฀The฀
effective฀finance฀cost฀of฀the฀loan฀notes฀is฀12%.฀
Required฀
Show฀the฀amortised฀cost฀for฀the฀two฀years฀ending฀31฀December฀20X4.฀
Financial฀liabilities฀at฀fair฀value฀through฀profit฀or฀loss฀
Financial฀liabilities฀which฀are฀held฀for฀trading฀are฀re-measured฀to฀fair฀value฀each฀year฀in฀accordance฀
with฀IFRS฀13฀Fair฀Value฀Measurement฀with฀any฀gain฀or฀loss฀recognised฀in฀profit฀or฀loss.฀
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Exceptions฀
The฀exceptions฀to฀the฀above฀treatment฀of฀financial฀liabilities฀occur฀if฀(IFRS฀9:฀para.฀5.7.1):฀
(a)฀ It฀is฀part฀of฀a฀hedging฀arrangement.฀
(b)฀ It฀ is฀ a฀ financial฀ liability฀ designated฀ as฀ at฀ fair฀ value฀ through฀ profit฀ or฀ loss฀ and฀ the฀ entity฀ is฀
required฀to฀present฀the฀effects฀of฀changes฀in฀the฀liability's฀credit฀risk฀in฀other฀comprehensive฀
income฀(see฀below).฀
Credit฀risk฀re฀financial฀liabilities฀designated฀at฀fair฀value฀through฀profit฀or฀loss฀
IFRS฀ 9฀ requires฀ that฀ financial฀ liabilities฀ which฀ are฀ designated฀ as฀ measured฀ at฀ fair฀ value฀
through฀profit฀or฀loss฀are฀treated฀differently.฀In฀this฀case฀the฀gain฀or฀loss฀in฀a฀period฀must฀
be฀classified฀into฀(IFRS฀9:฀para฀5.7.7):฀
฀ Gain฀or฀loss฀resulting฀from฀credit฀risk;฀and฀
฀ Remaining฀gain฀or฀loss.฀
This฀ provision฀ of฀ IFRS฀ 9฀ was฀ in฀ response฀ to฀ an฀ anomaly฀ regarding฀ changes฀ in฀ the฀ credit฀ risk฀ of฀ a฀
financial฀liability.฀฀
Changes฀ in฀ a฀ financial฀ liability's฀ credit฀ risk฀ affect฀ the฀ fair฀ value฀ of฀ that฀ financial฀
liability.฀This฀means฀that฀when฀an฀entity's฀creditworthiness฀deteriorates,฀the฀fair฀value฀of฀its฀issued฀
debt฀will฀decrease฀(and฀vice฀versa).฀For฀financial฀liabilities฀measured฀using฀the฀fair฀value฀option,฀this฀
would฀cause฀a฀gain฀(or฀loss)฀to฀be฀recognised฀in฀profit฀or฀loss฀for฀the฀year.฀For฀example:฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extract)฀
PROFIT฀OR฀LOSS฀FOR฀THE฀YEAR฀
Liabilities฀at฀fair฀value฀(except฀derivatives฀and฀liabilities฀held฀for฀trading) $'000฀
Change฀in฀fair฀value฀ 100฀
Profit฀(loss)฀for฀the฀year 100฀
Many฀ users฀ of฀ financial฀ statements฀ found฀ this฀ result฀ to฀ be฀ counter-intuitive฀ and฀ confusing.฀
Accordingly,฀IFRS฀9฀requires฀the฀gain฀or฀loss฀as฀a฀result฀of฀credit฀risk฀to฀be฀recognised฀ in฀ other฀
comprehensive฀income฀(IFRS฀9:฀para.฀5.7.7).฀
The฀remaining฀gain฀or฀loss฀(ie฀not฀the฀result฀of฀credit฀risk)฀is฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀
para.฀5.7.7).฀
On฀derecognition฀any฀gains฀or฀losses฀recognised฀in฀other฀comprehensive฀income฀are฀not฀transferred฀
to฀profit฀or฀loss,฀although฀the฀cumulative฀gain฀or฀loss฀may฀be฀transferred฀within฀equity.฀
Example฀of฀IFRS฀9฀presentation฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extract)฀ ฀
PROFIT฀OR฀LOSS฀FOR฀THE฀YEAR฀ ฀
Liabilities฀at฀fair฀value฀(except฀derivatives฀and฀liabilities฀held฀for฀trading) ฀฀฀$'000฀
Change฀in฀fair฀value฀not฀attributable฀to฀credit฀risk฀ ฀90฀
Profit฀(loss)฀for฀the฀year฀ ฀฀฀฀90฀
OTHER฀COMPREHENSIVE฀INCOME฀(NOT฀RECLASSIFIED฀TO฀PROFIT฀OR฀LOSS)฀
Fair฀value฀loss฀on฀financial฀liability฀attributable฀to฀change฀in฀credit฀risk฀ ฀฀฀฀10฀
Total฀comprehensive฀income฀ ฀100฀
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Accounting฀mismatch฀
There฀is฀an฀exception฀to฀the฀above฀rule.฀฀If฀recognising฀the฀gain฀or฀loss฀resulting฀from฀a฀change฀in฀
credit฀ risk฀ in฀ other฀ comprehensive฀ income฀ would฀ create฀ or฀ enlarge฀ an฀ accounting฀
mismatch,฀the฀gain฀or฀loss฀is฀still฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀para.฀5.7.8).฀฀
An฀ accounting฀ mismatch฀ is฀ a฀ measurement฀ or฀ recognition฀ inconsistency฀ that฀ would฀ otherwise฀ arise฀
from฀measuring฀assets฀or฀liabilities฀or฀recognising฀the฀gains฀and฀losses฀on฀them฀on฀different฀bases.฀
That฀determination฀is฀made฀at฀initial฀recognition฀and฀is฀not฀reassessed฀(IFRS฀9:฀para.฀4.1.5).฀
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฀ Activity฀answers฀
Chapter฀7฀
Activity฀1:฀Investments฀in฀equity฀instruments฀
(i)฀ STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extract)฀
฀ $m
Profit฀or฀loss฀for฀the฀year฀
Investment฀income฀(10m฀×฀(6.5฀– 5.0)) ฀ 12
Dividend฀income฀(10m฀×฀20c)฀ 2
Transaction฀costs (3)
Investments฀in฀equity฀instruments฀(10m฀×฀6.5) 65
(ii)฀ STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(Extract)฀
฀ $m
Profit฀or฀loss฀for฀the฀year฀
Dividend฀income ฀ ฀฀฀ 2
฀
Gain฀on฀investment฀in฀equity฀instruments฀(65฀– 50฀+฀3) 12
Investments฀in฀equity฀instruments฀
(10m฀×฀6.5)฀ 65
Activity฀2:฀Financial฀liability฀at฀amortised฀cost฀
The฀premium฀on฀redemption฀of฀the฀loan฀notes฀represents฀a฀finance฀cost.฀The฀effective฀rate฀of฀interest฀
must฀be฀applied฀so฀that฀the฀debt฀is฀measured฀at฀amortised฀cost.฀
At฀the฀time฀of฀issue,฀the฀loan฀notes฀are฀recognised฀at฀their฀net฀proceeds฀of฀$599,800฀(600,000฀–฀200).฀
The฀amortised฀cost฀is฀calculated฀as฀follows:฀
Year฀ 20X3 20X4 ฀
฀ ฀$ $ ฀
b/d฀(600,000฀–฀200)฀ 599,800 671,776 ฀
Effective฀interest฀(b/d฀× 12%)฀ 71,976 80,613 ฀
Cash฀received฀ ฀฀฀฀฀฀฀ (0) (0) ฀
c/d฀ ฀671,776 752,389 =฀600,000฀+฀152,389฀premium
฀
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฀
฀
฀
฀
Leases
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀ 667฀

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1฀Lessee฀accounting฀
1.1฀Identifying฀a฀lease:฀examples฀
The฀ following฀ flowchart฀ may฀ assist฀ you฀ in฀ determining฀ whether฀ a฀ lease฀ may฀ be฀ identified฀ in฀ the฀
examples฀that฀follow:฀
No
Is฀there฀an฀identified฀asset?
Consider฀paragraphs฀B13−B20.
Yes
Does฀the฀customer฀have฀the฀right฀to
obtain฀substantially฀all฀of฀the฀economic No
benefits฀from฀use฀of฀the฀asset฀throughout
the฀period฀of฀use?
Consider฀paragraphs฀B21–B23.
Yes
Does฀the฀customer,฀the฀supplier฀or
Customer neither฀party฀have฀the฀right฀to฀direct฀how Supplier
and฀for฀what฀purpose฀the฀asset฀is฀used
throughout฀the฀period฀of฀use?
Consider฀paragraphs฀B25–B30.
Neither;฀how฀and฀for฀what
purpose฀the฀asset฀will฀be
used฀is฀predetermined
Does฀the฀customer฀have฀the฀right฀to
Yes operate฀the฀asset฀throughout฀the฀period฀of
use,฀without฀the฀supplier฀having฀the฀right
to฀change฀those฀operating฀instructions?
Consider฀paragraph฀B24(b)(i).
No
Does฀the฀customer฀design฀the฀asset฀in฀a฀way
No
that฀predetermines฀how฀and฀for฀what
purpose฀the฀asset฀will฀be฀used฀throughout
the฀period฀of฀use?
Consider฀paragraph฀B24(b)(ii).
Yes
The฀contract฀does฀not
The฀contract฀contains฀a฀lease
contain฀a฀lease
฀
(IFRS฀16:฀Appendix฀B,฀para.฀B31)฀
Illustration฀1฀
Coketown฀Council฀has฀entered฀into฀a฀five-year฀contract฀with฀Carefleet฀Co,฀under฀which฀Carefleet฀Co฀
supplies฀the฀council฀with฀ten฀vehicles฀for฀the฀purposes฀of฀community฀transport.฀Carefleet฀Co฀owns฀the฀
relevant฀vehicles,฀all฀ten฀of฀which฀are฀specified฀in฀the฀contract.฀Coketown฀Council฀determines฀the฀
routes฀taken฀for฀community฀transport฀and฀the฀charges฀and฀eligibility฀for฀discounts.฀The฀council฀can฀
choose฀to฀use฀the฀vehicles฀for฀purposes฀other฀than฀community฀transport.฀When฀the฀vehicles฀are฀not฀
being฀used,฀they฀are฀kept฀at฀the฀council's฀offices฀and฀cannot฀be฀retrieved฀by฀Carefleet฀unless฀
Coketown฀Council฀defaults฀on฀payment.฀If฀a฀vehicle฀needs฀to฀be฀serviced฀or฀repaired,฀Carefleet฀is฀
obliged฀to฀provide฀a฀temporary฀replacement฀vehicle฀of฀the฀same฀type.฀฀
฀ ฀
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8:฀Leases฀
Analysis฀
Conclusion:฀this฀is฀a฀lease.฀There฀is฀an฀identifiable฀asset,฀the฀ten฀vehicles฀specified฀in฀the฀contract.฀
The฀council฀has฀a฀right฀to฀use฀the฀vehicles฀for฀the฀period฀of฀the฀contract.฀Carefleet฀Co฀does฀not฀have฀
the฀right฀to฀substitute฀any฀of฀the฀vehicles฀unless฀they฀are฀being฀serviced฀or฀repaired.฀Therefore฀
Coketown฀Council฀would฀need฀to฀recognise฀an฀asset฀and฀liability฀in฀its฀statement฀of฀financial฀position.฀฀
Illustration฀2฀
Broketown฀Council฀has฀recently฀made฀substantial฀cuts฀to฀its฀community฀transport฀service.฀It฀will฀now฀
provide฀such฀services฀only฀in฀cases฀of฀great฀need,฀assessed฀on฀a฀case฀by฀case฀basis.฀It฀has฀entered฀
into฀a฀two-year฀contract฀with฀Fleetcar฀Co฀for฀the฀use฀of฀one฀of฀its฀minibuses฀for฀this฀purpose.฀The฀
minibus฀must฀seat฀ten฀people,฀but฀Fleetcar฀Co฀can฀use฀any฀of฀its฀ten-seater฀minibuses฀when฀required.฀฀
Analysis฀
Conclusion:฀this฀is฀not฀a฀lease.฀There฀is฀no฀identifiable฀asset.฀Fleetcar฀can฀exchange฀one฀minibus฀for฀
another.฀Therefore฀Broketown฀Council฀should฀account฀for฀the฀rental฀payments฀as฀an฀expense฀in฀profit฀
or฀loss.฀฀
Illustration฀3฀
This฀example฀is฀taken฀from฀IFRS฀16฀Illustrative฀Example฀3.฀
Kabal฀enters฀into฀a฀ten-year฀contract฀with฀a฀utilities฀company฀(Telenew)฀for฀the฀right฀to฀use฀three฀
specified,฀physically฀distinct฀dark฀fibres฀within฀a฀larger฀cable฀connecting฀North฀Town฀to฀South฀Town.฀
Kabal฀makes฀the฀decisions฀about฀the฀use฀of฀the฀fibres฀by฀connecting฀each฀end฀of฀the฀fibres฀to฀its฀
electronic฀equipment฀(ie฀Kabal฀'lights'฀the฀fibres฀and฀decides฀what฀data,฀and฀how฀much฀data,฀
those฀fibres฀will฀transport).฀If฀the฀fibres฀are฀damaged,฀Telenew฀is฀responsible฀for฀the฀repairs฀and฀
maintenance.฀Telenew฀owns฀extra฀fibres,฀but฀can฀substitute฀those฀for฀Kabal's฀fibres฀only฀for฀reasons฀
of฀repairs,฀maintenance฀or฀malfunction฀(and฀is฀obliged฀to฀substitute฀the฀fibres฀in฀these฀cases).฀
Analysis฀
Conclusion:฀this฀is฀a฀lease.฀The฀contract฀contains฀a฀lease฀of฀dark฀fibres.฀Kabal฀has฀the฀right฀to฀use฀the฀
three฀dark฀fibres฀for฀ten฀years.฀
There฀are฀three฀identified฀fibres.฀The฀fibres฀are฀explicitly฀specified฀in฀the฀contract฀and฀are฀physically฀
distinct฀from฀other฀fibres฀within฀the฀cable.฀Telenew฀cannot฀substitute฀the฀fibres฀other฀than฀for฀reasons฀
of฀repairs,฀maintenance฀or฀malfunction฀(IFRS฀16:฀para.฀B18).฀฀
Kabal฀has฀the฀right฀to฀control฀the฀use฀of฀the฀fibres฀throughout฀the฀ten-year฀period฀of฀use฀because:฀
(a)฀ Kabal฀has฀the฀right฀to฀obtain฀substantially฀all฀of฀the฀economic฀benefits฀from฀use฀of฀the฀fibres฀
over฀the฀ten-year฀period฀of฀use฀and฀Kabal฀has฀exclusive฀use฀of฀the฀fibres฀throughout฀the฀period฀
of฀use.฀
(b)฀ Kabal฀has฀the฀right฀to฀direct฀the฀use฀of฀the฀fibres฀because฀IFRS฀16:฀para.฀B24฀applies:฀
฀ (i)฀ The฀customer฀has฀the฀right฀to฀direct฀how฀and฀for฀what฀purpose฀the฀asset฀is฀used฀during฀
the฀whole฀of฀its฀period฀of฀use;฀or฀
฀ (ii)฀ The฀relevant฀decisions฀about฀use฀are฀pre-determined฀and฀the฀customer฀can฀operate฀the฀
asset฀without฀the฀supplier฀having฀the฀right฀to฀change฀those฀operating฀instructions.฀
Kabal฀makes฀the฀relevant฀decisions฀about฀how฀and฀for฀what฀purpose฀the฀fibres฀are฀used฀by฀deciding฀
(i)฀when฀and฀whether฀to฀light฀the฀fibres฀and฀(ii)฀when฀and฀how฀much฀output฀the฀fibres฀will฀produce฀
(ie฀what฀data,฀and฀how฀much฀data,฀those฀fibres฀will฀transport).฀Kabal฀has฀the฀right฀to฀change฀these฀
decisions฀during฀the฀ten-year฀period฀of฀use.฀
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Although฀Telenew's฀decisions฀about฀repairing฀and฀maintaining฀the฀fibres฀are฀essential฀to฀their฀
efficient฀use,฀those฀decisions฀do฀not฀give฀Telenew฀the฀right฀to฀direct฀how฀and฀for฀what฀purpose฀the฀
fibres฀are฀used.฀Consequently,฀Telenew฀does฀not฀control฀the฀use฀of฀the฀fibres฀during฀the฀period฀of฀use.฀
1.2฀Separating฀multiple฀components฀of฀a฀lease฀contract฀
A฀contract฀may฀contain฀both฀a฀lease฀component฀and฀a฀non-lease฀component.฀In฀other฀words฀it฀may฀
include฀an฀amount฀payable฀by฀the฀lessee฀for฀activities฀and฀costs฀that฀do฀not฀transfer฀goods฀or฀
services฀to฀the฀lessee฀(IFRS฀16:฀para.฀B33).฀These฀activities฀and฀costs฀might,฀for฀example,฀include฀
maintenance,฀repairs฀or฀cleaning.฀฀
IFRS฀16฀requires฀entities฀to฀account฀for฀the฀lease฀component฀of฀the฀contract฀separately฀
from฀the฀non-lease฀component.฀The฀entity฀must฀split฀the฀rental฀or฀lease฀payment฀and:฀
฀ Account฀for฀the฀lease฀component฀under฀IFRS฀16;฀and฀
฀ Account฀for฀the฀service฀element฀separately,฀generally฀as฀an฀expense฀in฀profit฀or฀loss.฀
The฀consideration฀in฀the฀contract฀is฀allocated฀on฀the฀basis฀of฀the฀stand-alone฀prices฀of฀the฀
lease฀component(s)฀and฀the฀non-lease฀component(s).฀
Illustration฀4฀
Livery฀Co฀leases฀a฀delivery฀van฀from฀Bettalease฀Co฀for฀three฀years฀at฀$12,000฀per฀year.฀This฀
payment฀includes฀servicing฀costs.฀฀
Livery฀could฀lease฀the฀same฀make฀and฀model฀of฀van฀for฀$11,000฀per฀year฀and฀would฀need฀to฀pay฀
$2,000฀a฀year฀for฀servicing.฀฀
Solution฀
Livery฀Co฀would฀allocate฀$10,154฀($12,000฀×฀$11,000฀÷฀$(11,000฀+฀2,000))฀to฀the฀lease฀
component฀and฀account฀for฀that฀as฀a฀lease฀under฀IFRS฀16.฀
Livery฀Co฀would฀allocate฀$1,846฀($12,000฀×฀$2,000฀÷฀$(11,000฀+฀2,000))฀to฀the฀servicing฀
component฀and฀recognise฀it฀in฀profit฀or฀loss฀as฀an฀expense.฀
1.3฀Remeasurement฀example฀
Illustration฀5฀
Remeasurement:฀revision฀of฀lease฀term฀
(Adapted฀from฀IFRS฀16฀Illustrative฀Example฀13)฀
Lester฀enters฀into฀a฀ten-year฀lease฀of฀a฀floor฀of฀a฀building,฀with฀an฀option฀to฀extend฀for฀five฀years.฀
Lease฀payments฀are฀$50,000฀per฀year฀during฀the฀initial฀term฀and฀$55,000฀per฀year฀during฀the฀
optional฀period,฀all฀payable฀at฀the฀beginning฀of฀each฀year.฀The฀interest฀rate฀implicit฀in฀the฀lease฀was฀
not฀readily฀determinable.฀Lester's฀incremental฀borrowing฀rate฀was฀5฀per฀cent฀per฀annum.฀
Lester฀is฀now฀in฀the฀sixth฀year฀of฀the฀ten-year฀lease,฀with฀its฀option฀to฀renew฀for฀another฀five฀years.฀
The฀optional฀period฀has฀not฀been฀included฀in฀the฀initial฀assessment฀of฀the฀lease฀term.฀Lester฀acquires฀
Wester,฀which฀has฀been฀leasing฀a฀floor฀in฀another฀building.฀The฀lease฀entered฀into฀by฀Wester฀
contains฀a฀termination฀option฀that฀is฀exercisable฀by฀Wester.฀Following฀the฀acquisition฀of฀Wester,฀
Lester฀needs฀two฀floors฀in฀a฀building฀suitable฀for฀the฀increased฀workforce฀of฀the฀combined฀companies.฀
To฀minimise฀costs,฀Lester฀(a)฀enters฀into฀a฀separate฀eight-year฀lease฀of฀another฀floor฀in฀the฀building฀it฀
currently฀occupies฀that฀will฀be฀available฀for฀use฀at฀the฀end฀of฀Year฀7฀and฀(b)฀terminates฀early฀the฀
lease฀entered฀into฀by฀Wester฀with฀effect฀from฀the฀beginning฀of฀Year฀8.฀Wester฀will฀then฀move฀into฀the฀
new฀floor฀leased฀by฀Lester.฀
Lester's฀incremental฀borrowing฀rate฀at฀the฀end฀of฀Year฀6฀is฀6฀per฀cent฀per฀annum.฀
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8:฀Leases฀
Solution฀
Moving฀Wester's฀staff฀to฀the฀same฀building฀occupied฀by฀Lester฀creates฀an฀economic฀incentive฀for฀
Lester฀to฀extend฀its฀original฀lease฀at฀the฀end฀of฀the฀non-cancellable฀period฀of฀ten฀years.฀The฀
acquisition฀of฀Wester฀and฀the฀relocation฀of฀Wester's฀staff฀is฀a฀significant฀event฀that฀is฀within฀the฀
control฀of฀Lester฀and฀affects฀whether฀Lester฀is฀reasonably฀certain฀to฀exercise฀the฀extension฀option฀
not฀previously฀included฀in฀its฀determination฀of฀the฀lease฀term.฀This฀is฀because฀the฀original฀floor฀has฀
greater฀utility฀(and฀thus฀provides฀greater฀benefits)฀to฀Lester฀than฀alternative฀assets฀that฀could฀be฀
leased฀for฀a฀similar฀amount฀to฀the฀lease฀payments฀for฀the฀optional฀period฀–฀Lester฀would฀incur฀
additional฀costs฀if฀it฀were฀to฀lease฀a฀similar฀floor฀in฀a฀different฀building฀because฀the฀workforce฀
would฀be฀located฀in฀different฀buildings.฀Consequently,฀at฀the฀end฀of฀Year฀6,฀Lester฀concludes฀that฀
it฀is฀now฀reasonably฀certain฀to฀exercise฀the฀option฀to฀extend฀its฀original฀lease฀as฀a฀result฀of฀its฀
acquisition฀and฀planned฀relocation฀of฀Wester.฀฀
Lester฀remeasures฀the฀lease฀liability฀at฀the฀present฀value฀of฀four฀payments฀of฀$50,000฀followed฀by฀
five฀payments฀of฀$55,000,฀all฀discounted฀at฀the฀revised฀discount฀rate฀of฀6฀per฀cent฀per฀annum.฀
1.4฀Sale฀and฀leaseback฀example฀
Illustration฀6฀
Sale฀and฀leaseback:฀Selling฀price฀greater฀than฀fair฀value฀(additional฀financing)฀
(Adapted฀from฀IFRS฀16฀Illustrative฀Example฀24)฀
Selleasy฀Co฀sells฀a฀building฀to฀Buylesser฀for฀$800,000฀cash.฀The฀carrying฀amount฀of฀the฀building฀
prior฀to฀the฀sale฀was฀$600,000.฀Selleasy฀arranges฀to฀lease฀the฀building฀back฀for฀five฀years฀at฀
$120,000฀per฀annum,฀payable฀in฀arrears.฀The฀remaining฀economic฀life฀of฀the฀building฀is฀15฀years.฀
The฀transaction฀satisfies฀the฀performance฀obligations฀in฀IFRS฀15,฀so฀will฀be฀accounted฀for฀as฀a฀sale฀
and฀leaseback.฀
At฀the฀date฀of฀the฀sale฀the฀fair฀value฀of฀the฀building฀was฀$750,000,฀so฀the฀excess฀$50,000฀paid฀by฀
the฀buyer฀is฀recognised฀as฀additional฀financing฀provided฀by฀Buylesser.฀
The฀interest฀rate฀implicit฀in฀the฀lease฀is฀4.5%฀and฀the฀present฀value฀of฀the฀annual฀payments฀is:฀
฀ $
120,000/1.045฀ ฀114,833
120,000/1.0452฀ ฀109,888
120,000/1.0453฀ ฀105,155
120,000/1.0454฀ ฀100,627
120,000/1.0455฀ ฀฀฀96,294
฀ ฀526,797
฀ ฀
Of฀this,฀$476,797฀relates฀to฀the฀lease฀and฀$50,000฀relates฀to฀the฀additional฀financing.฀
At฀the฀commencement฀date,฀the฀seller-lessee฀measures฀the฀right-of-use฀asset฀arising฀from฀the฀
leaseback฀of฀the฀building฀at฀the฀proportion฀of฀the฀previous฀carrying฀amount฀of฀the฀building฀that฀
relates฀to฀the฀right฀of฀use฀retained.฀This฀is฀calculated฀as฀carrying฀amount฀×฀discounted฀lease฀
payments/fair฀value.฀
In฀this฀example:฀$600,000฀×฀$476,797/$750,000฀=฀$381,437฀
Selleasy฀only฀recognises฀the฀amount฀of฀gain฀that฀relates฀to฀the฀rights฀transferred.฀The฀gain฀on฀sale฀of฀
the฀building฀is฀$150,000฀(750,000฀–฀600,000),฀of฀which:฀
(a)฀ $150,000฀×฀$476,797/$750,000฀=฀$95,360฀–฀relates฀to฀the฀rights฀retained฀
(b)฀ The฀balance:฀$150,000฀–฀$95,360฀=฀$54,640฀–฀relates฀to฀the฀rights฀transferred฀to฀the฀buyer.฀
At฀the฀commencement฀date฀the฀lessee฀accounts฀for฀the฀transaction฀as฀follows:฀
฀ 671฀

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฀ ฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀
DEBIT฀ Cash฀ 800,000฀
DEBIT฀ Right-of-use฀asset฀ 381,437฀
CREDIT฀ Building฀ ฀ 600,000฀
CREDIT฀ Financial฀liability฀ ฀ 526,797฀
CREDIT฀ Gain฀on฀rights฀transferred฀ ฀ 54,640฀
The฀right-of-use฀asset฀will฀be฀depreciated฀over฀five฀years;฀the฀gain฀will฀be฀recognised฀in฀profit฀or฀loss฀
and฀the฀financial฀liability฀will฀be฀increased฀each฀year฀by฀the฀interest฀charge฀and฀reduced฀by฀the฀
lease฀payments.฀
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฀
฀
฀
฀
฀
฀
Share-based฀payment
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀ 673฀
฀

lOMoARcPSD|6256454
1฀Background฀to฀IFRS฀2฀
It฀has฀become฀increasingly฀common฀for฀entities฀to฀pay฀for฀goods฀or฀services฀by฀issuing฀shares฀or฀
share฀ options.฀ Share฀ schemes฀ are฀ a฀ common฀ feature฀ of฀ director฀ and฀ executive฀ remuneration.฀
Companies฀ whose฀ shares฀ or฀ share฀ options฀ are฀ regarded฀ as฀ a฀ valuable฀ 'currency'฀ commonly฀ use฀
share-based฀payments฀to฀obtain฀employee฀and฀professional฀services.฀
The฀increasing฀use฀of฀share-based฀payments฀raised฀questions฀about฀the฀accounting฀treatment฀of฀such฀
transactions฀in฀the฀financial฀statements.฀
Share฀options฀are฀often฀granted฀to฀employees฀at฀an฀exercise฀price฀that฀is฀equal฀to฀or฀higher฀than฀the฀
market฀ price฀ of฀ the฀ shares฀ at฀ the฀ date฀ the฀ option฀ is฀ granted.฀ Consequently,฀ the฀ options฀ have฀ no฀
intrinsic฀ value฀ and฀ so฀ prior฀ to฀ IFRS฀ 2฀ Share-based฀ Payment,฀ no฀ transaction฀ was฀ recorded฀ in฀ the฀
That฀led฀to฀an฀anomaly:฀if฀a฀company฀pays฀its฀employees฀in฀cash,฀an฀expense฀is฀recognised฀in฀profit฀
or฀loss,฀but฀if฀the฀payment฀is฀in฀share฀options,฀no฀expense฀is฀recognised.฀The฀omission฀of฀expenses฀
arising฀ from฀ share-based฀ payment฀ transactions฀ with฀ employees฀ was฀ believed฀ to฀ cause฀ economic฀
distortions฀and฀corporate฀governance฀concerns.฀
IFRS฀2฀was฀issued฀to฀address฀these฀issues฀and฀requires฀an฀entity฀to฀reflect฀the฀effects฀of฀share-based฀
payment฀transactions฀in฀its฀financial฀statements.฀
1.1฀ Arguments฀against฀recognition฀of฀share-based฀payment฀in฀the฀
There฀ are฀ a฀ number฀ of฀ arguments฀ against฀ recognition฀ of฀ share-based฀ payments฀ in฀ the฀ financial฀
statements.฀The฀IASB฀has฀considered฀and฀rejected฀the฀arguments฀below.฀
(a)฀ No฀cost฀therefore฀no฀charge฀
There฀ is฀ no฀ cost฀ to฀ the฀ entity฀ because฀ the฀ granting฀ of฀ shares฀ or฀ options฀ does฀ not฀ require฀ the฀
entity฀to฀sacrifice฀cash฀or฀other฀assets.฀Therefore,฀a฀charge฀should฀not฀be฀recognised.฀
This฀ argument฀ is฀ unsound฀ because฀ it฀ ignores฀ the฀ fact฀ that฀ a฀ transaction฀ has฀ occurred.฀ The฀
employees฀ have฀ provided฀ valuable฀ services฀ to฀ the฀ entity฀ in฀ return฀ for฀ valuable฀ shares฀ or฀
options.฀
(b)฀ Earnings฀per฀share฀is฀hit฀twice฀
It฀is฀argued฀that฀the฀charge฀to฀profit฀or฀loss฀for฀the฀employee฀services฀consumed฀reduces฀the฀
entity's฀earnings,฀while฀at฀the฀same฀time฀there฀is฀an฀increase฀in฀the฀number฀of฀shares฀issued.฀
However,฀the฀dual฀impact฀on฀earnings฀per฀share฀simply฀reflects฀the฀two฀economic฀events฀that฀
have฀occurred.฀
(i)฀ The฀entity฀has฀issued฀shares฀or฀options,฀thus฀increasing฀the฀denominator฀of฀the฀earnings฀
per฀share฀calculation.฀
(ii)฀ It฀has฀also฀consumed฀the฀resources฀it฀received฀for฀those฀shares฀or฀options,฀thus฀reducing฀
the฀numerator.฀
(c)฀ Adverse฀economic฀consequences฀
It฀could฀be฀argued฀that฀entities฀might฀be฀discouraged฀from฀introducing฀or฀continuing฀employee฀
share฀ plans฀ if฀ they฀ were฀ required฀ to฀ recognise฀ them฀ on฀ the฀ financial฀ statements.฀ However,฀ if฀
this฀ happened,฀ it฀ might฀ be฀ because฀ the฀ requirement฀ for฀ entities฀ to฀ account฀ properly฀ for฀
employee฀share฀plans฀had฀revealed฀the฀economic฀consequences฀of฀such฀plans.฀฀
A฀situation฀where฀entities฀are฀able฀to฀obtain฀and฀consume฀resources฀by฀issuing฀valuable฀shares฀
or฀options฀without฀having฀to฀account฀for฀such฀transactions฀could฀be฀perceived฀as฀a฀distortion.฀
฀
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฀
2฀Scope฀of฀IFRS฀2฀
IFRS฀2฀applies฀to฀all฀share-based฀payment฀transactions฀(IFRS฀2:฀para.฀2).฀฀
IFRS฀2฀was฀amended฀in฀June฀2009฀to฀address฀situations฀in฀those฀parts฀of฀the฀world฀where,฀for฀public฀
policy฀or฀other฀reasons,฀companies฀give฀their฀shares฀or฀rights฀to฀shares฀to฀individuals,฀organisations฀
or฀ groups฀ that฀ have฀ not฀ provided฀ goods฀ or฀ services฀ to฀ the฀ company.฀ An฀ example฀ is฀ the฀ issue฀ of฀
shares฀to฀a฀charitable฀organisation฀for฀less฀than฀fair฀value,฀where฀the฀benefits฀are฀less฀tangible฀than฀
usual฀goods฀or฀services.฀฀
฀ (IFRS฀2:฀paras.฀1–6)฀
2.1฀Share-based฀payment฀among฀group฀entities฀
Payment฀ for฀ goods฀ or฀ services฀ received฀ by฀ an฀ entity฀ within฀ a฀ group฀ may฀ be฀ made฀ in฀ the฀ form฀ of฀
granting฀equity฀instruments฀of฀the฀parent฀company,฀or฀equity฀instruments฀of฀another฀group฀company.฀
IFRS฀2฀states฀that฀this฀type฀of฀transaction฀qualifies฀as฀a฀share-based฀payment฀transaction฀within฀the฀
scope฀of฀IFRS฀2.฀฀
In฀2009,฀the฀standard฀was฀amended฀to฀clarify฀that฀it฀applies฀to฀the฀following฀arrangements:฀
(a)฀ Where฀the฀entity's฀suppliers฀(including฀employees)฀will฀receive฀cash฀payments฀that฀are฀linked฀
to฀the฀price฀of฀the฀equity฀instruments฀of฀the฀entity.฀฀
(b)฀ Where฀the฀entity's฀suppliers฀(including฀employees)฀will฀receive฀cash฀payments฀that฀are฀linked฀
to฀the฀price฀of฀the฀equity฀instruments฀of฀the฀entity's฀parent.฀฀
Under฀either฀arrangement,฀the฀entity's฀parent฀had฀an฀obligation฀to฀make฀the฀required฀cash฀payments฀
to฀the฀entity's฀suppliers.฀The฀entity฀itself฀did฀not฀have฀any฀obligation฀to฀make฀such฀payments.฀IFRS฀2฀
applies฀ to฀ arrangements฀ such฀ as฀ those฀ described฀ above฀ even฀ if฀ the฀ entity฀ that฀ receives฀ goods฀ or฀
services฀from฀its฀suppliers฀has฀no฀obligation฀to฀make฀the฀required฀share-based฀cash฀payments.฀฀
2.2฀Transactions฀outside฀the฀scope฀of฀IFRS฀2฀
Certain฀transactions฀are฀outside฀the฀scope฀of฀the฀IFRS:฀
(a)฀ Transactions฀with฀employees฀and฀others฀in฀their฀capacity฀as฀a฀holder฀of฀equity฀instruments฀of฀
the฀entity฀(for฀example,฀where฀an฀employee฀receives฀additional฀shares฀in฀a฀rights฀issue฀to฀all฀
shareholders)฀
(b)฀ The฀ issue฀ of฀ equity฀ instruments฀ in฀ exchange฀ for฀ control฀ of฀ another฀ entity฀ in฀ a฀ business฀
combination฀
3฀Equity-settled฀share-based฀payment฀–฀further฀practice฀
Activity฀1:฀Share฀options฀ ฀
During฀ its฀ financial฀ year฀ ended฀ 31฀ January฀ 20X6,฀ an฀ entity฀ issued฀ share฀ options฀ to฀ several฀ of฀ its฀
senior฀employees.฀The฀options฀vest฀immediately฀upon฀issue.฀
What฀is฀the฀double฀entry฀required฀to฀recognise฀the฀options?฀฀
฀ 675฀

lOMoARcPSD|6256454
Activity฀2:฀Share-based฀payment฀ ฀
On฀ 1฀ January฀ 20X3฀ an฀ entity฀ grants฀ 250฀ share฀ options฀ to฀ each฀ of฀ its฀ 200฀ employees.฀ The฀ only฀
condition฀ attached฀ to฀ the฀ grant฀ is฀ that฀ the฀ employees฀ should฀ continue฀ to฀ work฀ for฀ the฀ entity฀ until฀
31฀December฀20X6.฀Five฀employees฀leave฀during฀the฀year฀and฀management฀estimates฀that฀a฀total฀of฀
20฀employees฀will฀leave฀during฀the฀4฀year฀vesting฀period.฀฀
The฀market฀price฀of฀each฀option฀was฀$12฀at฀1฀January฀20X3฀and฀$15฀at฀31฀December฀20X3.฀
Required฀
Explain฀ how฀ this฀ transaction฀ will฀ be฀ reflected฀ in฀ the฀ financial฀ statements฀ for฀ the฀ year฀ ended฀
4฀Equity-settled฀compared฀to฀cash-settled฀share-based฀
payment฀
The฀following฀illustration฀shows฀the฀differences฀in฀accounting฀for฀an฀equity-settled฀transaction฀and฀a฀
cash-settled฀transaction.฀฀฀
Illustration฀1฀
Share-based฀payment฀
J&B฀granted฀200฀options฀on฀its฀$1฀ordinary฀shares฀to฀each฀of฀its฀800฀employees฀on฀1฀January฀
20X1.฀Each฀grant฀is฀conditional฀upon฀the฀employee฀being฀employed฀by฀J&B฀until฀31฀December฀20X3.฀
J&B฀estimated฀at฀1฀January฀20X1฀that:฀
(i)฀ The฀fair฀value฀of฀each฀option฀was฀$4฀(before฀adjustment฀for฀the฀possibility฀of฀forfeiture).฀
(ii)฀ Approximately฀50฀employees฀would฀leave฀during฀20X1,฀40฀during฀20X2฀and฀30฀during฀20X3฀
thereby฀forfeiting฀their฀rights฀to฀receive฀the฀options.฀The฀departures฀were฀expected฀to฀be฀evenly฀
spread฀within฀each฀year.฀
The฀exercise฀price฀of฀the฀options฀was฀$1.50฀and฀the฀market฀value฀of฀a฀J&B฀share฀on฀1฀January฀20X1฀
was฀$3.฀
In฀the฀event,฀only฀40฀employees฀left฀during฀20X1฀(and฀the฀estimate฀of฀total฀departures฀was฀revised฀
down฀to฀95฀at฀31฀December฀20X1),฀20฀during฀20X2฀(and฀the฀estimate฀of฀total฀departures฀was฀
revised฀to฀70฀at฀31฀December฀20X2)฀and฀none฀during฀20X3,฀spread฀evenly฀during฀each฀year.฀
Required฀
The฀directors฀of฀J&B฀have฀asked฀you฀to฀illustrate฀how฀the฀scheme฀is฀accounted฀for฀under฀IFRS฀2฀
Share-based฀Payment.฀
(a)฀ Show฀the฀double฀entries฀for฀the฀charge฀to฀profit฀or฀loss฀for฀employee฀services฀over฀the฀three฀
years฀and฀for฀the฀share฀issue,฀assuming฀all฀employees฀entitled฀to฀benefit฀from฀the฀scheme฀
exercised฀their฀rights฀and฀the฀shares฀were฀issued฀on฀31฀December฀20X3.฀
(b)฀ Explain฀how฀your฀solution฀would฀differ฀had฀J&B฀offered฀its฀employees฀cash฀based฀on฀the฀share฀
value฀rather฀than฀share฀options.฀ ฀
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฀
Solution฀
(a)฀ Accounting฀entries฀
31.12.X1฀ $฀ $฀
DEBIT฀ Profit฀or฀loss฀(staff฀costs) 188,000฀ ฀
CREDIT฀ Equity฀reserve฀((800฀–฀95)฀ 200฀ $4฀ 1/3) 188,000
31.12.X2฀ ฀
DEBIT฀ Profit฀or฀loss฀(staff฀costs)฀(W1) 201,333฀ ฀
CREDIT฀ Equity฀reserve฀ 201,333
31.12.X3฀ ฀
DEBIT฀ Profit฀or฀loss฀(staff฀costs)฀(W2) 202,667฀ ฀
CREDIT฀ Equity฀reserve฀ 202,667
Issue฀of฀shares฀ ฀
DEBIT฀ Cash฀(740฀฀200฀฀$1.50) 222,000฀ ฀
DEBIT฀ Equity฀reserve฀ 592,000฀ ฀
CREDIT฀ Share฀capital฀(740฀฀200฀ $1) 148,000
CREDIT฀ Share฀premium฀(balancing฀figure) 666,000 ฀
฀ Workings฀
฀ 1฀ Equity฀reserve฀at฀31.12.X2฀
฀ £$ ฀฀฀฀
Equity฀b/d฀ 188,000
฀P/L฀charge 201,333
Equity฀c/d฀((800฀–฀70)฀฀200฀ $4฀ 2/3) ฀389,333
฀
฀ 2฀ Equity฀reserve฀at฀31.12.X3฀
Equity฀b/d฀ 389,333
฀P/L฀charge 202,667
Equity฀c/d฀((800฀–฀40฀–฀20)฀ 200฀ $4฀ 3/3) ฀592,000
฀
(b)฀ Cash-settled฀share-based฀payment฀
฀ If฀J&B฀had฀offered฀cash฀payments฀based฀on฀the฀value฀of฀the฀shares฀at฀vesting฀date฀rather฀than฀
options,฀in฀each฀of฀the฀three฀years฀an฀accrual฀would฀be฀shown฀in฀the฀statement฀of฀financial฀
position฀representing฀the฀expected฀amount฀payable฀based฀on฀the฀following:฀
No฀of฀  Number฀of฀  Fair฀value฀of฀  Cumulative฀
employees฀ rights฀each฀ each฀right฀at฀ proportion฀of฀
estimated฀at฀ year฀end฀ vesting฀period฀
the฀year฀end฀ elapsed฀
to฀be฀entitled฀
to฀rights฀at฀the฀
vesting฀date฀ ฀
฀ The฀movement฀in฀the฀accrual฀would฀be฀charged฀to฀profit฀or฀loss฀representing฀further฀entitlements฀
received฀during฀the฀year฀and฀adjustments฀to฀expectations฀accrued฀in฀previous฀years.฀
฀ The฀accrual฀would฀continue฀to฀be฀adjusted฀(resulting฀in฀a฀profit฀or฀loss฀charge)฀for฀changes฀in฀
the฀fair฀value฀of฀the฀right฀over฀the฀period฀between฀when฀the฀rights฀become฀fully฀vested฀and฀are฀
subsequently฀exercised.฀It฀would฀then฀be฀reduced฀for฀cash฀payments฀as฀the฀rights฀are฀exercised.฀
฀ 677฀

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5฀Vesting฀conditions฀–฀further฀practice฀
Activity฀3:฀Vesting฀conditions฀ ฀
On฀1฀October฀20X1฀Omega฀granted฀share฀options฀to฀200฀senior฀executives.฀The฀options฀will฀vest฀on฀
30฀September฀20X4฀subject฀to฀the฀following฀conditions:฀
฀ Each฀executive฀will฀be฀entitled฀to฀1,000฀options฀if฀the฀cumulative฀profit฀in฀the฀three-year฀period฀
from฀1฀October฀20X1฀to฀30฀September฀20X4฀exceeds฀$30m.฀If฀the฀cumulative฀profit฀for฀this฀
period฀is฀between฀$35m฀and฀$40m,฀then฀1,500฀options฀will฀vest.฀If฀the฀cumulative฀profit฀for฀
the฀period฀exceeds฀$40m,฀then฀2,000฀options฀will฀vest.฀
฀ If฀ an฀ executive฀ leaves฀ during฀ the฀ three-year฀ vesting฀ period,฀ then฀ that฀ executive฀ would฀ forfeit฀
any฀rights฀to฀share฀options.฀
฀ Notwithstanding฀the฀above,฀no฀options฀will฀vest฀unless฀the฀share฀price฀at฀30฀September฀20X4฀
exceeds฀$5.฀
Details฀of฀the฀fair฀values฀of฀the฀shares฀and฀share฀options฀at฀relevant฀dates฀are฀as฀follows:฀
฀ Fair฀value฀of
Date฀ ฀ Omega฀share Option
฀ $ $
1฀October฀20X1฀ 4.00 0.50
30฀September฀20X2฀ 4.40 0.60
30฀September฀20X3฀ 4.60 0.75
The฀ estimate฀ of฀ the฀ cumulative฀ profit฀ for฀ the฀ three-year฀ period฀ ending฀ 30฀ September฀ 20X4฀ was฀
revised฀each฀year฀as฀follows:฀
฀ Expected฀profit฀
for฀the฀three-year฀period฀
Date฀ $m
1฀October฀20X1฀ 32
30฀September฀20X2฀ 39
30฀September฀20X3฀ 45
On฀1฀October฀20X1,฀none฀of฀the฀relevant฀executives฀were฀expected฀to฀leave฀in฀the฀three-year฀period฀
from฀1฀October฀20X1฀to฀30฀September฀20X4฀and฀none฀left฀in฀the฀year฀ended฀30฀September฀20X2.฀
However,฀ ten฀ executives฀ left฀ unexpectedly฀ on฀ 30฀ June฀ 20X3.฀ None฀ of฀ the฀ other฀ executives฀ are฀
expected฀to฀leave฀before฀฀30฀September฀20X4.฀
Required฀
Prepare฀relevant฀extracts฀from฀the฀statement฀of฀financial฀position฀of฀Omega฀at฀30฀September฀20X3฀
and฀its฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀30฀September฀
20X3.฀You฀should฀give฀appropriate฀explanations฀to฀support฀your฀extracts.฀
฀ ฀
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฀
Activity฀1:฀Share฀options฀
DEBIT฀฀ Profit฀or฀loss฀
CREDIT฀฀ Equity฀
Under฀IFRS฀2฀a฀charge฀must฀be฀made฀to฀profit฀or฀loss.฀
Activity฀2:฀Share-based฀payment฀1฀
The฀remuneration฀expense฀for฀the฀year฀is฀based฀on฀the฀fair฀value฀of฀the฀options฀granted฀at฀the฀grant฀
date฀ (1฀ January฀ 20X3).฀ Management฀ estimates฀ that฀ 20฀ employees฀ will฀ leave฀ during฀ the฀ 4฀ year฀
vesting฀period฀and฀that฀therefore฀45,000฀options฀(250฀×฀180)฀will฀actually฀vest.฀฀
Therefore,฀ at฀ 31฀ December฀ 20X3฀ the฀ entity฀ recognises฀ a฀ remuneration฀ expense฀ of฀ $135,000฀
(45,000฀×฀12฀×฀¼)฀in฀profit฀or฀loss฀and฀a฀corresponding฀increase฀in฀equity฀of฀the฀same฀amount.฀
Activity฀3:฀Vesting฀conditions฀
STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀ FOR฀ THE฀ YEAR฀
ENDED฀30฀SEPTEMBER฀20X3฀(Extract)฀
Employee฀expense฀ ฀ ฀ $76,667฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AT฀30฀SEPTEMBER฀20X3฀(Extract)฀
Equity฀(IFRS฀2฀reserve)฀ ฀ ฀ $126,667฀
Explanation฀
The฀ impact฀ of฀ the฀ expected฀ share฀ price฀ is฀ a฀ market-based฀ vesting฀ condition฀ and฀ is฀ ignored฀ in฀
calculating฀the฀IFRS฀2฀expense.฀The฀grant฀date฀fair฀value฀of฀the฀options฀is฀used฀in฀the฀calculation.฀The฀
number฀of฀options฀vesting฀for฀each฀executive฀is฀dependent฀on฀the฀expected฀cumulative฀profit฀over฀the฀
three฀year฀period.฀This฀is฀a฀non-market฀based฀performance฀condition฀and฀is฀taken฀into฀account฀in฀the฀
calculation฀of฀the฀IFRS฀2฀expense.฀At฀30฀September฀20X2,฀the฀expected฀cumulative฀profit฀is฀$39m,฀
so฀1,500฀options฀per฀director฀are฀expected฀to฀vest.฀At฀30฀September฀20X3,฀the฀expected฀cumulative฀
profit฀is฀increased฀to฀$45m,฀so฀2,000฀options฀per฀director฀are฀expected฀to฀vest.฀The฀expense฀should฀
be฀ spread฀ over฀ the฀ 3฀ year฀ vesting฀ period฀ and฀ be฀ based฀ on฀ the฀ latest฀ estimate฀ of฀ the฀ number฀ of฀
directors฀expected฀to฀be฀in฀employment฀on฀the฀vesting฀date.฀฀
The฀calculations฀are฀as฀follows:฀฀
At฀30฀September฀20X2฀(year฀1)฀ ฀$฀฀฀฀฀฀
Equity฀b/d฀ ฀0฀
Equity฀c/d฀(200฀฀1,500฀฀$0.50฀฀1/3)฀ ฀฀50,000฀
฀
At฀30฀September฀20X3฀(year฀2)฀ ฀$฀฀฀฀฀฀
Equity฀b/d฀ ฀50,000฀
฀Profit฀or฀loss฀expense ฀฀76,667฀
Equity฀c/d฀(190฀฀2,000฀฀$0.50฀฀2/3)฀฀ ฀฀126,667฀
฀ 679฀

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680฀

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฀
฀
฀ Basic฀groups
฀
฀
฀
฀
฀
฀
฀
฀ 681฀
฀

lOMoARcPSD|6256454
Exam฀context฀
Group฀accounting฀is฀extremely฀important฀for฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam.฀Question฀1฀
of฀the฀exam฀will฀be฀based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀extracts฀from฀them.฀Group฀
accounting฀could฀also฀feature฀in฀a฀Section฀B฀question.฀A฀lot฀of฀this฀chapter฀is฀revision฀as฀it฀has฀been฀
covered฀in฀your฀earlier฀studies฀in฀Financial฀Reporting.฀However,฀ensure฀you฀study฀it฀carefully,฀as฀not฀
only฀does฀it฀form฀the฀basis฀for฀the฀more฀complex฀chapters฀that฀follow,฀some฀basic฀group฀accounting฀
techniques฀will฀usually฀be฀required฀in฀group฀accounting฀questions฀in฀the฀exam.฀฀
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฀
1฀Measuring฀non-controlling฀interests฀at฀acquisition฀฀
IFRS฀ 3฀ views฀ the฀ group฀ as฀ an฀ economic฀ entity.฀ This฀ means฀ that฀ it฀ treats฀ all฀ providers฀ of฀ equity฀ –฀
including฀ non-controlling฀ interests฀ –฀ as฀ shareholders฀ in฀ the฀ group,฀ even฀ if฀ they฀ are฀ not฀
shareholders฀ of฀ the฀ parent.฀ Thus฀ goodwill฀ will฀ arise฀ on฀ the฀ non-controlling฀ interest.฀ Goodwill฀ is฀
calculated฀as:฀
Consideration฀transferred฀ X฀
Non-controlling฀interests฀(at฀FV฀or฀at฀share฀of฀FV฀of฀net฀assets)฀ X฀
Less:฀ Net฀fair฀value฀of฀identifiable฀assets฀acquired฀and฀
Share฀capital฀ X
Share฀premium฀ X
Retained฀earnings฀at฀acquisition฀ X
Other฀reserves฀at฀acquisition฀ X
Fair฀value฀adjustments฀at฀acquisition X
฀ (X)฀
฀ X฀
Less:฀ Impairment฀losses฀on฀goodwill฀to฀date (X)฀
฀ X฀
The฀non-controlling฀interest฀forms฀part฀of฀the฀calculation฀of฀goodwill.฀฀
IFRS฀3฀allows฀the฀non-controlling฀interests฀in฀a฀subsidiary฀to฀be฀measured฀at฀the฀acquisition฀date฀in฀
one฀of฀two฀ways฀(IFRS฀3:฀para.฀19):฀
฀ At฀proportionate฀share฀of฀fair฀value฀of฀net฀assets฀('partial฀goodwill฀method')฀
฀ At฀fair฀value฀('full฀goodwill฀method')฀฀
The฀ closest฀ approximation฀ to฀ fair฀ value฀ will฀ be฀ the฀ market฀ price฀ of฀ the฀ shares฀ held฀ by฀ the฀ non-
controlling฀shareholders฀just฀before฀the฀acquisition฀by฀the฀parent.฀
Non-controlling฀ interest฀ at฀ fair฀ value฀ will฀ be฀ different฀ from฀ non-controlling฀ interest฀ at฀ proportionate฀
share฀of฀the฀acquiree's฀net฀assets.฀The฀difference฀is฀goodwill฀attributable฀to฀non-controlling฀interest,฀
which฀may฀be,฀but฀often฀is฀not,฀proportionate฀to฀goodwill฀attributable฀to฀the฀parent.฀
1.1฀Simple฀examples฀
(a)฀ Partial฀goodwill฀method฀
On฀31฀December฀20X8,฀Penn฀acquired฀four฀million฀of฀the฀five฀million฀$1฀ordinary฀shares฀of฀
Sylvania,฀ paying฀ $10m฀ in฀ cash.฀ On฀ that฀ date,฀ the฀ fair฀ value฀ of฀ Sylvania's฀ net฀ assets฀ was฀
$7.5m.฀
It฀is฀the฀group's฀policy฀to฀value฀the฀non-controlling฀interest฀at฀its฀proportionate฀share฀of฀the฀fair฀
value฀of฀the฀subsidiary's฀identifiable฀net฀assets.฀
Goodwill฀on฀the฀acquisition฀is฀calculated฀as:฀
฀ ฀฀$'000฀
Consideration฀transferred฀ ฀฀10,000฀
Non-controlling฀interest:฀20%฀฀$7.5m฀ ฀฀1,500฀
฀ 11,500
Net฀fair฀value฀of฀identifiable฀assets acquired฀and฀ ฀(7,500)฀
liabilities฀assumed฀
Goodwill฀ ฀฀ 4,000฀
฀ 683฀

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(b)฀ Full฀goodwill฀method฀
On฀31฀December฀20X8,฀Penn฀acquired฀four฀million฀of฀the฀five฀million฀$1฀ordinary฀shares฀of฀
Sylvania,฀ paying฀ $10m฀ in฀ cash.฀ On฀ that฀ date,฀ the฀ fair฀ value฀ of฀ Sylvania's฀ net฀ assets฀ was฀
$7.5m.฀
It฀is฀the฀group's฀policy฀to฀value฀the฀non-controlling฀interest฀at฀fair฀value.฀The฀market฀price฀of฀the฀
shares฀held฀by฀the฀non-controlling฀shareholders฀just฀before฀the฀acquisition฀was฀$2.00.฀
Goodwill฀on฀the฀acquisition฀is฀calculated฀as:฀
฀ ฀ $'000฀
Consideration฀transferred฀ ฀ 10,000฀
Non-controlling฀interest:฀1m฀฀$2 ฀฀2,000฀
฀
12,000
Net฀fair฀value฀of฀identifiable฀assets acquired฀and฀ ฀(7,500)฀
liabilities฀assumed฀
Goodwill฀ ฀฀4,500฀
1.2฀Non-controlling฀interest฀at฀the฀year฀end฀(fair฀value฀method)฀
Where฀ the฀ option฀ is฀ used฀ to฀ value฀ non-controlling฀ interest฀ at฀ fair฀ value,฀ this฀ applies฀ only฀ to฀ non-
controlling฀ interest฀ at฀ acquisition.฀ At฀ the฀ year฀ end,฀ the฀ non-controlling฀ interest฀ will฀ have฀
increased฀by฀its฀share฀of฀the฀subsidiary's฀post-acquisition฀retained฀earnings.฀
Illustration฀1฀
Goodwill฀and฀non-controlling฀interest฀
P฀acquired฀75%฀of฀the฀shares฀in฀S฀on฀1฀January฀2007฀when฀S฀had฀retained฀earnings฀of฀$15,000.฀
The฀market฀price฀of฀S's฀shares฀at฀the฀date฀of฀acquisition฀was฀$1.60.฀P฀values฀non-controlling฀interest฀
at฀fair฀value฀at฀the฀date฀of฀acquisition.฀Goodwill฀is฀not฀impaired.฀
The฀statements฀of฀financial฀position฀of฀P฀and฀S฀at฀31฀December฀20X7฀were฀as฀follows.฀
฀ ฀P฀ ฀S฀
฀ ฀ $฀ ฀ $฀
Property,฀plant฀and฀equipment฀ ฀฀60,000฀ ฀฀50,000฀
Shares฀in฀S฀ ฀ ฀68,000฀ ฀฀฀฀฀฀฀฀฀฀฀–฀
฀ ฀ 128,000฀ ฀฀50,000฀
Current฀assets฀ ฀ ฀52,000฀ ฀35,000฀
฀ ฀180,000฀ ฀85,000฀
Share฀capital฀–฀$1฀shares฀ ฀100,000฀ ฀฀50,000฀
Retained฀earnings฀ ฀ ฀70,000฀ ฀25,000฀
฀ ฀ 170,000฀ ฀฀75,000฀
Current฀liabilities฀ ฀ ฀10,000฀ ฀10,000฀
฀ ฀180,000฀ ฀85,000฀ ฀
Prepare฀the฀consolidated฀statement฀of฀financial฀position฀of฀the฀P฀Group.฀
684฀

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฀
Solution฀
P฀GROUP฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀
฀ ฀ $฀
Assets฀฀ ฀
Property฀plant฀and฀equipment฀(60,000฀+฀50,000)฀฀ ฀฀ 110,000 ฀
Goodwill฀(W1)฀ ฀฀23,000฀
Current฀assets฀(52,000฀+฀35,000)฀ ฀฀฀฀87,000฀
Total฀assets฀ ฀฀220,000฀
Equity฀and฀liabilities฀฀ ฀
Equity฀attributable฀to฀the฀owners฀of฀P฀ ฀
Share฀capital฀ ฀฀100,000฀
Retained฀earnings฀(W2)฀ ฀฀฀฀77,500฀
฀ ฀฀177,500฀
Non-controlling฀interest฀(W3)฀ ฀฀฀฀22,500฀
Total฀equity฀ ฀฀200,000฀
Current฀liabilities฀(10,000฀+฀10,000)฀ ฀฀฀฀20,000฀
฀ ฀฀220,000฀
฀
Workings฀฀
1฀ Goodwill฀
฀ ฀ $฀ ฀$฀฀฀
Consideration฀transferred฀ ฀ ฀฀68,000฀
Non-controlling฀interests฀(12,500฀ $1.60)฀ ฀฀20,000฀
Net฀fair฀value฀of฀identifiable฀assets acquired฀and฀ ฀
liabilities฀assumed฀฀
Share฀capital฀฀ 50,000 ฀
Retained฀earnings฀at฀acquisition฀ 15,000 ฀
฀ ฀฀(65,000)฀
Goodwill฀฀ ฀฀฀23,000฀
฀
฀ ฀P฀ ฀S฀
฀ ฀ $฀ ฀ $฀
Per฀statement฀of฀financial฀position฀ ฀฀70,000฀ ฀฀25,000฀
Pre-acquisition฀retained฀earnings฀ ฀฀(15,000)฀
฀ ฀฀฀฀10,000฀
Group฀share฀of฀post-acquisition฀retained฀earnings฀of฀ ฀
฀S฀(10,000฀×฀75%)฀ ฀฀ ฀7,500฀ ฀
Group฀retained฀earnings฀ ฀฀77,500฀ ฀
฀
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3฀ Non-controlling฀interest฀at฀year฀end฀
฀ ฀ $฀
NCI฀at฀acquisition฀(W1)฀ ฀20,000฀
NCI฀share฀of฀S's฀post-acquisition฀retained฀earnings฀(25%฀ 10,000(W2))฀ ฀฀฀฀2,500฀
฀ ฀฀22,500฀
฀
1.3฀Effect฀on฀non-controlling฀interest฀of฀full฀goodwill฀method฀
You฀can฀see฀from฀the฀above฀example฀that฀the฀use฀of฀the฀full฀goodwill฀method฀increases฀goodwill฀and฀
non-controlling฀ interest฀ by฀ the฀ same฀ amount.฀ That฀ amount฀ represents฀ goodwill฀ attributable฀ to฀ the฀
shares฀ held฀ by฀ non-controlling฀ shareholders.฀ It฀ is฀ not฀ necessarily฀ proportionate฀ to฀ the฀ goodwill฀
attributed฀ to฀ the฀ parent.฀ The฀ parent฀ may฀ have฀ paid฀ more฀ to฀ acquire฀ a฀ controlling฀ interest.฀ If฀ non-
controlling฀ interest฀ was฀ valued฀ under฀ the฀ partial฀ goodwill฀ method,฀ goodwill฀ and฀ non-controlling฀
interest฀in฀the฀illustration฀above฀would฀be฀as฀follows:฀
W1฀ Goodwill฀
฀ ฀฀฀$฀
Considered฀transferred฀ ฀฀฀฀68,000฀
Non-controlling฀interest฀((50,000฀+฀15,000)฀× 25%)฀ ฀฀฀฀16,250฀
Net฀fair฀value฀of฀identifiable฀assets acquired฀and฀liabilities฀assumed ฀฀฀
(50,000฀+฀15,000)฀ ฀฀ (65,000) ฀
Goodwill฀ ฀ 19,250 ฀
W3฀ Non-controlling฀interest฀at฀year฀end฀฀
฀ ฀฀$฀฀฀฀฀
NCI฀at฀acquisition฀(W1)฀ ฀฀฀ 16,250 ฀
NCI฀share฀of฀S's฀post-acquisition฀retained฀earnings฀(25%฀×฀10,000) ฀฀฀2,500฀
฀ ฀18,750฀
Compare฀these฀with฀goodwill฀and฀non-controlling฀interest฀in฀the฀solution฀above฀and฀you฀will฀see฀that฀
both฀ have฀ been฀ reduced฀ by฀ $3,750฀ –฀ the฀ goodwill฀ attributable฀ to฀ the฀ non-controlling฀ interest.฀ So฀
whether฀ non-controlling฀ interest฀ is฀ valued฀ at฀ share฀ of฀ net฀ assets฀ or฀ at฀ fair฀ value,฀ the฀ statement฀ of฀
financial฀position฀will฀still฀balance.฀
In฀ the฀ SBR฀ exam,฀ both฀ the฀ partial฀ goodwill฀ and฀ the฀ full฀ goodwill฀ methods฀ are฀
examinable.฀฀
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฀
2฀Approach฀to฀consolidation฀
The฀next฀section฀is฀a฀recap฀of฀the฀techniques฀you฀should฀remember฀from฀Financial฀Reporting.฀The฀SBR฀
syllabus฀introduces฀a฀range฀of฀extra฀complications฀in฀consolidations,฀but฀the฀basics฀will฀always฀form฀
part฀of฀any฀question.฀
2.1฀Consolidated฀statement฀of฀financial฀position฀
Step฀1฀ Read฀ the฀ question฀ and฀ draw฀ up฀ the฀ group฀ structure฀ (as฀ Working฀ 1),฀ highlighting฀
useful฀information:฀฀
฀ The฀percentage฀owned฀
฀ Acquisition฀date฀
฀฀ Pre-acquisition฀reserves฀
Step฀2฀ Draw฀up฀a฀proforma฀taking฀into฀account฀the฀group฀structure฀identified:฀
฀ Leave฀out฀cost฀of฀investment฀
฀ Put฀in฀a฀line฀for฀goodwill฀
฀ Put฀in฀a฀line฀for฀investment฀in฀associate฀(where฀appropriate)฀
฀ Remember฀to฀include฀non-controlling฀interests฀
฀ Leave฀lines฀in฀case฀of฀any฀additions฀
Step฀3฀ Work฀ methodically฀ down฀ the฀ statement฀ of฀ financial฀ position,฀ transferring฀ figures฀ to฀
the฀proforma฀or฀workings:฀
฀ 100%฀of฀all฀assets/liabilities฀controlled฀at฀the฀year฀end฀aggregated฀in฀brackets฀
on฀face฀of฀proforma,฀ready฀for฀adjustments฀
฀ Cost฀of฀subsidiary/associate฀and฀reserves฀to฀group฀workings,฀setting฀them฀up฀
as฀you฀work฀down฀the฀statement฀of฀financial฀position฀
฀ Share฀capital฀and฀share฀premium฀(parent฀only)฀to฀the฀proforma฀
฀ Open฀up฀a฀(blank)฀working฀for฀non-controlling฀interests฀
Step฀4฀ Read฀ through฀ the฀ additional฀ notes฀ to฀ the฀ question฀ and฀ attempt฀ the฀ adjustments,
showing฀workings฀for฀all฀calculations.฀
Do฀the฀double฀entry฀for฀the฀adjustments฀on฀your฀proforma฀answer฀and฀on฀your฀group฀
workings฀(where฀the฀group฀workings฀are฀affected฀by฀one฀side฀of฀the฀double฀entry).฀
Examples:฀
฀ Cancel฀ any฀ intragroup฀ items฀ eg฀ intra-group฀ current฀ account฀ balances,฀
intragroup฀loans฀
฀ Adjust฀for฀unrealised฀profits:฀
฀
Unrealised฀profit฀on฀intragroup฀sales X ฀
Amount฀held฀in฀inventories฀at฀year฀end ฀%฀ ฀
=฀Provision฀for฀unrealised฀profit฀(PUP)฀฀ ฀X฀ ฀DEBIT฀ Retained฀earnings฀
฀฀฀(adjust฀in฀company฀selling฀goods)฀ ฀CREDIT฀ Group฀inventories฀
฀ ฀ ฀
฀
฀
฀
฀
฀
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฀ Make฀fair฀value฀adjustments:
฀ ฀Acquisition฀date฀ Movement฀ Year฀end฀
Inventories฀ ฀X฀ ฀(X)฀ ฀ X฀
Depreciable฀non- ฀X฀ ฀(X)฀ ฀ X฀
current฀assets฀
Non-depreciable฀ ฀X฀ ฀(X)฀ ฀ X฀
non-current฀assets฀
Other฀fair฀value฀ ฀X/(X)฀ ฀(X)/X฀ ฀X/(X)฀
adjustments฀
฀ ฀฀฀฀฀฀X฀ ฀฀฀฀฀฀(X)฀ ฀฀฀฀฀฀X฀
฀ This฀total฀ This฀total฀is฀used฀to฀ The฀individual฀
appears฀in฀the฀ adjust฀the฀ figures฀here฀are฀
goodwill฀ subsidiary's฀reserves฀ used฀to฀adjust฀the฀
working฀ in฀the฀reserves฀ relevant฀balances฀
working฀ on฀the฀
consolidated฀
statement฀of฀
financial฀position฀
฀
Step฀5฀ Complete฀goodwill฀calculation:฀
Consideration฀transferred ฀ ฀X฀
Non-controlling฀interests฀(at฀FV฀or฀at฀share฀of฀FV฀of฀net฀assets)฀ ฀ ฀X฀
Less:฀ Net฀fair฀value฀of฀identifiable฀assets฀acquired฀and฀ ฀ ฀
Share฀capital฀ X฀ ฀
Share฀premium฀ X฀ ฀
Retained฀earnings฀at฀acquisition X฀ ฀
Other฀reserves฀at฀acquisition X฀ ฀
Fair฀value฀adjustments฀at฀acquisition ฀X฀ ฀
฀ ฀ ฀(X)
฀ ฀ ฀X฀
Less:฀ Impairment฀losses฀on฀goodwill฀to฀date ฀ ฀(X)
฀ ฀ ฀X฀
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฀
Step฀6฀ Complete฀the฀consolidated฀retained฀earnings฀calculation:฀
฀ Parent฀ ฀Subsidiary฀ ฀Associate/฀
joint฀venture
Per฀question฀ ฀X฀฀ ฀X฀฀ ฀X฀฀
Adjustments฀ ฀X(X)฀ ฀X(X)฀ ฀X(X)฀
Fair฀value฀adjustments฀movement฀ ฀X/(X)฀ ฀X/(X)฀
Pre-acquisition฀retained฀earnings฀ ฀฀฀฀(X)฀ ฀฀฀฀(X)฀
฀ ฀฀฀฀฀Y฀฀ ฀฀฀฀฀Z฀฀
Group฀share฀of฀post-acquisition฀retained฀ ฀
earnings:฀
Subsidiary฀(Y฀฀group฀share)฀ ฀X฀ ฀
Associate/Joint฀venture฀(Z฀ group฀share)฀ ฀ X฀ ฀
Less฀group฀share฀of฀impairment losses฀to฀date ฀(X)฀ ฀
฀ ฀X฀ ฀
Note.฀Other฀reserves฀are฀treated฀in฀a฀similar฀way.฀
Step฀7฀ Complete฀'Investment฀in฀associate/joint฀venture'฀calculation฀(if฀appropriate):฀
Cost฀of฀associate/joint฀venture ฀X ฀
Share฀of฀post-acquisition฀retained฀reserves฀(from฀reserves฀working฀฀
฀X฀฀
Z฀฀group฀share)฀
Less฀group฀impairment฀losses฀on฀associate/joint฀venture฀to฀date฀ ฀(X)฀
฀ ฀฀X ฀
Step฀8฀ Complete฀the฀non-controlling฀interests฀(NCI)฀calculation:฀
NCI฀at฀acquisition฀(from฀goodwill฀working) ฀ ฀X ฀
NCI฀share฀of฀post-acquisition reserves฀(from฀reserves฀working฀
฀X฀฀
Y฀฀NCI฀share)฀
Less฀NCI฀share฀of฀impairment฀losses฀(only฀if฀NCI฀at฀FV฀at฀acquisition)฀ ฀(X)฀
฀ ฀ ฀฀X ฀
2.2฀Consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀
income฀฀
Step฀1฀ Read฀ the฀ question฀ and฀ draw฀ up฀ the฀ group฀ structure฀ and,฀ where฀ subsidiaries
/associates/joint฀ ventures฀ are฀ acquired฀ in฀ the฀ year,฀ identify฀ the฀ proportion฀ to฀
consolidate.฀฀A฀timeline฀may฀be฀useful.฀฀
Step฀2฀ Draw฀up฀a฀pro-forma:฀฀
฀ Remember฀ the฀ non-controlling฀ interests฀ reconciliation฀ at฀ the฀ foot฀ of฀ the฀
statement.฀
Step฀3฀ Work฀ methodically฀ down฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income,฀transferring฀figures฀to฀proforma฀or฀workings:฀
฀ 100%฀ of฀ all฀ income/expenses฀ (time฀ apportioned฀ ฀ /12฀ if฀ appropriate)฀ in฀
x
brackets฀on฀face฀of฀proforma,฀ready฀for฀adjustments฀
฀ Exclude฀dividends฀receivable฀from฀subsidiary฀
฀ Subsidiary's฀profit฀for฀the฀year฀(PFY)฀and฀total฀comprehensive฀income฀(TCI)฀to฀
face฀of฀proforma฀in฀brackets฀(or฀to฀a฀working฀if฀many฀adjustments)฀
฀ Associate's/joint฀venture's฀PFY฀and฀other฀comprehensive฀income฀(OCI)฀to฀face฀
of฀proforma฀in฀brackets฀
฀ 689฀

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Step฀4฀ Go฀through฀the฀question,฀calculating฀the฀necessary฀adjustments฀and฀showing฀workings฀
for฀all฀calculations,฀transfer฀the฀numbers฀to฀your฀proforma฀and฀make฀the฀adjustments฀
in฀the฀non-controlling฀interests฀working฀where฀the฀subsidiary's฀profit฀is฀affected.฀
Step฀5฀ Calculate฀ 'Share฀ of฀ profit฀ of฀ associate฀ (A)/joint฀ venture฀ (JV)'฀ and฀ 'Share฀ of฀ other฀
comprehensive฀income฀of฀associate/joint฀venture'฀(where฀appropriate):฀
A/JV's฀PFY฀฀group฀%฀ ฀X
Any฀group฀impairment฀loss฀recognised฀on฀A/JV฀during฀the฀period฀ ฀(X)
฀ ฀X฀
Shown฀before฀group฀profit฀before฀tax.฀
A/JV's฀OCI฀฀group฀%฀ ฀X฀
Both฀the฀profit฀or฀loss฀and฀other฀comprehensive฀income฀are฀calculated฀based฀on฀after฀
tax฀figures.฀
Step฀6฀ Complete฀the฀non-controlling฀interests฀in฀subsidiary's฀PFY฀and฀TCI฀calculation:฀
฀ PFY฀ TCI฀(if฀req'd)
PFY/TCI฀per฀question฀(time-apportioned฀ x/12 if฀ ฀X฀฀ ฀X฀฀
appropriate)฀
Adjustments,฀eg฀unrealised฀profit฀on฀sales฀made฀by฀ ฀(X)/X฀฀ ฀(X)/X฀฀
subsidiary฀
Impairment฀losses฀(if฀NCI฀held฀at฀fair฀value)฀ ฀(X)฀ ฀(X)฀
฀ ฀฀X฀฀ ฀฀X฀฀
฀ ฀ ฀
฀NCI%฀ ฀฀X฀฀ ฀฀X฀฀
3฀Fair฀values฀
3.1฀Fair฀value฀of฀consideration฀practice฀question฀
Activity฀1:฀Fair฀value฀of฀consideration฀ ฀
Berry฀acquired฀all฀of฀Goose's฀400,000฀ordinary฀shares฀during฀the฀year฀ended฀28฀February฀20X5.฀
Goose฀ was฀ purchased฀ from฀ its฀ directors฀ who฀ will฀ remain฀ directors฀ of฀ the฀ business.฀ Berry฀ incurred฀
legal฀and฀professional฀fees฀as฀a฀result฀of฀the฀acquisition฀of฀$75,000.฀
The฀purchase฀consideration฀comprised:฀
฀ $250,000฀in฀cash฀payable฀at฀acquisition฀
฀ $100,000฀payable฀1฀year฀after฀acquisition฀
฀ $100,000฀payable฀in฀2฀years'฀time฀if฀profits฀exceed฀$2m฀
฀ New฀shares฀issued฀in฀Berry฀on฀a฀1฀for฀4฀basis฀
The฀ consideration฀ payable฀ in฀ 2฀ years฀ after฀ acquisition฀ is฀ a฀ tough฀ target฀ for฀ the฀ directors฀ of฀ Goose฀
and฀ so฀ its฀ fair฀ value฀ (taking฀ into฀ account฀ the฀ time฀ value฀ of฀ money)฀ has฀ been฀ measured฀ at฀ only฀
$30,750.฀
The฀market฀value฀of฀Berry's฀shares฀on฀the฀acquisition฀date฀was฀$7.35.฀
An฀ appropriate฀ discount฀ rate฀ for฀ use฀ where฀ relevant฀ is฀ 7%฀ and฀ the฀ 1฀ year฀ 7%฀ discount฀ factor฀ is฀
0.935.฀
Required฀
Calculate฀the฀consideration฀transferred฀to฀acquire฀Goose฀at฀the฀date฀of฀acquisition.฀
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฀
3.2฀Fair฀value฀of฀assets฀and฀liabilities฀
The฀ general฀ rule฀ under฀ IFRS฀ 3฀ is฀ that,฀ on฀ acquisition,฀ the฀ subsidiary's฀ assets฀ and฀ liabilities฀ must฀ be฀
recognised฀ and฀ measured฀ at฀ their฀ acquisition฀ date฀ fair฀ value฀ except฀ in฀ limited,฀ stated฀
cases.฀฀
To฀be฀recognised฀as฀part฀of฀applying฀the฀acquisition฀method,฀the฀assets฀and฀liabilities;฀must:฀
(a)฀ Meet฀the฀definitions฀of฀assets฀and฀liabilities฀in฀the฀Conceptual฀Framework;฀and฀
(b)฀ Be฀part฀of฀what฀the฀acquirer฀and฀the฀acquiree฀(or฀its฀former฀owners)฀exchanged฀in฀the฀business฀
combination฀rather฀than฀the฀result฀of฀separate฀transactions.฀
IFRS฀ 13฀ Fair฀ Value฀ Measurement฀ provides฀ extensive฀ guidance฀ on฀ how฀ the฀ fair฀ value฀ of฀ assets฀ and฀
liabilities฀should฀be฀established.฀
This฀standard฀requires฀that฀the฀following฀are฀considered฀in฀measuring฀fair฀value฀(IFRS฀13:฀para.฀23):฀
(a)฀ The฀asset฀or฀liability฀being฀measured;฀
(b)฀ The฀ principal฀ market฀ (ie฀ that฀ where฀ the฀ most฀ activity฀ takes฀ place)฀ or,฀ where฀ there฀ is฀ no฀
principal฀ market,฀ the฀ most฀ advantageous฀ market฀ (ie฀ that฀ in฀ which฀ the฀ best฀ price฀ could฀ be฀
achieved)฀in฀which฀an฀orderly฀transaction฀would฀take฀place฀for฀the฀asset฀or฀liability;฀
(c)฀ The฀highest฀and฀best฀use฀of฀the฀asset฀or฀liability฀and฀whether฀it฀is฀used฀on฀a฀standalone฀basis฀
or฀in฀conjunction฀with฀other฀assets฀or฀liabilities;฀and฀
(d)฀ Assumptions฀that฀market฀participants฀would฀use฀when฀pricing฀the฀asset฀or฀liability.฀
Having฀considered฀these฀factors,฀IFRS฀13฀provides฀a฀hierarchy฀of฀inputs฀for฀arriving฀at฀fair฀value.฀It฀
requires฀that฀Level฀1฀inputs฀are฀used฀where฀possible฀(IFRS฀13:฀para.฀72):฀
Level฀1฀ Quoted฀prices฀in฀active฀markets฀for฀identical฀assets฀that฀the฀entity฀can฀access฀at฀the฀
measurement฀date฀฀
Level฀2฀ Inputs฀other฀than฀quoted฀prices฀that฀are฀directly฀or฀indirectly฀observable฀for฀the฀asset
Level฀3฀ Unobservable฀inputs฀for฀the฀asset
3.2.1฀Examples฀of฀fair฀value฀and฀business฀combinations฀
For฀ non-financial฀ assets,฀ fair฀ value฀ is฀ decided฀ based฀ on฀ the฀ highest฀ and฀ best฀ use฀ of฀ the฀ asset฀ as฀
determined฀by฀a฀market฀participant.฀The฀following฀illustrations,฀adapted฀from฀the฀illustrative฀examples฀
to฀IFRS฀13,฀demonstrate฀what฀is฀meant฀by฀this.฀
Illustration฀2฀
Land฀
Anscome฀Co฀has฀acquired฀land฀in฀a฀business฀combination.฀The฀land฀is฀currently฀developed฀for฀
industrial฀use฀as฀a฀site฀for฀a฀factory.฀The฀current฀use฀of฀land฀is฀presumed฀to฀be฀its฀highest฀and฀best฀
use฀unless฀market฀or฀other฀factors฀suggest฀a฀different฀use.฀Nearby฀sites฀have฀recently฀been฀developed฀
for฀residential฀use฀as฀sites฀for฀high-rise฀apartment฀buildings.฀On฀the฀basis฀of฀that฀development฀and฀
recent฀zoning฀and฀other฀changes฀to฀facilitate฀that฀development,฀Anscome฀determines฀that฀the฀land฀
currently฀used฀as฀a฀site฀for฀a฀factory฀could฀be฀developed฀as฀a฀site฀for฀residential฀use฀(ie฀for฀high-rise฀
apartment฀buildings)฀because฀market฀participants฀would฀take฀into฀account฀the฀potential฀to฀develop฀
the฀site฀for฀residential฀use฀when฀pricing฀the฀land.฀
How฀would฀the฀highest฀and฀best฀use฀of฀the฀land฀be฀determined?฀
฀ 691฀

lOMoARcPSD|6256454
Solution฀
The฀highest฀and฀best฀use฀of฀the฀land฀would฀be฀determined฀by฀comparing฀both฀of฀the฀following:฀
(a)฀฀ The฀value฀of฀the฀land฀as฀currently฀developed฀for฀industrial฀use฀(ie฀the฀land฀would฀be฀used฀in฀
combination฀with฀other฀assets,฀such฀as฀the฀factory,฀or฀with฀other฀assets฀and฀liabilities);฀and฀
(b)฀฀ The฀value฀of฀the฀land฀as฀a฀vacant฀site฀for฀residential฀use,฀taking฀into฀account฀the฀costs฀of฀
demolishing฀the฀factory฀and฀other฀costs฀(including฀the฀uncertainty฀about฀whether฀the฀entity฀
would฀be฀able฀to฀convert฀the฀asset฀to฀the฀alternative฀use)฀necessary฀to฀convert฀the฀land฀to฀a฀
vacant฀site฀(ie฀the฀land฀is฀to฀be฀used฀by฀market฀participants฀on฀a฀stand-alone฀basis).฀
The฀highest฀and฀best฀use฀of฀the฀land฀would฀be฀determined฀on฀the฀basis฀of฀the฀higher฀of฀those฀values.฀
Illustration฀3฀
Research฀and฀development฀project฀
Searcher฀Co฀has฀a฀research฀and฀development฀(R฀&฀D)฀project฀in฀a฀business฀combination.฀Searcher฀
Co฀does฀not฀intend฀to฀complete฀the฀project.฀If฀completed,฀the฀project฀would฀compete฀with฀one฀of฀its฀
own฀projects฀(to฀provide฀the฀next฀generation฀of฀the฀entity's฀commercialised฀technology).฀Instead,฀the฀
entity฀intends฀to฀hold฀(ie฀lock฀up)฀the฀project฀to฀prevent฀its฀competitors฀from฀obtaining฀access฀to฀the฀
technology.฀In฀doing฀this฀the฀project฀is฀expected฀to฀provide฀defensive฀value,฀principally฀by฀improving฀
the฀prospects฀for฀the฀entity's฀own฀competing฀technology.฀
If฀it฀could฀purchase฀the฀R฀&฀D฀project,฀Developer฀Co฀would฀continue฀to฀develop฀the฀project฀and฀that฀
use฀would฀maximise฀the฀value฀of฀the฀group฀of฀assets฀or฀of฀assets฀and฀liabilities฀in฀which฀the฀project฀
would฀be฀used฀(ie฀the฀asset฀would฀be฀used฀in฀combination฀with฀other฀assets฀or฀with฀other฀assets฀and฀
liabilities).฀Developer฀Co฀does฀not฀have฀similar฀technology.฀
How฀would฀the฀fair฀value฀of฀the฀project฀be฀measured?฀
Solution฀
The฀fair฀value฀of฀the฀project฀would฀be฀measured฀on฀the฀basis฀of฀the฀price฀that฀would฀be฀received฀in฀a฀
current฀transaction฀to฀sell฀the฀project,฀assuming฀that฀the฀R฀&฀D฀would฀be฀used฀with฀its฀complementary฀
assets฀and฀the฀associated฀liabilities,฀and฀that฀those฀assets฀and฀liabilities฀would฀be฀available฀to฀
Developer฀Co.฀
Illustration฀4฀
Decommissioning฀liability฀
Deacon฀assumes฀a฀decommissioning฀liability฀in฀a฀business฀combination.฀It฀is฀legally฀required฀to฀
dismantle฀a฀power฀station฀at฀the฀end฀of฀its฀useful฀life,฀which฀is฀estimated฀to฀be฀twenty฀years.฀฀
How฀would฀the฀decommissioning฀liability฀be฀measured?฀
Solution฀
Because฀this฀is฀a฀business฀combination,฀Deacon฀must฀measure฀the฀liability฀at฀fair฀value฀in฀accordance฀
with฀IFRS฀13,฀rather฀than฀using฀the฀best฀estimate฀measurement฀required฀by฀IAS฀37฀Provisions,฀
Contingent฀Liabilities฀and฀Contingent฀Assets.฀฀
Deacon฀will฀use฀the฀expected฀present฀value฀technique฀to฀measure฀the฀fair฀value฀of฀the฀
decommissioning฀liability.฀If฀Deacon฀were฀contractually฀committed฀to฀transfer฀its฀decommissioning฀
liability฀to฀a฀market฀participant,฀it฀would฀conclude฀that฀a฀market฀participant฀would฀use฀all฀of฀the฀
following฀inputs,฀probability฀weighted฀as฀appropriate,฀when฀estimating฀the฀price฀it฀would฀expect฀to฀
receive:฀
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lOMoARcPSD|6256454
฀
(a)฀ Labour฀costs฀
(b)฀ Allocated฀overhead฀costs฀
(c)฀ The฀compensation฀that฀a฀market฀participant฀would฀generally฀receive฀for฀undertaking฀the฀activity,฀
including฀profit฀on฀labour฀and฀overhead฀costs฀and฀the฀risk฀that฀the฀actual฀cash฀outflows฀might฀
differ฀from฀those฀expected฀
(d)฀ The฀effect฀of฀inflation฀
(e)฀ The฀time฀value฀of฀money฀(risk-free฀rate)฀
(f)฀ Non-performance฀risk,฀including฀Deacon's฀own฀credit฀risk฀
As฀an฀example฀of฀how฀the฀probability฀adjustment฀might฀work,฀Deacon฀values฀labour฀costs฀on฀the฀
basis฀of฀current฀marketplace฀wages฀adjusted฀for฀expected฀future฀wage฀increases.฀It฀determines฀that฀
there฀is฀a฀20%฀probability฀that฀the฀wage฀bill฀will฀be฀$15฀million,฀a฀30%฀probability฀that฀it฀will฀be฀
$25฀million฀and฀a฀50%฀probability฀that฀it฀will฀be฀$20฀million.฀Expected฀cash฀flows฀will฀then฀be฀
(20%฀×฀$15m)฀+฀(30%฀×฀$25m)฀+฀(50%฀×฀$20m)฀=฀$20.5m.฀The฀probability฀assessments฀will฀be฀
developed฀on฀the฀basis฀of฀Deacon's฀knowledge฀of฀the฀market฀and฀experience฀of฀fulfilling฀obligations฀
of฀this฀type.฀
3.2.2฀Restructuring฀and฀future฀losses฀
An฀acquirer฀should฀not฀recognise฀liabilities฀for฀future฀losses฀or฀other฀costs฀expected฀to฀be฀
incurred฀as฀a฀result฀of฀the฀business฀combination.฀
IFRS฀ 3฀ explains฀ (para.฀ 23)฀ that฀ a฀ plan฀ to฀ restructure฀ a฀ subsidiary฀ following฀ an฀ acquisition฀ is฀ not฀ a฀
present฀ obligation฀ of฀ the฀ acquiree฀ at฀ the฀ acquisition฀ date.฀ Neither฀ does฀ it฀ meet฀ the฀ definition฀ of฀ a฀
contingent฀ liability.฀ Therefore,฀ an฀ acquirer฀ should฀ not฀ recognise฀ a฀ liability฀ for฀ such฀ a฀
restructuring฀ plan฀ as฀ part฀ of฀ allocating฀ the฀ cost฀ of฀ the฀ combination฀ unless฀ the฀ subsidiary฀ was฀
already฀committed฀to฀the฀plan฀before฀the฀acquisition.฀
This฀ prevents฀ creative฀ accounting.฀ An฀ acquirer฀ cannot฀ set฀ up฀ a฀ provision฀ for฀ restructuring฀ or฀
future฀losses฀of฀a฀subsidiary฀and฀then฀release฀this฀to฀profit฀or฀loss฀in฀subsequent฀periods฀in฀order฀to฀
reduce฀losses฀or฀smooth฀profits.฀
3.2.3฀฀Intangible฀assets฀
The฀ acquiree฀ may฀ have฀ intangible฀ assets,฀ such฀ as฀ development฀ expenditure.฀ These฀ can฀ be฀
recognised฀separately฀from฀goodwill฀only฀if฀they฀are฀identifiable.฀An฀intangible฀asset฀is฀identifiable฀
only฀if฀it฀(IFRS฀3:฀para.฀29):฀฀
(a)฀ Is฀separable,฀ie฀capable฀of฀being฀separated฀or฀divided฀from฀the฀entity฀and฀sold,฀transferred,฀or฀
exchanged,฀either฀individually฀or฀together฀with฀a฀related฀contract,฀asset฀or฀liability;฀or฀฀
(b)฀ Arises฀from฀contractual฀or฀other฀legal฀rights.฀
3.2.4฀Contingent฀liabilities฀
Contingent฀ liabilities฀ of฀ the฀ acquiree฀ are฀ recognised฀ if฀ their฀ fair฀ value฀ can฀ be฀ measured฀
reliably.฀A฀contingent฀liability฀must฀be฀recognised฀even฀if฀the฀outflow฀is฀not฀probable,฀provided฀
there฀is฀a฀present฀obligation.฀
This฀is฀a฀departure฀from฀the฀normal฀rules฀in฀IAS฀37;฀contingent฀liabilities฀are฀not฀normally฀recognised,฀
but฀only฀disclosed.฀
After฀ their฀ initial฀ recognition,฀ the฀ acquirer฀ should฀ measure฀ contingent฀ liabilities฀ that฀ are฀ recognised฀
separately฀at฀the฀higher฀of฀(IFRS฀3:฀para.฀56):฀
(a)฀ The฀amount฀that฀would฀be฀recognised฀in฀accordance฀with฀IAS฀37;฀or฀฀
(b)฀ The฀amount฀initially฀recognised.฀
฀ 693฀

lOMoARcPSD|6256454
Activity฀2:฀Fair฀value฀of฀assets฀and฀liabilities฀ ฀
Ergo฀ acquired฀ 750,000฀ of฀ Rower's฀ 1,000,000฀ $1฀ ordinary฀ shares฀ on฀ 1฀ January฀ 20X2฀
for฀$3,800,000฀ when฀ Rower's฀ retained฀ earnings฀ were฀ $3,200,000.฀ It฀ is฀ group฀ policy฀ to฀ value฀
non-controlling฀ interest฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀ acquisition.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀
interest฀ at฀ 1฀ January฀ 20X2฀ was฀ $1,600,000.฀ As฀ at฀ 31฀ December฀ 20X3,฀ there฀ had฀ been฀ no฀
impairment฀of฀goodwill.฀
At฀1฀January฀20X2,฀the฀fair฀value฀of฀the฀net฀assets฀acquired฀was฀the฀same฀as฀the฀book฀value฀with฀the฀
following฀exceptions:฀
฀ The฀ fair฀ value฀ of฀ property,฀ plant฀ and฀ equipment฀ was฀ $800,000฀ higher฀ than฀ book฀ value.฀฀
These฀ assets฀ were฀ assessed฀ to฀ have฀ a฀ remaining฀ useful฀ life฀ of฀ 16฀ years฀ from฀ the฀ date฀ of฀
acquisition.฀
฀ The฀fair฀value฀of฀inventories฀was฀estimated฀to฀be฀$200,000฀higher฀than฀the฀book฀value.฀All฀of฀
these฀inventories฀were฀sold฀by฀31฀December฀20X2.฀
฀ Rower฀had฀a฀customer฀list฀which฀it฀had฀not฀recognised฀as฀an฀intangible฀asset฀because฀it฀was฀
internally฀ generated.฀ However,฀ on฀ acquisition,฀ external฀ experts฀ managed฀ to฀ establish฀ a฀ fair฀
value฀for฀the฀list฀of฀$150,000.฀Customers฀are฀typically฀retained฀for฀an฀average฀of฀5฀years.฀
฀ A฀ contingent฀ liability,฀ which฀ had฀ a฀ fair฀ value฀ of฀ $220,000฀ at฀ the฀ date฀ of฀ acquisition.฀ This฀
liability฀was฀settled฀in฀the฀year฀ended฀31฀December฀20X2.฀
At฀ 31฀ December฀ 20X3,฀ the฀ retained฀ earnings฀ of฀ Ergo฀ and฀ Rower฀ were฀ $7,500,000฀ and฀
$4,000,000฀ respectively.฀ Rower's฀ profit฀ for฀ the฀ year฀ and฀ total฀ comprehensive฀ income฀ for฀ the฀ year฀
ended฀31฀December฀20X3฀was฀$500,000.฀
Required฀
(a)฀ Calculate฀ the฀ amounts฀ that฀ will฀ appear฀ in฀ the฀ consolidated฀ statement฀ of฀ financial฀ position฀ of฀
the฀Ergo฀group฀as฀at฀31฀December฀20X3฀for:฀
(i)฀ Goodwill฀
(ii)฀ Consolidated฀retained฀earnings฀
(iii)฀ Non-controlling฀interest฀
(b)฀ Calculate฀ the฀ non-controlling฀ interest฀ in฀ the฀ profit฀ of฀ Rower฀ for฀ inclusion฀ in฀ the฀ consolidated฀
statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀31฀December฀
20X3.฀
฀
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lOMoARcPSD|6256454
฀
Activity฀1:฀Fair฀value฀of฀consideration฀
Consideration฀transferred฀
฀ ฀$ ฀฀
Cash฀ ฀250,000
Deferred฀consideration฀(100,000฀฀0.935)฀ ฀93,500
Contingent฀consideration฀(measure฀at฀fair฀value)฀ ฀30,750
Shares฀in฀Berry฀(400,000/4฀฀$7.35)฀ ฀ ฀735,000
฀ ฀1,109,250
Activity฀2:฀Fair฀values฀of฀assets฀and฀liabilities฀
(a)฀ (i)฀ Goodwill฀
฀ ฀$'000฀ ฀฀฀฀$'000฀
Consideration฀transferred฀ ฀3,800฀
Non-controlling฀interests฀(at฀fair฀value)฀ ฀1,600฀
฀ Less฀fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition: ฀
฀ Share฀capital฀ 1,000 ฀
฀ Retained฀earnings฀ 3,200 ฀
฀ Fair฀value฀adjustment฀(W2) ฀฀฀930฀ ฀
฀ ฀ (5,130) ฀
฀ ฀฀฀฀฀270฀
(ii)฀ Consolidated฀retained฀earnings฀
฀ ฀Ergo฀ ฀Rower฀
฀ ฀฀$'000฀ ฀฀$'000฀
At฀the฀year฀end฀ ฀7,500฀ ฀4,000฀
Fair฀value฀movement฀(W2)฀ ฀฀(140)฀
At฀acquisition฀฀ ฀฀(3,200)฀
฀ ฀฀฀฀฀660฀
Share฀of฀Rower's฀post-acquisition฀retained฀ ฀
earnings฀(75%฀฀660)฀ ฀฀฀฀495
฀฀฀ ฀7,995฀ ฀
(iii)฀ Non-controlling฀interests฀(NCI)฀(in฀statement฀of฀financial฀position)฀
฀ ฀$'000฀
NCI฀at฀acquisition฀(fair฀value) ฀ 1,600 ฀
NCI฀share฀of฀post-acq'n฀reserves฀(25%฀ 660฀[(a)(ii)]) ฀฀฀฀165฀
฀ ฀1,765฀
฀ 695฀

lOMoARcPSD|6256454
(b)฀ Non-controlling฀interests฀(in฀profit฀or฀loss)฀฀
฀ PFY฀
฀ $'000฀
Per฀question฀ 500฀
Fair฀value฀depreciation฀on฀property,฀plant฀&฀equipment฀ (50)฀
for฀the฀year฀(W2)฀
Fair฀value฀amortisation฀on฀intangible฀asset฀for฀the฀year฀(W2) ฀(30)฀
฀ ฀420฀
NCI฀share฀ ฀25%฀
=฀฀105฀
Tutorial฀note฀
As฀the฀inventory฀was฀sold฀and฀the฀contingent฀liability฀settled฀in฀the฀prior฀year฀(20X2),฀they฀
have฀no฀impact฀on฀the฀NCI฀for฀the฀year฀ended฀31฀December฀20X3.฀
Workings฀
฀ ฀ ฀฀Ergo฀
฀ ฀ ฀
฀ ฀ ฀ ฀ 1.1.X2฀฀฀750/1,000฀=฀75%฀ ฀
฀
฀ ฀ ฀฀Rower฀
฀ Pre-acquisition฀retained฀earnings฀=฀$3.2m฀
2฀ Fair฀value฀adjustment฀
฀ ฀Acq'n฀ ฀฀
date฀ Movement฀ Year฀end฀
฀ 1.1.X2 X2,฀X3 31.12.X3฀

฀ $'000 $'000 $'000฀
Adjust฀
Inventories฀ 200฀ ฀(200)฀ ฀฀฀–฀ figures฀
Property,฀plant฀and฀equipment฀(PPE)฀ 800฀ ฀฀(100)*฀ ฀700฀ in฀SOFP฀
Intangible฀assets฀ 150฀ ฀฀฀฀(60)**฀ ฀90฀

Contingent฀liabilities฀ ฀(220)฀ ฀220฀ ฀--฀฀฀฀-–฀
฀ ฀930฀ ฀(140)฀ ฀790฀
฀
฀ Goodwill฀ Retained฀
฀ ฀ earnings฀
*extra฀depreciation฀on฀PPE฀=฀800฀฀1/16฀=฀50฀per฀annum฀฀2฀years฀=฀100฀
**amortisation฀of฀intangibles฀=฀150฀฀1/5฀=฀30฀per฀annum฀฀2฀years฀=฀60฀
฀
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฀
฀
฀
฀
฀
฀
฀
฀
฀
structures:฀step
acquisitions
฀
฀
฀
฀
฀
฀
฀ 697฀

lOMoARcPSD|6256454
1฀Investment฀to฀associate฀step฀acquisitions฀
This฀ scenario฀ is฀ not฀ specifically฀ covered฀ under฀ any฀ of฀ IFRS฀ 3฀ Business฀ Combinations,฀ IFRS฀ 10฀
Consolidated฀ Financial฀ Statements฀ or฀ IAS฀ 28฀ Investments฀ in฀ Associates฀ and฀ Joint฀ Ventures.฀
Interpretative฀guidance฀from฀Deloitte฀(2008:฀p99)฀suggests฀that฀there฀are฀two฀possible฀treatments฀in฀
the฀group฀accounts:฀
(a)฀ Follow฀the฀IFRS฀3฀principles฀for฀step฀acquisitions฀achieving฀control฀
Remeasure฀ the฀ existing฀ investment฀ to฀ fair฀ value฀ on฀ the฀ date฀ significant฀ influence฀ is฀ achieved฀
with฀ any฀ corresponding฀ gain฀ or฀ loss฀ recognised฀ in฀ profit฀ or฀ loss฀ or฀ other฀ comprehensive฀
income฀ (OCI)฀ (depending฀ on฀ whether฀ the฀ investment฀ was฀ previously฀ measured฀ per฀ IFRS฀ 9฀
Financial฀Instruments฀[para.฀4.1.4]฀at฀fair฀value฀through฀profit฀or฀loss,฀or฀at฀fair฀value฀through฀
OCI฀under฀the฀irrevocable฀election).฀
(b)฀ Follow฀the฀IAS฀28฀principles฀for฀equity฀accounting฀
Record฀both฀the฀original฀investment฀and฀the฀new฀investment฀at฀cost฀on฀the฀basis฀that฀IAS฀28฀
(para.฀ 10)฀ states,฀ ‘under฀ the฀ equity฀ method,฀ on฀ initial฀ recognition฀ the฀ investment฀ in฀ an฀
associate฀or฀a฀joint฀venture฀is฀recognised฀at฀cost’.฀
Illustration฀1:฀Investment฀to฀associate฀step฀acquisition฀
Bravado฀has฀two฀subsidiaries.฀It฀also฀has฀an฀investment฀in฀a฀third฀company,฀Clarity.฀Bravado฀
acquired฀a฀10%฀interest฀in฀Clarity฀on฀1฀June฀20X7฀for฀$8฀million.฀The฀investment฀was฀accounted฀for฀
as฀an฀investment฀in฀equity฀instruments฀and฀the฀irrevocable฀election฀was฀made฀to฀take฀changes฀in฀fair฀
value฀through฀other฀comprehensive฀income.฀At฀31฀May฀20X8,฀10%฀investment฀in฀Clarity฀was฀
revalued฀to฀its฀fair฀value฀of฀$9฀million.฀On฀1฀June฀20X8,฀Bravado฀acquired฀an฀additional฀15%฀
interest฀in฀Clarity฀for฀$11฀million฀and฀achieved฀significant฀influence.฀Clarity฀made฀profits฀after฀
dividends฀of฀$6฀million฀and฀$10฀million฀for฀the฀years฀to฀31฀May฀20X8฀and฀31฀May฀20X9.฀Clarity’s฀
only฀reserves฀are฀retained฀earnings.฀
Required฀
Calculate฀the฀investment฀in฀associate฀for฀inclusion฀in฀the฀Bravado฀consolidated฀statement฀of฀financial฀
position฀as฀at฀31฀May฀20X9฀under฀the฀following฀assumptions:฀
(a)฀ Following฀the฀IFRS฀3฀principles฀for฀business฀combinations฀where฀control฀is฀achieved฀
(b)฀ Following฀the฀IAS฀28฀principles฀for฀equity฀accounting฀
฀ ฀
698฀

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฀
Solution฀
(a)฀ Following฀the฀IFRS฀3฀principles฀for฀business฀combinations฀where฀control฀is฀achieved฀
The฀investment฀in฀associate฀is฀calculated฀as฀follows:฀฀
฀ Do฀not฀record฀the฀initial฀10%฀investment฀at฀its฀1฀June฀20X7฀
The฀new฀15%฀investment฀is฀
cost฀of฀$8m.฀Instead,฀record฀it฀at฀its฀fair฀value฀of฀$9m฀at฀the฀
recorded฀at฀its฀cost฀on฀the฀date฀
฀ date฀significant฀influence฀is฀achieved฀(1฀June฀20X8),฀as฀in฀
significant฀influence฀is฀achieved฀
substance,฀a฀25%฀associate฀was฀‘purchased’฀on฀1฀June฀
(1฀June฀20X8).฀In฀substance,฀it฀is฀
฀ 20X7.฀No฀gain฀on฀remeasurement฀of฀the฀10%฀investment฀is฀
as฀if฀Bravado฀‘purchased’฀a฀25%฀
recognised฀in฀this฀Illustration฀because฀the฀investment฀had฀
associate฀on฀1฀June฀20X8.฀
฀ already฀been฀remeasured฀to฀fair฀value฀at฀31฀May฀20X8฀in฀
the฀parent’s฀(Bravado’s)฀individual฀accounts.฀
฀ $m฀
Cost฀=฀fair฀value฀at฀date฀significant฀influence฀is฀achieved฀($9m฀+฀$11m)฀ 20฀
Share฀of฀post-acquisition฀reserves฀($10m฀฀25%)฀ 2.5฀
Investment฀in฀associate฀ 22.5฀
฀ Post-acquisition฀reserves฀should฀only฀be฀included฀
from฀the฀date฀Clarity฀becomes฀an฀associate฀(1฀June฀ On฀the฀date฀significant฀influence฀is฀
฀ 20X8).฀By฀the฀year฀end฀of฀31฀May฀20X9,฀Clarity฀ achieved฀(1฀June฀20X8),฀Bravado฀
has฀only฀been฀associate฀for฀a฀year฀and฀given฀that฀ has฀a฀25%฀stake฀(10%฀+฀15%)฀in฀
฀ Clarity’s฀only฀reserves฀are฀retained฀earnings,฀the฀ Clarity.฀In฀substance,฀Bravado฀has฀
profit฀after฀dividends฀for฀the฀year฀ended฀31฀May฀ ‘sold’฀a฀10%฀investment฀and฀
฀ 20X9฀represents฀the฀post-acquisition฀reserves.฀The฀ ‘purchased’฀a฀25%฀associate.฀
profit฀after฀dividends฀for฀the฀year฀ended฀31฀May฀
฀ 20X8฀is฀ignored฀because฀Clarity฀was฀only฀a฀simple฀
investment฀at฀that฀stage.฀
฀
(b)฀ Following฀the฀IAS฀28฀principles฀for฀equity฀accounting฀
The฀investment฀in฀associate฀is฀calculated฀as฀follows:฀
Under฀this฀method,฀the฀10%฀is฀recorded฀at฀its฀original฀cost฀
The฀new฀15%฀investment฀is฀
on฀1฀June฀20X7฀of฀$8m฀which฀means฀the฀revaluation฀gain฀
recorded฀at฀its฀cost฀on฀the฀
of฀$1m฀recognised฀to฀date฀($9m฀fair฀value฀at฀31฀May฀
date฀significant฀influence฀is฀
20X8฀less฀$8m฀cost)฀would฀have฀to฀be฀reversed฀as฀a฀
achieved฀(1฀June฀20X8).฀฀
consolidation฀adjustment.฀
฀ $m฀
Cost฀=฀fair฀value฀at฀date฀significant฀influence฀is฀achieved฀($8m฀+฀$11m) 19฀
Share฀of฀post-acquisition฀reserves฀($10m฀ 25%) ฀฀฀฀2.5฀
Investment฀in฀associate฀ ฀21.5฀
฀ As฀for฀part฀(a)฀
As฀for฀part฀(a)฀
฀
฀
฀ ฀
฀ 699฀

lOMoARcPSD|6256454
700฀

lOMoARcPSD|6256454
฀
฀
฀
฀
฀
฀
฀
฀ structures:฀disposals
฀
฀ and฀group
฀
฀
reorganisations
฀
฀
฀
฀ 701฀
฀

lOMoARcPSD|6256454
1฀Group฀profit฀or฀loss฀on฀disposal฀
1.1฀ Group฀profit฀or฀loss฀on฀disposal฀where฀significant฀influence฀
is฀lost฀
Calculation฀of฀group฀profit฀or฀loss฀on฀disposal฀where฀significant฀infuence฀is฀lost฀
฀ $ $฀
Fair฀value฀of฀consideration฀received฀ X฀
Fair฀value฀of฀any฀investment฀retained฀ X฀
Less:฀ Carrying฀amount฀of฀investment฀in฀associate฀at฀date฀ ฀฀ ฀
significant฀influence฀lost:฀
฀ Cost฀of฀associate X ฀
฀ Share฀of฀associate’s฀post-acquisition฀reserves X ฀
฀ Less฀impairment฀of฀investment฀in฀associate (X) ฀
฀ ฀ ฀฀฀฀฀(X)฀
Group฀profit/(loss)฀(recognise฀in฀SPL)฀ ฀X/(X)฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ (IAS฀28:฀para.฀22(b))฀
1.2฀ Treatment฀of฀amounts฀previously฀recognised฀in฀other฀
IFRS฀10฀states฀that:฀฀
'if฀ a฀ parent฀ loses฀ control฀ of฀ a฀ subsidiary,฀ the฀ parent฀ shall฀ account฀ for฀ all฀ amounts฀ previously฀
recognised฀in฀other฀comprehensive฀income฀in฀relation฀to฀that฀subsidiary฀on฀the฀same฀basis฀as฀
would฀be฀required฀if฀the฀parent฀had฀directly฀disposed฀of฀the฀related฀assets฀or฀liabilities'฀(IFRS฀
10:฀B99).฀
IAS฀28฀(para.฀22c)฀requires฀the฀same฀treatment฀when฀an฀entity฀ceases฀to฀have฀significant฀influence฀
over฀an฀entity.฀฀
Examples฀are฀shown฀below.฀฀
Treatment฀if฀the฀parent฀ Example฀ Treatment฀in฀group฀

had฀disposed฀of฀related฀ financial฀statements฀
assets฀and฀liabilities฀ on฀loss฀of฀control฀of฀
subsidiary฀
Items฀that฀are฀reclassified฀from฀ Investment฀in฀debt฀instruments฀ Reclassify฀previous฀

OCI฀to฀profit฀or฀loss฀(P/L)฀ held฀to฀collect฀cash฀flows฀and฀ remeasurement฀gains฀or฀losses฀
sell฀where฀the฀cash฀flows฀are฀ on฀the฀investment฀in฀debt฀
solely฀the฀principal฀and฀interest฀ instruments฀from฀OCI฀to฀P/L฀
(see฀Chapter฀7฀Financial฀ (as฀part฀of฀the฀group฀profit฀on฀
instruments)฀ disposal)฀
Items฀that฀will฀never฀be฀ Revaluation฀surplus฀on฀ Reclassify฀revaluation฀surplus฀to฀

reclassified฀to฀P/L฀but฀where฀a฀ property,฀plant฀and฀equipment฀ retained฀earnings฀(this฀is฀purely฀
transfer฀within฀equity฀is฀ where฀the฀parent฀elects฀to฀ a฀consolidated฀statement฀of฀
permitted฀on฀disposal฀ transfer฀the฀revaluation฀surplus฀ financial฀position฀adjustment฀
to฀equity฀฀to฀retained฀earnings฀ and฀will฀have฀no฀impact฀on฀the฀
on฀disposal฀(see฀Chapter฀13฀ group฀profit฀or฀loss฀on฀disposal)฀
Non-current฀assets฀held฀for฀sale฀
and฀discontinued฀operations)฀
(IAS฀16:฀para.฀41)฀
฀
702฀

lOMoARcPSD|6256454
฀
2฀Deemed฀disposals฀
A฀‘deemed’฀disposal฀occurs฀when฀a฀subsidiary฀issues฀new฀shares฀and฀the฀parent฀does฀not฀take฀
up฀all฀of฀its฀rights฀such฀that฀its฀holding฀is฀reduced.฀
In฀substance฀this฀is฀a฀disposal฀and฀is฀therefore฀accounted฀for฀as฀such.฀The฀percentages฀owned฀by฀the฀
parent฀before฀and฀after฀the฀subsidiary฀issues฀shares฀must฀be฀calculated,฀and,฀where฀control฀is฀lost,฀a฀
group฀profit฀on฀disposal฀must฀be฀calculated.฀
Illustration฀1฀
Deemed฀disposal฀
At฀1฀January฀20X2฀Rey,฀a฀public฀limited฀company,฀had฀a฀direct฀holding฀of฀shares฀giving฀75%฀of฀the฀
voting฀rights฀in฀a฀subsidiary฀Mago.฀
The฀consolidated฀carrying฀amount฀of฀Mago’s฀net฀assets฀on฀1฀September฀20X2฀was฀$14฀million.฀
Goodwill฀of฀$2฀million฀was฀recognised฀upon฀the฀initial฀acquisition฀of฀Mago,฀and฀has฀not฀
subsequently฀been฀impaired.฀Rey฀elected฀to฀measure฀the฀non-controlling฀interests฀in฀Mago฀at฀fair฀
value฀at฀acquisition.฀At฀1฀September฀20X2,฀non-controlling฀interests฀(based฀on฀the฀original฀
shareholding฀in฀Mago)฀amounted฀to฀$3.9฀million.฀฀
On฀1฀September฀20X2,฀Mago฀then฀issued฀new฀shares฀for฀$5฀million,฀which฀were฀all฀purchased฀by฀a฀
new฀investor฀unrelated฀to฀Rey.฀The฀fair฀value฀of฀Mago฀at฀that฀date฀(before฀the฀share฀issue)฀was฀
$18฀million.฀
After฀the฀share฀issue,฀Rey฀retained฀an฀interest฀of฀40%฀of฀the฀voting฀rights฀of฀Mago฀and฀retained฀two฀
of฀the฀six฀seats฀on฀the฀board฀of฀directors฀(previously฀Rey฀held฀five฀of฀the฀six฀seats).฀
Required฀
Explain฀the฀accounting฀treatment฀for฀Mago฀in฀the฀consolidated฀financial฀statements฀of฀the฀Rey฀group฀
for฀the฀year฀ended฀31฀December฀20X2.฀
Solution฀
Rey฀loses฀control฀of฀Mago฀on฀1฀September฀20X2.฀Mago฀is฀consolidated฀as฀a฀subsidiary฀for฀the฀first฀
eight฀months฀of฀the฀year฀until฀that฀date.฀
A฀profit฀or฀loss฀is฀calculated฀on฀the฀loss฀of฀control:฀
฀ $m฀ $m฀
Fair฀value฀of฀consideration฀received฀ ฀ 0฀
Fair฀value฀of฀30%฀investment฀retained฀((18฀+฀5)฀฀40%)฀ ฀ 9.2฀
Less:฀ share฀of฀consolidated฀carrying฀amount฀when฀control฀lost:฀฀ ฀
฀ net฀assets฀ 14฀
฀ goodwill฀ 2฀ ฀
฀ Less฀non-controlling฀interests฀ ฀฀(3.9)฀฀
฀ ฀ ฀(12.1)฀
Loss฀on฀disposal฀ ฀฀฀(2.9)฀
For฀the฀final฀four฀months฀of฀20X2,฀Mago฀will฀be฀equity฀accounted฀as฀an฀associate.฀
฀ ฀
฀
฀
฀ ฀
฀ 703฀

lOMoARcPSD|6256454
3฀Group฀reorganisations฀
A฀group฀may฀restructure฀itself฀internally฀to฀achieve฀a฀desired฀effect.฀Companies฀move฀around฀within฀
the฀group฀but฀typically:฀
฀ The฀ultimate฀parent฀remains฀the฀same฀
฀ No฀cash฀leaves฀the฀group฀
฀ There฀is฀no฀change฀in฀non-controlling฀interests.฀
In฀substance,฀the฀group฀has฀remained฀the฀same฀so฀there฀is฀no฀impact฀on฀the฀consolidated฀financial฀
statements.฀However,฀the฀accounts฀of฀the฀individual฀entities฀within฀the฀group฀will฀be฀affected.฀
Group฀reorganisation฀
A฀Group฀is฀made฀up฀of฀a฀parent,฀A฀and฀two฀wholly-owned฀subsidiaries,฀B฀and฀C.฀The฀investments฀in฀
B฀and฀C฀are฀carried฀at฀their฀cost฀in฀A's฀separate฀financial฀statements.฀
The฀separate฀and฀group฀financial฀statements฀as฀at฀31฀December฀20X1฀(before฀the฀restructuring)฀are฀
as฀follows:฀
฀ A B C Group฀
฀ $m $m $m $m฀
Property,฀plant฀and฀equipment฀ ฀1,000฀ ฀500฀ ฀100฀ ฀ 1,600 ฀
Goodwill฀(re฀B)฀ 50฀
Investment฀in฀B฀ ฀450฀ ฀
Investment฀in฀C฀ 20 ฀
Current฀assets฀ ฀ ฀฀600 ฀ ฀300฀ ฀ ฀50฀ ฀ ฀฀฀950฀
฀ ฀ 2,070 ฀ ฀800฀ ฀150฀ ฀ 2,600 ฀
฀ ฀
Share฀capital฀ ฀200฀ ฀100฀ ฀20฀ ฀ 200 ฀
Reserves฀ ฀1,470฀ ฀500฀ ฀ ฀90฀ ฀1,760฀
฀ ฀1,670฀ ฀600฀ ฀110฀ ฀1,960฀
Liabilities฀ ฀ ฀฀400฀ ฀200฀ ฀ ฀40฀ ฀฀฀฀640฀
฀ ฀2,070฀ ฀800฀ ฀150฀ ฀2,600฀
฀
On฀31฀December฀20X1฀A฀decides฀to฀transfer฀its฀investment฀in฀C฀to฀B฀and฀therefore฀create฀a฀฀
sub-group.฀The฀transfer฀is฀to฀be฀effected฀by฀B฀acquiring฀C฀for฀$120m,฀with฀the฀balance฀to฀remain฀
outstanding฀on฀the฀intercompany฀account฀until฀such฀point฀as฀A฀decides฀it฀should฀be฀settled.฀The฀fair฀
value฀of฀C's฀net฀assets฀is฀equivalent฀to฀its฀book฀value.฀
A฀acquired฀B฀for฀$450m฀when฀the฀fair฀value฀of฀its฀net฀assets฀(equivalent฀to฀book฀value฀at฀the฀time)฀
was฀$400m฀(share฀capital฀$100m฀+฀reserves฀$300m).฀A฀originally฀set฀up฀C,฀contributing฀$20m฀of฀
share฀capital.฀
Required฀
Show฀the฀financial฀statements฀of฀A,฀B฀and฀C฀immediately฀after฀the฀reconstruction,฀showing฀the฀
calculation฀of฀group฀reserves.฀
704฀

lOMoARcPSD|6256454
฀
Solution฀
Group฀structure฀
฀
฀
฀฀฀฀Before฀ After฀
฀
฀ Shareholders฀ Shareholders
฀
฀ A฀ A
฀ 100%฀ 100%฀ 100%฀
฀
฀ B฀ C฀ B
฀ 100%฀
฀
C฀
฀
฀
After฀the฀restructuring฀
฀ B฀has฀
purchased฀ Consideration฀
฀ investment฀in฀ transferred฀of฀450฀
A฀has฀sold฀ C฀from฀A฀ less฀net฀assets฀of฀400
฀ investment฀in฀C฀
so฀investment฀of฀
฀ 20฀removed฀ A B C Group฀
฀ $m $m $m $m฀ Investments฀
Property,฀plant฀and฀equipment฀ ฀1,000฀ + ฀500฀ + ฀100฀ = ฀1,600฀ in฀group฀
companies฀
Goodwill฀(re฀B)฀ 50฀ cancel฀on฀
Investment฀in฀B฀ ฀450฀ ฀ consolidation
Investment฀in฀C฀ – 120 ฀ 720฀+฀

Current฀assets฀(A:฀600฀+฀120)฀ ฀ ฀฀720฀ ฀300฀ ฀ ฀50฀ ฀฀฀฀950฀ 300฀+฀50฀
฀Intragroup฀receivable฀in฀A’s฀ –฀฀120฀
฀2,170฀ ฀920฀ ฀150฀ ฀2,600฀ intragroup
฀books฀for฀sales฀proceeds฀of฀ ฀
฀120฀owed฀by฀B฀ ฀ Parent฀only
฀ ฀
Share฀capital฀ ฀200฀ ฀100฀ ฀20฀ ฀200฀
See฀
Reserves฀(A:฀1,470฀+฀(120฀–฀20)฀profit)฀ ฀1,570฀ ฀500฀ ฀ ฀90฀ ฀1,760฀฀ consolidated฀
฀ reserves฀
฀1,770฀ ฀600฀ ฀110฀ ฀1,960฀ working฀
Liabilities฀(B:฀200฀+฀120)฀ ฀ ฀฀400฀ ฀320฀ ฀ ฀40฀ ฀฀฀฀640฀
฀ ฀2,170฀ ฀920฀ ฀150฀ ฀2,600฀ 400฀+฀320฀+฀
40฀–฀120฀
฀ intragroup฀
Intragroup฀payable฀in฀ Profit฀is฀calculated฀as฀
฀ B’s฀books฀for฀sales฀ sales฀proceeds฀of฀120฀
proceeds฀owed฀to฀A฀ less฀carrying฀amount฀of฀
investment฀of฀20฀
฀ 705฀

lOMoARcPSD|6256454
Double฀entries฀are:฀
In฀A's฀financial฀statements:฀ In฀B's฀financial฀statements฀
฀ $m฀฀฀฀$m฀ $m฀ ฀฀฀$m฀
DEBIT฀฀฀฀Current฀assets฀(intragroup)฀ 120฀ DEBIT฀฀฀฀Investment฀in฀C฀ 120฀
CREDIT฀฀Investment฀in฀C฀ ฀฀฀฀฀฀฀฀20฀ CREDIT฀฀Liabilities฀(intragroup)฀ ฀฀฀฀฀฀฀฀฀ ฀฀120฀
CREDIT฀฀Profit฀or฀loss฀ ฀฀฀฀฀฀฀฀100฀
Calculation฀of฀consolidated฀reserves:฀
฀ ฀ A฀฀ B฀฀ C฀฀฀
฀ ฀$m฀ ฀$m฀ ฀$m฀
Per฀separate฀financial฀statements฀ ฀1,570฀ ฀500฀ ฀90฀
Unrealised฀profit฀on฀transfer฀of฀C฀(120฀– 20)฀ ฀(100)฀ ฀
Reserves฀at฀acquisition฀฀ ฀ ฀฀(300)฀ ฀฀฀฀(0)฀
฀ ฀200฀ ฀90฀
Share฀of฀post-acquisition฀reserves:฀ ฀ ฀ ฀
฀฀฀฀B฀(200฀฀100%)฀ ฀ ฀฀฀200 ฀ ฀ ฀
฀฀฀฀C฀(90฀฀100%)฀ ฀ ฀฀฀฀90 ฀ ฀
฀ ฀฀1,760฀ ฀ ฀
฀
฀
In฀the฀consolidated฀financial฀statements฀the฀unrealised฀profit฀on฀transfer฀of฀C฀must฀be฀eliminated.฀
The฀intragroup฀balance฀of฀$120m฀must฀also฀be฀eliminated฀from฀consolidated฀current฀assets฀and฀
liabilities.฀
฀ ฀
706฀

lOMoARcPSD|6256454
12: Changes in group structures: disposals and group reorganisations
707

lOMoARcPSD|6256454
฀
฀
฀
฀
฀
฀
708฀

lOMoARcPSD|6256454
Non-current assets held

for sale and
discontinued operations
Supplementary reading
709

lOMoARcPSD|6256454
1฀Discontinued฀operations฀
Activity฀1:฀Comprehensive฀example฀ Exam฀standard฀for฀30฀marks฀ ฀
Balboa,฀a฀public฀limited฀company,฀has฀acquired฀two฀subsidiaries฀during฀the฀accounting฀period.฀The฀
details฀of฀the฀acquisitions฀are฀as฀follows:฀
฀ ฀ Ordinary Fair฀value ฀ Ordinary
฀ ฀ share Reserves of฀net ฀ share฀capital
฀ ฀ capital at assets฀at Cost฀of฀ of฀$1
Company฀ Date฀of฀acquisition of฀$1 acquisition acquisition investment฀ acquired
฀ ฀ $m $m $m $m฀ $m
Borbon฀฀ 1฀May฀20X4฀ 500฀ 750 1,400฀ 1,332฀฀ 450
Carbonell฀฀ 1฀October฀20X4฀ 300฀ 180฀ 640฀ 476฀฀ 210
The฀ draft฀ statements฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ year฀ ended฀
31฀December฀20X4฀are:฀
฀ ฀Balboa฀ ฀Borbon฀ ฀Carbonell฀
฀ ฀$m฀ ฀$m฀ ฀$m฀
Revenue฀฀ ฀4,700฀฀ ฀3,300฀฀ ฀1,800฀
Cost฀of฀sales฀฀ ฀(3,700) ฀ ฀(2,400)฀฀ ฀(1,400)฀
Gross฀profit฀฀ ฀1,000฀฀ ฀900฀฀ ฀400฀
Other฀income฀฀ ฀150฀฀ ฀30฀฀ ฀–฀
Distribution฀costs฀฀ ฀(270)฀฀ ฀(210)฀฀ ฀(180)฀
Administrative฀expenses฀฀ ฀(350)฀฀ ฀(270)฀฀ ฀(130)฀
Finance฀costs฀฀ ฀ (110)฀฀ ฀ (60)฀฀ ฀฀฀฀(30)฀
Profit฀before฀tax฀฀ ฀420฀฀ ฀390฀฀ ฀60฀
Income฀tax฀expense฀฀ ฀ (140)฀฀ ฀ (120)฀฀ ฀฀฀฀(20)฀
Profit฀for฀the฀year฀฀ ฀ 280 ฀ ฀ 270฀฀ ฀฀฀฀40฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀ 90฀฀ ฀ 60฀฀ ฀฀฀฀฀40฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀ 370฀฀ ฀ 330฀฀ ฀฀฀฀฀80฀
The฀following฀information฀is฀relevant฀to฀the฀preparation฀of฀the฀group฀financial฀statements.฀
(a)฀ The฀ investment฀ in฀ Borbon฀ was฀ acquired฀ as฀ part฀ of฀ a฀ growth฀ strategy฀ of฀ the฀ group.฀ The฀
difference฀ between฀ fair฀ value฀ and฀ book฀ value฀ on฀ acquisition฀ relates฀ to฀ properties,฀ with฀ an฀
average฀remaining฀useful฀life฀of฀10฀years฀at฀the฀date฀of฀acquisition.฀฀Borbon฀made฀a฀dividend฀
payment฀of฀$50m฀on฀20฀October฀20X4฀out฀of฀post฀acquisition฀profits฀and฀this฀is฀included฀in฀
Balboa's฀'other฀income'.฀
(b)฀ Carbonell฀was฀acquired฀exclusively฀with฀a฀view฀to฀sale฀and฀at฀31฀December฀20X4฀meets฀the฀
criteria฀ of฀ being฀ a฀ disposal฀ group.฀ The฀ fair฀ value฀ of฀ Carbonell฀ at฀ 31฀ December฀ 20X4฀ is฀
$710m฀and฀the฀estimated฀selling฀costs฀of฀the฀shareholding฀in฀Carbonell฀are฀$14m.฀
฀ The฀ difference฀ between฀ fair฀ value฀ and฀ book฀ value฀ at฀ acquisition฀ related฀ to฀ land฀ held฀ by฀
Carbonell.฀฀Carbonell฀did฀not฀pay฀any฀dividends฀in฀the฀post-acquisition฀period.฀
(c)฀ At฀1฀January฀20X4,฀Balboa฀held฀an฀investment฀in฀the฀quoted฀loan฀notes฀of฀another฀company,฀
correctly฀ carried฀ at฀ amortised฀ cost฀ of฀ $113m,฀ which฀ it฀ intended฀ to฀ hold฀ to฀ its฀ maturity฀ date,฀
31฀December฀ 20X4,฀ when฀ they฀ were฀ to฀ be฀ redeemed฀ at฀ $115m.฀ The฀ loan฀ notes฀ had฀ an฀
effective฀ interest฀ rate฀ of฀ 5.5%.฀ In฀ previous฀ years,฀ no฀ allowance฀ for฀ credit฀ losses฀ had฀ been฀
recognised฀ as฀ the฀ credit฀ risk฀ of฀ the฀ holder฀ of฀ the฀ loan฀ notes฀ was฀ considered฀ negligible.฀฀
However,฀ on฀ 1฀ January฀ 20X4฀ the฀ company฀ received฀ a฀ letter฀ indicating฀ the฀ investee฀ was฀
suffering฀ financial฀ difficulties฀ and฀ was฀ expected฀ to฀ enter฀ liquidation.฀ ฀ The฀ directors฀ believed฀
this฀to฀be฀objective฀evidence฀of฀impairment.฀The฀letter฀indicated฀that฀the฀bond฀would฀be฀repaid฀
710฀

lOMoARcPSD|6256454
on฀its฀original฀repayment฀date฀31฀December฀20X4,฀but฀that฀no฀further฀interest฀would฀be฀paid.฀
This฀is฀indeed฀what฀happened.฀Lifetime฀credit฀losses฀on฀the฀loan฀notes฀at฀1฀January฀20X4฀were฀
estimated฀to฀be฀$4฀million.฀Other฀than฀recording฀the฀cash฀received฀on฀31฀December฀20X4,฀no฀
further฀adjustments฀have฀been฀made.฀The฀letter฀was฀not฀considered฀an฀adjusting฀event฀after฀the฀
reporting฀period฀affecting฀the฀20X3฀financial฀statements.฀
(d)฀ No฀ adjustments฀ have฀ yet฀ been฀ made฀ for฀ Balboa's฀ defined฀ benefit฀ pension฀ plan;฀ details฀ as฀
follows:฀
฀ ฀ $m฀
฀ Present฀value฀of฀obligation฀at฀31฀December฀20X3฀ 150฀
฀ Fair฀value฀of฀plan฀assets฀at฀31฀December฀20X3฀ 175฀
฀ Market฀yield฀on฀high฀quality฀corporate฀bonds฀ 4%฀
฀ Current฀service฀cost฀ 12฀
On฀ 31฀ December฀ 20X4,฀ given฀ the฀ surplus฀ on฀ the฀ plan,฀ the฀ plan฀ rules฀ were฀ changed฀ to฀
improve฀benefits.฀This฀resulted฀in฀an฀additional฀liability฀of฀$3m฀from฀that฀date.฀
The฀net฀pension฀cost฀is฀treated฀as฀a฀cost฀of฀sale.฀
Remeasurement฀of฀the฀defined฀benefit฀plan฀obligation฀and฀assets฀at฀the฀year฀end฀generated฀a฀
net฀gain฀$5m.฀
(e)฀ Calculations฀conducted฀at฀the฀year฀end฀showed฀the฀recoverable฀amount฀(based฀on฀continuing฀
use)฀ of฀ Borbon฀ to฀ be฀ $1,610m฀ at฀ 31฀ December฀ 20X4.฀ Impairment฀ losses฀ on฀ goodwill฀ are฀
charged฀to฀cost฀of฀sales.฀
฀ Balboa฀ elected฀ to฀ measure฀ the฀ non-controlling฀ interests฀ of฀ both฀ subsidiaries฀ at฀ the฀ date฀ of฀
acquisition฀ at฀ the฀ proportionate฀ share฀ of฀ the฀ fair฀ value฀ of฀ the฀ acquiree's฀ identifiable฀ assets฀
acquired฀and฀liabilities฀assumed.฀
(f)฀ Assume฀that฀profits฀accrue฀evenly฀throughout฀the฀year฀and฀ignore฀any฀taxation฀effects.฀
Required฀
Prepare฀ a฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ Balboa฀
Group฀for฀the฀year฀ended฀31฀December฀20X4฀in฀accordance฀with฀International฀Financial฀Reporting฀
Standards.฀฀฀
Notes฀to฀the฀financial฀statements฀are฀not฀required.฀
The฀ profit฀ and฀ total฀ comprehensive฀ income฀ figures฀ attributable฀ to฀ owners฀ of฀ the฀ parent฀ and฀
attributable฀ to฀ non-controlling฀ interests฀ need฀ not฀ be฀ subdivided฀ into฀ continuing฀ and฀ discontinued฀
operations.฀
Ignore฀the฀time฀value฀of฀money฀in฀part฀(c).฀
฀ 711฀

lOMoARcPSD|6256454
Solution฀
BALBOA฀GROUP฀
฀ ฀$m฀฀฀฀
Continuing฀operations฀
Revenue฀
Cost฀of฀sales฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
Gross฀profit฀
Other฀income฀
Distribution฀costs฀
Administrative฀expenses
Finance฀income฀
Finance฀costs฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
Profit฀before฀tax฀
Income฀tax฀expense฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
Profit฀for฀the฀year฀from฀continuing฀operations ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀
Discontinued฀operations
Profit฀for฀the฀year฀from฀discontinued฀operations ฀฀฀฀฀฀฀฀฀฀฀ ฀
PROFIT฀FOR฀THE฀YEAR
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀฀฀฀฀฀฀฀฀฀฀ ฀
Total฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀
฀฀Owners฀of฀the฀parent฀ ฀฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀
฀฀Owners฀of฀the฀parent฀ ฀฀
฀฀Non-controlling฀interests฀(W2)฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀
฀
712฀

lOMoARcPSD|6256454
Workings฀
฀
฀
฀
฀
฀
฀
฀
Timeline฀
฀
฀ 1.1.X4฀ 1.5.X4฀ 1.10.X4฀ 31.12.X4฀
฀
฀
฀
฀
฀
฀
฀ Profit฀for฀the฀year Total฀comp.฀income
฀ Borbon Carbonell Borbon฀ Carbonell
฀ $m
฀฀ ฀ ฀฀$m ฀ ฀฀ $m฀฀ ฀฀$m ฀
PFY/TCI฀per฀question฀ ฀
฀ ฀
฀ ฀฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀ ฀
฀ ฀฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀ ฀
฀ ฀฀ %฀ ฀฀ %฀ ฀฀฀฀฀฀฀฀%฀ ฀฀฀฀ %฀
฀ ฀฀฀
฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀
3฀ Dividend฀payment฀by฀Borbon฀
฀
฀
฀
฀ 713฀

lOMoARcPSD|6256454
4฀ Loan฀note฀asset฀held฀by฀Balboa฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
5฀ Defined฀benefit฀pension฀plan฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
6฀ Fair฀value฀adjustments฀–฀Borbon฀
฀ At฀ Additional฀ At฀year฀
฀ acquisition฀ depreciation฀ end฀
฀ ฀฀฀$m ฀฀ ฀฀฀$m฀฀฀ ฀฀฀฀$m฀฀
฀Properties฀ ฀ ฀ ฀ ฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀ ฀ ฀ ฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
7฀ Goodwill฀
฀ Borbon฀ Carbonell
฀ ฀฀฀$m฀฀฀ ฀฀฀฀$m฀฀฀
Consideration฀transferred฀ ฀
Non-controlling฀interests฀ ฀
Fair฀value฀of฀net฀assets฀at฀acq'n฀ ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀ ฀
฀
฀ ฀
714฀

lOMoARcPSD|6256454
8฀ Impairment฀losses฀
฀ Borbon฀ Carbonell
฀ ฀฀฀฀$m฀฀฀ ฀฀฀฀$m฀ ฀
'Notional'฀goodwill฀ ฀
Carrying฀amount฀of฀net฀assets฀(W9)/(W10)฀ ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀
Recoverable฀amount฀ ฀
Fair฀value฀less฀costs฀to฀sell฀ ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
Impairment฀loss:฀gross฀ ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
฀ ฀
Impairment฀loss฀recognised:฀all฀allocated฀to฀goodwill ฀ ฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀ ฀
9฀ Carrying฀amount฀of฀net฀assets฀at฀31฀December฀20X4฀(Borbon)฀
฀ ฀฀฀฀$m฀ ฀฀
฀
฀
฀
฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀ ฀
10฀ Carrying฀amount฀of฀net฀assets฀at฀31฀December฀20X4฀(Carbonell)฀
฀ ฀฀฀฀$m฀฀ ฀
฀
฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀฀฀฀฀฀฀฀฀ ฀
฀ ฀
฀ 715฀

lOMoARcPSD|6256454
฀ Activity฀answer฀
Activity฀1:฀Comprehensive฀example฀
BALBOA฀GROUP฀
฀ ฀$m฀
Continuing฀operations฀
Revenue฀(4,700฀+฀(3,300฀฀8/12))฀ ฀66,900฀
Cost฀of฀sales฀(3,700฀+฀(2,400฀฀8/12)฀+฀(W5)฀14฀+฀(W6)฀10฀+฀(W8)฀27)฀ ฀(5,351)฀
Other฀income฀(150฀+฀(30฀฀8/12)฀–฀(W3)฀45)฀ ฀125฀
Distribution฀costs฀(270฀+฀(210฀฀8/12))฀ ฀ ฀(410) ฀
Administrative฀expenses฀(350฀+฀(270฀ 8/12))฀ ฀ ฀(530) ฀
Finance฀income฀(W4)฀ ฀ 6฀
Finance฀costs฀(110฀+฀(60฀฀8/12)฀+฀(W4)฀4)฀ ฀฀฀฀(154)฀
Income฀tax฀expense฀(140฀+฀(120฀฀8/12))฀ ฀฀฀฀(220)฀
Profit฀for฀the฀year฀from฀continuing฀operations฀ ฀฀฀฀366฀
Profit฀for฀the฀year฀from฀discontinued฀operations฀(40฀ 3/12)฀– (W8)฀7)฀ ฀ ฀฀฀฀฀ 3 ฀
PROFIT฀FOR฀THE฀YEAR฀ ฀ 369 ฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀(90฀+฀(60฀ 8/12)฀+฀(40฀฀ ฀฀฀145฀
3/12)฀+฀(W5)฀5)฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀514฀
฀
฀฀Owners฀of฀the฀parent฀(β)฀ ฀349฀
฀฀Non-controlling฀interests฀(W2)฀ ฀ ฀฀฀฀฀20฀
฀ ฀ ฀฀369 ฀
฀฀Owners฀of฀the฀parent฀(β)฀ ฀487฀
฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀27฀
฀ ฀฀฀514฀
฀
฀ ฀
716฀

lOMoARcPSD|6256454
Workings฀
฀ Balboa฀
฀ 1.5.X4฀ 1.10.X4฀
450 210
฀ =฀90%฀ ฀=฀70%฀
500 300
฀ Borbon฀ Carbonell฀
Carbonell฀is฀a฀discontinued฀operation฀(IFRS฀5).฀
Timeline฀
฀
1.1.X4฀ 1.5.X4 1.10.X4฀ 31.12.X4
฀
฀
SPLOCI฀
Balboa฀(parent)฀– all฀year
฀
฀ Borbon฀– owned฀for฀8/12฀of฀year฀
฀
Carbonell฀฀3/12฀
฀
(discontinued)฀
฀ Profit฀for฀the฀year Total฀comp.฀income
฀ ฀฀Borbon฀ ฀฀Carbonell฀ ฀฀Borbon฀ ฀฀Carbonell฀
฀ ฀฀$m฀ ฀฀$m฀ ฀฀$m฀ ฀฀$m฀
PFY/TCI฀per฀question฀ ฀ ฀฀180฀ ฀฀220฀
฀ (270฀฀8/12)/(330฀฀8/12)
฀฀฀ (40฀฀3/12)/(80฀฀3/12)฀ ฀฀10฀ ฀ ฀฀20฀
Less฀fair฀value฀depreciation฀(W6)฀ ฀฀ (10)฀ ฀ ฀ ฀฀฀฀(10)฀ ฀ ฀
฀ ฀฀ 170฀ 10
฀฀ ฀ ฀฀฀210฀ 20
฀฀ ฀
฀ ฀฀ 10%฀ ฀฀ 30%฀ ฀฀฀10%฀ ฀฀ 30%฀
฀ ฀฀17฀ ฀฀3฀ ฀฀21฀ ฀฀6฀
฀ ฀
฀ 20 27฀
3฀ Dividend฀payment฀by฀Borbon฀
Amount฀received฀by฀Balboa฀=฀$50m฀฀90%฀=฀$45m.฀
Not฀included฀in฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income.฀
4฀ Loan฀note฀asset฀held฀by฀Balboa฀
At฀1.1.X4฀
Stage฀3฀has฀now฀been฀reached฀as฀there฀is฀objective฀evidence฀of฀impairment.฀฀Therefore,฀an฀
allowance฀for฀lifetime฀credit฀losses฀of฀$4฀million฀needs฀to฀be฀made฀in฀the฀statement฀of฀financial฀
position฀with฀a฀corresponding฀expense฀in฀profit฀or฀loss฀(finance฀costs).฀
฀ 717฀

lOMoARcPSD|6256454
฀ ฀$m฀
Carrying฀amount฀of฀loan฀at฀1.1.X4฀(amortised฀cost)฀ ฀113฀
Allowance฀for฀credit฀losses฀at฀1.1.X4฀ ฀฀฀฀฀(4)฀
Net฀carrying฀amount฀of฀loan฀at฀1.1.X4฀ ฀109฀
At฀31.12.X4฀
As฀ Stage฀ 3฀ has฀ been฀ reached,฀ IFRS฀ 9฀ requires฀ effective฀ interest฀ to฀ be฀ calculated฀ on฀ the฀
carrying฀amount฀net฀of฀the฀allowance฀for฀credit฀losses;฀ie฀$109฀million.฀
The฀ net฀ carrying฀ amount฀ at฀ 31.12.X4฀ will฀ then฀ be฀ cleared฀ to฀ zero฀ through฀ the฀ repayment฀ of฀
the฀principal฀by฀the฀loan฀note฀holder.฀
฀ ฀$m฀
Gross฀carrying฀amount฀of฀loan฀1.1.X4฀ ฀113฀
Effective฀interest฀income฀(109฀฀5.5%)฀ ฀฀฀฀฀6฀
Gross฀carrying฀amount฀at฀31.12.X4฀ ฀119฀
Allowance฀for฀credit฀losses฀at฀31.12.X4฀ ฀฀฀฀฀(4)฀
Net฀carrying฀amount฀at฀31.12.X4 ฀115฀
5฀ Defined฀benefit฀pension฀plan฀
Amount฀to฀record฀in฀cost฀of฀sales: $m
Current฀service฀cost฀ 12
Past฀service฀cost ฀ 3฀
Net฀interest฀income฀($175m฀–฀$150m)฀ 4%) ฀ (1)฀
฀ ฀14฀
The฀net฀remeasurements฀of฀$5m฀are฀recognised฀in฀other฀comprehensive฀income.฀
6฀ Fair฀value฀adjustments฀–฀Borbon฀
฀ At฀ Additional฀ At฀year฀฀
฀ acquisition฀ depreciation*฀ end฀
฀ ฀$m฀ ฀$m฀ $m
฀ ฀
Properties฀(1,400฀–฀500฀–฀750)฀ ฀150฀ ฀ (10)฀ ฀140฀
฀ ฀150฀ ฀ (10)฀ ฀140฀
*Additional฀depreciation฀=฀$150m/10฀=฀$15m฀per฀annum฀฀8/12฀=฀$10m฀
7฀ Goodwill฀
฀ ฀Borbon฀ ฀Carbonell฀ ฀
฀ ฀$m฀ ฀$m฀ ฀
Consideration฀transferred฀ ฀1,332฀ ฀476฀ ฀
Non-controlling฀interests฀(1,400฀ 10%) ฀140฀ ฀
฀ (640฀฀30%)฀ ฀192฀
Fair฀value฀of฀net฀assets฀at฀acq'n฀ ฀(1,400)฀ ฀(640)฀ ฀
฀ ฀ 72฀ ฀ 28฀ ฀
฀
฀ ฀
718฀

lOMoARcPSD|6256454
8฀ Impairment฀losses฀ As฀only฀partial฀goodwill฀is฀recognised,฀it฀
must฀be฀grossed฀up฀for฀the฀impairment฀test฀to฀
฀ compare฀correctly฀fair฀value฀less฀costs฀to฀sell฀ ฀
฀ (which฀is฀100%)฀with฀100%฀of฀the฀subsidiary Borbon฀ ฀Carbonell฀
฀ ฀$m฀ ฀$m฀
'Notional'*฀goodwill฀((W7)฀72฀ 100%/90%)฀((W7)฀28฀ ฀80฀ ฀40฀
100%/70%)฀
Carrying฀amount฀of฀net฀assets฀(W9)/(W10)฀ ฀1,560฀ ฀660฀
฀ ฀1,640฀ ฀700฀
Recoverable฀amount฀ ฀(1,610)฀ ฀
Fair฀value฀less฀costs฀to฀sell฀(710฀– (14฀ 100%/70%))฀ ฀ ฀ ฀(690)฀
Impairment฀loss:฀gross฀ Grossed฀up฀as฀14฀relates฀to฀ ฀฀฀฀฀฀30฀ ฀฀฀10฀
70%฀share฀of฀Carbonell฀
Impairment฀loss฀recognised:฀all฀allocated฀to฀goodwill฀ ฀ ฀
Grossed฀down฀ ฀฀฀(30฀฀90%)/(10฀฀70%)฀ ฀ 27฀ ฀ ฀฀฀฀7฀
again฀as฀
elected฀to฀show฀ *฀ Where฀ non-controlling฀ interests฀ are฀ measured฀ at฀ the฀ date฀ of฀ acquisition฀ at฀ the฀
only฀partial฀ proportionate฀share฀of฀the฀fair฀value฀of฀the฀acquiree's฀identifiable฀assets฀acquired฀and฀
goodwill฀
liabilities฀ assumed฀ (ie฀ not฀ at฀ fair฀ value),฀ part฀ of฀ the฀ calculation฀ of฀ the฀ recoverable฀
amount฀ of฀ the฀ CGU฀ relates฀ to฀ the฀ unrecognised฀ non-controlling฀ interest฀ share฀ of฀ the฀
goodwill.฀
For฀the฀purpose฀of฀calculating฀the฀impairment฀loss,฀the฀carrying฀amount฀of฀the฀CGU฀is฀
therefore฀notionally฀ adjusted฀to฀include฀the฀non-controlling฀interests฀in฀the฀goodwill฀
by฀grossing฀it฀up.฀
The฀ resulting฀ impairment฀ loss฀ calculated฀ is฀ only฀ recognised฀ to฀ the฀ extent฀ of฀ the฀
parent's฀share.฀
This฀ adjustment฀ is฀ not฀ required฀ where฀ non-controlling฀ interests฀ are฀ measured฀ at฀ fair฀
value฀at฀acquisition.฀
9฀ Carrying฀amount฀of฀net฀assets฀at฀31฀December฀20X4฀(Borbon)฀
฀ ฀฀$m฀
Fair฀value฀of฀identifiable฀assets฀and฀liabilities฀at฀acquisition฀(1฀May฀20X4)฀ ฀฀1,400฀
Post฀acquisition฀TCI฀(330฀฀8/12)฀ ฀฀220฀
Post฀acquisition฀dividends฀paid฀(note฀(a))฀ ฀฀ ฀฀฀฀(50)฀
Less฀depreciation฀of฀fair฀value฀adjustment฀(W6)฀ ฀฀ ฀฀฀฀(10)฀
฀ ฀1,560฀
10฀ Carrying฀amount฀of฀net฀assets฀at฀31฀December฀20X4฀(Carbonell)฀
฀ ฀$m฀
Fair฀value฀of฀identifiable฀assets฀and฀liabilities฀at฀acquisition฀(1฀October฀20X4)฀ 640
Post฀acquisition฀TCI฀(80฀฀3/12)฀ ฀฀฀20฀
฀ ฀660฀
฀ 719฀

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720฀

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฀
฀
฀
Joint฀arrangements
฀
฀
฀
and฀group฀disclosures
฀
฀
฀
฀ ฀
฀ 721฀

lOMoARcPSD|6256454
1฀ Joint฀arrangements฀
1.1฀Contractual฀arrangements฀
The฀existence฀of฀a฀contractual฀agreement฀distinguishes฀a฀joint฀arrangement฀from฀an฀investment฀in฀an฀
associate.฀If฀there฀is฀no฀contractual฀arrangement,฀then฀a฀joint฀arrangement฀does฀not฀
exist.฀
It฀is฀the฀contractual฀arrangement฀which฀establishes฀joint฀control฀over฀the฀joint฀venture,฀so฀that฀
no฀single฀party฀can฀control฀the฀activity฀of฀the฀joint฀venture฀on฀its฀own.฀
Contractual฀ arrangements฀ can฀ be฀ evidenced฀ in฀ several฀ ways.฀ An฀ enforceable฀ contractual฀
arrangement฀ is฀ often,฀ but฀ not฀ always,฀ in฀ writing,฀ usually฀ in฀ the฀ form฀ of฀ a฀ contract฀ or฀
documented฀ discussions฀ between฀ the฀ parties.฀ Statutory฀ mechanisms฀ can฀ also฀ create฀ enforceable฀
arrangements,฀ either฀ on฀ their฀ own฀ or฀ in฀ conjunction฀ with฀ contracts฀ between฀ the฀ parties฀ (IFRS฀11:฀
para.฀B2).฀
The฀contractual฀arrangement฀sets฀out฀the฀terms฀upon฀which฀the฀parties฀participate฀in฀the฀activity฀that฀
is฀the฀subject฀of฀the฀arrangement฀(IFRS฀11:฀para.฀B4).฀
The฀contractual฀arrangement฀generally฀deals฀with฀such฀matters฀as฀(IFRS฀11:฀para.฀B4):฀
(a)฀ The฀purpose,฀activity฀and฀duration฀of฀the฀joint฀arrangement;฀
(b)฀ How฀the฀members฀of฀the฀board฀of฀directors,฀or฀equivalent฀governing฀body,฀of฀the฀joint฀
arrangement,฀are฀appointed;฀
(c)฀ The฀ decision-making฀ process:฀ the฀ matters฀ requiring฀ decisions฀ from฀ the฀ parties,฀ the฀
voting฀rights฀of฀the฀parties฀and฀the฀required฀level฀of฀support฀for฀those฀matters;฀
(d)฀ The฀capital฀or฀other฀contributions฀required฀of฀the฀parties;฀and฀
(e)฀ How฀ the฀ parties฀ share฀ assets,฀ liabilities,฀ revenues,฀ expenses฀ or฀ profit฀ or฀ loss฀
relating฀to฀the฀joint฀arrangement.฀
The฀ terms฀ of฀ the฀ contractual฀ arrangement฀ are฀ key฀ to฀ deciding฀ whether฀ the฀ arrangement฀ is฀ a฀ joint฀
venture฀or฀joint฀operation.฀฀IFRS฀11฀includes฀a฀table฀of฀issues฀to฀consider,฀and฀explains฀the฀influence฀
of฀ a฀ range฀ of฀ points฀ that฀ could฀ be฀ included฀ in฀ the฀ contract฀ (IFRS฀11:฀ para.฀B27).฀ The฀ table฀ is฀
summarised฀below.฀
฀ Joint฀operation฀ Joint฀venture฀
The฀terms฀of฀ The฀parties฀to฀the฀joint฀arrangement฀have฀ The฀parties฀to฀the฀joint฀

the฀contractual฀ rights฀to฀the฀assets,฀and฀obligations฀for฀the฀ arrangement฀have฀rights฀to฀the฀
arrangement฀ liabilities,฀relating฀to฀the฀arrangement.฀ net฀assets฀of฀the฀arrangement฀
(ie฀it฀is฀the฀separate฀vehicle,฀not฀
the฀parties,฀that฀has฀rights฀to฀the฀
assets,฀and฀obligations฀for฀the฀
liabilities).฀
Rights฀to฀assets฀ The฀parties฀to฀the฀joint฀arrangement฀share฀ The฀assets฀brought฀into฀the฀

all฀interests฀(eg฀rights,฀title฀or฀ownership)฀in฀ arrangement฀or฀subsequently฀
the฀assets฀relating฀to฀the฀arrangement฀in฀a฀ acquired฀by฀the฀joint฀
specified฀proportion฀(eg฀in฀proportion฀to฀ arrangement฀are฀the฀
the฀parties'฀ownership฀interest฀in฀the฀ arrangement's฀assets.฀The฀
arrangement฀or฀in฀proportion฀to฀the฀activity฀ parties฀have฀no฀interests฀(ie฀no฀
carried฀out฀through฀the฀arrangement฀that฀is฀ rights,฀title฀or฀ownership)฀in฀the฀
directly฀attributed฀to฀them).฀ assets฀of฀the฀arrangement.฀
722฀

lOMoARcPSD|6256454
Obligations฀for฀ The฀parties฀share฀all฀liabilities,฀obligations,฀ The฀joint฀arrangement฀is฀liable฀

liabilities฀ costs฀and฀expenses฀in฀a฀specified฀ for฀the฀debts฀and฀obligations฀of฀
proportion฀(eg฀in฀proportion฀to฀their฀ the฀arrangement.฀
ownership฀interest฀in฀the฀arrangement฀
or฀in฀proportion฀to฀the฀activity฀carried฀out฀ The฀parties฀are฀liable฀to฀the฀
through฀the฀arrangement฀that฀is฀directly฀ arrangement฀only฀to฀the฀extent฀
attributed฀to฀them).฀ of:฀
฀ Their฀respective฀investments฀
in฀the฀arrangement;฀
฀ Their฀respective฀obligations฀
to฀contribute฀any฀unpaid฀or฀
additional฀capital฀to฀the฀
arrangement;฀or฀
฀ Both.฀
The฀parties฀to฀the฀joint฀arrangement฀are฀ Creditors฀of฀the฀joint฀
liable฀for฀claims฀by฀third฀parties.฀ arrangement฀do฀not฀have฀rights฀
of฀recourse฀against฀any฀party.฀฀
Revenues,฀ The฀contractual฀arrangement฀establishes฀ The฀contractual฀arrangement฀

expenses,฀ the฀allocation฀of฀revenues฀and฀expenses฀on฀ establishes฀each฀party's฀share฀in฀
profit฀or฀loss฀ the฀basis฀of฀the฀relative฀performance฀of฀ the฀profit฀or฀loss฀relating฀to฀the฀
each฀party฀to฀the฀joint฀arrangement.฀For฀ activities฀of฀the฀arrangement.฀
example,฀the฀contractual฀arrangement฀
might฀establish฀that฀revenues฀and฀expenses฀
are฀allocated฀on฀the฀basis฀of฀the฀capacity฀
that฀each฀party฀uses฀in฀a฀plant฀operated฀
jointly.฀
Guarantees฀ The฀parties฀to฀joint฀arrangements฀are฀often฀required฀to฀provide฀guarantees฀to฀
third฀parties฀that,฀for฀example,฀receive฀a฀service฀from,฀or฀provide฀financing฀
to,฀the฀joint฀arrangement.฀฀The฀provision฀of฀guarantees฀to฀third฀parties,฀or฀the฀
commitment฀by฀the฀parties฀to฀provide฀them,฀does฀not,฀by฀itself,฀determine฀that฀
the฀joint฀arrangement฀is฀a฀joint฀operation.฀฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀ 723฀

lOMoARcPSD|6256454
฀
฀
724฀

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฀
฀
฀
Foreign฀transactions
฀
฀
฀
฀
฀
and฀entities
฀
฀ ฀
฀ 725฀

lOMoARcPSD|6256454
1฀ Functional฀currency฀
1.1฀Changes฀in฀an฀entity's฀functional฀currency฀
The฀ functional฀ currency฀ of฀ an฀ entity฀ reflects฀ the฀ underlying฀ transactions,฀ events฀ and฀ conditions฀ that฀
are฀ relevant฀ to฀ the฀ entity.฀ Accordingly,฀ once฀ the฀ functional฀ currency฀ is฀ determined,฀ it฀ cannot฀ be฀
changed฀ unless฀ there฀ is฀ a฀ change฀ to฀ those฀ underlying฀ transactions,฀ events฀ and฀
conditions.฀(IAS฀21:฀para.฀36)฀
For฀example,฀a฀change฀in฀the฀currency฀that฀mainly฀influences฀the฀sales฀prices฀of฀goods฀and฀services฀
may฀lead฀to฀a฀change฀in฀an฀entity’s฀functional฀currency.฀
The฀ effect฀ of฀ a฀ change฀ in฀ functional฀ currency฀ is฀ accounted฀ for฀ prospectively฀ (IAS฀21:฀
para.฀37):฀
฀ The฀entity฀translates฀all฀items฀into฀the฀new฀functional฀currency฀using฀the฀exchange฀rate฀
at฀the฀date฀of฀the฀change.฀
฀ The฀ resulting฀ translated฀ amounts฀ for฀ non-monetary฀ items฀ are฀ treated฀ as฀ their฀
historical฀cost.฀
฀ Exchange฀ differences฀ arising฀ from฀ the฀ translation฀ of฀ a฀ foreign฀ operation฀ previously฀
recognised฀in฀other฀comprehensive฀income฀are฀not฀reclassified฀from฀equity฀to฀profit฀or฀loss฀
until฀the฀disposal฀of฀the฀operation.฀
฀
฀
฀
726฀

lOMoARcPSD|6256454
฀
฀
Group฀statements฀of
฀
cash฀flows
฀
฀
฀
฀
฀ 727฀
฀

lOMoARcPSD|6256454
1฀Revision฀–฀statement฀of฀cash฀flows฀฀
You฀should฀be฀familiar฀with฀the฀format฀of฀single฀entity฀statements฀of฀cash฀flows฀and฀the฀approach฀to฀
preparing฀them.฀It฀is฀essential฀that฀you฀are฀comfortable฀with฀single฀entity฀cash฀flows฀before฀you฀move฀
on฀to฀groups.฀฀This฀section฀provides฀revision฀of฀single฀entity฀statements฀of฀cash฀flows.฀
1.1฀Importance฀of฀cash฀flows฀
Cash฀ flows฀ are฀ often฀ easier฀ to฀ understand฀ as฀ a฀ concept฀ than฀ accounting฀ profits฀ and฀ can฀ provide฀
useful฀information฀to฀various฀user฀groups฀to฀aid฀their฀understanding฀of฀a฀group.฀฀
Several฀user฀groups฀benefit฀from฀information฀relating฀to฀group฀cash฀flows,฀for฀example:฀
Management
•฀ Cash฀flow฀provides฀more฀relevant฀information฀on฀which฀decisions฀should฀be฀taken.
•฀ Cash฀flow฀accounting฀can฀be฀both฀retrospective฀and฀include฀a฀forecast฀for฀the฀future.฀฀
฀ This฀is฀of฀great฀information฀value฀to฀all฀users฀of฀accounting฀information.
•฀ Forecasts฀can฀subsequently฀be฀monitored฀by฀the฀use฀of฀variance฀statements฀which฀฀ ฀
฀ compare฀actual฀cash฀flows฀against฀the฀forecast.
Users฀of฀cash฀
flow฀information
Shareholders
•฀ Creditors฀(long-฀and฀short-term)฀are฀more฀฀
•฀ Survival฀of฀a฀company฀depends฀on฀its฀ability฀to฀฀ ฀ ฀ ฀ interested฀in฀an฀entity's฀ability฀to฀repay฀them฀than฀฀฀
฀ generate฀cash.฀Cash฀flow฀accounting฀directs฀attention฀฀ ฀ ฀ in฀its฀profitability.฀฀
฀ towards฀this฀critical฀issue.
•฀ Could฀be฀misled฀by฀profit฀accounting;฀eg฀creditors฀฀
•฀ Cash฀flow฀accounting฀can฀be฀better฀for฀stewardship฀฀ ฀ ฀ might฀consider฀that฀a฀profitable฀company฀is฀a฀฀
฀ as฀cash฀flows฀are฀objective฀and฀not฀subject฀to฀manipulation. ฀ going฀concern
•฀ Cash฀flow฀reporting฀provides฀a฀better฀means฀of฀comparing฀฀ For฀example,฀if฀a฀company฀builds฀up฀large฀amounts฀
฀ the฀results฀of฀different฀companies฀than฀traditional฀profit฀฀ ฀ of฀unsold฀inventories฀of฀goods,฀their฀cost฀would฀
฀ reporting. not฀be฀chargeable฀against฀profits,฀but฀cash฀would฀
•฀ It฀helps฀manage฀expectations฀about฀potential฀dividend฀ have฀฀been฀used฀up฀in฀making฀them,฀thus฀weakening฀
payments.฀Shareholders฀might฀believe฀that฀a฀company฀ the฀company's฀liquid฀resources.
could฀pay฀all฀its฀profits฀as฀a฀dividend.฀The฀statement฀of฀
cash฀flows฀helps฀them฀understand฀the฀impact฀of฀cash฀
payments.
฀฀
฀
Cash:฀both฀cash฀on฀hand฀and฀demand฀deposits.฀
Key฀term฀ Cash฀equivalents:฀short-term,฀highly฀liquid฀investments฀that฀are฀readily฀convertible฀to฀known฀
amounts฀of฀cash฀and฀which฀are฀subject฀to฀an฀insignificant฀risk฀of฀changes฀in฀value.฀
Cash฀flows:฀inflows฀and฀outflows฀of฀cash฀and฀cash฀equivalents.฀
Operating฀activities:฀the฀principal฀revenue-producing฀activities฀of฀the฀entity฀and฀other฀activities฀
that฀are฀not฀investing฀or฀financing฀activities.฀
Investing฀activities:฀the฀acquisition฀and฀disposal฀of฀long-term฀assets฀and฀other฀investments฀not฀
included฀in฀cash฀equivalents.฀
Financing฀activities:฀activities฀that฀result฀in฀changes฀in฀the฀size฀and฀composition฀of฀the฀equity฀
capital฀and฀borrowings฀of฀the฀entity.฀
฀ (IAS฀7:฀para.฀6)฀
728฀

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฀
1.2฀Presentation฀of฀a฀statement฀of฀cash฀flows฀
IAS฀ 7฀ Statement฀ of฀ Cash฀ Flows฀ requires฀ statements฀ of฀ cash฀ flows฀ to฀ report฀ cash฀ flows฀ during฀ the฀
period฀classified฀by฀operating,฀investing฀and฀financing฀activities฀(IAS฀7:฀para.฀10).฀
1.2.1฀Operating฀activities฀
This฀ is฀ perhaps฀ the฀ key฀ part฀ of฀ the฀ statement฀ of฀cash฀ flows฀ because฀ it฀ shows฀ whether,฀ and฀ to฀ what฀
extent,฀companies฀can฀generate฀cash฀from฀their฀principal฀revenue-producing฀activities.฀฀
Most฀of฀the฀components฀of฀cash฀flows฀from฀operating฀activities฀will฀be฀those฀items฀which฀determine฀
the฀net฀profit฀or฀loss฀of฀the฀entity.฀฀The฀standard฀gives฀the฀following฀as฀examples฀of฀cash฀flows฀
from฀operating฀activities฀(IAS฀7:฀para.฀14):฀
฀ Cash฀receipts฀from฀the฀sale฀of฀goods฀and฀the฀rendering฀of฀services฀
฀ Cash฀receipts฀from฀royalties,฀fees,฀commissions฀and฀other฀revenue฀
฀ Cash฀payments฀to฀suppliers฀for฀goods฀and฀services฀
฀ Cash฀payments฀to฀and฀on฀behalf฀of฀employees฀
฀ Cash฀ payments/refunds฀ of฀ income฀ taxes฀ unless฀ they฀ can฀ be฀ specifically฀ identified฀ with฀
financing฀or฀investing฀activities฀
฀ Cash฀receipts฀and฀payments฀from฀contracts฀held฀for฀dealing฀or฀trading฀purposes฀
Certain฀ items฀ may฀ be฀ included฀ in฀ the฀ net฀ profit฀ or฀ loss฀ for฀ the฀ period฀ which฀ do฀ not฀ relate฀ to฀
operational฀cash฀flows;฀for฀example฀the฀profit฀or฀loss฀on฀the฀sale฀of฀a฀piece฀of฀plant฀will฀be฀included฀
in฀net฀profit฀or฀loss,฀but฀the฀cash฀flows฀(proceeds฀from฀sale)฀will฀be฀classed฀as฀investing.฀
1.2.2฀Investing฀activities฀
The฀ cash฀ flows฀ classified฀ under฀ this฀ heading฀ show฀ the฀ extent฀ of฀ new฀ investment฀ in฀ assets฀ which฀
will฀ generate฀ future฀ profit฀ and฀ cash฀ flows.฀ The฀ standard฀ gives฀ the฀ following฀ examples฀ of฀
cash฀flows฀arising฀from฀investing฀activities฀(IAS฀7:฀para.฀16).฀
฀ Cash฀ payments฀ to฀ acquire฀ property,฀ plant฀ and฀ equipment,฀ intangibles฀ and฀ other฀ long-term฀
assets,฀including฀those฀relating฀to฀capitalised฀development฀costs฀and฀self-constructed฀property,฀
plant฀and฀equipment฀
฀ Cash฀ receipts฀ from฀ sales฀ of฀ property,฀ plant฀ and฀ equipment,฀ intangibles฀ and฀ other฀ long-term฀
assets฀
฀ Cash฀payments฀to฀acquire฀shares฀or฀debentures฀of฀other฀entities฀
฀ Cash฀receipts฀from฀sales฀of฀shares฀or฀debentures฀of฀other฀entities฀฀
฀ Cash฀advances฀and฀loans฀made฀to฀other฀parties฀
฀ Cash฀receipts฀from฀the฀repayment฀of฀advances฀and฀loans฀made฀to฀other฀parties฀
฀ Cash฀payments฀for฀or฀receipts฀from฀futures/forward/option/swap฀contracts฀except฀where฀the฀
contracts฀are฀held฀for฀dealing฀purposes,฀or฀the฀payments/receipts฀are฀classified฀as฀financing฀
activities฀
฀ 729฀
฀ 729฀

lOMoARcPSD|6256454
1.2.3฀Financing฀activities฀
This฀ section฀ of฀ the฀ statement฀ of฀ cash฀ flows฀ shows฀ the฀ share฀ of฀ cash฀ which฀ the฀ entity's฀ capital฀
providers฀ have฀ claimed฀ during฀ the฀ period.฀ The฀ separate฀ disclosure฀ of฀ cash฀ flows฀ arising฀ from฀
financing฀ activities฀ is฀ important฀ because฀ it฀ is฀ useful฀ in฀ predicting฀ claims฀ on฀ future฀ cash฀ flows฀ by฀
providers฀ of฀ capital฀ to฀ the฀ entity฀ (IAS฀ 7:฀ para.฀ 17).฀ The฀ standard฀ gives฀ the฀ following฀ examples฀ of฀
cash฀flows฀which฀might฀arise฀under฀these฀headings฀(IAS฀7:฀para.฀17):฀
฀ Cash฀proceeds฀from฀issuing฀shares฀฀
฀ Cash฀payments฀to฀owners฀to฀acquire฀or฀redeem฀the฀entity's฀shares฀
฀ Cash฀ proceeds฀ from฀ issuing฀ debentures,฀ loans,฀ notes,฀ bonds,฀ mortgages฀ and฀ other฀ short฀ or฀
long-term฀borrowings฀
฀ Cash฀repayments฀of฀amounts฀borrowed฀
฀ Cash฀payments฀by฀a฀lessee฀for฀the฀reduction฀of฀the฀outstanding฀liability฀relating฀to฀a฀lease฀
1.3฀Taxes฀on฀income฀
Cash฀flows฀arising฀from฀taxes฀on฀income฀should฀be฀separately฀disclosed฀and฀should฀be฀classified฀
as฀cash฀flows฀from฀operating฀activities฀unless฀they฀can฀be฀specifically฀identified฀with฀financing฀and฀
investing฀activities.฀
Taxation฀cash฀flows฀are฀often฀difficult฀to฀match฀to฀the฀originating฀underlying฀transaction,฀so฀most฀
of฀the฀time฀all฀tax฀cash฀flows฀are฀classified฀as฀arising฀from฀operating฀activities฀(IAS฀7:฀para.฀35).฀
1.4฀Reporting฀cash฀flows฀from฀operating฀activities฀
The฀standard฀offers฀a฀choice฀of฀method฀for฀this฀part฀of฀the฀statement฀of฀cash฀flows฀(IAS฀7:฀para.฀18).฀
(a)฀ Direct฀method:฀disclose฀major฀classes฀of฀gross฀cash฀receipts฀and฀gross฀cash฀payments.฀฀
(b)฀ Indirect฀ method:฀ net฀ profit฀ or฀ loss฀ is฀ adjusted฀ for฀ the฀ effects฀ of฀ transactions฀ of฀ a฀ non-cash฀
nature,฀ any฀ deferrals฀ or฀ accruals฀ of฀ past฀ or฀ future฀ operating฀ cash฀ receipts฀ or฀ payments,฀ and฀
items฀of฀income฀or฀expense฀associated฀with฀investing฀or฀financing฀cash฀flows.฀
The฀ direct฀ method฀ is฀ the฀ preferred฀ method฀ because฀ it฀ discloses฀ information฀ not฀ available฀
elsewhere฀ in฀ the฀ financial฀ statements,฀ which฀ could฀ be฀ of฀ use฀ in฀ estimating฀ future฀ cash฀ flows.฀ Both฀
methods฀are฀shown฀in฀the฀following฀example.฀
Illustration฀1฀
Preparation฀of฀a฀statement฀of฀cash฀flows฀for฀a฀single฀entity฀
Below฀are฀the฀statements฀of฀financial฀position฀for฀Raglan฀at฀31฀December฀20X7฀and฀31฀December฀
20X8,฀and฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀
730฀

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฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀ ฀
฀ ฀ ฀20X8฀ ฀฀ 20X7฀
฀ ฀$'000฀ ฀$'000฀
Assets฀ ฀
Property,฀plant฀and฀equipment฀ ฀ 798 ฀ ฀638฀
Development฀costs฀ ฀฀฀฀110฀ ฀฀฀฀฀ ฀92฀
฀
฀ ฀ ฀฀908฀ ฀฀฀฀730฀
Inventories฀ ฀ 313 ฀ ฀280฀
Trade฀receivables฀ ฀208฀ ฀186฀
Cash฀ ฀ ฀฀111฀ ฀฀฀฀ ฀฀฀฀4฀
฀
฀ ฀ ฀ 632฀ ฀฀฀฀470฀
Total฀assets฀ ฀1,540฀ ฀1,200฀
฀ ฀
Equity฀ ฀
$1฀ordinary฀shares฀ ฀220฀ ฀200฀
Share฀premium฀ ฀140฀ ฀80฀
Revaluation฀surplus฀ ฀42฀ ฀฀฀฀฀–฀
Retained฀earnings฀ ฀ ฀฀599฀ ฀฀฀฀570฀
฀ ฀1,001฀ ฀฀฀฀850฀
฀ ฀
4%฀loan฀notes฀ ฀250฀ ฀฀฀฀100฀
Deferred฀tax฀ ฀76฀ ฀฀฀฀54฀
Provision฀for฀warranties฀ ฀ ฀฀฀฀30฀ ฀฀฀฀฀ ฀26฀
฀
฀ ฀฀฀฀356฀ ฀฀฀฀180฀
Trade฀payables฀ ฀ ฀฀152฀ ฀฀฀฀146฀
Current฀tax฀payable฀ ฀26฀ ฀24฀
Interest฀payable฀ ฀ ฀฀ ฀฀฀5฀ ฀฀฀฀฀฀฀฀฀–฀
฀ ฀ ฀฀183฀ ฀฀฀฀170฀
Total฀equity฀and฀liabilities฀ ฀1,540฀ ฀1,200฀
฀
฀
฀ 731฀
฀ 731฀

lOMoARcPSD|6256454
STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀ ฀

฀ ฀$'000฀
Cost฀of฀sales฀ ฀฀(750)฀
Gross฀profit฀ ฀350฀
Expenses฀ ฀(247)฀
Finance฀costs฀ ฀฀฀฀(10)฀
Profit฀on฀sale฀of฀equipment฀ ฀฀฀฀฀฀฀฀7฀
Income฀tax฀expense฀ ฀฀฀฀฀(30)฀
Profit฀for฀the฀year฀ ฀฀฀70
Gain฀on฀property฀revaluation฀ ฀฀฀฀฀60฀
Income฀tax฀relating฀to฀gain฀on฀property฀revaluation ฀฀฀฀฀(18)฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀฀฀฀฀฀42฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀฀112฀
฀
Notes:฀
(1)฀ Depreciation฀of฀property,฀plant฀and฀equipment฀during฀20X8฀was฀$54,000฀and฀capitalised฀
development฀expenditure฀amortised฀was฀$25,000.฀
(2)฀ Proceeds฀from฀the฀sale฀of฀equipment฀were฀$58,000,฀giving฀rise฀to฀a฀profit฀of฀$7,000.฀No฀
other฀items฀of฀property,฀plant฀and฀equipment฀were฀disposed฀of฀during฀the฀year.฀
(3)฀ Finance฀costs฀represent฀interest฀paid฀on฀the฀loan฀notes.฀New฀loan฀notes฀were฀issued฀on฀
1฀January฀20X8.฀
(4)฀ The฀company฀revalued฀its฀property฀at฀the฀year฀end.฀Company฀policy฀is฀to฀treat฀revaluations฀as฀
realised฀profits฀when฀the฀asset฀is฀retired฀or฀disposed฀of.฀
(5)฀ Expenses฀include฀wages฀paid฀of฀$44,000฀and฀bad฀debts฀of฀$12,000.฀
Required฀
(a)฀ Prepare฀a฀statement฀of฀cash฀flows฀for฀Raglan฀for฀the฀year฀ended฀31฀December฀20X8,฀using฀
the฀indirect฀method฀in฀accordance฀with฀IAS฀7.฀
(b)฀ Prepare฀the฀'cash฀flows฀from฀operating฀activities'฀section฀using฀the฀direct฀method.฀
732฀

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฀
Solution฀
(a)฀ RAGLAN฀STATEMENT฀OF฀CASH฀FLOWS฀FOR฀YEAR฀ENDED฀31฀DECEMBER฀20X8฀
(INDIRECT฀METHOD)฀
฀ $'000 $'000฀
Cash฀flows฀from฀operating฀activities ฀
Profit฀before฀tax฀ 100 ฀
฀฀฀Depreciation฀ 54 ฀
฀฀฀Amortisation฀ 25 ฀
฀฀฀Interest฀expense ฀฀10 ฀
฀฀฀Profit฀on฀disposal฀of฀equipment ฀ (7) ฀
฀ 182 ฀
฀฀฀Increase฀in฀inventories฀(W4)฀ (33) ฀
฀฀฀Increase฀in฀trade฀receivables฀(W4) (22) ฀
฀฀฀Increase฀in฀trade฀payables฀(W4) 6 ฀
฀฀฀Increase฀in฀provisions฀(W4)฀ ฀฀ 4 ฀
Cash฀generated฀from฀operations฀ 137 ฀
Interest฀paid฀(W3) (5) ฀
Income฀taxes฀paid฀(W3)฀ (24) ฀
Net฀cash฀from฀operating฀activities฀ 108฀
฀ ฀
Cash฀flows฀from฀investing฀activities ฀
Development฀expenditure฀(W1)฀ (43)฀ ฀
Purchase฀of฀property,฀plant฀and฀equipment฀(W1)฀ (205)฀ ฀
Proceeds฀from฀sale฀of฀equipment฀ ฀฀฀58
Net฀cash฀used฀in฀investing฀activities (190)฀
฀ ฀
Cash฀flows฀from฀financing฀activities ฀
Proceeds฀from฀issue฀of฀share฀capital฀(W2)฀ 80฀ ฀
Proceeds฀from฀issue฀of฀loan฀notes฀(W3)฀ 150฀
Dividends฀paid฀(W2)฀ ฀฀(41)
Net฀cash฀from฀financing฀activities ฀189฀
Net฀increase฀in฀cash฀and฀cash฀equivalents 107฀
Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀year ฀฀฀฀฀4฀
Cash฀and฀cash฀equivalent฀at฀end฀of฀year ฀฀111฀
฀
Workings฀
฀ 1฀ Assets฀
฀ Property,฀plant฀ Development฀
and฀equipment costs฀
฀ ฀$'000฀ ฀$'000฀
Opening฀balance฀(b/d) 638 92฀
Depreciation฀ (54) (25)฀
OCI฀ 60 ฀
Non-cash฀additions –฀ –฀
Disposals฀(58฀–฀7) (51) –฀
Cash฀paid/(rec'd) β฀ ฀205 ฀฀฀43฀
Closing฀balance฀(c/d)฀ ฀ 798 ฀110฀
฀
฀
฀
฀ 733฀
฀ 733฀

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฀ 2฀ Equity฀
฀ Share฀capital/ Retained฀
share฀premium earnings฀
฀ ฀$'000฀ ฀$'000฀
฀ (200฀+฀80) ฀280 570฀
Profit฀for฀the฀year฀ ฀ 70฀
Non-cash฀items฀ – –฀
Cash฀(paid)/rec'd฀β฀ ฀ 80 ฀ (41)฀
Closing฀balance฀(c/d)฀ (220฀+฀140) ฀360 ฀ 599฀
฀
฀
3฀ Liabilities฀
฀ Loan Income฀tax Interest฀
notes payable payable฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Opening฀balance฀(b/d)฀ 100 (54฀+฀24) 78 ฀ –฀
SPLOCI*฀ – P/L฀ 30 10฀
฀ – OCI฀ 18 ฀
Non-cash฀items฀ – – –฀
Cash฀(paid)/rec'd฀β฀ ฀150 ฀(24) (5)
฀ ฀
Closing฀balance฀(c/d)฀ ฀250 (76฀+฀26) ฀102 ฀ ฀5฀
฀
฀ ฀
฀ ฀ *฀SPLOCI฀=฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀ 4฀ Working฀capital฀changes฀
฀ Inventories฀ Trade฀ Trade฀ Provisions
receivables payables฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Opening฀balance฀(b/d)฀ ฀ 280฀ ฀ 186฀ ฀ 146฀ ฀ 26฀
฀Increase/(decrease) ฀฀฀33฀ ฀฀฀22฀ ฀฀฀฀฀6฀ ฀฀฀฀4฀
Closing฀balance฀(c/d)฀ ฀313 ฀208 ฀152฀ ฀ ฀฀30
฀
฀
(b)฀ RAGLAN฀
฀ ฀ CASH฀FLOWS฀FROM฀OPERATING฀ACTIVITIES฀(DIRECT฀METHOD)฀
฀ $'000฀ $'000
Cash฀receipts฀from฀customers฀(W1) 1,066฀
Cash฀paid฀to฀suppliers฀and฀employees฀(W2)฀ ฀(929)฀ ฀
Cash฀generated฀from฀operations฀ 137฀ ฀
Interest฀paid฀(from฀part฀(a)) (5)฀
Income฀taxes฀paid฀(from฀part฀(a))฀ ฀฀(24)฀ ฀
฀
Net฀cash฀from฀operating฀activities฀ ฀ 108
฀
734฀

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฀
฀ ฀ Workings฀
฀ ฀ 1฀ Cash฀received฀from฀customers฀
฀ Trade
receivables
฀ ฀$'000฀
Opening฀balance฀(b/d) 186
Revenue 1,100
Non-cash฀(bad฀debt)฀ (12)
Cash฀received฀β฀ ฀(1,066)
Closing฀balance฀(c/d)฀ ฀ ฀ ฀฀ 208
฀
฀
฀ 2฀ Cash฀paid฀to฀suppliers฀and฀employees฀
฀ Trade
payables
฀ ฀$'000฀
Opening฀balance฀(b/d) 146
Purchases฀and฀other฀฀ 935฀
expenses฀(W3)฀
Cash฀(paid)฀β฀ ฀(929)
Closing฀balance฀(c/d)฀ ฀ 152
฀
฀ 3฀ Purchases฀and฀other฀expenses฀
฀ ฀$'000฀
Cost฀of฀sales฀and฀expenses฀(750฀+฀247)฀ ฀997฀
฀
Inventory฀adjustments:฀
฀ Opening฀inventories฀ ฀(280)฀
฀ Closing฀inventories฀ ฀ 313฀
฀
Non-cash฀expenses:฀
฀ Depreciation฀ ฀(54)฀
฀ Amortisation฀ ฀(25)฀
฀ Bad฀debts฀ ฀(12)฀
฀ Increase฀in฀provision฀ ฀ ฀฀(4)฀
฀ ฀935฀
฀
฀
฀
2฀Group฀statement฀of฀cash฀flows฀
2.1฀Preparing฀a฀group฀statement฀of฀cash฀flows฀
The฀illustration฀below฀shows฀how฀a฀group฀statement฀of฀cash฀flows฀is฀prepared฀using฀the฀consolidated฀
฀ 735฀
฀ 735฀

lOMoARcPSD|6256454
Illustration฀2฀
Preparation฀of฀a฀consolidated฀statement฀of฀cash฀flows฀
On฀1฀October฀20X8฀P฀acquired฀90%฀of฀S฀by฀issuing฀100฀million฀shares฀at฀an฀agreed฀value฀of฀
$1.60฀per฀share฀and฀$140m฀in฀cash.฀At฀that฀time฀the฀statement฀of฀financial฀position฀of฀S฀(equivalent฀
to฀the฀fair฀value฀of฀the฀assets฀and฀liabilities)฀was฀as฀follows:฀
฀ ฀฀$m฀
Property,฀plant฀and฀equipment฀ ฀฀190฀
Inventories฀ ฀฀70฀
Trade฀receivables฀฀ ฀฀30฀
Cash฀and฀cash฀equivalents฀ ฀฀10฀
Trade฀payables฀ ฀฀฀(40)฀
฀ ฀฀฀260฀
฀
฀
Group฀policy฀is฀to฀measure฀non-controlling฀interests฀at฀the฀date฀of฀acquisition฀at฀the฀proportionate฀
share฀of฀net฀assets.฀
The฀consolidated฀statements฀of฀financial฀position฀of฀P฀as฀at฀31฀December฀were฀as฀follows:฀
฀ 20X8฀ 20X7฀
฀ ฀$m฀ ฀฀฀$m฀
Goodwill฀ ฀ ฀฀฀฀60฀ ฀฀฀฀฀฀฀–฀฀
฀ ฀2,702฀ ฀2,300฀
Inventories฀ ฀1,450 ฀ ฀ 1,200 ฀
Cash฀and฀cash฀equivalents฀ ฀ ฀฀฀฀ 2฀ ฀฀฀฀฀฀50฀
฀ ฀2,822฀ ฀2,350฀
฀ ฀5,524฀ ฀4,650฀
Share฀capital฀($1฀ordinary฀shares)฀ ฀1,150 ฀ ฀ 1,000 ฀
Share฀premium฀account฀ ฀590฀ ฀500฀
Revaluation฀surplus฀ ฀ ฀฀฀฀74฀ ฀฀฀฀฀฀฀–฀฀
฀ ฀3,592฀ ฀3,030฀
Non-controlling฀interests฀ ฀ ฀฀฀฀32฀ ฀฀฀฀฀฀฀–฀฀
฀ ฀3,624฀ ฀3,030฀
Deferred฀tax฀ ฀80฀ ฀40฀
฀ ฀ ฀
Trade฀payables฀ ฀1,710฀ ฀1,520฀
Current฀tax฀ ฀ ฀฀110฀ ฀฀฀฀฀60฀
฀ ฀1,820฀ ฀1,580฀
฀ ฀5,524฀ ฀4,650฀
฀
฀
736฀

lOMoARcPSD|6256454
฀
The฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀
31฀December฀20X8฀was฀as฀follows:฀
฀ ฀$m฀
Cost฀of฀sales฀ ฀(7,500)฀
Administrative฀expenses฀ ฀฀(2,083)฀
Income฀tax฀expense฀ ฀฀฀฀(150)฀
Profit฀for฀the฀year฀ ฀฀฀฀฀267฀
Gains฀on฀property฀revaluation฀ ฀115฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified฀ ฀ ฀฀฀฀฀(40)฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax฀ ฀ ฀฀฀฀฀฀75฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀฀342฀
฀
฀
Owners฀of฀the฀parent฀ ฀258฀
Non-controlling฀interests฀ ฀฀฀฀฀฀฀฀฀9 ฀
฀ ฀฀฀฀ 267 ฀
Owners฀of฀the฀parent฀ ฀ 332 ฀
Non-controlling฀interests฀ ฀ ฀฀฀฀฀10 ฀
฀ ฀฀฀342฀
฀
฀
You฀are฀also฀given฀the฀following฀information:฀
(1)฀ All฀other฀subsidiaries฀are฀wholly฀owned.฀
(2)฀ Depreciation฀charged฀to฀the฀consolidated฀profit฀or฀loss฀amounted฀to฀$210m.฀
(3)฀ There฀were฀no฀disposals฀of฀property,฀plant฀and฀equipment฀during฀the฀year.฀
Required฀
Prepare฀a฀consolidated฀statement฀of฀cash฀flows฀for฀the฀year฀ended฀31฀December฀20X8฀under฀the฀
indirect฀method฀in฀accordance฀with฀IAS฀7.฀
฀ 737฀
฀ 737฀

lOMoARcPSD|6256454
Solution฀
P฀GROUP฀
฀ ฀$m฀ ฀$m฀
Profit฀before฀tax฀ 417 ฀
฀฀Depreciation฀ 210 ฀
฀฀Impairment฀of฀goodwill฀(W2)฀ ฀ ฀฀6฀ ฀
฀ 633 ฀
฀฀Increase฀in฀inventories฀(W3)฀ (180) ฀
฀฀Increase฀in฀trade฀receivables฀(W3)฀ (240) ฀
฀฀Increase฀in฀trade฀payables฀(W3)฀ ฀฀150฀ ฀
Cash฀generated฀from฀operations฀ 363 ฀
Income฀taxes฀paid฀(W7)฀ ฀(100)฀ ฀
Net฀cash฀from฀operating฀activities฀ ฀263฀
฀
Cash฀flows฀from฀investing฀activities฀
Acquisition฀of฀subsidiary฀net฀of฀cash฀acquired฀(140฀– 10) (130) ฀
Purchase฀of฀property,฀plant฀and฀equipment฀(W1)฀ ฀(247)฀ ฀
Net฀cash฀used฀in฀investing฀activities฀ ฀(377)฀
฀ ฀
Cash฀flows฀from฀financing฀activities฀
Proceeds฀from฀issue฀of฀share฀capital฀(W4) 80 ฀
Dividends฀paid฀to฀owners฀of฀the฀parent฀(W5) (10) ฀
Dividends฀paid฀to฀non-controlling฀interests฀(W6)฀ ฀ ฀(4)฀ ฀
Net฀cash฀from฀financing฀activities฀ ฀฀฀66฀
Net฀decrease฀in฀cash฀and฀cash฀equivalents฀ ฀(48)฀
Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀the฀year฀ ฀ ฀฀฀50฀
Cash฀and฀cash฀equivalents฀at฀the฀end฀of฀the฀year฀ ฀฀฀฀฀2฀
2฀
Workings฀
1฀ Property,฀plant฀and฀equipment฀
฀ ฀$m฀
b/d฀ ฀ 2,300 ฀
Revaluation฀ ฀115 ฀
Depreciation฀ ฀(210)฀
Acquisition฀of฀subsidiary฀ ฀฀฀190฀
฀ ฀2,395฀
Additions฀(balancing฀figure)฀ ฀฀฀฀247฀
c/d฀ ฀2,642฀
฀
฀
738฀

lOMoARcPSD|6256454
฀
2฀ Goodwill฀
฀ ฀$m฀
b/d฀ ฀–฀
Acquisition฀of฀subsidiary*฀ ฀฀66฀
฀ ฀66฀
Impairment฀loss฀(balancing฀figure)฀ ฀฀฀(6)฀
c/d฀ ฀฀60฀
฀
฀
*Goodwill฀on฀acquisition฀of฀subsidiary: ฀
฀ ฀$m฀
Consideration฀transferred฀(140฀+฀(100฀ $1.60))฀ ฀ 300 ฀
NCI฀(260฀฀10%)฀ 26
฀ ฀
฀ ฀
Less฀net฀assets฀at฀acquisition฀ ฀(260) ฀
฀ ฀฀฀฀66฀
฀
3฀ Inventories,฀trade฀receivables฀and฀trade฀payables฀
฀ ฀Trade฀ ฀Trade฀
฀Inventories฀ receivables฀ payables฀
$m฀ $m฀ $m฀
b/d฀ ฀1,200฀ ฀1,100฀ ฀1,520฀
Add฀acquisition฀of฀subsidiary฀ ฀ ฀฀ 70฀ ฀ ฀฀฀30฀ ฀฀฀฀฀40฀
฀ ฀1,270฀ ฀1,130฀ ฀1,560฀
Increase฀(balancing฀figure)฀ ฀ ฀180฀ ฀ ฀240฀ ฀฀฀฀150฀
c/d฀ ฀1,450฀ ฀1,370฀ ฀1,710฀
฀
฀
4฀ Share฀capital฀and฀share฀premium฀
฀ ฀$m฀
b/d฀(1,000฀+฀500)฀ ฀1,500฀
Issued฀on฀acquisition฀of฀subsidiary฀(100฀ $1.60)฀ ฀฀฀160฀
฀ ฀1,660฀
Issue฀for฀cash฀(balancing฀figure)฀ ฀฀฀฀฀฀80฀
c/d฀(1,150฀+฀590)฀ ฀1,740฀
฀
5฀ Retained฀earnings฀(to฀find฀dividends฀paid฀to฀owners฀of฀the฀parent)฀
฀ ฀฀$m฀
b/d฀ ฀1,530฀
SPLOCI฀–฀profit฀attributable฀to฀owners฀of฀parent฀ ฀฀฀฀258฀
฀ ฀1,788฀
Dividends฀paid฀to฀owners฀of฀the฀parent฀(balancing฀figure)฀ ฀฀฀฀฀฀฀฀฀฀(10)฀
c/d฀ ฀1,778฀
฀
฀
฀ 739฀
฀ 739฀

lOMoARcPSD|6256454
฀ ฀$m฀
b/d฀ –฀
NCI฀share฀of฀total฀comprehensive฀income ฀ 10
฀ ฀
Acquisition฀of฀subsidiary฀(W2)฀ ฀26฀
฀ ฀36฀
Dividends฀paid฀to฀NCI฀(balancing฀figure)฀ ฀(4)฀
c/d฀ ฀฀32฀
฀
฀
7฀ Current฀and฀deferred฀tax฀
฀ ฀$m฀
b/d฀(40฀+฀60)฀ ฀100฀
SPLOCI฀–฀P/L฀ ฀150฀
SPLOCI฀–฀OCI฀ ฀฀฀40฀
฀ ฀290฀
Tax฀paid฀(balancing฀figure)฀ ฀(100)฀
c/d฀(80฀+฀110)฀ ฀190฀
฀
฀
2.2฀Foreign฀currency฀translation฀
The฀value฀of฀assets฀and฀liabilities฀denominated฀in฀a฀foreign฀currency฀will฀be฀subject฀to฀exchange฀rate฀
fluctuations.฀These฀are฀non-cash฀movements฀and฀should฀be฀factored฀into฀workings฀when฀calculating฀
the฀actual฀cash฀movement฀in฀the฀year.฀
The฀ exception฀ to฀ this฀ is฀ if฀ cash฀ balances฀ are฀ denominated฀ in฀ a฀ foreign฀ currency.฀ In฀ this฀ case,฀ the฀
effect฀of฀the฀exchange฀rate฀movement฀should฀be฀included฀in฀the฀reconciliation฀of฀opening฀to฀closing฀
cash฀and฀cash฀equivalents.฀
For฀the฀group฀consolidated฀statement฀of฀cash฀flows,฀IAS฀7฀requires฀that฀all฀cash฀flows฀relating฀to฀an฀
overseas฀ subsidiary฀ be฀ translated฀ at฀ the฀ exchange฀ rates฀ between฀ the฀ functional฀ currency฀ and฀ the฀
foreign฀currency฀at฀the฀date฀of฀the฀cash฀flows฀(IAS฀7:฀para.฀26).฀Where฀the฀average฀rate฀has฀been฀
used฀ to฀ translate฀ the฀ subsidiary's฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income,฀ then฀
this฀rate฀is฀also฀used฀to฀translate฀the฀subsidiary's฀cash฀flows฀prior฀to฀consolidation.฀
If฀the฀average฀rate฀is฀used,฀then฀using฀the฀statements฀of฀financial฀position฀to฀derive฀the฀figures฀is฀not฀
appropriate฀as฀the฀resulting฀statement฀of฀cash฀flows฀would฀not฀comply฀with฀IAS฀7,฀with฀some฀items฀
being฀translated฀at฀the฀closing฀rate.฀The฀practical฀answer฀to฀this฀problem฀is฀to฀produce฀a฀statement฀of฀
cash฀flows฀for฀each฀subsidiary฀and฀then฀translate฀each฀of฀these฀into฀the฀reporting฀currency฀using฀the฀
average฀rate.฀Each฀translated฀statement฀of฀cash฀flows฀can฀then฀be฀consolidated.฀
2.3฀Disposal฀of฀subsidiaries฀in฀group฀statements฀of฀cash฀flows฀
The฀approach฀is฀very฀similar฀to฀that฀of฀acquisition฀of฀a฀subsidiary.฀฀
Recall฀that฀when฀a฀group฀disposes฀of฀a฀subsidiary:฀
฀ The฀ investing฀ activities฀ section฀ will฀ include฀ the฀ line฀ 'Disposal฀ of฀ subsidiary฀ X฀ net฀ of฀ cash฀
disposed'.฀
฀ The฀ relevant฀ assets฀ and฀ liabilities฀ of฀ the฀ subsidiary฀ should฀ be฀ deducted฀ from฀ the฀ asset฀ and฀
liability฀calculations.฀
740฀

lOMoARcPSD|6256454
฀
Activity฀1:฀Group฀statement฀of฀cash฀flows฀–฀disposal฀of฀subsidiary฀ ฀
Below฀is฀the฀consolidated฀statement฀of฀financial฀position฀of฀Columbus฀Group฀as฀at฀30฀June฀20X5฀and฀
the฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀for฀the฀year฀ended฀on฀
that฀date:฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀30฀JUNE฀
฀ 20X5฀ 20X4฀
฀ $m฀ $m฀
Goodwill฀(re฀New฀World)฀ ฀ ฀฀฀฀฀฀–฀ ฀฀฀฀฀฀40฀
฀ ฀4,067฀ ฀3,949฀
Inventories฀ ฀ 736 ฀ ฀535฀
Trade฀receivables฀ ฀605฀ ฀417฀
Cash฀and฀cash฀equivalents฀ ฀ ฀฀294฀ ฀฀฀฀238฀
฀ ฀1,635฀ ฀1,190฀
฀ ฀5,702฀ ฀5,139฀
Share฀capital฀ ฀ 1,000 ฀ ฀1,000฀
฀ ฀4,637฀ ฀4,117฀
Non-controlling฀interests฀ ฀฀฀฀฀482฀ ฀฀฀฀512฀
฀ ฀5,119฀ ฀4,629฀
Trade฀payables฀ ฀ 380 ฀ ฀408฀
Income฀tax฀payable฀ ฀ ฀฀203฀ ฀฀฀฀102฀
฀ ฀ ฀฀583฀ ฀฀฀฀510฀
฀ ฀5,702฀ ฀5,139฀
THE฀YEAR฀ENDED฀30฀JUNE฀20X5฀
฀ ฀$m฀
Profit฀before฀interest฀and฀tax฀ ฀ 878 ฀
Profit฀on฀disposal฀of฀shares฀in฀subsidiary฀ ฀฀฀฀36฀
Income฀tax฀expense฀ ฀(290)฀
Profit฀for฀the฀year฀ ฀฀624฀
฀
฀฀฀Owners฀of฀the฀parent฀ ฀520฀
฀฀฀Non-controlling฀interests฀ ฀104฀
฀ ฀624฀
You฀are฀given฀the฀following฀information:฀
1฀ Columbus,฀a฀public฀limited฀company,฀sold฀its฀entire฀interest฀in฀New฀World,฀a฀limited฀company,฀
on฀ 31฀ March฀ 20X5฀ for฀ $420m.฀ Columbus฀ had฀ acquired฀ an฀ 80%฀ interest฀ in฀ New฀ World฀ a฀
number฀of฀years฀ago฀when฀New฀World's฀reserves฀stood฀at฀$80m.฀
฀ 741฀
฀ 741฀

lOMoARcPSD|6256454
฀ The฀statement฀of฀financial฀position฀of฀New฀World฀at฀the฀date฀of฀disposal฀showed:฀
฀ $m฀
Property,฀plant฀and฀equipment฀ ฀ 370 ฀
Inventories฀ 46
฀ ฀
Trade฀receivables฀ ฀42฀
Cash฀and฀cash฀equivalents฀ ฀฀฀฀20฀
฀ ฀฀478฀
Share฀capital฀ ฀100฀
Reserves฀ ฀฀340฀
฀ ฀฀440฀
Trade฀payables฀ ฀฀฀฀38฀
฀ ฀฀478฀
฀ The฀ non-controlling฀ interests฀ in฀ New฀ World฀ were฀ measured฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀
acquisition฀of฀$44m.฀
Impairment฀ tests฀ conducted฀ annually฀ since฀ the฀ date฀ of฀ acquisition฀ did฀ not฀ reveal฀ any฀
impairment฀losses฀in฀respect฀of฀the฀consolidated฀investment฀in฀New฀World.฀
All฀other฀subsidiaries฀were฀set฀up฀by฀Columbus฀and฀did฀not฀have฀any฀goodwill.฀
2฀ Depreciation฀charge฀for฀the฀year฀was฀$800m.฀
฀ There฀were฀no฀disposals฀of฀non-current฀assets฀other฀than฀on฀the฀disposal฀of฀the฀subsidiary.฀
Required฀
Using฀the฀proformas฀given฀below,฀work฀to฀the฀nearest฀$'m฀and฀answer฀the฀following฀questions:฀
(a)฀ How฀will฀the฀disposal฀appear฀in฀the฀statement฀of฀cash฀flows?฀
(b)฀ What฀are฀the฀additions฀to฀property,฀plant฀and฀equipment?฀
(c)฀ What฀is฀the฀dividend฀paid฀to฀non-controlling฀interests?฀
(d)฀ Prepare฀the฀reconciliation฀of฀profit฀before฀tax฀to฀cash฀generated฀from฀operations,฀as฀at฀the฀top฀
of฀the฀indirect฀method฀statement฀of฀cash฀flows.฀
Solution฀ $m฀
(a)฀ Cash฀flows฀from฀investing฀activities
฀ Disposal฀of฀subsidiary฀net฀of฀cash฀disposed฀of
฀ ฀
(b)฀ Cash฀flows฀from฀investing฀activities
฀ Purchase฀of฀property,฀plant฀and฀equipment฀(W1)
฀ ฀
(c)฀ Cash฀flows฀from฀financing฀activities
฀ Dividend฀paid฀to฀non-controlling฀interests฀(W2)
฀ ฀
742฀

lOMoARcPSD|6256454
฀
฀ ฀ ฀$m฀
(d)฀ Cash฀flows฀from฀operating฀activities฀
฀ ฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
Increase฀in฀inventories฀(W3)฀ ฀
Increase฀in฀trade฀receivables฀(W3)฀ ฀
Increase฀in฀trade฀payables฀(W3)฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Cash฀generated฀from฀operations฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Workings฀
1฀ Purchase฀of฀property,฀plant฀and฀equipment฀
฀ Property,฀plant฀
&฀equipment
฀ ฀$m฀
b/d฀
SPLOCI฀ –
Depreciation฀
Non-cash฀additions฀ –
Cash฀paid฀β฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
c/d฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
2฀ Dividends฀paid฀to฀non-controlling฀interests฀
฀ Non-controlling
interests
฀ ฀$m฀
b/d฀
SPLOCI฀
Non-cash฀ –
Cash฀(paid)฀β฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
c/d฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ Trade฀ Trade
Inventories receivables payables
฀ ฀$m฀ ฀$m฀ ฀$m฀
b/d฀ ฀
Disposal฀of฀subsidiary฀ ฀
Increase/(decrease)฀β฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀
c/d฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀
฀
฀ 743฀
฀ 743฀

lOMoARcPSD|6256454
3฀Disclosure฀฀฀
There฀are฀additional฀disclosure฀requirements฀in฀respect฀of฀acquisitions฀and฀disposals฀of฀subsidiaries฀
or฀other฀business฀units฀during฀the฀period.฀The฀following฀amounts฀should฀be฀disclosed฀(in฀aggregate):฀
฀ Total฀purchase/disposal฀consideration฀
฀ Portion฀of฀purchase/disposal฀consideration฀discharged฀by฀means฀of฀cash/cash฀equivalents฀
฀ Amount฀of฀cash/cash฀equivalents฀in฀the฀subsidiary฀or฀business฀unit฀disposed฀of฀
฀ Amount฀of฀assets฀and฀liabilities฀other฀than฀cash/cash฀equivalents฀in฀the฀subsidiary฀or฀business฀
unit฀acquired฀or฀disposed฀of,฀summarised฀by฀major฀category฀(IAS฀7:฀paras.฀39–40,฀42)฀
3.1฀Disclosure฀amendments฀
In฀January฀2016,฀the฀IASB฀published฀amendments฀to฀IAS฀7฀intended฀to฀improve฀information฀provided฀
to฀ users฀ of฀ financial฀ statements฀ about฀ changes฀ in฀ liabilities฀ arising฀ from฀ an฀ entity's฀
financing฀activities.฀They฀are฀effective฀for฀annual฀periods฀beginning฀on฀or฀after฀1฀January฀2017.฀฀
3.1.1฀Improved฀information฀about฀an฀entity's฀financing฀activities฀
The฀amendments฀are฀a฀result฀of฀investor฀requests฀for฀entities฀to฀provide฀disclosures฀that฀allow฀them฀to฀
better฀understand฀changes฀in฀the฀entity's฀net฀debt฀and฀management฀of฀financing฀activities.฀
Entities฀ must฀ disclose฀ the฀ following฀ changes฀ in฀ liabilities฀ arising฀ from฀ financing฀ activities฀ (IAS฀ 7:฀
para.฀44B):฀฀
(a)฀ Changes฀from฀financing฀cash฀flows;฀
(b)฀ Changes฀arising฀from฀obtaining฀or฀losing฀control฀of฀subsidiaries฀or฀other฀businesses;฀
(c)฀ The฀effect฀of฀changes฀in฀foreign฀exchange฀rates;฀฀
(d)฀ Changes฀in฀fair฀values;฀and฀
(e)฀ Other฀changes.฀
'Liabilities฀ arising฀ from฀ financing฀ activities'฀ could฀ include฀ long-term฀ and฀ short-term฀ borrowings฀ and฀
lease฀liabilities.฀฀
The฀ disclosures฀ also฀ apply฀ to฀ changes฀ in฀ financial฀ assets฀ if฀ cash฀ flows฀ arising฀ from฀ those฀
financial฀ assets฀ are฀ classified฀ as฀ 'cash฀ flows฀ from฀ financing฀ activities';฀ for฀ example฀ assets฀ held฀ to฀
hedge฀long-term฀borrowings฀(IAS฀7:฀para.฀44C).฀฀
One฀ way฀ to฀ fulfil฀ the฀ new฀ disclosure฀ requirement฀ is฀ to฀ provide฀ a฀ reconciliation฀ of฀ cash฀ flows฀
arising฀ from฀ financing฀ activities฀ (as฀ reported฀ in฀ the฀ statement฀ of฀ cash฀ flows฀ excluding฀
contributed฀equity)฀to฀the฀corresponding฀liabilities฀in฀the฀opening฀and฀closing฀statement฀
of฀financial฀position฀(IAS฀7:฀para.฀44C).฀
The฀reconciliation฀could฀include:฀฀
(a)฀฀ Opening฀balances฀in฀the฀statement฀of฀financial฀position฀฀
(b)฀฀ Movements฀in฀the฀period฀฀
(c)฀฀ Closing฀balances฀in฀the฀statement฀of฀financial฀position฀฀
However,฀this฀reconciliation฀is฀not฀obligatory.฀
Lastly,฀ the฀ amendments฀ state฀ that฀ changes฀ in฀ liabilities฀ arising฀ from฀ financing฀ activities฀ must฀ be฀
disclosed฀separately฀from฀changes฀in฀other฀assets฀and฀liabilities฀(IAS฀7:฀para.฀44E).฀฀
744฀

lOMoARcPSD|6256454
฀
Activity฀answer฀
฀ $m฀
(a)฀ Cash฀flows฀from฀investing฀activities ฀
฀ Disposal฀of฀subsidiary฀net฀of฀cash฀disposed฀of฀(420฀– 20) 400฀
฀ ฀ ฀
(b)฀ Cash฀flows฀from฀investing฀activities ฀
฀ Purchase฀of฀property,฀plant฀and฀equipment฀(W1) (1,328)฀
฀ ฀ ฀
(c)฀ Cash฀flows฀from฀financing฀activities ฀
฀ Dividend฀paid฀to฀non-controlling฀interests฀(W2) (38)฀฀
฀ ฀ ฀
(d)฀ Cash฀flows฀from฀operating฀activities฀ $m฀
Depreciation฀ ฀800฀
Profit฀on฀disposal฀of฀subsidiary฀ ฀฀฀฀(36)฀
฀ ฀ 1,678 ฀
Increase฀in฀inventories฀(W3)฀ ฀ (247) ฀
Increase฀in฀trade฀receivables฀(W3)฀ ฀(230)฀
Increase฀in฀trade฀payables฀(W3)฀ ฀฀฀฀฀฀10฀
Cash฀generated฀from฀operations฀ ฀1,211฀
Workings฀
1฀ Purchase฀of฀property,฀plant฀and฀equipment฀
฀ PPE
฀ ฀$m฀
b/d฀ 3,909
SPLOCI฀ –
Depreciation฀ (800)
Non-cash฀additions฀ –
Disposal฀of฀subsidiary฀ (370)
Cash฀paid฀β฀ ฀1,328฀
c/d฀ ฀4,067
2฀ Dividends฀paid฀to฀non-controlling฀interests฀
฀ Non-controlling
interests฀
฀ $m
b/d฀ 512
SPLOCI฀(TCI)฀ 104
Non-cash฀ –
Disposal฀of฀subsidiary*฀ (96)
Cash฀(paid)฀β฀ ฀฀(38)฀
c/d฀ ฀482
*NCI฀at฀acquisition฀ 44฀
฀฀NCI฀share฀of฀post฀acq'n฀reserves฀((340฀–฀80)฀฀20%)฀ ฀52฀
฀ ฀ ฀ ฀96฀
฀ 745฀
฀ 745฀

lOMoARcPSD|6256454
฀ Trade฀ Trade฀
฀ Inventories receivables payables
฀ $m $m $m
b/d฀ ฀ 535 417 ฀ 408
Disposal฀of฀subsidiary฀ (46) (42) (38)
Increase/(decrease)฀β฀ ฀247฀ ฀230฀ ฀฀฀10฀
c/d฀ ฀ ฀736 ฀605 ฀380
฀
746฀

lOMoARcPSD|6256454
฀
฀
฀
Interpreting฀financial
statements฀for฀different
฀
฀
stakeholders
฀
฀ ฀
฀ 747฀
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1฀Ratio฀calculations฀
The฀broad฀categories฀of฀ratios฀
Financial฀performance฀(focus฀on฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income):฀
฀ Profitability฀฀
฀ Efficiency฀
฀ Investor฀฀
Financial฀position฀(focus฀on฀statement฀of฀financial฀position):฀
฀ Liquidity฀
฀ Working฀capital฀management฀(activity)฀
฀ Financial฀leverage฀
1.1฀Profitability฀
Return฀on฀capital฀employed฀(ROCE)฀
Profit฀before฀Interest฀and฀Tax฀(PBIT) PBIT
ROCE฀=฀  ฀
Capital฀employed Total฀assets฀less฀current฀liabilities
Return฀ on฀ capital฀ employed฀ measures฀ how฀ efficiently฀ a฀ company฀ uses฀ its฀ capital฀ to฀
generate฀profits.฀A฀potential฀investor฀or฀lender฀should฀compare฀the฀return฀to฀a฀target฀return฀or฀a฀
return฀on฀other฀investments/loans.฀฀฀฀
Return฀on฀equity฀(ROE)฀
Profit฀after฀tax฀and฀pref฀div
ROE฀=฀ %฀
Ordinary฀share฀capital฀+฀reserves
While฀the฀return฀on฀capital฀employed฀looks฀at฀the฀overall฀return฀on฀the฀long-term฀sources฀of฀finance,฀
return฀on฀equity฀focuses฀on฀the฀return฀for฀the฀ordinary฀shareholders.฀
Gross฀profit฀margin฀
Gross฀profit
Gross฀profit฀margin฀=฀ ฀ 100%฀
Revenue
The฀gross฀profit฀margin฀measures฀how฀well฀a฀company฀is฀running฀its฀core฀operations.฀
Operating฀profit฀margin฀
Profit฀before฀interest and tax

Operating฀profit฀margin฀=฀ ฀ 100% ฀
Revenue
Profit฀before฀interest฀and฀taxation฀(PBIT)฀is฀used฀because฀it฀avoids฀distortion฀when฀comparisons฀are฀
made฀between฀two฀different฀companies฀where฀one฀is฀heavily฀financed฀by฀means฀of฀loans,฀and฀the฀
other฀is฀financed฀entirely฀by฀ordinary฀share฀capital.฀฀The฀extra฀consideration฀for฀the฀operating฀margin฀
over฀ the฀ gross฀ margin฀ is฀ how฀ well฀ the฀ company฀ is฀ controlling฀ its฀ non-production฀
overheads.฀
Net฀profit฀margin฀
Profit฀for฀year
Net฀profit฀margin฀=฀ ฀ 100% ฀
Revenue
The฀extra฀considerations฀for฀the฀net฀margin฀over฀the฀operating฀margins฀are฀interest฀and฀tax.฀
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฀ ฀ 17:฀Interpreting฀financial฀statements฀for฀different฀stakeholders฀฀
฀
Activity฀1:฀Preparation฀question฀to฀test฀your฀understanding฀of฀
profitability฀ratios฀ ฀
The฀following฀information฀is฀available฀for฀two฀potential฀acquisition฀targets.฀The฀entities฀have฀similar฀
capital฀structures฀and฀both฀operate฀in฀the฀manufacturing฀sector.฀
฀ FG฀ HI฀
Revenue฀ $460m฀ $420m฀
Gross฀profit฀margin฀ 25%฀ 14%฀
Net฀profit฀margin฀ 10%฀ 9%฀
Required฀
Which฀of฀the฀following฀statements฀give฀realistic฀conclusions฀that฀could฀be฀drawn฀from฀the฀above฀
information?฀
Tick฀all฀relevant฀statements.฀
Tick฀ Statements฀
HI's฀management฀exercises฀better฀cost฀control฀of฀the฀entity's฀non-production฀overheads.฀
HI฀has฀sourced฀cheaper฀raw฀materials.฀฀
FG฀operates฀its฀production฀process฀more฀efficiently฀with฀less฀wastage฀and฀more฀goods฀
produced฀per฀machine฀hour.฀
HI฀operates฀in฀the฀low฀price฀end฀of฀the฀market฀but฀incurs฀similar฀manufacturing฀costs฀฀
to฀FG.฀
FG's฀management฀exercises฀better฀cost฀control฀of฀the฀entity's฀non-production฀overheads.฀
HI฀has฀access฀to฀cheaper฀interest฀rates฀on฀its฀borrowings฀than฀FG.฀
1.2฀Efficiency฀
Asset฀turnover฀
Revenue Revenue
Asset฀turnover฀=฀  ฀
Capital฀employed Total฀assets฀฀less฀current฀฀liabilitie s
This฀ratio฀shows฀how฀much฀revenue฀is฀produced฀per฀unit฀of฀capital฀invested.฀Therefore,฀it฀is฀a฀
measure฀of฀how฀efficiently฀the฀entity฀is฀using฀its฀capital฀to฀generate฀revenue.฀
Total฀asset฀turnover฀
Revenue
Total฀asset฀turnover฀฀=฀ ฀
Total assets
Total฀ asset฀ turnover฀ is฀ an฀ indication฀ of฀ how฀ efficiently฀ the฀ entity฀ is฀ using฀ its฀ assets฀ to฀
generate฀revenue.฀
Non-current฀asset฀turnover฀
Revenue
Non-current฀asset฀turnover฀=฀ ฀
Non- current฀assets
This฀ratio฀specifically฀examines฀the฀productivity฀of฀non-current฀assets฀in฀generating฀sales.฀It฀is฀
suitable฀for฀a฀capital-intensive฀entity,฀for฀example,฀a฀manufacturing฀company.฀
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Making฀sense฀of฀profitability฀and฀efficiency฀ratios฀
Listed฀ below฀ are฀ possible฀ reasons฀ for฀ changes฀ in฀ the฀ above฀ ratios฀ year฀ on฀ year฀ or฀ differences฀
between฀two฀entities.฀
Return฀on฀capital฀employed฀(ROCE)฀and฀asset฀turnover฀ratios฀
(a)฀ Type฀of฀industry฀(eg฀a฀manufacturing฀company฀will฀typically฀have฀higher฀assets฀and฀therefore฀
lower฀ROCE/asset฀turnover฀than฀a฀services฀or฀knowledge฀based฀company)฀
(b)฀ Age฀ of฀ assets฀ (eg฀ old฀ asset฀ =฀ low฀ carrying฀ amount฀ (CA)฀ =฀ low฀ capital฀ employed฀ and฀ high฀
ROCE/asset฀turnover)฀
(c)฀ Leased฀versus฀owned฀assets฀
(d)฀ Revaluations฀ (increased฀ capital฀ employed฀ =฀ lower฀ ROCE/asset฀ turnover,฀ increased฀
depreciation฀=฀lower฀ROCE)฀
(e)฀ Timing฀ of฀ purchase฀ (eg฀ at฀ year฀ end฀ =฀ increased฀ capital฀ employed฀ but฀ no฀ time฀ to฀ affect฀
PBIT/revenue฀ and฀ also฀ a฀ full฀ year's฀ depreciation฀ may฀ be฀ charged฀ depending฀ on฀ the฀
accounting฀policy)฀
Gross฀profit฀margin฀
(a)฀ Change฀in฀sales฀price฀
(b)฀ Change฀in฀sales฀mix฀(eg฀silver฀cutlery฀(high฀mark-up)฀versus฀plastic฀cutlery฀(low฀mark฀up))฀
(c)฀ Change฀in฀purchase฀price฀and/or฀production฀costs฀(eg฀due฀to฀discounts/efficiencies)฀
(d)฀ Inventory฀obsolescence฀(written฀off฀through฀cost฀of฀sales)฀
Operating฀profit฀margin฀
(a)฀ One-off฀non-recurring฀expenses฀
(b)฀ Rapid฀expansion฀
(c)฀ Relocation฀
(d)฀ Efficiency฀savings฀(economies฀of฀scale)฀
Link฀between฀ROCE,฀operating฀profit฀margin฀and฀asset฀turnover฀
Return฀ on฀ capital฀ employed฀ is฀ a฀ useful฀ primary฀ ratio฀ in฀ analysing฀ profitability฀ and฀
efficiency฀together.฀However,฀to฀sub-analyse฀ROCE,฀two฀secondary฀ratios฀can฀be฀used฀to฀consider฀
profitability฀and฀efficiency฀separately:฀
฀ Profitability฀–฀operating฀profit฀margin฀
฀ Efficiency฀–฀asset฀turnover฀ratio฀
This฀is฀because฀when฀the฀operating฀profit฀margin฀is฀multiplied฀by฀the฀asset฀turnover฀ratio,฀this฀results฀
in฀the฀ROCE฀ratio:฀
Operating฀profit฀margin฀฀Asset฀turnover฀ratio฀=฀Return฀on฀capital฀employed฀
PBIT Revenue PBIT
  ฀
Revenue Capital employed Capital employed
1.3฀Investor฀ratios฀
Investors฀may฀either฀be฀seeking:฀
฀ Income฀(in฀the฀form฀of฀dividends);฀and/or฀
฀ Capital฀growth฀(in฀the฀form฀of฀an฀increase฀in฀the฀share฀price).฀
Which฀investor฀ratios฀they฀are฀interested฀in฀depends฀on฀whether฀they฀are฀seeking฀income฀or฀capital฀
growth.฀
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Earnings฀per฀share฀(EPS)฀
Earnings
Earnings฀per฀share฀=
Weighted฀average฀no.฀of฀shares
This฀is฀a฀measure฀of฀the฀amount฀of฀profit฀available฀for฀each฀share฀held.฀
Earnings฀per฀share฀is฀considered฀in฀more฀detail฀in฀Section฀2฀as฀it฀has฀its฀own฀accounting฀standard฀
(IAS฀33฀Earnings฀per฀Share).฀฀
Price/earnings฀(P/E฀ratio)฀
Current market price per share
P/E฀ratio฀=฀ ฀
EPS
The฀P/E฀ratio฀is฀a฀measure฀of฀the฀market's฀confidence฀in฀the฀future฀of฀an฀entity.฀
Profit฀retention฀ratio฀
Profit after dividends
Profit฀retention฀ratio฀=฀ ฀100%฀
Profit before dividends
This฀is฀a฀useful฀ratio฀for฀an฀investor฀seeking฀capital฀growth฀and฀it฀shows฀the฀portion฀of฀the฀profit฀
to฀be฀reinvested฀into฀the฀business฀for฀future฀growth฀(rather฀than฀being฀paid฀out฀as฀dividends).฀
Dividend฀payout฀rate฀
Cash dividend per share
Dividend฀payout฀rate฀=฀ ฀฀100%฀
EPS
This฀ ratio฀ is฀ useful฀ for฀ an฀ income-seeking฀ investor฀ as฀ it฀ shows฀ portion฀ of฀ profit฀ paid฀ out฀ to฀
investors฀in฀the฀form฀of฀a฀dividend.฀
Dividend฀yield฀
Dividend per share
Dividend฀yield฀=฀ ฀100%฀
Market฀price฀per฀share
This฀ratio฀gives฀the฀cash฀return฀on฀the฀investment฀(valued฀at฀current฀market฀value).฀It฀is฀useful฀
for฀an฀income-seeking฀investor.฀
Dividend฀cover฀
EPS
Dividend฀cover฀=฀ ฀
Dividend฀per฀share
This฀ ratio฀ shows฀ how฀ easily฀ an฀ entity฀ can฀ allocate฀ dividends฀ out฀ of฀ its฀ profits.฀ It฀ does฀ not฀
consider฀whether฀there฀is฀cash฀available฀to฀pay฀dividends.฀
investor฀ratios฀ ฀
The฀ following฀ information฀ is฀ available฀ for฀ two฀ listed฀entities฀ of฀ a฀ similar฀ size฀ operating฀ in฀ the฀ retail฀
sector:฀
฀ PQ฀ SR฀
EPS฀฀ 25฀cents฀per฀share฀ 20฀cents฀per฀share฀
P/E฀ratio฀ 15฀ 20฀
Dividend฀payout฀ratio฀ 90%฀ 50%฀
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Required฀
Identify฀which฀THREE฀of฀the฀following฀statements฀give฀realistic฀conclusions฀that฀could฀be฀drawn฀
from฀the฀above฀information?฀
An฀investor฀seeking฀to฀maximise฀their฀short-term฀return฀will฀be฀more฀attracted฀to฀PQ฀
than฀SR.฀
The฀dividend฀policy฀of฀SR฀is฀more฀generous฀than฀that฀of฀PQ.฀
The฀current฀return฀per฀share฀of฀SR฀is฀better฀than฀that฀of฀PQ.฀
SR฀has฀reinvested฀a฀greater฀proportion฀of฀its฀profit฀than฀PQ.฀
The฀market฀has฀greater฀confidence฀in฀the฀future฀of฀PQ฀than฀SR.฀
An฀investor฀seeking฀long-term฀capital฀growth฀will฀be฀more฀attracted฀to฀SR฀than฀PQ.฀
1.4฀Liquidity฀
Current฀ratio฀
Current฀assets
Current฀ratio฀=฀ ฀
Current฀liabilities
This฀ ratio฀ measures฀ a฀ company's฀ ability฀ to฀ pay฀ its฀ current฀ liabilities฀ out฀ of฀ its฀ current฀
assets.฀ The฀ industry฀ the฀ company฀ operates฀ in฀ should฀ be฀ taken฀ into฀ consideration.฀ For฀ example,฀ a฀
supermarket฀ has฀ low฀ receivables฀ (mainly฀ cash฀ sales),฀ low฀ inventory฀ (as฀ perishable)฀ and฀ high฀
payables฀(superior฀bargaining฀power)฀so฀overall฀will฀have฀a฀low฀current฀ratio.฀
Quick฀ratio฀
Current฀assets – Inventory
Quick฀ratio฀(acid฀test)฀=฀ ฀
Current฀฀liabilities
This฀is฀similar฀to฀the฀current฀ratio฀except฀that฀it฀omits฀the฀inventories฀figure฀from฀current฀assets.฀
This฀ is฀ because฀ inventories฀ are฀ the฀ least฀ liquid฀ current฀ asset฀ that฀ a฀ company฀ has,฀ as฀ it฀ has฀ to฀ be฀
sold,฀turned฀into฀receivables฀and฀then฀the฀cash฀has฀to฀be฀collected.฀This฀is฀a฀more฀reliable฀measure฀
as฀businesses฀will฀not฀be฀able฀to฀use฀inventories฀to฀pay฀off฀payables฀quickly.฀
1.5฀Working฀capital฀management฀
Receivables฀days฀
Trade฀receivables
Receivables฀days฀=฀ ฀฀365฀days฀
Credit฀sales
This฀ratio฀shows,฀on฀average,฀how฀long฀it฀takes฀for฀the฀trade฀receivables฀to฀settle฀their฀
account฀ with฀ the฀ company.฀ The฀ average฀ credit฀ term฀ granted฀ to฀ customers฀ should฀ be฀ taken฀ into฀
account฀as฀well฀as฀the฀efficiency฀of฀the฀credit฀control฀function฀within฀the฀company.฀
Inventory฀days฀
Inventories
Inventory฀days฀=฀฀ ฀365฀days*
Cost฀of฀sales ฀
This฀ratio฀measures฀the฀number฀of฀days฀inventories฀are฀held฀by฀a฀company฀on฀average.฀
This฀figure฀will฀depend฀on฀the฀type฀of฀goods฀sold฀by฀the฀company.฀A฀company฀selling฀fresh฀fruit฀and฀
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vegetables฀should฀have฀low฀inventory฀holding฀periods฀as฀these฀goods฀will฀quickly฀become฀inedible.฀
A฀manufacturer฀of฀aged฀wine฀will฀by฀default฀have฀very฀long฀inventory฀holding฀periods.฀It฀is฀important฀
for฀a฀company฀to฀keep฀its฀inventory฀days฀as฀low฀as฀possible,฀subject฀of฀course฀to฀being฀able฀to฀meet฀
its฀customers'฀demands.฀
Payables฀days฀
Trade ฀payables
Payables฀days฀=฀ ฀฀365฀
Purchases
Use฀cost฀of฀sales฀if฀purchases฀are฀not฀disclosed.฀
This฀ ratio฀ is฀ measuring฀ the฀ time฀ it฀ takes฀ the฀ company฀ to฀ settle฀ its฀ trade฀ payable฀
balances.฀ Trade฀ payables฀ provide฀ the฀ company฀ with฀ a฀ valuable฀ source฀ of฀ short-term฀ finance,฀ but฀
delaying฀ payment฀ for฀ too฀ long฀ a฀ period฀ of฀ time฀ can฀ cause฀ operational฀ problems฀ as฀ suppliers฀ may฀
stop฀providing฀goods฀and฀services฀until฀payment฀is฀received.฀฀
Working฀capital฀cycle฀
The฀ working฀ capital฀ cycle฀ (also฀ known฀ as฀ the฀ 'cash฀ operating฀ cycle')฀ includes฀ cash,฀ receivables,฀
inventories฀and฀payables.฀It฀effectively฀represents฀the฀time฀between฀payment฀of฀cash฀for฀inventories฀
and฀eventual฀receipt฀of฀cash฀from฀sale฀of฀the฀inventories.฀฀
It฀ shows฀ the฀ number฀ of฀ days฀ for฀ which฀ finance฀ is฀ required.฀ Therefore,฀ ideally฀ the฀ shorter฀ it฀ is,฀ the฀
better.฀However,฀it฀will฀vary฀from฀industry฀to฀industry.฀
The฀length฀of฀the฀cycle฀is฀determined฀using฀the฀working฀capital฀management฀ratios:฀
฀
Buy฀ Inventory฀days฀ Sell฀ Receivable days Receive฀
inventories฀ inventories฀ cash฀from฀
฀ receivables฀
Payable฀
฀ Working฀capital฀
days฀
cycle฀
฀ Pay฀
payables฀
฀
The฀working฀capital฀cycle฀can฀be฀therefore฀be฀calculated฀as:฀
Inventory฀days฀+฀Receivable฀days฀–฀Payable฀days฀
working฀capital฀ratios฀ ฀
FC฀is฀a฀mobile฀phone฀manufacturer,฀selling฀to฀both฀network฀providers฀and฀independent฀retailers.฀FC฀
has฀the฀following฀working฀capital฀ratios฀for฀the฀years฀ended฀31฀December฀20X4฀and฀20X5.฀
฀ 20X5฀ 20X4฀
Inventory฀days฀ 93฀ 98฀
Receivables฀days฀ 54฀ 52฀
Payables฀days฀ 97฀ 91฀
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Required฀
Identify฀ which฀ TWO฀ of฀ the฀ following฀ statements฀ give฀ realistic฀ conclusions฀ that฀ could฀ be฀ drawn฀
from฀the฀above฀information?฀
฀ The฀risk฀of฀inventory฀obsolescence฀has฀increased฀year฀on฀year.฀
฀ The฀working฀capital฀cycle฀has฀decreased฀year฀on฀year.฀
฀ The฀number฀of฀days'฀finance฀required฀to฀fund฀working฀capital฀is฀greater฀in฀20X5฀than฀
20X4.฀฀
฀ Overall,฀FC's฀working฀capital฀management฀has฀deteriorated฀year฀on฀year.฀
฀ There฀is฀a฀slightly฀higher฀possibility฀of฀bad฀debts฀arising฀in฀20X5฀than฀20X4.฀
1.6฀Financial฀leverage฀
Gearing฀
Long-term฀debt
Debt/Equity฀=฀฀ ฀100%฀or฀
Equity
Long-term฀debt
Debt/(Debt฀+฀Equity)฀=฀฀ ฀100%฀
Long-term฀debt฀฀Equity
Note.฀ What฀ to฀ include฀ in฀ 'long-term฀ debt'฀ is฀ subjective฀ and฀ will฀ often฀ vary฀ from฀ company฀ to฀
company.฀ Typically,฀ interest-bearing฀ borrowings฀ such฀ as฀ bank฀ loans฀ and฀ lease฀ liabilities฀ are฀
included.฀An฀overdraft฀should฀also฀be฀included฀if฀it฀is฀being฀used฀as฀a฀source฀of฀long-term฀finance.฀
Pension฀liabilities฀and฀preference฀shares฀classified฀as฀a฀financial฀liability฀may฀also฀be฀included.฀
Gearing฀ is฀ concerned฀ with฀ the฀ long-term฀ financial฀ stability฀ of฀ the฀ company.฀ It฀ looks฀ at฀ how฀
much฀ the฀ company฀ is฀ financed฀ by฀ debt.฀ The฀ advantage฀ of฀ debt฀ is฀ that฀ it฀ is฀ a฀ cheaper฀ source฀ of฀
finance฀ than฀ equity฀ as฀ interest฀ is฀ tax฀ deductible.฀ However,฀ the฀ higher฀ the฀ gearing฀ ratio,฀ the฀ less฀
secure฀will฀be฀the฀financing฀of฀the฀company฀and฀possibly฀the฀company's฀future.฀฀฀
Interest฀cover฀
PBIT
Interest฀cover฀=฀฀ ฀
Interest expense
The฀ interest฀ cover฀ ratio฀ considers฀ the฀ number฀ of฀ times฀ a฀ company฀ could฀ pay฀ its฀ interest฀
payments฀using฀its฀profit฀from฀operations.฀The฀main฀concern฀is฀that฀a฀company฀should฀not฀
have฀so฀much฀debt฀finance฀that฀it฀risks฀not฀being฀able฀to฀settle฀the฀debt฀as฀it฀falls฀due.฀
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Activity฀4:฀Ratio฀analysis฀ ฀
RST฀ Co฀ is฀ considering฀ a฀ potential฀ investment฀ in฀ its฀ competitor฀ XYZ฀ Co.฀ The฀ managing฀ director฀ of฀
RST฀Co฀ has฀ obtained฀ the฀ three฀ most฀ recent฀ statements฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income฀and฀statements฀of฀financial฀position฀of฀XYZ฀Co฀as฀shown฀below.฀
XYZ฀CO฀
FOR฀YEARS฀ENDED฀31฀DECEMBER฀
฀ 20X6 20X7฀ 20X8฀
฀ $'000 $'000฀ ฀$'000฀
Revenue฀ 18,000 18,900฀ ฀19,845฀
Cost฀of฀sales฀ 10,440 10,340฀ ฀11,890฀
Gross฀profit฀ 7,560 8,560฀ ฀7,955฀
Distribution฀costs฀ 1,565 1,670฀ ฀1,405฀
Administrative฀expenses 1,409 1,503฀ ฀1,591฀
Operating฀profit฀ 4,586 5,387฀ ฀4,959฀
Interest฀payable฀on฀bank฀overdraft฀ 104 215฀ ฀450฀
Interest฀payable฀on฀12%฀debentures฀ ฀฀600 ฀฀600฀ ฀฀฀฀600฀
Profit฀before฀tax฀ 3,882 4,572฀ ฀3,909฀
Income฀tax฀ 1,380 2,000฀ ฀1,838฀
Profit฀after฀tax฀ ฀ 2,502 ฀ ฀ 2,572 ฀ ฀2,071฀
XYZ฀CO฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀DECEMBER฀
฀ 20X6 20X7 20X8฀
฀ $'000 $'000 $'000 $'000 $'000฀ $'000
Assets฀฀ ฀
Non-current฀assets฀฀ ฀
฀฀฀Land฀and฀buildings฀ 11,460 12,121 11,081฀
฀฀฀Plant฀and฀machinery฀ ฀฀8,896 9,020 ฀฀9,130฀
฀฀ 20,356 21,141 ฀ 20,211
Current฀assets฀฀ ฀
฀฀฀Inventory฀ ฀1,775 2,663 ฀3,995฀
฀฀฀Trade฀receivables฀ ฀1,440 2,260 ฀3,164฀
฀฀฀Cash฀ ฀฀฀฀฀฀50 ฀฀฀฀53 ฀฀฀฀฀฀55฀
฀฀ 3,265 4,976 ฀ ฀฀฀฀7,214
฀฀ ฀23,621 ฀26,117฀ ฀ ฀27,425฀
Equity฀ ฀
฀฀฀Share฀capital฀ ฀8,000 8,000 ฀ 8,000 ฀
฀฀฀Retained฀earnings฀ ฀฀6,434 7,313 ฀฀7,584฀
฀฀ 14,434 15,313 ฀ ฀15,584
Non-current฀liabilities฀฀ ฀
฀฀฀12%฀debentures฀20Y1฀–฀20Y4฀ 5,000 5,000 ฀ ฀5,000
฀฀฀Trade฀payables฀ ฀390 388 ฀446฀
฀฀฀Bank฀ ฀1,300 2,300 ฀3,400฀
฀฀฀Tax฀ ฀897 1,420 ฀1,195฀
฀฀฀Dividend฀payable฀ ฀ 1,600 1,696 ฀1,800฀
฀฀ ฀฀4,187 ฀ ฀5,804 ฀ ฀ ฀฀฀6,841฀
฀฀ ฀23,621 ฀26,117฀ ฀ ฀27,425฀
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Required฀
Prepare฀ a฀ brief฀ report฀ for฀ the฀ Managing฀ Director฀ of฀ RST฀ Co฀ commenting฀ on฀ the฀ financial฀
performance฀ and฀ financial฀ leverage฀ of฀ XYZ฀ Co฀ from฀ the฀ perspective฀ of฀ making฀ the฀ potential฀
investment.฀You฀should฀highlight฀any฀areas฀that฀require฀further฀investigation.฀
2฀Problems฀with฀ratio฀analysis฀
The฀lack฀of฀detailed฀information฀available฀to฀the฀outsider฀is฀a฀potential฀problem฀in฀undertaking฀
ratio฀analysis,฀as:฀
 There฀may฀simply฀be฀insufficient฀data฀to฀calculate฀all฀of฀the฀required฀ratios;฀and฀
 A฀ suitable฀ 'yardstick'฀ with฀ which฀ the฀ calculated฀ ratios฀ may฀ be฀ compared฀ may฀ not฀ be฀ readily฀
available.฀
Limitations฀of฀year-on-year฀comparisons฀
When฀ undertaking฀ trend฀ analysis฀ (comparisons฀ for฀ the฀ same฀ business฀ over฀ time),฀ it฀ is฀ important฀ to฀
consider฀the฀following฀limitations:฀
Limitation฀ Example฀
Change฀in฀nature฀of฀the฀business฀or฀ The฀launch฀of฀a฀new฀product฀or฀entry฀into฀a฀new฀
geographical฀areas฀in฀which฀the฀entity฀ geographical฀market฀
operates฀
Increasing฀costs฀or฀a฀change฀in฀the฀ Rising฀energy฀costs,฀agreeing฀to฀pay฀staff฀the฀living฀
value฀of฀the฀currency฀ wage฀or฀a฀weakening฀of฀the฀home฀currency฀making฀
foreign฀imports฀more฀expensive.฀Can฀make฀a฀simple฀
comparison฀difficult฀as฀these฀factors฀would฀mean฀that฀
inconsistencies฀would฀exist฀between฀periods฀฀
Changes฀in฀accounting฀policies฀ A฀change฀from฀using฀the฀FIFO฀method฀to฀the฀average฀
cost฀method฀under฀IAS฀2.฀Is฀likely฀to฀reduce฀the฀cost฀of฀
closing฀inventories฀and฀increase฀cost฀of฀sales฀which฀has฀
an฀impact฀on฀gross฀and฀net฀profit฀margins฀and฀the฀
inventory฀holding฀period฀
Limitations฀of฀intersegment฀comparisons฀
When฀undertaking฀'cross-sectional'฀analysis฀(making฀comparisons฀with฀other฀companies)฀the฀position฀
is฀ even฀ more฀ difficult฀ because฀ of฀ the฀ problem฀ of฀ identifying฀ companies฀ that฀ are฀ comparable.฀
Comparability฀between฀companies฀may฀be฀impaired฀due฀to฀the฀following฀reasons.฀
Different฀accounting฀policies฀ An฀entity฀that฀revalues฀PPE฀will฀have฀higher฀depreciation฀
than฀one฀that฀does฀not฀revalue,฀reducing฀its฀margins฀
and฀return฀on฀capital฀employed฀
Operating฀at฀different฀ends฀of฀the฀ Low฀price/high฀volume฀versus฀luxury฀items฀with฀high฀
sector฀ sales฀prices฀resulting฀in฀different฀profit฀margins฀
Slightly฀different฀range฀of฀activities฀ Supermarkets฀now฀often฀operate฀in฀food,฀retail฀clothing฀
within฀the฀business฀ and฀financial฀services.฀The฀product฀mix฀and฀therefore฀
margins฀will฀vary฀from฀entity฀to฀entity฀
Difference฀in฀size฀of฀entities฀ Larger฀entities฀may฀benefit฀from฀economies฀of฀scale฀and฀
better฀margins฀
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฀
Different฀classification฀of฀costs฀฀ Different฀classification฀between฀cost฀of฀sales,฀distribution฀
costs฀and฀administrative฀expenses฀will฀impact฀margins฀
Different฀business฀decisions฀ Whether฀to฀purchase฀assets฀under฀finance฀or฀operating฀
leases฀will฀reduce฀comparability.฀Finance฀leases฀
increase฀capital฀employed฀and฀gearing฀whereas฀
operating฀leases฀have฀no฀SOFP฀impact฀
The฀age฀of฀the฀business฀ This฀could฀impact฀the฀P/E฀ratio.฀A฀new฀entity฀may฀have฀
a฀lower฀P/E฀ratio฀than฀an฀established฀entity฀as฀it฀may฀
be฀perceived฀to฀be฀higher฀risk฀
Age฀of฀assets฀ The฀older฀the฀assets,฀the฀lower฀the฀capital฀employed฀
and฀the฀lower฀the฀depreciation฀which฀could฀result฀in฀a฀
higher฀ROCE฀for฀an฀entity฀with฀older฀assets฀
P/E฀ratio฀often฀impacted฀by฀factors฀ Some฀entities฀might฀be฀impacted฀more฀than฀others฀by฀
outside฀the฀control฀of฀the฀entity฀ factors฀influencing฀the฀market฀generally฀(eg฀recession)฀
or฀macro-economic฀factors฀(eg฀interest฀rate฀changes)฀
Limitations฀of฀international฀comparisons฀
Different฀accounting฀standards฀ Different฀countries฀will฀potentially฀be฀following฀different฀
GAAPs.฀Different฀measurement฀rules฀for฀major฀elements฀
(eg฀PPE,฀inventories,฀provisions)฀are฀likely฀to฀impact฀
profit฀margins฀and฀ROCE฀
Different฀economic฀environments฀with฀ Examples:฀minimum฀wage,฀quotas,฀local฀taxes฀on฀goods฀
different฀cultural฀pressures฀ shipped฀in฀or฀out฀of฀country,฀environmental฀legislation฀
Listed฀on฀stock฀markets฀with฀different฀ A฀small฀illiquid฀market฀may฀have฀lower฀share฀prices฀as฀
levels฀of฀liquidity฀ there฀is฀less฀activity฀in฀the฀market,฀causing฀a฀lower฀P/E฀
ratio฀
The฀ major฀ intragroup฀ comparison฀ organisations฀ (whose฀ results฀ are฀ intended฀ for฀ the฀ use฀ of฀
participating฀ companies฀ and฀ are฀ not฀ generally฀ available)฀ go฀ to฀ considerable฀ length฀ to฀ adjust฀
accounts฀to฀comparable฀bases.฀฀
The฀ external฀ user฀ will฀ rarely฀ be฀ in฀ a฀ position฀ to฀ make฀ such฀ adjustments.฀ Although฀ the฀ position฀ is฀
improved฀ by฀ increases฀ in฀ disclosure฀ requirements,฀ direct฀ comparisons฀ between฀ companies฀ will฀
inevitably,฀on฀occasion,฀continue฀to฀give฀rise฀to฀misleading฀results.฀
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3฀Earnings฀per฀share฀
The฀following฀definitions฀are฀given฀in฀IAS฀33฀Earnings฀per฀Share฀(IAS฀33:฀para.฀5–฀7).฀It฀is฀necessary฀
to฀be฀familiar฀with฀these:฀
Ordinary฀share:฀an฀equity฀instrument฀that฀is฀subordinate฀to฀all฀other฀classes฀of฀equity฀instruments.฀
Key฀term฀ Potential฀ordinary฀share:฀a฀financial฀instrument฀or฀other฀contract฀that฀may฀entitle฀its฀holder฀to฀
ordinary฀shares.฀
Options,฀warrants฀and฀their฀equivalents:฀financial฀instruments฀that฀give฀the฀holder฀the฀right฀
to฀purchase฀ordinary฀shares.฀
Contingently฀issuable฀ordinary฀shares:฀ordinary฀shares฀issuable฀for฀little฀or฀no฀cash฀or฀other฀
consideration฀upon฀the฀satisfaction฀of฀certain฀conditions฀in฀a฀contingent฀share฀agreement.฀
Contingent฀share฀agreement:฀an฀agreement฀to฀issue฀shares฀that฀is฀dependent฀on฀the฀
satisfaction฀of฀specified฀conditions.฀
Dilution:฀a฀reduction฀in฀earnings฀per฀share฀or฀an฀increase฀in฀loss฀per฀share฀resulting฀from฀the฀
assumption฀that฀convertible฀instruments฀are฀converted,฀that฀options฀or฀warrants฀are฀exercised,฀or฀that฀
ordinary฀shares฀are฀issued฀upon฀the฀satisfaction฀of฀certain฀conditions.฀฀
Antidilution:฀an฀increase฀in฀earnings฀per฀share฀or฀a฀reduction฀in฀loss฀per฀share฀resulting฀from฀the฀
assumption฀that฀convertible฀instruments฀are฀converted,฀that฀options฀or฀warrants฀are฀exercised,฀or฀that฀
ordinary฀shares฀are฀issued฀upon฀the฀satisfaction฀of฀certain฀conditions.฀฀ ฀
(IAS฀33:฀para.฀5฀–฀7)฀
3.2฀Basic฀EPS฀
Basic฀EPS฀should฀be฀calculated฀for฀profit฀or฀loss฀attributable฀to฀ordinary฀equity฀holders฀of฀
the฀ parent฀ entity฀ and฀ profit฀ or฀ loss฀ from฀ continuing฀ operations฀ attributable฀ to฀ those฀ equity฀
holders฀(if฀this฀is฀presented)฀(IAS฀33:฀para.฀9).฀
Basic฀ EPS฀ should฀ be฀ calculated฀ by฀ dividing฀ the฀ net฀ profit฀ or฀ loss฀ for฀ the฀ period฀ attributable฀ to฀
ordinary฀ equity฀ holders฀ by฀ the฀ weighted฀ average฀ number฀ of฀ ordinary฀ shares฀ outstanding฀
during฀the฀period฀(IAS฀33:฀para.฀10).฀
Net฀profit฀or฀loss฀attributable฀to฀ordinary฀equity฀holders฀of฀the฀patent฀entity
EPS = ฀cents
Weighed฀average฀no.฀of฀ordinary฀equity฀shares฀outstanding฀during฀the฀period
฀
Earnings฀
The฀net฀profit฀or฀loss฀attributable฀to฀ordinary฀equity฀holders฀of฀the฀parent฀is฀the฀consolidated฀profit฀
after:฀
฀ Income฀taxes฀
฀ Non-controlling฀interests฀
฀ Preference฀dividends฀(on฀preference฀shares฀which฀have฀been฀classified฀as฀equity)฀
Note.฀Preference฀dividends฀on฀preference฀shares฀which฀have฀been฀classified฀as฀a฀financial฀liability฀
do฀not฀need฀to฀be฀deducted฀as฀they฀will฀already฀have฀been฀reported฀in฀the฀profit฀figure฀as฀a฀finance฀
cost.฀
฀ (IAS฀33:฀para.฀12–14).฀
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฀
Number฀of฀shares฀
The฀ number฀ of฀ ordinary฀ shares฀ used฀ should฀ be฀ the฀ weighted฀ average฀ number฀ of฀ ordinary฀ shares฀
during฀the฀period.฀This฀figure฀(for฀all฀periods฀presented)฀should฀be฀adjusted฀for฀events,฀other฀than฀
the฀ conversion฀ of฀ potential฀ ordinary฀ shares,฀ that฀ have฀ changed฀ the฀ number฀ of฀ shares฀ outstanding฀
without฀a฀corresponding฀change฀in฀resources฀(IAS฀33:฀para.฀19).฀
3.3฀Diluted฀EPS฀
At฀the฀end฀of฀an฀accounting฀period,฀a฀company฀may฀have฀in฀issue฀some฀securities฀which฀do฀not฀(at฀
present)฀have฀any฀'claim'฀to฀a฀share฀of฀equity฀earnings,฀but฀may฀give฀rise฀to฀such฀a฀claim฀in฀
the฀future.฀These฀may฀include:฀
(a)฀฀ A฀separate฀class฀of฀equity฀shares฀which฀at฀present฀is฀not฀entitled฀to฀any฀dividend,฀but฀
will฀be฀entitled฀after฀some฀future฀date฀
(b)฀ Convertible฀loan฀stock฀or฀convertible฀preferred฀shares฀which฀give฀their฀holders฀the฀
right฀at฀some฀future฀date฀to฀exchange฀their฀securities฀for฀ordinary฀shares฀of฀the฀company,฀at฀a฀
pre-determined฀conversion฀rate฀
(c)฀ Options฀or฀warrants฀
In฀such฀circumstances,฀the฀future฀number฀of฀shares฀ranking฀for฀dividend฀might฀increase,฀which฀in฀turn฀
results฀in฀a฀fall฀in฀the฀EPS.฀In฀other฀words,฀a฀future฀increase฀in฀the฀number฀of฀equity฀shares฀
will฀cause฀a฀dilution฀or฀'watering฀down'฀of฀equity,฀and฀it฀is฀possible฀to฀calculate฀a฀diluted฀
earnings฀per฀share฀(ie฀the฀EPS฀that฀would฀have฀been฀obtained฀during฀the฀financial฀period฀if฀the฀
dilution฀ had฀ already฀ taken฀ place).฀ This฀ will฀ indicate฀ to฀ investors฀ the฀ possible฀ effects฀ of฀ a฀ future฀
dilution.฀
Diluted฀earnings฀
The฀earnings฀calculated฀for฀basic฀EPS฀should฀be฀adjusted฀by฀the฀post-tax฀(including฀deferred฀tax)฀
effect฀of฀the฀following฀(IAS฀33:฀para.฀33):฀
(a)฀ Any฀dividends฀on฀dilutive฀potential฀ordinary฀shares฀that฀were฀deducted฀to฀arrive฀at฀earnings฀
for฀basic฀EPS฀
(b)฀ Interest฀recognised฀in฀the฀period฀for฀the฀dilutive฀potential฀ordinary฀shares฀
(c)฀ Any฀other฀changes฀in฀income฀or฀expenses฀(fees฀and฀discount,฀premium฀accounted฀for฀
as฀ yield฀ adjustments)฀ that฀ would฀ result฀ from฀ the฀ conversion฀ of฀ the฀ dilutive฀ potential฀ ordinary฀
shares,฀or฀changes฀in฀for฀example฀employee฀bonuses฀if฀linked฀to฀profit.฀
Diluted฀number฀of฀shares฀
The฀ number฀ of฀ ordinary฀ shares฀ is฀ the฀ weighted฀ average฀ number฀ of฀ ordinary฀ shares฀ calculated฀ for฀
basic฀ EPS฀ plus฀ the฀ weighted฀ average฀ number฀ of฀ ordinary฀ shares฀ that฀ would฀ be฀ issued฀ on฀ the฀
conversion฀ of฀ all฀ the฀ dilutive฀ potential฀ ordinary฀ shares฀ into฀ ordinary฀ shares฀ (IAS฀ 33:฀
para.฀36).฀
It฀ should฀ be฀ assumed฀ that฀ dilutive฀ ordinary฀ shares฀ were฀ converted฀ into฀ ordinary฀ shares฀ at฀ the฀
beginning฀of฀the฀period฀or,฀if฀later,฀at฀the฀actual฀date฀of฀issue.฀฀
The฀ computation฀ assumes฀ the฀ most฀ advantageous฀ conversion฀ rate฀ or฀ exercise฀ rate฀ from฀ the฀
standpoint฀of฀the฀holder฀of฀the฀potential฀ordinary฀shares.฀
An฀ EPS฀ question฀ in฀ the฀ SBR฀ exam฀ is฀ unlikely฀ to฀ focus฀ on฀ detailed฀ IAS฀ 33฀ calculations.฀ Instead,฀ the฀
question฀could฀ask฀to฀you฀to฀explain฀the฀impact฀of฀certain฀accounting฀treatments฀on฀EPS฀or฀to฀correct฀
errors฀in฀accounting฀treatment฀then฀recalculate฀EPS.฀It฀could฀also฀focus฀on฀the฀importance฀of฀EPS฀to฀
stakeholders.฀
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3.4฀Presentation฀
An฀ entity฀ should฀ present฀ (with฀ equal฀ prominence)฀ on฀ the฀ face฀ of฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀
other฀comprehensive฀income฀basic฀and฀diluted฀EPS฀for:฀
(a)฀ Profit฀or฀loss฀from฀continuing฀operations;฀and฀
(b)฀ Profit฀or฀loss฀for฀the฀period฀
for฀each฀class฀of฀ordinary฀share฀that฀has฀a฀different฀right฀to฀share฀in฀the฀net฀profit฀for฀the฀period.฀฀
Basic฀and฀diluted฀EPS฀for฀any฀discontinuing฀operations฀must฀also฀be฀presented.฀
Disclosure฀must฀still฀be฀made฀where฀the฀EPS฀figures฀(basic฀and/or฀diluted)฀are฀negative฀(ie฀a฀loss฀
per฀share).฀
฀ (IAS฀33:฀para.฀66–69)฀
3.5฀Alternative฀EPS฀figures฀
An฀entity฀may฀present฀alternative฀EPS฀figures฀if฀it฀wishes.฀However,฀IAS฀33฀lays฀out฀certain฀
rules฀where฀this฀takes฀place฀(IAS฀33:฀para.฀73).฀
(a)฀ The฀weighted฀average฀number฀of฀shares฀as฀calculated฀under฀IAS฀33฀must฀be฀used.฀
(b)฀ A฀reconciliation฀must฀be฀given฀between฀the฀component฀of฀profit฀used฀in฀the฀alternative฀EPS฀
(if฀it฀is฀not฀a฀line฀item฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income)฀and฀
the฀line฀item฀for฀profit฀reported฀in฀profit฀or฀loss.฀
(c)฀ The฀entity฀must฀indicate฀the฀basis฀on฀which฀the฀numerator฀is฀determined.฀
(d)฀ Basic฀and฀diluted฀EPS฀must฀be฀shown฀with฀equal฀prominence.฀
If฀ comparing฀ the฀ EPS฀ of฀ two฀ entities,฀ you฀ should฀ be฀ aware฀ of฀ the฀ basis฀ on฀ which฀ the฀ EPS฀ is฀
calculated.฀If฀an฀alternative฀approach฀is฀used,฀it฀may฀not฀be฀possible฀to฀easily฀compare฀the฀figures.฀฀฀
3.6฀Significance฀of฀earnings฀per฀share฀
Earnings฀per฀share฀(EPS)฀is฀one฀of฀the฀most฀frequently฀quoted฀statistics฀in฀financial฀analysis.฀It฀is฀easily฀
accessible฀to฀investors฀because฀it฀is฀presented฀on฀the฀face฀of฀the฀financial฀statements,฀and฀basic฀EPS฀
is฀fairly฀easily฀understood.฀
Because฀ of฀ its฀ interaction฀ with฀ the฀ price฀ earnings฀ (P/E฀ ratio)฀ and฀ the฀ widespread฀ use฀ of฀ the฀ P/E฀
ratio฀ as฀ a฀ yardstick฀ for฀ investment฀ decisions,฀ EPS฀ can,฀ through฀ the฀ P/E฀ ratio,฀ have฀ a฀ significant฀
effect฀ on฀ a฀ company's฀ share฀ price.฀ Therefore,฀ a฀ share฀ price฀ might฀ fall฀ if฀ it฀ looks฀ as฀ if฀ EPS฀ is฀
going฀to฀be฀low.฀This฀is฀not฀very฀rational,฀as฀EPS฀can฀depend฀on฀many,฀often฀subjective,฀assumptions฀
used฀ in฀ preparing฀ a฀ historical฀ statement,฀ namely฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income.฀It฀does฀not฀necessarily฀bear฀any฀relation฀to฀the฀value฀of฀a฀company,฀and฀of฀
its฀shares.฀Nevertheless,฀the฀market฀is฀sensitive฀to฀EPS.฀
฀ ฀
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฀
4฀Problems฀with฀financial฀performance฀indicators฀
It฀is฀increasingly฀the฀case฀that฀financial฀performance฀measures฀do฀not฀fully฀report฀all฀the฀factors฀that฀
an฀ entity฀ nor฀ its฀ stakeholders฀ consider฀ important.฀ Some฀ of฀ the฀ common฀ problems฀ with฀ financial฀
performance฀indicators฀include:฀
฀ They฀do฀not฀identify฀the฀causes฀of฀performance,฀only฀the฀effects฀of฀it.฀
฀ They฀ focus฀ only฀ on฀ variables฀ which฀ can฀ be฀ expressed฀ in฀ monetary฀ terms,฀ ignoring฀ other฀
important฀variables฀which฀cannot฀be฀expressed฀in฀monetary฀terms.฀
฀ They฀focus฀on฀the฀past.฀
฀ They฀do฀not฀convey฀the฀full฀picture฀of฀a฀company's฀performance฀in฀a฀modern฀business฀
environment฀eg฀quality,฀customer฀satisfaction.฀
฀ They฀focus฀on฀the฀short฀term.฀
5฀Global฀Reporting฀Initiative฀(GRI)฀฀
The฀ GRI฀ published฀ its฀ sustainability฀ reporting฀ standards,฀ the฀ GRI฀ Standards,฀ in฀ 2016.฀ These฀
replace฀the฀previous฀GRI฀guidelines฀and฀are฀effective฀for฀reports฀or฀other฀material฀published฀from฀July฀
2018,฀ though฀ earlier฀ adoption฀ is฀ encouraged.฀ The฀ GRI฀ Standards฀ are฀ designed฀ to฀ be฀ used฀ by฀
organisations฀to฀report฀about฀their฀impacts฀on฀the฀economy,฀the฀environment,฀and/or฀society.฀
There฀are฀two฀basic฀approaches฀for฀using฀the฀GRI฀Standards:฀฀
(a)฀ Using฀ the฀ GRI฀ Standards฀ as฀ a฀ set฀ to฀ prepare฀ a฀ sustainability฀ report฀ in฀ accordance฀ with฀ the฀
Standards.฀฀
(b)฀ Using฀selected฀Standards,฀or฀parts฀of฀their฀content,฀to฀report฀specific฀information.฀฀
(GRI฀101:฀Foundation,฀p21)฀
There฀are฀three฀universal฀standards฀(known฀as฀the฀'100฀series'),฀followed฀by฀a฀series฀of฀topic-specific฀
standards.฀The฀universal฀standards฀are:฀
Standard฀ Description฀
GRI฀101:฀Foundation฀ 'Sets฀out฀the฀reporting฀principles฀for฀defining฀report฀content฀and฀
quality.฀It฀includes฀requirements฀for฀preparing฀a฀sustainability฀report฀
in฀accordance฀with฀the฀GRI฀Standards,฀and฀describes฀how฀the฀GRI฀
Standards฀can฀be฀used฀and฀referenced'฀(GRI฀101:฀Foundation,฀p4).
GRI฀102:฀General฀ 'Used฀to฀report฀contextual฀information฀about฀an฀organization฀and฀
Disclosures฀ its฀sustainability฀reporting฀practices.฀This฀includes฀information฀about฀
an฀organisation's฀profile,฀strategy,฀ethics฀and฀integrity,฀governance,฀
stakeholder฀engagement฀practices,฀and฀reporting฀process'฀(GRI฀
101:฀Foundation,฀p4).฀
GRI฀103:฀Management฀ 'Used฀to฀report฀information฀about฀how฀an฀organization฀manages฀a฀
Approach฀ material฀topic.฀It฀is฀designed฀to฀be฀used฀for฀each฀material฀topic฀in฀a฀
sustainability฀report,฀including฀those฀covered฀by฀the฀topic-specific฀
GRI฀Standards฀(series฀200,฀300,฀and฀400)฀and฀other฀material฀
topics.฀฀
Applying฀GRI฀103฀with฀each฀material฀topic฀allows฀the฀organization฀
to฀provide฀a฀narrative฀explanation฀of฀why฀the฀topic฀is฀material,฀
where฀the฀impacts฀occur฀(the฀topic฀Boundary),฀and฀how฀the฀
organisation฀manages฀the฀impacts'฀(GRI฀101:฀Foundation,฀p4).฀
A฀high฀level฀description฀of฀GRI฀101:฀Foundation฀is฀given฀in฀Section฀5.1฀below.฀฀
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Exercise฀1:฀GRI฀Standards฀ ฀
The฀GRI฀standards฀are฀available฀to฀download฀from฀the฀GRI฀website:฀www.globalreporting.org.฀฀
Take฀ a฀ look฀ at฀ the฀ GRI฀ Standards฀ and฀ think฀ about฀ how฀ a฀ company฀ you฀ know฀ might฀ apply฀ these฀
standards฀to฀its฀reporting.฀Do฀you฀think฀it฀would฀be฀difficult/expensive฀to฀apply฀the฀standards?฀฀
5.1฀GRI฀101฀Reporting฀principles฀฀
GRI฀101฀Section฀1฀provides฀four฀reporting฀principles.฀GRI฀believes฀these฀principles฀are฀fundamental฀
to฀achieving฀high฀quality฀sustainability฀reporting.฀In฀order฀to฀claim฀that฀a฀report฀has฀been฀prepared฀in฀
accordance฀with฀the฀GRI฀Standards,฀an฀entity฀must฀comply฀with฀the฀reporting฀principles฀of฀GRI฀101.฀
Reporting฀principle฀ Definition฀
Stakeholder฀ 'The฀reporting฀organisation฀shall฀identify฀its฀stakeholders,฀and฀explain฀
inclusiveness฀ how฀it฀has฀responded฀to฀their฀reasonable฀expectations฀and฀interests.'฀
Sustainability฀context฀ 'The฀report฀shall฀present฀the฀reporting฀organisation's฀performance฀in฀
the฀wider฀context฀of฀sustainability.'฀(GRI฀101:฀Foundation,฀p9)฀
Materiality฀ 'The฀report฀shall฀cover฀topics฀that:฀฀
reflect฀the฀reporting฀organisation's฀significant฀economic,฀
environmental,฀and฀social฀impacts;฀or฀฀
substantively฀influence฀the฀assessments฀and฀decisions฀of฀stakeholders.'฀
Completeness฀ 'The฀report฀shall฀include฀coverage฀of฀material฀topics฀and฀their฀
Boundaries,฀sufficient฀to฀reflect฀significant฀economic,฀environmental,฀
and฀social฀impacts,฀and฀to฀enable฀stakeholders฀to฀assess฀the฀reporting฀
organisation's฀performance฀in฀the฀reporting฀period.'฀(GRI฀101:฀
Foundation,฀p12)฀
It฀also฀sets฀out฀principles฀for฀defining฀reporting฀quality:฀
Principle฀ Description฀
Accuracy฀ 'The฀reported฀information฀shall฀be฀sufficiently฀accurate฀and฀detailed฀for฀
stakeholders฀to฀assess฀the฀reporting฀organisation's฀performance.'฀(GRI฀
101:฀Foundation,฀p13)฀
Balance฀ 'The฀reported฀information฀shall฀reflect฀positive฀and฀negative฀aspects฀of฀
the฀reporting฀organisation's฀performance฀to฀enable฀a฀reasoned฀
assessment฀of฀overall฀performance.'฀(GRI฀101:฀Foundation,฀p13)฀
Clarity฀ 'The฀reporting฀organisation฀shall฀make฀information฀available฀in฀a฀
manner฀that฀is฀understandable฀and฀accessible฀to฀stakeholders฀using฀
that฀information.'฀(GRI฀101:฀Foundation,฀p14)฀
Comparability฀ 'The฀reporting฀organisation฀shall฀select,฀compile,฀and฀report฀
information฀consistently.฀The฀reported฀information฀shall฀be฀presented฀in฀
a฀manner฀that฀enables฀stakeholders฀to฀analyse฀changes฀in฀the฀
organisation's฀performance฀over฀time,฀and฀that฀could฀support฀analysis฀
relative฀to฀other฀organisations.'฀(GRI฀101:฀Foundation,฀p14)฀
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฀
Principle฀ Description฀
Reliability฀ 'The฀reporting฀organisation฀shall฀gather,฀record,฀compile,฀analyse,฀and฀
report฀information฀and฀processes฀used฀in฀the฀preparation฀of฀the฀report฀
in฀a฀way฀that฀they฀can฀be฀subject฀to฀examination,฀and฀that฀establishes฀
the฀quality฀and฀materiality฀of฀the฀information.'฀(GRI฀101:฀Foundation,฀
p15)฀
Timeliness฀ 'The฀reporting฀organisation฀shall฀report฀on฀a฀regular฀schedule฀so฀that฀
information฀is฀available฀in฀time฀for฀stakeholders฀to฀make฀informed฀
decisions.'฀(GRI฀101:฀Foundation,฀p16)฀
฀
6฀Environmental฀and฀social฀reporting฀
6.1฀Benefits฀of฀environmental฀and฀social฀reporting฀
Companies฀which฀voluntarily฀publish฀environmental฀and฀social฀reports฀have฀identified฀the฀following฀
benefits:฀
฀ It฀demonstrates฀coherence฀of฀overall฀management฀strategy฀to฀important฀external฀stakeholders.฀
฀ It฀strengthens฀stakeholder฀relations.฀
฀ It฀increases฀competitive฀advantages฀(the฀'first฀mover'฀effect).฀
฀ It฀increases฀public฀recognition฀for฀corporate฀accountability฀and฀responsibility.฀
฀ Target฀setting฀and฀external฀reporting฀drive฀continual฀environmental฀and฀social฀improvement.฀
฀ Effective฀self-regulation฀minimises฀risk฀of฀regulatory฀intervention.฀
฀ It฀ may฀ improve฀ access฀ to฀ lists฀ of฀ 'preferred฀ suppliers'฀ of฀ buyers฀ with฀ green฀ procurement฀
policies.฀
฀ It฀ reduces฀ corporate฀ risk,฀ which฀ may฀ reduce฀ financing฀ costs฀ and฀ broaden฀ the฀ range฀ of฀
investors.฀
฀ It฀enhances฀employee฀morale.฀
฀ It฀leads฀to฀improved฀profitability.฀
6.2฀Human฀capital฀accounting฀
Human฀ capital฀ accounting฀ has฀ at฀ its฀ core฀ the฀ principle฀ that฀ employees฀ are฀ assets.฀ Competitive฀
advantage฀is฀largely฀gained฀by฀effective฀use฀of฀people.฀
Implications฀of฀regarding฀people฀as฀organisational฀assets฀
(a)฀ People฀ are฀ a฀ resource฀ which฀ needs฀ to฀ be฀ carefully฀ and฀ efficiently฀ managed฀ with฀ overriding฀
concern฀for฀organisational฀objectives.฀
(b)฀ The฀organisation฀needs฀to฀protect฀its฀investment฀by฀retaining,฀safeguarding฀and฀developing฀its฀
human฀assets.฀
(c)฀ Deterioration฀ in฀ the฀ attitudes฀ and฀ motivation฀ of฀ employees,฀ increases฀ in฀ labour฀ turnover฀
(followed฀ by฀ costs฀ of฀ hiring฀ and฀ training฀ replacements)฀ are฀ costs฀ to฀ the฀ company฀ –฀ even฀
though฀ a฀ 'liquidation'฀ of฀ human฀ assets,฀ brought฀ about฀ by฀ certain฀ managerial฀ styles,฀ may฀
produce฀short-term฀increases฀in฀profit.฀
(d)฀ A฀concept฀developed฀some฀time฀ago฀was฀that฀of฀human฀asset฀accounting฀(the฀inclusion฀of฀
human฀assets฀in฀the฀financial฀reporting฀system฀of฀the฀organisation).฀
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Intellectual฀assets฀
Because฀ of฀ the฀ difficulties฀ found฀ in฀ both฀ theory฀ and฀ practice,฀ the฀ concept฀ of฀ human฀ assets฀ was฀
broadened฀ and฀ became฀ intellectual฀ assets.฀ Intellectual฀ assets,฀ or฀ 'intellectual฀ capital'฀ as฀ they฀ are฀
sometimes฀called฀can฀be฀divided฀into฀three฀main฀types:฀
(a)฀ External฀assets.฀These฀include฀the฀reputation฀of฀brands฀and฀franchises฀and฀the฀strength฀of฀
customer฀relationships.฀
(b)฀ Internal฀ assets.฀ These฀ include฀ patents,฀ trademarks฀ and฀ information฀ held฀ in฀ customer฀
databases.฀
(c)฀ Competencies.฀These฀reflect฀the฀capabilities฀and฀skills฀of฀individuals.฀
'Intellectual฀assets'฀thus฀includes฀'human฀assets'.฀
The฀value฀of฀intellectual฀assets฀will฀continue฀to฀rise฀and฀will฀represent฀an฀increasing฀proportion฀of฀the฀
value฀ of฀ most฀ companies.฀ Whether฀ or฀ not฀ traditional฀ accounting฀ will฀ be฀ able฀ to฀ measure฀ them฀
remains฀to฀be฀seen.฀
7฀Management฀commentary฀
7.1฀Elements฀of฀management฀commentary฀฀
The฀ IFRS฀ Practice฀ Statement:฀ Management฀ Commentary฀ has฀ provided฀ a฀ table฀ relating฀ the฀ five฀
elements฀(given฀in฀Chapter฀17฀section฀3.4.2)฀to฀its฀assessments฀of฀the฀needs฀of฀the฀primary฀users฀of฀a฀
management฀commentary฀(existing฀and฀potential฀investors,฀lenders฀and฀creditors).฀฀
Element฀ User฀needs฀
Nature฀of฀the฀ The฀knowledge฀of฀the฀business฀in฀which฀an฀entity฀is฀engaged฀and฀the฀
business฀ external฀environment฀in฀which฀it฀operates฀
Objectives฀and฀ To฀assess฀the฀strategies฀adopted฀by฀the฀entity฀and฀the฀likelihood฀that฀
strategies฀ those฀strategies฀will฀be฀successful฀in฀meeting฀management's฀stated฀
objectives฀
Resources,฀risks฀and฀ A฀basis฀for฀determining฀the฀resources฀available฀to฀the฀entity฀as฀well฀as฀
relationships฀ obligations฀to฀transfer฀resources฀to฀others;฀the฀ability฀of฀the฀entity฀to฀
generate฀long-term฀sustainable฀net฀inflows฀of฀resources;฀and฀the฀risks฀to฀
which฀those฀resource-generating฀activities฀are฀exposed,฀both฀in฀the฀near฀
term฀and฀in฀the฀long฀term฀
Results฀and฀prospects฀ The฀ability฀to฀understand฀whether฀an฀entity฀has฀delivered฀results฀in฀line฀
with฀expectations฀and,฀implicitly,฀how฀well฀management฀has฀understood฀
the฀entity's฀market,฀executed฀its฀strategy฀and฀managed฀the฀entity's฀
resources,฀risks฀and฀relationships฀
Performance฀ The฀ability฀to฀focus฀on฀the฀critical฀performance฀measures฀and฀indicators฀
measures฀and฀ that฀management฀uses฀to฀assess฀and฀manage฀the฀entity's฀performance฀
indicators฀ against฀stated฀objectives฀and฀strategies฀
(IFRS฀Practice฀Statement:฀para.฀BC48)฀
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฀
7.2฀ Advantages฀and฀disadvantages฀of฀a฀compulsory฀management฀
commentary฀
Advantages฀ Disadvantages฀
Entity฀ Entity฀
฀ Promotes฀the฀entity,฀and฀attracts฀investors,฀ ฀ Costs฀may฀outweigh฀benefits฀
lenders,฀customers฀and฀suppliers฀฀ ฀ Risk฀that฀investors฀may฀ignore฀the฀financial฀
฀ Communicates฀management฀plans฀and฀ statements฀
outlook฀
Users฀ Users฀
฀ Financial฀statements฀not฀enough฀to฀make฀ ฀ Subjective฀
decisions฀(financial฀information฀only)฀ ฀ Not฀normally฀audited฀
฀ Financial฀statements฀backward฀looking฀฀฀฀฀฀฀ ฀ Could฀encourage฀companies฀to฀de-list฀฀฀฀฀฀฀฀฀
(need฀forward฀looking฀information)฀ (to฀avoid฀requirement฀to฀produce฀MC)฀
฀ Highlights฀risks฀ ฀ Different฀countries฀have฀different฀needs฀
฀ Useful฀for฀comparability฀to฀other฀entities฀
8฀Segment฀reporting฀
8.1฀Aggregation฀of฀segments฀
Two฀ or฀ more฀ operating฀ segments฀ may฀ be฀ aggregated฀ if฀ the฀ segments฀ have฀ similar฀ economic฀
characteristics,฀and฀the฀segments฀are฀similar฀in฀each฀of฀the฀following฀respects฀(IFRS฀8:฀para.฀12):฀
฀ The฀nature฀of฀the฀products฀or฀services฀
฀ The฀nature฀of฀the฀production฀process฀
฀ The฀type฀or฀class฀of฀customer฀for฀their฀products฀or฀services฀
฀ The฀methods฀used฀to฀distribute฀their฀products฀or฀provide฀their฀services฀
฀ If฀applicable,฀the฀nature฀of฀the฀regulatory฀environment฀
8.2฀Illustrative฀example฀of฀disclosure฀under฀IFRS฀8฀
The฀ following฀ example฀ is฀ adapted฀ from฀ the฀ IFRS฀ 8฀ Implementation฀ Guidance฀ (para.฀ IG3),฀ which฀
emphasises฀that฀this฀is฀for฀illustrative฀purposes฀only฀and฀that฀the฀information฀must฀be฀presented฀in฀the฀
most฀understandable฀manner฀in฀the฀specific฀circumstances.฀
The฀ hypothetical฀ company฀ does฀ not฀ allocate฀ tax฀ expense฀ (tax฀ income)฀ or฀ non-recurring฀ gains฀ and฀
losses฀to฀reportable฀segments.฀In฀addition,฀not฀all฀reportable฀segments฀have฀material฀non-cash฀items฀
other฀ than฀ depreciation฀ and฀ amortisation฀ in฀ profit฀ or฀ loss.฀ The฀ amounts฀ in฀ this฀ illustration,฀
denominated฀ as฀ dollars,฀ are฀ assumed฀ to฀ be฀ the฀ amounts฀ in฀ reports฀ used฀ by฀ the฀ chief฀ operating฀
decision฀maker.฀฀
฀ ฀ Motor฀ ฀ ฀
Car฀parts฀ vessel฀ Software฀ Electronics Finance฀ All฀other฀ Totals฀
฀ $฀ $ $ $ $฀ $฀ $
Revenues฀from฀external฀฀ 3,000฀ 5,000 9,500฀ 12,000฀ 5,000฀ 1,000
(a) 35,500
฀฀customers฀ ฀ ฀ ฀
Intersegment฀revenues฀ –฀ –฀ 3,000฀ 1,500฀ –฀ –฀ 4,500฀
Interest฀revenue฀ 450฀ 800฀ 1,000฀ 1,500฀ –฀ –฀ 3,750฀
Interest฀expense฀ 350฀ 600฀ 700฀ 1,100฀ –฀ –฀ 2,750฀
(b)
Net฀interest฀revenue ฀ –฀ –฀ –฀ –฀ 1,000฀ –฀ 1,000฀
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฀ ฀ Motor฀ ฀ ฀
Car฀parts฀ vessel฀ Software฀ Electronics Finance฀ All฀other฀ Totals฀
฀ $฀ $ $ $ $฀ $฀ $
Depreciation฀and฀ 200฀ 100฀ 50฀ 1,500฀ 1,100฀ –฀ 2,950฀
amortisation฀
Reportable฀segment฀profit฀ 200฀ 70฀ 900฀ 2,300฀ 500฀ 100฀ 4,070฀
Other฀material฀non-cash฀items:฀ ฀ ฀ ฀ ฀ ฀ ฀
฀฀฀฀฀฀฀Impairment฀of฀assets฀ –฀ 200฀ –฀ –฀ –฀ –฀ 200฀
Reportable฀segment฀assets฀ 2,000฀ 5,000฀ 3,000฀ 12,000฀ 57,000฀ 2,000฀ 81,000฀
Expenditure฀for฀reportable฀฀ 300฀ 700฀ 500฀ 800฀ 600฀ –฀ 2,900฀
฀฀segment฀non-current฀assets฀
Reportable฀segment฀liabilities฀ 1,050฀ 3,000฀ 1,800฀ 8,000฀ 30,000฀ –฀ 43,850฀
(a)฀ Revenues฀ from฀ segments฀ below฀ the฀ quantitative฀ thresholds฀ are฀ attributable฀ to฀ four฀ operating฀
segments฀ of฀ the฀ company.฀ These฀ segments฀ include฀ a฀ small฀ property฀ business,฀ an฀ electronics฀
equipment฀rental฀business,฀a฀software฀consulting฀practice฀and฀a฀warehouse฀leasing฀operation.฀
None฀ of฀ these฀ segments฀ has฀ ever฀ met฀ any฀ of฀ the฀ quantitative฀ thresholds฀ for฀ determining฀
reportable฀segments.฀
(b)฀ The฀ finance฀ segment฀ derives฀ a฀ majority฀ of฀ its฀ revenue฀ from฀ interest.฀ Management฀ primarily฀
relies฀on฀net฀interest฀revenue,฀not฀the฀gross฀revenue฀and฀expense฀amounts,฀in฀managing฀that฀
segment.฀Therefore,฀as฀permitted฀by฀IFRS฀8,฀only฀the฀net฀amount฀is฀disclosed.฀
8.3฀Advantages฀and฀disadvantages฀of฀IFRS฀8฀
There฀are฀some฀commonly฀cited฀advantages฀and฀disadvantages฀of฀IFRS฀8.฀
Advantages฀ Disadvantages฀
The฀managerial฀approach฀used฀by฀IFRS฀8฀is฀ Segment฀determination฀is฀the฀responsibility฀of฀
cost฀effective฀because฀the฀marginal฀cost฀of฀ directors฀and฀is฀subjective.฀
reporting฀segmental฀data฀will฀be฀low.฀ ฀
Users฀can฀be฀sure฀that฀the฀segment฀data฀ Management฀may฀report฀segments฀which฀are฀
reflects฀the฀operational฀strategy฀of฀the฀ not฀consistent฀for฀internal฀reporting฀
business.฀ and฀control฀purposes฀making฀its฀usefulness฀
฀ questionable.฀
Management's฀selection฀of฀operating฀segments฀ The฀management฀approach฀may฀mean฀that฀
helps฀avoid฀releasing฀commercially฀ financial฀statements฀of฀different฀entities฀are฀not฀
sensitive฀information.฀ comparable;฀eg฀there฀is฀no฀defined฀
฀฀ measure฀of฀segment฀profit฀or฀loss.฀
The฀segment฀report฀helps฀users฀of฀accounts฀ Segment฀reporting฀does฀not฀help฀the฀user฀to฀
better฀understand฀an฀entity's฀past฀ fully฀understand฀profitability,฀risks฀and฀returns฀of฀
performance฀and฀it฀enables฀them฀to฀assess฀ operations฀
the฀effectiveness฀of฀management฀
strategy,฀allowing฀them฀to฀make฀informed฀
decisions.฀
฀
฀ ฀
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฀
Activity฀1฀
The฀statements฀ticked฀below฀give฀realistic฀conclusions:฀
HI's฀management฀exercises฀better฀cost฀control฀of฀the฀entity's฀non-production฀overheads.฀
HI฀has฀a฀smaller฀difference฀between฀its฀gross฀margin฀and฀net฀margin฀
 (5%)฀than฀FG฀(15%)฀which฀means฀that฀HI฀is฀controlling฀the฀entity's฀฀
non-production฀overheads฀better.฀One฀of฀the฀differences฀between฀฀
gross฀and฀net฀margin฀is฀non-production฀overheads฀(distribution฀costs฀
and฀administrative฀expense).฀
HI฀has฀sourced฀cheaper฀raw฀materials.฀
This฀is฀incorrect฀as฀it฀would฀make฀HI's฀gross฀margin฀higher฀than฀FG's฀
(whereas฀FG's฀is฀higher).฀
FG฀operates฀its฀production฀process฀more฀efficiently฀with฀less฀wastage฀and฀more฀goods฀
produced฀per฀machine฀hour.฀

This฀is฀correct฀as฀FG฀has฀a฀higher฀gross฀margin฀than฀HI฀and฀a฀more฀
efficient฀production฀process฀would฀cause฀this.฀
HI฀operates฀in฀the฀low฀price฀end฀of฀the฀market฀but฀incurs฀similar฀manufacturing฀costs฀
 to฀FG.฀
This฀is฀correct฀as฀it฀would฀cause฀HI฀to฀have฀a฀lower฀gross฀margin฀than฀FG.
FG's฀management฀exercises฀better฀cost฀control฀of฀the฀entity's฀non-production฀overheads.฀
This฀is฀incorrect฀as฀it฀would฀make฀the฀difference฀between฀FG's฀gross฀and฀
net฀margins฀less฀than฀HI's฀whereas฀the฀opposite฀is฀the฀case.฀
HI฀has฀access฀to฀cheaper฀interest฀rates฀on฀its฀borrowings฀than฀FG.฀
 One฀of฀the฀differences฀between฀gross฀and฀net฀margin฀is฀interest฀and,฀as฀
HI฀has฀a฀smaller฀difference฀between฀gross฀and฀net฀margins,฀this฀could฀be฀
explained฀by฀HI฀having฀lower฀finance฀costs฀than฀FG.฀
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Activity฀2฀
The฀statements฀ticked฀below฀give฀realistic฀conclusions:฀
An฀investor฀seeking฀to฀maximise฀their฀short-term฀return฀will฀be฀more฀attracted฀to฀PQ฀
than฀SR.฀
฀
PQ฀has฀a฀higher฀dividend฀payout฀ratio฀than฀SR฀suggesting฀a฀more฀
generous฀dividend฀policy฀which฀would฀appeal฀to฀a฀short-term฀investor.฀
The฀dividend฀policy฀of฀SR฀is฀more฀generous฀than฀that฀of฀PQ.฀
฀ This฀is฀incorrect฀because฀SR฀has฀a฀lower฀dividend฀payout฀ratio฀than฀PQ,฀
indicating฀a฀less฀generous฀dividend฀policy฀as฀they฀are฀paying฀a฀lower฀
proportion฀of฀their฀profits฀out฀as฀dividends.฀
The฀current฀return฀per฀share฀of฀SR฀is฀better฀than฀that฀of฀PQ.฀
฀
This฀is฀incorrect฀because฀SR฀has฀a฀lower฀EPS฀than฀PQ.฀
SR฀has฀reinvested฀a฀greater฀proportion฀of฀its฀profit฀than฀PQ.฀
฀ This฀is฀correct฀because฀SR฀has฀a฀lower฀dividend฀payout฀ratio฀and฀has฀
therefore฀retained฀a฀greater฀proportion฀of฀profits฀for฀reinvestment.฀
The฀market฀has฀greater฀confidence฀in฀the฀future฀of฀PQ฀than฀SR.฀
฀ This฀is฀incorrect฀because฀the฀P/E฀ratio฀is฀an฀indication฀of฀market฀
confidence฀in฀an฀entity฀and฀PQ฀has฀a฀lower฀P/E฀ratio฀and฀SR.฀
An฀investor฀seeking฀long-term฀capital฀growth฀will฀be฀more฀attracted฀to฀SR฀than฀PQ.฀฀฀฀
This฀is฀correct฀because฀SR฀has฀a฀higher฀P/E฀ratio฀than฀PQ฀indicating฀
฀ greater฀market฀confidence฀in฀the฀future฀of฀SR.฀Also,฀SR฀is฀retaining฀more฀
profits฀for฀reinvestment฀which,฀if฀successful,฀will฀have฀a฀positive฀impact฀
on฀the฀future฀share฀price฀of฀SR.฀
Activity฀3฀
The฀correct฀answers฀are:฀
฀ The฀risk฀of฀inventory฀obsolescence฀has฀increased฀year฀on฀year.฀
฀ The฀working฀capital฀cycle฀has฀decreased฀year฀on฀year.฀
฀ The฀number฀of฀days'฀finance฀required฀to฀fund฀working฀capital฀is฀greater฀in฀20X5฀
than฀20X4.฀
฀ Overall,฀FC's฀working฀capital฀management฀has฀deteriorated฀year฀on฀year.฀
฀ There฀is฀a฀slightly฀higher฀possibility฀of฀bad฀debts฀arising฀in฀20X5฀than฀20X4.฀
The฀working฀capital฀cycle฀is฀calculated฀as:฀฀
Inventory฀days฀+฀Receivables฀days฀–฀Payable฀days฀
In฀20X5฀=฀93฀+฀54฀–฀97฀=฀50฀days฀
In฀20X4฀=฀98฀+฀52฀–฀91฀=฀59฀days฀
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฀
Therefore,฀ the฀ working฀ capital฀ cycle฀ has฀ decreased฀ by฀ nine฀ days฀ year฀ on฀ year,฀ meaning฀ that฀ the฀
number฀of฀days'฀finance฀required฀to฀fund฀working฀capital฀is฀less฀(not฀greater)฀in฀20X5฀than฀20X4.฀
The฀risk฀of฀inventory฀obsolescence฀has฀decreased฀year฀on฀year฀because฀inventory฀days฀have฀fallen฀
by฀five฀days฀meaning฀that฀FC฀is฀selling฀its฀mobile฀phones฀faster฀in฀20X5฀than฀20X4.฀
Overall,฀working฀capital฀management฀has฀improved฀(not฀deteriorated)฀year฀on฀year฀with฀the฀working฀
capital฀cycle฀decreasing฀by฀nine฀days.฀There฀has฀been฀a฀five-day฀improvement฀in฀inventory฀days฀and฀
a฀six฀day฀improvement฀in฀payables฀days฀(although฀this฀is฀partly฀offset฀by฀a฀two-day฀deterioration฀in฀
receivables฀days).฀
The฀increase฀in฀receivables฀days฀from฀52฀to฀54฀days฀implies฀that฀the฀credit฀control฀function฀has฀been฀
less฀effective฀in฀20X5฀compared฀to฀20X4,฀thereby฀increasing฀the฀risk฀of฀bad฀debts.฀
Activity฀4฀฀
To:฀ MD฀of฀RST฀Co฀
From:฀ An฀Accountant฀
Date:฀ XX.XX.XX฀฀
Subject:฀ The฀financial฀position฀and฀performance฀of฀XYZ฀Co฀฀
Introduction฀฀
This฀report฀has฀been฀prepared฀on฀the฀basis฀of฀the฀three฀most฀recent฀statements฀of฀profit฀or฀loss฀and฀
other฀comprehensive฀income฀and฀statement฀of฀financial฀position฀of฀XYZ฀Co฀covering฀the฀years฀20X6฀
to฀ 20X8฀ inclusive.฀ Ratio฀ analysis฀ used฀ in฀ this฀ report฀ is฀ based฀ on฀ the฀ calculations฀ shown฀ in฀ the฀
appendix฀attached.฀
Financial฀performance฀฀
Sales฀have฀increased฀at฀a฀steady฀5%฀per฀annum฀over฀the฀three-year฀period.฀
In฀ contrast,฀ the฀ gross฀ profit฀ percentage฀ has฀ increased฀ from฀ 42%฀ in฀ 20X6฀ to฀ 45%฀ in฀ 20X7฀ before฀
dropping฀back฀to฀40%฀in฀20X8.฀Similarly,฀operating฀profit฀as฀a฀percentage฀of฀sales฀was฀25.5%฀in฀
20X6,฀28.5%฀in฀20X7฀and฀25.0%฀in฀20X8.฀This฀may฀indicate฀some฀misallocation฀of฀costs฀between฀
20X7฀and฀20X8฀and฀should฀be฀investigated,฀or฀it฀may฀be฀indicative฀of฀a฀longer฀downward฀trend฀in฀
profitability.฀
Return฀on฀capital฀employed,฀as฀one฀would฀expect,฀has฀shown฀a฀similar฀pattern฀with฀an฀increase฀in฀
20X7฀followed฀by฀a฀subsequent฀fall฀in฀20X8฀to฀a฀level฀below฀that฀of฀20X6.฀
Financial฀leverage฀
The฀debt฀ratio฀measures฀the฀ratio฀of฀a฀company's฀total฀debt฀to฀its฀total฀assets.฀Although฀we฀have฀no฀
information฀as฀to฀the฀norm฀for฀the฀industry฀as฀a฀whole,฀the฀debt฀ratios฀appear฀reasonable.฀However,฀
it฀ should฀ be฀ noted฀ that฀ debt฀ has฀ risen฀ steadily฀ over฀ the฀ three฀ year฀ period.฀ We฀ should฀ obtain฀ more฀
information฀relating฀to฀the฀reason฀for฀the฀increase฀in฀debt฀as฀it฀does฀not฀appear฀to฀be฀used฀to฀fund฀
any฀ significant฀ investments.฀ The฀ bank฀ overdraft฀ in฀ particular฀ has฀ risen฀ sharply฀ and฀ perhaps฀ gives฀
concerns฀ about฀ the฀ working฀ capital฀ management฀ of฀ the฀ company.฀ Further฀ analysis฀ of฀ the฀ liquidity฀
position฀should฀also฀be฀undertaken.฀
Conclusion฀฀
The฀review฀of฀the฀three-year฀financial฀statements฀for฀XYZ฀Co฀has฀given฀rise฀to฀a฀number฀of฀queries฀
which฀ need฀ to฀ be฀ resolved฀ before฀ a฀ useful฀ conclusion฀ can฀ be฀ reached฀ on฀ the฀ financial฀ position฀ of฀
XYZ฀Co.฀It฀may฀also฀be฀useful฀to฀compare฀XYZ฀Co's฀ratios฀to฀those฀of฀other฀companies฀in฀the฀same฀
industry฀in฀order฀to฀obtain฀some฀idea฀of฀the฀industry฀norms.฀
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APPENDIX฀TO฀MEMORANDUM฀
฀ 20X6 20X7 20X8฀
%฀sales฀increase฀฀ 5% 5%฀
Gross฀profit฀%฀ 42% 45% 40%฀
Operating฀profit฀%฀ 25.5% 28.5% 25.0%฀
฀ ฀
Return฀on฀capital฀employed฀฀ ฀
Profit฀before฀interest฀and฀tax 4,586  104 5,387  215 4,959  450

=฀ ฀
Capital฀employed 14,434  5,000 15,313  5,000 15,584  5,000
฀
฀ ฀100%฀ =฀23% =฀25.5% =฀21.9%฀
฀ ฀
Debt฀ratio฀฀ ฀
Total฀debt 4,187  5,000 5,804  5,000 6,841  5,000
=฀ ฀
Total฀assets 20,356  3,265 21,141 4,976 20,211  7,214
฀
฀ ฀100%฀ =฀38.9% =฀41.4% =฀43.2%฀
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฀
฀
Reporting฀requirements
of฀small฀and฀medium-
฀
฀
฀
sized฀entities
฀
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1฀Background฀
1.1฀Big฀GAAP/little฀GAAP฀divide฀
In฀ most฀ countries฀ the฀ majority฀ of฀ companies฀ or฀ other฀ types฀ of฀ entity฀ are฀ very฀ small.฀ The฀ owners฀
have฀invested฀their฀own฀money฀in฀the฀business฀and฀there฀are฀no฀outside฀shareholders฀to฀protect.฀
Large฀ entities,฀ by฀ contrast,฀ particularly฀ companies฀ listed฀ on฀ a฀ stock฀ exchange,฀ may฀ have฀
shareholders฀ who฀ have฀ invested฀ their฀ money,฀ possibly฀ through฀ a฀ pension฀ fund,฀ with฀ no฀ knowledge฀
whatsoever฀ of฀ the฀ company.฀ These฀ shareholders฀ need฀ protection,฀ and฀ the฀ regulations฀ for฀ such฀
companies฀need฀to฀be฀more฀stringent.฀
It฀could฀therefore฀be฀argued฀that฀company฀accounts฀should฀be฀of฀two฀types:฀
(a)฀ 'Simple'฀ones฀for฀small฀companies฀with฀fewer฀regulations฀and฀disclosure฀requirements;฀and฀
(b)฀ 'Complicated'฀ones฀for฀larger฀companies฀with฀extensive฀and฀detailed฀requirements.฀
This฀is฀sometimes฀called฀the฀big฀GAAP/little฀GAAP฀divide.฀
1.2฀Possible฀solutions฀
There฀are฀two฀approaches฀to฀overcoming฀the฀big฀GAAP/little฀GAAP฀divide:฀
(a)฀ Differential฀reporting,฀ie฀producing฀new฀reduced฀standards฀specifically฀for฀smaller฀companies,฀
such฀as฀IFRS฀for฀SMEs;฀or฀
(b)฀ Providing฀ exemptions฀ for฀ smaller฀ companies฀ from฀ some฀ of฀ the฀ requirements฀ of฀ existing฀
standards.฀
1.3฀Differential฀reporting฀
A฀ one-size-fits-all฀ framework฀ does฀ not฀ generate฀ relevant,฀ and฀ useful฀ information,฀ even฀ if฀ this฀
information฀is฀reliable฀–฀฀this฀is฀because:฀
(a)฀฀ The฀costs฀may฀not฀be฀justified฀for฀the฀more฀limited฀needs฀of฀users฀of฀SME฀accounts.฀
(b)฀฀ The฀purpose฀of฀the฀financial฀statements฀and฀the฀use฀to฀which฀they฀are฀put฀will฀not฀be฀the฀same฀
as฀for฀listed฀companies.฀
Differential฀ reporting฀ overcomes฀ this฀ by฀ tailoring฀ the฀ reporting฀ requirements฀ to฀ the฀ entity.฀ The฀ main฀
characteristic฀that฀distinguishes฀SMEs฀from฀other฀entities฀is฀the฀degree฀of฀public฀accountability.฀฀
Differential฀ reporting฀ may฀ have฀ drawbacks฀ in฀ terms฀ of฀ reducing฀ comparability฀ between฀ small฀ and฀
larger฀company฀accounts.฀
Furthermore,฀problems฀may฀arise฀where฀entities฀no฀longer฀meet฀the฀criteria฀to฀be฀classified฀as฀small.฀
2฀Consequences,฀good฀and฀bad฀ ฀
2.1฀Likely฀effect฀
Because฀there฀is฀no฀supporting฀guidance฀in฀the฀IFRS฀for฀SMEs,฀it฀is฀likely฀that฀differences฀will฀arise฀
from฀full฀IFRSs,฀even฀where฀the฀principles฀are฀the฀same.฀Most฀of฀the฀exemptions฀in฀the฀IFRS฀for฀SMEs฀
are฀ on฀ grounds฀ of฀ cost฀ or฀ undue฀ effort.฀ However,฀ despite฀ the฀ practical฀ advantages฀ of฀ a฀ simpler฀
reporting฀framework,฀there฀will฀be฀costs฀involved฀for฀those฀moving฀to฀IFRSs฀–฀even฀a฀simplified฀IFRS฀–฀
for฀the฀first฀time.฀
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18:฀Reporting฀requirements฀of฀small฀and฀medium-sized฀entities฀฀
฀
2.2฀Advantages฀and฀disadvantages฀of฀the฀IFRS฀for฀SMEs฀
2.2.1฀Advantages฀
(a)฀ It฀is฀virtually฀a฀'one฀stop฀shop'.฀
(b)฀ It฀is฀structured฀according฀to฀topics,฀which฀should฀make฀it฀practical฀to฀use.฀
(c)฀ It฀is฀written฀in฀an฀accessible฀style.฀
(d)฀ There฀is฀considerable฀reduction฀in฀disclosure฀requirements.฀
(e)฀ Guidance฀not฀relevant฀to฀private฀entities฀is฀excluded.฀
2.2.2฀Disadvantages฀฀
(a)฀ It฀does฀not฀focus฀on฀the฀smallest฀companies.฀
(b)฀ The฀scope฀extends฀to฀'non-publicly฀accountable'฀entities.฀Potentially,฀the฀scope฀is฀too฀wide.฀
(c)฀ The฀standard฀is฀still฀onerous฀for฀small฀companies.฀฀
Further฀simplifications฀could฀be฀made.฀These฀might฀include:฀
(i)฀ No฀ requirement฀ to฀ value฀ intangibles฀ separately฀ from฀ goodwill฀ on฀ a฀ business฀
combination;฀
(ii)฀ No฀recognition฀of฀deferred฀tax;฀
(iii)฀ No฀measurement฀rules฀for฀equity-settled฀share-based฀payment;฀
(iv)฀ No฀ requirement฀ for฀ consolidated฀ accounts฀ (as฀ for฀ EU-based฀ small฀ and฀ medium-sized฀
entities฀currently);฀and฀
(v)฀ Fair฀value฀measurement฀when฀readily฀determinable฀without฀undue฀cost฀or฀effort.฀
฀
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฀
฀
774฀

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฀
฀
The฀impact฀of฀changes
฀
฀
฀
and฀potential฀changes
฀
฀
in฀accounting฀regulation
฀
฀
฀ ฀
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1฀Managing฀the฀transition฀to฀IFRS:฀practical฀issues฀
1.1฀General฀issues฀
The฀implementation฀of฀the฀change฀to฀IFRS฀is฀likely฀to฀entail฀careful฀management฀in฀most฀companies.฀
Here฀are฀some฀of฀the฀change฀management฀considerations฀that฀should฀be฀addressed.฀
(a)฀ Accurate฀ assessment฀ of฀ the฀ task฀ involved.฀ Underestimation฀ or฀ wishful฀ thinking฀ may฀
hamper฀the฀effectiveness฀of฀the฀conversion฀and฀may฀ultimately฀prove฀inefficient.฀
(b)฀ Proper฀ planning.฀ This฀ should฀ take฀ place฀ at฀ the฀ overall฀ project฀ level,฀ but฀ a฀ detailed฀ task฀
analysis฀could฀be฀drawn฀up฀to฀control฀work฀performed.฀
(c)฀ Human฀resource฀management.฀The฀project฀must฀be฀properly฀structured฀and฀staffed.฀
(d)฀ Training.฀Where฀there฀are฀skills฀gaps,฀remedial฀training฀should฀be฀provided.฀
(e)฀ Monitoring฀and฀accountability.฀A฀relaxed฀'it฀will฀be฀all฀right฀on฀the฀night'฀attitude฀could฀
spell฀danger.฀Implementation฀progress฀should฀be฀monitored฀and฀regular฀ meetings฀ set฀
up฀ so฀ that฀ participants฀ can฀ personally฀ account฀ for฀ what฀ they฀ are฀ doing฀ as฀ well฀ as฀
flag฀up฀any฀problems฀as฀early฀as฀possible.฀Project฀drift฀should฀be฀avoided.฀
(f)฀ Achieving฀ milestones.฀ Successful฀ completion฀ of฀ key฀ steps฀ and฀ tasks฀ should฀ be฀
appropriately฀ acknowledged,฀ ie฀ what฀ managers฀ call฀ 'celebrating฀ success',฀ so฀ as฀ to฀ sustain฀
motivation฀and฀performance.฀
(g)฀ Physical฀ resourcing.฀The฀need฀for฀IT฀equipment฀and฀office฀ space฀ should฀be฀properly฀
assessed.฀
(h)฀ Process฀ review.฀ Care฀ should฀ be฀ taken฀ not฀ to฀ perceive฀ the฀ change฀ as฀ a฀ one-off฀ quick฀ fix.฀
Any฀ change฀ in฀ future฀ systems฀ and฀ processes฀ should฀ be฀ assessed฀ and฀ properly฀
implemented.฀
(i)฀ Follow-up฀ procedures.฀ As฀ with฀ general฀ good฀ management฀ practice,฀ the฀ follow-up฀
procedures฀ should฀be฀planned฀in฀to฀make฀ sure฀ that฀ the฀ changes฀ stick฀ and฀that฀any฀
further฀changes฀are฀identified฀and฀addressed.฀
1.2฀Financial฀reporting฀infrastructure฀
As฀ well฀ as฀ sound฀ management฀ judgement,฀ implementation฀ of฀ IFRS฀ requires฀ a฀ sound฀ financial฀
reporting฀infrastructure.฀Key฀aspects฀of฀this฀include฀the฀following:฀
(a)฀ A฀ robust฀ regulatory฀ framework.฀ For฀ IFRS฀ to฀ be฀ successful,฀ they฀ must฀ be฀ rigorously฀
enforced.฀
(b)฀ Trained฀ and฀ qualified฀ staff.฀ Many฀ preparers฀ of฀ financial฀ statements฀ will฀ have฀ been฀
trained฀ in฀ local฀ GAAP฀ and฀ not฀ be฀ familiar฀ with฀ the฀ principles฀ underlying฀ IFRS,฀ let฀ alone฀ the฀
detail.฀Some฀professional฀bodies฀provide฀conversion฀qualifications฀–฀for฀example,฀the฀ACCA's฀
Diploma฀ in฀ International฀ Financial฀ Reporting฀ –฀ but฀ the฀ availability฀ of฀ such฀ qualifications฀ and฀
courses฀may฀vary฀from฀country฀to฀country.฀
(c)฀ Availability฀ and฀ transparency฀ of฀ market฀ information.฀This฀is฀particularly฀important฀
in฀the฀determination฀of฀fair฀values,฀which฀are฀such฀a฀key฀component฀of฀many฀IFRSs.฀
(d)฀ High฀standards฀of฀corporate฀governance฀and฀audit.฀This฀is฀all฀the฀more฀important฀in฀
the฀transition฀period,฀especially฀where฀there฀is฀resistance฀to฀change.฀
Overall,฀there฀are฀significant฀advantages฀to฀the฀widespread฀adoption฀of฀IFRS,฀but฀if฀the฀transition฀is฀
to฀go฀well,฀there฀must฀be฀a฀realistic฀assessment฀of฀potential฀challenges.฀
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2฀ Disclosure฀Initiative:฀amendments฀to฀IAS฀1฀and฀IAS฀7฀
2.1฀Amendments฀to฀IAS฀1฀
These฀amendments฀were฀published฀in฀2014฀and฀took฀effect฀from฀January฀2016.฀Their฀purpose฀is฀to฀
address฀ perceived฀ obstacles฀ that฀ prevent฀ preparers฀ from฀ exercising฀ their฀ judgement฀ in฀ presenting฀
financial฀reports.฀
2.1.1฀Materiality฀
Entities฀ should฀ avoid฀ aggregating฀ or฀ disaggregating฀ information฀ in฀ a฀ manner฀ that฀ obscures฀ useful฀
information,฀ for฀ example,฀ by฀ aggregating฀ items฀ that฀ have฀ different฀ characteristics฀ or฀ disclosing฀ a฀
large฀amount฀of฀immaterial฀detail.฀This฀reduces฀understandability.฀
When฀ management฀ determines฀ an฀ item฀ is฀ material,฀ IAS฀ 1฀ requires฀ assessment฀ of฀ which฀ specific฀
disclosures฀(set฀out฀in฀the฀relevant฀standard)฀should฀be฀presented.฀An฀assessment฀is฀also฀required฀of฀
whether฀additional฀information฀is฀necessary฀to฀meet฀the฀needs฀of฀users฀or฀the฀disclosure฀objectives฀of฀
the฀standard฀in฀question.฀
฀ (IAS฀1:฀paras.฀29,฀55A)฀
2.1.2฀Disaggregation฀and฀subtotals฀
IAS฀1฀allows฀subtotals฀additional฀to฀the฀ones฀required฀by฀IAS฀1฀in฀the฀statement฀of฀financial฀position฀
or฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income.฀The฀amendments฀to฀IAS฀1฀specify฀
which฀additional฀subtotals฀are฀acceptable฀and฀how฀they฀are฀presented.฀
Additional฀subtotals฀should฀meet฀the฀following฀requirements฀(IAS฀1:฀para.฀55A):฀
(a)฀ They฀must฀comprise฀items฀recognised฀and฀measured฀in฀accordance฀with฀IFRSs.฀
(b)฀ They฀must฀be฀presented฀and฀labelled฀in฀a฀manner฀that฀makes฀the฀components฀of฀the฀subtotal฀
clear฀and฀understandable.฀฀
(c)฀ They฀must฀be฀consistent฀from฀period฀to฀period.฀฀
(d)฀ They฀ must฀ not฀ be฀ displayed฀ with฀ more฀ prominence฀ than฀ the฀ subtotals฀ and฀ totals฀ specified฀ in฀
IAS฀1.฀฀
(e)฀ Any฀additional฀subtotals฀must฀be฀reconciled฀to฀the฀subtotals฀and฀totals฀required฀by฀IAS฀1.฀
2.1.3฀Notes฀
IAS฀1฀does฀not฀require฀entities฀to฀present฀the฀notes฀to฀the฀financial฀statements฀in฀a฀particular฀order.฀
There฀is฀scope,฀therefore,฀for฀management฀to฀consider฀understandability฀and฀comparability฀when฀it฀
determines฀the฀order฀of฀the฀notes.฀For฀example,฀an฀entity฀might฀present฀more฀significant฀notes฀first,฀or฀
present฀ linked฀ areas฀ sequentially.฀ IAS฀ 1฀ already฀ permits฀ this฀ flexibility,฀ which฀ may฀ enable฀
management฀to฀provide฀further฀insight฀about฀the฀entity.฀
2.1.4฀Disclosure฀of฀accounting฀policies฀
These฀ amendments฀ remove฀ guidance฀ and฀ examples฀ with฀ regard฀ to฀ the฀ identification฀ of฀ significant฀
accounting฀policies฀that฀were฀perceived฀as฀being฀potentially฀unhelpful.฀
2.1.5฀ Other฀comprehensive฀income฀arising฀from฀investments฀accounted฀for฀under฀
the฀equity฀method฀
The฀ amendments฀ clarify฀ that฀ the฀ share฀ of฀ other฀ comprehensive฀ income฀ arising฀ from฀ investments฀
accounted฀ for฀ under฀ the฀ equity฀ method฀ is฀ grouped฀ based฀ on฀ whether฀ the฀ items฀ will฀ or฀ will฀ not฀
subsequently฀be฀reclassified฀as฀profit฀or฀loss.฀Each฀group฀should฀then฀be฀presented฀as฀a฀single฀line฀
item฀in฀the฀statement฀of฀other฀comprehensive฀income.฀
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2.2฀Amendments฀to฀IAS฀7฀
In฀January฀2016,฀the฀IASB฀published฀amendments฀to฀IAS฀7฀intended฀to฀improve฀information฀provided฀
to฀ users฀ of฀ financial฀ statements฀ about฀ an฀ entity's฀ financing฀ activities.฀ They฀ are฀ effective฀ for฀ annual฀
periods฀beginning฀on฀or฀after฀1฀January฀2017.฀฀
The฀ objective฀ of฀ the฀ amendments฀ is฀ that฀ IAS฀ 7฀ should฀ provide฀ disclosures฀ that฀ enable฀ users฀ of฀
financial฀ statements฀ to฀ evaluate฀ changes฀ in฀ liabilities฀ arising฀ from฀ financing฀ activities฀ (IAS฀ 7:฀
para.฀44A).฀
To฀achieve฀this฀objective,฀entities฀reporting฀cash฀flows฀under฀IAS฀7฀must฀disclose฀ the฀ following฀
changes฀in฀liabilities฀arising฀from฀financing฀activities฀(IAS฀7:฀para.฀44B):฀฀
(a)฀ Changes฀from฀financing฀cash฀flows;฀
(b)฀ Changes฀arising฀from฀obtaining฀or฀losing฀control฀of฀subsidiaries฀or฀other฀businesses;฀
(c)฀ The฀effect฀of฀changes฀in฀foreign฀exchange฀rates;฀฀
(d)฀ Changes฀in฀fair฀values;฀and฀
(e)฀ Other฀changes.฀
Liabilities฀arising฀from฀financing฀activities฀are฀defined฀by฀the฀IASB฀as฀liabilities฀'for฀which฀cash฀flows฀
were,฀ or฀ future฀ cash฀ flows฀ will฀ be,฀ classified฀ in฀ the฀ statement฀ of฀ cash฀ flows฀ as฀ cash฀ flows฀ from฀
financing฀activities'.฀If฀financial฀assets฀meet฀the฀same฀definition,฀then฀the฀new฀disclosure฀requirements฀
will฀also฀relate฀to฀financial฀assets฀(IAS฀7:฀para.฀44C).฀
One฀ way฀ to฀ fulfil฀ the฀ new฀ disclosure฀ requirement฀ is฀ to฀ provide฀ a฀ reconciliation฀ of฀ cash฀ flows฀
arising฀ from฀ financing฀ activities฀ (as฀ reported฀ in฀ the฀ statement฀ of฀ cash฀ flows฀ excluding฀
contributed฀equity)฀to฀the฀corresponding฀liabilities฀in฀the฀opening฀and฀closing฀statement฀
of฀financial฀position฀(IAS฀7:฀para.฀44D).฀
The฀reconciliation฀could฀include:฀฀
(a)฀฀ Opening฀balances฀in฀the฀statement฀of฀financial฀position฀฀
(b)฀฀ Movements฀in฀the฀period฀฀
(c)฀฀ Closing฀balances฀in฀the฀statement฀of฀financial฀position฀฀
However,฀this฀reconciliation฀is฀not฀obligatory,฀as฀it฀was฀proposed฀in฀the฀2014฀ED฀on฀the฀subject.฀
Lastly,฀ the฀ amendments฀ state฀ that฀ changes฀ in฀ liabilities฀ arising฀ from฀ financing฀ activities฀ must฀ be฀
disclosed฀separately฀from฀changes฀in฀other฀assets฀and฀liabilities฀(IAS฀7:฀para.฀44E).฀฀
3฀Classification฀issues฀
3.1฀Profit฀or฀loss฀versus฀other฀comprehensive฀income฀
3.1.1฀The฀classification฀issue฀฀
The฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ aims฀ to฀ present฀ the฀ financial฀
performance฀of฀an฀entity฀to฀a฀wide฀variety฀of฀users฀in฀a฀way฀that฀is฀understandable฀and฀comparable฀
for฀the฀purpose฀of฀assessing฀the฀net฀cash฀inflows฀of฀the฀entity.฀The฀manner฀in฀which฀the฀information฀in฀
the฀statement฀is฀classified฀and฀aggregated฀plays฀a฀key฀role฀in฀fulfilling฀this฀aim.฀
Since฀ the฀ 2011฀ revision฀ of฀ IAS฀ 1,฀ entities฀ have฀ been฀ required฀ to฀ show฀ separately฀ in฀ other฀
comprehensive฀ income฀ those฀ items฀ that฀ may฀ be฀ reclassified฀ to฀ profit฀ or฀ loss฀ (recycled)฀ and฀ those฀
which฀may฀never฀be฀reclassified฀(together฀with฀the฀related฀tax฀effects).฀
There฀has฀been฀disagreement฀ as฀ to฀ which฀ items฀ should฀ appear฀ in฀ profit฀ or฀ loss,฀ and฀
which฀ in฀ other฀ comprehensive฀ income฀ (OCI).฀ The฀ issue฀ of฀ reclassification฀ has฀ also฀ been฀
controversial.฀฀
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3.1.2฀Profit฀or฀loss฀items฀฀
Generally,฀ changes฀ resulting฀ from฀ or฀ related฀ to฀ an฀ entity's฀ primary฀ performance฀ or฀ main฀
revenue-producing฀ activities฀ are฀ reported฀ in฀ profit฀ or฀ loss.฀ Examples฀ include฀ sales฀ revenue,฀
administration฀ expenses฀ and฀ gains฀ on฀ disposal฀ of฀ property,฀ plant฀ and฀ equipment.฀ Reclassification฀
adjustments,฀that฀is฀when฀items฀are฀recycled฀from฀other฀comprehensive฀income,฀are฀also฀included.฀
Investors฀tend฀to฀focus฀on฀profit฀or฀loss฀rather฀than฀OCI,฀and฀many฀accounting฀ratios฀are฀calculated฀
using฀profit฀or฀loss฀for฀the฀year,฀rather฀than฀total฀comprehensive฀income.฀฀
3.1.3฀Other฀comprehensive฀income฀฀
Generally,฀ these฀ are฀ items฀ of฀ income฀ and฀ expense฀ arising฀ from฀ other,฀ non-primary฀ or฀ non-
revenue฀ producing฀ activities฀ of฀ the฀ company฀ that฀ are฀ not฀ reported฀ in฀ profit฀ or฀ loss฀ as฀
required฀or฀permitted฀by฀other฀IFRSs.฀฀
3.1.4฀Profit฀or฀loss฀v฀OCI฀≠฀realised฀v฀unrealised฀
A฀common฀misconception฀in฀considering฀the฀classification฀of฀items฀is฀that฀profit฀or฀loss฀is฀for฀realised฀
gains฀ and฀ losses,฀ and฀ OCI฀ for฀ unrealised.฀ However,฀ this฀ distinction฀ is฀ itself฀ controversial฀ and฀
therefore฀of฀limited฀use฀in฀determining฀the฀P/L฀versus฀OCI฀classification.฀
3.1.5฀OCI฀as฀the฀'dumping฀ground'฀฀
It฀could฀be฀argued฀that฀OCI฀is฀defined฀in฀opposition฀to฀profit฀or฀loss฀–฀that฀is,฀items฀that฀are฀not฀profit฀
or฀loss฀–฀or฀even฀that฀it฀has฀been฀used฀as฀a฀'dumping฀ground'฀for฀items฀that฀entities฀do฀not฀wish฀to฀
report฀in฀profit฀or฀loss.฀Reclassification฀from฀OCI฀has฀been฀said฀to฀compromise฀the฀reliability฀of฀both฀
profit฀or฀loss฀and฀OCI.฀
3.1.6฀Approach฀in฀Conceptual฀Framework฀฀
Part฀of฀the฀problem฀is฀conceptual฀–฀the฀current฀Conceptual฀Framework฀does฀not฀contain฀principles฀to฀
determine:฀
(a)฀ What฀items฀are฀recognised฀in฀profit฀or฀loss;฀
(b)฀ What฀items฀are฀recognised฀in฀other฀comprehensive฀income;฀or฀
(c)฀ Whether,฀and฀when,฀items฀can฀be฀reclassified฀from฀other฀comprehensive฀income฀to฀profit฀or฀
loss.฀
ED/2015/3฀ Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ proposes฀ that฀ all฀ income฀ and฀ expense฀
should฀be฀shown฀in฀profit฀or฀loss฀unless฀relating฀to฀the฀remeasurement฀of฀assets฀and฀liabilities฀–฀these฀
would฀normally฀be฀shown฀in฀OCI.฀The฀ED฀presumes฀that฀items฀recognised฀in฀OCI฀will฀be฀reclassified฀
to฀profit฀or฀loss฀in฀a฀later฀period.฀The฀'later฀period'฀is฀based฀on฀when฀that฀reclassification฀will฀provide฀
relevant฀information฀to฀users฀(ED/2015/3฀paras.฀7.27–7.27).฀
(The฀Conceptual฀Framework฀and฀the฀related฀ED฀are฀covered฀in฀Chapter฀1฀of฀this฀Workbook.)฀฀
3.2฀Debt฀versus฀equity฀
3.2.1฀Classification฀differences฀
It฀ is฀ not฀ always฀ easy฀ to฀ distinguish฀ between฀ debt฀ and฀ equity฀ in฀ an฀ entity's฀ statement฀ of฀
financial฀position,฀partly฀because฀many฀financial฀instruments฀have฀elements฀of฀both.฀IAS฀32฀Financial฀
Instruments:฀Presentation฀ brings฀clarity฀and฀consistency฀to฀this฀matter,฀so฀that฀the฀ classification฀ is฀
based฀on฀principles฀rather฀than฀being฀driven฀by฀perceptions฀of฀users.฀฀
IAS฀ 32฀ defines฀ an฀ equity฀ instrument฀ as฀ 'any฀ contract฀ that฀ evidences฀ a฀ residual฀ interest฀ in฀ the฀
assets฀of฀an฀entity฀after฀deducting฀all฀of฀its฀liabilities'฀(IAS฀32:฀para.฀11).฀It฀must฀first฀be฀established฀
that฀an฀instrument฀is฀not฀a฀financial฀liability฀before฀it฀can฀be฀classified฀as฀equity.฀
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A฀ key฀ feature฀ of฀ the฀ IAS฀ 32฀ definition฀ of฀ a฀ financial฀ liability฀ is฀ that฀ it฀ is฀ a฀ contractual฀
obligation฀ to฀ deliver฀ cash฀ or฀ another฀ financial฀ asset฀ to฀ another฀ entity฀ (IAS฀ 32:฀
para.฀11).฀The฀contractual฀obligation฀may฀arise฀from฀a฀requirement฀to฀make฀payments฀of฀principal,฀
interest฀ or฀ dividends.฀ The฀ contractual฀ obligation฀ may฀ be฀ explicit,฀ but฀ it฀ could฀ also฀ be฀ implied฀
indirectly฀in฀the฀terms฀of฀the฀contract.฀An฀example฀of฀a฀debt฀instrument฀is฀a฀bond฀which฀requires฀the฀
issuer฀to฀make฀interest฀payments฀and฀redeem฀the฀bond฀for฀cash.฀฀
A฀ financial฀ instrument฀ is฀ an฀ equity฀ instrument฀ only฀ if฀ there฀ is฀ no฀ obligation฀ to฀ deliver฀ cash฀ or฀
other฀financial฀assets฀to฀another฀entity฀and฀if฀the฀instrument฀will฀or฀may฀be฀settled฀in฀the฀issuer's฀own฀
equity฀ instruments.฀ An฀ example฀ of฀ an฀ equity฀ instrument฀ is฀ ordinary฀ shares,฀ on฀ which฀
dividends฀ are฀ payable฀ at฀ the฀ discretion฀ of฀ the฀ issuer.฀ A฀ less฀ obvious฀ example฀ is฀
preference฀shares฀required฀to฀be฀converted฀into฀a฀fixed฀number฀of฀ordinary฀shares฀on฀a฀fixed฀date฀or฀
on฀the฀occurrence฀of฀an฀event฀which฀is฀certain฀to฀occur.฀฀
An฀ instrument฀ may฀ be฀ classified฀ as฀ an฀ equity฀ instrument฀ if฀ it฀ contains฀ a฀ contingent฀ settlement฀
provision฀requiring฀settlement฀in฀cash฀or฀a฀variable฀number฀of฀the฀entity's฀own฀shares฀only฀on฀the฀
occurrence฀ of฀ an฀ event฀ which฀ is฀ very฀ unlikely฀ to฀ occur฀ –฀ such฀ a฀ provision฀ is฀ not฀
considered฀ to฀ be฀ genuine.฀If฀the฀contingent฀ payment฀ condition฀is฀beyond฀ the฀ control฀
of฀both฀the฀entity฀and฀the฀holder฀of฀the฀instrument,฀then฀the฀instrument฀is฀classified฀as฀a฀financial฀
liability.฀
A฀ contract฀ resulting฀ in฀ the฀ receipt฀ or฀ delivery฀ of฀ an฀ entity's฀ own฀ shares฀ is฀ not฀
automatically฀an฀equity฀instrument.฀The฀classification฀depends฀on฀the฀so-called฀'fixed฀test'฀
in฀IAS฀32.฀A฀contract฀which฀will฀be฀settled฀by฀the฀entity฀receiving฀or฀delivering฀a฀fixed฀number฀of฀
its฀ own฀ equity฀ instruments฀ in฀ exchange฀ for฀ a฀ fixed฀ amount฀ of฀ cash฀ is฀ an฀ equity฀
instrument.฀The฀reasoning฀behind฀this฀is฀that฀by฀fixing฀upfront฀the฀number฀of฀shares฀to฀be฀received฀
or฀ delivered฀ on฀ settlement฀ of฀ the฀ instrument฀ in฀ question,฀ the฀ holder฀ is฀ exposed฀ to฀ the฀ upside฀ and฀
downside฀risk฀of฀movements฀in฀the฀entity's฀share฀price.฀
In฀contrast,฀if฀the฀amount฀of฀cash฀or฀own฀equity฀shares฀to฀be฀delivered฀or฀received฀is฀
variable,฀ then฀ the฀ contract฀ is฀ a฀ financial฀ liability฀ or฀ asset.฀ The฀ reasoning฀ behind฀ this฀ is฀ that฀
using฀a฀variable฀number฀of฀own฀equity฀instruments฀to฀settle฀a฀contract฀can฀be฀similar฀to฀using฀own฀
shares฀ as฀ 'currency'฀ to฀ settle฀ what฀ in฀ substance฀ is฀ a฀ financial฀ liability.฀ Such฀ a฀ contract฀ does฀ not฀
evidence฀a฀residual฀interest฀in฀the฀entity's฀net฀assets.฀Equity฀classification฀is฀therefore฀inappropriate.฀
IAS฀ 32฀ gives฀ two฀ examples฀ of฀ contracts฀ where฀ the฀ number฀ of฀ own฀ equity฀ instruments฀ to฀ be฀
received฀ or฀ delivered฀ varies฀ so฀ that฀ their฀ fair฀ value฀ equals฀ the฀ amount฀ of฀ the฀ contractual฀ right฀ or฀
obligation.฀
(a)฀ A฀ contract฀ to฀ deliver฀ a฀ variable฀ number฀ of฀ own฀ equity฀ instruments฀ equal฀ in฀ value฀ to฀ a฀ fixed฀
monetary฀amount฀on฀the฀settlement฀date฀is฀classified฀as฀a฀financial฀liability.฀
(b)฀ A฀contract฀to฀deliver฀as฀many฀of฀the฀entity's฀own฀equity฀instruments฀as฀are฀equal฀in฀value฀to฀the฀
value฀of฀100฀ounces฀of฀a฀commodity฀results฀in฀liability฀classification฀of฀the฀instrument.฀฀
฀ ฀(IAS฀32:฀para.฀AG฀27)฀
There฀are฀other฀factors฀which฀might฀result฀in฀an฀instrument฀being฀classified฀as฀debt.฀
(a)฀ Dividends฀are฀non-discretionary.฀
(b)฀ Redemption฀is฀at฀the฀option฀of฀the฀instrument฀holder.฀
(c)฀ The฀instrument฀has฀a฀limited฀life.฀
(d)฀ Redemption฀ is฀ triggered฀ by฀ a฀ future฀ uncertain฀ event฀ which฀ is฀ beyond฀ the฀ control฀ of฀ both฀ the฀
issuer฀and฀the฀holder฀of฀the฀instrument.฀
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Other฀ factors฀ which฀ might฀ result฀ in฀ an฀ instrument฀ being฀ classified฀ as฀ equity฀ include฀ the฀
following.฀฀
(a)฀ Dividends฀are฀discretionary.฀
(b)฀ The฀shares฀are฀non-redeemable.฀
(c)฀ There฀is฀no฀liquidation฀date.฀
฀ ฀ (IAS฀32:฀para.฀AG฀16C)฀
3.2.2฀Significance฀of฀the฀classification฀
The฀ distinction฀ between฀ debt฀ and฀ equity฀ is฀ very฀ important,฀ since฀ the฀ classification฀ of฀ a฀ financial฀
instrument฀as฀either฀debt฀or฀equity฀can฀have฀a฀significant฀impact฀ on฀the฀entity's฀reported฀
earnings฀ and฀ gearing฀ ratio,฀which฀in฀turn฀can฀affect฀debt฀covenants.฀Companies฀may฀wish฀to฀
classify฀a฀financial฀instrument฀as฀equity,฀in฀order฀to฀give฀a฀favourable฀impression฀of฀gearing,฀
but฀this฀may฀in฀turn฀have฀a฀negative฀effect฀on฀the฀perceptions฀of฀existing฀shareholders฀if฀it฀is฀seen฀
as฀diluting฀existing฀equity฀interests.฀฀
The฀distinction฀is฀also฀relevant฀in฀the฀context฀of฀a฀business฀ combination฀where฀an฀entity฀issues฀
financial฀ instruments฀ as฀ part฀ consideration,฀ or฀ to฀ raise฀ funds฀ to฀ settle฀ a฀ business฀
combination฀ in฀ cash.฀ Management฀ is฀ often฀ called฀ upon฀ to฀ evaluate฀ different฀ financing฀
options,฀ and฀ in฀ order฀ to฀ do฀ so฀ must฀ understand฀ the฀ classification฀ rules฀ and฀ their฀
potential฀ effects.฀For฀example,฀classification฀ as฀ a฀ liability฀generally฀means฀that฀payments฀
are฀treated฀as฀interest฀and฀charged฀to฀profit฀or฀loss,฀and฀this฀may,฀in฀turn,฀affect฀the฀entity's฀
ability฀to฀pay฀dividends฀on฀equity฀shares.฀฀
4฀Definition฀of฀a฀business฀and฀accounting฀for฀previously฀
held฀interests฀
4.1฀Background฀
Following฀ a฀ post-implementation฀ review฀ of฀ IFRS฀ 3฀ Business฀ Combinations,฀ it฀ emerged฀ that฀ entities฀
sometimes฀find฀it฀difficult฀to฀determine฀whether฀they฀have฀acquired฀a฀business฀or฀acquired฀a฀group฀of฀
assets.฀ The฀ distinction฀ is฀ important฀ because฀ the฀ accounting฀ treatment฀ is฀ very฀ different฀ for฀ the฀
acquisition฀of฀a฀business฀compared฀to฀the฀acquisition฀of฀a฀group฀of฀assets.฀The฀differences฀relate฀to฀
goodwill,฀deferred฀tax฀and฀acquisition฀costs.฀To฀resolve฀these฀difficulties,฀the฀IASB฀decided฀to฀issue฀
some฀narrow฀scope฀amendments.฀฀
Meanwhile,฀ the฀ IFRS฀ Interpretations฀ Committee฀ had฀ entered฀ into฀ discussions฀ relating฀ to฀ transactions฀
involving฀ previously฀ held฀ interests฀ in฀ joint฀ operations.฀ There฀ is฀ diversity฀ in฀ practice฀ when฀ an฀ entity฀
acquires฀sole฀control฀over฀a฀joint฀operation฀in฀which฀it฀previously฀had฀an฀interest.฀
The฀IASB฀decided฀to฀bring฀these฀two฀aspects฀together,฀and฀in฀June฀2016฀issued฀ED/2016/1฀Definition฀
of฀ a฀ Business฀ and฀ Accounting฀ for฀ Previously฀ Held฀ Interests฀(Proposed฀ amendments฀ to฀ IFRS฀ 3฀ and฀
IFRS฀11).฀฀
4.2฀Definition฀of฀a฀business฀
The฀IASB฀has฀proposed฀changes฀to฀the฀Application฀Guidance฀of฀IFRS฀3฀to฀clarify฀the฀definition฀of฀a฀
business.฀฀฀
The฀current฀Application฀Guidance฀of฀IFRS฀3฀defines฀a฀business฀as฀follows:฀
฀ 'A฀ business฀ consists฀ of฀ inputs฀ and฀ processes฀ applied฀ to฀ those฀ inputs฀ that฀ have฀ the฀ ability฀ to฀
create฀ outputs.฀ Although฀ businesses฀ usually฀ have฀ outputs,฀ outputs฀ are฀ not฀ required฀ for฀ an฀
integrated฀set฀to฀qualify฀as฀a฀business.'฀(IFRS฀3:฀IG฀para.฀B7)฀
The฀ED฀proposes฀that฀rather฀than฀'create'฀outputs,฀a฀business฀should฀have฀the฀ability฀to฀'contribute฀to฀
the฀creation฀of฀outputs'฀(ED/2016/1:฀para.฀B7).฀
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Furthermore,฀the฀ED฀states฀that:฀฀
'To฀constitute฀a฀business,฀an฀integrated฀ set฀ of฀ activities฀ and฀ assets฀must฀include,฀at฀a฀
minimum,฀ an฀ input฀ and฀ a฀ substantive฀ process฀ that฀ together฀ have฀ the฀ ability฀ to฀
contribute฀ to฀ the฀ creation฀ of฀ outputs.฀However,฀a฀business฀need฀not฀include฀all฀of฀the฀
inputs฀or฀processes฀that฀the฀seller฀used฀in฀operating฀that฀business.'฀(ED/2016/1:฀para.฀B8)฀
The฀ED฀details฀a฀series฀of฀steps฀to฀assess฀whether฀a฀business฀has฀been฀acquired.฀The฀first฀step฀in฀the฀
assessment฀is฀to฀determine฀'whether฀substantially฀all฀of฀the฀fair฀value฀of฀the฀gross฀assets฀acquired฀are฀
concentrated฀ either฀ in฀ a฀ single฀ asset฀ or฀ group฀ of฀ similar฀ assets'฀ (ED/2016/1:฀ para.฀ B8A).฀ If฀ this฀ is฀
the฀case,฀then฀the฀acquisition฀is฀not฀a฀business.฀฀
If฀ the฀ fair฀ value฀ of฀ assets฀ acquired฀ is฀ not฀ concentrated฀ in฀ this฀ way,฀ then฀ the฀ next฀ step฀ in฀ the฀
assessment฀ is฀ to฀ determine฀ whether฀ the฀ acquired฀ process฀ is฀ substantive.฀ The฀ ED฀ states฀ how฀ this฀
should฀be฀carried฀out,฀depending฀on฀whether฀the฀acquired฀process฀has฀outputs฀or฀not.฀฀
If฀ there฀ are฀ no฀ outputs฀ (eg฀ a฀ new฀ entity฀ that฀ hasn't฀ started฀ trading),฀ then฀ the฀ acquisition฀ is฀ only฀ a฀
business฀ if฀ the฀ process฀ acquired฀ is฀ critical฀ to฀ transforming฀ acquired฀ inputs฀ into฀ outputs฀ and฀ if฀ the฀
acquisition฀includes฀a฀workforce฀who฀are฀able฀to฀perform฀the฀acquired฀process฀(ED/2016/1:฀para.฀
B12A).฀
The฀ED฀also฀proposes฀to฀add฀new฀material฀to฀the฀Illustrative฀Examples฀of฀IFRS฀3฀to฀show฀how฀the฀new฀
guidance฀should฀be฀applied.฀฀
4.3฀Accounting฀for฀previously฀held฀interests฀
ED/2016/1฀ proposes฀ to฀ clarify฀ that฀ when฀ an฀ entity฀ obtains฀ sole฀ control฀ of฀ a฀ joint฀ operation฀ in฀
which฀ it฀ currently฀ participates,฀ the฀ entity฀ should฀ remeasure฀ its฀ previously฀ held฀ interest฀ in฀ the฀ assets฀
and฀ liabilities฀ of฀ that฀ joint฀ operation฀ at฀ fair฀ value.฀ This฀ only฀ applies฀ if฀ the฀ joint฀ operation฀ meets฀ the฀
definition฀of฀a฀business,฀as฀discussed฀above.฀The฀clarification฀will฀mean฀that฀this฀kind฀of฀transaction฀is฀
treated฀like฀any฀other฀step฀acquisition฀under฀IFRS฀3.฀฀฀
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Further฀question฀practice฀and฀solutions฀
1฀Conceptual฀Framework฀
(a)฀ Explain฀ the฀ main฀ purposes฀ of฀ the฀ International฀ Accounting฀ Standards฀ Board's฀ Conceptual฀
Framework฀for฀Financial฀Reporting.฀
(b)฀ Identify฀ any฀ four฀ user฀ groups฀ of฀ financial฀ statements฀ and฀ explain฀ what฀ information฀ they฀ are฀
likely฀to฀want฀from฀them.฀
2฀Fundamental฀principles฀
Fundamental฀ principles฀ require฀ that฀ a฀ member฀ of฀ a฀ professional฀ accountancy฀ body฀ should฀ behave฀
with฀integrity฀in฀all฀professional,฀business฀and฀financial฀relationships฀and฀should฀strive฀for฀objectivity฀
in฀all฀professional฀and฀business฀judgements.฀Objectivity฀can฀only฀be฀assured฀if฀the฀member฀is฀and฀is฀
seen฀to฀be฀independent.฀Conflicts฀of฀interest฀have฀an฀important฀bearing฀on฀independence฀and฀hence฀
also฀ on฀ the฀ public's฀ perception฀ of฀ the฀ integrity,฀ objectivity฀ and฀ independence฀ of฀ the฀ accounting฀
profession.฀
The฀ following฀ scenario฀ is฀ an฀ example฀ of฀ press฀ reports฀ in฀ recent฀ years฀ which฀ deal฀ with฀ issues฀ of฀
objectivity฀and฀independence฀within฀a฀multinational฀firm฀of฀accountants:฀
'A฀partner฀in฀the฀firm฀was฀told฀by฀the฀regulatory฀body฀that฀he฀must฀resign฀because฀he฀was฀in฀breach฀
of฀the฀regulatory฀body's฀independence฀rules,฀as฀his฀brother-in-law฀was฀financial฀controller฀of฀an฀audit฀
client.฀He฀was฀told฀that฀the฀alternative฀was฀that฀he฀could฀move฀his฀home฀and฀place฀of฀work฀at฀least฀
400฀miles฀from฀the฀offices฀of฀the฀client,฀even฀though฀he฀was฀not฀the฀reporting฀partner.฀This฀made฀his฀
job฀untenable.฀The฀regulatory฀body฀was฀seen฀as฀'taking฀its฀rules฀to฀absurd฀lengths'฀by฀the฀accounting฀
firm.฀Shortly฀after฀this฀comment,฀the฀multinational฀firm฀announced฀proposals฀to฀split฀the฀firm฀into฀three฀
areas฀between฀audit,฀tax฀and฀business฀advisory฀services;฀management฀consultancy;฀and฀investment฀
advisory฀services'.฀
Required฀
Discuss฀ the฀ impact฀ that฀ the฀ above฀ events฀ may฀ have฀ on฀ the฀ public฀ perception฀ of฀ the฀ integrity,฀
objectivity฀and฀independence฀of฀the฀multinational฀firm฀of฀accountants.฀
3฀Ace฀ ฀
On฀ 1฀ April฀ 20X1,฀ Ace฀ Co฀ owned฀ 75%฀ of฀ the฀ equity฀ share฀ capital฀ of฀ Deuce฀ Co฀ and฀ 80%฀ of฀ the฀
equity฀ share฀ capital฀ of฀ Trey฀ Co.฀ On฀ 1฀ April฀ 20X2,฀ Ace฀ Co฀ purchased฀ the฀ remaining฀ 25%฀ of฀ the฀
equity฀ shares฀ of฀ Deuce฀ Co.฀ In฀ the฀ two฀ years฀ ended฀ 31฀ March฀ 20X3,฀ the฀ following฀ transactions฀
occurred฀between฀the฀three฀companies:฀
(a)฀ On฀ 30฀ June฀ 20X1฀ Ace฀ Co฀ manufactured฀ a฀ machine฀ for฀ use฀ by฀ Deuce฀ Co.฀ The฀ cost฀ of฀
manufacture฀was฀$20,000.฀The฀machine฀was฀delivered฀to฀Deuce฀Co฀for฀an฀invoiced฀price฀of฀
$25,000.฀Deuce฀Co฀paid฀the฀invoice฀on฀31฀August฀20X1.฀Deuce฀Co฀depreciated฀the฀machine฀
over฀its฀anticipated฀useful฀life฀of฀five฀years,฀charging฀a฀full฀year's฀depreciation฀in฀the฀year฀of฀
purchase.฀
(b)฀ On฀ 30฀ September฀ 20X2,฀ Deuce฀ Co฀ sold฀ some฀ goods฀ to฀ Trey฀ Co฀ at฀ an฀ invoiced฀ price฀ of฀
$15,000.฀ Trey฀ Co฀ paid฀ the฀ invoice฀ on฀ 30฀ November฀ 20X2.฀ The฀ goods฀ had฀ cost฀ Deuce฀ Co฀
$12,000฀ to฀ manufacture.฀ By฀ 31฀ March฀ 20X3,฀ Trey฀ Co฀ had฀ sold฀ all฀ the฀ goods฀ outside฀ the฀
group.฀
(c)฀ For฀each฀of฀the฀two฀years฀ended฀31฀March฀20X3,฀Ace฀Co฀provided฀management฀services฀to฀
Deuce฀Co฀and฀Trey฀Co.฀Ace฀Co฀did฀not฀charge฀for฀these฀services฀in฀the฀year฀ended฀31฀March฀
20X2฀ but฀ in฀ the฀ year฀ ended฀ 31฀ March฀ 20X3฀ decided฀ to฀ impose฀ a฀ charge฀ of฀ $10,000฀ per฀
annum฀to฀Trey฀Co.฀The฀amount฀of฀$10,000฀is฀due฀to฀be฀paid฀by฀Trey฀Co฀on฀31฀May฀20X3.฀
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Required฀
Summarise฀ the฀ related฀ party฀ disclosures฀ which฀ will฀ be฀ required฀ in฀ respect฀ of฀ transactions฀ (a)฀ to฀ (c)฀
above฀for฀both฀of฀the฀years฀ended฀31฀March฀20X2฀and฀31฀March฀20X3฀in฀the฀financial฀statements฀
of฀Ace฀Co,฀Deuce฀Co฀and฀Trey฀Co.฀
Note.฀You฀may฀assume฀that฀Ace฀Co฀presents฀consolidated฀financial฀statements฀for฀both฀of฀the฀years฀
dealt฀with฀in฀the฀question.฀
4฀Camel฀Telecom฀ 49฀mins฀
Camel฀Telecom฀(Camel)฀operates฀in฀the฀telecommunications฀industry฀under฀the฀name฀Mobistar฀which฀
it฀developed฀itself.฀Camel฀has฀entered฀into฀a฀number฀of฀transactions฀relating฀to฀non-current฀assets฀on฀
which฀it฀would฀like฀accounting฀advice.฀
(a)฀ Camel฀ won฀ a฀ government฀ tender฀ to฀ be฀ awarded฀ a฀ licence฀ to฀ operate฀ 5G฀ mobile฀ phone฀
services.฀ Only฀ four฀ such฀ licences฀ were฀ available฀ in฀ the฀ country.฀ Under฀ the฀ terms฀ of฀ the฀
agreement,฀Camel฀can฀operate฀5G฀services฀for฀a฀period฀of฀10฀years฀from฀the฀commencement฀
of฀ the฀ licence฀ which฀ was฀ 1฀ July฀ 20X7.฀ During฀ that฀ period฀ Camel฀ can,฀ if฀ it฀ chooses,฀ sell฀ the฀
licence฀ to฀ another฀ operator฀ meeting฀ certain฀ government฀ criteria,฀ sharing฀ any฀ profits฀ made฀
equally฀with฀the฀government.฀
฀ Camel฀ paid฀ $344m฀ for฀ the฀ licence฀ on฀ 1฀ July฀ 20X7.฀ Its฀ market฀ value฀ was฀ estimated฀ at฀
$370฀million฀at฀that฀date.฀
Due฀to฀lower฀take฀up฀than฀expected฀of฀5G฀services,฀the฀fair฀value฀of฀the฀licence฀was฀valued฀at฀
$335฀ million฀ at฀ the฀ company's฀ year฀ end฀ 30฀ June฀ 20X8,฀ by฀ Valyou,฀ a฀ professional฀ services฀
firm.฀
฀ (6฀marks)฀
(b)฀ In฀September฀20X7,฀Camel฀purchased฀a฀plot฀of฀land฀on฀which฀it฀intends฀to฀build฀its฀new฀head฀
office฀ and฀ service฀ centre฀ in฀ 2฀ years'฀ time.฀ In฀ the฀ meantime฀ the฀ land฀ is฀ rented฀ out฀ to฀ a฀ local฀
farm.฀The฀land฀cost฀$10.4฀million.฀It฀has฀been฀valued฀at฀the฀year฀end฀by฀Valyou฀and฀has฀a฀
value฀ of฀ $10.6฀ million฀ as฀ farmland฀ and฀ $14.3฀ million฀ as฀ land฀ for฀ development.฀ Planning฀
permission฀ is฀ in฀ process฀ at฀ the฀ year฀ end,฀ but฀ Camel's฀ lawyer฀ expects฀ it฀ to฀ be฀ granted฀ by฀฀
mid-20X9.฀ (4฀marks)฀
(c)฀ Camel฀purchased฀a฀number฀of฀hilltop฀sites฀a฀number฀of฀years฀ago฀on฀which฀(after฀receiving฀
planning฀permission),฀it฀erects฀mobile฀phone฀transmitter฀masts.฀
฀ Because฀of฀the฀prime฀location฀of฀the฀sites,฀their฀market฀value฀has฀increased฀substantially฀since฀
the฀ original฀ purchase.฀ Camel฀ is฀ also฀ able฀ to฀ lease฀ part฀ of฀ the฀ sites฀ to฀ other฀ mobile฀
communication฀companies.฀ (4฀marks)฀
(d)฀ During฀the฀year,฀Camel฀did฀a฀deal฀with฀a฀mobile฀operator฀in฀another฀country฀whereby฀Camel฀
sold฀its฀fixed฀line฀ADSL฀business฀to฀another฀company,฀Purple,฀for฀an฀agreed฀market฀value฀of฀
$320฀ million฀ and฀ in฀ return฀ acquired฀ Purple's฀ mobile฀ phone฀ business฀ in฀ the฀ other฀ country.฀
Camel฀ paid฀ $980฀ million฀ to฀ Purple฀ in฀ addition฀ to฀ the฀ legal฀ transfer฀ of฀ its฀ fixed฀ line฀ ADSL฀
business.฀Purple฀did฀not฀make฀any฀payment฀other฀than฀the฀transfer฀of฀its฀mobile฀business.฀
฀ Under฀ the฀ terms฀ of฀ the฀ agreement,฀ the฀ mobile฀ phone฀ business฀ will฀ remain฀ under฀ the฀ name฀
Purple฀for฀up฀to฀one฀year,฀after฀which฀Camel฀time฀intends฀to฀re-brand฀the฀business฀under฀its฀
own฀national฀and฀international฀mobile฀brand฀Mobistar.฀ (5฀marks)฀
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฀
(e)฀ An฀embarrassing฀incident฀occurred฀in฀February฀20X8฀where฀a฀laptop฀containing฀details฀of฀all฀
of฀ Camel's฀ national฀ customers฀ and฀ the฀ expiry฀ date฀ of฀ their฀ contracts฀ was฀ stolen.฀ The฀ details฀
subsequently฀ fell฀ into฀ the฀ hands฀ of฀ competitors฀ who฀ have฀ been฀ contacting฀ Camel's฀ clients฀
when฀their฀Mobistar฀contracts฀are฀up฀for฀renewal.฀
฀ As฀ a฀ result฀ of฀ this฀ Camel฀ has฀ realised฀ that฀ the฀ value฀ of฀ the฀ client฀ details฀ is฀ significant฀ and฀
proposes฀to฀recognise฀a฀value฀determined฀by฀Valyou฀in฀its฀financial฀statements.฀This฀valuation฀
of฀ $44฀ million฀ takes฀ into฀ account฀ business฀ expected฀ to฀ be฀ lost฀ as฀ a฀ result฀ of฀ the฀ incident.฀
฀ (4฀marks)฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ how฀ the฀ above฀ transactions฀ should฀ be฀ accounted฀ for฀ in฀ the฀
financial฀statements฀of฀the฀Camel฀Telecom฀Group฀under฀IFRSs฀for฀the฀year฀ended฀30฀June฀20X8.฀
All฀amounts฀are฀considered฀material฀to฀the฀group฀financial฀statements.฀
Professional฀marks฀for฀clarity฀and฀expression฀ (2฀marks)฀
5฀Acquirer฀ 49฀mins฀
Acquirer฀is฀an฀entity฀that฀regularly฀purchases฀new฀subsidiaries.฀On฀30฀June฀20X0,฀the฀entity฀acquired฀
all฀the฀equity฀shares฀of฀Prospects฀for฀a฀cash฀payment฀of฀$260฀million.฀The฀net฀assets฀of฀Prospects฀on฀
30฀June฀20X0฀were฀$180฀million฀and฀no฀fair฀value฀adjustments฀were฀necessary฀upon฀consolidation฀
of฀Prospects฀for฀the฀first฀time.฀฀
On฀31฀December฀20X0,฀Acquirer฀carried฀out฀a฀review฀of฀the฀goodwill฀on฀consolidation฀of฀Prospects฀
for฀evidence฀of฀impairment.฀The฀review฀was฀carried฀out฀despite฀the฀fact฀that฀there฀were฀no฀obvious฀
indications฀of฀adverse฀trading฀conditions฀for฀Prospects.฀The฀review฀involved฀allocating฀the฀net฀asset฀
of฀ Prospects฀ into฀ three฀ cash-generating฀ units฀ and฀ computing฀ the฀ value฀ in฀ use฀ of฀ each฀ unit.฀ The฀
carrying฀values฀of฀the฀individual฀units฀before฀any฀impairment฀adjustments฀are฀given฀below.฀
฀ Unit฀A Unit฀B Unit฀C฀
฀ $m $m $m฀
Patents฀ ฀ 5฀ – –
Property,฀plant฀and฀equipment฀ ฀60฀ ฀30฀ ฀40฀
Net฀current฀assets฀ ฀20฀ ฀25฀ ฀20฀
฀ ฀85฀ ฀55฀ ฀60฀
Value฀in฀use฀of฀unit฀ ฀72฀ ฀60฀ ฀65฀
It฀ was฀ not฀ possible฀ to฀ meaningfully฀ allocate฀ the฀ goodwill฀ on฀ consolidation฀ to฀ the฀ individual฀ cash-
generating฀ units,฀ but฀ all฀ other฀ net฀ assets฀ of฀ Prospects฀ are฀ allocated฀ in฀ the฀ table฀ shown฀ above.฀ The฀
patents฀ of฀ Prospects฀ have฀ no฀ ascertainable฀ market฀ value฀ but฀ all฀ the฀ current฀ assets฀ have฀ a฀ market฀
value฀that฀is฀above฀carrying฀value.฀The฀value฀in฀use฀of฀Prospects฀as฀a฀single฀cash-generating฀unit฀at฀
31฀December฀20X1฀is฀£205฀million.฀
Required฀
(a)฀ Explain฀what฀is฀meant฀by฀a฀cash-generating฀unit.฀ (5฀marks)฀
(b)฀ Explain฀ why฀ it฀ was฀ necessary฀ to฀ review฀ the฀ goodwill฀ on฀ consolidation฀ of฀ Prospects฀ for฀
impairment฀at฀31฀December฀20X0.฀ (3฀marks)฀
(c)฀ Explain฀briefly฀the฀purpose฀of฀an฀impairment฀review฀and฀why฀the฀net฀assets฀of฀Prospects฀were฀
allocated฀into฀cash-generating฀units฀as฀part฀of฀the฀review฀of฀goodwill฀for฀impairment.฀ ฀
฀ ฀ (5฀marks)฀
(d)฀ Demonstrate฀how฀the฀impairment฀loss฀in฀unit฀A฀will฀affect฀the฀carrying฀value฀of฀the฀net฀assets฀of฀
unit฀A฀in฀the฀consolidated฀financial฀statements฀of฀Acquirer.฀ (5฀marks)฀
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(e)฀ Explain฀and฀calculate฀the฀effect฀of฀the฀impairment฀review฀on฀the฀carrying฀value฀of฀the฀goodwill฀
on฀consolidation฀of฀Prospects฀at฀31฀December฀20X0.฀ (7฀marks)฀
6฀Radost฀ 23฀mins฀
Radost,฀a฀public฀limited฀company,฀has฀a฀defined฀benefit฀pension฀plan฀for฀its฀staff.฀Staff฀are฀eligible฀
for฀an฀annual฀pension฀between฀the฀date฀of฀their฀retirement฀and฀the฀date฀of฀their฀death฀equal฀to:฀
Final฀salary฀per฀year
Annual฀pension฀=฀ ฀years'฀service.฀
50
You฀are฀given฀the฀following฀data฀relating฀to฀the฀year฀ended฀31฀December฀20X3:฀
(a)฀ Yield฀on฀high฀quality฀corporate฀bonds:฀10%฀pa.฀
(b)฀ Contributions฀paid฀by฀Radost฀to฀pension฀plan:฀$12฀million฀
(c)฀ Pensions฀paid฀to฀former฀employees:฀$8฀million฀
(d)฀ Current฀service฀cost:฀$3.75฀million฀
(e)฀ After฀ consultation฀ with฀ employees,฀ an฀ amendment฀ was฀ agreed฀ to฀ the฀ terms฀ of฀ the฀ plan,฀
reducing฀the฀benefits฀payable.฀The฀amendment฀takes฀effect฀from฀31฀December฀20X3฀and฀the฀
actuary฀has฀calculated฀that฀the฀resulting฀reduction฀in฀the฀pension฀obligation฀is฀$6฀million.฀
(f)฀ NPV฀of฀the฀pension฀obligation฀at:฀
1.1.X3฀–฀$45฀million฀
31.12.X3฀–฀$44฀million฀(as฀given฀by฀the฀actuary,฀after฀adjusting฀for฀the฀plan฀amendment)฀
(g)฀ Fair฀value฀of฀the฀plan฀assets,฀as฀valued฀by฀the฀actuary:฀
1.1.X3฀–฀$52฀million฀
31.12.X3฀–฀$64.17฀million฀
Required฀
(a)฀ Produce฀ the฀ notes฀ to฀ the฀ statement฀ of฀ financial฀ position฀ and฀ statement฀ of฀ profit฀ or฀ loss฀ and฀
other฀comprehensive฀income฀in฀accordance฀with฀IAS฀19.฀ (8฀marks)฀
(b)฀ Explain฀why฀the฀pension฀plan฀assets฀are฀recognised฀in฀the฀financial฀statements฀of฀Radost,฀even฀
though฀they฀are฀held฀in฀a฀separate฀legal฀trust฀for฀Radost's฀employees.฀ (4฀marks)฀
Notes฀฀
1฀ Work฀to฀the฀nearest฀$1,000฀throughout.฀฀
2฀ You฀should฀assume฀contributions฀and฀benefits฀were฀paid฀on฀the฀last฀day฀of฀the฀year.฀
7฀Cleanex฀ 49฀mins฀
Cleanex฀prepares฀its฀financial฀statements฀in฀accordance฀with฀IFRS.฀On฀25฀June฀20X0,฀Cleanex฀made฀
a฀public฀announcement฀of฀its฀decision฀to฀reduce฀the฀level฀of฀emissions฀of฀harmful฀chemicals฀from฀its฀
factories.฀The฀average฀useful฀lives฀of฀the฀factories฀on฀30฀June฀20X0฀was฀20฀years.฀The฀depreciation฀
of฀ the฀ factories฀ is฀ computed฀ on฀ a฀ straight-line฀ basis฀ and฀ charged฀ to฀ cost฀ of฀ sales.฀ The฀ directors฀
formulated฀the฀proposals฀for฀emission฀reduction฀following฀agreement฀in฀principle฀earlier฀in฀the฀year.฀
The฀directors฀prepared฀detailed฀estimates฀of฀the฀costs฀of฀their฀proposals฀and฀these฀showed฀that฀the฀
following฀expenditure฀would฀be฀required.฀
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฀
฀ $30฀million฀on฀30฀June฀20X1฀
All฀ estimates฀ were฀ for฀ the฀ actual฀ anticipated฀ cash฀ payments.฀ No฀ contracts฀ were฀ entered฀ into฀ until฀
after฀1฀July฀20X0.฀The฀estimate฀proved฀accurate฀as฀far฀as฀the฀expenditure฀due฀on฀30฀June฀20X1฀was฀
concerned.฀When฀the฀directors฀decided฀to฀proceed฀with฀this฀project,฀they฀used฀discounted฀cash฀flow฀
techniques฀ to฀ appraise฀ the฀ proposed฀ investment.฀ The฀ annual฀ discount฀ rate฀ they฀ used฀ was฀ 8%.฀ The฀
entity฀ has฀ a฀ reputation฀ of฀ fulfilling฀ its฀ financial฀ commitments฀ after฀ it฀ has฀ publicly฀ announced฀ them.฀
Cleanex฀included฀a฀provision฀for฀the฀expected฀costs฀of฀its฀proposal฀in฀its฀financial฀statements฀for฀the฀
year฀ended฀30฀June฀20X0.฀
Required฀
(a)฀ Explain฀ why฀ there฀ was฀ a฀ need฀ for฀ an฀ accounting฀ standard฀ dealing฀ with฀ provisions,฀ and฀
summarise฀the฀criteria฀that฀need฀to฀be฀satisfied฀before฀a฀provision฀is฀recognised.฀ (10฀marks)฀
(b)฀ Explain฀the฀decision฀of฀the฀directors฀of฀Cleanex฀to฀recognise฀the฀provision฀in฀the฀statement฀of฀
financial฀position฀at฀30฀June฀20X0.฀ (5฀marks)฀
(c)฀ Compute฀ the฀ appropriate฀ provision฀ in฀ the฀ statements฀ of฀ financial฀ position฀ in฀ respect฀ of฀ the฀
proposed฀expenditure฀at฀30฀June฀20X0฀and฀30฀June฀20X1.฀ (4฀marks)฀
(d)฀ Compute฀the฀two฀components฀of฀the฀charge฀to฀profit฀or฀loss฀in฀respect฀of฀the฀proposal฀for฀the฀
year฀ ended฀ 30฀ June฀ 20X1.฀ You฀ should฀ explain฀ how฀ each฀ component฀ arises฀ and฀ identify฀
where฀in฀the฀statements฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀each฀component฀is฀
reported.฀ (6฀marks)฀
8฀DT฀Group฀ 49฀mins฀
(a)฀ IAS฀12฀Income฀Taxes฀focuses฀on฀the฀statement฀of฀financial฀position฀in฀accounting฀for฀deferred฀
taxation,฀ which฀ is฀ calculated฀ on฀ the฀ basis฀ of฀ temporary฀ differences.฀ The฀ methods฀ used฀ in฀
IAS฀12฀can฀lead฀to฀accumulation฀of฀large฀tax฀assets฀or฀liabilities฀over฀a฀prolonged฀period฀and฀
this฀could฀be฀remedied฀by฀discounting฀these฀assets฀or฀liabilities.฀There฀is฀currently฀international฀
disagreement฀over฀the฀discounting฀of฀deferred฀tax฀balances.฀
Required฀
(i)฀ Explain฀ what฀ the฀ terms฀ 'focus฀ on฀ the฀ statement฀ of฀ financial฀ position'฀ and฀ 'temporary฀
differences'฀mean฀in฀relation฀to฀deferred฀taxation.฀ (6฀marks)฀
(ii)฀ Discuss฀the฀arguments฀for฀and฀against฀discounting฀long-term฀deferred฀tax฀balances.฀
฀ ฀ (6฀marks)฀
(b)฀ DT,฀ a฀ public฀ limited฀ company,฀ has฀ decided฀ to฀ adopt฀ IFRSs฀ for฀ the฀ first฀ time฀ in฀ its฀ financial฀
statements฀for฀the฀year฀ending฀30฀November฀20X1.฀The฀amounts฀of฀deferred฀tax฀provided฀as฀
set฀out฀in฀the฀notes฀of฀the฀group฀financial฀statements฀for฀the฀year฀ending฀30฀November฀20X0฀
were฀as฀follows:฀
฀ ฀$m฀
Tax฀depreciation฀in฀excess฀of฀accounting฀depreciation฀ ฀38฀
Other฀temporary฀differences฀ ฀11฀
Liabilities฀for฀health฀care฀benefits฀ ฀(12)฀
Losses฀available฀for฀offset฀against฀future฀taxable฀profits฀ ฀(34)฀
฀ ฀฀฀฀3฀
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The฀ following฀ notes฀ are฀ relevant฀ to฀ the฀ calculation฀ of฀ the฀ deferred฀ tax฀ liability฀ as฀ at฀
30฀November฀20X1:฀
(i)฀ DT฀ acquired฀ a฀ 100%฀ holding฀ in฀ a฀ foreign฀ company฀ on฀ 30฀ November฀ 20X1.฀ The฀
subsidiary฀does฀not฀plan฀to฀pay฀any฀dividends฀for฀the฀financial฀year฀to฀30฀November฀
20X1฀ or฀ in฀ the฀ foreseeable฀ future.฀ The฀ carrying฀ amount฀ in฀ DT's฀ consolidated฀ financial฀
statements฀ of฀ its฀ investment฀ in฀ the฀ subsidiary฀ at฀ 30฀ November฀ 20X1฀ is฀ made฀ up฀ as฀
follows:฀
฀ ฀$m฀
฀Carrying฀value฀of฀net฀assets฀acquired฀excluding฀deferred฀tax฀ ฀76฀
฀Goodwill฀(before฀deferred฀tax฀and฀impairment฀losses)฀ ฀14฀
฀Carrying฀amount/cost฀of฀investment฀ ฀90฀
The฀ tax฀ base฀ of฀ the฀ net฀ assets฀ of฀ the฀ subsidiary฀ at฀ acquisition฀ was฀ $60฀ million.฀ No฀
deduction฀is฀available฀in฀the฀subsidiary's฀tax฀jurisdiction฀for฀the฀cost฀of฀the฀goodwill.฀
Immediately฀ after฀ acquisition฀ on฀ 30฀ November฀ 20X1,฀ DT฀ had฀ supplied฀ the฀ subsidiary฀
with฀ inventories฀ amounting฀ to฀ $30฀ million฀ at฀ a฀ profit฀ of฀ 20%฀ on฀ selling฀ price.฀ The฀
inventories฀ had฀ not฀ been฀ sold฀ by฀ the฀ year฀ end฀ and฀ the฀ tax฀ rate฀ applied฀ to฀ the฀
subsidiary's฀ profit฀ is฀ 25%.฀ There฀ was฀ no฀ significant฀ difference฀ between฀ the฀ fair฀ values฀
and฀carrying฀values฀on฀the฀acquisition฀of฀the฀subsidiary.฀
(ii)฀ The฀ carrying฀ amount฀ of฀ the฀ property,฀ plant฀ and฀ equipment฀ (excluding฀ that฀ of฀ the฀
subsidiary)฀is฀$2,600฀million฀and฀their฀tax฀base฀is฀$1,920฀million.฀Tax฀arising฀on฀the฀
revaluation฀of฀properties฀of฀$140฀million,฀if฀disposed฀of฀at฀their฀revalued฀amounts,฀is฀the฀
same฀ at฀ 30฀ November฀ 20X1฀ as฀ at฀ the฀ beginning฀ of฀ the฀ year.฀ The฀ revaluation฀ of฀ the฀
properties฀is฀included฀in฀the฀carrying฀amount฀above.฀
Other฀taxable฀temporary฀differences฀(excluding฀the฀subsidiary)฀amount฀to฀$90฀million฀as฀
at฀30฀November฀20X1.฀
(iii)฀ The฀ liability฀ for฀ health฀ care฀ benefits฀ in฀ the฀ statement฀ of฀ financial฀ position฀ had฀ risen฀ to฀
$100฀million฀as฀at฀30฀November฀20X1฀and฀the฀tax฀base฀is฀zero.฀Health฀care฀benefits฀
are฀ deductible฀ for฀ tax฀ purposes฀ when฀ payments฀ are฀ made฀ to฀ retirees.฀ No฀ payments฀
were฀made฀during฀the฀year฀to฀30฀November฀20X1.฀
(iv)฀ DT฀Group฀incurred฀$300฀million฀of฀tax฀losses฀in฀the฀year฀ended฀30฀November฀20X0.฀
Under฀the฀tax฀law฀of฀the฀country,฀tax฀losses฀can฀be฀carried฀forward฀for฀three฀years฀only.฀
The฀ taxable฀ profit฀ for฀ the฀ year฀ ending฀ 30฀ November฀ 20X1฀ was฀ $110฀ million.฀ In฀ the฀
years฀ending฀30฀November,฀taxable฀profits฀were฀anticipated฀to฀be:฀
20X2 20X3
$m $m
100 130
The฀auditors฀are฀unsure฀about฀the฀availability฀of฀taxable฀profits฀in฀20X3฀as฀the฀amount฀
is฀ based฀ upon฀ the฀ projected฀ acquisition฀ of฀ a฀ profitable฀ company.฀ It฀ is฀ anticipated฀ that฀
there฀ will฀ be฀ no฀ future฀ reversals฀ of฀ existing฀ taxable฀ temporary฀ differences฀ until฀ after฀
30฀November฀20X3.฀
(v)฀ Income฀ tax฀ of฀ $165฀ million฀ on฀ a฀ property฀ disposed฀ of฀ in฀ 20X0฀ becomes฀ payable฀ on฀
30฀November฀20X4฀under฀the฀deferral฀relief฀provisions฀of฀the฀tax฀laws฀of฀the฀country.฀
There฀had฀been฀no฀sales฀or฀revaluations฀of฀property฀during฀the฀year฀to฀30฀November฀
20X1.฀
(vi)฀ Income฀tax฀is฀assumed฀to฀be฀30%฀for฀the฀foreseeable฀future฀in฀DT's฀jurisdiction฀and฀the฀
company฀ wishes฀ to฀ discount฀ any฀ deferred฀ tax฀ liabilities฀ at฀ a฀ rate฀ of฀ 4%฀ if฀ allowed฀ by฀
IAS฀12.฀
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฀
(vii)฀ There฀are฀no฀other฀temporary฀differences฀other฀than฀those฀set฀out฀above.฀The฀directors฀
of฀ DT฀ have฀ calculated฀ the฀ opening฀ balance฀ of฀ deferred฀ tax฀ using฀ IAS฀ 12฀ to฀ be฀
$280฀million.฀
Required฀
Calculate฀the฀liability฀for฀deferred฀tax฀required฀by฀the฀DT฀Group฀at฀30฀November฀20X1฀and฀
the฀ deferred฀ tax฀ expense฀ in฀ profit฀ or฀ loss฀ for฀ the฀ year฀ ending฀ 30฀ November฀ 20X1฀ using฀
IAS฀12,฀ commenting฀ on฀ the฀ effect฀ that฀ the฀ application฀ of฀ IAS฀ 12฀ will฀ have฀ on฀ the฀ financial฀
statements฀of฀the฀DT฀Group.฀ (13฀marks)฀
9฀PQR฀฀ 20฀mins฀
PQR฀ has฀ the฀ following฀ financial฀ instruments฀ in฀ its฀ financial฀ statements฀ for฀ the฀ year฀ ended฀
31฀December฀20X5:฀
(a)฀ An฀investment฀in฀the฀debentures฀of฀STU,฀nominal฀value฀$40,000,฀purchased฀on฀their฀issue฀on฀
1฀January฀20X5฀at฀a฀discount฀of฀$6,000฀and฀carrying฀a฀4%฀coupon.฀PQR฀plans฀to฀hold฀these฀
until฀their฀redemption฀on฀31฀December฀20X8.฀The฀internal฀rate฀of฀return฀of฀the฀debentures฀is฀
8.6%.฀
(b)฀ A฀ foreign฀ currency฀ forward฀ contract฀ purchased฀ to฀ hedge฀ the฀ commitment฀ to฀ purchase฀ a฀
machine฀in฀foreign฀currency฀six฀months฀after฀the฀year฀end.฀
(c)฀ 100,000฀ redeemable฀ preference฀ shares฀ issued฀ in฀ 20X0฀ at฀ $1฀ per฀ share฀ with฀ an฀ annual฀
dividend฀payment฀of฀6฀cents฀per฀share,฀redeemable฀in฀20X8฀at฀their฀nominal฀value.฀
Required฀
Advise฀ the฀ directors฀ (insofar฀ as฀ the฀ information฀ permits)฀ about฀ the฀ accounting฀ for฀ the฀ financial฀
instruments฀ stating฀ the฀ effect฀ of฀ each฀ on฀ the฀ gearing฀ of฀ the฀ company.฀ Your฀ answer฀ should฀ be฀
accompanied฀by฀calculations฀where฀appropriate.฀
฀ (Total฀=฀10฀marks)฀ ฀
10฀Sirus฀ 49฀mins฀
Sirus฀is฀a฀large฀national฀public฀limited฀company฀(plc).฀The฀directors'฀service฀agreements฀require฀each฀
director฀ to฀ purchase฀ 'B'฀ ordinary฀ shares฀ on฀ becoming฀ a฀ director฀ and฀ this฀ capital฀ is฀ returned฀ to฀ the฀
director฀ on฀ leaving฀ the฀ company.฀ Any฀ decision฀ to฀ pay฀ a฀ dividend฀ on฀ the฀ 'B'฀ shares฀ must฀ be฀
approved฀in฀a฀general฀meeting฀by฀a฀majority฀of฀all฀of฀the฀shareholders฀in฀the฀company.฀Directors฀are฀
the฀only฀holders฀of฀'B'฀shares.฀
Sirus฀would฀like฀advice฀on฀how฀to฀account฀under฀International฀Financial฀Reporting฀Standards฀(IFRSs)฀
for฀the฀following฀events฀in฀its฀financial฀statements฀for฀the฀year฀ended฀30฀April฀20X8.฀
(a)฀ The฀ capital฀ subscribed฀ to฀ Sirus฀ by฀ the฀ directors฀ and฀ shareholders฀ is฀ shown฀ as฀ follows฀ in฀ the฀
statement฀of฀financial฀position฀as฀at฀30฀April฀20X8:฀
฀Equity฀ ฀$m฀
฀Ordinary฀'A'฀shares฀฀ ฀100฀
฀Ordinary฀'B'฀shares฀฀ ฀20฀
฀Retained฀earnings฀฀ ฀฀฀30฀
฀Total฀equity฀฀ ฀150฀
On฀ 30฀ April฀ 20X8฀ the฀ directors฀ had฀ recommended฀ that฀ $3฀ million฀ of฀ the฀ profits฀ should฀ be฀
paid฀to฀the฀holders฀of฀the฀ordinary฀'B'฀shares,฀in฀addition฀to฀the฀$10฀million฀paid฀to฀directors฀
under฀ their฀ employment฀ contracts.฀ The฀ payment฀ of฀ $3฀ million฀ had฀ not฀ been฀ approved฀ in฀ a฀
general฀meeting.฀The฀directors฀would฀like฀advice฀as฀to฀whether฀the฀capital฀subscribed฀by฀the฀
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directors฀(the฀ordinary฀'B'฀shares)฀is฀equity฀or฀a฀liability฀and฀how฀to฀treat฀the฀payments฀out฀of฀
profits฀to฀them.฀฀ (6฀marks)฀
(b)฀ When฀ a฀ director฀ retires,฀ amounts฀ become฀ payable฀ to฀ the฀ director฀ as฀ a฀ form฀ of฀ retirement฀
benefit฀as฀an฀annuity.฀These฀amounts฀are฀not฀based฀on฀salaries฀paid฀to฀the฀director฀under฀an฀
employment฀ contract.฀ Sirus฀ has฀ contractual฀ or฀ constructive฀ obligations฀ to฀ make฀ payments฀ to฀
former฀directors฀as฀at฀30฀April฀20X8฀as฀follows:฀
(i)฀ Certain฀former฀directors฀are฀paid฀a฀fixed฀annual฀amount฀for฀a฀fixed฀term฀beginning฀on฀
the฀ first฀ anniversary฀ of฀ the฀ director's฀ retirement.฀ If฀ the฀ director฀ dies,฀ an฀ amount฀
representing฀the฀present฀value฀of฀the฀future฀payment฀is฀paid฀to฀the฀director's฀estate.฀
(ii)฀ In฀the฀case฀of฀other฀former฀directors,฀they฀are฀paid฀a฀fixed฀annual฀amount฀which฀ceases฀
on฀death.฀
The฀rights฀to฀the฀annuities฀are฀determined฀by฀the฀length฀of฀service฀of฀the฀former฀directors฀
and฀are฀set฀out฀in฀the฀former฀directors'฀service฀contracts.฀฀ (6฀marks)฀
(c)฀ On฀1฀May฀20X7฀Sirus฀acquired฀another฀company,฀Marne฀plc.฀The฀directors฀of฀Marne,฀who฀
were฀the฀only฀shareholders,฀were฀offered฀an฀increased฀profit฀share฀in฀the฀enlarged฀business฀
for฀a฀period฀of฀two฀years฀after฀the฀date฀of฀acquisition฀as฀an฀incentive฀to฀accept฀the฀purchase฀
offer.฀ After฀ this฀ period,฀ normal฀ remuneration฀ levels฀ will฀ be฀ resumed.฀ Sirus฀ estimated฀ that฀ this฀
would฀ cost฀ them฀ $5฀million฀ at฀ 30฀ April฀ 20X8,฀ and฀ a฀ further฀ $6฀ million฀ at฀ 30฀ April฀ 20X9.฀
These฀amounts฀will฀be฀paid฀in฀cash฀shortly฀after฀the฀respective฀year฀ends.฀฀ (6฀marks)฀
(d)฀ Sirus฀raised฀a฀loan฀with฀a฀bank฀of฀$2฀million฀on฀1฀May฀20X7.฀The฀market฀interest฀rate฀of฀8%฀
per฀ annum฀ is฀ to฀ be฀ paid฀ annually฀ in฀ arrears฀ and฀ the฀ principal฀ is฀ to฀ be฀ repaid฀ in฀ 10฀ years'฀
time.฀ The฀ terms฀ of฀ the฀ loan฀ allow฀ Sirus฀ to฀ redeem฀ the฀ loan฀ after฀ seven฀ years฀ by฀ paying฀ the฀
interest฀ to฀ be฀ charged฀ over฀ the฀ seven฀ year฀ period,฀ plus฀ a฀ penalty฀ of฀ $200,000฀ and฀ the฀
principal฀ of฀ $2฀ million.฀ The฀ effective฀ interest฀ rate฀ of฀ the฀ repayment฀ option฀ is฀ 9.1%.฀ The฀
directors฀ of฀ Sirus฀ are฀ currently฀ restructuring฀ the฀ funding฀ of฀ the฀ company฀ and฀ are฀ in฀ initial฀
discussions฀with฀the฀bank฀about฀the฀possibility฀of฀repaying฀the฀loan฀within฀the฀next฀financial฀
year.฀ Sirus฀ is฀ uncertain฀ about฀ the฀ accounting฀ treatment฀ for฀ the฀ current฀ loan฀ agreement฀ and฀
whether฀the฀loan฀can฀be฀shown฀as฀a฀current฀liability฀because฀of฀the฀discussions฀with฀the฀bank.฀
฀ (7฀marks)฀
Required฀
Draft฀ a฀ report฀ to฀ the฀ directors฀ of฀ Sirus฀ which฀ discusses฀ the฀ principles฀ and฀ nature฀ of฀ the฀ accounting฀
treatment฀ of฀ the฀ above฀ elements฀ under฀ International฀ Financial฀ Reporting฀ Standards฀ in฀ the฀ financial฀
statements฀for฀the฀year฀ended฀30฀April฀20X8.฀
11฀Lambda฀ 39฀mins฀
In฀ recent฀ years฀ it฀ has฀ become฀ increasingly฀ common฀ for฀ entities฀ to฀ enter฀ into฀ transactions฀ with฀ third฀
parties฀that฀are฀settled฀by฀means฀of฀a฀share-based฀payment.฀IFRS฀2฀Share-based฀Payment฀was฀issued฀
in฀order฀to฀provide฀a฀basis฀of฀accounting฀for฀such฀transactions.฀Share-based฀payments฀can฀be฀equity฀
settled฀or฀cash฀settled.฀
Required฀
(a)฀ Explain฀ the฀ accounting฀ treatment฀ of฀ both฀ equity฀ and฀ cash฀ settled฀ share฀ based฀ payment฀
transactions฀with฀employees.฀ (8฀marks)฀
790฀

lOMoARcPSD|6256454
฀
Lambda฀prepares฀financial฀statements฀to฀30฀September฀each฀year.฀Lambda฀has฀a฀number฀of฀highly฀
skilled฀employees฀that฀it฀wishes฀to฀retain฀and฀has฀put฀two฀schemes฀in฀place฀to฀discourage฀employees฀
from฀leaving:฀
Scheme฀A฀
On฀1฀October฀20X7฀Lambda฀granted฀share฀options฀to฀200฀employees.฀Each฀employee฀was฀entitled฀
to฀500฀options฀to฀purchase฀equity฀shares฀at฀$10฀per฀share.฀The฀options฀vest฀on฀30฀September฀20Y0฀
if฀the฀employees฀continue฀to฀work฀for฀Lambda฀throughout฀the฀three-year฀period.฀Relevant฀data฀is฀as฀
follows:฀
฀ ฀ Expected฀number฀of฀
฀ ฀ ฀ employees฀for฀whom฀
฀ Share฀price฀ Fair฀value฀of฀option฀ 500฀options฀will฀vest฀
฀ $฀ $ ฀
1฀October฀20X7฀ 10 2.40 190฀
30฀September฀20X8฀ 11 2.60 185฀
30฀September฀20X9฀ 12 2.80 188฀
Scheme฀B฀
On฀ 1฀ October฀ 20X6฀ Lambda฀ granted฀ two฀ share฀ appreciation฀ rights฀ to฀ 250฀ employees.฀ Each฀ right฀
gave฀ the฀ holder฀ a฀ cash฀ payment฀ of฀ $100฀ for฀ every฀ 50฀ cent฀ increase฀ in฀ the฀ share฀ price฀ from฀ the฀
1฀October฀ 20X6฀ value฀ to฀ the฀ date฀ the฀ rights฀ vest.฀ The฀ rights฀ vest฀ on฀ 30฀ September฀ 20X9฀ for฀ those฀
employees฀ who฀ continue฀ to฀ work฀ for฀ Lambda฀ throughout฀ the฀ three-year฀ period.฀ Payment฀ is฀ due฀ on฀
31฀January฀20Y0.฀Relevant฀data฀is฀as฀follows:฀
฀ ฀ Expected฀number฀of฀
฀ ฀ ฀ employees฀for฀whom฀
฀ Share฀price฀ Fair฀value฀of฀option฀ two฀rights฀will฀vest฀
฀ $฀ $ ฀
1฀October฀20X6฀ 9฀ 500 240฀
30฀September฀20X7฀ 10 520 235฀
30฀September฀20X8฀ 11 540 240฀
30฀September฀20X9฀ 12 600 238*฀฀
฀ ฀ *actual฀number฀for฀
whom฀two฀rights฀vested
Required฀
(b)฀ (i)฀ For฀ both฀ schemes,฀ compute฀ the฀ charge฀ to฀ the฀ statement฀ or฀ profit฀ or฀ loss฀ for฀ the฀ year฀
ended฀30฀September฀20X9.฀ (8฀marks)฀
(ii)฀ For฀ both฀ schemes,฀ compute฀ the฀ amount฀ that฀ will฀ appear฀ in฀ the฀ statement฀ of฀ financial฀
position฀of฀Lambda฀at฀30฀September฀20X9฀and฀state฀where฀in฀the฀statement฀the฀relevant฀
amount฀will฀appear.฀ ฀
฀ (4฀marks)฀
12฀Highland฀ 35฀mins฀
Highland฀owns฀two฀subsidiaries,฀acquired฀as฀follows:฀
1฀July฀20X1฀ 80%฀ of฀ Aviemore฀ for฀ $5฀ million฀ when฀ the฀ book฀ value฀ of฀ the฀ net฀ assets฀ of฀
Aviemore฀was฀$4฀million.฀
30฀November฀20X7฀ 65%฀ of฀ Buchan฀ for฀ $2.6฀ million฀ when฀ the฀ book฀ value฀ of฀ the฀ net฀ assets฀ of฀
Buchan฀was฀$3.35฀million.฀
฀ 791฀

lOMoARcPSD|6256454
The฀ companies'฀ statements฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀ the฀ year฀ ended฀
31฀March฀20X8฀were:฀
฀ ฀Highland฀ ฀Aviemore฀ Buchan฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Revenue฀ ฀ ฀5,000฀ ฀3,000฀ ฀2,910฀
Cost฀of฀sales฀ ฀(3,000)฀ ฀(2,300)฀ ฀(2,820)฀
Gross฀profit฀ ฀2,000฀ ฀700฀ ฀90฀
Administrative฀expenses฀ ฀(1,000)฀ ฀(500)฀ ฀(150)฀
Other฀income฀ ฀230฀ ฀–฀ ฀฀฀฀–฀
Finance฀costs฀ ฀ ฀฀ ฀฀฀฀ ฀ ฀฀฀(50)฀ ฀฀฀(210)฀
Profit/(loss)฀before฀tax฀ ฀1,230฀ ฀150฀ ฀(270)฀
Income฀tax฀expense฀ ฀ (300)฀ ฀ ฀฀(50)฀ ฀฀฀฀฀฀฀฀–฀
Profit/(loss)฀for฀the฀year ฀ 930฀ ฀100฀ ฀(270)฀
Other฀comprehensive฀income฀that฀will฀not฀be฀ ฀฀ ฀ ฀
reclassified฀to฀profit฀or฀loss,฀net฀of฀tax฀ ฀฀130 ฀฀฀฀40฀ ฀฀฀120
Total฀comprehensive฀income฀for฀the฀year ฀ 1,060฀ ฀฀฀ 140฀ ฀฀฀฀(150)฀
Dividends฀paid฀during฀the฀year฀ ฀200฀ ฀50฀ ฀฀฀฀–฀
(a)฀ On฀1฀April฀20X7,฀Buchan฀issued฀$2.1฀million฀10%฀loan฀stock฀to฀Highland.฀Interest฀is฀payable฀
twice฀ yearly฀ on฀ 1฀October฀ and฀ 1฀April.฀ Highland฀has฀ accounted฀ for฀ the฀ interest฀ received฀ on฀
1฀October฀20X7฀only.฀
(b)฀ On฀1฀July฀20X7,฀Aviemore฀sold฀a฀freehold฀property฀to฀Highland฀for฀$800,000฀(land฀element฀
–฀ $300,000).฀ The฀ property฀ originally฀ cost฀ $900,000฀ (land฀ element฀ –฀ $100,000)฀ on฀ 1฀ July฀
20W7.฀The฀property's฀total฀useful฀life฀was฀50฀years฀on฀1฀July฀20W7฀and฀there฀has฀been฀no฀
change฀in฀the฀useful฀life฀since.฀Aviemore฀has฀credited฀the฀profit฀on฀disposal฀to฀'Administrative฀
expenses'.฀
(c)฀ The฀ property,฀ plant฀ and฀ equipment฀ of฀ Buchan฀ on฀ 30฀November฀20X7฀ was฀ valued฀ at฀
$500,000฀(book฀value฀$350,000)฀and฀was฀acquired฀in฀April฀20X7.฀The฀property,฀plant฀and฀
equipment฀has฀a฀total฀useful฀life฀of฀ten฀years.฀Buchan฀has฀not฀adjusted฀its฀accounting฀records฀
to฀ reflect฀ fair฀ values.฀ The฀ group฀ accounting฀ policy฀ to฀ measure฀ non-controlling฀ interests฀ at฀ the฀
proportionate฀share฀of฀the฀fair฀value฀of฀net฀identifiable฀assets฀at฀acquisition.฀
(d)฀ All฀ companies฀ use฀ the฀ straight-line฀ method฀ of฀ depreciation฀ and฀ charge฀ a฀ full฀ year's฀
depreciation฀in฀the฀year฀of฀acquisition฀and฀none฀in฀the฀year฀of฀disposal.฀Depreciation฀on฀fair฀
value฀adjustments฀is฀time฀apportioned฀from฀the฀date฀of฀acquisition.฀
(e)฀ Highland฀charges฀Aviemore฀an฀annual฀fee฀of฀$85,000฀for฀management฀services฀and฀this฀has฀
been฀included฀in฀'Other฀income'.฀
(f)฀ Highland฀has฀accounted฀for฀its฀dividend฀received฀from฀Aviemore฀in฀'Other฀income'.฀
(g)฀ Impairment฀tests฀conducted฀at฀the฀year฀end฀revealed฀recoverable฀amounts฀of฀$7.04฀million฀for฀
Aviemore฀and฀$3.7฀million฀for฀Buchan฀versus฀book฀values฀of฀net฀assets฀of฀$4.45฀million฀and฀
$3.3฀ million฀ in฀ the฀ separate฀ financial฀ statements฀ of฀ Aviemore฀ and฀ Buchan฀ respectively฀
(adjusted฀for฀the฀effects฀of฀group฀fair฀value฀adjustments).฀No฀impairment฀losses฀had฀previously฀
been฀recognised.฀฀
Required฀
Prepare฀ the฀ consolidated฀ statements฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ for฀
Highland฀for฀the฀year฀ended฀31฀March฀20X8.฀ (Total฀=฀18฀marks)฀
792฀

lOMoARcPSD|6256454
฀
13฀Investor฀ 49฀mins฀
Investor฀ is฀ a฀ listed฀ company฀ with฀ a฀ number฀ of฀ subsidiaries฀ located฀ throughout฀ the฀ UK.฀ Investor฀
currently฀appraises฀investment฀opportunities฀using฀a฀cost฀of฀capital฀of฀10%.฀
On฀1฀April฀20X9฀Investor฀purchased฀80฀per฀cent฀of฀the฀equity฀share฀capital฀of฀Cornwall฀for฀a฀total฀
cash฀price฀of฀$60฀million.฀Half฀the฀price฀was฀payable฀on฀1฀April฀20X9;฀the฀balance฀was฀payable฀on฀
1฀April฀ 20Y1.฀ The฀ net฀ identifiable฀ assets฀ that฀ were฀ actually฀ included฀ in฀ the฀ statement฀ of฀ financial฀
position฀of฀Cornwall฀had฀a฀carrying฀value฀totalling฀$55฀million฀at฀1฀April฀20X9.฀With฀the฀exception฀
of฀the฀pension฀provision฀(see฀below),฀you฀discover฀that฀the฀fair฀values฀of฀the฀net฀identifiable฀assets฀of฀
Cornwall฀ at฀ 1฀ April฀ 20X9฀ are฀ the฀ same฀ as฀ their฀ carrying฀ values.฀ When฀ performing฀ the฀ fair฀ value฀
exercise฀at฀1฀April฀20X9,฀you฀discover฀that฀Cornwall฀has฀a฀defined฀benefit฀pension฀scheme฀that฀was฀
actuarially฀ valued฀ three฀ years฀ ago฀ and฀ found฀ to฀ be฀ in฀ deficit.฀ As฀ a฀ result฀ of฀ that฀ valuation,฀ a฀
provision฀of฀$6฀million฀has฀been฀built฀up฀in฀the฀statement฀of฀financial฀position.฀The฀fair฀value฀exercise฀
indicates฀that฀on฀1฀April฀20X9,฀the฀pension฀scheme฀was฀in฀deficit฀by฀$11฀million.฀This฀information฀
became฀available฀on฀31฀July฀20X9.฀
Assume฀that฀today's฀date฀is฀31฀October฀20X9.฀You฀are฀in฀the฀process฀of฀preparing฀the฀consolidated฀
financial฀ statements฀ of฀ the฀ group฀ for฀ the฀ year฀ ended฀ 30฀ September฀ 20X9.฀ Intangible฀ assets฀ are฀
normally฀ written฀ off฀ on฀ a฀ pro-rata฀ basis฀ over฀ 20฀ years.฀ Your฀ Financial฀ Director฀ is฀ concerned฀ that฀
profits฀ for฀ the฀ year฀ will฀ be฀ lower฀ than฀ originally฀ anticipated.฀ She฀ is฀ therefore฀ wondering฀ about฀
changing฀the฀accounting฀policy฀used฀by฀the฀group,฀so฀that฀all฀intangible฀assets฀are฀treated฀as฀having฀
an฀indefinite฀useful฀life.฀
Required฀
(a)฀ Calculate฀ the฀ value฀ of฀ goodwill฀ on฀ acquisition฀ of฀ Cornwall฀ in฀ the฀ consolidated฀ accounts฀ of฀
Investor฀for฀the฀year฀ended฀30฀September฀20X9.฀You฀should฀fully฀explain฀and฀justify฀all฀parts฀
of฀the฀calculation.฀ (10฀marks)฀
(b)฀ Write฀a฀memorandum฀to฀your฀Financial฀Director.฀
(i)฀ Evaluate฀the฀policy฀of฀writing฀off฀all฀intangible฀assets฀over฀20฀years.฀
(ii)฀ Explain฀ whether฀ it฀ is฀ ever฀ permissible฀ to฀ select฀ a฀ longer฀ write-off฀ period฀ for฀ intangible฀
assets,฀and฀describe฀the฀future฀implications฀of฀selecting฀such฀a฀period.฀ (10฀marks)฀
(c)฀ Cornwall฀ has฀ purchased฀ some฀ valuable฀ brands,฀ which฀ are฀ included฀ in฀ the฀ statement฀ of฀
financial฀position.฀Explain฀the฀justification฀for฀including฀purchased฀brands฀in฀the฀statement฀of฀
financial฀position฀and฀how฀non-purchased฀brands฀should฀be฀treated.฀ (5฀marks)฀
14฀ROB฀Group฀ 49฀mins฀
The฀statements฀of฀financial฀position฀for฀ROB฀and฀PER฀as฀at฀30฀September฀20X3฀are฀provided฀below:฀
฀ ROB PER฀
Assets฀ ฀$'000฀ ฀$'000฀
Investment฀in฀PER฀ ฀ ฀3,850 ฀฀฀฀฀฀฀฀–฀
฀ ฀25,850 ฀5,000฀
Inventories฀ ฀6,200฀ ฀ 800 ฀
Receivables฀ ฀6,600฀ ฀1,900฀
Cash฀and฀cash฀equivalents฀ ฀฀ 1,200 ฀฀฀฀300฀
฀ ฀14,000 ฀3,000฀
Total฀assets฀ ฀39,850 ฀8,000฀
฀ 793฀

lOMoARcPSD|6256454
฀
Equity฀and฀liabilities฀
Equity฀ ฀
Share฀capital฀($1฀equity฀shares)฀ ฀20,000฀ ฀ 1,000 ฀
Retained฀earnings฀ ฀฀฀7,850฀ ฀ 5,000 ฀
Total฀equity฀ ฀27,850 ฀6,000฀
฀
Non-current฀liabilities฀
5%฀bonds฀20X6฀(note฀2)฀ ฀3,900฀ ฀–฀
Current฀liabilities฀ ฀ 8,100 ฀2,000฀
Total฀liabilities฀ ฀12,000 ฀2,000฀
Total฀equity฀and฀liabilities฀ ฀39,850 ฀8,000฀
(a)฀ ROB฀ acquired฀ a฀ 15%฀ investment฀ in฀ PER฀ on฀ 1฀ May฀ 20X2฀ for฀ $600,000.฀ ROB฀ treated฀ this฀
investment฀ at฀ fair฀ value฀ through฀ profit฀ or฀ loss฀ in฀ the฀ financial฀ statements฀ to฀ 30฀ September฀
20X2,฀ remeasuring฀ it฀ to฀ $650,000.฀ However,฀ ROB฀ has฀ not฀ recognised฀ any฀ remeasurement฀
gains฀or฀losses฀on฀the฀investment฀in฀the฀year฀ended฀30฀September฀20X3.฀The฀fair฀value฀of฀the฀
15%฀investment฀at฀1฀April฀20X3฀was฀$800,000.฀
On฀ 1฀ April฀ 20X3,฀ ROB฀ acquired฀ an฀ additional฀ 60%฀ of฀ the฀ equity฀ share฀ capital฀ of฀ PER฀ at฀ a฀
cost฀of฀$3.2฀million.฀At฀that฀date,฀the฀fair฀value฀of฀PER's฀net฀assets฀was฀equivalent฀to฀their฀book฀
value.฀
(b)฀ ROB฀ issued฀ 4฀ million฀ $1฀ 5%฀ redeemable฀ bonds฀ on฀ 1฀ October฀ 20X2฀ at฀ par.฀ The฀ associated฀
costs฀ of฀ issue฀ were฀ $100,000฀ and฀ the฀ net฀ proceeds฀ of฀ $3.9฀ million฀ have฀ been฀ recorded฀
within฀ non-current฀ liabilities.฀ The฀ bonds฀ are฀ redeemable฀ at฀ $4.4฀ million฀ on฀ 30฀ September฀
20X6฀and฀the฀effective฀interest฀rate฀associated฀with฀them฀is฀approximately฀8%.฀The฀interest฀on฀
the฀ bonds฀ is฀ payable฀ annually฀ in฀ arrears฀ and฀ the฀ amount฀ due฀ has฀ been฀ paid฀ in฀ the฀ year฀ to฀
30฀September฀20X3฀and฀charged฀to฀the฀statement฀of฀profit฀or฀loss.฀
(c)฀ An฀impairment฀review฀conducted฀at฀the฀year฀end฀revealed฀an฀impairment฀of฀the฀goodwill฀of฀
PER฀of฀$60,000.฀
(d)฀ ROB฀wishes฀to฀measure฀non-controlling฀interests฀at฀fair฀value฀at฀the฀date฀of฀acquisition.฀The฀fair฀
value฀of฀the฀non-controlling฀interests฀in฀PER฀at฀1฀April฀20X3฀was฀$1฀million.฀
(e)฀ The฀ profit฀ for฀ the฀ year฀ of฀ PER฀ was฀ $3฀ million,฀ and฀ profits฀ are฀ assumed฀ to฀ accrue฀ evenly฀
throughout฀the฀year.฀
(f)฀ PER฀ sold฀ goods฀ to฀ ROB฀ on฀ 5฀ August฀ 20X3฀ for฀ $400,000.฀ Half฀ of฀ these฀ goods฀ remained฀ in฀
inventories฀at฀30฀September฀20X3.฀PER฀makes฀20%฀margin฀on฀all฀sales.฀
(g)฀฀฀฀฀฀No฀dividends฀were฀paid฀by฀either฀entity฀in฀the฀year฀to฀30฀September฀20X3.฀
Required฀
(a)฀ Explain฀ how฀ the฀ investment฀ in฀ PER฀ should฀ be฀ accounted฀ for฀ in฀ the฀ consolidated฀ financial฀
statements฀of฀ROB,฀following฀the฀acquisition฀of฀the฀additional฀60%฀shareholding.฀ (5฀marks)฀
(b)฀ Prepare฀the฀consolidated฀statement฀of฀financial฀position฀as฀at฀30฀September฀20X3฀for฀the฀ROB฀
Group.฀฀ (20฀marks)฀
794฀

lOMoARcPSD|6256454
฀
15฀Holmes฀and฀Deakin฀ 43฀mins฀
Holmes,฀a฀public฀limited฀company,฀has฀owned฀85%฀of฀the฀ordinary฀share฀capital฀of฀Deakin,฀a฀public฀
limited฀company,฀for฀some฀years.฀The฀shares฀were฀bought฀for฀$255฀million฀and฀Deakin's฀reserves฀at฀
the฀time฀of฀purchase฀were฀$20฀million.฀
On฀28฀February฀20X3฀Holmes฀sold฀40m฀of฀the฀Deakin฀shares฀for฀$160฀million.฀The฀only฀entry฀made฀
in฀respect฀of฀this฀transaction฀has฀been฀the฀receipt฀of฀the฀cash,฀which฀was฀credited฀to฀the฀'investment฀
in฀subsidiary'฀account.฀No฀dividends฀were฀paid฀by฀either฀entity฀in฀the฀period.฀
The฀following฀draft฀summarised฀financial฀statements฀are฀available:฀
FOR฀THE฀YEAR฀TO฀31฀MAY฀20X3฀
฀ Holmes Deakin฀
฀ ฀$m฀ ฀$m฀
Profit฀before฀tax฀ ฀ ฀130฀ ฀฀฀60฀
Income฀tax฀expense฀ ฀ (40)฀฀ ฀฀(20)฀
Profit฀for฀the฀year฀ ฀ ฀90฀ ฀฀฀฀40฀
Other฀comprehensive฀income,฀net฀of฀tax ฀ ฀฀20 ฀ ฀฀฀10฀฀
Total฀comprehensive฀income฀for฀the฀year ฀ 110฀ ฀฀฀50฀
฀ ฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀MAY฀20X3 ฀
฀ ฀$m฀ ฀$m฀
Property,฀plant฀and฀equipment฀ ฀ ฀535฀ ฀฀฀178฀
Investment฀in฀Deakin฀ ฀ ฀ ฀95฀ ฀฀฀฀–฀฀
฀ ฀฀ 630฀ ฀178฀
Inventories฀ ฀ ฀320฀ ฀ ฀฀190฀
Trade฀receivables฀ ฀ ฀250฀ ฀ ฀฀175฀
Cash฀ ฀ ฀฀฀฀80฀ ฀฀฀฀89฀
฀ ฀ ฀฀650฀ ฀454฀
฀฀฀ ฀1,280฀ ฀632฀
Equity฀ ฀
Share฀capital฀$1฀ordinary฀shares฀ ฀ ฀500฀ ฀ ฀฀200 ฀
Reserves฀ ฀ ฀310 ฀ ฀ 170 ฀
฀ ฀ ฀810฀฀ ฀370฀
Trade฀payables฀ ฀295฀ ฀171฀
Income฀tax฀payable฀ ฀80฀ ฀60฀
Provisions฀ ฀ ฀฀฀฀95 ฀ ฀ ฀฀31฀
฀ ฀ ฀฀470 ฀ ฀262฀
฀ ฀1,280฀ ฀632฀
No฀impairment฀losses฀have฀been฀necessary฀in฀the฀group฀financial฀statements฀to฀date.฀
Assume฀ that฀ the฀ gain฀ as฀ calculated฀ in฀ the฀ parent's฀ separate฀ financial฀ statements฀ will฀ be฀ subject฀ to฀
corporate฀ income฀ tax฀ at฀ a฀ rate฀ of฀ 30%฀ and฀ that฀ profit฀ and฀ other฀ comprehensive฀ income฀ accrue฀
evenly฀throughout฀the฀year.฀
Holmes฀ elected฀ to฀ measure฀ the฀ non-controlling฀ interests฀ in฀ Deakin฀ at฀ fair฀ value฀ at฀ the฀ date฀ of฀
acquisition.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interests฀ in฀ Deakin฀ was฀ $45฀ million฀ at฀ the฀ date฀ of฀
acquisition.฀No฀control฀premium฀was฀paid฀on฀acquisition.฀
฀ 795฀

lOMoARcPSD|6256454
Required฀
Prepare:฀
(a)฀ The฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀and฀a฀statement฀of฀changes฀in฀
equity฀(total)฀of฀Holmes฀for฀the฀year฀ended฀31฀May฀20X3;฀ (5฀marks)฀
(b)฀ The฀consolidated฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀of฀Holmes฀for฀the฀
same฀period;฀ (6฀marks)฀
(c)฀ A฀consolidated฀statement฀of฀financial฀position฀as฀at฀31฀May฀20X3;฀and฀ (9฀marks)฀
(d)฀ A฀consolidated฀statement฀of฀changes฀in฀equity฀(total)฀for฀the฀year฀ended฀31฀May฀20X3.฀ ฀
฀ ฀ (2฀marks)฀
16฀Burley฀(P2฀December฀2009฀Q3)฀ 49฀mins฀
Burley,฀ a฀ public฀ limited฀ company,฀ operates฀ in฀ the฀ energy฀ industry.฀ It฀ has฀ entered฀ into฀ several฀
arrangements฀with฀other฀entities฀as฀follows:฀
(a)฀ Burley฀ and฀ Slite,฀ a฀ public฀ limited฀ company,฀ jointly฀ control฀ an฀ oilfield.฀ Burley฀ has฀ a฀ 60%฀
interest฀ and฀ Slite฀ a฀ 40%฀ interest,฀ and฀ the฀ companies฀ are฀ entitled฀ to฀ extract฀ oil฀ in฀ these฀
proportions.฀An฀agreement฀was฀signed฀on฀1฀December฀20X8,฀which฀allowed฀for฀the฀net฀cash฀
settlement฀of฀any฀over/under฀extraction฀by฀one฀company.฀The฀net฀cash฀settlement฀would฀be฀at฀
the฀ market฀ price฀ of฀ oil฀ at฀ the฀ date฀ of฀ settlement.฀ Both฀ parties฀ have฀ used฀ this฀ method฀ of฀
settlement฀ before.฀ 200,000฀ barrels฀ of฀ oil฀ were฀ produced฀ up฀ to฀ 1฀ October฀ 20X9฀ but฀ none฀
were฀produced฀after฀this฀up฀to฀30฀November฀20X9฀due฀to฀production฀difficulties.฀The฀oil฀was฀
all฀sold฀to฀third฀parties฀at฀$100฀per฀barrel.฀Burley฀has฀extracted฀10,000฀barrels฀more฀than฀the฀
company's฀quota฀and฀Slite฀has฀under฀extracted฀by฀the฀same฀amount.฀The฀market฀price฀of฀oil฀at฀
the฀year฀end฀of฀30฀November฀20X9฀was฀$105฀per฀barrel.฀The฀excess฀oil฀extracted฀by฀Burley฀
was฀settled฀on฀12฀December฀20X9฀under฀the฀terms฀of฀the฀agreement฀at฀$95฀per฀barrel.฀
Burley฀had฀purchased฀oil฀from฀another฀supplier฀because฀of฀the฀production฀difficulties฀at฀$98฀
per฀barrel฀and฀has฀oil฀inventory฀of฀5,000฀barrels฀at฀the฀year฀end,฀purchased฀from฀this฀source.฀
Slite฀had฀no฀inventory฀of฀oil.฀Neither฀company฀had฀oil฀inventory฀at฀1฀December฀20X8.฀Selling฀
costs฀are฀$2฀per฀barrel.฀฀
Burley฀wishes฀to฀know฀how฀to฀account฀for฀the฀recognition฀of฀revenue,฀the฀excess฀oil฀extracted฀
and฀the฀oil฀inventory฀at฀the฀year฀end.฀฀ (9฀marks)฀
(b)฀ Burley฀also฀entered฀into฀an฀agreement฀with฀Jorge,฀a฀public฀limited฀company,฀on฀1฀December฀
20X8.฀Each฀of฀the฀companies฀holds฀one฀half฀of฀the฀equity฀in฀an฀entity,฀Wells,฀a฀public฀limited฀
company,฀which฀operates฀offshore฀oil฀rigs. The฀contractual฀arrangement฀between฀Burley฀and฀
Jorge฀establishes฀joint฀control฀of฀the฀activities฀that฀are฀conducted฀in฀Wells.฀The฀main฀feature฀of฀
Wells's฀legal฀form฀is฀that฀Wells,฀not฀Burley฀or฀Jorge,฀has฀rights฀to฀the฀assets,฀and฀obligations฀
for฀the฀liabilities,฀relating฀to฀the฀arrangement.฀฀
The฀terms฀of฀the฀contractual฀arrangement฀are฀such฀that:฀฀
(i)฀ Wells฀owns฀the฀oil฀rigs.฀The฀contractual฀arrangement฀does฀not฀specify฀that฀Burley฀and฀
Jorge฀have฀rights฀to฀the฀oil฀rigs.฀฀
(ii)฀ Burley฀and฀Jorge฀are฀not฀liable฀in฀respect฀of฀the฀debts,฀liabilities฀or฀obligations฀of฀Wells.฀
If฀ Wells฀ is฀ unable฀ to฀ pay฀ any฀ of฀ its฀ debts฀ or฀ other฀ liabilities฀ or฀ to฀ discharge฀ its฀
obligations฀to฀third฀parties,฀the฀liability฀of฀each฀party฀to฀any฀third฀party฀will฀be฀limited฀to฀
the฀unpaid฀amount฀of฀that฀party's฀capital฀contribution.฀฀
(iii)฀ Burley฀and฀Jorge฀have฀the฀right฀to฀sell฀or฀pledge฀their฀interests฀in฀Wells.฀
(iv)฀ Each฀party฀receives฀a฀share฀of฀the฀income฀from฀operating฀the฀oil฀rig฀in฀accordance฀with฀
its฀interest฀in฀Wells.฀
796฀

lOMoARcPSD|6256454
฀
Burley฀wants฀to฀account฀for฀the฀interest฀in฀Wells฀by฀using฀the฀equity฀method,฀and฀wishes฀for฀
advice฀on฀the฀matter.฀฀
The฀ oil฀ rigs฀ of฀ Wells฀ started฀ operating฀ on฀ 1฀ December฀ 20W8,฀ ie฀ ten฀ years฀ before฀ the฀
agreement฀was฀signed,฀and฀are฀measured฀under฀the฀cost฀model.฀The฀useful฀life฀of฀the฀rigs฀is฀
40฀years.฀The฀initial฀cost฀of฀the฀rigs฀was฀$240฀million,฀which฀included฀decommissioning฀costs฀
(discounted)฀ of฀ $20฀ million.฀ At฀ 1฀ December฀ 20X8,฀ the฀ carrying฀ amount฀ of฀ the฀
decommissioning฀ liability฀ has฀ grown฀ to฀ $32.6฀ million,฀ but฀ the฀ net฀ present฀ value฀ of฀
decommissioning฀liability฀has฀decreased฀to฀$18.5฀million฀as฀a฀result฀of฀the฀increase฀in฀the฀risk-
adjusted฀discount฀rate฀from฀5%฀to฀7%.฀Burley฀is฀unsure฀how฀to฀account฀for฀the฀oil฀rigs฀in฀the฀
financial฀statements฀of฀Wells฀for฀the฀year฀ended฀30฀November฀20X9.฀฀
Burley฀owns฀a฀10%฀interest฀in฀a฀pipeline,฀which฀is฀used฀to฀transport฀the฀oil฀from฀the฀offshore฀
oilrig฀ to฀ a฀ refinery฀ on฀ the฀ land.฀ Burley฀ has฀ joint฀ control฀ over฀ the฀ pipeline฀ and฀ has฀ to฀ pay฀ its฀
share฀ of฀ the฀ maintenance฀ costs.฀ Burley฀ has฀ the฀ right฀ to฀ use฀ 10%฀ of฀ the฀ capacity฀ of฀ the฀
pipeline.฀ Burley฀ wishes฀ to฀ show฀ the฀ pipeline฀ as฀ an฀ investment฀ in฀ its฀ financial฀ statements฀ to฀
30฀November฀20X9.฀ (10฀marks)฀฀
(c)฀ Burley฀has฀purchased฀a฀transferable฀interest฀in฀an฀oil฀exploration฀licence.฀Initial฀surveys฀of฀the฀
region฀designated฀for฀exploration฀indicate฀that฀there฀are฀substantial฀oil฀deposits฀present,฀but฀
further฀ surveys฀ will฀ be฀ required฀ in฀ order฀ to฀ establish฀ the฀ nature฀ and฀ extent฀ of฀ the฀ deposits.฀
Burley฀ also฀ has฀ to฀ determine฀ whether฀ the฀ extraction฀ of฀ the฀ oil฀ is฀ commercially฀ viable.฀ Past฀
experience฀has฀shown฀that฀the฀licence฀can฀increase฀substantially฀in฀value฀if฀further฀information฀
becomes฀available฀as฀to฀the฀viability฀of฀the฀extraction฀of฀the฀oil.฀Burley฀wishes฀to฀capitalise฀the฀
cost฀of฀the฀licence฀but฀is฀unsure฀whether฀the฀accounting฀policy฀is฀compliant฀with฀International฀
Financial฀Reporting฀Standards.฀ ฀(4฀marks)฀
Required฀
Discuss,฀with฀suitable฀computations฀where฀necessary,฀how฀the฀above฀arrangements฀and฀events฀would฀
be฀accounted฀for฀in฀the฀financial฀statements฀of฀Burley.฀ ฀
Professional฀marks฀will฀be฀awarded฀in฀this฀question฀for฀clarity฀and฀expression.฀฀ (2฀marks)฀฀
17฀Harvard฀฀ 35฀mins฀
The฀ draft฀ financial฀ statements฀ of฀ Harvard,฀ a฀ public฀ limited฀ company,฀ and฀ its฀ subsidiary,฀ Krakow฀
Sp.฀zo.o.฀are฀set฀out฀below.฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X5 ฀
฀ Harvard฀ Krakow
฀ ฀฀$'000฀ ฀฀PLN'000฀
฀Non-current฀assets฀ ฀
฀Property,฀plant฀and฀equipment฀ ฀฀2,870฀ ฀฀4,860฀
฀Investment฀in฀Krakow฀ ฀฀฀฀840฀ ฀฀฀฀฀฀฀฀฀฀–
฀ ฀3,710฀ ฀฀4,860฀
฀Current฀assets฀ ฀
฀Inventories฀ ฀฀ 1,990 ฀ ฀฀8,316฀
฀Trade฀receivables฀ ฀฀1,630฀ ฀฀4,572฀
฀Cash฀ ฀ 240฀ ฀฀฀2,016฀
฀ ฀3,860฀ ฀14,904
฀ ฀7,570฀ ฀19,764฀
฀ 797฀

lOMoARcPSD|6256454
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X5 ฀
฀ Harvard฀ Krakow
฀ ฀฀$'000฀ ฀฀PLN'000฀
฀Equity฀ ฀
฀Share฀capital฀($1/PLN1)฀ ฀฀118฀ ฀฀1,348฀
฀Retained฀reserves฀ ฀ ฀฀502฀ ฀14,060฀
฀ ฀ ฀฀620฀ ฀15,408฀
฀Non-current฀liabilities฀ ฀
฀Loans฀ ฀฀ 1,920 ฀ ฀฀฀฀฀฀฀฀– ฀
฀Current฀liabilities฀ ฀
฀Trade฀payables฀ ฀฀฀5,030฀ ฀฀฀4,356฀
฀ ฀7,570฀ ฀19,764฀
฀STATEMENTS฀OF฀PROFIT฀OR฀LOSS฀AND฀COMPREHENSIVE฀INCOME฀
฀FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X5฀
฀Revenue฀ ฀฀40,425฀ ฀฀97,125฀
฀Cost฀of฀sales฀ ฀(35,500)฀ ฀(77,550)฀
฀Gross฀profit฀ ฀฀4,925฀ ฀฀19,575฀
฀Distribution฀and฀administrative฀expenses฀ ฀฀(4,400)฀ ฀฀(5,850)฀
฀Investment฀income฀ ฀ ฀ ฀720฀ ฀฀฀฀฀฀฀฀฀฀–฀
฀Profit฀before฀tax฀ ฀฀1,245฀ ฀฀13,725฀
฀Income฀tax฀expense฀ ฀฀฀฀฀(300)฀ ฀฀(4,725)฀
฀Profit/total฀comprehensive฀income฀for฀the฀year฀ ฀฀฀฀฀฀945฀ ฀฀฀9,000฀
฀ ฀ ฀
฀Dividends฀paid฀during฀the฀period฀ ฀฀฀฀ 700฀ ฀฀3,744฀
The฀following฀additional฀information฀is฀given:฀
(a)฀ Exchange฀rates฀
฀ Złoty฀(PLN)฀to฀$฀
31฀December฀20X2฀ 4.40฀
31฀December฀20X3฀ 4.16฀
31฀December฀20X4฀ 4.00฀
15฀May฀20X5฀ 3.90฀
31฀December฀20X5฀ 3.60฀
Average฀for฀20X5 3.75฀
(b)฀ Harvard฀acquired฀1,011,000฀shares฀in฀Krakow฀for฀$840,000฀on฀31฀December฀20X2฀when฀
Krakow's฀ retained฀ reserves฀ stood฀ at฀ PLN฀ 2,876,000.฀ Krakow฀ operates฀ as฀ an฀ autonomous฀
subsidiary.฀Its฀functional฀currency฀is฀the฀Polish฀złoty.฀
The฀fair฀value฀of฀the฀identifiable฀net฀assets฀of฀Krakow฀were฀equivalent฀to฀their฀book฀values฀at฀
the฀ acquisition฀ date.฀ Group฀ policy฀ is฀ to฀ measure฀ non-controlling฀ interests฀ at฀ fair฀ value฀ at฀ the฀
acquisition฀ date.฀ The฀ fair฀ value฀ of฀ the฀ non-controlling฀ interests฀ in฀ Krakow฀ was฀ measured฀ at฀
$270,000฀on฀31฀December฀20X2.฀
(c)฀ Krakow฀ paid฀ an฀ interim฀ dividend฀ of฀ PLN฀ 3,744,000฀ on฀ 15฀ May฀ 20X5.฀ No฀ other฀ dividends฀
were฀paid฀or฀declared฀in฀the฀period.฀
(d)฀ No฀ impairment฀ losses฀ were฀ necessary฀ in฀ the฀ consolidated฀ financial฀ statements฀ by฀
798฀

lOMoARcPSD|6256454
฀
Required฀
(a)฀ Prepare฀the฀consolidated฀statement฀of฀financial฀position฀at฀31฀December฀20X5.฀ (6฀marks)฀
(b)฀ Prepare฀the฀consolidated฀statements฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀and฀an฀
extract฀ from฀ the฀ statement฀ of฀ changes฀ in฀ equity฀ for฀ retained฀ reserves฀ for฀ the฀ year฀ ended฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
31฀December฀20X5.฀ (12฀marks)฀
Ignore฀deferred฀tax฀on฀translation฀differences.฀
18฀Porter฀ 49฀mins฀
The฀following฀consolidated฀financial฀statements฀relate฀to฀Porter,฀a฀public฀limited฀company:฀
PORTER฀GROUP฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀MAY฀20X6฀
฀ ฀ 20X6 20X5฀
฀ ฀ ฀$m฀ ฀฀฀$m฀
Property,฀plant฀and฀equipment฀ ฀ ฀958฀ ฀ 812 ฀
Goodwill฀ ฀ ฀ ฀฀฀฀15฀ ฀ ฀฀฀10฀฀฀฀
Investment฀in฀associate฀ ฀ ฀ ฀฀฀฀48฀ ฀฀฀฀฀฀39฀
฀ ฀ ฀1,021฀ ฀฀฀฀861฀
Inventories฀ ฀ ฀154฀ ฀168฀
Trade฀receivables฀ ฀ ฀132฀ ฀112฀
Financial฀assets฀at฀fair฀value฀through฀profit฀or฀loss฀ ฀ ฀฀฀ 16฀ ฀฀฀฀฀฀0฀
Cash฀and฀cash฀equivalents฀ ฀ ฀ 158฀ ฀฀฀฀฀฀48฀
฀ ฀ ฀ ฀฀460฀ ฀฀฀฀328฀
฀ ฀ ฀1,481 ฀1,189฀
Share฀capital฀($1฀ordinary฀ ฀ ฀332฀ ฀ 300 ฀
shares)฀
Share฀premium฀account฀ ฀ ฀212฀ ฀172฀
Retained฀earnings฀ ฀ ฀188฀ ฀165฀
Revaluation฀surplus฀ ฀ ฀ ฀฀101฀ ฀฀฀฀฀฀54฀
฀ ฀ ฀833฀ ฀691฀
Non-controlling฀interests฀ ฀ ฀ ฀฀฀฀84฀ ฀฀฀฀฀฀28฀
฀ ฀ ฀ ฀฀917 ฀฀฀฀719฀
Long-term฀borrowings฀ ฀ ฀380฀ ฀320฀
Deferred฀tax฀liability฀ ฀ ฀ ฀฀฀฀38฀ ฀฀฀฀฀฀26฀
฀ ฀ ฀ ฀฀418 ฀฀฀฀346฀
Trade฀and฀other฀payables฀ ฀ ฀110฀ 98
฀ ฀
Interest฀payable฀ ฀ ฀ ฀฀8฀ ฀฀฀4฀
Current฀tax฀payable฀ ฀ ฀ ฀฀฀฀28฀ ฀฀฀฀฀฀22฀
฀ ฀ ฀ ฀฀146฀ ฀฀฀฀124฀
฀ ฀ ฀1,481฀ ฀1,189฀
฀ 799฀

lOMoARcPSD|6256454
PORTER฀GROUP฀
FOR฀THE฀YEAR฀ENDED฀31฀MAY฀20X6฀
฀ ฀$m฀
Revenue฀ ฀ 956 ฀
Cost฀of฀sales฀ ฀(634)฀
Gross฀profit฀ ฀322฀
Other฀income฀ ฀ 6฀
Distribution฀costs฀ ฀ (97) ฀
Administrative฀expenses฀ ฀ (115) ฀
Finance฀costs฀ ฀฀(16)฀
Share฀of฀profit฀of฀associate฀ ฀ ฀฀฀12฀
Income฀tax฀expense฀ ฀฀฀(34)฀
Profit฀for฀the฀year฀ ฀฀฀฀78฀
Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss: ฀
Gains฀on฀property฀revaluation฀ ฀58฀
Share฀of฀gain฀on฀property฀revaluation฀of฀associate฀ ฀ 8฀
Income฀tax฀relating฀to฀items฀that฀will฀not฀be฀reclassified฀ ฀฀฀(17)฀
Other฀comprehensive฀income฀for฀the฀year,฀net฀of฀tax ฀฀฀฀49฀
Total฀comprehensive฀income฀for฀the฀year ฀฀127฀
฀ ฀
฀฀Owners฀of฀the฀parent฀ ฀68฀
฀฀Non-controlling฀interests฀ ฀฀฀10฀
฀ ฀฀฀78฀
฀฀Owners฀of฀the฀parent฀ ฀ 115 ฀
฀฀Non-controlling฀interests฀ ฀฀฀12฀
฀ ฀127฀
The฀following฀information฀relates฀to฀the฀consolidated฀financial฀statements฀of฀Porter:฀
1฀ During฀the฀period,฀Porter฀acquired฀60%฀of฀a฀subsidiary.฀The฀purchase฀was฀effected฀by฀issuing฀
shares฀of฀Porter฀on฀a฀one฀for฀two฀basis,฀at฀their฀market฀value฀on฀that฀date฀of฀$2.25฀per฀share,฀
plus฀$26฀million฀in฀cash.฀
A฀ statement฀ of฀ financial฀ position฀ of฀ the฀ subsidiary,฀ prepared฀ at฀ the฀ acquisition฀ date฀ for฀
consolidation฀purposes,฀showed฀the฀following฀position:฀
฀ ฀$m฀
฀Property,฀plant฀and฀equipment฀ ฀92฀
฀Inventories฀ ฀20฀
฀Trade฀receivables฀฀ ฀16฀
฀Cash฀and฀cash฀equivalents฀ ฀฀฀฀฀8฀
฀ ฀136฀
฀ ฀
800฀

lOMoARcPSD|6256454
฀
฀ ฀$m฀
฀Share฀capital฀($1฀shares)฀ ฀80฀
฀Reserves฀ ฀฀฀40฀
฀฀ ฀฀120฀
฀Trade฀payables฀ ฀฀12฀
฀Income฀taxes฀payable฀ ฀฀฀฀฀4฀
฀ ฀136฀
An฀impairment฀test฀conducted฀at฀the฀year฀end฀resulted฀in฀a฀write-down฀of฀goodwill฀relating฀to฀
another฀wholly฀owned฀subsidiary.฀This฀was฀charged฀to฀cost฀of฀sales.฀
Group฀policy฀is฀to฀value฀non-controlling฀interests฀at฀the฀date฀of฀acquisition฀at฀the฀proportionate฀
share฀of฀the฀fair฀value฀of฀the฀acquiree's฀identifiable฀assets฀acquired฀and฀liabilities฀assumed.฀
2฀ Depreciation฀charged฀to฀the฀consolidated฀profit฀or฀loss฀amounted฀to฀$44฀million.฀There฀were฀
no฀disposals฀of฀property,฀plant฀and฀equipment฀during฀the฀year.฀
3฀ Other฀ income฀ represents฀ gains฀ on฀ financial฀ assets฀ at฀ fair฀ value฀ through฀ profit฀ or฀ loss.฀ The฀
financial฀assets฀are฀investments฀in฀quoted฀shares.฀They฀were฀purchased฀shortly฀before฀the฀year฀
end฀with฀surplus฀cash,฀and฀were฀designated฀at฀fair฀through฀profit฀or฀loss฀as฀they฀are฀expected฀
to฀be฀sold฀after฀the฀year฀end.฀No฀dividends฀have฀yet฀been฀received.฀
4฀ Included฀ in฀ 'trade฀ and฀ other฀ payables'฀ is฀ the฀ $฀ equivalent฀ of฀ an฀ invoice฀ for฀ 102฀ million฀
shillings฀for฀some฀equipment฀purchased฀from฀a฀foreign฀supplier.฀The฀asset฀was฀invoiced฀on฀5฀
March฀20X6,฀but฀had฀not฀been฀paid฀for฀at฀the฀year฀end,฀31฀May฀20X6.฀
฀ Exchange฀ gains฀ or฀ losses฀ on฀ the฀ transaction฀ have฀ been฀ included฀ in฀ administrative฀ expenses.฀฀
Relevant฀exchange฀rates฀were฀as฀follows:฀
฀ Shillings฀to฀$1฀
฀ 5฀March฀20X6฀ 6.8฀
฀ 31฀May฀20X6฀ 6.0฀
5฀ Movement฀on฀retained฀earnings฀was฀as฀follows:฀
฀฀ ฀$m฀
฀At฀31฀May฀20X5฀ ฀165฀
฀Total฀comprehensive฀income฀ ฀68฀
฀Dividends฀paid฀ ฀฀(45)฀
฀At฀31฀May฀20X6฀ ฀188฀
Required฀
Prepare฀ a฀ consolidated฀ statement฀ of฀ cash฀ flows฀ for฀ Porter฀ for฀ the฀ year฀ ended฀ 31฀ May฀ 20X6฀ in฀
accordance฀with฀IAS฀7฀Statements฀of฀Cash฀Flows,฀using฀the฀indirect฀method.฀
Notes฀to฀the฀statement฀of฀cash฀flows฀are฀not฀required.฀
฀ 801฀

lOMoARcPSD|6256454
19฀Grow฀by฀acquisition฀ 49฀mins฀
Expand฀is฀a฀large฀group฀that฀seeks฀to฀grow฀by฀acquisition.฀The฀directors฀of฀Expand฀have฀identified฀
two฀potential฀target฀entities฀(A฀and฀B)฀and฀obtained฀copies฀of฀their฀financial฀statements.฀Extracts฀from฀
these฀financial฀statements,฀together฀with฀notes฀providing฀additional฀information,฀are฀given฀below.฀
YEAR฀ENDED฀31฀DECEMBER฀20X1฀
฀ A B฀
฀ ฀$'000฀ ฀$'000฀
Revenue฀ ฀ 68,000 ฀ ฀ 66,000 ฀
Cost฀of฀sales฀ ฀(42,000)฀ ฀(45,950)฀
Gross฀profit฀ ฀26,000฀ ฀20,050฀
Other฀operating฀expenses฀ ฀(18,000)฀ ฀(14,000)฀
Profit฀from฀operations฀ ฀8,000฀ ฀6,050฀
Finance฀cost฀ ฀ (3,000)฀ ฀฀(4,000)฀
Profit฀before฀tax฀ ฀5,000฀ ฀2,050฀
Income฀tax฀expense฀ ฀ (1,500)฀ ฀฀(1,000)฀
Profit฀for฀the฀year฀ ฀ 3,500฀ ฀฀1,050฀
Other฀comprehensive฀income฀(items฀that฀will฀not฀be฀reclassified฀ ฀฀ ฀ ฀฀Nil฀ ฀฀฀฀6,000฀
to฀profit฀or฀loss)฀
Surplus฀on฀revaluation฀of฀properties฀฀฀
Total฀comprehensive฀income฀ ฀ 3,500฀ ฀฀฀7,050฀
STATEMENTS฀OF฀CHANGES฀IN฀EQUITY฀YEAR฀ENDED฀31฀DECEMBER฀20X1฀
฀ A B฀
฀ ฀ $'000 ฀ ฀ $'000 ฀
Balance฀at฀1฀January฀20X1฀ ฀22,000฀ ฀16,000฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀3,500฀ ฀7,050฀
Dividends฀paid฀ ฀ (2,000)฀ ฀฀(1,000)฀
Balance฀at฀31฀December฀20X1฀ ฀23,500฀ ฀22,050฀
STATEMENTS฀OF฀FINANCIAL฀POSITION฀AT฀31฀DECEMBER฀20X1฀
฀ A B฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Property,฀plant฀and฀equipment฀ ฀32,000฀ ฀35,050฀ ฀
฀ ฀32,000฀ ฀35,050฀
Inventories฀ ฀6,000฀ ฀7,000฀ ฀
Trade฀receivables฀ ฀ 12,000 ฀ ฀ 10,000 ฀ ฀
฀ ฀18,000฀ ฀17,000฀
฀ ฀50,000฀ ฀52,050฀
Equity฀ ฀
Issued฀capital฀($1฀shares)฀ ฀16,000฀ ฀12,000฀
Revaluation฀reserve฀ ฀Nil฀ ฀5,000฀
Retained฀earnings฀ ฀ ฀7,500 ฀ ฀ ฀฀5,050 ฀
฀ ฀23,500฀ ฀22,050฀
802฀

lOMoARcPSD|6256454
฀
฀ A B฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Interest฀bearing฀borrowings฀ ฀16,000฀ ฀18,000฀
฀ ฀
Trade฀payables฀ ฀5,000฀ ฀5,000฀ ฀
Income฀tax฀ ฀1,500฀ ฀1,000฀ ฀
Short-term฀borrowings฀ ฀4,000฀ ฀6,000฀ ฀
฀ ฀10,500฀ ฀12,000฀
฀ ฀50,000฀ ฀52,050฀
Notes฀
1฀ Sale฀by฀A฀to฀X฀
On฀ 31฀ December฀ 20X1,฀ A฀ supplied฀ goods,฀ at฀ the฀ normal฀ selling฀ price฀ of฀ $2.4฀ million,฀ to฀
another฀entity,฀X.฀A's฀normal฀selling฀price฀is฀at฀a฀mark-up฀of฀60%฀on฀cost.฀X฀paid฀for฀the฀goods฀
in฀ cash฀ on฀ the฀ same฀ day.฀ The฀ terms฀ of฀ the฀ selling฀ agreement฀ were฀ that฀ A฀ repurchase฀ these฀
goods฀on฀30฀June฀20X2฀for฀$2.5฀million.฀A฀has฀accounted฀for฀the฀transaction฀as฀a฀sale.฀The฀
amount฀ payable฀ reflects฀ the฀ capital฀ repayment฀ plus฀ market฀ interest฀ rates฀ for฀ the฀ six-month฀
period.฀
2฀ Revaluation฀of฀non-current฀assets฀by฀B฀
B฀revalued฀its฀non-current฀assets฀for฀the฀first฀time฀on฀1฀January฀20X1.฀The฀non-current฀assets฀of฀
A฀are฀very฀similar฀in฀age฀and฀type฀to฀the฀non-current฀assets฀of฀B.฀However,฀A฀has฀a฀policy฀of฀
maintaining฀ all฀ its฀ non-current฀ assets฀ at฀ depreciated฀ historical฀ cost.฀ Both฀ entities฀ charge฀
depreciation฀of฀non-current฀assets฀to฀cost฀of฀sales.฀B฀has฀transferred฀the฀excess฀depreciation฀on฀
the฀ revalued฀ assets฀ from฀ the฀ revaluation฀ reserve฀ to฀ retained฀ earnings฀ as฀ permitted฀ in฀ IAS฀ 16฀฀
Property,฀Plant฀and฀Equipment.฀
Expand฀ uses฀ ratio฀ analysis฀ to฀ appraise฀ potential฀ investment฀ opportunities.฀ It฀ is฀ normal฀ practice฀ to฀
base฀the฀appraisal฀on฀four฀key฀ratios:฀
฀ Return฀on฀capital฀employed฀ ฀ Asset฀turnover฀
฀ Gross฀profit฀margin฀฀ ฀ ฀ Debt/Equity฀
For฀the฀purposes฀of฀the฀ratio฀analysis,฀Expand฀computes:฀
(a)฀ Capital฀employed฀as฀capital฀and฀reserves฀plus฀borrowings฀
(b)฀ Borrowings฀as฀interest–bearing฀borrowings฀plus฀short-term฀borrowings฀
Your฀ assistant฀ has฀ computed฀ the฀ four฀ key฀ ratios฀ for฀ the฀ two฀ entities฀ from฀ the฀ financial฀ statements฀
provided฀and฀the฀results฀are฀summarised฀below.฀
Ratio฀ A B฀
Return฀on฀capital฀employed฀ 18.4%฀ 13.1%฀
Gross฀profit฀margin฀ 38.2%฀ 30.4%฀
Asset฀turnover฀ 1.72฀ 1.65฀
Debt/Equity฀ 0.85:1฀ 1.09:1฀
Your฀assistant฀has฀informed฀you฀that,฀on฀the฀basis฀of฀the฀ratios฀calculated,฀the฀performance฀of฀A฀is฀
superior฀to฀that฀of฀B฀in฀all฀respects฀and฀is฀therefore฀a฀more฀attractive฀investment.฀Therefore,฀Expand฀
should฀carry฀out฀a฀more฀detailed฀review฀of฀A฀with฀a฀view฀to฀making฀a฀bid฀to฀acquire฀it.฀However,฀
you฀ are฀ unsure฀ whether฀ this฀ is฀ necessarily฀ the฀ correct฀ conclusion฀ given฀ the฀ information฀ provided฀ in฀
notes฀1฀and฀2.฀
฀ 803฀

lOMoARcPSD|6256454
Required฀
(a)฀ Explain฀and฀compute฀the฀adjustments฀that฀would฀be฀appropriate฀in฀respect฀of฀notes฀1฀and฀2฀so฀
as฀to฀make฀the฀financial฀statements฀of฀A฀and฀B฀comparable฀for฀analysis.฀
(b)฀ Recalculate฀ the฀ four฀ key฀ ratios฀ mentioned฀ in฀ the฀ question฀ for฀ both฀ A฀ and฀ B฀ after฀ making฀ the฀
adjustments฀ you฀ have฀ recommended฀ in฀ your฀ answer฀ to฀ part฀ (a).฀ You฀ should฀ provide฀
appropriate฀workings฀to฀support฀your฀calculations.฀
(c)฀ In฀the฀light฀of฀the฀work฀that฀you฀have฀carried฀out฀in฀answer฀to฀parts฀(a)฀and฀(b),฀evaluate฀your฀
assistant's฀ conclusion฀ that฀ A฀ appears฀ to฀ be฀ the฀ more฀ attractive฀ investment.฀ Comment฀ on฀ any฀
additional฀ financial฀ and฀ non-financial฀ information฀ that฀ may฀ be฀ useful฀ in฀ considering฀ the฀
investment.฀
20฀Ghorse฀ 49฀mins฀
Ghorse,฀ a฀ public฀ limited฀ company,฀ operates฀ in฀ the฀ fashion฀ sector฀ and฀ had฀ undertaken฀ a฀ group฀
re-organisation฀ during฀ the฀ current฀ financial฀ year฀ to฀ 30฀ September฀ 20X7.฀ As฀ a฀ result฀ the฀ following฀
events฀occurred.฀
(a)฀ Ghorse฀identified฀two฀manufacturing฀units,฀Cee฀and฀Gee,฀which฀it฀had฀decided฀to฀dispose฀of฀
in฀a฀single฀transaction.฀These฀units฀comprised฀non-current฀assets฀only.฀One฀of฀the฀units,฀Cee,฀
had฀ been฀ impaired฀ prior฀ to฀ the฀ financial฀ year฀ end฀ on฀ 30฀ September฀ 20X7฀ and฀ it฀ had฀ been฀
written฀ down฀ to฀ its฀ recoverable฀ amount฀ of฀ $35฀ million.฀ The฀ criteria฀ in฀ IFRS฀ 5฀ Non-current฀
Assets฀Held฀for฀Sale฀and฀Discontinued฀Operations,฀for฀classification฀as฀held฀for฀sale฀had฀been฀
met฀for฀Cee฀and฀Gee฀at฀30฀September฀20X7.฀The฀following฀information฀related฀to฀the฀assets฀
of฀the฀cash฀generating฀units฀at฀30฀September฀20X7:฀
฀ ฀ ฀Fair฀value฀less ฀
costs฀of฀disposal฀
฀ ฀Depreciated and฀recoverable฀ ฀Carrying฀value
historical฀cost฀ amount฀ under฀IFRS฀
฀$m฀ ฀$m฀ ฀$m฀
Cee฀ ฀฀฀฀50฀ ฀ ฀฀35฀ ฀฀฀฀35฀
Gee฀ ฀฀฀฀70฀ ฀ ฀90฀ ฀฀฀฀70฀
฀ ฀฀120฀ ฀ 125฀ ฀฀105฀
The฀ fair฀ value฀ less฀ costs฀ of฀ disposal฀ had฀ risen฀ at฀ the฀ year฀ end฀ to฀ $40฀ million฀ for฀ Cee฀ and฀
$95฀million฀for฀Gee.฀The฀increase฀in฀the฀fair฀value฀less฀costs฀of฀disposal฀had฀not฀been฀taken฀
into฀account฀by฀Ghorse.฀ (6฀marks)฀
(b)฀ As฀ a฀ consequence฀ of฀ the฀ re-organisation,฀ and฀ a฀ change฀ in฀ government฀ legislation,฀ the฀ tax฀
authorities฀have฀allowed฀a฀revaluation฀of฀the฀non-current฀assets฀of฀the฀holding฀company฀for฀tax฀
purposes฀ to฀ market฀ value฀ at฀ 31฀ October฀ 20X7.฀ There฀ has฀ been฀ no฀ change฀ in฀ the฀ carrying฀
values฀ of฀ the฀ non-current฀ assets฀ in฀ the฀ financial฀ statements.฀ The฀ tax฀ base฀ and฀ the฀ carrying฀
values฀after฀the฀revaluation฀are฀as฀follows:฀
฀ Carrying฀amount ฀฀฀ Tax฀base฀at฀ Tax฀base฀at฀

at฀31฀October฀ 31฀October฀20X7฀ 31฀October฀20X7฀
20X7฀ after฀revaluation฀ before฀revaluation฀
฀ $m $m $m฀
Property฀ 50฀ 65 48฀
Vehicles฀ 30 35 28฀
Other฀ taxable฀ temporary฀ differences฀ amounted฀ to฀ $5฀ million฀ at฀ 31฀ October฀ 20X7.฀ Assume฀
income฀ tax฀ is฀ paid฀ at฀ 30%.฀ The฀ deferred฀ tax฀ provision฀ at฀ 31฀ October฀ 20X7฀ had฀ been฀
calculated฀using฀the฀tax฀values฀before฀revaluation.฀ (5฀marks)฀
804฀

lOMoARcPSD|6256454
฀
(c)฀ A฀subsidiary฀company฀had฀purchased฀computerised฀equipment฀for฀$4฀million฀on฀31฀October฀
20X6฀ to฀ improve฀ the฀ manufacturing฀ process.฀ Whilst฀ re-organising฀ the฀ group,฀ Ghorse฀ had฀
discovered฀ that฀ the฀ manufacturer฀ of฀ the฀ computerised฀ equipment฀ was฀ now฀ selling฀ the฀ same฀
system฀for฀$2.5฀million.฀The฀projected฀cash฀flows฀from฀the฀equipment฀are:฀
฀ Cash฀flows฀
฀ $m
Year฀ended฀31฀October฀20X8฀ 1.3฀
฀ 20X9฀ 2.2฀
฀ 20Y0฀ 2.3฀
The฀residual฀value฀of฀the฀equipment฀is฀assumed฀to฀be฀zero.฀The฀company฀uses฀a฀discount฀rate฀
of฀ 10%.฀ The฀ directors฀ think฀ that฀ the฀ fair฀ value฀ less฀ costs฀ of฀ disposal฀ of฀ the฀ equipment฀ is฀
$2฀million.฀ The฀ directors฀ of฀ Ghorse฀ propose฀ to฀ write฀ down฀ the฀ non-current฀ asset฀ to฀ the฀ new฀
selling฀price฀of฀$2.5฀million.฀The฀company's฀policy฀is฀to฀depreciate฀its฀computer฀equipment฀by฀
25%฀per฀annum฀on฀the฀straight฀line฀basis.฀ (5฀marks)฀
(d)฀ The฀ manufacturing฀ property฀ of฀ the฀ group,฀ other฀ than฀ the฀ head฀ office,฀ was฀ held฀ on฀ an฀
operating฀ lease฀ over฀ eight฀ years฀ in฀ accordance฀ with฀ IAS฀ 17,฀ the฀ predecessor฀ of฀ IFRS฀ 16฀
Leases.฀On฀re-organisation฀on฀31฀October฀20X7,฀the฀lease฀has฀been฀renegotiated฀and฀is฀held฀
for฀12฀years฀at฀a฀rent฀of฀$5฀million฀per฀annum฀paid฀in฀arrears.฀IFRS฀16฀has฀also฀come฀into฀
force.฀ The฀ fair฀ value฀ of฀ the฀ property฀ is฀ $35฀ million฀ and฀ its฀ remaining฀ economic฀ life฀ is฀ 13฀
years.฀The฀lease฀relates฀to฀the฀buildings฀and฀not฀the฀land.฀The฀factor฀to฀be฀used฀for฀an฀annuity฀
at฀10%฀for฀12฀years฀is฀6.8137.฀ (4฀marks)฀
The฀directors฀are฀worried฀about฀the฀impact฀that฀the฀above฀changes฀will฀have฀on฀the฀value฀of฀its฀non-
current฀assets฀and฀its฀key฀performance฀indicator฀which฀is฀'return฀on฀capital฀employed'฀(ROCE).฀ROCE฀
is฀ defined฀ as฀ operating฀ profit฀ before฀ interest฀ and฀ tax฀ divided฀ by฀ share฀ capital,฀ other฀ reserves฀ and฀
retained฀earnings.฀The฀directors฀have฀calculated฀ROCE฀as฀$30฀million฀divided฀by฀$220฀million,฀ie฀
13.6%฀before฀any฀adjustments฀required฀by฀the฀above.฀฀
Marks฀ will฀ be฀ awarded฀ in฀ this฀ question฀ for฀ your฀ formation฀ of฀ opinion฀ on฀ the฀ impact฀ on฀ ROCE.฀
฀ (2฀marks)฀
Required฀
(i)฀ Discuss฀ the฀ accounting฀ treatment฀ of฀ the฀ above฀ transactions฀ and฀ the฀ impact฀ that฀ the฀ resulting฀
adjustments฀to฀the฀financial฀statements฀would฀have฀on฀ROCE.฀฀฀
Note.฀Your฀answer฀should฀include฀appropriate฀calculations฀where฀necessary฀and฀a฀discussion฀
of฀the฀accounting฀principles฀involved.฀
(ii)฀ The฀directors฀of฀Ghorse฀have฀historically฀focused฀on฀financial฀performance฀indicators.฀They฀are฀
under฀ pressure฀ from฀ stakeholder฀ groups฀ to฀ measure฀ non-financial฀ performance.฀ Recommend฀
three฀relevant฀non-financial฀performance฀indicators฀that฀Ghorse฀could฀use.฀฀
฀ (3฀marks)฀
฀
฀ 805฀

lOMoARcPSD|6256454
21฀German฀competitor฀฀
You฀are฀the฀chief฀accountant฀of฀Tone฀plc,฀a฀UK฀company.฀The฀Managing฀Director฀has฀provided฀you฀
with฀ the฀ financial฀ statements฀ of฀ Tone฀ plc's฀ main฀ competitor,฀ Hilde฀ GmbH,฀ a฀ German฀ company.฀ He฀
finds฀difficulty฀in฀reviewing฀these฀statements฀in฀their฀non-UK฀format,฀presented฀below.฀
HILDE฀GmbH฀
STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀MARCH฀20X5฀(in฀€฀million)฀
฀ 31.3.X5฀ 31.3.X4฀ ฀ 31.3.X5฀ 31.3.X4฀

Assets฀ ฀ Capital฀and฀liabilities ฀ ฀
Tangible฀non-current฀assets฀ ฀ Capital฀and฀reserves ฀
฀฀฀Land฀ 1,000฀ 750 ฀Share฀capital ฀850฀ ฀750
฀฀฀ Buildings ฀ 750฀ 500 ฀Share฀premium ฀100฀ –
฀฀฀ Plant ฀ ฀฀฀฀200฀ ฀฀150 ฀Legal฀reserve ฀200฀ ฀ 200
฀ ฀1,950฀ 1,400 Profit฀&฀loss฀b/fwd฀ ฀590฀ ฀300
฀ ฀ Profit฀&฀loss฀for฀year฀ ฀ ฀฀฀185 ฀ ฀ ฀฀฀290
Current฀assets฀ ฀ Net฀worth ฀1,925฀ ฀1,540
฀฀Inventory฀ 150฀ 120 ฀
฀฀Trade฀receivables฀ 180฀ 100 Payables ฀
฀฀Cash฀ ฀฀฀฀฀฀20฀ ฀200 ฀Trade payables ฀170฀ ฀150
฀ ฀฀฀฀350฀ ฀420 ฀Taxation ฀180฀ ฀150
฀ ฀ ฀Other฀payables ฀฀฀฀฀75฀ ฀฀฀฀฀฀50
Prepayments฀and฀ ฀ ฀฀฀425฀ ฀฀฀350
฀฀accrued฀income฀ ฀ ฀
฀฀prepayments฀ ฀฀฀฀฀฀50฀ ฀฀฀฀70 ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀
฀ ฀2,350฀ 1,890 ฀2,350฀ ฀1,890
HILDE฀GmbH฀
STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀
FOR฀THE฀YEAR฀ENDED฀31฀MARCH฀20X5฀(in฀€฀million)฀
฀ 20X5฀ ฀20X4฀ 20X5฀ 20X4฀
Expenses฀ ฀ ฀Income฀ ฀
Operating฀expenses฀ ฀ ฀Operating฀income฀ ฀
Purchase฀of฀raw฀materials฀ ฀740฀ ฀400฀ ฀Sale฀of฀goods฀produced฀ ฀1,890฀ ฀1,270฀
Variation฀in฀inventories฀ ฀ ฀Variation฀in฀inventory฀of฀ ฀
thereof฀ ฀90฀ ฀40฀ ฀ ฀฀฀฀finished฀goods฀and฀WIP ฀120฀ ฀80฀
Taxation฀ ฀190฀ ฀ 125 ฀ ฀Other฀operating฀income฀ ฀฀฀฀฀฀75฀ ฀ ฀฀฀฀฀50฀
Wages฀ ฀500฀ ฀285฀ ฀Total฀operating฀income฀ ฀2,085฀ ฀ 1,400 ฀
Valuation฀adjustment฀ ฀ ฀
on฀non-current฀assets฀ ฀ ฀
฀฀Depreciation฀ ฀200฀ ฀150฀ ฀
Valuation฀adjustment฀ ฀ ฀
on฀current฀assets฀ ฀ ฀
฀฀Amounts฀written฀off฀ ฀30฀ ฀20฀ ฀
Other฀operating฀ ฀ ฀
expenses฀ ฀50฀ ฀40฀ ฀
Total฀operating฀ ฀ ฀฀฀฀฀฀฀฀฀ ฀ ฀ ฀฀฀฀฀฀฀ ฀ ฀
expenses฀ ฀ 1,800 ฀ ฀ 1,060 ฀ ฀
806฀

lOMoARcPSD|6256454
฀
฀ 20X5฀ ฀20X4฀ 20X5฀ 20X4฀
Financial฀expenses฀ ฀ ฀
Interest฀ ฀ 100 ฀ ฀50฀ ฀
Total฀financial฀expenses฀ ฀฀฀฀฀฀฀฀฀฀ ฀ ฀฀฀฀฀฀ ฀ ฀
฀ ฀฀฀100฀ ฀ ฀฀50฀ ฀
Total฀expenses฀ ฀1,900฀ ฀1,110฀ ฀Total฀income฀ ฀2,085฀ ฀1,400฀
Balance:฀PROFIT฀ ฀฀฀฀185฀ ฀฀฀฀290฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀฀฀฀
Sum฀total฀ ฀2,085฀ ฀1,400฀ ฀2,085฀ ฀1,400฀
Required฀
Prepare฀a฀report฀for฀the฀Managing฀Director:฀
(a)฀ Analysing฀the฀performance฀of฀Hilde฀GmbH฀using฀the฀financial฀statements฀provided.฀ ฀
(b)฀ Explaining฀ why฀ a฀ direct฀ comparison฀ of฀ the฀ results฀ of฀ Tone฀ plc฀ and฀ Hilde฀ GmbH฀ may฀ be฀
misleading.฀
(c)฀ Hilde฀ GmbH฀ reports฀ on฀ its฀ commitment฀ to฀ be฀ carbon฀ neutral฀ within฀ the฀ next฀ 10฀ years฀ and฀
discloses฀information฀relating฀to฀its฀carbon฀footprint,฀emissions฀from฀its฀delivery฀vehicles฀and฀its฀
recycling฀ targets.฀ Tone฀ plc฀ has฀ similar฀ commitments฀ but฀ does฀ not฀ publicly฀ report฀ on฀ them.฀
Briefly฀ explain฀ to฀ the฀ directors฀ of฀ Tone฀ plc฀ the฀ potential฀ benefits฀ of฀ reporting฀ social฀ and฀
environmental฀information.฀ ฀
22฀Peter฀Holdings฀
Peter฀Holdings฀is฀a฀large฀investment฀conglomerate.฀
Required฀
Explain฀how฀divisional฀performance฀should฀be฀measured฀in฀the฀interest฀of฀the฀group's฀shareholders.฀
23฀Jay฀ 29฀mins฀
(a)฀ Jay฀is฀a฀public฀limited฀company฀which฀is฀preparing฀its฀financial฀statements฀for฀the฀year฀ended฀
31฀ May฀ 20X6.฀ Jay฀ purchased฀ goods฀ from฀ a฀ foreign฀ supplier฀ for฀ €8฀ million฀ on฀ 28฀ February฀
20X6.฀At฀31฀May฀20X6,฀the฀trade฀payable฀was฀still฀outstanding฀and฀the฀goods฀were฀still฀held฀
by฀Jay.฀Similarly฀Jay฀has฀sold฀goods฀to฀a฀foreign฀customer฀for฀€4฀million฀on฀28฀February฀20X6฀
and฀it฀received฀payment฀for฀the฀goods฀in฀euros฀on฀31฀May฀20X6.฀฀
Jay฀had฀purchased฀an฀investment฀property฀on฀1฀June฀20X5฀for฀€28฀million.฀At฀31฀May฀20X6,฀
the฀investment฀property฀had฀a฀fair฀value฀of฀€24฀million.฀The฀company฀uses฀the฀fair฀value฀model฀
in฀accounting฀for฀investment฀properties.฀
Jay's฀functional฀and฀presentation฀currency฀is฀the฀dollar.฀
฀ Average฀rate฀(€:฀$)฀
Exchange฀rates฀ €:฀$ for฀year฀to฀
1฀June฀20X5฀ 1.4 ฀
28฀February฀20X6฀ 1.6 ฀
31฀May฀20X6฀ 1.3 1.5฀
Required฀
Advise฀Jay฀on฀how฀to฀treat฀these฀transactions฀in฀the฀financial฀statements฀for฀the฀year฀ended฀31฀
May฀20X6.฀
฀ (8฀marks)฀
(b)฀ Jay฀ has฀ a฀ reputation฀ for฀ responsible฀ corporate฀ behaviour฀ and฀ sees฀ the฀ workforce฀ as฀ the฀ key฀
factor฀in฀the฀profitable฀growth฀of฀the฀business.฀The฀company฀is฀also฀keen฀to฀provide฀detailed฀
disclosures฀relating฀to฀environmental฀matters฀and฀sustainability.฀
฀ 807฀

lOMoARcPSD|6256454
Required฀
Discuss฀ what฀ matters฀ should฀ be฀ disclosed฀ in฀ Jay's฀ annual฀ report฀ in฀ relation฀ to฀ the฀ nature฀ of฀
corporate฀citizenship,฀in฀order฀that฀there฀might฀be฀a฀better฀assessment฀of฀the฀performance฀of฀
the฀company.฀ (7฀marks)฀
24฀Small฀and฀medium-sized฀entities฀฀ 49฀mins฀
In฀July฀2009,฀the฀IASB฀issued฀its฀IFRS฀for฀SMEs.฀The฀aim฀of฀the฀standard฀is฀to฀provide฀a฀simplified,฀
self-contained฀ set฀ of฀ accounting฀ principles฀ for฀ companies฀ which฀ are฀ not฀ publicly฀ accountable.฀ The฀
IFRS฀ reduces฀ the฀ volume฀ of฀ accounting฀ guidance฀ applicable฀ to฀ SMEs฀ by฀ more฀ than฀ 90%฀ when฀
compared฀to฀a฀full฀set฀of฀IFRSs.฀฀฀
The฀IFRS฀for฀SMEs฀removes฀choices฀of฀accounting฀treatment,฀eliminates฀topics฀that฀are฀not฀generally฀
relevant฀ to฀ SMEs,฀ simplifies฀ methods฀ for฀ recognition฀ and฀ measurement฀ and฀ reduces฀ the฀ disclosure฀
requirements฀of฀full฀IFRSs.฀
Required฀
(a)฀ Discuss฀ the฀ advantages฀ and฀ disadvantages฀ of฀ SMEs฀ following฀ a฀ separate฀ IFRS฀ for฀ SMEs฀ as฀
opposed฀to฀full฀IFRSs.฀ (10฀marks)฀
(b)฀ Give฀ some฀ examples฀ from฀ full฀ IFRSs฀ with฀ choice฀ or฀ complex฀ recognition฀ and฀ measurement฀
requirements.฀Explain฀how฀the฀IFRS฀for฀SMEs฀removes฀this฀choice฀or฀simplifies฀the฀recognition฀
and฀measurement฀requirements.฀ (15฀marks)฀
25฀Taupe฀ 49฀mins฀
One฀of฀your฀colleagues฀has฀recently฀inherited฀investments฀in฀several฀listed฀entities฀and฀she฀frequently฀
asks฀ for฀ your฀ advice฀ on฀ accounting฀ issues.฀ She฀ has฀ recently฀ received฀ the฀ consolidated฀ financial฀
statements฀of฀Taupe,฀an฀entity฀that฀provides฀haulage฀and฀freight฀services฀in฀several฀countries.฀She฀has฀
noticed฀that฀Note฀3฀to฀the฀financial฀statements฀is฀headed฀'Segment฀information'.฀
Note฀3฀explains฀that฀Taupe's฀primary฀segment฀reporting฀format฀is฀business฀segments฀of฀which฀there฀
are฀ three:฀ in฀ addition฀ to฀ road฀ and฀ air฀ freight,฀ the฀ entity฀ provides฀ secure฀ transportation฀ services฀ for฀
smaller฀ items฀ of฀ high฀ value.฀ Taupe's฀ Operating฀ and฀ Financial฀ Review฀ provides฀ further฀ background฀
information:฀ the฀ secure฀ transport฀ services฀ segment฀ was฀ established฀ only฀ three฀ years฀ ago.฀ This฀ new฀
operation฀ required฀ a฀ sizeable฀ investment฀ in฀ infrastructure฀ which฀ was฀ principally฀ funded฀ through฀
borrowing.฀ However,฀ the฀ segment฀ has฀ experienced฀ rapid฀ revenue฀ growth฀ in฀ that฀ time,฀ and฀ has฀
become฀a฀significant฀competitor฀in฀the฀industry฀sector.฀
Extracts฀from฀Taupe's฀segment฀report฀for฀the฀year฀ended฀31฀August฀20X5฀are฀as฀follows:฀
฀ Secure฀
฀Road฀haulage฀ ฀Air฀freight฀ transport฀ Group฀
฀ ฀ 20X5 ฀ ฀ 20X4 ฀ ฀ 20X5 ฀ ฀20X4฀ ฀20X5฀ ฀20X4฀ ฀20X5฀ ฀20X4฀
฀ ฀฀฀Km฀฀ ฀Km฀ ฀Km฀ ฀฀฀Km฀ ฀Km฀ ฀Km฀ ฀Km฀ ฀Km฀
Revenue฀ ฀653฀ ฀642฀ ฀208฀ ฀199฀ ฀98฀ ฀63฀ ฀959฀ ฀904฀
Segment฀result฀ ฀169฀ ฀168฀ ฀ ฀68฀ ฀ ฀62฀ ฀ ฀6฀ ฀(16)฀ ฀243฀ ฀214฀
Unallocated฀corporate฀expenses฀ ฀ ฀฀(35)฀ ฀ (37)฀
Operating฀profit฀ ฀ ฀ ฀208฀ ฀177฀
Interest฀expense฀ ฀ ฀ ฀(22)฀ ฀(21)฀
Share฀of฀profits฀of฀associates฀ ฀16฀ ฀12฀ ฀ ฀฀฀16฀ ฀ 12฀
808฀

lOMoARcPSD|6256454
฀
฀ Secure฀
฀Road฀haulage฀ ฀Air฀freight฀ transport฀ Group฀
฀ ฀ 20X5 ฀ ฀ 20X4 ฀ ฀ 20X5 ฀ ฀20X4฀ ฀20X5฀ ฀20X4฀ ฀20X5฀ ฀20X4฀
฀ ฀฀฀Km฀฀ ฀Km฀ ฀Km฀ ฀฀฀Km฀ ฀Km฀ ฀Km฀ ฀Km฀ ฀Km฀
Profit฀before฀tax฀ ฀ ฀ ฀202฀ ฀168฀
Income฀tax฀ ฀ ฀ ฀(65) ฀(49)
Profit฀ ฀ ฀ ฀137฀ ฀119฀
฀ ฀ ฀
Other฀information฀ ฀ ฀
Segment฀assets฀ ฀805฀ ฀796฀ ฀306฀ ฀287฀ ฀437฀ ฀422฀ ฀1,54 ฀1,505฀
8
Investment฀in฀equity฀method฀ ฀ ฀
฀฀฀associates฀ ฀85฀ ฀84฀ ฀ ฀85฀ ฀84฀
Unallocated฀corporate฀assets฀ ฀ ฀ ฀฀฀฀573฀ ฀ ฀฀522฀
Consolidated฀total฀assets฀ ฀ ฀ ฀2,206฀ ฀2,111฀
Segment฀liabilities฀ ฀345฀ ฀349฀ ฀176฀ ฀178฀ ฀197฀ ฀184฀ ฀718฀ ฀711฀
Unallocated฀corporate฀ ฀ ฀ ฀
฀ liabilities฀ ฀฀37 ฀12
Consolidated฀total฀liabilities฀ ฀ ฀ ฀755฀ ฀723฀
Your฀colleague฀finds฀several฀aspects฀of฀this฀note฀confusing:฀
'I฀ thought฀ I'd฀ understood฀ what฀ you฀ told฀ me฀ about฀ consolidated฀ financial฀ statements;฀ the฀ idea฀ of฀
aggregating฀ several฀ pieces฀ of฀ information฀ to฀ provide฀ an฀ overall฀ view฀ of฀ the฀ activities฀ of฀ the฀ group฀
makes฀ sense.฀ But฀ the฀ segment฀ report฀ seems฀ to฀ be฀ trying฀ to฀ disaggregate฀ the฀ information฀ all฀ over฀
again.฀What฀is฀the฀point฀of฀doing฀this?฀Does฀this฀information฀actually฀tell฀me฀anything฀useful฀about฀
Taupe?฀ I฀ know฀ from฀ talking฀ to฀ you฀ previously฀ that฀ financial฀ information฀ does฀ not฀ always฀ tell฀ us฀
everything฀we฀need฀to฀know.฀So,฀what฀are฀the฀limitations฀in฀this฀statement?'฀
Required฀
(a)฀ Analyse฀ and฀ interpret฀ Taupe's฀ segment฀ disclosures฀ for฀ the฀ benefit฀ of฀ your฀ colleague,฀
explaining฀your฀findings฀in฀a฀brief฀report.฀ (8฀marks)฀
(b)฀ Explain฀the฀general฀limitations฀of฀segment฀reporting,฀illustrating฀your฀answer฀where฀applicable฀
with฀references฀to฀Taupe's฀segment฀report.฀ (8฀marks)฀
(c)฀฀ Outline฀ how฀ the฀ IASB฀ has฀ addressed฀ the฀ weaknesses฀ of฀ the฀ current฀ standard฀ on฀ segment฀
reporting.฀฀ (7฀marks)฀
Professional฀marks฀will฀be฀awarded฀in฀this฀question฀for฀the฀clarity฀and฀quality฀of฀the฀presentation฀and฀
discussion.฀฀ ฀(2฀marks)฀
฀
฀ 809฀

lOMoARcPSD|6256454
810฀

lOMoARcPSD|6256454
SUGGESTED฀SOLUTIONS฀
1฀Conceptual฀Framework฀
(a)฀ The฀stated฀purposes฀of฀the฀Conceptual฀Framework฀are฀as฀follows.฀
(i)฀ To฀assist฀the฀Board฀in฀the฀development฀of฀future฀IFRSs฀and฀in฀its฀review฀of฀existing฀IFRSs.฀
(ii)฀ To฀ assist฀ the฀ Board฀ in฀ promoting฀ harmonisation฀ of฀ regulations,฀ accounting฀ standards฀
and฀ procedures฀ by฀ reducing฀ the฀ number฀ of฀ alternative฀ accounting฀ treatment฀ permitted฀
by฀IFRSs.฀
(iii)฀ To฀assist฀national฀standard-setting฀bodies฀in฀developing฀national฀standards.฀
(iv)฀ To฀assist฀preparers฀of฀financial฀statements฀in฀applying฀IFRSs฀and฀in฀dealing฀with฀topics฀
that฀have฀yet฀to฀form฀the฀subject฀of฀an฀IFRS.฀
(v)฀ To฀ assist฀ auditors฀ in฀ forming฀ an฀ opinion฀ on฀ whether฀ financial฀ statements฀ comply฀ with฀
IFRSs.฀
(vi)฀ To฀ assist฀ users฀ of฀ financial฀ statements฀ in฀ interpreting฀ the฀ information฀ contained฀ in฀
financial฀statements฀prepared฀in฀compliance฀with฀IFRSs.฀
(vii)฀ To฀provide฀those฀who฀are฀interested฀in฀the฀work฀of฀the฀IASB฀with฀information฀about฀its฀
approach฀to฀the฀formulation฀of฀IFRSs.฀
(b)฀ The฀ people฀ who฀ might฀ be฀ interested฀ in฀ financial฀ information฀ about฀ the฀ company฀ may฀ be฀
classified฀as฀follows.฀
(i)฀ Shareholders฀ in฀ the฀ company.฀ They฀ will฀ be฀ interested฀ in฀ the฀ company's฀
profitability฀ and฀ its฀ ability฀ to฀ pay฀ dividends.฀ They฀ will฀ also฀ be฀ interested฀ in฀ the฀
company's฀long฀term฀prospects.฀
(ii)฀ Managers฀of฀the฀company.฀These฀are฀people฀appointed฀by฀the฀company's฀owners฀
to฀supervise฀the฀day-to-day฀activities฀of฀the฀company.฀They฀need฀information฀about฀the฀
company's฀financial฀situation฀as฀it฀is฀currently฀and฀as฀it฀is฀expected฀to฀be฀in฀the฀future.฀
This฀ is฀ to฀ enable฀ them฀ to฀ manage฀ the฀ business฀ efficiently฀ and฀ to฀ take฀ effective฀ control฀
and฀planning฀decisions.฀
(iii)฀ Trade฀contacts,฀including฀suppliers฀who฀provide฀goods฀to฀the฀company฀on฀credit฀and฀
customers฀who฀purchase฀the฀goods฀or฀services฀provided฀by฀the฀company.฀Suppliers฀will฀
want฀to฀know฀about฀the฀company's฀ability฀to฀pay฀its฀debts;฀customers฀need฀to฀know฀that฀
the฀company฀is฀a฀secure฀source฀of฀supply฀and฀is฀in฀no฀danger฀of฀having฀to฀close฀down.฀
(iv)฀ Providers฀of฀finance฀to฀the฀company.฀These฀might฀include฀a฀bank฀which฀permits฀
the฀ company฀ to฀ operate฀ an฀ overdraft,฀ or฀ provides฀ longer-term฀ finance฀ by฀ granting฀ a฀
loan.฀ The฀ bank฀ will฀ want฀ to฀ ensure฀ that฀ the฀ company฀ is฀ able฀ to฀ keep฀ up฀ with฀ interest฀
payments,฀and฀eventually฀to฀repay฀the฀amounts฀advanced.฀
(v)฀ The฀taxation฀authorities,฀who฀will฀want฀to฀know฀about฀business฀profits฀in฀order฀to฀
assess฀the฀tax฀payable฀by฀the฀company฀on฀its฀profits฀and฀any฀sales฀taxes.฀
(vi)฀ Employees฀ of฀ the฀ company.฀ These฀ should฀ have฀ a฀ right฀ to฀ information฀ about฀ the฀
company's฀financial฀situation,฀because฀their฀future฀careers฀and฀the฀size฀of฀their฀wages฀
and฀salaries฀depend฀on฀it.฀
฀ 811฀

lOMoARcPSD|6256454
2฀Fundamental฀principles฀
Tutorial฀note฀
Don't฀let฀this฀scenario฀panic฀you฀in฀the฀long฀list฀of฀details฀it฀gives฀you.฀Deal฀with฀each฀point฀as฀it฀
arises.฀Also,฀don't฀be฀afraid฀to฀draw฀a฀conclusion฀about฀the฀facts฀given฀to฀you,฀but฀remember฀to฀back฀
your฀opinions฀up฀with฀justification.฀Consider฀what฀the฀fundamental฀principles฀and฀general฀guidance฀
of฀the฀ACCA฀say,฀but฀also฀think฀about฀practical฀issues,฀such฀as฀ease฀of฀modern฀communication.฀Deal฀
with฀the฀two฀issues฀raised฀in฀the฀scenario฀(the฀individual฀partner฀issue฀and฀the฀firm฀split)฀separately,฀
there฀is฀no฀need฀to฀assume฀any฀connection฀between฀them.฀However,฀you฀may฀feel฀there฀is฀a฀point฀to฀
be฀made฀about฀the฀juxtaposition฀of฀the฀two฀events.฀
Independence฀
It฀is฀important฀that฀auditors฀are,฀and฀are฀seen฀to฀be,฀independent.฀Independence฀is฀at฀the฀heart฀of฀the฀
auditing฀profession฀as฀auditors฀claim฀to฀give฀an฀impartial,฀objective฀opinion฀on฀the฀truth฀and฀fairness฀
of฀the฀financial฀statements.฀฀
Objectivity฀
A฀ family฀ relationship฀ between฀ an฀ auditor฀ and฀ the฀ client฀ can฀ substantially฀ affect฀ the฀
objectivity฀of฀the฀audit,฀so฀auditors฀are฀advised฀not฀to฀build฀close฀personal฀relationships฀with฀audit฀
clients฀and฀should฀not฀audit฀a฀company฀where฀family฀are฀employed฀in฀a฀capacity฀which฀is฀sensitive฀
to฀the฀accounts,฀for฀example,฀in฀the฀finance฀department,฀although฀this฀is฀not฀prohibited฀by฀law.฀
In฀ this฀ instance,฀ the฀ partner฀ was฀ not฀ the฀ reporting฀ partner฀ for฀ the฀ audit฀ client฀ in฀ which฀ his฀
brother-in-law฀was฀a฀financial฀controller.฀According฀to฀generally฀accepted฀ethical฀practice฀then,฀the฀
firm฀appeared฀to฀be฀independent฀of฀the฀audit฀client฀if฀the฀related฀partner฀did฀not฀have฀anything฀to฀do฀
with฀the฀audit.฀
Resolution?฀
The฀regulatory฀body฀required฀the฀audit฀partner฀to฀move฀400฀miles.฀This฀presumably฀implies฀that฀the฀
partner฀ was฀ requested฀ to฀ change฀ offices฀ within฀ the฀ firm฀ by฀ which฀ he฀ was฀ employed.฀ Given฀ current฀
levels฀of฀computer฀networking฀and฀other฀communications฀common฀in฀business,฀this฀would฀appear฀
to฀ be฀ an฀ arbitrary฀ distinction,฀ as฀ a฀ partner฀ in฀ an฀ office฀ 400฀ miles฀ away฀ could฀ have฀ similar฀
access฀and฀influence฀over฀a฀single฀audit฀carried฀out฀by฀the฀firm฀as฀a฀partner฀in฀the฀locality.฀
Independence฀in฀appearance฀
However,฀ in฀ this฀ situation,฀ the฀ regulatory฀ body฀ appear฀ to฀ be฀ concerned฀ about฀ the฀ appearance฀ of฀
independence.฀They฀appear฀to฀be฀concerned฀that฀the฀public฀will฀not฀perceive฀the฀distinction฀between฀
a฀ partner฀ and฀ a฀ partner฀ who฀ reports฀ on฀ a฀ specific฀ engagement.฀ This฀ may฀ or฀ may฀ not฀ be฀ fair.฀
Arguably,฀it฀is฀only฀in฀publicising฀the฀problem฀that฀the฀public฀are฀likely฀to฀have฀a฀perception฀at฀all.฀฀
Also,฀given฀the฀comments฀made฀about฀modern฀communications฀above,฀the฀public฀are฀unlikely฀to฀be฀
convinced฀that฀moving฀a฀member฀of฀staff฀to฀a฀different฀office฀will฀solve฀this฀independence฀problem,฀if฀
they฀perceive฀that฀there฀is฀one.฀
Split฀of฀audit฀firm฀
The฀decision฀of฀the฀firm฀to฀split฀into฀three฀divisions฀could฀enhance฀the฀public฀perception฀of฀the฀
independence฀ of฀ the฀ audit฀ department.฀ While฀ there฀ might฀ be฀ underlying฀ scepticism฀
relating฀to฀the฀reasons฀behind฀the฀split฀(which฀could฀merely฀be฀for฀marketing฀purposes฀or฀to฀enable฀
non-audit฀ divisions฀ to฀ raise฀ capital฀ more฀ easily),฀ the฀ underlying฀ benefit฀ for฀ objectivity฀ still฀
exists.฀
However,฀ some฀ audit฀ clients฀ will฀ be฀ unhappy฀ with฀ the฀ move฀ of฀ the฀ firm฀ as฀ it฀ will฀ entail฀ their฀
appointing฀ several฀ different฀ service฀ providers฀ to฀ gain฀ the฀ services฀ they฀ previously฀ got฀ from฀ the฀ one฀
audit฀firm.฀
812฀

lOMoARcPSD|6256454
3฀Ace฀
Year฀ended฀31฀March฀20X2฀
Relationship฀
Ace฀Co฀has฀a฀75%฀subsidiary฀(Deuce฀Co)฀and฀an฀80%฀subsidiary฀(Trey฀Co).฀
Ace฀is฀a฀related฀party฀of฀Deuce฀and฀Trey฀and฀vice฀versa.฀
Deuce฀ and฀ Trey฀ are฀ also฀ related฀ parties฀ because฀ they฀ are฀ subject฀ to฀ 'common฀ control'.฀ Any฀
transactions฀between฀Ace,฀Deuce฀and฀Trey฀need฀not฀be฀disclosed฀in฀Ace's฀consolidated฀accounts฀as฀
they฀are฀eliminated.฀
Disclosures฀
Ace฀Co฀
฀ Intragroup฀sale฀of฀machine฀for฀$25,000฀at฀profit฀of฀$5,000.฀No฀balances฀outstanding.฀
฀ Management฀services฀provided฀to฀Deuce฀(nil฀charge)฀and฀Trey฀(nil฀charge)฀
No฀disclosure฀is฀required฀in฀the฀group฀accounts฀of฀Ace฀of฀these฀items฀as฀they฀are฀eliminated.฀
Deuce฀
฀ Parent฀(and฀ultimate฀controlling฀party)฀is฀Ace฀Co฀
฀ Machine฀ purchased฀ from฀ parent฀ $25,000฀ (original฀ cost฀ $20,000)฀ and฀ depreciation฀ charge฀
$5,000.฀No฀amounts฀outstanding฀at฀year฀end.฀
฀ Purchase฀of฀management฀services฀from฀Ace฀(nil฀charge)฀
Trey฀
For฀ all฀ transactions฀ the฀ nature฀ of฀ the฀ related฀ party฀ relationship฀ (ie฀ parent,฀ subsidiary,฀ fellow฀
subsidiary)฀should฀be฀disclosed.฀
Year฀ended฀31฀March฀20X3฀
Relationship฀
Ace฀Co฀has฀a฀100%฀subsidiary฀(Deuce฀Co)฀and฀an฀80%฀subsidiary฀(Trey฀Co).฀
Ace฀is฀a฀related฀party฀of฀Deuce฀and฀Trey฀and฀vice฀versa.฀Deuce฀and฀Trey฀are฀related฀because฀they฀
remain฀ under฀ common฀ control.฀ Any฀ transactions฀ between฀ Ace,฀ Deuce฀ and฀ Trey฀ need฀ not฀ be฀
disclosed฀in฀Ace's฀consolidated฀accounts฀as฀they฀are฀eliminated.฀
Disclosures฀
Ace฀Co฀
฀ Management฀services฀provided฀to฀Deuce฀(nil฀charge)฀and฀Trey฀($10,000฀outstanding)฀
No฀disclosure฀is฀required฀in฀the฀group฀accounts฀of฀Ace฀of฀these฀items฀as฀they฀are฀eliminated.฀
Deuce฀
Disclosures฀ of฀ intragroup฀ transactions฀ is฀ still฀ required฀ even฀ though฀ Deuce฀ is฀ a฀ wholly-owned฀
subsidiary:฀
฀ Sale฀ of฀ inventories฀ to฀ Trey฀ for฀ $15,000฀ (original฀ cost฀ $12,000)฀ all฀ sold฀ on,฀ no฀ amounts฀
outstanding฀at฀year฀end฀
฀ 813฀

lOMoARcPSD|6256454
Trey฀
฀ Purchase฀ of฀ inventories฀ from฀ Deuce฀ $15,000฀ (original฀ cost฀ $12,000)฀ all฀ sold,฀ no฀ amounts฀
outstanding฀at฀year฀end฀
฀ Purchase฀of฀management฀services฀from฀Ace฀costing฀$10,000.฀All฀outstanding฀at฀year฀end฀
For฀ all฀ transactions฀ the฀ nature฀ of฀ the฀ related฀ party฀ relationship฀ (ie฀ parent,฀ subsidiary,฀ fellow฀
subsidiary)฀should฀be฀disclosed.฀
4฀Camel฀Telecom฀
(a)฀ The฀licence฀is฀an฀intangible฀asset฀accounted฀for฀under฀IAS฀38฀Intangible฀Assets.฀
Given฀ that฀ the฀ market฀ value฀ on฀ the฀ date฀ of฀ acquisition฀ was฀ more฀ than฀ the฀ amount฀ paid฀ by฀
Camel,฀a฀government฀grant฀has฀been฀given.฀
Two฀accounting฀treatments฀are฀acceptable฀under฀IAS฀20.฀฀
(i)฀ The฀asset฀is฀recognised฀initially฀at฀its฀market฀value฀of฀$370m,฀and฀the฀government฀grant฀
of฀ $26m฀ (being฀ the฀ difference฀ between฀ the฀ market฀ value฀ and฀ the฀ cost฀ of฀ the฀ asset)฀ is฀
recognised฀as฀deferred฀income.฀฀฀
(ii)฀ Alternatively฀the฀government฀grant฀can฀be฀deducted฀from฀the฀market฀value฀of฀the฀asset฀
to฀give฀a฀carrying฀amount฀of฀$344m.฀฀
The฀licence฀should฀be฀amortised฀over฀the฀10฀year฀licence฀period฀to฀a฀zero฀residual฀value.฀฀
Any฀deferred฀income฀will฀be฀amortised฀over฀the฀same฀period฀and฀presented฀as฀a฀current฀and฀
non-current฀liability฀in฀the฀statement฀of฀financial฀position.฀
Either฀ way฀ the฀ annual฀ effect฀ on฀ profit฀ or฀ loss฀ is฀ a฀ charge฀ of฀ $34.4m฀ (either฀ $344m/10฀ or฀
$370m/10฀less฀a฀credit฀of฀$26m/10).฀
The฀lower฀take฀up฀of฀5G฀services฀is฀an฀impairment฀indicator฀and฀so฀an฀impairment฀test฀must฀
be฀undertaken฀at฀the฀year฀end.฀However,฀after฀taking฀into฀account฀amortisation฀for฀the฀period,฀
the฀carrying฀amount฀of฀the฀asset฀at฀the฀year฀end฀is฀either฀$309.6m฀($344m฀–฀$34.4m)฀if฀the฀
grant฀ is฀ deducted฀ from฀ the฀ asset฀ value฀ or฀ $333m฀ ($370m฀ –฀ $37m)฀ if฀ the฀ asset฀ is฀ initially฀
measured฀ at฀ market฀ value฀ and฀ the฀ grant฀ is฀ recognised฀ separately.฀ Therefore฀ the฀ asset฀ is฀ not฀
impaired.฀
The฀asset฀cannot฀be฀revalued฀upwards฀to฀$335m฀because฀IAS฀38฀requires฀an฀active฀market฀to฀
exist฀ for฀ revaluation฀ of฀ intangible฀ assets฀ and,฀ despite฀ the฀ fact฀ that฀ the฀ licence฀ can฀ be฀ sold,฀
there฀is฀no฀active฀market฀in฀these฀four฀licences฀due฀to฀their฀nature.฀An฀active฀market฀is฀defined฀
as฀a฀market฀in฀which฀transactions฀for฀the฀particular฀asset฀take฀place฀with฀sufficient฀frequency฀
and฀volume฀to฀provide฀pricing฀information฀on฀an฀ongoing฀basis.฀This฀is฀not฀the฀case฀as฀there฀
are฀only฀four฀licences.฀
(b)฀ Camel's฀ intention฀ is฀ to฀ use฀ the฀ land฀ for฀ its฀ new฀ head฀ office.฀ Therefore฀ it฀ does฀ not฀ meet฀ the฀
definition฀of฀investment฀property฀under฀IAS฀40฀Investment฀Property:฀
'property฀held฀to฀earn฀rentals฀or฀for฀capital฀appreciation฀or฀both,฀rather฀than฀for:฀
฀ Use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services฀or฀for฀administrative฀purposes,฀or฀
฀ Sale฀in฀the฀ordinary฀course฀of฀business.'฀(IAS฀40:฀para.฀5)฀
Therefore฀the฀land฀is฀held฀under฀IAS฀16฀Property,฀Plant฀and฀Equipment฀and฀is฀initially฀recorded฀
at฀its฀cost฀of฀$10.4m.฀Being฀land,฀ordinarily฀it฀would฀not฀be฀depreciated.฀฀
The฀land฀can฀either฀be฀held฀under฀the฀cost฀model฀or฀revaluation฀model฀depending฀on฀Camel's฀
accounting฀policy฀which฀applies฀to฀all฀of฀its฀land฀as฀a฀class.฀
814฀

lOMoARcPSD|6256454
If฀ revalued,฀ the฀ fair฀ value฀ measurement฀ of฀ the฀ land฀ should฀ take฀ into฀ account฀ a฀ market฀
participant's฀ability฀to฀generate฀economic฀benefits฀by฀using฀the฀asset฀in฀its฀highest฀and฀best฀
use฀ or฀ by฀ selling฀ it฀ to฀ another฀ market฀ participant฀ that฀ would฀ use฀ the฀ asset฀ in฀ its฀ highest฀ and฀
best฀ use.฀ The฀ highest฀ and฀ best฀ use฀ of฀ an฀ asset฀ takes฀ into฀ account฀ the฀ use฀ that฀ is฀ physically฀
possible,฀legally฀permissible฀and฀financially฀feasible.฀At฀the฀current฀year฀end,฀as฀planning฀
permission฀has฀not฀been฀granted,฀use฀for฀development฀is฀not฀legally฀permissible฀so฀the฀value฀of฀
$14.3m฀cannot฀be฀used.฀If฀Camel's฀policy฀is฀to฀revalue฀its฀land,฀it฀can฀be฀revalued฀to฀$10.6m฀
at฀the฀year฀end,฀ie฀its฀value฀as฀farmland.฀The฀gain฀of฀$0.2m฀($10.6m฀–฀$10.4m)฀would฀be฀
reported฀in฀other฀comprehensive฀income.฀
(c)฀ The฀land฀is฀also฀used฀for฀the฀supply฀of฀services฀and฀therefore฀meets฀the฀definition฀of฀property,฀
plant฀and฀equipment.฀However,฀if฀the฀portion฀leased฀to฀other฀parties฀is฀separate฀and฀could฀be฀
sold฀separately,฀that฀portion฀could฀be฀treated฀separately฀as฀investment฀property.฀
Camel฀ therefore฀ has฀ the฀ option฀ of฀ using฀ the฀ cost฀ model฀ (for฀ both฀ property,฀ plant฀ and฀
equipment฀and฀investment฀property฀portions)฀or฀the฀revaluation฀model฀(for฀the฀property,฀plant฀
and฀ equipment฀ portion)฀ or฀ the฀ fair฀ value฀ model฀ (for฀ the฀ investment฀ property฀ portion).฀ This฀
depends฀on฀Camel's฀underlying฀accounting฀policy.฀
Given฀ that฀ the฀ sites฀ have฀ increased฀ substantially฀ in฀ value,฀ this฀ would฀ result฀ in฀ gains฀ in฀ other฀
comprehensive฀income฀(for฀the฀property,฀plant฀and฀equipment฀portion)฀or฀profit฀or฀loss฀(for฀the฀
investment฀property฀portion)฀if฀the฀revaluation/fair฀value฀models฀are฀used.฀Any฀rental฀income฀
is฀credited฀to฀profit฀or฀loss฀(assuming฀that฀they฀are฀operating฀leases฀under฀IFRS฀16฀Leases฀as฀it฀
applies฀to฀lessors).฀
฀(d)฀ An฀ exchange฀ transaction฀ has฀ occurred฀ here.฀ Under฀ IAS฀ 16฀ and฀ IAS฀ 38฀ which฀ cover฀
exchanges฀ of฀ tangible฀ and฀ intangible฀ assets,฀ the฀ cost฀ of฀ the฀ new฀ asset฀ is฀ measured฀ at฀ fair฀
value,฀ unless฀ the฀ transaction฀ lacks฀ commercial฀ substance,฀ which฀ does฀ not฀ appear฀ to฀ be฀ the฀
case฀here,฀as฀the฀assets฀given฀up฀relate฀to฀different฀products฀to฀those฀acquired,฀ie฀landline฀vs฀
mobile฀businesses.฀
The฀best฀indication฀of฀the฀fair฀value฀of฀the฀assets฀acquired฀is฀the฀fair฀value฀of฀the฀non-monetary฀
assets฀ given฀ up฀ ($320m)฀ plus฀ the฀ monetary฀ consideration฀ of฀ $980m.฀ A฀ gain฀ or฀ loss฀ is฀
therefore฀ reported฀ in฀ Camel's฀ financial฀ statements฀ on฀ derecognition฀ of฀ its฀ fixed฀ line฀ ADSL฀
business฀comparing฀the฀selling฀price฀($320m)฀with฀its฀carrying฀amount.฀
Part฀of฀the฀$980m฀paid฀to฀Purple฀includes฀the฀value฀of฀the฀Purple฀brand฀(ie฀its฀customer฀base฀
and฀their฀loyalty฀and฀the฀brand฀recognition฀in฀the฀market).฀The฀brand฀must฀be฀given฀up฀after฀
one฀ year฀ it฀ will฀ have฀ no฀ value฀ to฀ Camel฀ in฀ that฀ country฀ at฀ that฀ time.฀ However,฀ during฀ the฀
period฀of฀re-branding฀from฀Purple฀to฀Mobistar,฀the฀brand฀still฀has฀a฀value.฀
Consequently฀a฀fair฀value฀should฀be฀attributed฀to฀the฀brand฀during฀the฀acquisition฀accounting฀
and฀the฀brand฀should฀be฀amortised฀to฀a฀residual฀value฀of฀zero฀over฀the฀next฀year.฀฀
(e)฀ The฀Mobistar฀brand฀is฀internally฀generated฀as฀it฀developed฀the฀brand฀itself.฀Therefore,฀under฀
IAS฀38,฀ the฀ brand฀ cannot฀ be฀ recognised฀ in฀ the฀ financial฀ statements฀ of฀ Camel฀ as฀ its฀ value฀ is฀
deemed฀not฀to฀be฀able฀to฀be฀measured฀on฀a฀reliable฀basis.฀
Camel฀ should฀ analyse฀ further฀ the฀ impact฀ of฀ the฀ stolen฀ customer฀ details.฀ An฀ impairment฀ test฀
may฀ be฀ necessary฀ on฀ Camel's฀ national฀ business฀ if฀ customers฀ are฀ leaving฀ beyond฀ what฀ had฀
been฀expected฀in฀normal฀market฀conditions.฀Further,฀a฀provision฀may฀be฀necessary฀for฀a฀fine฀
over฀the฀loss฀of฀private฀data฀under฀national฀law฀since฀the฀event฀occurred฀before฀the฀year฀end,฀
which฀would฀be฀considered฀the฀obligating฀event฀for฀fines฀under฀IAS฀37฀Provisions,฀Contingent฀
Liabilities฀and฀Contingent฀Assets.฀Disclosure฀would฀also฀need฀to฀be฀made฀of฀the฀nature฀of฀the฀
incident/provision฀and฀uncertainty฀over฀the฀amount฀of฀any฀fine฀accrued.฀
฀ 815฀

lOMoARcPSD|6256454
5฀Acquirer฀
Top฀tips.฀This฀question฀tests฀students'฀ability฀to฀apply฀the฀principles฀of฀IFRS฀3฀and฀IAS฀36.฀In฀Part฀(d)฀
you฀should฀have฀computed฀the฀value฀in฀use฀of฀the฀relevant฀net฀assets.฀This฀involved฀allocating฀assets฀
into฀cash฀generating฀units.฀In฀Part฀(e)฀you฀needed฀to฀allocate฀this฀impairment฀loss฀by฀computing฀the฀
carrying฀value฀of฀the฀goodwill฀and฀therefore฀of฀the฀total฀carrying฀value฀of฀the฀individual฀subsidiary.฀
The฀whole฀impairment฀loss฀was฀allocated฀to฀goodwill.฀Remember฀that฀the฀impairment฀review฀has฀to฀
be฀done฀in฀two฀stages.฀
(a)฀ To฀ determine฀ whether฀ impairment฀ of฀ a฀ non-current฀ asset฀ has฀ occurred,฀ it฀ is฀ necessary฀ to฀
compare฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ with฀ its฀ recoverable฀ amount.฀ The฀ recoverable฀
amount฀is฀the฀higher฀of฀fair฀value฀less฀costs฀to฀sell฀and฀value฀in฀use.฀It฀is฀not฀always฀
easy฀to฀estimate฀value฀in฀use.฀In฀particular,฀it฀is฀not฀always฀practicable฀to฀identify฀cash฀flows฀
arising฀ from฀ an฀ individual฀ non-current฀ asset.฀ If฀ this฀ is฀ the฀ case,฀ value฀ in฀ use฀ should฀ be฀
calculated฀at฀the฀level฀of฀cash฀generating฀units.฀
A฀cash-generating฀unit฀is฀defined฀as฀a฀group฀of฀assets,฀liabilities฀and฀associated฀goodwill฀
that฀ generates฀ income฀ that฀ is฀ largely฀ independent฀ of฀ the฀ reporting฀ entity's฀ other฀
income฀streams.฀The฀assets฀and฀liabilities฀include฀those฀already฀involved฀in฀generating฀the฀
income฀and฀an฀appropriate฀portion฀of฀those฀used฀to฀generate฀more฀than฀one฀income฀stream.฀
(b)฀ IAS฀36฀Impairment฀of฀assets฀requires฀that฀there฀should฀be฀some฀indication฀of฀impairment฀of฀a฀
non-current฀ asset฀ before฀ an฀ impairment฀ review฀ is฀ carried฀ out.฀ However,฀ IFRS฀ 3฀ Business฀
combinations฀sets฀out฀different฀requirements฀for฀the฀special฀case฀of฀goodwill.฀
IFRS฀3฀states฀that฀goodwill฀resulting฀from฀a฀business฀combination฀should฀be฀recognised฀in฀the฀
statement฀of฀financial฀position฀and฀measured฀at฀cost.฀Goodwill฀is฀not฀amortised.฀Instead,฀it฀
should฀ be฀ reviewed฀ for฀ impairment฀ annually฀ and฀ written฀ down฀ to฀ its฀ recoverable฀
amount฀ where฀ necessary.฀ Where฀ goodwill฀ is฀ acquired฀ in฀ a฀ business฀ combination฀ during฀ the฀
current฀annual฀period,฀it฀should฀be฀tested฀for฀impairment฀before฀the฀end฀of฀the฀current฀annual฀
period.฀Prospects฀was฀acquired฀on฀30฀June฀20X0,฀so฀the฀impairment฀review฀should฀be฀carried฀
out฀by฀31฀December฀20X0.฀
(c)฀ An฀impairment฀review฀involves฀a฀comparison฀of฀the฀carrying฀value฀of฀a฀non-current฀
asset฀or฀goodwill฀with฀its฀recoverable฀amount.฀To฀the฀extent฀that฀the฀carrying฀amount฀
exceeds฀ the฀ recoverable฀ amount,฀ the฀ non-current฀ asset฀ or฀ goodwill฀ is฀ impaired฀ and฀ needs฀ to฀
be฀written฀down.฀
Recoverable฀amount฀is฀the฀higher฀of฀fair฀value฀less฀costs฀to฀sell฀and฀value฀in฀
use.฀Generally,฀recoverable฀amount฀is฀taken฀to฀be฀value฀in฀use.฀This฀is฀because฀fair฀value฀
less฀costs฀to฀sell฀may฀be฀difficult฀to฀determine,฀and฀may฀in฀any฀case฀be฀very฀low,฀because฀the฀
asset฀is฀only฀of฀use฀in฀the฀business฀rather฀than฀of฀value฀in฀the฀open฀market.฀This฀means฀that฀an฀
impairment฀ review฀ usually฀ involves฀ computing฀ value฀ in฀ use,฀ particularly฀ in฀ the฀ case฀ of฀
goodwill.฀฀
It฀ is฀ not฀ always฀ easy฀ to฀ estimate฀ value฀ in฀ use.฀ In฀ particular,฀ it฀ is฀ not฀ always฀ practicable฀ to฀
identify฀ cash฀ flows฀ arising฀ from฀ an฀ individual฀ non-current฀ asset.฀ This฀ is฀ certainly฀ true฀ of฀
goodwill,฀which฀cannot฀generate฀cash฀flows฀in฀isolation฀from฀other฀assets.฀If฀this฀is฀the฀case,฀
value฀in฀use฀should฀be฀calculated฀at฀the฀level฀of฀cash฀generating฀units.฀A฀cash฀generating฀
unit฀ is฀ the฀ smallest฀ grouping฀ of฀ assets฀ that฀ can฀ be฀ said฀ to฀ generate฀ cash฀ flows฀ that฀ are฀
independent฀of฀those฀generated฀by฀other฀units.฀To฀calculate฀value฀in฀use,฀we฀therefore฀need฀to฀
identify฀the฀cash฀generating฀units฀and฀the฀cash฀flows฀attributable฀to฀them.฀
(d)฀ The฀ value฀ in฀ use฀ of฀ the฀ assets฀ of฀ Unit฀ A฀ is฀ $72m,฀ which฀ is฀ less฀ than฀ the฀ carrying฀ value฀ of฀
$85m.฀There฀is฀therefore฀an฀impairment฀loss฀of฀$13m.฀This฀must฀be฀allocated฀as฀follows.฀
816฀

lOMoARcPSD|6256454
(i)฀ To฀ any฀ assets฀ which฀ have฀ suffered฀ obvious฀ impairment.฀ We฀ are฀ not฀ given฀ any฀
indication฀that฀there฀are฀any฀such฀assets฀here.฀
(ii)฀ To฀goodwill฀in฀the฀unit.฀We฀are฀not฀told฀that฀there฀is฀any.฀
(iii)฀ To฀ other฀ assets฀ in฀ the฀ unit,฀ ie฀ the฀ patents฀ of฀ $5฀ and฀ tangible฀ non-current฀ assets฀ of฀
$60m.฀
(iv)฀ Therefore฀the฀$13m฀is฀written฀off฀in฀proportion฀against฀patents฀(5/65฀฀$13m฀=฀$1m)฀
and฀tangible฀non-current฀assets฀(60/65฀฀$13m฀=฀$12m).฀
(e)฀ The฀goodwill฀on฀consolidation฀is:฀
฀ ฀$m฀
Cost฀of฀investment฀ ฀260฀
Net฀assets฀acquired฀ ฀180฀
฀ ฀฀฀฀฀80฀
This฀goodwill฀cannot฀be฀allocated฀to฀individual฀units,฀so฀the฀impairment฀review฀must฀be฀carried฀
out฀in฀two฀stages:฀฀
Stage฀1:฀Review฀individual฀units฀for฀impairment.฀
It฀is฀clear฀that฀the฀assets฀of฀unit฀A฀have฀suffered฀impairment,฀since฀the฀value฀in฀use฀of฀$72m฀is฀
less฀than฀the฀carrying฀value฀of฀$85m.฀The฀assets฀of฀unit฀A฀must฀therefore฀be฀written฀down฀to฀
$72m.฀
Stage฀2:฀Compare฀the฀adjusted฀carrying฀value฀of฀the฀net฀assets฀of฀Prospects,฀
including฀goodwill,฀with฀the฀value฀in฀use฀of฀the฀whole฀business.฀
The฀carrying฀value฀is฀as฀follows.฀
฀ ฀$m฀
฀Goodwill฀ ฀80฀
฀Unit฀A฀ ฀72฀
฀Unit฀B฀ ฀55฀
฀Unit฀C฀ ฀฀฀60฀
฀Total฀ ฀267฀
The฀value฀in฀use฀of฀the฀whole฀business฀is฀$205m,฀so฀an฀additional฀impairment฀loss฀of฀$267m฀
–฀ $205m฀ =฀ $62m฀ must฀ be฀ provided฀ for.฀ This฀ is฀ allocated฀ first฀ to฀ goodwill,฀ reducing฀ the฀
goodwill฀to฀$80m฀–฀$62m฀=฀$18m.฀
6฀Radost฀
(a)฀ Notes฀to฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
Defined฀benefit฀expense฀recognised฀in฀profit฀or฀loss฀
฀ ฀$'m฀
Current฀service฀cost฀ ฀฀3.75฀
Past฀service฀cost฀– plan฀amendment฀ ฀฀(6.00)฀
Net฀interest฀income฀(from฀SOFP:฀4.5฀– 5.2)฀ ฀฀(0.70)฀
Profit฀or฀loss฀expense/(credit)฀ ฀฀(2.95)฀
Other฀ comprehensive฀ income฀ (items฀ that฀ will฀ not฀ be฀ reclassified฀ to฀ profit฀ or฀ loss):฀฀
฀ $'m฀
฀Actuarial฀gain/(loss)฀on฀defined฀benefit฀obligation฀ ฀(4.75)฀
฀Return฀on฀plan฀assets฀(excluding฀amounts฀included฀in฀net฀interest)฀ ฀฀2.97฀
฀ ฀(1.78)฀
฀ 817฀

lOMoARcPSD|6256454
฀ Notes฀to฀the฀statement฀of฀financial฀position฀
Net฀defined฀benefit฀asset฀recognised฀in฀the฀statement฀of฀financial฀position฀
฀ $'m฀
฀Fair฀value฀of฀plan฀assets฀ ฀ 64.17 ฀
฀Present฀value฀of฀defined฀benefit฀obligation฀ ฀(44.00)฀
฀Net฀asset฀ ฀฀20.17฀
Changes฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation฀
฀ $'m฀
฀Opening฀defined฀benefit฀obligation฀ ฀45.00฀
฀Interest฀on฀obligation฀(45฀฀10%)฀ ฀4.50฀
฀Current฀service฀cost฀ ฀ ฀฀3.75฀
฀Past฀service฀cost฀ ฀(6.00)฀
฀Benefits฀paid฀ ฀(8.00)฀
฀Loss฀on฀remeasurement฀recognised฀in฀OCI฀(balancing฀figure)฀ ฀฀฀4.75฀
฀Closing฀defined฀benefit฀obligation฀– per฀actuary฀ ฀44.00฀
Changes฀in฀the฀fair฀value฀of฀plan฀assets฀
฀ $'m
฀Opening฀fair฀value฀of฀plan฀assets฀ ฀52.00฀
฀Interest฀on฀plan฀assets฀(52฀฀10%)฀ ฀5.20฀
฀Contributions฀ ฀12.00฀
฀Benefits฀paid฀ ฀(8.00)฀
฀Gain฀on฀remeasurement฀recognised฀in฀OCI฀(balancing฀figure)฀ ฀฀฀2.97฀
฀Closing฀fair฀value฀of฀plan฀assets฀– per฀actuary฀ ฀64.17฀
(b)฀ Legally฀the฀assets฀of฀the฀Radost฀pension฀plan฀do฀not฀belong฀to฀Radost฀once฀the฀contributions฀
are฀made.฀This฀is฀because฀to฀meet฀the฀definition฀of฀plan฀assets฀of฀a฀post-employment฀benefit฀
plan฀ under฀ IAS฀ 19฀ Employee฀ Benefits฀ they฀ must฀ be฀ held฀ by฀ an฀ entity/fund฀ that฀ is฀ legally฀
separate฀from฀the฀reporting฀entity.฀This฀provides฀the฀employees฀with฀a฀measure฀of฀protection฀
should฀the฀entity฀go฀bankrupt฀or฀should฀the฀directors฀fraudulently฀attempt฀to฀plunder฀the฀assets฀
of฀the฀pension฀plan.฀Nevertheless,฀the฀substance฀of฀the฀arrangement฀is฀that฀the฀assets฀are฀held฀
exclusively฀ to฀ pay฀ the฀ company's฀ future฀ defined฀ benefit฀ obligation฀ and฀ it฀ is฀ therefore฀ logical฀
that฀ they฀ should฀ be฀ shown฀ in฀ the฀ company's฀ statement฀ of฀ financial฀ position฀ reducing฀ that฀
liability.฀ In฀ the฀ case฀ of฀ plan฀ assets฀ that฀ exceed฀ the฀ value฀ of฀ the฀ associated฀ obligation฀ (as฀ in฀
Radost's฀ case),฀ a฀ net฀ asset฀ would฀ normally฀ be฀ recognised฀ in฀ the฀ company's฀ statement฀ of฀
financial฀position฀on฀the฀grounds฀that฀the฀definition฀of฀an฀asset฀('a฀resource฀controlled฀by฀the฀
entity฀as฀a฀result฀of฀past฀events฀and฀from฀which฀future฀economic฀benefits฀are฀expected฀to฀flow฀
to฀the฀entity')฀is฀met.฀In฀this฀case฀the฀'benefits'฀are฀reduced฀future฀contributions฀as฀the฀plan฀is฀in฀
surplus.฀
7฀Cleanex฀
(a)฀ Why฀there฀was฀a฀need฀for฀an฀accounting฀standard฀dealing฀with฀provisions฀
IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀was฀issued฀to฀prevent฀entities฀
from฀using฀provisions฀for฀creative฀accounting.฀It฀was฀common฀for฀entities฀to฀recognise฀material฀
provisions฀ for฀ items฀ such฀ as฀ future฀ losses,฀ restructuring฀ costs฀ or฀ even฀ expected฀ future฀
expenditure฀ on฀ repairs฀ and฀ maintenance฀ of฀ assets.฀ These฀ could฀ be฀ combined฀ in฀ one฀ large฀
provision฀(sometimes฀known฀as฀the฀'big฀bath').฀Although฀these฀provisions฀reduced฀profits฀in฀the฀
period฀ in฀ which฀ they฀ were฀ recognised฀ (and฀ were฀ often฀ separately฀ disclosed฀ on฀ grounds฀ of฀
materiality),฀ they฀ were฀ then฀ released฀ to฀ enhance฀ profits฀ in฀ subsequent฀ periods.฀ To฀ make฀
818฀

lOMoARcPSD|6256454
matters฀worse,฀provisions฀were฀often฀recognised฀where฀there฀was฀no฀firm฀commitment฀to฀incur฀
expenditure.฀ For฀ example,฀ an฀ entity฀ might฀ set฀ up฀ a฀ provision฀ for฀ restructuring฀ costs฀ and฀ then฀
withdraw฀from฀the฀plan,฀leaving฀the฀provision฀available฀for฀profit฀smoothing.฀
Criteria฀for฀recognition฀฀
IAS฀37฀states฀that฀a฀provision฀shall฀be฀recognised฀when:฀
฀ An฀ entity฀ has฀ a฀ present฀ obligation฀ to฀ transfer฀ economic฀ benefits฀ as฀ a฀ result฀ of฀ a฀ past฀
transaction฀or฀event;฀and฀
฀ It฀ is฀ probable฀ that฀ a฀ transfer฀ of฀ economic฀ benefits฀ will฀ be฀ required฀ to฀ settle฀ the฀
obligation;฀and฀
฀ A฀reliable฀estimate฀can฀be฀made฀of฀the฀amount฀of฀the฀obligation.฀
An฀obligation฀can฀be฀legal฀or฀constructive.฀An฀entity฀has฀a฀constructive฀obligation฀if:฀
฀ It฀ has฀ indicated฀ to฀ other฀ parties฀ that฀ it฀ will฀ accept฀ certain฀ responsibilities฀ (by฀ an฀
established฀pattern฀of฀past฀practice฀or฀published฀policies);฀and฀
฀ As฀a฀result,฀it฀has฀created฀a฀valid฀expectation฀on฀the฀part฀of฀those฀other฀parties฀that฀it฀
will฀discharge฀those฀responsibilities.฀
(b)฀ Two฀of฀the฀three฀conditions฀in฀IAS฀37฀are฀very฀clearly฀met.฀Cleanex฀will฀incur฀expenditure฀
(transfer฀ of฀ economic฀ benefits฀ is฀ virtually฀ certain)฀ and฀ the฀ directors฀ have฀ prepared฀ detailed฀
estimates฀of฀the฀amount.฀
Although฀ Cleanex฀ is฀ not฀ legally฀ obliged฀ to฀ carry฀ out฀ the฀ project,฀ it฀ appears฀ that฀ it฀ has฀ a฀
constructive฀obligation฀to฀do฀so.฀IAS฀37฀states฀that฀an฀entity฀has฀a฀constructive฀obligation฀
if฀both฀of฀the฀following฀apply.฀
(i)฀ It฀ has฀ indicated฀ to฀ other฀ parties฀ that฀ it฀ will฀ accept฀ certain฀ responsibilities฀ (by฀ an฀
established฀pattern฀of฀past฀practice฀or฀published฀policies).฀
(ii)฀ As฀a฀result,฀it฀has฀created฀a฀valid฀expectation฀on฀the฀part฀of฀those฀other฀parties฀that฀
it฀will฀discharge฀those฀responsibilities.฀
Cleanex฀has฀a฀reputation฀of฀fulfilling฀its฀financial฀commitments฀once฀they฀have฀been฀publicly฀
announced.฀ Therefore฀ the฀ obligating฀ event฀ is฀ the฀ announcement฀ of฀ the฀ proposal฀ on฀ 25฀ June฀
20X0,฀ the฀ obligation฀ exists฀ at฀ 30฀ June฀ 20X0฀ (the฀ year-end)฀ and฀ Cleanex฀ is฀ required฀ to฀
recognise฀a฀provision.฀
(c)฀ Provision฀at฀30฀June฀20X0:฀
฀ ฀ ฀$'000฀
Expenditure฀on:฀ ฀ ฀
฀฀฀30฀June฀20X1฀ ฀30,000฀ 0.926฀ ฀ 27,780 ฀
฀฀฀30฀June฀20X2฀ ฀30,000฀ 0.857฀ ฀25,710฀
฀฀฀30฀June฀20X3฀ ฀40,000฀ 0.794฀ ฀31,760฀
฀ ฀ ฀85,250฀
Provision at 30 June 20X1:
฀ ฀ ฀$'000฀
Expenditure฀on:฀ ฀ ฀
฀฀฀30฀June฀20X2฀ ฀30,000฀ 0.926฀ ฀27,780฀
฀฀฀30฀June฀20X3฀ ฀40,000฀ 0.857฀ ฀34,280฀
฀ ฀ ฀62,060฀
฀ 819฀

lOMoARcPSD|6256454
(d)฀ The฀charge฀to฀profit฀or฀loss฀for฀the฀year฀ended฀30฀June฀20X1฀consists฀of:฀
(i)฀ Depreciation฀(85,250,000/20)฀ ฀$฀4,262,500฀

This฀is฀reported฀in฀cost฀of฀sales.฀
The฀ provision฀ of฀ $85,250,000฀ also฀ represents฀ an฀ asset฀ as฀ it฀ gives฀ access฀ to฀ future฀
economic฀ benefits฀ (it฀ enhances฀ the฀ performance฀ of฀ the฀ factories).฀ This฀ is฀ capitalised฀
and฀depreciated฀over฀20฀years฀(the฀average฀useful฀life฀of฀the฀factories).฀
(ii)฀ Unwinding฀of฀the฀discount฀(see฀working)฀ ฀$฀6,810,000฀

This฀is฀reported฀as฀a฀finance฀cost.฀
Working฀
฀ ฀$'000฀
Provision฀at฀1฀July฀20X0฀ ฀85,250฀
Expenditure฀on฀30฀June฀20X1฀ ฀(30,000)฀
Unwinding฀of฀discount฀(balancing฀figure)฀ ฀฀฀6,810฀
Provision฀at฀30฀June฀20X1฀ ฀62,060฀
Alternative฀calculation฀ ฀
฀ ฀$'000฀
Expenditure฀on:฀ ฀
30฀June฀20X1฀(30,000฀–฀27,780)฀ ฀ 2,220 ฀
30฀June฀20X2฀(27,780฀–฀25,710)฀ ฀2,070฀
30฀June฀20X3฀(34,280฀–฀31,760)฀ ฀2,520฀
฀ ฀6,810฀
8฀DT฀Group฀฀
(a)฀ (i)฀ IAS฀ 12฀ focuses฀ on฀ the฀ statement฀ of฀ financial฀ position฀ in฀ accounting฀ for฀ deferred฀
taxation.฀ It฀ is฀ based฀ on฀ the฀ principle฀ that฀ a฀ deferred฀ tax฀ liability฀ or฀ asset฀ should฀ be฀
recognised฀ if฀ the฀ recovery฀ of฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ or฀ the฀ settlement฀ of฀ the฀
liability฀will฀result฀in฀higher฀or฀lower฀tax฀payments฀in฀the฀future฀than฀would฀be฀the฀case฀if฀
that฀recovery฀or฀settlement฀were฀to฀have฀no฀tax฀consequences.฀Future฀tax฀consequences฀
of฀ past฀ events฀ determine฀ the฀ deferred฀ tax฀ liabilities฀ or฀ assets.฀ (IAS฀ 12฀ gives฀ certain฀
exceptions฀ to฀ this฀ general฀ rule,฀ eg฀ deferred฀ tax฀ is฀ not฀ provided฀ on฀ goodwill.)฀ The฀
calculation฀of฀deferred฀tax฀balances฀is฀determined฀by฀looking฀at฀the฀difference฀between฀
the฀tax฀base฀of฀an฀asset฀and฀its฀statement฀of฀financial฀position฀carrying฀value.฀Thus฀the฀
calculation฀is฀focused฀on฀the฀statement฀of฀financial฀position.฀
Differences฀between฀the฀carrying฀amount฀of฀the฀asset฀and฀liability฀and฀its฀tax฀base฀are฀
called฀ 'temporary฀ differences'.฀ The฀ word฀ 'temporary'฀ is฀ used฀ because฀ the฀ IASB's฀
Conceptual฀ Framework฀ assumes฀ that฀ an฀ enterprise฀ will฀ realise฀ its฀ assets฀ and฀ settle฀ its฀
liabilities฀over฀time฀at฀which฀point฀the฀tax฀consequences฀will฀crystallise.฀
The฀ objective฀ of฀ the฀ temporary฀ difference฀ approach฀ is฀ to฀ recognise฀ the฀ future฀ tax฀
consequences฀inherent฀in฀the฀carrying฀amounts฀of฀assets฀and฀liabilities฀in฀the฀statement฀
of฀financial฀position.฀The฀approach฀looks฀at฀the฀tax฀payable฀if฀the฀assets฀and฀liabilities฀
were฀ realised฀ for฀ the฀ pre฀ tax฀ amounts฀ recorded฀ in฀ the฀ statement฀ of฀ financial฀ position.฀
The฀presumption฀is฀that฀there฀will฀be฀recovery฀of฀statement฀of฀financial฀position฀items฀out฀
of฀ future฀ revenues฀ and฀ tax฀ needs฀ to฀ be฀ provided฀ in฀ relation฀ to฀ such฀ a฀ recovery.฀ This฀
involves฀looking฀at฀temporary฀differences฀between฀the฀carrying฀values฀of฀the฀assets฀and฀
liabilities฀ and฀ the฀ tax฀ base฀ of฀ the฀ elements.฀ The฀ standard฀ recognises฀ two฀ types฀ of฀
temporary฀ differences,฀ which฀ are฀ described฀ as฀ 'taxable'฀ and฀ 'deductible'฀ temporary฀
differences.฀
820฀

lOMoARcPSD|6256454
(ii)฀ By฀ definition,฀ deferred฀ tax฀ involves฀ the฀ postponement฀ of฀ the฀ tax฀ liability฀ and฀ it฀ is฀
possible,฀therefore,฀to฀regard฀the฀deferred฀liability฀as฀equivalent฀to฀an฀interest฀free฀loan฀
from฀ the฀ tax฀ authorities.฀ Thus฀ it฀ could฀ be฀ argued฀ that฀ it฀ is฀ appropriate฀ to฀ reflect฀ this฀
benefit฀of฀postponement฀by฀discounting฀the฀liability฀and฀recording฀a฀lower฀tax฀charge.฀
This฀discount฀is฀then฀amortised฀over฀the฀period฀of฀deferment.฀The฀purpose฀of฀discounting฀
is฀ to฀ measure฀ future฀ cash฀ flows฀ at฀ their฀ present฀ value฀ and,฀ therefore,฀ deferred฀ tax฀
balances฀can฀only฀be฀discounted฀if฀they฀can฀be฀viewed฀as฀future฀cash฀flows฀that฀are฀not฀
already฀measured฀at฀their฀present฀value.฀
Some฀temporary฀differences฀clearly฀represent฀future฀tax฀cash฀flows.฀For฀example,฀where฀
there฀is฀an฀accrual฀for฀an฀expense฀that฀is฀to฀be฀paid฀in฀the฀future฀and฀tax฀relief฀will฀only฀
be฀ given฀ when฀ the฀ expense฀ is฀ paid.฀ Some฀ expenses฀ are฀ already฀ measured฀ on฀ a฀
discounted฀ basis฀ (eg฀ retirement฀ benefits),฀ and฀ it฀ is฀ not฀ appropriate฀ to฀ discount฀ the฀
resulting฀deferred฀tax.฀However,฀there฀is฀controversy฀over฀whether฀it฀is฀valid฀to฀discount฀
deferred฀tax฀when฀tax฀cash฀flows฀have฀already฀occurred฀as฀in฀the฀case฀of฀accelerated฀
tax฀depreciation.฀It฀is฀argued฀that฀this฀temporary฀difference฀does฀not฀give฀rise฀to฀a฀future฀
cash฀flow฀and฀there฀is฀no฀basis฀for฀discounting.฀An฀alternative฀view฀is฀that฀accelerated฀
tax฀depreciation฀is฀a฀liability฀that฀will฀be฀repaid฀in฀the฀form฀of฀higher฀tax฀assessments฀in฀
the฀ future.฀ It฀ can฀ be฀ argued฀ that฀ there฀ are฀ two฀ cash฀ flows,฀ with฀ the฀ second฀ cash฀ flow฀
occurring฀on฀the฀reversal฀of฀the฀temporary฀difference,฀as฀the฀tax฀payment฀will฀be฀higher.฀
Discounting,฀ however,฀ makes฀ the฀ deferred฀ tax฀ computation฀ more฀ difficult฀ to฀ calculate฀
and฀more฀subjective.฀Also฀there฀will฀be฀an฀additional฀cost฀in฀scheduling฀and฀calculating฀
deferred฀taxation,฀as฀well฀as฀the฀problem฀of฀the฀determination฀of฀the฀discount฀rate.฀IAS฀
12฀specifically฀prohibits฀discounting.฀
(b)฀ Calculation฀of฀deferred฀tax฀liability฀
฀ Carrying Tax฀ Temporary
amount฀ base฀ differences฀
$m฀ $m฀ $m฀
฀Goodwill฀(note฀1)฀ ฀14฀ ฀–฀ ฀–฀
฀Subsidiary฀(note฀1)฀ ฀76฀ ฀60฀ ฀16฀
฀Inventories฀(note฀2)฀ ฀24฀ ฀30฀ ฀฀(6)฀
฀Property,฀plant฀and฀equipment฀(note฀3)฀ ฀ 2,600 ฀ ฀ 1,920 ฀ ฀ 680 ฀
฀Other฀temporary฀differences฀ ฀ 90
฀ ฀
฀Liability฀for฀health฀care฀benefits฀ ฀(100)฀ ฀0฀฀ ฀(100)฀
฀Unrelieved฀tax฀losses฀(note฀4)฀ ฀ ฀(100)฀
฀Property฀sold฀–฀tax฀due฀30.11.20X4฀(165/30%)฀ ฀ ฀฀฀฀550
฀Temporary฀differences฀ ฀1,130฀
฀Deferred฀tax฀liability฀ ฀1,320฀at฀30%฀ ฀396฀
฀(680฀+฀90฀+฀550)฀
฀Deferred฀tax฀liability฀฀ ฀16฀at฀25%฀ ฀ 4฀
฀Deferred฀tax฀asset฀฀ ฀฀ (200)฀at฀30%฀ ฀฀(60)฀
฀Deferred฀tax฀asset฀ ฀฀฀฀฀฀ ฀(6)฀at฀25%฀ ฀฀฀฀(1.5)฀
฀ ฀฀1,130฀ ฀338.5฀
฀Deferred฀tax฀liability฀b/d฀(given) ฀฀฀280฀
฀Deferred฀tax฀attributable฀to฀subsidiary฀to฀goodwill฀(76฀– 60)฀ 25%฀ ฀฀฀฀฀฀4฀฀฀
฀฀Deferred฀tax฀expense฀for฀the฀year฀charged฀to฀P/L฀(balance)฀ ฀฀฀฀54.5฀
฀Deferred฀tax฀liability฀c/d฀(from฀above)฀ ฀฀338.5฀
฀ 821฀

lOMoARcPSD|6256454
Notes฀
1฀ As฀no฀deduction฀is฀available฀for฀the฀cost฀of฀goodwill฀in฀the฀subsidiary's฀tax฀jurisdiction,฀
then฀the฀tax฀base฀of฀goodwill฀is฀zero.฀Paragraph฀15(a)฀of฀IAS฀12,฀states฀that฀DT฀Group฀
should฀ not฀ recognise฀ a฀ deferred฀ tax฀ liability฀ of฀ the฀ temporary฀ difference฀ associated฀ in฀
B's฀ jurisdiction฀ with฀ the฀ goodwill.฀ Goodwill฀ will฀ be฀ increased฀ by฀ the฀ amount฀ of฀ the฀
deferred฀tax฀liability฀of฀the฀subsidiary฀ie฀$4฀million.฀
2฀ Unrealised฀ group฀ profit฀ eliminated฀ on฀ consolidation฀ are฀ provided฀ for฀ at฀ the฀ receiving฀
company's฀rate฀of฀tax฀(ie฀at฀25%).฀
3฀ The฀ tax฀ that฀ would฀ arise฀ if฀ the฀ properties฀ were฀ disposed฀ of฀ at฀ their฀ revalued฀ amounts฀
which฀ was฀ provided฀ at฀ the฀ beginning฀ of฀ the฀ year฀ will฀ be฀ included฀ in฀ the฀ temporary฀
difference฀arising฀on฀the฀property,฀plant฀and฀equipment฀at฀30฀November฀20X1.฀
4฀ DT฀Group฀has฀unrelieved฀tax฀losses฀of฀$300m.฀This฀will฀be฀available฀for฀offset฀against฀
current฀ year's฀ profits฀ ($110m)฀ and฀ against฀ profits฀ for฀ the฀ year฀ ending฀ 30฀ November฀
20X2฀ ($100m).฀ Because฀ of฀ the฀ uncertainty฀ about฀ the฀ availability฀ of฀ taxable฀ profits฀ in฀
20X3,฀ no฀ deferred฀ tax฀ asset฀ can฀ be฀ recognised฀ for฀ any฀ losses฀ which฀ may฀ be฀ offset฀
against฀this฀amount.฀Therefore,฀a฀deferred฀tax฀asset฀may฀be฀recognised฀for฀the฀losses฀to฀
be฀offset฀against฀taxable฀profits฀in฀20X2.฀That฀is฀$100m฀฀30%฀ie฀$30m.฀
Comment฀
The฀deferred฀tax฀liability฀of฀DT฀Group฀will฀rise฀in฀total฀by฀$335.5฀million฀($338.5m฀–฀$3m),฀
thus฀reducing฀net฀assets,฀distributable฀profits,฀and฀post-tax฀earnings.฀The฀profit฀for฀the฀year฀will฀
be฀reduced฀by฀$54.5฀million฀which฀would฀probably฀be฀substantially฀more฀under฀IAS฀12฀than฀
the฀old฀method฀of฀accounting฀for฀deferred฀tax.฀A฀prior฀period฀adjustment฀will฀occur฀of฀$280m฀
–฀$3m฀as฀IAS฀are฀being฀applied฀for฀the฀first฀time฀(IFRS฀1)฀ie฀$277m.฀The฀borrowing฀position฀of฀
the฀ company฀ may฀ be฀ affected฀ and฀ the฀ directors฀ may฀ decide฀ to฀ cut฀ dividend฀ payments.฀
However,฀ the฀ amount฀ of฀ any฀ unprovided฀ deferred฀ tax฀ may฀ have฀ been฀ disclosed฀ under฀ the฀
previous฀ GAAP฀ standard฀ used.฀ ฀ IAS฀ 12฀ brings฀ this฀ liability฀ into฀ the฀ statement฀ of฀ financial฀
position฀but฀if฀the฀bulk฀of฀the฀liability฀had฀already฀been฀disclosed฀the฀impact฀on฀the฀share฀price฀
should฀be฀minimal.฀
9฀PQR฀
Investment฀in฀debentures฀
Given฀ that฀ these฀ debentures฀ are฀ planned฀ to฀ be฀ held฀ until฀ redemption,฀ under฀ IFRS฀ 9฀ Financial฀
instruments฀they฀would฀be฀held฀at฀amortised฀cost,฀on฀the฀assumption฀that:฀
(a)฀ The฀objective฀of฀the฀business฀model฀within฀which฀the฀asset฀is฀held฀is฀to฀hold฀assets฀in฀order฀to฀
collect฀contractual฀cash฀flows,฀and฀฀
solely฀payments฀of฀principal฀and฀interest฀on฀the฀principal฀outstanding.฀
This฀means฀that฀they฀are฀initially฀shown฀at฀their฀cost฀(including฀any฀transaction฀costs)฀and฀their฀value฀
increased฀over฀time฀to฀the฀redemption฀value฀by฀applying฀a฀constant฀effective฀interest฀rate฀which฀takes฀
into฀ account฀ not฀ only฀ the฀ annual฀ income฀ due฀ from฀ the฀ coupon,฀ but฀ also฀ amortisation฀ of฀ the฀
redemption฀premium.฀Their฀value฀is฀reduced฀by฀distributions฀received,฀ie฀the฀coupon.฀฀
Consequently฀the฀amortised฀cost฀valuation฀of฀these฀debentures฀at฀the฀year฀end฀would฀be:฀
Cost฀(40,000฀–฀6,000) ฀34,000฀
Effective฀interest฀at฀8.6%฀ ฀2,924฀ ฀shown฀as฀finance฀income฀
Coupon฀received฀(4%฀ 40,000)฀ ฀ (1,600) ฀Debited฀to฀cash฀
฀ ฀35,324฀
822฀

lOMoARcPSD|6256454
The฀ debentures฀ are฀ an฀ asset฀ belonging฀ to฀ the฀ equity฀ holders฀ and฀ so฀ as฀ the฀ increase฀ in฀ value฀ is฀
recognised฀until฀redemption,฀the฀equity฀of฀the฀business฀will฀increase,฀marginally฀reducing฀gearing.฀
Forward฀contract฀
Providing฀the฀forward฀meets฀the฀following฀criteria฀it฀qualifies฀for฀hedge฀accounting:฀
(a)฀ the฀ hedging฀ relationship฀ consists฀ only฀ of฀ eligible฀ hedging฀ instruments฀ and฀ eligible฀
hedged฀items.฀
(b)฀ it฀ was฀ designated฀ at฀ its฀ inception฀ as฀ a฀ hedge฀ with฀ full฀ documentation฀ of฀ how฀ this฀
hedge฀fits฀into฀the฀company's฀strategy.฀
(c)฀ the฀hedging฀relationship฀meets฀all฀of฀the฀following฀hedge฀effectiveness฀requirements:฀
(i)฀ there฀ is฀ an฀ economic฀ relationship฀ between฀ the฀ hedged฀ item฀ and฀ the฀ hedging฀
instrument,฀i.e.฀the฀hedging฀instrument฀and฀the฀hedged฀item฀have฀values฀that฀generally฀
move฀in฀the฀opposite฀direction฀because฀of฀the฀same฀risk,฀which฀is฀the฀hedged฀risk;฀
(ii)฀ the฀effect฀of฀credit฀risk฀does฀not฀dominate฀the฀value฀changes฀that฀result฀from฀
that฀ economic฀ relationship,฀ i.e.฀ the฀ gain฀ or฀ loss฀ from฀ credit฀ risk฀ does฀ not฀ frustrate฀ the฀
effect฀ of฀ changes฀ in฀ the฀ underlyings฀ on฀ the฀ value฀ of฀ the฀ hedging฀ instrument฀ or฀ the฀
hedged฀item,฀even฀if฀those฀changes฀were฀significant;฀and฀
(iii)฀ the฀ hedge฀ ratio฀ of฀ the฀ hedging฀ relationship฀ (quantity฀ of฀ hedging฀ instrument฀ vs฀
quantity฀of฀hedged฀item)฀is฀the฀same฀as฀that฀resulting฀from฀the฀quantity฀of฀the฀hedged฀
item฀ that฀ the฀ entity฀ actually฀ hedges฀ and฀ the฀ quantity฀ of฀ the฀ hedging฀ instrument฀ that฀
the฀entity฀actually฀uses฀to฀hedge฀that฀quantity฀of฀hedged฀item.฀
A฀foreign฀currency฀forward฀contract฀can฀be฀argued฀to฀be฀either฀a฀hedge฀of฀the฀future฀cash฀flow฀or฀a฀
hedge฀of฀the฀fair฀value฀of฀the฀machine฀to฀be฀purchased.฀IFRS฀9฀Financial฀Instruments฀therefore฀allows฀
foreign฀ currency฀ hedges฀ of฀ firm฀ commitments฀ to฀ be฀ classed฀ as฀ either฀ a฀ cash฀ flow฀ hedge฀ or฀ a฀ fair฀
value฀hedge.฀
If฀the฀contract฀is฀classed฀as฀a฀cash฀flow฀hedge,฀given฀that฀the฀machine฀is฀not฀yet฀recognised฀in฀the฀
books,฀any฀gain฀or฀loss฀on฀the฀hedging฀instrument฀is฀split฀into฀two฀components:฀
฀ The฀ effective฀ portion฀ of฀ the฀ hedge฀ (which฀ matches฀ the฀ change฀ in฀ expected฀ cash฀ flow)฀ is฀
recognised฀initially฀in฀other฀comprehensive฀income฀(and฀in฀the฀cash฀flow฀hedge฀reserve).฀฀It฀is฀
transferred฀ out฀ of฀ the฀ cash฀ flow฀ hedge฀ reserve฀ when฀ the฀ asset฀ is฀ recognised฀ (adjusting฀ the฀
asset฀base฀and฀future฀depreciation).฀This฀applies฀the฀accruals฀concept.฀
฀ The฀ ineffective฀ portion฀ of฀ the฀ hedge฀ is฀ recognised฀ in฀ profit฀ or฀ loss฀ immediately฀ as฀ it฀ has฀ not฀
hedged฀anything.฀
If฀the฀contract฀is฀classed฀as฀a฀fair฀value฀hedge,฀all฀gains฀and฀losses฀on฀the฀hedging฀instrument฀must฀
be฀ recognised฀ immediately฀ in฀ profit฀ or฀ loss.฀ However,฀ in฀ order฀ to฀ match฀ those฀ against฀ the฀ asset฀
hedged,฀the฀gain฀or฀loss฀on฀the฀fair฀value฀of฀the฀asset฀hedged฀is฀also฀recognised฀in฀profit฀or฀loss฀(and฀
as฀an฀asset฀or฀liability฀in฀the฀statement฀of฀financial฀position).฀฀This฀is฀arguably฀less฀transparent฀as฀it฀
results฀ in฀ part฀ of฀ the฀ asset฀ value฀ (the฀ change฀ in฀ fair฀ value)฀ being฀ recognised฀ in฀ the฀ statement฀ of฀
financial฀position฀until฀the฀purchase฀actually฀occurs฀–฀consequently,฀IFRS฀9฀allows฀the฀option฀to฀treat฀
foreign฀currency฀forward฀contracts฀as฀a฀cash฀flow฀hedge.฀
Gearing฀will฀be฀different฀depending฀on฀whether฀the฀forward฀contract฀is฀accounted฀for฀as฀a฀cash฀flow฀
hedge฀or฀a฀fair฀value฀hedge฀(and฀whether฀a฀gain฀or฀loss฀on฀the฀hedging฀instrument฀occurs).฀Gearing฀
will฀be฀less฀volatile฀if฀a฀fair฀value฀hedge฀is฀used฀as฀the฀change฀in฀fair฀value฀of฀the฀hedged฀asset฀is฀
also฀recognised฀offsetting฀gains฀or฀losses฀on฀the฀hedging฀instrument,฀whereas฀this฀is฀not฀the฀case฀until฀
the฀asset฀is฀purchased฀(and฀recognised)฀for฀the฀cash฀flow฀hedge.฀
Redeemable฀preference฀shares฀
Redeemable฀preference฀shares,฀although฀called฀shares,฀are฀not,฀in฀substance,฀equity,฀they฀are฀a฀debt฀
instrument,฀ie฀a฀loan฀made฀to฀the฀company฀which฀receives฀interest฀and฀is฀paid฀back฀at฀a฀later฀date.฀
฀ 823฀

lOMoARcPSD|6256454
Consequently,฀ IAS฀ 32฀ requires฀ them฀ to฀ be฀ classed฀ as฀ such,฀ ie฀ as฀ a฀ non-current฀ liability฀ in฀ the฀
statement฀of฀financial฀position.฀The฀'dividends'฀paid฀will฀be฀shown฀in฀profit฀or฀loss฀as฀finance฀costs฀
and฀accrued฀at฀the฀end฀of฀the฀year฀if฀outstanding,฀whether฀declared฀or฀not.฀
The฀ shares฀ are฀ consequently฀ a฀ financial฀ liability฀ held฀ at฀ amortised฀ cost.฀ In฀ this฀ case,฀ given฀ that฀ the฀
shares฀ are฀ issued฀ and฀ redeemed฀ at฀ the฀ same฀ value,฀ the฀ effective฀ interest฀ rate฀ and฀ nominal฀ coupon฀
rate฀will฀be฀the฀same฀(6%)฀and฀each฀year฀$6,000฀will฀be฀shown฀as฀a฀finance฀cost฀in฀profit฀or฀loss฀
and฀ the฀ balance฀ outstanding฀ under฀ non-current฀ liabilities฀ at฀ each฀ year฀ end฀ will฀ be฀ $100,000฀ as฀
follows:฀
฀ $ ฀฀฀฀
Cash฀received/฀b/d฀value฀ ฀100,000฀
Effective฀interest฀at฀6%฀ ฀6,000฀ shown฀as฀finance฀cost฀
Coupon฀paid฀(6%฀฀100,000)฀ ฀ ฀ (6,000) credited฀to฀cash฀
฀ ฀100,000฀
In฀ the฀ financial฀ statements฀ for฀ the฀ year฀ ending฀ 31฀ December฀ 20X7,฀ the฀ shares฀ will฀ need฀ to฀ be฀
reclassified฀as฀a฀current฀liability฀given฀that฀they฀will฀be฀repaid฀within฀one฀year.฀
Given฀that฀these฀shares฀are฀classed฀as฀a฀financial฀liability,฀gearing฀will฀be฀higher฀(as฀they฀are฀treated฀
as฀debt)฀than฀if฀they฀were฀ordinary฀shares฀(which฀would฀be฀treated฀as฀equity).฀
10฀Sirus฀฀
Marking฀scheme฀
฀ ฀Marks฀
(a)฀ Definition฀of฀financial฀liability฀and฀equity ฀ 3฀
Principle฀in฀IAS฀32฀ ฀ 1฀
Discussion฀ ฀ 2฀
(b)฀ IAS฀19฀ ฀1฀
Financial฀liability฀ ฀2฀
Provision฀ ฀1฀
Build฀up฀over฀service฀period฀ ฀1฀
Recalculate฀annually฀ ฀ 1฀
(c)฀ Purchase฀method฀ ฀ 1฀
Cost฀of฀business฀combinations฀ ฀ 2฀
Future฀payment฀ ฀ 1฀
Remuneration฀versus฀cost฀of฀acquisition฀ ฀ 2฀
(d)฀ Not฀exercised฀ ฀ 2฀
Expected฀exercise฀ ฀ 2฀
IFRS฀9฀ ฀ 1฀
Current฀v฀non-current฀ ฀฀฀฀2฀
฀ ฀Maximum ฀ ฀25฀
฀ Report฀
To:฀ The฀Directors,฀Sirus฀
From:฀Accountant฀
Date:฀ 15฀June฀20X8฀
Accounting฀treatment฀of฀items฀in฀the฀financial฀statements฀
824฀

lOMoARcPSD|6256454
(a)฀ Directors'฀ordinary฀'B'฀shares฀
The฀ capital฀ of฀ Sirus฀ must฀ be฀ shown฀ either฀ as฀ a฀ liability฀ or฀ as฀ equity.฀ The฀ criteria฀ for฀
distinguishing฀ between฀ financial฀ liabilities฀ and฀ equity฀ are฀ found฀ in฀ IAS฀ 32฀ Financial฀
instruments:฀ presentation.฀ Equity฀ and฀ liabilities฀ must฀ be฀ classified฀ according฀ to฀ their฀
substance,฀not฀just฀their฀legal฀form,฀
A฀financial฀liability฀is฀defined฀as฀any฀liability฀that฀is:฀
(i)฀ A฀contractual฀obligation:฀
–฀ To฀deliver฀cash฀or฀another฀financial฀asset฀to฀another฀entity,฀or฀
–฀ To฀ exchange฀ financial฀ instruments฀ with฀ another฀ entity฀ under฀ conditions฀ that฀ are฀
potentially฀unfavourable;฀or฀
(ii)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀the฀entity's฀own฀equity฀instruments.฀
An฀equity฀instrument฀is฀any฀contract฀that฀evidences฀a฀residual฀interest฀in฀the฀assets฀of฀
an฀entity฀after฀deducting฀all฀of฀its฀liabilities฀
The฀ ordinary฀ 'B'฀ shares,฀ the฀ capital฀ subscribed฀ by฀ the฀ directors฀ must,฀ according฀ to฀ the฀
directors'฀ service฀ agreements,฀ be฀ returned฀ to฀ any฀ director฀ on฀ leaving฀ the฀ company.฀ There฀ is฀
thus฀a฀contractual฀obligation฀to฀deliver฀cash.฀The฀redemption฀is฀not฀discretionary,฀and฀
Sirus฀ has฀ no฀ right฀ to฀ avoid฀ it.฀ The฀ mandatory฀ nature฀ of฀ the฀ repayment฀ makes฀ this฀ capital฀ a฀
liability฀(if฀it฀were฀discretionary,฀it฀would฀be฀equity).฀฀On฀initial฀recognition,฀that฀is฀when฀the฀
'B'฀shares฀are฀purchased,฀the฀financial฀liability฀must฀be฀stated฀at฀the฀present฀value฀of฀the฀
amount฀ due฀ on฀ redemption,฀ discounted฀ over฀ the฀ life฀ of฀ the฀ service฀ contract.฀ In฀
subsequent฀periods,฀the฀financial฀liability฀may฀be฀carried฀at฀fair฀value฀through฀profit฀or฀loss,฀or฀
at฀amortised฀cost฀under฀IFRS฀9.฀
In฀ contrast,฀ the฀ payment฀ of฀ $3฀ million฀ to฀ holders฀ of฀ 'B'฀ shares,฀ is฀ discretionary฀ in฀ that฀ it฀
must฀be฀approved฀in฀a฀general฀meeting฀by฀a฀majority฀of฀all฀shareholders.฀This฀approval฀may฀
be฀refused,฀and฀so฀it฀would฀not฀be฀correct฀to฀show฀the฀$3฀million฀as฀a฀liability฀in฀the฀statement฀
of฀financial฀position฀at฀30฀April฀20X8.฀Instead,฀it฀should฀be฀recognised฀when฀approved.฀The฀
dividend฀ when฀ recognised฀ will฀ be฀ treated฀ as฀ interest฀ expense.฀ This฀ is฀ because฀ IAS฀ 32฀
(para฀ 35-36)฀ requires฀ the฀ treatment฀ of฀ dividends฀ to฀ follow฀ the฀ treatment฀ of฀ the฀ instrument,฀ ie฀
because฀the฀instrument฀is฀treated฀as฀a฀liability,฀the฀dividends฀are฀treated฀as฀an฀expense.฀
(b)฀ Directors'฀retirement฀benefits฀฀
These฀ are฀ unfunded฀ defined฀ benefit฀ plans,฀ which฀ are฀ likely฀ to฀ be฀ governed฀ by฀ IAS฀ 19฀
Employee฀ benefits,฀ but฀ IAS฀ 32฀ and฀ IFRS฀ 9฀ on฀ financial฀ instruments,฀ and฀ IAS฀ 37฀ Provisions,฀
contingent฀liabilities฀and฀contingent฀assets฀also฀apply.฀฀
Sirus฀ has฀ contractual฀ or฀ constructive฀ obligations฀ to฀ make฀ payments฀ to฀ former฀ directors.฀ The฀
treatment฀and฀applicable฀standard฀depends฀on฀the฀obligation.฀
(i)฀ Fixed฀annuity฀with฀payment฀to฀director's฀estate฀on฀death.฀This฀meets฀the฀
definition฀of฀a฀financial฀liability฀under฀IAS฀32,฀because฀there฀is฀a฀contractual฀
obligation฀ to฀ deliver฀ cash฀ or฀ a฀ financial฀ asset.฀ The฀ firm฀ does฀ not฀ have฀ the฀ option฀ to฀
withhold฀the฀payment.฀The฀rights฀to฀these฀annuities฀are฀earned฀over฀the฀directors'฀period฀
of฀service,฀so฀it฀follows฀that฀the฀costs฀should฀also฀be฀recognised฀over฀this฀service฀period.฀
(ii)฀ Fixed฀annuity฀ceasing฀on฀death฀
The฀ timing฀ of฀ the฀ death฀ is฀ clearly฀ uncertain,฀ which฀ means฀ that฀ the฀ annuities฀ have฀ a฀
contingent฀element฀with฀a฀mortality฀risk฀to฀be฀calculated฀by฀an฀actuary.฀It฀meets฀the฀
definition฀ of฀ an฀ insurance฀ contract,฀ which฀ is฀ outside฀ the฀ scope฀ of฀ IFRS฀ 9,฀ as฀ are฀
employers'฀ obligations฀ under฀ IAS฀ 19.฀ However,฀ insofar฀ as฀ there฀ is฀ a฀ constructive฀
obligation,฀these฀annuities฀fall฀within฀the฀scope฀of฀IAS฀37,฀because฀these฀are฀liabilities฀
of฀ uncertain฀ timing฀ or฀ amount.฀ The฀ amount฀ of฀ the฀ obligation฀ should฀ be฀ measured฀ in฀ a฀
manner฀similar฀to฀a฀warranty฀provision:฀that฀is฀the฀probability฀of฀the฀future฀cash฀
outflow฀ of฀ the฀ present฀ obligation฀ should฀ be฀ measured฀ for฀ the฀ class฀ of฀ all฀ such฀
฀ 825฀

lOMoARcPSD|6256454
obligations.฀ An฀ estimate฀ of฀ the฀ costs฀ should฀ include฀ any฀ liability฀ for฀ post฀ retirement฀
payments฀that฀directors฀have฀earned฀so฀far.฀The฀liability฀should฀be฀built฀up฀over฀the฀
service฀period฀and฀will฀in฀practice฀be฀calculated฀on฀an฀actuarial฀basis฀as฀under฀IAS฀
19฀Employee฀benefits.฀If฀the฀effect฀is฀material,฀the฀liability฀will฀be฀discounted.฀It฀should฀
be฀re-calculated฀every฀year฀to฀take฀account฀of฀directors฀joining฀or฀leaving,฀or฀any฀
other฀changes.฀
(c)฀ Acquisition฀of฀Marne฀฀
An฀ increased฀ profit฀ share฀ is฀ payable฀ to฀ the฀ directors฀ of฀ Marne฀ if฀ the฀ purchase฀ offer฀ is฀
accepted.฀The฀question฀arises฀of฀whether฀this฀additional฀payment฀constitutes฀remuneration฀
or฀consideration฀for฀the฀business฀acquired.฀Because฀the฀payment฀is฀for฀two฀years฀only,฀after฀
which฀time฀remuneration฀falls฀back฀to฀normal฀levels,฀the฀payment฀should฀be฀seen฀as฀part฀of฀the฀
purchase฀consideration.฀฀
The฀second฀issue฀is฀the฀treatment฀of฀this฀consideration.฀IFRS฀3฀(revised฀January฀2008)฀Business฀
combinations฀requires฀that฀an฀acquirer฀must฀be฀identified฀for฀all฀business฀combinations.฀In฀this฀
case฀Sirus฀is฀the฀acquirer.฀The฀cost฀of฀the฀combination฀must฀be฀measured฀as฀the฀sum฀of฀the฀fair฀
values,฀at฀the฀date฀of฀exchange,฀of฀assets฀given฀or฀liabilities฀assumed฀in฀exchange฀for฀control.฀฀
IFRS฀3฀recognises฀that,฀by฀entering฀into฀an฀acquisition,฀the฀acquirer฀becomes฀obliged฀to฀make฀
additional฀payments.฀Not฀recognising฀that฀obligation฀means฀that฀the฀consideration฀recognised฀
at฀the฀acquisition฀date฀is฀not฀fairly฀stated.฀฀
The฀revised฀IFRS฀3฀requires฀recognition฀of฀contingent฀consideration,฀measured฀at฀
fair฀value,฀at฀the฀acquisition฀date.฀This฀is,฀arguably,฀consistent฀with฀how฀other฀forms฀of฀
consideration฀are฀fair฀valued.฀
The฀ acquirer฀ may฀ be฀ required฀ to฀ pay฀ contingent฀ consideration฀ in฀ the฀ form฀ of฀ equity฀ or฀ of฀ a฀
debt฀instrument฀or฀cash.฀In฀this฀case,฀it฀is฀in฀the฀form฀of฀cash,฀or฀increased฀remuneration.฀
Accordingly,฀ the฀ cost฀ of฀ the฀ combination฀ must฀ include฀ the฀ full฀ $11m,฀ measured฀ at฀
net฀ present฀ value฀ at฀ 1฀ May฀ 20X7.฀ ฀ The฀ payment฀ of฀ $5฀ million฀ would฀ be฀ discounted฀ for฀ one฀
year฀and฀the฀payment฀of฀$6฀million฀for฀two฀years.฀
(d)฀ Repayment฀of฀bank฀loan฀
The฀bank฀loan฀is฀to฀be฀repaid฀in฀ten฀years'฀time,฀but฀the฀terms฀of฀the฀loan฀state฀that฀Sirus฀can฀
pay฀it฀off฀in฀seven฀years.฀The฀issue฀arises฀as฀to฀whether฀the฀early฀repayment฀option฀is฀
likely฀to฀be฀exercised.฀฀
If,฀when฀the฀loan฀was฀taken฀out฀on฀1฀May฀20X7฀the฀option฀of฀early฀repayment฀was฀not฀
expected฀to฀be฀exercised,฀then฀at฀30฀April฀20X8฀the฀normal฀terms฀apply.฀The฀loan฀would฀
be฀stated฀at฀$2฀million฀in฀the฀statement฀of฀financial฀position,฀and฀the฀effective฀interest฀would฀be฀
8%฀฀$2฀million฀=฀$160,000,฀the฀interest฀paid.฀฀
If฀ at฀ 1฀ May฀ 20X7฀ it฀ was฀ expected฀ that฀ the฀ early฀ repayment฀ option฀ would฀ be฀
exercised,฀ then฀ the฀ effective฀ interest฀ rate฀ would฀ be฀ 9.1%,฀ and฀ the฀ effective฀ interest฀
9.1%฀฀$2฀million฀=฀$182,000.฀The฀cash฀paid฀would฀still฀be฀$160,000,฀and฀the฀difference฀of฀
$22,000฀would฀be฀added฀to฀the฀carrying฀amount฀of฀the฀financial฀liability฀in฀the฀statement฀of฀
financial฀position,฀giving฀$2,022,000.฀฀
IFRS฀9฀Financial฀instruments฀requires฀that฀the฀carrying฀amount฀of฀a฀financial฀asset฀or฀liability฀
should฀be฀adjusted฀to฀reflect฀actual฀cash฀flows฀or฀revised฀estimates฀of฀cash฀flows.฀This฀means฀
that,฀ even฀ if฀ it฀ was฀ thought฀ at฀ the฀ outset฀ that฀ early฀ repayment฀ would฀ not฀ take฀ place,฀ if฀
expectations฀then฀change,฀the฀carrying฀amount฀must฀be฀revised฀to฀reflect฀future฀
estimated฀cash฀flows฀using฀the฀effective฀interest฀rate.฀
The฀directors฀of฀Sirus฀are฀currently฀in฀discussion฀with฀the฀bank฀regarding฀repayment฀in฀the฀next฀
financial฀year.฀However,฀these฀discussions฀do฀not฀create฀a฀legal฀obligation฀to฀repay฀the฀loan฀
in฀ twelve฀ months,฀ and฀ Sirus฀ has฀ an฀ unconditional฀ right฀ to฀ defer฀ settlement฀ for฀ longer฀ than฀
826฀

lOMoARcPSD|6256454
twelve฀months.฀Accordingly,฀it฀would฀not฀be฀correct฀to฀show฀the฀loan฀as฀a฀current฀
liability฀on฀the฀basis฀of฀the฀discussions฀with฀the฀bank.฀
I฀hope฀that฀this฀report฀is฀helpful฀to฀you.฀
Signed,฀Accountant฀
11฀Lambda฀฀
(a)฀ Equity-settled฀
In฀ this฀ case,฀ the฀ fair฀ value฀ of฀ the฀ share-based฀ payment฀ to฀ be฀ recognised฀ is฀ the฀ fair฀ value฀ of฀ the฀
equity฀instruments฀at฀the฀grant฀date.฀
This฀is฀not฀all฀recognised฀in฀the฀financial฀statements฀at฀once,฀however,฀but฀is฀built฀up฀gradually฀
over฀ the฀ vesting฀ period.฀ This฀ is฀ the฀ period฀ between฀ the฀ grant฀ date฀ and฀ the฀ vesting฀ date฀ (the฀
vesting฀date฀is฀when฀the฀employee฀is฀entitled฀to฀receive฀the฀equity฀instruments).฀
Therefore฀ each฀ year฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ shows฀ the฀ amount฀ of฀ fair฀ value฀ that฀ has฀
been฀built฀up฀during฀the฀year฀–฀the฀difference฀between฀the฀fair฀value฀of฀the฀SBP฀recognised฀in฀
the฀opening฀and฀closing฀statements฀of฀financial฀position.฀
The฀ statement฀ of฀ financial฀ position฀ shows฀ the฀ fair฀ value฀ of฀ the฀ SBP฀ that฀ has฀ been฀ recognised฀ to฀
date,฀within฀equity.฀
One฀complication฀is฀that฀the฀vesting฀may฀be฀subject฀to฀certain฀conditions,฀so฀it฀is฀not฀certain฀
what฀the฀fair฀value฀of฀the฀SBP฀will฀be.฀In฀this฀case,฀an฀estimate฀should฀be฀made฀based฀on฀the฀
information฀available.฀
Cash-settled฀
The฀liability฀should฀be฀measured฀at฀its฀fair฀value฀at฀the฀end฀of฀the฀reporting฀period.฀The฀liability฀
should฀be฀recognised฀as฀the฀employees฀render฀their฀service.฀
(b)฀ Scheme฀A฀–฀equity-settled฀
The฀vesting฀period฀is฀three฀years฀(1฀October฀20X7฀–฀30฀September฀20Y0).฀
The฀fair฀value฀of฀the฀scheme฀brought฀forward฀is฀500฀฀185฀฀$2.40฀=฀$222,000.฀The฀amount฀
that฀would฀have฀been฀recognised฀in฀the฀statement฀of฀financial฀position฀for฀20X8฀was฀therefore฀
$222,000฀฀1/3฀=฀$74,000.฀
The฀fair฀value฀of฀the฀scheme฀carried฀forward฀at฀30฀September฀20X9฀is฀500฀฀188฀฀$2.40฀=฀
$225,600.฀฀
The฀ amount฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀ position฀ for฀ 20X9฀ was฀ therefore฀
$225,600฀฀2/3฀=฀$150,400.฀This฀is฀recognised฀within฀equity.฀
The฀statement฀of฀profit฀or฀loss฀charge฀for฀20X9฀is฀therefore฀$150,400฀–฀$74,000฀=฀$76,400.฀
Scheme฀B฀–฀cash-settled฀
The฀ employees฀ render฀ their฀ services฀ over฀ the฀ period฀ from฀ 1฀ October฀ 20X6฀ to฀ 30฀ September฀
20X9฀–฀3฀years.฀
The฀ fair฀ value฀ of฀ the฀ final฀ liability฀ as฀ at฀ 30฀ September฀ 20X8฀ would฀ have฀ been฀ 2฀ ฀ 240฀ ฀
$540฀=฀$259,200.฀The฀amount฀that฀would฀have฀been฀recognised฀in฀the฀statement฀of฀financial฀
position฀for฀20X8฀was฀therefore฀$259,200฀฀2/3฀=฀$172,800.฀
The฀ fair฀ value฀ of฀ the฀ final฀ liability฀ as฀ at฀ 30฀ September฀ 20X9฀ would฀ have฀ been฀ 2฀ ฀ 238฀ ฀
$600฀=฀$285,600.฀฀
This฀is฀recognised฀in฀the฀statement฀of฀financial฀position฀for฀20X9฀as฀a฀current฀liability,฀as฀it฀is฀
payable฀within฀one฀year฀of฀the฀period฀end,฀on฀31฀January฀20Y0.฀
฀ 827฀

lOMoARcPSD|6256454
The฀ statement฀ of฀ profit฀ or฀ loss฀ charge฀ for฀ 20X9฀ is฀ therefore฀ $285,600฀ –฀ $172,800฀ =฀
$112,800.฀
12฀ Highland฀฀
HIGHLAND฀GROUP฀
CONSOLIDATED฀ STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀ INCOME฀
FOR฀THE฀YEAR฀ENDED฀31฀MARCH฀20X8฀
฀ ฀$'000฀
Revenue฀(5,000฀+฀3,000฀+฀(2,910฀ 4
12
))฀ ฀8,970฀
Cost฀of฀sales฀(3,000฀+฀2,300฀+฀(2,820฀ 4
12
))฀ ฀(6,240)฀
Administrative฀expenses฀(1,000฀+฀500฀+฀(150฀ 412 )฀+฀(W4)฀63.5฀+฀(W5)฀5฀–฀ ฀(1,599)฀
(W6)฀85฀+฀(W8)฀65)฀
Finance฀income*฀(230฀+฀(W3)฀35฀–฀(W6)฀85฀– (W6)฀40)฀ ฀140฀
Finance฀costs฀(50฀+฀(210฀ 4 )฀–฀(W3)฀70)฀ ฀ ฀฀฀฀(50) ฀
12
Income฀tax฀expense฀(300฀+฀50)฀ ฀฀฀(350)฀
PROFIT฀FOR฀THE฀YEAR฀ ฀฀฀฀871฀
Other฀comprehensive฀income,฀net฀of฀tax฀(130฀+฀40฀+฀(120฀ 4 ))฀ ฀฀฀฀210฀
12
TOTAL฀COMPREHENSIVE฀INCOME฀FOR฀THE฀YEAR ฀1,081฀
฀
฀฀฀Owners฀of฀the฀parent฀(871฀+฀26)฀ ฀897฀
฀฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀(26)฀
฀ ฀฀฀฀871฀
฀฀฀Owners฀of฀the฀parent฀(1,081฀+฀4)฀ ฀1,085฀
฀฀฀Non-controlling฀interests฀(W2)฀ ฀฀฀฀฀฀฀(4)฀
฀ ฀1,081฀
*฀Other฀income฀becomes฀finance฀income฀as฀only฀interest฀income฀from฀Buchan฀remains฀
Workings฀
฀ Highland฀
฀ Aviemore฀ Buchan฀
฀ 80%฀ 65%฀(owned฀for฀4฀months)฀
฀
฀ ฀$'000฀ ฀$'000฀ $'000฀ ฀$'000฀
฀ Aviemore Buchan Aviemore฀ Buchan
Profit/(loss)฀for฀the฀year฀฀ ฀
4 ฀100฀ ฀(90)฀
(B:฀270฀loss฀×฀ )฀
12
Total฀comp฀income฀for฀the฀year ฀
828฀

lOMoARcPSD|6256454
4 ฀
(B:฀150฀loss฀×฀ )฀
12 ฀140฀ ฀(50)฀
Unrealised฀profit฀on฀disposal฀(W4) ฀ ฀(63.5)฀ ฀฀฀(63.5)฀
FV฀depreciation฀(W5)฀ ฀ ฀฀฀฀฀฀฀฀ ฀ ฀(5)฀ ฀฀฀฀฀฀฀฀฀฀ ฀ ฀(5)฀
฀ 36.5฀ ฀(95)฀ 76.5฀ ฀(55)฀
฀ ฀
NCI฀share฀ 7.3฀DR฀ ฀(33.3)฀CR 15.3฀DR฀ ฀(19.3)฀CR฀
(20%/35%/20%/35%)฀
฀
฀ (26.0)฀CR฀ (4.0)฀CR
Hence,฀ rounding฀ to฀ nearest฀ $'000,฀ NCI฀ increases฀ profit/total฀ comprehensive฀ income฀
attributable฀to฀owners฀of฀the฀parent.฀
3฀ Interest฀income/payable฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀$'000฀
฀ Interest฀income:฀฀$2,100,000฀฀10%฀฀6/12฀฀105฀ recorded฀on฀1฀October฀20X7฀
฀ ฀ ฀฀฀฀฀฀฀6/12฀105฀ to฀be฀recorded฀
฀ ฀ ฀ ฀ 210฀
฀ ฀ ฀ ฀
฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀Pre-acquisition฀ Post-acquisition฀
฀ ฀ ฀฀฀฀฀฀210฀฀ 812 ฀=฀140฀ (210฀ 412 )฀=฀70฀
฀฀฀฀ ฀ ฀ ฀
฀ ฀ ฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀Genuine฀finance฀income฀฀฀฀Cancel฀on฀consolidation:฀
฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀DR฀Finance฀income฀ ฀70฀
฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀CR฀Finance฀costs฀฀฀฀฀฀70฀
฀Overall฀adjustment฀to฀interest฀income: ฀฀
฀ ฀ $'000฀
฀Interest฀income฀from฀Buchan฀not฀yet฀recorded฀(210฀ 6/12)฀ ฀฀105฀
4
12 ฀฀฀(70)฀
฀Less:฀post฀acquisition฀intragroup฀element฀(210฀ )฀
฀ ฀฀฀฀35฀
฀
฀ ฀
฀ 829฀

lOMoARcPSD|6256454
4฀ Unrealised฀profit฀on฀disposal฀of฀freehold฀property฀
฀ ฀$'000฀ ฀$'000฀
Land฀ Proceeds฀ ฀300฀ ฀
฀฀ Net฀book฀value฀ ฀(100)฀ ฀
฀฀ Profit฀on฀disposal฀(in฀Aviemore)฀ ฀ 200 ฀
฀ ฀
Buildings฀ Proceeds฀(800฀– 300)฀ ฀500฀ ฀
฀฀ ฀ Net฀book฀value฀(800฀฀ 40 ) ฀(640)฀ ฀
50 ฀
฀฀ ฀ Loss฀on฀disposal฀(in฀Aviemore)฀ ฀(140)฀฀
Proportion฀of฀loss฀depreciated฀(1/40)฀ ฀฀฀฀฀3.5฀
฀ ฀฀฀63.5฀
5฀ Fair฀value฀depreciation฀
฀ At฀acquisition Additional฀
฀ depreciation*฀ At฀year฀end
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Property,฀plant฀and฀equipment฀(500฀– 350)฀ ฀150฀ ฀฀(5)฀ ฀145฀
฀ ฀150฀ ฀฀(5)฀ ฀145฀
4
฀ *฀Additional฀depreciation฀=฀ 150 ฀=฀15฀per฀annum฀ ฀=฀$5,000฀
10 12
6฀ Intragroup฀cancellations฀
฀ Cancel฀management฀services:฀
฀ DEBIT฀Other฀income฀ $85,000฀
฀ CREDIT฀Administrative฀expenses฀ ฀ ฀ $85,000฀
฀ Cancel฀dividend฀income฀from฀Aviemore:฀
฀ DEBIT฀Other฀income฀(50฀฀80%)฀ $40,000฀
฀ CREDIT฀Aviemore's฀retained฀earnings฀ ฀ ฀ $40,000฀
7฀ Goodwill฀
฀ Aviemore Buchan฀
฀ ฀$'000฀ ฀$'000฀ ฀$'000฀ ฀$'000฀
Consideration฀transferred฀ ฀5,000฀ ฀2,600฀
Non-controlling฀interests฀ ฀800฀
(4,000฀฀80%)฀ ฀1,225฀
(3,500฀฀35%)฀
฀ ฀
FV฀net฀assets฀at฀acq'n:฀ ฀
Net฀book฀value฀per฀Q฀ 4,000 3,350 ฀
Fair฀value฀adjustment฀(W5)฀ ฀ ฀฀฀฀฀฀฀–฀ ฀ ฀฀150฀ ฀
฀ ฀(4,000)฀ ฀(3,500)฀
฀ ฀ 1,800฀ ฀฀฀฀฀325฀
฀
฀ ฀
830฀

lOMoARcPSD|6256454
8฀ Impairment฀losses฀
฀ ฀Aviemore฀ ฀Buchan฀
฀ ฀$'000฀ ฀$'000฀
Goodwill฀(W7)฀ ฀1,800฀ ฀325฀
฀ ฀
'Notional'฀goodwill฀(฀100%/80%)฀( 100%/65%)฀ ฀2,250฀ ฀500฀
Net฀assets฀at฀31฀March฀20X7฀ ฀4,450฀ ฀3,300฀
฀ ฀6,700฀ ฀3,800฀
Recoverable฀amount฀ ฀7,040฀ ฀3,700฀
Impairment฀loss฀ ฀ ฀฀฀฀฀฀0฀ ฀฀฀฀100฀
Allocated฀to:฀ ฀
'Notional'฀goodwill฀ – 100฀
Other฀assets฀ ฀฀฀฀฀฀– ฀฀฀฀฀฀฀–฀
฀ ฀ ฀฀฀฀฀฀0฀ ฀฀฀฀100฀
Recognised฀impairment฀loss: ฀
Recognised฀goodwill฀(100฀ 65%) – 65฀
Other฀assets฀(100%)฀ ฀฀฀฀– ฀฀฀฀฀–฀฀
฀
13฀Investor฀
(a)฀ The฀ recognition฀ and฀ measurement฀ of฀ goodwill฀ on฀ acquisition฀ is฀ governed฀ by฀ IFRS฀ 3.฀ Where฀
the฀ purchase฀ price฀ is฀ paid฀ in฀ instalments,฀ the฀ cost฀ of฀ the฀ investment฀ is฀ calculated฀ on฀ a฀
discounted฀cash฀basis฀and฀the฀fair฀value฀is฀based฀on฀present฀values.฀
Goodwill฀arising฀on฀acquisitions฀
฀ $m $m฀
 30 m  54.793฀
Cost฀of฀Cornwall฀  30 m  ฀
 1.10 
2
Net฀assets฀ 55 ฀
Add฀back฀pension฀provision฀ 6 ฀
Deduct฀pension฀scheme฀deficit฀ (11) ฀
฀ 50 ฀
Fair฀value฀of฀assets฀acquired฀(80%฀ $50m) ฀40.000฀
Goodwill฀ ฀14.793฀
Goodwill฀ recognised฀ in฀ a฀ business฀ acquisition฀ is฀ not฀ amortised,฀ but฀ reviewed฀ for฀ impairment฀
annually.฀
(b)฀ MEMORANDUM฀
To:฀฀ The฀financial฀director฀
From:฀฀ The฀accountant฀
Subject:฀฀ Intangible฀assets฀
1฀ Introduction฀
฀ It฀is฀group฀policy฀to฀write฀off฀all฀intangible฀assets฀over฀twenty฀years.฀This฀complies฀with฀
the฀requirements฀of฀IAS฀38.฀
฀ However฀it฀is฀possible฀to฀select฀a฀longer฀period.฀
2฀ Determining฀the฀useful฀life฀of฀an฀intangible฀asset฀
฀ IAS฀ 38฀ states฀ that฀ an฀ entity฀ should฀ assess฀ the฀ useful฀ life฀ of฀ its฀ intangible฀ assets.฀ Assets฀
with฀a฀finite฀useful฀life฀are฀amortised฀over฀that฀useful฀life.฀
฀ 831฀

lOMoARcPSD|6256454
฀ The฀ useful฀ life฀ of฀ an฀ intangible฀ asset฀ depends฀ on฀ many฀ factors.฀ For฀ example,฀ many฀
computer฀ related฀ assets฀ have฀ short฀ lives฀ because฀ they฀ are฀ susceptible฀ to฀ technological฀
obsolescence.฀Where฀an฀asset฀arises฀from฀contractual฀or฀legal฀rights,฀the฀period฀of฀the฀
rights฀normally฀determines฀the฀useful฀life.฀However,฀some฀types฀of฀asset,฀such฀as฀brand฀
names,฀may฀have฀very฀long฀lives฀or฀indefinite฀lives.฀
฀ An฀intangible฀asset฀has฀an฀indefinite฀useful฀life฀when฀there฀is฀no฀foreseeable฀limit฀to฀
the฀period฀over฀which฀the฀asset฀is฀expected฀to฀generate฀net฀cash฀inflows฀for฀the฀entity.฀
฀ IAS฀ 38฀ allows฀ intangible฀ assets฀ to฀ be฀ treated฀ as฀ having฀ indefinite฀ lives.฀ An฀ intangible฀
asset฀with฀an฀indefinite฀life฀is฀not฀amortised.฀
฀ However,฀it฀is฀clearly฀not฀appropriate฀to฀treat฀assets฀as฀having฀an฀indefinite฀useful฀life฀
unless฀this฀can฀be฀demonstrated฀to฀be฀the฀case.฀IAS฀38฀requires฀that฀the฀useful฀life฀of฀an฀
asset฀should฀be฀realistic;฀it฀is฀not฀acceptable฀to฀select฀a฀useful฀life฀simply฀on฀the฀basis฀of฀
practical฀simplicity฀or฀expediency.฀฀
฀ Therefore,฀ it฀ is฀ possible฀ to฀ avoid฀ amortising฀ intangible฀ assets฀ in฀ theory;฀ but฀ the฀
intangible฀ assets฀ needs฀ to฀ be฀ able฀ to฀ be฀ continually฀ measured,฀ so฀ that฀ impairment฀
reviews฀can฀be฀carried฀out.฀
3฀ Future฀implications฀
฀ Where฀ an฀ intangible฀ asset฀ is฀ assessed฀ as฀ having฀ an฀ indefinite฀ useful฀ life,฀ IAS฀ 38฀
requires฀an฀impairment฀review฀to฀be฀carried฀out฀annually.฀In฀addition,฀the฀useful฀life฀of฀
the฀ asset฀ should฀ be฀ reviewed฀ each฀ period฀ to฀ determine฀ whether฀ events฀ and฀
circumstances฀continue฀to฀support฀this฀assessment.฀
฀ If฀an฀asset฀is฀assessed฀as฀having฀a฀finite฀useful฀life,฀then฀an฀impairment฀review฀is฀only฀
required฀if฀there฀are฀indications฀that฀the฀carrying฀value฀is฀not฀recoverable.฀
฀ Therefore฀ adopting฀ your฀ proposals฀ would฀ mean฀ carrying฀ out฀ an฀ annual฀ impairment฀
review,฀which฀could฀be฀costly฀both฀in฀time฀and฀staff.฀
(c)฀ Arguments฀for฀capitalisation฀
(i)฀ The฀ statement฀ of฀ financial฀ position฀ reflects฀ commercial฀ reality฀ if฀ brands฀ are฀ included,฀
provided฀they฀meet฀fully฀the฀IAS฀38฀definition฀of฀a฀purchased฀intangible฀asset.฀
(ii)฀ IAS฀38฀does฀not฀permit฀non฀purchased฀or฀internally฀generated฀brands฀to฀be฀recognised.฀
This฀ may฀ be฀ unfair฀ since฀ predator฀ entities฀ could฀ acquire฀ entities฀ with฀ valuable฀ brand฀
names฀at฀less฀than฀true฀value.฀
(iii)฀ Many฀ entities฀ would฀ argue฀ that฀ the฀ inclusion฀ of฀ non-purchased฀ brands฀ might฀ provide฀
valuable฀information฀to฀users.฀However,฀the฀difficulties฀associated฀with฀revaluation฀and฀
assigning฀an฀appropriate฀amortisation฀period฀may฀negate฀these฀benefits.฀
14฀ROB฀Group
(a)฀ Treatment฀of฀PER฀in฀the฀consolidated฀financial฀statements฀of฀ROB฀
The฀ acquisition฀ of฀ the฀ additional฀ 60%฀ shareholding฀ on฀ 1฀ April฀ 20X3฀ brings฀ ROB's฀ total฀
investment฀in฀PER฀to฀75%฀(15%฀+฀60%),฀giving฀ROB฀control฀of฀PER,฀making฀PER฀a฀subsidiary.฀
Therefore,฀PER฀must฀be฀consolidated.฀
This฀is฀a฀mid-year฀acquisition฀so฀the฀results฀of฀PER฀would฀have฀to฀be฀pro-rated฀and฀only฀
the฀ post-acquisition฀ 6฀ months'฀ results฀ included฀ in฀ the฀ consolidated฀ statement฀ of฀ profit฀ or฀ loss฀
and฀other฀comprehensive฀income฀and฀in฀group฀retained฀earnings.฀
In฀the฀consolidated฀statement฀of฀financial฀position,฀100%฀of฀PER's฀assets฀and฀liabilities฀
must฀be฀consolidated฀with฀a฀25%฀non-controlling฀interest.฀
832฀

lOMoARcPSD|6256454
This฀ step฀ acquisition฀ involves฀ a฀ change฀ in฀ status฀ for฀ PER฀ from฀ an฀ investment฀ (where฀ ROB฀
had฀no฀significant฀influence฀or฀control)฀to฀a฀subsidiary.฀The฀change฀in฀investment฀from฀15%฀
to฀75%฀crosses฀the฀50%฀control฀boundary,฀so:฀
฀ The฀substance฀of฀the฀transaction฀is฀that฀the฀15%฀investment฀has฀been฀"sold",฀so฀it฀must฀
be฀remeasured฀to฀its฀fair฀value฀at฀the฀date฀of฀the฀change฀in฀status.฀Since฀the฀investment฀
has฀been฀treated฀at฀fair฀value฀through฀profit฀or฀loss,฀this฀gain฀or฀loss฀must฀be฀recognised฀
in฀profit฀or฀loss.฀฀
฀ In฀ substance,฀ ROB฀ has฀ "purchased"฀ a฀ 75%฀ subsidiary฀ on฀ 1฀ April฀ 20X3.฀ Goodwill฀
should฀be฀calculated฀as฀if฀the฀full฀75%฀were฀acquired฀on฀that฀date.฀
(b)฀ ROB฀ GROUP฀ CONSOLIDATED฀ STATEMENT฀ OF฀ FINANCIAL฀ POSITION฀ AS฀ AT฀
30฀SEPTEMBER฀20X3฀
฀ ฀$'000฀ ฀$'000฀
ASSETS฀ ฀ ฀
Non-current฀assets ฀ ฀
฀ ฀ ฀
Property,฀plant฀and฀equipment฀(22,000฀+฀5,000)฀ ฀ ฀27,000฀
Goodwill฀(W2)฀ ฀ ฀฀฀฀฀฀440฀
฀ ฀ ฀27,440฀
Inventories฀(6,200฀+฀800฀–฀40฀(W7)) 6,960฀ ฀
Trade฀receivables฀(6,600฀+฀1,900)฀ ฀8,500฀ ฀
Cash฀(1,200฀+฀300)฀ ฀1,500฀ ฀
฀ ฀ ฀฀16,960฀
฀ ฀ ฀฀44,400฀
฀ ฀ ฀
EQUITY฀AND฀LIABILITIES฀ ฀ ฀
Equity฀ ฀ ฀
Share฀capital฀($1฀ordinary฀shares) ฀ ฀฀20,000฀
Retained฀earnings฀(W3)฀ ฀ ฀฀฀8,938฀
฀ ฀ ฀฀28,938฀
Non-controlling฀interest฀(W4)฀ ฀ ฀฀฀฀1,350฀
฀ ฀ ฀30,288฀
5%฀bonds฀20X6฀(3,900฀+฀112฀(W6)) ฀ 4,012฀
Current฀liabilities (8,100฀+฀2,000) ฀ ฀฀฀10,100฀
฀ ฀ ฀44,400฀
Workings฀฀
ROB฀
1.5.X2฀฀฀฀฀฀฀฀ 15%฀฀฀Financial฀asset฀
1.4.X3฀ ฀60%฀฀
PER฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀75%฀฀฀Subsidiary฀
฀ ฀
฀ 833฀

lOMoARcPSD|6256454
Pre฀acquisition฀retained฀earnings:฀
฀ $'000฀
At฀30.9.X3 5,000฀
Less:฀6฀months'฀฀profit฀(1.4.X3฀– 30.9.X3)฀($3m฀ 6/12) ฀(1,500)
At฀1.4.X3฀ ฀฀3,500฀
฀ ฀
2฀ Goodwill฀฀
฀ ฀ $'000฀ ฀฀$'000฀
Consideration฀transferred฀(for฀60%)฀ ฀3,200฀
Non-controlling฀interest฀(at฀fair฀value)฀ ฀1,000฀
Fair฀value฀of฀previously฀held฀investment฀(for฀15%) 800฀
Less:฀fair฀value฀of฀net฀assets฀ ฀
Share฀capital฀ ฀1,000฀ ฀
Retained฀earnings฀(W1)฀ ฀3,500฀ ฀
฀ ฀฀(4,500)฀
฀ 500฀
Impairment฀฀ ฀฀฀฀฀฀฀(60)
฀ ฀฀฀฀฀฀440฀
฀ ROB฀ PER฀
฀ ฀฀$'000฀ ฀$'000
At฀the฀year฀end฀ 7,850฀ ฀5,000฀
Gain฀on฀remeasurement฀of฀investment (W5) 150฀
Finance฀cost฀on฀bond฀(W6) (112)฀
Less:฀unrealised฀profit฀on฀inventory฀(W7)฀ ฀ ฀(40)฀
At฀acquisition฀(W1)฀ ฀ ฀(3,500)฀
฀ ฀ ฀฀1,460
Share฀of฀PER฀post฀acquisition฀(75%฀ 1,460)฀ ฀฀ 1,095฀
Share฀of฀impairment฀loss฀(75%฀ 60 (W2))฀฀ ฀ ฀฀(45)฀
฀ ฀฀฀8,938฀
4฀ Non-controlling฀interest฀฀
฀ ฀$'000฀
NCI฀at฀acquisition฀(W2)฀ ฀1,000฀
NCI฀share฀of฀post฀acquisition฀reserves฀(25%฀ 1,460฀(W3))฀ ฀365฀
NCI฀share฀of฀impairment฀loss฀(25%฀ 60 (W2)) ฀฀฀฀฀฀(15)฀
฀ ฀฀1,350฀
5฀ Gain฀on฀remeasurement฀of฀investment฀
฀ ฀$'000฀
Fair฀value฀at฀date฀control฀was฀achieved฀(1฀April฀20X3)฀ ฀800฀
Less:฀Carrying฀amount฀(fair฀value฀at฀30฀September฀20X2) ฀฀(650)
Gain฀on฀remeasurement฀ ฀฀฀150฀
Note:฀฀Prior฀to฀PER฀becoming฀a฀subsidiary,฀the฀15%฀investment฀was฀treated฀at฀fair฀value฀
through฀profit฀or฀loss.฀Therefore,฀the฀original฀cost฀of฀$600,000฀was฀revalued฀to฀a฀fair฀
value฀ of฀ $650,000฀ at฀ the฀ previous฀ year฀ end฀ of฀ 30฀ September฀ 20X2.฀ On฀ achieving฀
control฀ on฀ 1฀ April฀ 20X3,฀ in฀ substance,฀ ROB฀ has฀ "sold"฀ a฀ 15%฀ investment฀ and฀
"purchased"฀ a฀75%฀ subsidiary.฀ The฀ 15%฀ investment฀ is฀ therefore฀ remeasured฀ to฀ its฀ fair฀
value฀ of฀ $800,000฀ on฀ 1฀ April฀ 20X3฀ and฀ then฀ derecognised.฀ As฀ it฀ had฀ a฀ carrying฀
amount฀ of฀ $650,000฀ at฀ that฀ date,฀ this฀ results฀ in฀ a฀ remeasurement฀ gain฀ of฀ $150,000฀
834฀

lOMoARcPSD|6256454
and฀since฀ROB฀has฀been฀treating฀the฀investment฀at฀fair฀value฀through฀profit฀or฀loss,฀this฀
gain฀of฀$150,000฀must฀be฀recognised฀in฀profit฀or฀loss฀(P/L).฀This฀will฀then฀feed฀through฀
to฀ retained฀ earnings.฀ (If฀ ROB฀ had฀ taken฀ up฀ the฀ irrevocable฀ election฀ under฀ IFRS฀ 9฀ to฀
measure฀ the฀ investment฀ at฀ fair฀ value฀ through฀ other฀ comprehensive฀ income฀ (OCI),฀ the฀
gain฀would฀have฀been฀recognised฀in฀OCI฀rather฀than฀P/L).฀
6฀ Bonds฀
฀ ฀$'000฀
1.10.X2฀Net฀proceeds฀฀ ฀3,900
Finance฀cost฀(3,900฀฀8%) 312
Interest฀paid฀(4,000฀฀5%)฀ ฀฀฀(200)
30.9.X3฀Balance฀c/d฀ ฀4,012
The฀ adjustment฀ required฀ to฀ recognise฀ the฀ full฀ effective฀ finance฀ cost฀ (312,000฀ −฀
200,000)฀is:฀
DEBIT฀฀ (↑฀)฀Finance฀costs฀((↓฀)฀Retained฀earnings)฀ $112,000฀฀
CREDIT฀ (↑฀)฀Non-current฀liability฀฀ ฀ ฀ ฀ ฀ ฀ $112,000฀฀
Note:฀ These฀ bonds฀ are฀ a฀ financial฀ liability.฀ As฀ they฀ are฀ neither฀ 'held฀ for฀ trading'฀ nor฀
derivatives,฀ they฀ should฀ be฀ initially฀ be฀ measured฀ at฀ fair฀ value฀ less฀ transaction฀ costs฀ of฀
$3.9฀ million฀ ($4฀ million฀ less฀ $100,000฀ issue฀ costs)฀ and฀ subsequently฀ measured฀ at฀
amortised฀cost.฀฀
7฀ Provision฀for฀unrealised฀profit฀
PER฀(subsidiary)฀sold฀to฀ROB฀(parent).฀
Unrealised฀profit฀=฀$400,000฀฀20%฀margin฀฀½฀in฀inventory฀=฀$40,000฀
The฀adjustment฀required฀is:฀ ฀
DEBIT฀฀฀ (↓฀)฀PER's฀retained฀earnings฀฀ $40,000฀
CREDIT฀฀ (↓฀)฀Inventories฀฀ ฀ ฀ ฀ ฀ $40,000฀
15฀Holmes฀&฀Deakin฀
(a)฀ HOLMES฀
FOR฀THE฀YEAR฀ENDED฀31฀MAY฀20X3฀
฀ ฀฀$'000฀
Profit฀before฀gain฀on฀disposal฀of฀shares฀in฀subsidiary฀ ฀฀130฀
Gain฀on฀disposal฀of฀shares฀in฀subsidiary฀(W5)฀ ฀฀100฀
Profit฀before฀tax฀฀฀ ฀฀230฀
Income฀tax฀expense฀(40฀+฀(W5)฀30)฀ ฀฀฀(70)฀
PROFIT฀FOR฀THE฀YEAR฀฀฀ ฀฀160฀
Other฀comprehensive฀income,฀net฀of฀tax฀ ฀฀฀฀20฀
TOTAL฀COMPREHENSIVE฀INCOME฀FOR฀THE฀YEAR฀฀฀ ฀฀180฀
฀ ฀
Statement฀of฀changes฀in฀equity฀(Total)฀ $m
฀฀ ฀
Balance฀at฀1฀June฀20X2฀(810฀–฀110)฀ ฀฀700฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀฀180฀
Balance฀at฀31฀May฀20X3฀ ฀฀880฀
฀
฀ ฀
฀ 835฀

lOMoARcPSD|6256454
(b)฀ HOLMES฀GROUP฀
CONSOLIDATED฀ STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀
INCOME฀FOR฀THE฀YEAR฀ENDED฀31฀MAY฀20X3฀
฀ ฀$m฀
Profit฀before฀tax฀(130฀+฀60)฀ ฀ 190 ฀
Income฀tax฀expense฀(40฀+฀20)฀ ฀฀(60)฀
PROFIT/฀FOR฀THE฀YEAR฀ ฀130฀
Other฀comprehensive฀income,฀net฀of฀tax (20฀+฀10)฀ ฀฀฀30฀
TOTAL฀COMPREHENSIVE฀INCOME฀FOR฀THE฀YEAR ฀160฀
฀ ฀
฀฀Owners฀of฀the฀parent฀ ฀122฀
9 3 ฀
฀ Non-controlling฀interests฀[(40฀฀ ฀฀15%)฀+฀(40฀ ฀35%)]฀
12 12 ฀฀฀฀8฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀130฀
฀฀Owners฀of฀the฀parent฀ ฀ 150 ฀
9 3 ฀
Non-controlling฀interests฀[(50฀฀ ฀฀15%)฀+฀(50฀ ฀35%)]฀
฀ ฀฀10฀
12 12
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀ ฀160฀
(c)฀ HOLMES฀GROUP฀
CONSOLIDATED฀STATEMENT฀OF฀FINANCIAL฀POSITION฀AS฀AT฀31฀MAY฀20X3฀
฀ ฀฀$m฀
Property,฀plant฀and฀equipment฀(535฀+฀178)฀ ฀฀฀฀713฀
Goodwill฀(W2)฀ ฀฀฀฀฀฀฀80฀
฀ ฀฀฀793฀
Inventories฀(320฀+฀190)฀ ฀฀ ฀฀510฀
Trade฀receivables฀(250฀+฀175)฀ ฀฀฀฀425฀
Cash฀(80฀+฀89)฀ ฀฀฀฀฀฀฀169฀
฀ ฀฀1,104฀
฀ ฀฀1,897฀
฀
Share฀capital฀$1฀ordinary฀shares฀ ฀500฀
Reserves฀(W3)฀ ฀฀฀฀477.5฀
฀ ฀฀฀฀฀977.5฀
Non-controlling฀interests฀(W4)฀ ฀฀฀฀157.5฀
฀ ฀1,135.0฀
Current฀liabilities ฀
Trade฀payables฀(295฀+฀171)฀ ฀466฀
Income฀tax฀payable฀(80฀+฀60฀+฀(W5)฀30)฀ ฀170฀
Provisions฀(95฀+฀31)฀ ฀ ฀฀฀126฀
฀ ฀ ฀฀฀762฀
฀ ฀฀฀1,897฀
836฀

lOMoARcPSD|6256454
(d)฀ STATEMENT฀OF฀CHANGES฀IN฀EQUITY฀(TOTAL฀COLUMN)฀
฀ Group NCI฀ Total
฀ ฀$m฀ ฀$m฀ ฀$m฀
Balance฀at฀1฀June฀20X2฀(500฀+฀(W7)฀285)/฀(45฀+฀((W7)฀ ฀785฀ ฀60฀ ฀845฀
100฀฀15%))฀
Adjustment฀to฀parent's฀equity฀on฀sale฀of฀non-controlling฀ ฀ ฀
interests฀ ฀42.5฀ ฀42.5฀
((W6)฀72.5฀–฀(W5)฀30)฀
Increase฀in฀non-controlling฀interests฀((W6)฀71.5฀+฀16)฀ ฀87.5฀ ฀87.5฀
Total฀comprehensive฀income฀for฀the฀year฀ ฀150 ฀฀฀ ฀฀฀10฀฀฀฀ ฀฀฀฀160.0฀
Balance฀at฀31฀May฀20X3฀(from฀SOFP)฀ ฀977.5฀ ฀157.5฀ ฀1,135.0฀
฀
฀ Shown฀for฀clarity฀
฀ (not฀required)฀
Workings฀
1฀ Timeline฀
฀
1.6.X2฀ 28.2.X3฀ 31.5.X3฀
฀
SPLOCI฀
฀ Subsidiary฀– all฀year
฀
15%฀NCI฀฀9/12฀ 35%฀NCI฀฀3/12฀
฀
฀ Held฀85%฀of฀ Sells฀40m฀shares฀ Consol฀in฀
฀ Deakin฀ =฀20%฀of฀B฀ SOFP฀
฀ Retain฀ control฀ (65%)฀฀

฀adjust฀parent's฀equity฀
2฀ Goodwill฀
฀ ฀$m฀ ฀$m฀
฀Consideration฀transferred ฀255฀
฀Non-controlling฀interests฀(at฀fair฀value) ฀45฀
฀Fair฀value฀of฀identifiable฀net฀assets฀at฀acquisition:฀ ฀
฀฀฀Share฀capital฀ ฀200 ฀
฀฀฀Pre-acquisition฀reserves฀ ฀ ฀20 ฀
฀ ฀(220)฀
฀ ฀฀฀฀80฀
3฀ Group฀reserves฀at฀31฀May฀20X3฀
฀ ฀ Holmes Deakin฀ Deakin
฀ ฀ 85%฀ 65%฀ret'd
฀ $m $m฀ $m
Per฀question/at฀date฀of฀disposal฀(170฀–฀(50฀
3
))฀ 310 157.5฀ 170
12
Adjustment฀to฀parent's฀equity฀on฀disposal฀(W6) ฀72.5 ฀
Tax฀on฀parent's฀gain฀(W5) ฀(30)* ฀
Reserves฀at฀acquisition฀(W2)/date฀of฀disposal฀(as฀ ฀฀฀(20)฀฀ ฀฀(157.5)฀
above)฀
฀ 137.5฀ 12.5
Group฀share฀of฀post฀acquisition฀reserves: ฀
฀฀Deakin฀– 85%฀(137.5฀฀85%) ฀116.9 ฀
฀฀Deakin฀– 65%฀(12.5฀฀65%) ฀฀฀฀8.1 ฀
฀ ฀ 477.5฀ ฀
฀ 837฀

lOMoARcPSD|6256454
฀ *฀ Tax฀ recognised฀ directly฀ in฀ reserves฀ in฀ the฀ consolidated฀ financial฀ statements฀ as฀ the฀
item฀ it฀ relates฀ to฀ is฀ recognised฀ in฀ reserves฀ (matching฀ concept฀ and฀ IAS฀ 12฀ para฀
61A(b)).฀
฀ ฀$m฀
NCI฀at฀acquisition฀(W2)฀ ฀45฀
NCI฀share฀of฀post฀acquisition฀reserves: ฀
฀฀Deakin฀(137.5฀฀15%)฀ ฀฀ 20.6฀
฀ ฀65.6฀
฀฀Deakin฀(12.5฀฀35%)฀ ฀4.4฀
Increase฀in฀NCI฀(W6)฀ 20.6฀ ฀ ฀฀87.5 ฀
฀ 20.6฀ ฀฀ 157.5 ฀
5฀ Gain฀on฀disposal฀of฀shares฀in฀parent's฀separate฀financial฀statements฀
฀ ฀ ฀$m฀
Fair฀value฀of฀consideration฀received฀ ฀ ฀ 160 ฀
Less฀original฀cost฀of฀shares฀(255฀ 20%/85%)฀ ฀ ฀ ฀฀(60)฀
Parent฀gain฀ ฀ ฀฀100฀
Less฀tax฀on฀parent's฀gain฀(30%)฀ ฀ ฀฀฀(30)฀฀
฀ ฀ ฀฀฀฀70฀
6฀ Adjustment฀to฀parent's฀equity฀on฀disposal฀of฀shares฀in฀group฀financial฀statements฀
฀ ฀$m฀
Fair฀value฀of฀consideration฀received฀ ฀160.0
Increase฀in฀NCI฀in฀net฀assets฀and฀goodwill฀at฀disposal ((W4)฀65.6฀฀ ฀฀(87.5)
20%/15%)฀
฀ ฀฀฀72.5
฀ OR฀(as฀a฀double฀entry):฀
฀ ฀ ฀ $m฀ ฀ $m฀
DEBIT฀฀Cash฀ ฀ ฀ 160฀
CREDIT฀Non-controlling฀interests฀((W4)฀65.6฀฀20%/15%)฀฀ ฀ ฀ 87.5฀
CREDIT฀Parent's฀equity฀(balancing฀figure)฀ ฀ ฀ ฀ ฀ 72.5฀
7฀ Reserves฀brought฀forward฀
฀ Holmes฀ Deakin
฀ $m฀ $m฀
Per฀question฀(31.5.X3)฀ ฀310฀ ฀170฀
Less฀comprehensive฀income฀for฀the฀year฀ ฀(110)฀ ฀(50)฀
Reserves฀at฀acquisition฀ ฀ ฀฀(20)฀
฀ ฀ ฀100฀
Group฀share฀of฀post฀acquisition฀reserves: ฀ ฀
฀฀Deakin฀(100฀฀85%)฀ ฀ ฀85฀ ฀
฀ ฀285฀ ฀
฀
฀ ฀
838฀

lOMoARcPSD|6256454
16฀Burley฀
Marking฀scheme฀
฀ Marks
(a)฀ Revenue฀recognition฀ 3฀
Inventory฀ ฀3฀
Events฀after฀reporting฀period฀ ฀3฀
฀ ฀9฀
(b)฀ Jointly฀controlled ฀3฀
Accounting฀for฀entity฀ ฀2฀
Decommissioning ฀ ฀฀5฀
฀ ฀฀฀10฀
(c)฀ Asset฀definition/IAS฀38/IAS฀36฀ ฀4฀

Professional฀marks฀ ฀฀฀2฀
฀ ฀25฀
฀
(a)฀ Revenue฀ from฀ the฀ sale฀ of฀ goods฀ should฀ only฀ be฀ recognised฀ when฀ all฀ the฀ following฀
conditions฀are฀satisfied.฀
(i)฀ The฀ entity฀ has฀ transferred฀ the฀ significant฀ risks฀ and฀ rewards฀ of฀ ownership฀ of฀ the฀
goods฀to฀the฀buyer฀
(ii)฀ The฀ entity฀ has฀ no฀ continuing฀ managerial฀ involvement฀ to฀ the฀ degree฀ usually฀
associated฀with฀ownership,฀and฀no฀longer฀has฀effective฀control฀over฀the฀goods฀sold฀
(iii)฀ The฀amount฀of฀revenue฀can฀be฀measured฀reliably฀
(iv)฀ It฀is฀probable฀that฀the฀economic฀benefits฀associated฀with฀the฀transaction฀will฀flow฀to฀
the฀enterprise฀฀
(v)฀ The฀costs฀incurred฀in฀respect฀of฀the฀transaction฀can฀be฀measured฀reliably฀
The฀transfer฀of฀risks฀and฀rewards฀can฀only฀be฀decided฀by฀examining฀each฀transaction.฀In฀the฀
case฀ of฀ the฀ oil฀ sold฀ to฀ third฀ parties,฀ all฀ the฀ revenue฀ should฀ be฀ recognised฀ as฀ all฀ the฀ criteria฀
have฀been฀met.฀
IFRS฀15฀Revenue฀from฀contracts฀with฀customers฀requires฀revenue฀to฀be฀recognised฀when฀(or฀as)฀
a฀performance฀obligation฀is฀satisfied฀i.e.฀when฀an฀entity฀transfers฀a฀promised฀good฀or฀service฀
to฀ a฀ customer.฀ ฀ The฀ good฀ or฀ service฀ is฀ considered฀ transferred฀ when฀ (or฀ as)฀ the฀ customer฀
obtains฀ control฀ of฀ that฀ good฀ or฀ service฀ (ie฀ the฀ ability฀ to฀ direct฀ the฀ use฀ of,฀ and฀ obtain฀
substantially฀all฀of฀the฀remaining฀benefits฀from,฀the฀asset).฀
The฀sale฀of฀oil฀results฀in฀satisfaction฀of฀an฀obligation฀at฀a฀point฀in฀time.฀฀To฀determine฀the฀point฀
in฀ time฀ when฀ a฀ customer฀ obtains฀ control฀ of฀ a฀ promised฀ asset฀ and฀ an฀ entity฀ satisfies฀ a฀
performance฀ obligation,฀ the฀ entity฀ would฀ consider฀ indicators฀ of฀ the฀ transfer฀ of฀ control฀ that฀
include,฀but฀are฀not฀limited฀to,฀the฀following.฀
(i)฀ The฀entity฀has฀a฀present฀right฀to฀payment฀for฀the฀asset.฀
(ii)฀ The฀customer฀has฀legal฀title฀to฀the฀asset.฀
(iii)฀ The฀entity฀has฀transferred฀physical฀possession฀of฀the฀asset.฀
(iv)฀ The฀customer฀has฀the฀significant฀risks฀and฀rewards฀of฀ownership฀of฀the฀asset.฀
(v)฀ The฀customer฀has฀accepted฀the฀asset.฀
These฀criteria฀need฀to฀be฀assessed฀on฀a฀transaction฀by฀transaction฀basis.฀In฀the฀case฀of฀the฀oil฀
sold฀ to฀ third฀ parties,฀ revenue฀ should฀ be฀ recognised฀ as฀ the฀ performance฀ obligation฀ is฀ the฀
delivery฀of฀the฀oil฀to฀the฀customers฀which฀took฀place฀prior฀to฀the฀year฀end.฀฀Control฀has฀been฀
transferred฀as฀the฀customers฀can฀now฀obtain฀the฀benefits฀of฀the฀oil฀either฀through฀use฀or฀resale.฀
฀ 839฀

lOMoARcPSD|6256454
Revenue฀up฀to฀1฀October฀20X9฀
The฀ arrangement฀ between฀ Burley฀ and฀ Slite฀ is฀ a฀ joint฀ arrangement฀ under฀ IFRS฀ 11฀ Joint฀
arrangements,฀ since฀ both฀ entities฀ jointly฀ control฀ an฀ asset฀ –฀ the฀ oilfield.฀ However,฀ the฀
arrangement฀ is฀ not฀ structured฀ as฀ a฀ separate฀ entity,฀ so฀ it฀ is฀ a฀ joint฀ operation฀ not฀ a฀ joint฀
venture.฀This฀means฀that฀each฀company฀accounts฀for฀its฀share฀of฀revenue฀in฀respect฀
of฀ oil฀ produced฀ up฀ to฀ 1฀ October฀ 20X9,฀ calculated,฀ using฀ the฀ selling฀ price฀ to฀ third฀ parties฀ of฀
$100฀per฀barrel,฀as:฀
Burley:฀60%฀฀
Slite:฀40%฀฀
Excess฀oil฀extracted฀
Burley฀has฀over-extracted฀and฀Slite฀under-extracted฀by฀10,000฀barrels฀of฀oil.฀The฀substance฀
of฀ the฀ transaction฀ is฀ that฀ Burley฀ has฀ purchased฀ the฀ oil฀ from฀ Slite฀ at฀ the฀ point฀ of฀
production฀ at฀ the฀ market฀ value฀ ruling฀ at฀ that฀ point,฀ namely฀ $100฀ per฀ barrel.฀ Burley฀ should฀
therefore฀recognise฀a฀purchase฀from฀Slite฀in฀the฀amount฀of฀10,000฀×฀$100฀=฀$1m.฀฀
The฀accounting฀entries฀would฀be:฀
DEBIT฀ Purchases $1m
CREDIT฀ Slite฀–฀financial฀liability $1m฀
The฀amount฀payable฀to฀Slite฀at฀the฀year-end฀will฀change฀with฀the฀movement฀in฀
the฀ price฀ of฀ oil฀ and฀ therefore฀ the฀ financial฀ liability฀ recorded฀ at฀ the฀ year-end฀ should฀ reflect฀
the฀best฀estimate฀of฀the฀cash฀payable.฀฀By฀the฀year฀end฀the฀price฀of฀oil฀has฀risen฀to฀$105฀per฀
barrel,฀ so฀ the฀ financial฀ liability฀ will฀ be฀ 10,000฀ ฀ $105฀ =฀ $1,050,000,฀ an฀ increase฀ of฀
$50,000.฀฀The฀accounting฀entries฀to฀reflect฀this฀increase฀in฀liability฀and฀expense฀to฀profit฀or฀
loss฀at฀the฀year-end฀will฀be:฀
DEBIT฀ Expense฀(P/L) $50,000 ฀
CREDIT฀ Slite฀–฀financial฀liability $50,000฀
After฀ the฀ year฀ end฀ the฀ price฀ of฀ oil฀ changes฀ again,฀ and฀ the฀ transaction฀ is฀ settled฀ at฀ $95฀ per฀
barrel.฀The฀cash฀paid฀by฀Burley฀to฀Slite฀on฀12฀December฀20X9฀is฀10,000฀฀$95฀=฀$950,000.฀฀
This฀ means฀ that฀ a฀ gain฀ arises฀ after฀ the฀ year-end฀ of฀ $1,050,000฀ -฀ $950,000฀ =฀
$100,000.฀ ฀ This฀ gain฀ will฀ be฀ taken฀ to฀ profit฀ or฀ loss฀ in฀ the฀ following฀ accounting฀
period:฀
DEBIT฀ Slite฀–฀financial฀liability $100,000 ฀
CREDIT฀ Profit฀or฀loss $100,000฀
The฀ gain฀ arising฀ is฀ an฀ event฀ after฀ the฀ reporting฀ period.฀ These฀ are฀ defined฀ by฀ IAS฀ 10฀
Events฀ after฀ the฀ reporting฀ period฀ as฀ events,฀ both฀ favourable฀ and฀ unfavourable,฀ that฀ occur฀
between฀ the฀ end฀ of฀ the฀ reporting฀ period฀ and฀ the฀ date฀ that฀ the฀ financial฀ statements฀ are฀
authorised฀for฀issue.฀
The฀question฀arises฀of฀whether฀this฀is฀an฀adjusting฀or฀non-adjusting฀event.฀An฀adjusting฀
event฀ is฀ an฀ event฀ after฀ the฀ reporting฀ period฀ that฀ provides฀ further฀ evidence฀ of฀ conditions฀ that฀
existed฀ at฀ the฀ end฀ of฀ the฀ reporting฀ period.฀ ฀ A฀ non-adjusting฀ event฀ is฀ an฀ event฀ after฀ the฀
reporting฀ period฀ that฀ is฀ indicative฀ of฀ a฀ condition฀ that฀ arose฀ after฀ the฀ end฀ of฀ the฀
reporting฀period.฀฀The฀price฀of฀oil฀changes฀frequently฀in฀response฀to฀a฀number฀of฀factors,฀
reflecting฀events฀that฀arose฀after฀the฀year฀end.฀It฀would฀therefore฀not฀be฀appropriate฀to฀adjust฀
the฀financial฀statements฀in฀response฀to฀the฀decline฀in฀the฀price฀of฀oil.฀The฀gain฀is฀therefore฀a฀
non-adjusting฀event฀after฀the฀reporting฀period.฀
Inventory฀
IAS฀ 2฀ Inventories฀ requires฀ that฀ inventories฀ should฀ be฀ stated฀ at฀ the฀ lower฀ of฀ cost฀ and฀ net฀
realisable฀ value.฀ Net฀ realisable฀ value฀ (NRV)฀ is฀ the฀ estimated฀ selling฀ price฀ in฀ the฀ ordinary฀
840฀

lOMoARcPSD|6256454
course฀of฀business฀less฀the฀estimated฀cost฀of฀completion฀and฀the฀estimated฀costs฀of฀making฀the฀
sale.฀฀
In฀estimating฀NRV,฀entities฀must฀use฀reliable฀evidence฀of฀the฀market฀price฀available฀at฀the฀
time.฀ Such฀ evidence฀ includes฀ any฀ movements฀ in฀price฀that฀reflect฀conditions฀at฀the฀year฀end,฀
including฀฀prices฀recorded฀after฀the฀year฀end฀to฀the฀extent฀that฀they฀confirm฀these฀conditions.฀In฀
the฀ case฀ of฀ Burley,฀ the฀ appropriate฀ market฀ price฀ to฀ use฀ is฀ that฀ recorded฀ at฀ the฀ year฀ end,฀
namely฀$105฀per฀barrel,฀since฀the฀decline฀to฀$95฀results฀from฀conditions฀arising฀after฀the฀
year฀ end.฀ Selling฀ costs฀ are฀ $2฀ per฀ barrel,฀ so฀ the฀ amount฀ to฀ be฀ used฀ for฀ NRV฀ in฀ valuing฀ the฀
inventory฀is฀$105฀–฀$2฀=฀$103฀per฀barrel.฀฀
Net฀ realisable฀ value,฀ in฀ this฀ instance,฀ is฀ higher฀ than฀ cost,฀ which฀ was฀ $98฀ per฀
barrel.฀The฀inventory฀should฀be฀stated฀at฀the฀lower฀of฀the฀two,฀that฀is฀at฀$98฀per฀barrel,฀giving฀
a฀total฀inventory฀value฀of฀$98฀฀5,000฀=฀$490,000.฀฀No฀loss฀is฀recorded฀as฀no฀write-down฀to฀
NRV฀has฀been฀made.฀
(b)฀ Arrangement฀with฀Jorge฀฀
Burley฀wishes฀to฀account฀for฀its฀arrangement฀with฀Jorge฀using฀the฀equity฀method.฀It฀can฀only฀do฀
so฀if฀the฀arrangement฀meets฀the฀criteria฀in฀IFRS฀11฀Joint฀arrangements฀for฀a฀joint฀venture.฀
A฀joint฀arrangement฀is฀an฀arrangement,฀as฀here,฀of฀which฀two฀or฀more฀parties฀have฀joint฀
control.฀A฀joint฀venture฀is฀a฀joint฀arrangement฀whereby฀the฀parties฀that฀have฀control฀of฀the฀
arrangement฀have฀rights฀to฀the฀net฀assets฀of฀the฀arrangement.฀
Wells฀is฀a฀separate฀vehicle.฀As฀such,฀it฀could฀be฀either฀a฀joint฀operation฀or฀joint฀venture,฀so฀
other฀facts฀must฀be฀considered.฀
There฀are฀no฀facts฀that฀suggest฀that฀Burley฀and฀Jorge฀have฀rights฀to฀substantially฀all฀the฀benefits฀
of฀the฀assets฀of฀Wells฀nor฀an฀obligation฀for฀its฀liabilities.฀
Each฀party's฀liability฀is฀limited฀to฀any฀unpaid฀capital฀contribution.฀
As฀a฀result,฀each฀party฀has฀an฀interest฀in฀the฀net฀assets฀of฀Wells฀and฀should฀account฀for฀it฀as฀
a฀joint฀venture฀using฀the฀equity฀method.฀
Decommissioning฀costs฀
Decommissioning฀ costs฀ are฀ not฀ payable฀ until฀ some฀ future฀ date,฀ therefore฀ the฀ amount฀ of฀
costs฀ that฀ will฀ be฀ incurred฀ is฀ generally฀ uncertain.฀ IAS฀ 16฀ Property,฀ plant฀ and฀ equipment฀
requires฀that฀management฀should฀record฀its฀best฀estimate฀of฀the฀entity's฀obligations.฀฀Since฀
the฀ cash฀ flows฀ are฀ delayed,฀ discounting฀ is฀ used.฀ The฀ estimate฀ of฀ the฀ amount฀ payable฀ is฀
discounted฀ to฀ the฀ date฀ of฀ initial฀ recognition฀ and฀ the฀ discounted฀ amount฀ is฀ capitalised.฀ ฀ A฀
corresponding฀ credit฀ is฀ recorded฀ in฀ provisions.฀ ฀ Changes฀ in฀ the฀ liability฀ and฀ resulting฀ from฀
changes฀in฀the฀discount฀rate฀adjust฀the฀cost฀of฀the฀related฀asset฀in฀the฀current฀period.฀
The฀decommissioning฀costs฀of฀Wells฀are฀accounted฀for฀as฀follows:฀
฀ ฀$m฀
Cost฀ten฀years฀ago฀ ฀240.0฀
Depreciation:฀240฀฀10/40฀ ฀(60.0)฀
Decrease฀ in฀ decommissioning฀ costs:฀ ฀(14.1)฀
32.6฀–฀18.5฀
Carrying฀value฀at฀1฀December฀20X8฀ ฀165.9฀
Less฀depreciation:฀165.9฀฀÷฀30฀years฀ ฀฀฀(5.5)฀
Carrying฀amount฀at฀30฀November฀20X9฀ ฀160.4฀
฀
฀ ฀
฀ 841฀

lOMoARcPSD|6256454
The฀provision฀as฀restated฀at฀1฀December฀20X8฀would฀be฀increased฀at฀30฀November฀20X9฀by฀
the฀unwinding฀of฀the฀discount฀of฀the฀new฀rate฀of฀7%.฀฀
฀ ฀$m฀
Decommissioning฀liability:฀32.6฀– 14.1฀ ฀18.5฀
Finance฀costs:฀18.5฀฀7%฀ ฀฀฀1.3฀
Decommissioning฀ liability฀ at฀ 30฀ ฀19.8฀
November฀20X9฀
Pipeline฀
Since฀Burley฀has฀joint฀control฀over฀the฀pipeline,฀even฀though฀its฀interest฀is฀only฀10%,฀it฀would฀
not฀ be฀ appropriate฀ to฀ show฀ the฀ pipeline฀ as฀ an฀ investment.฀ ฀ This฀ is฀ a฀ joint฀ arrangement฀
under฀IFRS฀11.฀
The฀ pipeline฀ is฀ a฀ jointly฀ controlled฀ asset,฀ and฀ it฀ is฀ not฀ structured฀ through฀ a฀
separate฀vehicle.฀Accordingly,฀the฀arrangement฀is฀a฀joint฀operation.฀
IFRS฀11฀Joint฀arrangements฀requires฀that฀a฀joint฀operator฀recognises฀line-by-line฀
the฀following฀in฀relation฀to฀its฀interest฀in฀a฀joint฀operation:฀
(i)฀ Its฀assets,฀including฀its฀share฀of฀any฀jointly฀held฀assets฀
(ii)฀ Its฀liabilities,฀including฀its฀share฀of฀any฀jointly฀incurred฀liabilities฀
(iii)฀ Its฀revenue฀from฀the฀sale฀of฀its฀share฀of฀the฀output฀arising฀from฀the฀joint฀operation฀
(iv)฀ Its฀ share฀ of฀ the฀ revenue฀ from฀ the฀ sale฀ of฀ the฀ output฀ by฀ the฀ joint฀ operation,฀
and฀
(v)฀ Its฀expenses,฀including฀its฀share฀of฀any฀expenses฀incurred฀jointly.฀
This฀treatment฀is฀applicable฀in฀both฀the฀separate฀and฀consolidated฀financial฀statements฀of฀the฀
joint฀operator.฀
(c)฀ Intangible฀asset฀
The฀relevant฀standard฀here฀is฀IAS฀38฀Intangible฀assets.฀An฀intangible฀asset฀may฀be฀recognised฀
if฀ it฀ meets฀ the฀ identifiability฀ criteria฀ in฀ IAS฀ 38,฀ if฀ it฀ is฀ probable฀ that฀ future฀ economic฀
benefits฀ attributable฀ to฀ the฀ asset฀ will฀ flow฀ to฀ the฀ entity฀ and฀ if฀ its฀ fair฀ value฀ can฀ be฀
measured฀reliably.฀For฀an฀intangible฀asset฀to฀be฀identifiable,฀the฀asset฀must฀be฀separable,฀
or฀it฀must฀arise฀from฀contractual฀or฀other฀legal฀rights.฀
It฀appears฀that฀these฀criteria฀have฀been฀met.฀The฀licence฀has฀been฀acquired฀separately,฀
and฀its฀value฀can฀be฀measured฀reliably฀at฀the฀purchase฀price.฀
Burley฀does฀not฀yet฀know฀if฀the฀extraction฀of฀oil฀is฀commercially฀viable,฀and฀does฀not฀know฀for฀
sure฀ whether฀ oil฀ will฀ be฀ discovered฀ in฀ the฀ region.฀ If,฀ on฀ further฀ exploration,฀ some฀ or฀ all฀
activities฀must฀be฀discontinued,฀then฀the฀licence฀must฀be฀tested฀for฀impairment฀following฀
IAS฀ 36฀ Impairment฀ of฀ assets.฀ (IAS฀ 36฀ has฀ a฀ number฀ of฀ impairment฀ indicators,฀ both฀ internal฀
and฀external.)฀
It฀ is฀ possible฀ that฀ the฀ licence฀ may฀ increase฀ in฀ value฀ if฀ commercial฀ viability฀ is฀ proven.฀
However,฀IAS฀38฀does฀not฀allow฀revaluation฀unless฀there฀is฀an฀active฀market฀for฀the฀asset.฀
฀ ฀
842฀

lOMoARcPSD|6256454
17฀Harvard฀
(a)฀ HARVARD฀GROUP฀
฀ ฀$'000฀
Property,฀plant฀and฀equipment฀(2,870฀+฀(W2)฀1,350) ฀4,220.0฀
Goodwill฀(W4)฀ ฀฀฀฀183.3฀
฀ ฀4,403.3฀
Inventories฀(1,990฀+฀(W2)฀2,310) ฀4,300.0฀
Trade฀receivables฀(1,630฀+฀(W2)฀1,270) ฀2,900.0฀
Cash฀at฀bank฀and฀in฀hand฀(240฀+฀(W2)฀560) ฀฀฀฀฀฀800.0฀
฀ ฀฀฀8,000.0฀฀
฀ ฀12,403.3฀
Share฀capital฀($1) ฀118.0฀
Retained฀reserves฀(W5)฀ ฀฀3,017.0฀
฀ ฀3,135.0฀
Non-controlling฀interests฀(W6)฀฀ ฀฀1,108.3฀
฀ ฀฀฀4,243.3฀
Loans฀ ฀1,920฀
Trade฀payables฀(5,030฀+฀(W2)฀1,210) ฀฀฀6,240฀฀฀฀
฀ ฀12,403.3฀
(b)฀ CONSOLIDATED฀ STATEMENT฀ OF฀ PROFIT฀ OR฀ LOSS฀ AND฀ OTHER฀ COMPREHENSIVE฀
INCOME฀FOR฀YEAR฀ENDED฀31฀DECEMBER฀20X5฀
฀ ฀$'000฀
Revenue฀(40,425฀+฀(W3)฀25,900) ฀66,325฀
Cost฀of฀sales฀(35,500฀+฀(W3)฀20,680) ฀(56,180)฀
Distribution฀and฀administrative฀expenses฀(4,400฀+฀(W3)฀1,560) ฀฀฀(5,960)฀
Income฀tax฀expense฀(300฀+฀(W3)฀1,260) ฀฀(1,560)฀
PROFIT฀FOR฀THE฀YEAR฀ ฀฀2,625฀
Other฀comprehensive฀income:฀ ฀
Items฀that฀may฀be฀reclassified฀to฀profit฀or฀loss: ฀
Exchange฀differences฀on฀translating฀foreign฀operations฀(W7) ฀ ฀฀฀฀฀320.3
Other฀comprehensive฀income฀for฀the฀year ฀฀฀฀฀฀320.3
TOTAL฀COMPREHENSIVE฀INCOME฀FOR฀THE฀YEAR ฀฀฀2,945.3
฀ ฀
฀฀Owners฀of฀the฀parent฀(2,625฀–฀600) ฀2,025฀
฀฀Non-controlling฀interests฀((W3)฀2,400฀ 25%) ฀฀฀฀600฀
฀ ฀2,625฀
฀฀Owners฀of฀the฀parent฀(2,945.3฀– 680.1) ฀2,265.2
฀฀Non-controlling฀interests฀[((W3)฀2,400฀+฀(W7)฀320.3)฀ 25%] ฀฀฀฀680.1
฀ ฀2,945.3
฀ 843฀

lOMoARcPSD|6256454
STATEMENT฀OF฀CHANGES฀IN฀EQUITY฀
FOR฀THE฀YEAR฀ENDED฀31฀DECEMBER฀20X5฀(EXTRACT)฀
฀ ฀$'000฀
฀ ฀Retained฀
฀ ฀reserves฀
Balance฀at฀1฀January฀20X5฀(W5) ฀1,451.8฀
Dividends฀ ฀฀฀(700)฀
Total฀comprehensive฀income฀for฀the฀year฀(per฀SPLOCI) ฀฀2,265.2฀
Balance฀at฀31฀December฀20X5฀(W5) ฀฀3,017.0฀
Workings฀
฀ ฀ Harvard฀
฀
฀ 31.12.X2฀ ฀ 1,011฀=฀75%฀
฀ ฀ ฀ 1,348฀
฀ ฀ ฀ Pre-acq'n฀ret'd฀reserves฀=฀PLN฀2,876,000฀
฀ ฀ Krakow฀
2฀ Translation฀of฀Krakow฀–฀statement฀of฀financial฀position฀
฀ PLN฀ Rate฀ $'000฀
'000฀
Property,฀plant฀and฀equipment฀ ฀4,860฀ 3.6฀ ฀1,350฀
Inventories฀ ฀8,316฀ 3.6฀ ฀2,310฀
Trade฀receivables฀ ฀4,572฀ 3.6฀ ฀1,270฀
Cash฀ ฀ ฀2,016 3.6฀ ฀฀฀฀560
฀ ฀19,764฀ ฀5,490฀
฀
Share฀capital฀ ฀1,348฀ 4.4฀ ฀306.4฀
Retained฀reserves฀
฀ –฀pre-acquisition฀ 2,876฀ 4.4฀ 653.6฀
฀ –฀post-acquisition฀(14,060฀–฀ ฀11,184฀ ฀ ฀3,320฀
2,876)฀
฀ 15,408 4,280
Trade฀payables฀ ฀ ฀4,356฀ ฀3.6฀ ฀1,210฀
฀ ฀19,764฀ ฀5,490฀
3฀ Translation฀of฀Krakow฀–฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
฀ ฀฀ PLN฀ ฀Rate฀ ฀฀$'000฀
'000฀
Revenue฀ ฀฀97,125฀ 3.75฀ ฀25,900฀
Cost฀of฀sales฀ ฀฀(77,550)฀ 3.75฀ ฀฀(20,680)฀
Gross฀profit฀ ฀฀19,575฀ ฀฀5,220฀
Distribution฀and฀administrative฀expenses฀ ฀ (5,850)฀ 3.75฀ ฀฀(1,560)฀
Profit฀before฀tax฀ ฀฀13,725฀ ฀฀3,660฀
Income฀tax฀expense฀ ฀฀(4,725)฀ 3.75฀ ฀฀(1,260)฀
Profit฀for฀the฀year฀ ฀฀ ฀9,000฀ ฀฀฀฀฀2,400฀
844฀

lOMoARcPSD|6256454
4฀ Goodwill฀
฀ PLN PLN Rate฀ $'000
฀ ฀'000฀ ฀'000฀ ฀ ฀
Consideration฀transferred฀(840฀ 4.4)฀ ฀3,696฀ ฀ ฀840฀
Non-controlling฀interests฀(at฀FV:฀270฀ 4.4)฀ ฀1,188฀ ฀ ฀270฀
฀ ฀
Less฀ share฀of฀net฀assets฀at฀acquisition: 4.4฀
฀฀ Share฀capital฀ ฀1,348฀ ฀
฀฀ Retained฀reserves฀ ฀2,876฀ ฀
฀ ฀(4,224)฀ ฀ ฀(960)
Goodwill฀at฀acquisition฀ ฀ ฀฀660฀ ฀ ฀150฀
Exchange฀gain฀20X3฀–฀20X4฀ ฀฀฀฀ ฀฀– ß฀ ฀฀฀฀15฀
Goodwill฀at฀31฀December฀20X4฀ ฀ ฀฀660฀ 4.0฀ ฀165฀
Exchange฀gain฀20X5฀ ฀฀฀฀ ฀฀– ß฀ ฀฀฀18.3
Goodwill฀at฀year฀end฀ ฀ ฀฀ 660฀ 3.6฀ ฀183.3
5฀ Proof฀of฀retained฀reserves฀
฀ ฀$'000฀
(i)฀ At฀31฀December฀20X5
฀ Harvard฀ ฀502฀
฀ Add฀group฀share฀of฀post-acquisition฀retained฀reserves฀of฀Krakow฀฀ ฀2,490฀
((W2)฀3,320฀฀75%)
฀ Group฀share฀of฀impairment฀losses฀to฀date฀ ฀(0)
฀ Group฀share฀of฀exchange฀differences฀on฀goodwill฀((W4)฀15฀+฀ ฀฀฀฀฀฀ 25.0
18.3)฀฀75%)฀
฀ ฀3,017.0
฀
฀ ฀$'000
(ii)฀ At฀31฀December฀20X4
฀ Harvard฀(502฀–฀(945฀– 700))฀ ฀฀257
฀ Add฀group฀share฀of฀post-acquisition฀retained฀reserves฀of฀Krakow฀*฀ ฀฀1,183.5
฀ ((PLN15,408฀–฀9,000฀+฀3,744)/4)฀–฀
฀ (PLN฀(W2)฀(1,348฀+฀2,876)/4.4)฀฀75%)
฀ Group฀share฀of฀impairment฀losses฀to฀31.12.X4฀ ฀฀฀฀฀฀฀฀(0)
฀ Group฀share฀of฀exchange฀differences฀on฀goodwill฀((W4)฀15฀฀ ฀฀฀฀฀฀฀11.3
75%)฀
฀ ฀฀1,451.8
฀ ฀ *฀Note.฀This฀is฀calculated฀by฀comparing฀the฀net฀assets฀at฀the฀two฀dates.฀
฀ $'000
NCI฀at฀acquisition฀(W4)฀ ฀270
Add฀NCI฀share฀of฀post-acquisition฀retained฀reserves฀of฀Krakow฀((W2)฀ ฀830฀
3,320฀฀25%)฀
NCI฀share฀of฀impairment฀losses฀to฀date (0)
NCI฀share฀of฀exchange฀differences฀on฀goodwill฀(((W4)฀15฀+฀18.3)฀฀ ฀฀฀฀฀฀฀฀8.3฀
25%)฀
฀ ฀1,108.3฀
฀ 845฀

lOMoARcPSD|6256454
฀ SPLOCI
฀ $'000
On฀translation฀of฀net฀assets฀of฀Krakow:
Closing฀NA฀at฀CR฀(W2)฀ ฀4,280฀
Opening฀NA฀@฀OR฀[(15,408฀– 9,000฀+฀3,744)/4.0]฀ ฀(2,538)฀
฀ ฀1,742฀
Less฀฀retained฀profit฀as฀translated฀((W3)฀2,400฀– 3,744/3.90)฀ ฀(1,440)฀
฀ ฀฀฀฀302฀
On฀goodwill฀(W4)฀ ฀฀฀฀฀฀฀18.3฀
฀ ฀฀฀฀320.3฀
18฀Porter฀
PORTER฀GROUP฀
STATEMENT฀OF฀CASH฀FLOWS฀FOR฀THE฀YEAR฀ENDED฀31฀MAY฀20X6฀
฀ ฀$'m฀ ฀$'m฀
Profit฀before฀taxation฀ ฀ 112 ฀ ฀
Adjustments฀for:฀ ฀ ฀
Depreciation฀ ฀44฀ ฀
Impairment฀losses฀on฀goodwill฀(W1)฀ ฀3฀ ฀
Foreign฀exchange฀loss฀(W7)฀ ฀ ฀฀2฀ ฀
Investment฀income฀–฀share฀of฀profit฀of฀associate฀ ฀ ฀฀(12)฀ ฀
Investment฀ income฀ –฀ gains฀ on฀ financial฀ assets฀ at฀ fair฀ value฀ through฀ ฀ ฀฀(6)฀ ฀
profit฀or฀loss฀
Interest฀expense฀ ฀ 16฀ ฀
฀159฀ ฀
Increase฀in฀trade฀receivables฀(W4)฀ ฀(4)฀ ฀
Decrease฀in฀inventories฀฀(W4)฀ ฀34฀ ฀
Decrease฀in฀trade฀payables฀฀(W4)฀ ฀ ฀(17)฀ ฀
Cash฀generated฀from฀operations฀ ฀172฀ ฀
Interest฀paid฀(W5)฀ ฀(12)฀ ฀
Income฀taxes฀paid฀(W3)฀ ฀ ฀(37)฀ ฀
Net฀cash฀from฀operating฀activities฀ ฀ ฀123฀
Cash฀flows฀from฀investing฀activities฀ ฀ ฀
Acquisition฀of฀subsidiary,฀net฀of฀cash฀acquired฀(W6)฀ ฀(18)฀ ฀
Purchase฀of฀property,฀plant฀and฀equipment฀(W1)฀ ฀(25)฀ ฀
Purchase฀of฀financial฀assets฀(W1)฀ ฀(10)฀ ฀
Dividend฀received฀from฀associate฀(W1)฀ ฀ 11฀ ฀
Net฀cash฀used฀in฀investing฀activities฀ ฀ ฀(42)฀
Proceeds฀from฀issuance฀of฀share฀capital฀(W2) ฀18฀ ฀
Proceeds฀from฀long-term฀borrowings฀(W3)฀ ฀60฀ ฀
Dividend฀paid฀ ฀ ฀(45)฀ ฀
Dividends฀paid฀to฀non-controlling฀interests฀(W2)฀ ฀ (4)฀ ฀
846฀

lOMoARcPSD|6256454
฀ ฀$'m฀ ฀$'m฀
Net฀cash฀from฀financing฀activities฀ ฀ ฀฀฀29฀
Net฀increase฀in฀cash฀and฀cash฀equivalents฀ ฀ ฀110฀
Cash฀and฀cash฀equivalents฀at฀the฀beginning฀of฀the฀year฀ ฀ ฀฀฀48฀
Cash฀and฀cash฀equivalents฀at฀the฀end฀of฀the฀year฀ ฀ ฀158฀
Workings฀
1฀ Assets฀
฀ Property,฀ ฀
plant฀and฀ ฀ ฀ Financial฀
equipment Goodwill Associate฀ asset฀
฀ ฀$m฀ ฀$m฀ ฀$m฀ $m฀
b/d฀ 812 10 39฀ –฀
P/L฀ 12฀ 6฀
OCI฀ 58 8฀ ฀
Depreciation/฀Impairment฀ ฀(44) ฀ (3)฀β฀ ฀ ฀
Acquisition฀of฀sub/assoc฀ 92 8฀(W6) ฀ ฀
Additions฀on฀credit฀(W7)฀ 15 ฀ ฀
Cash฀paid/(rec'd)฀β฀ ฀฀฀ 25฀ ฀ ฀฀฀– ฀฀(11)฀ 10
฀ ฀
c/d฀ ฀958 ฀ ฀15฀ ฀฀48฀ ฀16฀
Note.฀The฀share฀of฀the฀associate's฀profit,฀recognised฀in฀the฀consolidated฀statement฀of฀profit฀or฀
loss฀and฀other฀comprehensive฀income,฀is฀not฀a฀cash฀item฀so฀is฀added฀back฀on฀the฀face฀of฀the฀
statement฀of฀cash฀flows฀in฀the฀section฀that฀calculates฀the฀cash฀generated฀from฀operations.฀The฀
dividend฀received฀from฀the฀associate฀is฀the฀cash฀item฀and฀appears฀in฀the฀investing฀activities฀
section.฀
2฀ Equity฀฀
฀ Non-
Share฀ Share฀ Retained฀ controlling฀
capital premium earnings฀ interest฀
$m $m $m฀ $m฀
b/d฀ 300 172 165฀ 28฀
TCI฀ 68฀ 12฀
Acquisition฀of฀subsidiary฀ 24 30 ฀ 48฀(W6)
Cash฀(paid)/rec'd฀β฀ ฀฀฀฀฀8฀ ฀฀฀฀10฀ ฀฀(45)*฀ ฀฀(4)*฀
c/d฀ ฀332 ฀212 ฀188฀ ฀84฀
฀ *80฀฀60%/2฀SC,฀80฀฀60%/2฀฀1.25฀SP฀
฀ **Dividend฀paid฀is฀given฀in฀question฀but฀working฀shown฀for฀clarity.฀
3฀ Liabilities฀
฀ Loans฀ Tax฀
payable฀
฀ $m $m฀
฀ (22฀+฀26)฀
b/d฀ 320฀ 48฀
P/L฀ 34฀
OCI฀ 17฀
Acquisition฀of฀subsidiary฀ 4฀
Cash฀(paid)/rec'd฀฀ ฀฀฀฀฀฀60฀ ฀(37) β฀
c/d฀ ฀380 ฀฀66฀
(28฀+฀38)฀
฀ 847฀

lOMoARcPSD|6256454
฀ Inventories Receivables฀ Payables
$m฀ $m฀ $m฀
Balance฀b/d฀ 168 112 98฀
PPE฀payable฀(W7)฀ 17฀
Acquisition฀of฀subsidiary฀ ฀20 ฀16 ฀฀฀12฀
฀ 188 128 127฀
Increase/(decrease)฀(balancing฀figure) ฀(34) ฀฀4 ฀฀(17)฀
Balance฀c/d฀ 154 132 ฀110฀
5฀ Interest฀paid฀฀
฀ $m฀
Balance฀b/d฀ 4฀
Profit฀or฀loss฀ 16฀
฀Interest฀paid฀β฀ ฀ ฀฀(12)฀
Balance฀c/d฀ ฀฀฀฀8฀
6฀ Purchase฀of฀subsidiary฀฀
฀ $m฀
Cash฀received฀on฀acquisition฀of฀subsidiary 8฀
Less฀cash฀consideration฀ ฀฀(26)฀
Cash฀outflow฀ ฀฀18฀
Note.฀Only฀the฀cash฀consideration฀is฀included฀in฀the฀figure฀reported฀in฀the฀statement฀of฀cash฀
flows.฀The฀shares฀issued฀as฀part฀of฀the฀consideration฀are฀reflected฀in฀the฀share฀capital฀working฀
(W2)฀above.฀
Goodwill฀on฀acquisition฀(to฀calculate฀impairment):฀
฀ $m฀
Consideration:฀26฀+฀(80฀฀60%/2฀ 2.25)฀฀ 80฀
Non-controlling฀interest:฀120฀฀40% 48฀
Net฀assets฀acquired฀ ฀ ฀(120) ฀
Goodwill฀ 8
฀฀฀฀฀฀ ฀
7฀ Foreign฀currency฀transaction฀
Transactions฀recorded฀on:฀ $m฀ $m฀
(1)฀฀ 5฀March฀ DEBIT฀Property,฀plant฀and฀equipment฀(102m/6.8)฀ 15฀
฀ ฀ CREDIT฀Payables฀ ฀ 15฀
(2)฀฀ 31฀May฀ Payable฀=฀102m/6.0฀=฀$17m฀
฀ ฀ DEBIT฀P/L฀(Admin฀expenses)฀ 2฀
฀ ฀ CREDIT฀Payables฀(17฀–฀15)฀ ฀ 2฀
19฀Grow฀by฀acquisition฀
(a)฀ Note฀1฀
The฀substance฀of฀this฀transaction฀is฀that฀X฀has฀made฀a฀loan฀of฀$2.4m฀to฀A.฀All฀aspects฀of฀the฀
'sale'฀should฀be฀eliminated,฀as฀follows.฀
(i)฀ Reduce฀revenue฀by฀$2,400,000.฀
(ii)฀ Reduce฀cost฀of฀sales฀by฀$2,400,000฀฀100/160฀=฀$1,500,000.฀
(iii)฀ Reduce฀gross฀profit฀by฀($2,400,000฀–฀$1,500,000)฀=฀$900,000.฀
(iv)฀ Increase฀loans฀by฀$2,400,000.฀
848฀

lOMoARcPSD|6256454
Note฀2฀
To฀be฀comparable,฀the฀non-current฀assets฀of฀A฀and฀B฀should฀either฀both฀be฀shown฀at฀cost฀or฀
both฀at฀a฀revalued฀amount,฀with฀the฀revaluation฀done฀on฀the฀same฀basis.฀It฀is฀not฀feasible฀to฀
'revalue'฀ A's฀ non-current฀ assets฀ for฀ purposes฀ of฀ comparison.฀ However,฀ B's฀ non-current฀ assets฀
can฀be฀shown฀at฀cost฀by฀reversing฀out฀the฀revaluation,฀as฀follows.฀
(i)฀ Reduce฀non-current฀assets฀by฀$5,000,000.฀
(ii)฀ Reduce฀the฀revaluation฀reserve฀to฀nil.฀
(iii)฀ Reduce฀cost฀of฀sales฀by฀$1,000,000.฀This฀is฀the฀excess฀depreciation฀no฀longer฀required฀
(being฀ the฀ $6,000,000฀ revaluation฀ less฀ the฀ $5,000,000฀ remaining฀ in฀ the฀ reserve฀ at฀
year฀end).฀
(iv)฀ Increase฀ gross฀ profit,฀ operating฀ profit,฀ profit฀ for฀ the฀ year฀ and฀ profit฀ before฀ tax฀ by฀
$1,000,000.฀
Summary฀
A฀
Item฀ Per฀original฀ Adjustment฀ New฀figure฀

f/s฀
฀ $'000 $'000 $'000฀
Revenue฀ 68,000 (2,400) 65,600฀
Cost฀of฀sales฀ 42,000 (1,500) 40,500฀
Gross฀profit฀ 26,000 (900) 25,100฀
Profit฀from฀operations฀ 8,000 (900) 7,100฀
Inventory฀ 6,000 1,500 7,500฀
Short฀term฀borrowing฀ 4,000 2,400 6,400฀
Total฀borrowings฀(4,000฀+฀16,000) 20,000 2,400 22,400฀
Shareholders'฀funds฀ 23,500 (900) 22,600฀
B฀฀
Item฀ Per฀original฀ Adjustment฀ New฀figure฀

f/s฀
฀ $'000 $'000 $'000฀
Non-current฀assets 35,050 (5,000) 30,050฀
Revaluation฀reserve฀฀ 5,000 (5,000) Nil฀
Cost฀of฀sales฀ 45,950 (1,000) 44,950฀
Gross฀profit฀ 20,050 1,000 21,050฀
Profit฀from฀operations฀ 6,050 1,000 7,050฀
Profit฀before฀tax฀ 2,050 1,000 3,050฀
Profit฀for฀the฀year 1,050 1,000 2,050฀
Shareholders'฀funds฀ 22,050 (5,000) 17,050฀
(b)฀ All฀monetary฀amounts฀in฀$'000฀
Ratio฀ A B฀
Return฀on฀capital฀ 7,100 7, 050
฀ =฀15.8%฀ ฀ =฀17.2%
employed฀ 22, 600 + 22, 400 17,050 + 6,000 +18, 000
Gross฀profit฀ 25,100 21, 050
margin฀ ฀ =฀38.3%฀ ฀ =฀31.9%
65, 600 66, 000
Asset฀turnover฀ 65, 600 66, 000
฀ =฀1.9฀

50,000 +1, 500 –฀ 10, 500฀+฀2, 400  =฀1.7฀
52, 050 – 5, 000 – 12, 000
฀
22, 400 24, 000
Debt/Equity฀ ฀ =฀1:1฀ ฀ =฀1.4:1฀
22,600 17, 050
฀
฀ 849฀

lOMoARcPSD|6256454
BPP฀note.฀The฀effective฀loan฀of฀$2.4m฀could฀arguably฀be฀excluded฀from฀borrowings฀as฀it฀is฀short฀
term.฀
(c)฀ The฀ adjustments฀ carried฀ out฀ to฀ make฀ the฀ financial฀ statements฀ of฀ the฀ two฀ entities฀ comparable฀
make฀it฀far฀less฀easy฀to฀decide฀which฀entity฀to฀target.฀A฀has฀a฀higher฀gross฀profit฀and฀
gross฀profit฀margin.฀However,฀the฀return฀on฀capital฀employed฀is฀lower.฀The฀main฀
reason฀ for฀ this฀ is฀ that฀ A's฀ other฀ operating฀ expenses฀ are฀ higher฀ than฀ B's.฀ The฀ revenue฀ figures฀
are฀not฀significantly฀different฀following฀the฀elimination฀of฀the฀'sale'฀from฀the฀accounts฀of฀A.฀฀
The฀asset฀turnover฀ratio฀is฀slightly฀in฀favour฀of฀company฀B฀but฀there฀is฀not฀significant฀difference฀
between฀the฀two฀companies฀
Where฀A฀has฀an฀advantage฀over฀B฀is฀in฀the฀adjusted฀debt/equity฀ratio.฀Whether฀this฀
influences฀ the฀ directors'฀ decision฀ depends฀ on฀ whether฀ they฀ intend฀ to฀ change฀ the฀ financial฀
structure฀of฀the฀company.฀
As฀it฀is฀very฀difficult฀to฀make฀a฀decision฀based฀purely฀on฀the฀ratios,฀it฀is฀important฀to฀consider฀
additional฀factors฀that฀may฀help฀the฀directors฀to฀decide.฀They฀should฀consider฀the฀reputation฀of฀
each฀ company,฀ researching฀ media฀ publications฀ may฀ give฀ insight฀ into฀ any฀ public฀ matters฀ the฀
directors฀need฀to฀be฀aware฀of.฀฀Reviewing฀non-financial฀elements฀of฀A฀and฀B's฀annual฀report฀
may฀ help฀ to฀ reveal฀ for฀ example฀ each฀ company's฀ environmental฀ policies,฀ the฀ importance฀ it฀
places฀ on฀ staff฀ wellbeing,฀ the฀ commitments฀ it฀ has฀ to฀ reducing฀ emissions.฀ The฀ directors฀ may฀
wish฀to฀consider฀the฀management฀structure฀of฀A฀and฀B฀and฀the฀personalities฀in฀place฀in฀order฀
to฀ assess฀ how฀ easy฀ it฀ will฀ be฀ to฀ integrate฀ the฀ investment฀ into฀ Expand.฀ It฀ is฀ highly฀ likely฀ the฀
directors฀of฀Expand฀will฀want฀to฀look฀at฀the฀statements฀of฀cash฀flows฀of฀each฀company฀in฀order฀
to฀ understand฀ how฀ they฀ generate฀ and฀ use฀ cash฀ and฀ whether฀ cash฀ injections฀ are฀ likely฀ to฀ be฀
needed.฀ ฀ Using฀ four฀ ratios฀ for฀ investment฀ appraisal฀ is฀ very฀ narrow฀ and฀ a฀ wider฀ set฀ of฀
information฀should฀be฀considered.฀
20฀Ghorse฀
Marking฀scheme฀
฀ ฀Marks฀
(a)฀ Discontinuance฀ ฀ 6฀
(b)฀ Deferred฀tax฀asset฀ ฀ 5฀
(c)฀ Impairment฀ ฀ 5฀
(d)฀ Lease฀ ฀ 4฀
฀฀ Formation฀of฀opinion฀of฀impact฀on฀ROCE 2฀
฀ Non-financial฀performance฀indicators฀ 3฀
฀฀ Maximum฀ ฀25฀
(a)฀ The฀criteria฀in฀IFRS฀5฀Non-current฀assets฀held฀for฀sale฀and฀discontinued฀operations฀have฀been฀
met฀ for฀ Cee฀ and฀ Gee.฀ As฀ the฀ assets฀ are฀ to฀ be฀ disposed฀ of฀ in฀ a฀ single฀ transaction,฀ Cee฀ and฀
Gee฀together฀are฀deemed฀to฀be฀a฀disposal฀group฀under฀IFRS฀5.฀฀
The฀ disposal฀ group฀ as฀ a฀ whole฀ is฀ measured฀ on฀ the฀ basis฀ required฀ for฀ non-current฀
assets฀held฀for฀sale.฀Any฀impairment฀loss฀reduces฀the฀carrying฀amount฀of฀the฀non-current฀
assets฀ in฀ the฀ disposal฀ group,฀ the฀ loss฀ being฀ allocated฀ in฀ the฀ order฀ required฀ by฀ IAS฀ 36฀
Impairment฀of฀assets.฀Before฀the฀manufacturing฀units฀are฀classified฀as฀held฀for฀sale,฀impairment฀
is฀tested฀for฀on฀an฀individual฀cash฀generating฀unit฀basis.฀Once฀classified฀as฀held฀for฀sale,฀the฀
impairment฀testing฀is฀done฀on฀a฀disposal฀group฀basis.฀฀
A฀ disposal฀ group฀ that฀ is฀ held฀ for฀ sale฀ should฀ be฀ measured฀ at฀ the฀ lower฀ of฀ its฀ carrying฀
amount฀and฀fair฀value฀less฀costs฀to฀sell.฀Immediately฀before฀classification฀of฀a฀disposal฀
group฀ as฀ held฀ for฀ sale,฀ the฀ entity฀ must฀ recognise฀ impairment฀ in฀ accordance฀ with฀ applicable฀
IFRS.฀ Any฀ impairment฀ loss฀ is฀ generally฀ recognised฀ in฀ profit฀ or฀ loss,฀ but฀ if฀ the฀ asset฀ has฀ been฀
850฀

lOMoARcPSD|6256454
measured฀ at฀ a฀ revalued฀ amount฀ under฀ IAS฀ 16฀ Property,฀ plant฀ and฀ equipment฀ or฀ IAS฀ 38฀
Intangible฀assets,฀the฀impairment฀will฀be฀treated฀as฀a฀revaluation฀decrease.฀Once฀the฀disposal฀
group฀has฀been฀classified฀as฀held฀for฀sale,฀any฀impairment฀loss฀will฀be฀based฀on฀the฀
difference฀between฀the฀adjusted฀carrying฀amounts฀and฀the฀fair฀value฀less฀cost฀
to฀sell.฀The฀impairment฀loss฀(if฀any)฀will฀be฀recognised฀in฀profit฀or฀loss.฀
A฀subsequent฀increase฀in฀fair฀value฀less฀costs฀to฀sell฀may฀be฀recognised฀in฀profit฀or฀loss฀
only฀to฀the฀extent฀of฀any฀impairment฀previously฀recognised.฀To฀summarise:฀
Step฀1 Calculate฀carrying฀value฀under฀the฀individual฀standard,฀here฀given฀as฀$105m.฀
Step฀2 Classified฀as฀held฀for฀sale.฀Compare฀the฀carrying฀amount฀($105m)฀with฀fair฀value฀
less฀costs฀to฀sell฀($125m).฀Measure฀at฀the฀lower฀of฀carrying฀value฀and฀fair฀value฀
less฀costs฀to฀sell,฀here฀$105m.฀
Step฀3 Determine฀ fair฀ value฀ less฀ costs฀ to฀ sell฀ at฀ the฀ year-end฀ (see฀ below)฀ and฀ compare฀
with฀carrying฀value฀of฀$105m.฀
Ghorse฀ has฀ not฀ taken฀ account฀ of฀ the฀ increase฀ in฀ fair฀ value฀ less฀ cost฀ to฀ sell,฀ but฀
only฀part฀of฀this฀increase฀can฀be฀recognised,฀calculated฀as฀follows.฀
฀ ฀$m฀
Fair฀value฀less฀costs฀to฀sell:฀Cee฀ ฀40฀
Fair฀value฀less฀costs฀to฀sell:฀Gee฀ ฀฀฀฀95฀
฀ ฀135฀
Carrying฀value฀ ฀(105)฀
Increase฀ ฀฀฀฀฀30฀
Impairment฀previously฀recognised฀in฀Cee:฀$15m฀($50m฀–฀$35m)฀
Step฀4 The฀ change฀ in฀ fair฀ value฀ less฀ cost฀ to฀ sell฀ is฀ recognised฀ but฀ the฀ gain฀ recognised฀
cannot฀exceed฀any฀impairment฀losses฀to฀date.฀Here฀the฀gain฀recognised฀is฀$50m฀
–฀$35m฀=฀$15m฀
Therefore฀carrying฀value฀can฀increase฀by฀$15m฀to฀$120m฀as฀loss฀reversals฀are฀limited฀to฀
impairment฀losses฀previously฀recognised฀(under฀IFRS฀5฀or฀IAS฀36).฀฀
These฀adjustments฀will฀affect฀ROCE.฀
(b)฀ IAS฀ 12฀ Income฀ Taxes฀ requires฀ that฀ deferred฀ tax฀ liabilities฀ must฀ be฀ recognised฀ for฀ all฀ taxable฀
temporary฀ differences.฀ Deferred฀ tax฀ assets฀ should฀ be฀ recognised฀ for฀ deductible฀ temporary฀
differences฀ but฀ only฀ to฀ the฀ extent฀ that฀ taxable฀ profits฀ will฀ be฀ available฀ against฀ which฀ the฀
deductible฀temporary฀differences฀may฀be฀utilised.฀
The฀ differences฀ between฀ the฀ carrying฀ amounts฀ and฀ the฀ tax฀ base฀ represent฀ temporary฀
differences.฀These฀temporary฀differences฀are฀revised฀in฀the฀light฀of฀the฀revaluation฀for฀
tax฀purposes฀to฀market฀value฀permitted฀by฀the฀government.฀฀
Deferred฀tax฀liability฀before฀revaluation฀
฀ Carrying Temporary฀
฀ amount฀ ฀Tax฀base ฀ difference฀
฀ $m฀฀฀ ฀$m฀฀฀ ฀$m฀
Property฀ ฀50฀ ฀48฀ ฀ 2฀
Vehicles฀ ฀30฀ ฀28฀ ฀2฀
฀ ฀ 4฀
Other฀temporary฀differences฀ ฀ 5฀
฀ ฀ 9฀
Provision:฀30%฀฀$9m฀=฀$2.7m฀
฀ 851฀

lOMoARcPSD|6256454
Deferred฀tax฀asset฀after฀revaluation฀
฀ ฀Carrying฀ ฀Temporary฀
฀ ฀amount฀ ฀Tax฀base฀ ฀difference฀
฀ ฀$m฀ ฀$m฀ ฀$m฀
Property฀ ฀50฀ ฀65฀ 15฀
Vehicles฀ ฀30฀ 35฀ ฀฀฀5฀
Other฀temporary฀differences฀ ฀฀(5)฀
฀ ฀15฀
Deferred฀tax฀asset:฀$15m฀฀30%฀=฀$4.5m฀
This฀ will฀ have฀ a฀ considerable฀ impact฀ on฀ ROCE.฀ While฀ the฀ release฀ of฀ the฀ provision฀ of฀
$2.7m฀ and฀ the฀ creation฀ of฀ the฀ asset฀ of฀ $4.5m฀ will฀ not฀ affect฀ the฀ numerator,฀ profit฀ before฀
interest฀and฀tax฀(although฀it฀will฀affect฀profit฀or฀loss฀for฀the฀year),฀it฀will฀significantly฀affect฀
the฀capital฀employed฀figure.฀
(c)฀ IAS฀ 36฀ Impairment฀ of฀ assets฀ requires฀ that฀ no฀ asset฀ should฀ be฀ carried฀ at฀ more฀ than฀ its฀
recoverable฀ amount.฀ At฀ each฀ reporting฀ date,฀ Ghorse฀ must฀ review฀ all฀ assets฀ for฀
indications฀of฀impairment,฀that฀is฀indications฀that฀the฀carrying฀value฀may฀be฀higher฀than฀
the฀ recoverable฀ amount.฀ Such฀ indications฀ include฀ fall฀ in฀ the฀ market฀ value฀ of฀ an฀ asset฀ or฀
adverse฀changes฀in฀the฀technological,฀economic฀or฀legal฀environment฀of฀the฀business.฀(IAS฀36฀
has฀an฀extensive฀list฀of฀criteria.)฀If฀impairment฀is฀indicated,฀then฀the฀asset's฀recoverable฀
amount฀must฀be฀calculated.฀The฀manufacturer฀has฀reduced฀the฀selling฀price,฀but฀this฀does฀not฀
automatically฀mean฀that฀the฀asset฀is฀impaired.฀
The฀ recoverable฀ amount฀ is฀ defined฀ as฀ the฀ higher฀ of฀ the฀ asset's฀ fair฀ value฀ less฀
disposal฀ of฀ disposal฀ and฀ its฀ value฀ in฀ use.฀ If฀ the฀ recoverable฀ amount฀ is฀ less฀ than฀ the฀
carrying฀amount,฀then฀the฀resulting฀impairment฀loss฀should฀be฀charged฀to฀profit฀or฀loss฀as฀an฀
expense.฀฀
Value฀in฀use฀is฀the฀discounted฀present฀value฀of฀estimated฀future฀cash฀flows฀expected฀to฀arise฀
from฀the฀continuing฀use฀of฀an฀asset฀and฀from฀its฀disposal฀at฀the฀end฀of฀its฀useful฀life.฀The฀value฀
in฀use฀of฀the฀equipment฀is฀calculated฀as฀follows:฀
Year฀ended฀31฀October฀ ฀Cash฀flows฀ ฀Discounted฀(10%)฀
฀ ฀$m฀ ฀$m฀
20X8฀ ฀1.3฀ ฀1.2฀
20X9฀ ฀2.2฀ ฀1.8฀
20Y0฀ ฀2.3฀ ฀1.7฀
Value฀in฀use฀ ฀4.7฀
The฀ fair฀ value฀ less฀ disposal฀ costs฀ of฀ the฀ asset฀ is฀ estimated฀ at฀ $2m.฀ The฀ recoverable฀ amount฀
must฀ be฀ the฀ value฀ in฀ use฀ of฀ $4.7m,฀ as฀ this฀ is฀ higher.฀ Since฀ the฀ recoverable฀ amount฀ is฀
higher฀than฀the฀carrying฀value฀of฀$3m,฀the฀asset฀is฀not฀impaired.฀Consequently฀
there฀will฀be฀no฀effect฀on฀ROCE.฀
(d)฀ The฀manufacturing฀property฀was฀held฀under฀an฀operating฀lease.฀IAS฀17฀Leases฀required฀that฀
operating฀lease฀payments฀are฀charged฀to฀profit฀or฀loss฀over฀the฀term฀of฀the฀lease,฀generally฀on฀
straight฀line฀basis.฀
The฀ renegotiation฀ of฀ the฀ lease฀ means฀ that฀ its฀ terms฀ have฀ changed฀ significantly.฀ In฀
addition,฀ IFRS฀ 16฀ now฀ requires฀ that฀ all฀ leases฀ of฀ more฀ than฀ twelve฀ months฀ (other฀
than฀ leases฀ of฀ low-value฀ assets)฀ must฀ be฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀
position.฀฀
Since฀the฀IFRS฀16฀is฀now฀in฀force,฀it฀will฀be฀shown฀in฀the฀statement฀of฀financial฀position.฀The฀
entity฀ must฀ measure฀ the฀ lease฀ liability฀ at฀ present฀ value฀ of฀ the฀ remaining฀ lease฀
852฀

lOMoARcPSD|6256454
payments฀($(5฀×฀6.8137)m฀=฀$34.1m),฀ie฀at฀$34.1m.฀The฀entity฀must฀also฀recognise฀a฀
right-of-use฀asset฀of฀$34.1m.฀
However,฀ since฀ both฀ assets฀ and฀ liabilities฀ would฀ increase,฀ this฀ reclassification฀ would฀ not฀
affect฀ROCE.฀
Recalculation฀of฀ROCE฀
฀ ฀฀$m฀฀฀
Profit฀before฀interest฀and฀tax฀ ฀฀30.0฀
Add฀increase฀in฀value฀of฀disposal฀group฀ ฀15.0฀
฀ ฀45.0฀
Capital฀employed฀ ฀฀220.0฀
Add฀increase฀in฀value฀of฀disposal฀group฀ ฀15.0฀
Add฀release฀of฀deferred฀tax฀provision฀and฀ ฀
฀ deferred฀tax฀asset:฀4.5฀+฀2.7฀ ฀฀ ฀฀฀฀7.2 ฀
฀ ฀฀242.2฀
฀ROCE฀is฀45/242.2฀=฀13.6%฀
The฀ directors฀ were฀ concerned฀ that฀ the฀ above฀ changes฀ would฀ adversely฀ affect฀ ROCE.฀ In฀ fact,฀ the฀
effect฀ has฀ been฀ favourable,฀ as฀ ROCE฀ has฀ risen฀ from฀ 13.6%฀ to฀ 18.6%,฀ so฀ the฀ directors'฀
fears฀were฀misplaced.฀
Non-financial฀performance฀indicators฀
The฀fashion฀industry฀has฀had฀a฀negative฀reputation฀in฀the฀past฀due฀to฀treatment฀of฀staff,฀particularly฀if฀
there฀ are฀ overseas฀ factories฀ in฀ which฀ garments฀ are฀ made.฀ Ghorse฀ could฀ consider฀ employee฀
wellbeing฀ as฀ a฀ non-financial฀ metric.฀ There฀ are฀ many฀ components฀ that฀ could฀ be฀ included฀ here฀ –฀
wages฀is฀likely฀to฀be฀key฀so฀Ghorse฀could฀consider฀eg฀ensuring฀all฀staff฀are฀paid฀living฀wage฀by฀a฀
certain฀date,฀or฀closing฀the฀gap฀between฀highest฀and฀lowest฀paid฀employees.฀
Ghorse฀will฀purchase฀materials฀from฀suppliers.฀It฀could฀consider฀indicators฀such฀as฀having฀20%฀of฀its฀
materials฀ being฀ ethically฀ sourced,฀ or฀ reporting฀ what฀ proportion฀ of฀ materials฀ come฀ from฀ fair฀ trade฀
regions.฀
Manufacturing฀ companies฀ often฀ have฀ high฀ energy฀ usage฀ due฀ to฀ operating฀ manufacturing฀ sites฀ and฀
having฀high฀levels฀of฀deliveries฀in฀and฀out฀of฀the฀business.฀Commitments฀to฀cutting฀carbon฀emissions฀
and฀reducing฀the฀carbon฀footprint฀would฀be฀good฀non-financial฀indicators.฀
The฀non-financial฀indicators฀need฀to฀have฀a฀measurement฀basis฀in฀order฀that฀success฀or฀otherwise฀can฀
be฀measured฀and฀analysed.฀
21฀German฀competitor฀
Tutorial฀note฀
You฀do฀not฀need฀to฀know฀about฀German฀accounting฀practice฀to฀answer฀this฀question,฀just฀a฀basic฀
knowledge฀of฀the฀differences฀between฀the฀European฀and฀UK฀models฀and฀your฀common฀sense!฀Think฀
of฀this฀as฀an฀interpretation฀of฀accounts฀questions.฀
To:฀ Managing฀Director฀
From:฀An฀Accountant฀
Date:฀ xx.xx.xx฀
Re:฀ Hilde฀GmbH฀
฀ 853฀

lOMoARcPSD|6256454
(a)฀ Analysis฀of฀performance฀plus฀commentary฀(€฀million)฀
฀ %฀
฀ Increase฀
Statement฀of฀profit฀or฀loss฀and฀other฀ 20X4 20X5 (decrease)฀
Sales฀ 1,270 1,890 ฀฀49฀
Cost฀of฀sales฀ ฀
฀฀ Material฀purchased฀ 400 740 ฀
฀฀ De-stocking฀of฀materials฀ ฀฀ 40 ฀ 90 ฀
฀฀ Material฀cost฀ 440 830 ฀89฀
฀฀ Labour฀cost 285 500 ฀75฀
฀฀ Depreciation฀ 150 200 ฀33฀
฀฀ Current฀assets฀written฀off฀ 20 30 ฀50฀
฀฀ Other฀operating฀expenses฀ 40 50 ฀25฀
฀฀ Finished฀goods฀inventory฀increase ฀(80) ฀(120) ฀50฀
฀ 855 1,490 ฀
Operating฀profit฀before฀other฀income 415 ฀ 400 ฀(4)
฀ ฀
Profit฀rate฀on฀revenue฀ ฀32% ฀21% ฀
Other฀operating฀income฀ ฀฀50฀ ฀฀75฀ 50
฀฀ ฀
฀฀ Cash฀flows฀
฀ ฀฀€฀million฀
Share฀capital฀issued฀ ฀฀200฀
Increased฀payables฀ ฀฀75฀
Increased฀accruals฀ ฀฀20฀
Profit฀ploughed฀back฀(185฀+฀200)฀ ฀฀385฀
฀ ฀฀680฀
These฀flows฀were฀used฀to฀finance:฀
Purchases฀of฀plant฀(550฀+฀200)฀ ฀750฀
Net฀inventory฀ ฀30฀
More฀credit฀to฀customers฀ ฀฀฀80฀
฀ ฀860฀
Difference:฀reduction฀in฀cash฀reserves฀ ฀180฀
Other฀relevant฀performance฀measures฀
฀ 20X4 20X5฀
Receivables฀turnover฀
Trade ฀receivable s 100 180
=฀ ฀฀365฀฀ ฀365฀ ฀฀365฀
Sales 1, 270 1,890
฀ =฀29฀days =฀35฀days฀
Current฀ratio฀
Current฀assets 420 + 70 350 + 50
=฀ ฀ ฀ ฀
Current฀liabilities
350 425
฀ =฀1.4 =฀0.94฀
Quick฀ratio฀
Current฀assets฀฀Inventory 100 + 200 + 70 180 + 20 + 50
=฀ ฀ ฀ ฀
Current฀liabilities 350 425
฀ =฀1.06 =฀0.59฀
854฀

lOMoARcPSD|6256454
Commentary฀
(i)฀ Material฀costs฀and฀labour฀costs฀have฀risen฀at฀an฀alarming฀rate฀in฀20X5฀and฀to฀a฀certain฀
extent฀other฀costs฀have฀also฀increased฀substantially.฀These฀increases฀are฀far฀greater฀than฀
the฀ increase฀ in฀ revenue.฀ A฀ lack฀ of฀ co-ordination฀ of฀ production฀ to฀ sales฀ has฀ created฀ a฀
substantial฀build฀up฀of฀finished฀goods฀in฀inventory.฀
(ii)฀ Interest฀ costs฀ and฀ other฀ operating฀ income฀ have฀ both฀ increased฀ substantially,฀ but฀
because฀debt฀and฀investments฀(respectively)฀are฀not฀shown฀on฀the฀statement฀of฀financial฀
position฀it฀is฀not฀possible฀to฀judge฀why฀these฀rises฀have฀taken฀place.฀One฀possibility฀is฀
that฀ the฀ increases฀ in฀ the฀ value฀ of฀ land฀ and฀ buildings฀ represent฀ additions฀ which฀ are฀
being฀rented฀out.฀
(iii)฀ Payables฀have฀increased฀only฀slightly฀considering฀the฀increases฀in฀purchases฀during฀the฀
year.฀ This฀ may฀ indicate฀ that฀ the฀ company's฀ trade฀ payables฀ are฀ taking฀ a฀ very฀ firm฀ line฀
with฀the฀company฀and฀thus฀the฀trade฀payables฀balance฀is฀being฀held฀firm.฀
(iv)฀ Although฀ shares฀ were฀ issued฀ during฀ the฀ year,฀ at฀ a฀ premium฀ of฀ 100%,฀ the฀ fact฀ that฀
appropriations฀ are฀ not฀ disclosed฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀makes฀it฀very฀difficult฀to฀determine฀what฀type฀of฀dividend฀policy฀
the฀ company฀ is฀ following,฀ and฀ hence฀ what฀ kind฀ of฀ return฀ shareholders฀ have฀ received฀
over฀the฀two฀years.฀
(v)฀ The฀length฀of฀credit฀period฀given฀to฀customers฀has฀increased฀(if฀all฀sales฀are฀on฀credit).฀
While฀trading฀conditions฀may฀make฀this฀slip฀in฀credit฀control฀a฀necessity,฀it฀is฀regrettable฀
that฀ the฀ company฀ cannot฀ obtain฀ the฀ same฀ more฀ relaxed฀ terms฀ from฀ its฀ suppliers;฀ this฀
would฀balance฀out฀working฀capital฀requirements,฀at฀least฀to฀some฀extent.฀
(vi)฀ The฀ inventory฀ situation฀ is฀ what฀ has฀ changed฀ most฀ dramatically฀ between฀ 20X4฀ and฀
20X5.฀The฀rise฀in฀position฀statement฀inventories฀of฀€฀30m฀may฀appear฀moderate,฀but฀it฀
represents฀a฀rise฀of฀€฀120m฀in฀finished฀goods฀and฀a฀fall฀of฀€฀90฀m฀in฀raw฀materials.฀It฀
may฀ be฀ the฀ case฀ that฀ the฀ company฀ is฀ manufacturing฀ less฀ and฀ buying฀ in฀ more฀ finished฀
goods,฀but฀the฀increase฀in฀labour฀costs฀would฀tend฀to฀negate฀this.฀It฀seems฀more฀likely฀
that฀ the฀ company฀ has฀ greatly฀ over-estimated฀ the฀ level฀ of฀ sales฀ for฀ 20X5,฀ and฀ has฀
therefore฀ended฀20X5฀with฀an฀anomalous฀inventory฀position.฀
(vii)฀ The฀cash฀levels฀held฀by฀the฀business,฀while฀perhaps฀on฀the฀high฀side฀at฀the฀beginning฀of฀
the฀year,฀now฀appear฀far฀too฀low.฀The฀company฀is฀verging฀on฀an฀overdraft฀situation,฀in฀
spite฀of฀receiving฀cash฀from฀a฀share฀issue฀during฀the฀year.฀The฀working฀capital฀situation,฀
and฀in฀particular฀the฀inventory฀levels,฀must฀be฀resolved฀in฀order฀to฀recover฀the฀liquidity฀
position฀of฀the฀business.฀If฀not,฀then฀there฀will฀be฀some฀difficulty฀in฀paying฀suppliers฀and฀
taxes฀in฀the฀near฀future.฀
(b)฀ A฀ direct฀ comparison฀ of฀ the฀ results฀ of฀ Tone฀ and฀ Hilde฀ GmbH฀ may฀ be฀ misleading฀ for฀ the฀
following฀reasons.฀
(i)฀ It฀ is฀ unlikely฀ that฀ the฀ two฀ companies฀ follow฀ the฀ same,฀ or฀ even฀ similar,฀ accounting฀
policies,฀ for฀ example฀ on฀ inventory฀ valuation,฀ depreciation,฀ valuation฀ of฀ land฀ and฀
buildings฀etc.฀Also,฀the฀general฀approach฀to฀receivables฀recoverability฀may฀be฀more฀or฀
less฀ prudent฀ in฀ the฀ UK฀ than฀ under฀ Tone's฀ approach.฀ These฀ policies฀ would฀ have฀ to฀ be฀
investigated฀to฀discover฀whether฀comparison฀is฀really฀feasible.฀
(ii)฀ Hilde฀GmbH's฀payables฀are฀not฀split฀between฀short฀and฀long฀term,฀ie฀those฀due฀within฀
one฀year฀and฀in฀more฀than฀one฀year฀(if฀any).฀Gearing฀ratios฀cannot฀be฀calculated,฀and฀
the฀current฀and฀quick฀ratios฀calculated฀in฀(a)฀are฀of฀limited฀value.฀
(iii)฀ There฀ may฀ be฀ local฀ or฀ country-specific฀ types฀ of฀ relationships฀ between฀ customers฀ and฀
suppliers฀which฀are฀different฀from฀the฀UK฀methods฀of฀doing฀business.฀
(iv)฀ There฀ is฀ an฀ interest฀ charge฀ shown฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀ income฀ but฀ the฀ statement฀ of฀ financial฀ position฀ shows฀ no฀ separate฀
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disclosure฀of฀loans.฀The฀explanation฀may฀be฀that฀an฀interest฀charge฀is฀payable฀on฀the฀
share฀capital฀in฀place฀of฀dividends.฀
(v)฀ A฀ legal฀ reserve฀ is฀ shown.฀ There฀ is฀ no฀ indication฀ of฀ what฀ type฀ of฀ reserve฀ this฀ may฀ be฀
comparable฀with฀(if฀any)฀in฀UK฀financial฀statements.฀
(vi)฀ The฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀does฀not฀show฀a฀figure฀
of฀gross฀profit฀making฀it฀difficult฀to฀compare฀margins.฀
(vii)฀ The฀expenses฀include฀valuation฀adjustments฀for฀depreciation฀and฀current฀assets.฀It฀is฀not฀
clear฀how฀these฀arise.฀They฀may฀simply฀comprise฀the฀normal฀depreciation฀charge฀and,฀
say,฀a฀provision฀against฀doubtful฀receivables฀and฀obsolete฀inventory.฀It฀is฀true฀of฀many฀
of฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀figures,฀that฀a฀lack฀of฀
knowledge฀ about฀ how,฀ say,฀ 'cost฀ of฀ sales'฀ is฀ computed,฀ prevents฀ comparison฀ with฀ UK฀
accounts.฀
(c)฀฀ Reporting฀ social฀ and฀ environmental฀ information฀ is฀ voluntary.฀ There฀ is฀ an฀ increasing฀ trend฀
towards฀ reporting฀ non-financial฀ information.฀ Companies฀ who฀ do฀ so฀ can฀ experience฀ the฀
following฀benefits:฀
 It฀ can฀ help฀ to฀ demonstrate฀ elements฀ of฀ management฀ strategy฀ to฀ important฀ external฀
stakeholders,฀ and฀ help฀ to฀ avoid฀ adverse฀ political฀ or฀ media฀ pressure฀ to฀ 'do฀ the฀ right฀
thing'..฀฀
 It฀ can฀ strengthen฀ stakeholder฀ relations฀ and฀ create฀ a฀ positive฀ reputation฀ amongst฀
stakeholder฀groups.฀
 The฀ company฀ will฀ receive฀ public฀ recognition฀ for฀ corporate฀ accountability฀ and฀
responsibility.฀
 Target฀ setting฀ and฀ external฀ reporting฀ drives฀ continual฀ environmental฀ and฀ social฀
improvement฀ and฀ may฀ help฀ keep฀ the฀ company฀ ahead฀ of฀ the฀ curve฀ when฀ it฀ comes฀ to฀
environmental฀matters..฀
 Effective฀self-regulation฀minimises฀risk฀of฀regulatory฀intervention฀and฀can฀ensure฀that฀if฀for฀
example฀the฀government฀made฀cutting฀emissions฀mandatory,฀the฀company฀would฀be฀well฀
placed฀to฀demonstrate฀commitment฀to฀this.฀
 It฀ may฀ improve฀ access฀ to฀ lists฀ of฀ 'preferred฀ suppliers'฀ of฀ buyers฀ with฀ green฀ procurement฀
policies.฀
The฀benefits฀should฀however฀always฀be฀weighed฀up฀against฀the฀additional฀costs฀of฀preparing฀the฀
information฀ and฀ the฀ potential฀ loss฀ of฀ competitive฀ advantage฀ that฀ can฀ come฀ from฀ additional฀
disclosure.฀
22฀Peter฀Holdings฀
Divisional฀performance฀should฀be฀measured,฀in฀the฀interests฀of฀the฀group's฀shareholders,฀in฀such฀
a฀ way฀ as฀ to฀ indicate฀ what฀ sort฀ of฀ return฀ each฀ subsidiary฀ is฀ making฀ on฀ the฀ shareholder's฀
investment.฀Shareholders฀themselves฀are฀likely฀to฀be฀interested฀in฀the฀performance฀of฀the฀group฀as฀
a฀ whole,฀ measured฀ in฀ terms฀ of฀ return฀ on฀ shareholders'฀ capital,฀ earnings฀ per฀ share,฀ dividend฀ yield,฀
and฀growth฀in฀earnings฀and฀dividends.฀These฀performance฀ratios฀cannot฀be฀used฀for฀subsidiaries฀in฀
the฀ group,฀ and฀ so฀ an฀ alternative฀ measure฀ has฀ to฀ be฀ selected,฀ which฀ compares฀ the฀ return฀ from฀ the฀
subsidiary฀with฀the฀value฀of฀the฀investment฀in฀the฀subsidiary.฀
Two฀performance฀measures฀could฀be฀used.฀Both฀would฀provide฀a฀suitable฀indication฀of฀performance฀
from฀the฀point฀of฀view฀of฀the฀group's฀shareholders.฀
(a)฀ Return฀on฀capital฀employed,฀which฀from฀the฀shareholders'฀point฀of฀view฀would฀be:฀
Profit฀after฀interest
Net฀assets฀at฀current฀valuation฀minus฀non - current฀liabilities฀(eg฀฀long - term฀borrowings)
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(b)฀ Alternatively,฀residual฀income฀could฀be฀used.฀This฀might฀be:฀
฀ Profit฀after฀debt฀interest฀
Minus฀ A฀notional฀interest฀charge฀on฀the฀value฀of฀assets฀financed฀by฀shareholders'฀capital฀
Equals฀ Residual฀income.฀
Residual฀income฀might฀be฀measured฀instead฀as:฀
฀ Profit฀before฀interest฀(controllable฀by฀the฀subsidiary's฀management)฀
Minus฀ A฀notional฀interest฀charge฀on฀the฀controllable฀investments฀of฀the฀subsidiary฀
Equals฀ Residual฀income.฀
Each฀ subsidiary฀ would฀ be฀ able฀ to฀ increase฀ its฀ residual฀ income฀ if฀ it฀ earned฀ an฀ incremental฀ profit฀ in฀
excess฀of฀the฀notional฀interest฀charges฀on฀its฀incremental฀investments฀–฀ie฀in฀effect,฀if฀it฀added฀to฀the฀
value฀of฀the฀group's฀equity.฀
23฀Jay฀
Marking฀scheme฀
(a)฀ Inventory฀ ฀4฀
฀ Investment฀property฀ 4฀
฀ ฀
(b)฀ Corporate฀citizenship:฀ ฀
฀฀ Corporate฀governance฀ ฀ 2฀
฀฀ Ethics฀ ฀ ฀ 2฀
฀฀ Employee฀reports฀ ฀ 2฀
฀฀ Environment฀ ฀฀฀1฀
฀Maximum ฀15฀
(a)฀ The฀initial฀transaction฀of฀the฀purchase฀of฀goods฀from฀the฀foreign฀supplier฀would฀be฀recorded฀
in฀ the฀ ledger฀ accounts฀ at฀ $5฀ million฀ (€8/1.6).฀ Both฀ the฀ purchase฀ and฀ the฀ payables฀
balance฀ would฀ be฀ recorded฀ at฀ this฀ amount.฀ At฀ the฀ year฀ end฀ the฀ payables฀ balance฀ is฀
restated฀ to฀ the฀ closing฀ rate฀ as฀ it฀ is฀ a฀ monetary฀ liability,฀ but฀ the฀ inventories฀ are฀ non-
monetary฀ and฀ therefore฀ remain฀ at฀ $5฀ million.฀ Therefore฀ the฀ payable฀ is฀ restated฀ to฀ $6.2฀
million฀(€8m/1.3)฀and฀an฀exchange฀loss฀is฀taken฀to฀profit฀or฀loss฀of฀$1.2฀million฀($6.2m฀–฀
5m).฀
On฀ the฀ sale,฀ the฀ original฀ transaction฀ is฀ recorded฀ at฀ $2.5฀ million฀ (€4m/1.6)฀ as฀ both฀ a฀ sale฀
and฀ a฀ receivable.฀ When฀ payment฀ is฀ made฀ the฀ amount฀ actually฀ received฀ is฀ $3.1฀ million฀
(€4m/1.3)฀ and฀ an฀ exchange฀ gain฀ is฀ recognised฀ in฀ profit฀ or฀ loss฀ of฀ $0.6฀ million฀ ($3.1฀ –฀
2.5m).฀฀
When฀ the฀ investment฀ property฀ was฀ first฀ purchased฀ it฀ should฀ have฀ been฀ recognised฀ in฀ the฀
statement฀ of฀ financial฀ position฀ at฀ $20฀ million฀ (€28m/1.4).฀ At฀ the฀ year฀ end฀ the฀ investment฀
property฀ has฀ fallen฀ in฀ value฀ to฀ €24฀ million฀ and฀ the฀ exchange฀ rate฀ has฀ changed฀ to฀ 1.3.฀
Therefore฀at฀31฀May฀20X6฀the฀property฀would฀be฀valued฀at฀$18.5฀million฀(€24m/1.3).฀฀
The฀fall฀in฀value฀of฀$1.5฀million฀($20฀–฀18.5m)฀is฀recognised฀in฀profit฀or฀loss.฀The฀loss฀is฀
a฀ mixture฀ of฀ a฀ fall฀ in฀ value฀ of฀ the฀ property฀ and฀ a฀ gain฀ due฀ to฀ the฀ exchange฀ rate฀ movement.฀
However,฀ as฀ the฀ investment฀ property฀ is฀ a฀ non-monetary฀ asset฀ the฀ foreign฀ currency฀
element฀is฀not฀recognised฀separately.฀
(b) Nature฀of฀corporate฀citizenship฀
Increasingly฀businesses฀are฀expected฀to฀be฀socially฀responsible฀as฀well฀as฀profitable.฀
Strategic฀ decisions฀ by฀ businesses,฀ particularly฀ global฀ businesses฀ nearly฀ always฀ have฀ wider฀
social฀consequences.฀It฀could฀be฀argued,฀as฀Henry฀Mintzburg฀does,฀that฀a฀company฀produces฀
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two฀ outputs:฀ goods฀ and฀ services,฀ and฀ the฀ social฀ consequences฀ of฀ its฀ activities,฀ such฀ as฀
pollution.฀
One฀major฀development฀in฀the฀area฀of฀corporate฀citizenship฀is฀the฀environmental฀report.฀
While฀ this฀ is฀ not฀ a฀ legal฀ requirement,฀ a฀ large฀ number฀ of฀ major฀ companies฀ produce฀ them.฀
Worldwide฀ there฀ are฀ around฀ 20฀ award฀ schemes฀ for฀ environmental฀ reporting,฀ notably฀ the฀
ACCA's.฀
Jay฀ might฀ be฀ advised฀ to฀ adopt฀ the฀ guidelines฀ on฀ sustainability฀ given฀ in฀ the฀ Global฀
Reporting฀ Initiative.฀ These฀ guidelines฀ cover฀ a฀ number฀ of฀ areas฀ (economic,฀ environmental฀
and฀ social).฀ The฀ GRI฀ specifies฀ key฀ performance฀ indicators฀ for฀ each฀ area.฀ For฀ environmental฀
reporting,฀the฀indicators฀are:฀
(i)฀ Energy฀
(ii)฀ Water฀
(iii)฀ Biodiversity฀
(iv)฀ Emissions฀
(v)฀ Energy฀and฀waste฀
(vi)฀ Products฀and฀services฀
(vii)฀ Compliance฀
(viii)฀ Transport฀
Another฀ environmental฀ issue฀ which฀ the฀ company฀ could฀ consider฀ is฀ emission฀ levels฀ from฀
factories.฀Many฀companies฀now฀include฀details฀of฀this฀in฀their฀environmental฀report.฀
The฀other฀main฀aspect฀of฀corporate฀citizenship฀where฀Jay฀scores฀highly฀is฀in฀its฀treatment฀of฀
its฀ workforce.฀ The฀ company฀ sees฀ the฀ workforce฀ as฀ the฀ key฀ factor฀ in฀ the฀ growth฀ of฀ its฀
business.฀ The฀ car฀ industry฀ had฀ a฀ reputation฀ in฀ the฀ past฀ for฀ restrictive฀ practices,฀ and฀ the฀
annual฀report฀could฀usefully฀discuss฀the฀extent฀to฀which฀these฀have฀been฀eliminated.฀
Employees฀of฀a฀businesses฀are฀stakeholders฀in฀that฀business,฀along฀with฀shareholders฀and฀
customers.฀ A฀ company฀ wishing฀ to฀ demonstrate฀ good฀ corporate฀ citizenship฀ will฀ therefore฀ be฀
concerned฀ with฀ employee฀ welfare.฀ Accordingly,฀ the฀ annual฀ report฀ might฀ usefully฀ contain฀
information฀on฀details฀of฀working฀hours,฀industrial฀accidents฀and฀sickness฀of฀employees.฀
In฀ conclusion,฀ it฀ can฀ be฀ seen฀ that฀ the฀ annual฀ report฀ can,฀ and฀ should฀ go฀ far฀ beyond฀ the฀
financial฀statements฀and฀traditional฀ratio฀analysis.฀
24฀Small฀and฀medium-sized฀entities฀
(a)฀ Advantages฀
Although฀ International฀ Financial฀ Reporting฀ Standards฀ (IFRSs)฀ issued฀ by฀ the฀ International฀
Accounting฀ Standards฀ Board฀ (IASB)฀ were฀ originally฀ designed฀ to฀ be฀ suitable฀ for฀ all฀ types฀ of฀
entity,฀ in฀ recent฀ years฀ IFRSs฀ have฀ come฀ increasingly฀ complex.฀ They฀ are฀ now฀ designed฀
primarily฀ to฀ meet฀ the฀ information฀ needs฀ of฀ institutional฀ investors฀ in฀ large฀ listed฀
entities.฀
Shareholders฀ of฀ SMEs฀ are฀ often฀ also฀ directors.฀ Therefore,฀ through฀ managing฀ the฀
company฀ and฀ maintaining฀ the฀ financial฀ records,฀ they฀ are฀ already฀ aware฀ of฀ the฀ company's฀
financial฀ performance฀ and฀ position฀ and฀ so฀ do฀ not฀ need฀ the฀ level฀ of฀ detail฀ in฀ financial฀
statements฀required฀by฀external฀institutional฀investors฀of฀larger฀companies.฀
The฀main฀external฀users฀of฀SMEs฀tend฀to฀be฀lenders,฀trade฀suppliers฀and฀the฀tax฀
authorities.฀They฀have฀different฀needs฀from฀institutional฀investors฀and฀are฀more฀likely฀to฀
focus฀on฀shorter-term฀cash฀flows,฀liquidity฀and฀solvency.฀
Full฀ IFRSs฀ cover฀ a฀ wide฀ range฀ of฀ issues,฀ contain฀ a฀ sizeable฀ amount฀ of฀ implementation฀
guidance฀ and฀ include฀ disclosure฀ requirements฀ appropriate฀ for฀ public฀ companies.฀ This฀ can฀
make฀them฀too฀complex฀for฀users฀of฀SMEs฀to฀understand.฀
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Many฀SMEs฀feel฀that฀following฀full฀IFRSs฀places฀an฀unacceptable฀burden฀on฀preparers฀of฀SME฀
accounts฀ –฀ a฀ burden฀ that฀ has฀ been฀ growing฀ as฀ IFRSs฀ become฀ more฀ detailed฀ and฀ more฀
countries฀ adopt฀ them.฀ The฀ cost฀ of฀ following฀ full฀ IFRSs฀ often฀ appears฀ to฀ outweigh฀
the฀benefits.฀
The฀ disclosure฀ requirements฀ of฀ full฀ IFRSs฀ are฀ very฀ extensive฀ and฀ as฀ such,฀ can฀ result฀ in฀
information฀ overload฀ for฀ the฀ users฀ of฀ SME฀ accounts,฀ reducing฀ the฀ understandability฀ of฀
Some฀ IFRSs฀ still฀ offer฀ choice฀ of฀ accounting฀ treatments,฀ leading฀ to฀ lack฀ of฀
comparability฀between฀different฀companies฀adopting฀different฀accounting฀standards.฀
Disadvantages฀
If฀ SMEs฀ follow฀ their฀ own฀ simplified฀ IFRSs,฀ their฀ accounts฀ are฀ no฀ longer฀ be฀ comparable฀
with฀larger฀companies฀following฀full฀IFRSs฀or฀with฀SMEs฀choosing฀to฀follow฀full฀IFRSs.฀This฀may฀
make฀it฀harder฀to฀attract฀investors.฀
The฀ changeover฀ from฀ full฀ IFRSs฀ to฀ the฀ simplified฀ IFRS฀ for฀ SMEs,฀ will฀ require฀ training฀ and฀
possible฀changes฀in฀systems.฀This฀will฀place฀both฀a฀time฀and฀cost฀burden฀on฀the฀company.฀
Full฀IFRSs฀are฀now฀well฀established฀and฀respected฀and฀act฀as฀a฀form฀of฀quality฀control฀on฀
financial฀ statements฀ which฀ comply฀ with฀ them.฀ It฀ could฀ be฀ argued฀ therefore฀ that฀ financial฀
statements฀ which฀ no฀ longer฀ comply฀ with฀ full฀ IFRSs฀ will฀ lose฀ their฀ credibility.฀ This฀ is฀ often฀
called฀the฀'Big฀GAAP,฀Little฀GAAP฀divide'.฀
The฀ IFRS฀ for฀ SMEs฀ reduce฀ disclosures฀ required฀ by฀ full฀ IFRSs฀ substantially.฀ Omission฀ of฀
certain฀key฀information฀might฀actually฀make฀the฀financial฀statements฀harder฀to฀understand.฀
Conclusion฀
The฀ IASB฀ believes฀ that฀ the฀ advantages฀ for฀ SMEs฀of฀ having฀ a฀ separate฀ simplified฀ set฀ of฀ IFRSs฀
outweigh฀the฀disadvantages.฀They฀believe฀that฀both฀preparers฀and฀users฀of฀SME฀accounts฀will฀
benefit.฀
(b)฀ Examples฀of฀full฀IFRSs฀with฀choice฀
(i)฀ Under฀ IAS฀ 40฀ Investment฀ property,฀ either฀ the฀ cost฀ model฀ or฀ fair฀ value฀ model฀ (through฀
profit฀ or฀ loss)฀ are฀ permitted.฀ The฀ IFRS฀ for฀ SMEs฀ requires฀ the฀ fair฀ value฀ model฀ (through฀
profit฀ or฀ loss)฀ to฀ be฀ used฀ as฀ long฀ as฀ fair฀ value฀ can฀ be฀ measure฀ without฀ undue฀ cost฀ or฀
effort.฀This฀promotes฀consistency฀in฀the฀treatment฀of฀investment฀properties฀between฀SMEs฀
(ii)฀ IAS฀38฀Intangible฀assets฀allows฀either฀the฀cost฀model฀or฀revaluation฀model฀(where฀there฀
is฀ an฀ active฀ market).฀ The฀ IFRS฀ for฀ SMEs฀ does฀ not฀ permit฀ the฀ revaluation฀ model฀ to฀ be฀
used.฀ This฀ eliminates฀ the฀ use฀ of฀ other฀ comprehensive฀ income,฀ simplifying฀ financial฀
reporting฀and฀the฀need฀for฀costly฀revaluations.฀
(iii)฀ IFRS฀ 3฀ Business฀ combinations฀ allows฀ an฀ entity฀ to฀ adopt฀ the฀ full฀ or฀ partial฀ goodwill฀
method฀ in฀ its฀ consolidated฀ financial฀ statements.฀ The฀ IFRS฀ for฀ SMEs฀ only฀ allows฀ the฀
partial฀ goodwill฀ method,฀ ie฀ excluding฀ non-controlling฀ interests฀ in฀ goodwill.฀ This฀ avoids฀
the฀ need฀ for฀ SMEs฀ to฀ determine฀ the฀ fair฀ value฀ of฀ the฀ non-controlling฀ interests฀ not฀
purchased฀when฀undertaking฀a฀business฀combination.฀
The฀ IFRS฀ for฀ SMEs฀ does฀ not฀ eliminate฀ choice฀ completely฀ but฀ disallows฀ the฀ third฀ of฀ the฀
above฀options.฀It฀is฀one฀of฀the฀rare฀uses฀of฀other฀comprehensive฀income฀under฀the฀IFRS฀
for฀SMEs.฀
Examples฀of฀IFRSs฀with฀complex฀recognition฀and฀measurement฀requirements฀
(iv)฀ IAS฀38฀Intangible฀assets฀requires฀internally฀generated฀assets฀to฀be฀capitalised฀if฀certain฀
criteria฀(proving฀future฀economic฀benefits)฀are฀met.฀In฀reality,฀it฀is฀an฀onerous฀exercise฀to฀
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test฀these฀criteria฀for฀each฀type฀of฀internally฀generated฀asset฀and฀leads฀to฀inconsistency฀
with฀some฀items฀being฀expensed฀and฀some฀capitalised.฀
The฀ IFRS฀ for฀ SMEs฀ removes฀ these฀ capitalisation฀ criteria฀ and฀ requires฀ all฀ internally฀
generated฀research฀and฀development฀expenditure฀to฀be฀expensed฀through฀profit฀or฀loss.฀
(v)฀ IFRS฀3฀Business฀combinations฀requires฀goodwill฀to฀be฀tested฀annually฀for฀impairment.฀In฀
reality,฀it฀is฀very฀difficult฀to฀ascertain฀the฀recoverable฀amount฀for฀goodwill฀so฀instead฀the฀
assets฀of฀the฀business฀need฀to฀be฀combined฀into฀cash-generating฀units฀or฀even฀a฀group฀
of฀cash-generating฀units฀in฀order฀to฀determine฀any฀impairment฀loss.฀The฀impairment฀then฀
needs฀ to฀ be฀ allocated฀ to฀ goodwill฀ and฀ the฀ other฀ individual฀ assets.฀ This฀ is฀ a฀ complex฀
exercise.฀
The฀ IFRS฀ for฀ SMEs฀ requires฀ goodwill฀ to฀ be฀ amortised฀ instead.฀ This฀ is฀ a฀ much฀ simpler฀
approach฀and฀the฀IFRS฀for฀SMEs฀specifies฀that฀if฀an฀entity฀is฀unable฀to฀make฀a฀reliable฀
estimate฀of฀the฀useful฀life,฀it฀is฀presumed฀to฀be฀ten฀years,฀simplifying฀things฀even฀further.฀
(vi)฀ IAS฀ 20฀ Accounting฀ for฀ government฀ grants฀ and฀ disclosure฀ of฀ government฀ assistance฀
requires฀ grants฀ to฀ be฀ recognised฀ only฀ when฀ it฀ is฀ reasonably฀ certain฀ that฀ the฀ entity฀ will฀
comply฀with฀the฀conditions฀attached฀to฀the฀grant฀and฀the฀grants฀will฀be฀received.฀Grants฀
relating฀to฀income฀are฀recognised฀in฀profit฀or฀loss฀over฀the฀period฀the฀related฀costs฀are฀
recognised฀in฀profit฀or฀loss.฀Grants฀relating฀to฀assets฀are฀either฀netted฀off฀the฀cost฀of฀the฀
asset฀ (reducing฀ depreciation฀ by฀ the฀ amount฀ of฀ the฀ grant฀ over฀ the฀ asset's฀ useful฀ life)฀ or฀
presented฀as฀deferred฀income฀(and฀released฀to฀profit฀or฀loss฀as฀income฀over฀the฀useful฀
life฀of฀the฀asset).฀
The฀IFRS฀for฀SMEs฀simplifies฀this฀and฀specifies฀that฀where฀there฀are฀no฀specified฀future฀
performance฀ conditions,฀ the฀ grant฀ should฀ be฀ recognised฀ as฀ income฀ when฀ it฀ is฀
receivable.฀ Otherwise,฀ it฀ should฀ be฀ recognised฀ as฀ income฀ when฀ the฀ performance฀
conditions฀ are฀ met.฀ This฀ is฀ more฀ consistent฀ with฀ the฀ IASB฀ Framework's฀ definition฀ of฀
income฀than฀the฀IAS฀20฀approach.฀
(vii)฀ IAS฀23฀Borrowing฀costs฀requires฀borrowing฀costs฀to฀be฀capitalised฀for฀qualifying฀assets฀
for฀ the฀ period฀ of฀ construction.฀ This฀ involves฀ a฀ complex฀ calculation฀ particularly฀ where฀
funds฀are฀borrowed฀generally฀as฀a฀weighted฀average฀rate฀on฀loans฀outstanding฀has฀to฀
be฀calculated฀in฀order฀to฀determine฀the฀amount฀of฀interest฀to฀be฀capitalised.฀
The฀IFRS฀for฀SMEs฀requires฀borrowing฀costs฀to฀be฀expensed,฀removing฀the฀need฀for฀such฀
a฀complex฀calculation.฀
(viii)฀ IAS฀ 36฀ Impairment฀ of฀ assets฀ requires฀ annual฀ impairment฀ tests฀ for฀ indefinite฀ life฀
intangibles,฀intangibles฀not฀yet฀available฀for฀use฀and฀goodwill.฀This฀is฀a฀complex,฀time-
consuming฀and฀expensive฀test.฀
The฀ IFRS฀ for฀ SMEs฀ only฀ requires฀ impairment฀ tests฀ where฀ there฀ are฀ indicators฀ of฀
impairment.฀
The฀ full฀ IFRS฀ requires฀ impairment฀ losses฀ to฀ be฀ charged฀ firstly฀ to฀ other฀ comprehensive฀ income฀
for฀revalued฀assets฀then฀to฀profit฀or฀loss.฀The฀IFRS฀for฀SMEs฀requires฀all฀impairment฀losses฀to฀be฀
recognised฀in฀profit฀or฀loss,฀given฀that฀tangible฀and฀intangible฀assets฀cannot฀be฀revalued฀under฀
the฀IFRS฀for฀SMEs.฀
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25฀ Taupe฀
(a)฀ ฀ REPORT฀
To:฀ Investor฀฀
From:฀฀ Accountant฀
Date:฀ November฀20X5฀
Subject:฀฀ Segment฀analysis฀of฀Taupe
I฀have฀looked฀at฀the฀segment฀analysis฀note฀from฀Taupe's฀financial฀statements฀and฀have฀made฀
the฀ following฀ analysis฀ of฀ the฀ figures฀ shown฀ which฀ may฀ be฀ of฀ use฀ to฀ you.฀ The฀ detailed฀
calculations฀ upon฀ which฀ this฀ analysis฀ has฀ been฀ based฀ are฀ included฀ in฀ the฀ appendix฀ to฀ this฀
report.฀฀
From฀the฀segment฀analysis฀we฀can฀add฀more฀information฀to฀our฀overview฀of฀the฀results฀of฀the฀
organisation.฀฀
Profit฀margin฀
The฀overall฀profit฀margin฀of฀the฀group฀has฀increased฀slightly฀from฀24%฀in฀20X4฀to฀
25%฀in฀20X5.฀We฀can฀also฀see฀that฀this฀is฀nothing฀to฀do฀with฀road฀haulage฀as฀its฀profit฀
margin฀has฀stayed฀the฀same฀but฀is฀in฀fact฀due฀to฀a฀2%฀increase฀from฀31%฀to฀33%฀for฀airfreight฀
and฀the฀change฀from฀an฀operating฀loss฀in฀20X4฀of฀25%฀for฀the฀new฀secure฀transport฀business฀
to฀an฀operating฀profit฀in฀20X5฀of฀6%.฀฀
ROCE฀
Similarly฀ with฀ return฀ on฀ capital฀ employed฀ the฀ overall฀ figure฀ is฀ an฀ increase฀ from฀ 27%฀ in฀
20X4฀ in฀ 29%฀ in฀ 20X5.฀ However,฀ this฀ is฀ solely฀ due฀ to฀ the฀ performance฀ of฀ the฀ secure฀
transport฀activities.฀Road฀haulage฀shows฀a฀slight฀decrease฀in฀ROCE฀but฀air฀freight฀shows฀a฀
decrease฀from฀57%฀to฀52%.฀฀
Summary฀
Although฀the฀figures฀for฀the฀secure฀transport฀business฀are฀still฀small฀with฀low฀profit฀margins฀it฀is฀
clearly฀ improving฀ as฀ the฀ investment฀ in฀ the฀ infrastructure฀ starts฀ to฀ feed฀ through฀ to฀ the฀ profits.฀
However฀for฀the฀other฀two฀divisions฀the฀position฀is฀either฀only฀slightly฀better฀than฀last฀year฀or฀
worse.฀฀
I฀hope฀that฀this฀additional฀information฀has฀been฀of฀use฀to฀you.฀
APPENDIX฀
Key฀Ratios฀
฀ 20X5฀ 20X4
Profit฀margin฀฀ ฀
Road฀haulage฀ 169/653 26%฀ ฀
฀ 168/642 26%
Air฀freight฀ 68/208 33%฀ ฀
฀ 62/199 31%
Secure฀transport฀ 6/98 6%฀ ฀
฀ (16)/63 -25%
Group฀฀ 243/959 25%฀ ฀
฀ 214/904 24%
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฀ 20X5฀ 20X4
Return฀on฀capital฀employed฀฀ ฀
Road฀haulage฀฀ 169/(805฀– 345) 37%฀ ฀
฀ 168/(796฀– 349) 38%
Air฀freight฀฀ 68/(306฀– 176) 52%฀ ฀
฀ 62/(287฀– 178) 57%
Secure฀transport 6/(437฀– 197) 2.5%฀ ฀
฀ (16)/(422฀– 184) -6.7%
Group฀฀ 243/(1,548฀– 718) 29%฀ ฀
฀ 214/(1,505฀– 711) 27%
Note.฀ When฀ the฀ group฀ ratios฀ were฀ calculated฀ the฀ figures฀ did฀ not฀ include฀ unallocated฀
expenses฀ or฀ assets/liabilities฀ in฀ order฀ to฀ be฀ able฀ to฀ compare฀ directly฀ with฀ the฀ segmental฀
figures.฀
(b)฀ Even฀ though฀ segment฀ reporting฀ can฀ be฀ very฀ useful฀ to฀ investors฀ it฀ does฀ also฀ have฀ some฀
limitations.฀฀
Defining฀segments฀฀
IFRS฀8฀Operating฀segments฀does฀not฀define฀segment฀revenue฀and฀expense,฀segment฀results฀or฀
segment฀assets฀and฀liabilities.฀It฀does,฀however,฀require฀an฀explanation฀of฀how฀segment฀profit฀
or฀loss,฀segment฀assets฀and฀segment฀liabilities฀are฀measured฀for฀each฀operating฀segment.฀
IFRS฀ 8฀ requires฀ operating฀ segments฀ to฀ be฀ identified฀ on฀ the฀ basis฀ of฀ internal฀ reports฀ about฀
components฀of฀the฀entity฀that฀are฀regularly฀reviewed฀by฀the฀chief฀operating฀decision฀maker฀in฀
order฀to฀allocate฀resources฀to฀the฀segment฀or฀assess฀performance.฀
Consequently,฀entities฀have฀discretion฀in฀determining฀what฀is฀included฀under฀segment฀results,฀
which฀is฀limited฀only฀by฀their฀reporting฀practices.฀
Although฀ this฀ should฀ mean฀ that฀ the฀ analysis฀ is฀ comparable฀ over฀ time,฀ it฀ is฀ unlikely฀ to฀ be฀
comparable฀with฀that฀of฀another฀business.฀
Common฀costs฀฀
In฀many฀cases฀it฀will฀not฀be฀possible฀to฀allocate฀an฀expense฀to฀a฀segment฀and฀therefore฀they฀
will฀be฀shown฀as฀unallocated฀expenses฀as฀in฀Taupe's฀segmental฀analysis.฀If฀these฀unallocated฀
costs฀ are฀ material฀ it฀ can฀ distort฀ the฀ segment฀ results฀ and฀ make฀ comparison฀ with฀ the฀ overall฀
group฀results฀misleading.฀Also฀if฀costs฀are฀allocated฀to฀segments฀on฀an฀arbitrary฀basis฀then฀this฀
can฀distort฀the฀segment฀results.฀฀
Unallocated฀assets/liabilities฀฀
In฀a฀similar฀way฀to฀common฀costs฀it฀may฀be฀that฀some฀of฀the฀entity's฀assets฀and/or฀liabilities฀
cannot฀ be฀ allocated฀ to฀ a฀ particular฀ segment฀ and฀ must฀ be฀ shown฀ as฀ unallocated฀
assets/liabilities฀as฀in฀Taupe.฀Again฀this฀can฀make฀the฀results฀and฀comparisons฀misleading.฀฀
Finance฀costs฀
Finance฀is฀normally฀raised฀centrally฀and฀allocated฀to฀divisions฀as฀required฀therefore฀the฀normal฀
treatment฀for฀finance฀costs฀is฀to฀show฀them฀as฀an฀unallocated฀expense.฀However฀if฀some฀areas฀
of฀ the฀ business฀ rely฀ more฀ heavily฀ on฀ debt฀ finance฀ than฀ others฀ then฀ this฀ exclusion฀ of฀ finance฀
costs฀could฀be฀misleading.฀฀
Tax฀costs฀฀
As฀with฀finance฀costs฀the฀effects฀of฀tax฀are฀normally฀shown฀as฀a฀total฀rather฀than฀split฀between฀
the฀segments.฀If฀however฀a฀segment฀had฀a฀significantly฀different฀tax฀profile฀to฀other฀segments฀
again฀this฀information฀would฀be฀lost.฀฀
฀ ฀
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(c)฀ In฀ March฀ 2017,฀ the฀ IASB฀ published฀ an฀ exposure฀ draft฀ Improvements฀ to฀ IFRS฀ 8฀ Operating฀
฀ Segments฀ (Proposed฀ amendments฀ to฀ IFRS฀ 8฀ and฀ IAS฀ 34).฀ This฀ was฀ driven฀ by฀ an฀
฀ implementation฀ review,฀ which฀ concluded฀ that,฀ while฀ IFRS฀ 8฀ was฀ working฀ satisfactorily฀ in฀
฀ general,฀certain฀improvements฀were฀needed.฀฀
(i)฀ Description฀ of฀ the฀ chief฀ operating฀ decision฀ maker.฀ The฀ IASB฀ proposes฀ to฀
clarify฀IFRS฀8฀by:฀
฀ Stressing฀ that฀ the฀ chief฀ operating฀ decision฀ maker฀ is฀ the฀ function฀ that฀ makes฀
operating฀ decisions฀ and฀ decisions฀ about฀ allocating฀ resources฀ to฀ operating฀
segments฀and฀assesses฀their฀performance;฀
฀ Noting฀that฀the฀chief฀operating฀decision฀maker฀can฀be฀an฀individual฀or฀a฀group;฀
฀ Stating฀that฀a฀group฀identified฀as฀a฀chief฀operating฀decision฀maker฀can฀have฀non-
executive฀members;฀and฀
฀฀ Requiring฀ that฀ an฀ entity฀ discloses฀ the฀ title฀ and฀ description฀ of฀ the฀ role฀ of฀ the฀
individual฀or฀the฀group฀identified฀as฀the฀chief฀operating฀decision฀maker.฀
(ii)฀ Identification฀ of฀ reportable฀ segments.฀ Proposed฀ amendments฀ to฀ IFRS฀ 8฀

regarding฀this฀issue฀include:฀
฀ Requiring฀that฀an฀explanation฀of฀the฀reasons฀is฀disclosed฀if฀segments฀identified฀in฀
the฀ financial฀ statements฀ differ฀ from฀ segments฀ identified฀ in฀ other฀ parts฀ of฀ the฀
entity's฀reporting;฀and฀
฀฀ adding฀further฀examples฀to฀the฀aggregation฀criteria฀for฀operating฀segments฀with฀
similar฀economic฀characteristics.฀
(iii)฀฀฀ Additional฀segment฀information.฀The฀IASB฀believes฀that฀IFRS฀8฀should฀be฀clarified฀
by:฀
฀ noting฀ that฀ under฀ certain฀ circumstances฀ an฀ entity฀ may฀ disclose฀ segment฀
information฀that฀goes฀beyond฀the฀information฀regularly฀provided฀to฀and฀reviewed฀
by฀the฀chief฀operating฀decision฀maker.฀
(iv)฀฀ Description฀of฀reconciling฀items.฀Regarding฀this฀issue฀IFRS฀8฀would฀be฀amended฀
by:฀
฀ clarifying฀ that฀ sufficiently฀ detailed฀ explanations฀ are฀ required฀ for฀ the฀ reconciling฀
items฀so฀that฀users฀can฀understand฀their฀nature.฀
(v)฀฀ Change฀ in฀ the฀ composition฀ of฀ an฀ entity's฀ reportable฀ segments.฀ This฀
proposed฀ amendment฀ affects฀ IAS฀ 34฀ where฀ the฀ IASB฀ suggests฀ requiring฀ that฀ the฀ first฀
interim฀report฀after฀a฀change฀in฀the฀composition฀of฀an฀entity's฀reportable฀segments฀must฀
contain฀restated฀segment฀information฀for฀all฀interim฀periods฀presented฀
฀
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Glossary฀
Glossary฀
Chapter฀1฀The฀financial฀reporting฀framework฀
฀ Contract฀–฀An฀agreement฀between฀two฀or฀more฀parties฀that฀creates฀enforceable฀rights฀and฀
obligations.฀
฀ Contract฀asset฀–฀An฀entity's฀right฀to฀consideration฀in฀exchange฀for฀goods฀or฀services฀that฀the฀entity฀
has฀transferred฀to฀a฀customer฀when฀that฀right฀is฀conditioned฀on฀something฀other฀than฀the฀passage฀of฀
time฀(for฀example฀the฀entity's฀future฀performance).฀
฀ Contract฀liability฀–฀An฀entity's฀obligation฀to฀transfer฀goods฀or฀services฀to฀a฀customer฀for฀which฀the฀
entity฀has฀received฀consideration฀(or฀the฀amount฀is฀due)฀from฀the฀customer.฀
฀ Customer฀–฀A฀party฀that฀has฀contracted฀with฀an฀entity฀to฀obtain฀goods฀or฀services฀that฀are฀an฀output฀
of฀the฀entity's฀ordinary฀activities฀in฀exchange฀for฀consideration.฀
฀ Income฀–฀Increases฀in฀economic฀benefits฀during฀the฀accounting฀period฀in฀the฀form฀of฀inflows฀or฀
enhancements฀of฀assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀an฀increase฀in฀equity,฀other฀than฀those฀
relating฀to฀contributions฀from฀equity฀participants.฀
฀ Interim฀financial฀report฀(IAS฀34)฀
A฀financial฀report฀containing฀either฀a฀complete฀ set฀of฀financial฀statements฀(as฀described฀in฀IAS฀1)฀
or฀a฀set฀of฀condensed฀financial฀statements฀(as฀described฀in฀IAS฀34)฀for฀an฀interim฀period.฀
฀ Performance฀obligation฀–฀A฀promise฀in฀a฀contract฀with฀a฀customer฀to฀transfer฀to฀the฀customer฀
either:฀฀
(a)฀฀ A฀good฀or฀service฀(or฀a฀bundle฀of฀goods฀or฀services)฀that฀is฀distinct;฀or฀
(b)฀฀ A฀series฀of฀distinct฀goods฀or฀services฀that฀are฀substantially฀the฀same฀and฀that฀have฀the฀same฀
pattern฀of฀transfer฀to฀the฀customer.฀
฀ Revenue฀–฀Income฀arising฀in฀the฀course฀of฀an฀entity's฀ordinary฀activities.฀
฀ Receivable฀–฀An฀entity's฀right฀to฀consideration฀that฀is฀unconditional฀–฀ie฀only฀the฀passage฀of฀time฀is฀
required฀before฀payment฀is฀due.฀
฀ Stand-alone฀selling฀price฀–฀The฀price฀at฀which฀an฀entity฀would฀sell฀a฀promised฀good฀or฀service฀
separately฀to฀a฀customer.฀฀
฀ Transaction฀price฀–฀The฀amount฀of฀consideration฀to฀which฀an฀entity฀expects฀to฀be฀entitled฀in฀
exchange฀for฀transferring฀promised฀goods฀or฀services฀to฀a฀customer,฀excluding฀amounts฀collected฀on฀
behalf฀of฀third฀parties.฀
Chapter฀2฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀
฀ Accounting฀policies฀(IAS฀8)฀
Accounting฀policies฀are฀the฀specific฀principles,฀bases,฀conventions,฀rules฀and฀practices฀applied฀by฀an฀
entity฀in฀preparing฀and฀presenting฀financial฀statements.฀(IAS฀8:฀para.฀5)฀
฀ Change฀in฀accounting฀estimate฀(IAS฀8)฀
A฀ change฀ in฀ accounting฀ estimate฀ is฀ an฀ adjustment฀ of฀ the฀ carrying฀ amount฀ of฀ an฀ asset฀ or฀ a฀
liability,฀ or฀ the฀ amount฀ of฀ periodic฀ consumption฀ of฀ an฀ asset,฀ that฀ results฀ from฀ the฀ assessment฀ of฀ the฀
present฀status฀of,฀and฀expected฀future฀benefits฀and฀obligations฀associated฀with฀assets฀and฀liabilities.'฀
(IAS฀8:฀para.฀5)฀
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฀฀
฀ Prior฀period฀errors฀(IAS฀8)฀
Prior฀period฀errors฀are฀omissions฀from,฀and฀misstatements฀in,฀the฀entity's฀financial฀statements฀for฀
one฀or฀more฀prior฀periods฀arising฀from฀a฀failure฀to฀use,฀or฀misuse฀of,฀reliable฀information฀that:฀
(a)฀ Was฀available฀when฀the฀financial฀statements฀for฀those฀periods฀were฀authorised฀for฀issue;฀and฀
(b)฀ Could฀ reasonably฀ be฀ expected฀ to฀ have฀ been฀ obtained฀ and฀ taken฀ into฀ account฀ in฀ the฀
preparation฀and฀presentation฀of฀those฀financial฀statements.฀
฀ Related฀party฀(IAS฀24)฀
A฀ related฀ party฀ is฀ a฀ person฀ or฀ entity฀ that฀ is฀ related฀ to฀ the฀ entity฀ that฀ is฀ preparing฀ its฀ financial฀
statements฀(the฀'reporting฀entity').฀
Chapter฀3฀Non-current฀assets฀
฀ Active฀market฀
An฀ active฀ market฀ is฀ a฀ market฀ in฀ which฀ transactions฀ for฀ the฀ asset฀ or฀ liability฀ take฀ place฀ with฀
sufficient฀frequency฀and฀volume฀to฀provide฀pricing฀information฀on฀an฀ongoing฀basis.฀
฀ Agricultural฀produce฀is฀the฀harvested฀product฀of฀an฀entity's฀biological฀assets.฀
฀ Biological฀assets฀are฀living฀animals฀or฀plants.฀
฀ Biological฀transformation฀compromises฀the฀processes฀of฀growth,฀degeneration,฀production฀and฀
procreation฀that฀cause฀qualitative฀and฀quantitative฀changes฀in฀a฀biological฀asset.฀
฀ Cash-generating฀unit฀(IAS฀36)฀
A฀cash-generating฀unit฀is฀the฀smallest฀identifiable฀group฀of฀assets฀that฀generates฀cash฀inflows฀that฀
are฀largely฀independent฀of฀the฀cash฀inflows฀from฀other฀assets฀or฀groups฀of฀assets.฀
฀ Fair฀value฀(IFRS฀13)฀
The฀ price฀ that฀ would฀ be฀ received฀ to฀ sell฀ an฀ asset฀ or฀ paid฀ to฀ transfer฀ a฀ liability฀ in฀ an฀ orderly฀
transaction฀between฀market฀participants฀at฀the฀measurement฀date.฀
฀ Fair฀value฀less฀costs฀of฀disposal฀is฀the฀price฀that฀would฀be฀received฀to฀sell฀the฀asset฀in฀
an฀orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date฀(IFRS฀13฀definition฀of฀
fair฀value),฀less฀the฀direct฀incremental฀costs฀attributable฀to฀the฀disposal฀of฀the฀asset฀(IAS฀36:฀
para.฀6).฀
฀ An฀intangible฀asset฀is฀an฀identifiable฀non-monetary฀asset฀without฀physical฀substance.฀The฀asset฀
must฀be:฀
(a)฀ Controlled฀by฀the฀entity฀as฀a฀result฀of฀events฀in฀the฀past,฀and฀
(b)฀ Something฀from฀which฀the฀entity฀expects฀future฀economic฀benefits฀to฀flow.฀
฀ Investment฀property฀(IAS฀40)฀
Investment฀property฀is฀property฀(land฀or฀building฀–฀or฀part฀of฀a฀building฀–฀or฀both)฀held฀(by฀the฀owner฀
or฀ by฀ the฀ lessee฀ as฀ a฀ right-of-use฀ asset)฀ to฀ earn฀ rentals฀ or฀ for฀ capital฀ appreciation฀ or฀ both,฀
rather฀than฀for:฀
(a)฀ use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services฀or฀for฀administrative฀purposes;฀or฀
(b)฀ sale฀in฀the฀ordinary฀course฀of฀business.฀
฀ Value฀in฀use฀
The฀ value฀ in฀ use฀ of฀ an฀ asset฀ is฀ measured฀ as฀ the฀ present฀ value฀ of฀ estimated฀ future฀ cash฀ flows฀
(inflows฀minus฀outflows)฀generated฀by฀the฀asset,฀including฀its฀estimated฀net฀disposal฀value฀(if฀any)฀at฀
the฀end฀of฀its฀expected฀useful฀life.฀
฀
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Glossary฀
Chapter฀4฀Employee฀benefits฀
฀ Defined฀benefit฀plans:฀Post-employment฀benefit฀plans฀other฀than฀defined฀contribution฀plans.฀
฀ Defined฀contribution฀plans:฀Post-employment฀benefit฀plans฀under฀which฀an฀entity฀pays฀fixed฀
฀ Employee฀benefits:฀All฀forms฀of฀consideration฀given฀by฀an฀entity฀in฀exchange฀for฀service฀
rendered฀by฀employees฀or฀for฀the฀termination฀of฀employment.฀
฀ Short-term฀benefits:฀Employee฀benefits฀(other฀than฀termination฀benefits)฀that฀are฀expected฀to฀be฀
settled฀wholly฀before฀twelve฀months฀after฀the฀end฀of฀the฀annual฀reporting฀period฀in฀which฀the฀
employees฀render฀the฀related฀service.฀
Chapter฀5฀Provisions,฀contingencies฀and฀events฀after฀the฀
฀ Contingent฀asset฀(IAS฀37)฀
A฀contingent฀asset฀is฀a฀possible฀asset฀that฀arises฀from฀past฀events฀and฀whose฀existence฀will฀be฀
confirmed฀ by฀ the฀ occurrence฀ of฀ one฀ or฀ more฀ uncertain฀ future฀ events฀ not฀ wholly฀ within฀ the฀ entity's฀
control.฀
฀ Contingent฀liability฀(IAS฀37)฀
A฀contingent฀liability฀is฀either:฀
(a)฀ A฀possible฀ obligation฀arising฀from฀past฀events฀whose฀existence฀will฀be฀confirmed฀only฀by฀
the฀ occurrence฀ of฀ one฀ or฀ more฀ uncertain฀ future฀ events฀ not฀ wholly฀ within฀ the฀ control฀ of฀ the฀
entity;฀or฀
(b)฀ A฀present฀obligation฀that฀arises฀from฀past฀events฀but฀is฀not฀recognised฀because:฀
(i)฀ it฀ is฀ not฀ probable฀ that฀ an฀ outflow฀ of฀ economic฀ benefit฀ will฀ be฀ required฀ to฀ settle฀ the฀
obligation;฀or฀฀
(ii)฀ the฀amount฀of฀the฀obligation฀cannot฀be฀measured฀with฀sufficient฀reliability.฀
฀ A฀provision฀is฀a฀liability฀of฀uncertain฀timing฀or฀amount฀
Chapter฀6฀Income฀taxes฀
฀ Current฀tax฀is฀the฀amount฀of฀income฀taxes฀payable฀(or฀recoverable)฀in฀respect฀of฀taxable฀profit฀(or฀
loss)฀for฀a฀period.฀
฀ The฀tax฀base฀of฀an฀asset฀or฀liability฀is฀the฀amount฀attributed฀to฀that฀asset฀or฀liability฀for฀tax฀purposes฀
(IAS฀12:฀para.฀5).฀
฀ Temporary฀differences฀are฀differences฀between฀the฀carrying฀amount฀of฀an฀asset฀or฀liability฀in฀the฀
statement฀of฀financial฀position฀(eg฀value฀from฀an฀accounting฀perspective)฀and฀its฀tax฀base฀(eg฀value฀
from฀a฀tax฀perspective).฀
Chapter฀7฀Financial฀instruments฀
฀ Amortised฀cost.฀The฀amount฀at฀which฀the฀financial฀asset฀or฀financial฀liability฀is฀measured฀at฀initial฀
recognition฀minus฀the฀principal฀repayments,฀plus฀or฀minus฀the฀cumulative฀amortisation฀using฀the฀
effective฀interest฀method฀of฀any฀difference฀between฀that฀initial฀amount฀and฀the฀maturity฀amount฀and,฀
for฀financial฀assets,฀adjusted฀for฀any฀loss฀allowance.฀
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฀฀
฀ Credit฀loss.฀The฀difference฀between฀all฀contractual฀cash฀flows฀that฀are฀due฀to฀an฀entity…and฀all฀the฀
cash฀flows฀that฀the฀entity฀expects฀to฀receive,฀discounted.฀
฀ Derivative.฀A฀derivative฀has฀three฀characteristics฀(IFRS฀9:฀Appendix฀A):฀
(a)฀ its฀ value฀ changes฀ in฀ response฀ to฀ an฀ underlying฀ variable฀ (eg฀ share฀ price,฀ commodity฀ price,฀
foreign฀exchange฀rate฀or฀interest฀rate)฀
(b)฀ it฀ requires฀ no฀ initial฀ net฀ investment฀ or฀ an฀ initial฀ net฀ investment฀ that฀ is฀ smaller฀ than฀ would฀ be฀
required฀ for฀ other฀ types฀ of฀ contracts฀ that฀ would฀ be฀ expected฀ to฀ have฀ a฀ similar฀ response฀ to฀
changes฀in฀market฀factors฀
(c)฀ it฀is฀settled฀at฀a฀future฀date.฀
Examples:฀
฀ foreign฀currency฀forward฀contracts;฀
฀ interest฀rate฀swaps;฀
฀ options.฀
฀ Effective฀interest฀rate.฀The฀rate฀that฀exactly฀discounts฀estimated฀future฀cash฀payments฀or฀receipts฀
through฀the฀expected฀life฀of฀the฀financial฀asset฀or฀financial฀liability฀to฀the฀gross฀carrying฀amount฀of฀a฀
financial฀asset฀or฀to฀the฀amortised฀cost฀of฀a฀financial฀liability.฀
฀ Equity฀instrument.฀Any฀contract฀that฀evidences฀a฀residual฀interest฀in฀the฀assets฀of฀an฀entity฀after฀
deducting฀all฀of฀its฀liabilities.฀
Examples:฀
฀ an฀entity's฀own฀ordinary฀shares;฀
฀ warrants;฀
฀ non-cumulative฀irredeemable฀preference฀shares.฀
฀ Expected฀credit฀losses.฀The฀weighted฀average฀of฀credit฀losses฀with฀the฀respective฀risks฀of฀a฀
default฀occurring฀as฀the฀weights.฀
฀ Financial฀asset.฀
Any฀asset฀that฀is:฀
฀ (a)฀ cash;฀
฀ (b)฀ an฀equity฀instrument฀of฀another฀entity;฀
฀ (c)฀ a฀contractual฀right:฀
(i)฀ to฀receive฀cash฀or฀another฀financial฀asset฀from฀another฀entity;฀or฀
(ii)฀ to฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀conditions฀
that฀are฀potentially฀favourable฀to฀the฀entity;฀or฀
฀ (d)฀ a฀contract฀that฀will฀or฀may฀be฀settled฀in฀the฀entity's฀own฀equity฀instruments.฀
Examples:฀
฀ trade฀receivables;฀
฀ options;฀
฀ shares฀(as฀an฀investment).฀
฀ Financial฀guarantee฀contract.฀A฀contract฀that฀requires฀the฀issuer฀to฀make฀specified฀payments฀to฀
reimburse฀the฀holder฀for฀a฀loss฀it฀incurs฀because฀a฀specified฀debtor฀fails฀to฀make฀payment฀when฀due฀
in฀accordance฀with฀the฀original฀or฀modified฀terms฀of฀the฀debt฀instrument.฀
฀฀ Financial฀instrument.฀Any฀contract฀that฀gives฀rise฀to฀both฀a฀financial฀asset฀of฀one฀entity฀and฀a฀
financial฀liability฀or฀equity฀instrument฀of฀another฀entity.฀
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Glossary฀
฀ Financial฀liability.฀
Any฀liability฀that฀is:฀
(a)฀ A฀contractual฀obligation:฀
(i)฀ to฀deliver฀cash฀or฀another฀financial฀asset฀to฀another฀entity;฀or฀
(ii)฀ to฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀conditions฀
that฀are฀potentially฀unfavourable฀to฀the฀entity;฀or฀
(b)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀an฀entity's฀own฀equity฀instruments.฀
Examples:฀
฀ trade฀payables;฀
฀ debenture฀loans฀(payable);฀
฀ mandatorily฀redeemable฀preference฀shares;฀
฀ forward฀contracts฀standing฀at฀a฀loss.฀
฀ Held฀for฀trading.฀A฀financial฀asset฀or฀financial฀liability฀that:฀
(a)฀ is฀ acquired฀ or฀ incurred฀ principally฀ for฀ the฀ purpose฀ of฀ selling฀ or฀ repurchasing฀ it฀ in฀ the฀ near฀
term;฀
(b)฀ on฀initial฀recognition฀is฀part฀of฀a฀portfolio฀of฀identified฀financial฀instruments฀that฀are฀managed฀
together฀and฀for฀which฀there฀is฀evidence฀of฀a฀recent฀actual฀pattern฀of฀short-term฀profit-taking;฀
or฀
(c)฀ is฀a฀derivative฀(except฀for฀a฀derivative฀that฀is฀a฀financial฀guarantee฀contract฀or฀a฀designated฀
and฀effective฀hedging฀instrument).฀
฀ Lifetime฀expected฀credit฀losses.฀The฀expected฀credit฀losses฀that฀result฀from฀all฀possible฀default฀
events฀over฀the฀expected฀life฀of฀a฀financial฀instrument.฀
฀ Past฀due.฀A฀financial฀asset฀is฀past฀due฀when฀a฀counterparty฀has฀failed฀to฀make฀a฀payment฀when฀
that฀payment฀was฀contractually฀due.฀
฀ 12-month฀expected฀credit฀losses.฀The฀portion฀of฀the฀lifetime฀expected฀credit฀losses฀that฀
represent฀the฀expected฀credit฀losses฀that฀result฀from฀default฀events฀on฀a฀financial฀instrument฀that฀are฀
possible฀within฀the฀12฀months฀after฀the฀reporting฀date.฀
Chapter฀8฀Leases฀
฀ Finance฀lease฀
A฀lease฀that฀transfers฀substantially฀all฀the฀risks฀and฀rewards฀incidental฀to฀ownership฀of฀an฀
underlying฀asset.฀
฀ Lease฀
A฀contract,฀or฀part฀of฀a฀contract,฀that฀conveys฀the฀right฀to฀use฀an฀asset฀(the฀underlying฀asset)฀for฀
a฀period฀of฀time฀in฀exchange฀for฀consideration.฀
฀ Lease฀term฀
The฀ lease฀ term฀ is฀ 'the฀ non-cancellable฀ period฀ for฀ which฀ a฀ lessee฀ has฀ the฀ right฀ to฀ use฀ an฀
underlying฀asset,฀together฀with฀both:฀
(a)฀ periods฀covered฀by฀an฀option฀to฀extend฀the฀lease฀if฀the฀lessee฀is฀reasonably฀certain฀to฀
exercise฀that฀option;฀and฀
(b)฀ periods฀covered฀by฀an฀option฀to฀terminate฀the฀lease฀if฀the฀lessee฀is฀reasonably฀certain฀
not฀to฀exercise฀that฀option.'฀
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฀฀
฀ Operating฀lease฀
A฀lease฀that฀does฀not฀transfer฀substantially฀all฀the฀risks฀and฀rewards฀incidental฀to฀ownership฀of฀an฀
underlying฀asset.฀
Chapter฀9฀Share-based฀payment฀
฀ Equity฀instrument฀granted.฀The฀right฀(conditional฀or฀unconditional)฀to฀an฀equity฀instrument฀of฀the฀
entity฀conferred฀by฀the฀entity฀on฀another฀party,฀under฀a฀share-based฀payment฀arrangement.฀
฀ Fair฀value.฀The฀amount฀for฀which฀an฀asset฀could฀be฀exchanged,฀a฀liability฀settled,฀or฀an฀equity฀
instrument฀granted฀could฀be฀exchanged,฀between฀knowledgeable,฀willing฀parties฀in฀an฀arm's฀length฀
transaction.฀฀
฀ Grant฀date.฀The฀date฀at฀which฀the฀entity฀and฀another฀party฀(including฀an฀employee)฀agree฀to฀a฀
share-based฀payment฀arrangement.฀At฀grant฀date฀the฀entity฀confers฀on฀the฀other฀party฀(the฀
counterparty)฀the฀right฀to฀cash,฀other฀assets,฀or฀equity฀instruments฀of฀the฀entity,฀provided฀the฀specified฀
vesting฀conditions,฀if฀any,฀are฀met.฀฀
฀ Share-based฀payment฀arrangement.฀An฀agreement฀between฀the฀entity฀and฀another฀party฀
(including฀an฀employee)฀to฀enter฀into฀a฀share-based฀payment฀transaction.฀
฀ Share-based฀payment฀transaction.฀A฀transaction฀in฀which฀the฀entity฀receives฀goods฀or฀
services฀as฀consideration฀for฀equity฀instruments฀of฀the฀entity฀(including฀shares฀or฀share฀options),฀or฀
acquires฀goods฀or฀services฀by฀incurring฀liabilities฀to฀the฀supplier฀of฀those฀goods฀or฀services฀for฀
amounts฀that฀are฀based฀on฀the฀price฀of฀the฀entity's฀shares฀or฀other฀equity฀instruments฀of฀the฀entity.฀
฀ Share฀option.฀A฀contract฀that฀gives฀the฀holder฀the฀right,฀but฀not฀the฀obligation,฀to฀subscribe฀to฀the฀
entity's฀shares฀at฀a฀fixed฀or฀determinable฀price฀for฀a฀specified฀period฀of฀time.฀
฀ Vest.฀To฀become฀an฀entitlement.฀Under฀a฀share-based฀payment฀arrangement,฀a฀counterparty's฀right฀
to฀receive฀cash,฀other฀assets,฀or฀equity฀instruments฀of฀the฀entity฀vests฀upon฀satisfaction฀of฀any฀
specified฀vesting฀conditions.฀
฀ Vesting฀conditions.฀The฀conditions฀that฀must฀be฀satisfied฀for฀the฀counterparty฀to฀become฀entitled฀to฀
receive฀cash,฀other฀assets฀or฀equity฀instruments฀of฀the฀entity,฀under฀a฀share-based฀payment฀
arrangement.฀฀
฀ Vesting฀period.฀The฀period฀during฀which฀all฀the฀specified฀vesting฀conditions฀of฀a฀share-based฀
payment฀arrangement฀are฀to฀be฀satisfied.฀
Chapter฀10฀Basic฀groups฀
฀ An฀associate฀is฀an฀entity฀over฀which฀the฀investor฀has฀significant฀influence฀(IAS฀28:฀para.฀3).฀
฀ Control.฀The฀power฀to฀govern฀the฀financial฀and฀operating฀policies฀of฀an฀entity฀so฀as฀to฀obtain฀
benefits฀from฀its฀activities.฀
฀ Power.฀Existing฀rights฀that฀give฀the฀current฀ability฀to฀direct฀the฀relevant฀activities฀of฀the฀investee.฀
฀ Subsidiary.฀An฀entity฀that฀is฀controlled฀by฀another฀entity.฀
Chapter฀11฀Changes฀in฀group฀structures:฀step฀acquisitions฀
฀ A฀step฀acquisition฀where฀control฀is฀retained฀occurs฀when฀there฀is฀an฀increase฀in฀the฀parent's฀
shareholding฀in฀an฀existing฀subsidiary฀through฀the฀purchase฀of฀additional฀shares.฀It฀is฀sometimes฀
known฀as฀'an฀increase฀in฀a฀controlling฀interest'฀
฀ When฀there฀is฀an฀increase฀in฀a฀shareholding฀in฀a฀subsidiary,฀an฀adjustment฀to฀equity฀is฀
calculated฀as฀the฀difference฀between฀the฀consideration฀paid฀and฀the฀decrease฀in฀non-
controlling฀interests.฀The฀entity฀shall฀recognise฀this฀adjustment฀directly฀in฀equity฀and฀attribute฀it฀to฀
the฀owners฀of฀the฀parent.฀
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Glossary
 Where a controlling interest in a subsidiary is built up over a period of time, IFRS 3 Business
Combinations refers to this 'business combination achieved in stages'. This may be also be
known as a 'step acquisition' or 'piecemeal acquisition'.
Chapter 12 Changes in group structures: disposals and group

reorganisations
 A 'deemed' disposal occurs when a subsidiary issues new shares and the parent does not take
up all of its rights such that its holding is reduced.
 Disposals occur when the parent company sells some or all of its shareholding in a group
company. When the full shareholding is sold, this is known as a full disposal. When only some
of the shareholding is sold, this is referred to as a partial disposal.
Chapter 13 Non-current assets held for sale and discontinued

operations
 Component of an entity
A component of an entity is a part that has operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity.
 Discontinued operation
A discontinued operation is a component of an entity that either has been disposed of or is
classified as held for sale and:
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations, or
(c) is a subsidiary acquired exclusively with a view to resale.
 Disposal group – definition
A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group in
a single transaction, and liabilities directly associated with those assets that will be transferred in the
transaction.
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฀฀
Chapter฀14฀Joint฀arrangements฀and฀group฀disclosures฀
฀ Joint฀arrangement฀
An฀arrangement฀of฀which฀two฀or฀more฀parties฀have฀joint฀control.฀
฀ Joint฀control฀
The฀ contractually฀ agreed฀ sharing฀ of฀ control฀ of฀ an฀ arrangement,฀ which฀ exists฀ only฀ when฀ decisions฀
about฀the฀relevant฀activities฀require฀the฀unanimous฀consent฀of฀the฀parties฀sharing฀control.฀
฀ Joint฀operation฀
A฀joint฀arrangement฀whereby฀the฀parties฀that฀have฀joint฀control฀of฀the฀arrangement฀have฀rights฀ to฀
the฀assets,฀and฀obligations฀for฀the฀liabilities,฀relating฀to฀the฀arrangement฀
฀ Joint฀venture฀
A฀joint฀arrangement฀whereby฀the฀parties฀that฀have฀joint฀control฀of฀the฀arrangement฀have฀rights฀ to฀
the฀net฀assets฀of฀the฀arrangement.฀
฀ Structured฀entity฀
An฀ entity฀ that฀ has฀ been฀ designed฀ so฀ that฀ voting฀ or฀ similar฀ rights฀ are฀ not฀ the฀ dominant฀
factor฀ in฀ deciding฀ who฀ controls฀ the฀ entity,฀ such฀ as฀ when฀ any฀ voting฀ rights฀ relate฀ to฀
administrative฀ tasks฀ only฀ and฀ the฀ relevant฀ activities฀ are฀ directed฀ by฀ means฀ of฀ contractual฀
arrangements.฀
Chapter฀15฀Foreign฀transactions฀and฀entities฀
฀ Closing฀rate.฀฀The฀spot฀exchange฀rate฀at฀the฀end฀of฀the฀reporting฀period.฀
฀ Foreign฀operation฀
An฀ entity฀ that฀ is฀ a฀ subsidiary,฀ associate,฀ joint฀ arrangement฀ or฀ branch฀ of฀ a฀ reporting฀ entity,฀ the฀
activities฀of฀which฀are฀based฀or฀conducted฀in฀a฀country฀or฀currency฀other฀than฀those฀of฀the฀reporting฀
entity.฀
฀ Functional฀currency.฀฀The฀currency฀of฀the฀primary฀economic฀environment฀in฀which฀the฀
entity฀operates.฀
฀ Monetary฀items.฀฀Units฀of฀currency฀held฀and฀assets฀and฀liabilities฀to฀be฀received฀or฀
paid฀in฀a฀fixed฀or฀determinable฀number฀of฀units฀of฀currency.฀
฀ Net฀investment฀in฀a฀foreign฀operation฀
The฀amount฀of฀the฀reporting฀entity's฀interest฀in฀the฀net฀assets฀of฀a฀foreign฀operation.฀ ฀ ฀
฀ Presentation฀currency฀
The฀currency฀in฀which฀the฀financial฀statements฀are฀presented.฀
฀ Spot฀exchange฀rate.฀฀The฀exchange฀rate฀for฀immediate฀delivery.฀
Chapter฀16฀Group฀statements฀of฀cash฀flows฀
฀ Cash฀comprises฀cash฀on฀hand฀and฀demand฀deposits.฀
฀ Cash฀equivalents฀are฀short-term,฀highly฀liquid฀investments฀that฀are฀readily฀convertible฀into฀known฀
amounts฀of฀cash฀and฀which฀are฀subject฀to฀an฀insignificant฀risk฀of฀changes฀in฀value.฀
฀ Cash฀flows฀are฀inflows฀and฀outflows฀of฀cash฀and฀cash฀equivalents.฀
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Glossary
Chapter 17 Interpret financial statements for different

stakeholders
 Integrated report
A concise communication about how an organisation's strategy, governance, performance and
prospects, in the context of its external environment, lead to the creation of value over the short,
medium and long term.
 Integrated reporting <IR>
A process founded on integrated thinking that results in a periodic integrated report by an
organisation about value creation over time and related communications regarding aspects of
value creation.
 A narrative report that relates to financial statements that have been prepared in accordance
with IFRSs. Management commentary provides users with historical explanations of the
amounts presented in the financial statements, specifically the entity's financial position, financial
performance and cash flows. It also provides commentary on an entity's prospects and other
information not presented in the financial statements. Management commentary also serves as a
basis for understanding management's objectives and its strategies for achieving those
objectives.
 An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
entity),
(b) whose operating results are regularly reviewed by the entity's chief operating decision maker
to make decisions about resources to be allocated to the segment and assess its performance,
and
(c) for which discrete financial information is available.
 A stakeholder is anyone with an interest in a business, and can either affect or be affected by the
business.
Chapter 18 Reporting requirements of small and medium-sized

entities
 Small and medium-sized entities are defined as entities that do not have public accountability
and they do not publish general purpose financial statements. Small and medium-sized entities may
apply IFRS for SMEs rather than full IFRS.
Chapter 19 The impact of changes and potential changes in

accounting regulation
 Material (IAS 1)
Omissions or misstatements of items are material if they could, individually or collectively,
influence the economic decisions that users make on the basis of financial statements.
Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.
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฀฀
฀
฀
874฀

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Mathematical฀tables฀
Mathematical฀tables฀
Present฀value฀table฀
-n
Present฀value฀of฀£1฀=฀(1+r) ฀where฀r฀=฀interest฀rate,฀n฀=฀number฀of฀periods฀until฀payment฀or฀receipt.฀
Periods฀ Discount฀rates฀(r)฀
(n)฀ 1%฀ 2%฀ 3%฀ 4%฀ 5%฀ 6%฀ 7%฀ 8%฀ 9%฀ 10%฀
1฀ 0.990฀ 0.980฀ 0.971฀ 0.962฀ 0.952฀ 0.943฀ 0.935฀ 0.926฀ 0.917฀ 0.909฀
2฀ 0.980฀ 0.961 0.943฀ 0.925 0.907 0.890 0.873 0.857฀ 0.842฀ 0.826
3฀ 0.971฀ 0.942 0.915฀ 0.889 0.864 0.840 0.816 0.794฀ 0.772฀ 0.751
4฀ 0.961฀ 0.924 0.888฀ 0.855 0.823 0.792 0.763 0.735฀ 0.708฀ 0.683
5฀ 0.951฀ 0.906 0.863฀ 0.822 0.784 0.747 0.713 0.681฀ 0.650฀ 0.621
6฀ 0.942฀ 0.888฀ 0.837฀ 0.790฀ 0.746฀ 0.705฀ 0.666฀ 0.630฀ 0.596฀ 0.564฀
7฀ 0.933฀ 0.871 0.813฀ 0.760 0.711 0.665 0.623 0.583฀ 0.547฀ 0.513
8฀ 0.923฀ 0.853 0.789฀ 0.731 0.677 0.627 0.582 0.540฀ 0.502฀ 0.467
9฀ 0.914฀ 0.837 0.766฀ 0.703 0.645 0.592 0.544 0.500฀ 0.460฀ 0.424
10฀ 0.905฀ 0.820 0.744฀ 0.676 0.614 0.558 0.508 0.463฀ 0.422฀ 0.386
11฀ 0.896฀ 0.804฀ 0.722฀ 0.650฀ 0.585฀ 0.527฀ 0.475฀ 0.429฀ 0.388฀ 0.350฀
12฀ 0.887฀ 0.788 0.701฀ 0.625 0.557 0.497 0.444 0.397฀ 0.356฀ 0.319
13฀ 0.879฀ 0.773 0.681฀ 0.601 0.530 0.469 0.415 0.368฀ 0.326฀ 0.290
14฀ 0.870฀ 0.758 0.661฀ 0.577 0.505 0.442 0.388 0.340฀ 0.299฀ 0.263
15฀ 0.861฀ 0.743 0.642฀ 0.555 0.481 0.417 0.362 0.315฀ 0.275฀ 0.239
16฀ 0.853฀ 0.728฀ 0.623฀ 0.534฀ 0.458฀ 0.394฀ 0.339฀ 0.292฀ 0.252฀ 0.218฀
17฀ 0.844฀ 0.714 0.605฀ 0.513 0.436 0.371 0.317 0.270฀ 0.231฀ 0.198
18฀ 0.836฀ 0.700 0.587฀ 0.494 0.416 0.350 0.296 0.250฀ 0.212฀ 0.180
19฀ 0.828฀ 0.686 0.570฀ 0.475 0.396 0.331 0.277 0.232฀ 0.194฀ 0.164
20฀ 0.820฀ 0.673 0.554฀ 0.456 0.377 0.312 0.258 0.215฀ 0.178฀ 0.149
฀
(n)฀ 11%฀ 12%฀ 13%฀ 14%฀ 15%฀ 16%฀ 17%฀ 18%฀ 19%฀ 20%฀
1฀ 0.901฀ 0.893฀ 0.885฀ 0.877฀ 0.870฀ 0.862฀ 0.855฀ 0.847฀ 0.840฀ 0.833฀
2฀ 0.812฀ 0.797 0.783฀ 0.769 0.756 0.743 0.731 0.718฀ 0.706฀ 0.694
3฀ 0.731฀ 0.712 0.693฀ 0.675 0.658 0.641 0.624 0.609฀ 0.593฀ 0.579
4฀ 0.659฀ 0.636 0.613฀ 0.592 0.572 0.552 0.534 0.516฀ 0.499฀ 0.482
5฀ 0.593฀ 0.567 0.543฀ 0.519 0.497 0.476 0.456 0.437฀ 0.419฀ 0.402
6฀ 0.535฀ 0.507฀ 0.480฀ 0.456฀ 0.432฀ 0.410฀ 0.390฀ 0.370฀ 0.352฀ 0.335฀
7฀ 0.482฀ 0.452 0.425฀ 0.400 0.376 0.354 0.333 0.314฀ 0.296฀ 0.279
8฀ 0.434฀ 0.404 0.376฀ 0.351 0.327 0.305 0.285 0.266฀ 0.249฀ 0.233
9฀ 0.391฀ 0.361 0.333฀ 0.308 0.284 0.263 0.243 0.225฀ 0.209฀ 0.194
10฀ 0.352฀ 0.322 0.295฀ 0.270 0.247 0.227 0.208 0.191฀ 0.176฀ 0.162
11฀ 0.317฀ 0.287฀ 0.261฀ 0.237฀ 0.215฀ 0.195฀ 0.178฀ 0.162฀ 0.148฀ 0.135฀
12฀ 0.286฀ 0.257 0.231฀ 0.208 0.187 0.168 0.152 0.137฀ 0.124฀ 0.112
13฀ 0.258฀ 0.229 0.204฀ 0.182 0.163 0.145 0.130 0.116฀ 0.104฀ 0.093
14฀ 0.232฀ 0.205 0.181฀ 0.160 0.141 0.125 0.111 0.099฀ 0.088฀ 0.078
15฀ 0.209฀ 0.183 0.160฀ 0.140 0.123 0.108 0.095 0.084฀ 0.074฀ 0.065
16฀ 0.188฀ 0.163฀ 0.141฀ 0.123฀ 0.107฀ 0.093฀ 0.081฀ 0.071฀ 0.062฀ 0.054฀
17฀ 0.170฀ 0.146 0.125฀ 0.108 0.093 0.080 0.069 0.060฀ 0.052฀ 0.045
18฀ 0.153฀ 0.130 0.111฀ 0.095 0.081 0.069 0.059 0.051฀ 0.044฀ 0.038
19฀ 0.138฀ 0.116 0.098฀ 0.083 0.070 0.060 0.051 0.043฀ 0.037฀ 0.031
20฀ 0.124฀ 0.104 0.087฀ 0.073 0.061 0.051 0.043 0.037฀ 0.031฀ 0.026
฀ 877฀

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฀฀
Cumulative฀present฀value฀table฀
This฀table฀shows฀the฀present฀value฀of฀£1฀per฀annum,฀receivable฀or฀payable฀at฀the฀end฀of฀each฀year฀
for฀n฀years.฀
(n)฀ 1%฀ 2%฀ 3%฀ 4%฀ 5%฀ 6%฀ 7%฀ 8%฀ 9%฀ 10%฀
1฀ 0.990฀ 0.980฀ 0.971฀ 0.962฀ 0.952฀ 0.943฀ 0.935฀ 0.926฀ 0.917฀ 0.909฀
2฀ 1.970฀ 1.942฀ 1.913฀ 1.886 1.859 1.833 1.808 1.783฀ 1.759฀ 1.736
3฀ 2.941฀ 2.884฀ 2.829฀ 2.775 2.723 2.673 2.624 2.577฀ 2.531฀ 2.487
4฀ 3.902฀ 3.808฀ 3.717฀ 3.630 3.546 3.465 3.387 3.312฀ 3.240฀ 3.170
5฀ 4.853฀ 4.713฀ 4.580฀ 4.452 4.329 4.212 4.100 3.993฀ 3.890฀ 3.791
6฀ 5.795฀ 5.601฀ 5.417฀ 5.242฀ 5.076฀ 4.917฀ 4.767฀ 4.623฀ 4.486฀ 4.355฀
7฀ 6.728฀ 6.472฀ 6.230฀ 6.002 5.786 5.582 5.389 5.206฀ 5.033฀ 4.868
8฀ 7.652฀ 7.325฀ 7.020฀ 6.733 6.463 6.210 5.971 5.747฀ 5.535฀ 5.335
9฀ 8.566฀ 8.162฀ 7.786฀ 7.435 7.108 6.802 6.515 6.247฀ 5.995฀ 5.759
10฀ 9.471฀ 8.983฀ 8.530฀ 8.111 7.722 7.360 7.024 6.710฀ 6.418฀ 6.145
11฀ 10.37฀ 9.787฀ 9.253฀ 8.760฀ 8.306฀ 7.887฀ 7.499฀ 7.139฀ 6.805฀ 6.495฀
12฀ 11.26฀ 10.58฀ 9.954฀ 9.385 8.863 8.384 7.943 7.536฀ 7.161฀ 6.814
13฀ 12.13฀ 11.35฀ 10.63฀ 9.986 9.394 8.853 8.358 7.904฀ 7.487฀ 7.103
14฀ 13.00฀ 12.11฀ 11.30฀ 10.56 9.899 9.295 8.745 8.244฀ 7.786฀ 7.367
15฀ 13.87฀ 12.85฀ 11.94฀ 11.12 10.38 9.712 9.108 8.559฀ 8.061฀ 7.606
16฀ 14.71 13.578฀ 12.561฀ 11.652 10.838 10.106 9.447฀ 8.851฀ 8.313฀ 7.824฀
8฀
17฀ 15.56 14.292฀ 13.166฀ 12.166 11.274 10.477 9.763 9.122฀ 8.544฀ 8.022
2฀
18฀ 16.39 14.992฀ 13.754฀ 12.659 11.690 10.828 10.059 9.372฀ 8.756฀ 8.201
8฀
19฀ 17.22 15.678฀ 14.324฀ 13.134 12.085 11.158 10.336 9.604฀ 8.950฀ 8.365
6฀
20฀ 18.04 16.351฀ 14.877฀ 13.590 12.462 11.470 10.594 9.818฀ 9.129฀ 8.514
6฀
฀
(n)฀ 11%฀ 12%฀ 13%฀ 14%฀ 15%฀ 16%฀ 17%฀ 18%฀ 19%฀ 20%฀
1฀ 0.901฀ 0.893฀ 0.885฀ 0.877฀ 0.870฀ 0.862฀ 0.855฀ 0.847฀ 0.840฀ 0.833฀
2฀ 1.713฀ 1.690 1.668฀ 1.647 1.626 1.605 1.585 1.566฀ 1.547฀ 1.528
3฀ 2.444฀ 2.402 2.361฀ 2.322 2.283 2.246 2.210 2.174฀ 2.140฀ 2.106
4฀ 3.102฀ 3.037 2.974฀ 2.914 2.855 2.798 2.743 2.690฀ 2.639฀ 2.589
5฀ 3.696฀ 3.605 3.517฀ 3.433 3.352 3.274 3.199 3.127฀ 3.058฀ 2.991
6฀ 4.231฀ 4.111฀ 3.998฀ 3.889฀ 3.784฀ 3.685฀ 3.589฀ 3.498฀ 3.410฀ 3.326฀
7฀ 4.712฀ 4.564 4.423฀ 4.288 4.160 4.039 3.922 3.812฀ 3.706฀ 3.605
8฀ 5.146฀ 4.968 4.799฀ 4.639 4.487 4.344 4.207 4.078฀ 3.954฀ 3.837
9฀ 5.537฀ 5.328 5.132฀ 4.946 4.772 4.607 4.451 4.303฀ 4.163฀ 4.031
10฀ 5.889฀ 5.650 5.426฀ 5.216 5.019 4.833 4.659 4.494฀ 4.339฀ 4.192
11฀ 6.207฀ 5.938฀ 5.687฀ 5.453฀ 5.234฀ 5.029฀ 4.836฀ 4.656฀ 4.486฀ 4.327฀
12฀ 6.492฀ 6.194 5.918฀ 5.660 5.421 5.197 4.988 4.793฀ 4.611฀ 4.439
13฀ 6.750฀ 6.424 6.122฀ 5.842 5.583 5.342 5.118 4.910฀ 4.715฀ 4.533
14฀ 6.982฀ 6.628 6.302฀ 6.002 5.724 5.468 5.229 5.008฀ 4.802฀ 4.611
15฀ 7.191฀ 6.811 6.462฀ 6.142 5.847 5.575 5.324 5.092฀ 4.876฀ 4.675
16฀ 7.379฀ 6.974฀ 6.604฀ 6.265฀ 5.954฀ 5.668฀ 5.405฀ 5.162฀ 4.938฀ 4.730฀
17฀ 7.549฀ 7.120 6.729฀ 6.373 6.047 5.749 5.475 5.222฀ 4.990฀ 4.775
18฀ 7.702฀ 7.250 6.840฀ 6.467 6.128 5.818 5.534 5.273฀ 5.033฀ 4.812
19฀ 7.839฀ 7.366 6.938฀ 6.550 6.198 5.877 5.584 5.316฀ 5.070฀ 4.843
฀
20฀ 7.963฀ 7.469 7.025฀ 6.623 6.259 5.929 5.628 5.353฀ 5.101฀ 4.870
878฀

lOMoARcPSD|6256454
฀ ฀ Index฀
Index฀
12-month฀expected฀credit฀losses,฀161,฀ Business฀model฀approach,฀155฀
162฀ ฀
฀
C฀
A฀ Calculating฀deferred฀tax,฀131฀
Absences,฀80฀ Cancellation฀
ACCA฀Code฀of฀Ethics฀and฀Conduct,฀25,฀26฀ (share-based฀payment),฀208,฀210฀
Accounting฀estimates,฀35฀ Cancellation฀of฀share฀options,฀211฀
Accounting฀mismatch,฀155,฀157,฀158฀ Capital฀appreciation,฀66฀
Accounting฀policies฀(IAS฀8),฀34฀ Capital฀maintenance,฀6,฀9฀
Accounting฀under฀IFRS฀for฀SMEs,฀460฀ Cash,฀357฀
Accrual฀accounting,฀4฀ Cash฀equivalents,฀357฀
Acquisition฀method,฀244฀ Cash฀flow฀hedge,฀166฀
Acquisitions฀where฀control฀is฀retained,฀287฀ Cash฀flows,฀357฀
Acquisitions฀ where฀ significant฀ influence฀ or฀ Cash฀ flows฀ on฀ acquisition฀ or฀ disposal฀ of฀ a฀
control฀is฀achieved,฀265฀ subsidiary,฀365฀
Active฀market,฀60,฀64฀ Cash฀receipts฀basis,฀130฀
Actuarial฀assumptions,฀83฀ Cash-generating฀unit฀(IAS฀36),฀52฀
Actuary,฀83฀ Cash-generating฀units,฀52฀
Adjustment฀to฀equity,฀274,฀275฀ Change฀in฀accounting฀estimate฀(IAS฀8),฀
Adjustment฀to฀parent’s฀equity,฀299฀ 35฀
Agricultural฀produce,฀70฀ Change฀in฀use,฀67฀
Agriculture฀(IAS฀41),฀70฀ Classification฀of฀Liabilities฀–฀Proposed฀
Alternative฀performance฀measures฀ amendments฀to฀IAS฀1,฀469฀
(APMs),฀409฀ Closing฀rate,฀337฀
Amortisation,฀64฀ Commitments฀ to฀ provide฀ a฀ loan฀ at฀ a฀ below฀
Amortised฀cost,฀154,฀155,฀157,฀160฀ market฀interest฀rate,฀158,฀161฀
'Asset฀Ceiling'฀test,฀90฀ Common฀stakeholders,฀402฀
Assets,฀7฀ Component฀of฀an฀entity,฀315฀
retirements฀and฀disposals,฀48฀ Compound฀financial฀instruments,฀151฀
Assets฀held฀for฀sale,฀455฀ Conceptual฀framework,฀4฀
Associate,฀248฀ Conceptual฀Framework฀ED,฀475฀
Associate฀to฀investment,฀289฀ Consoldiated฀cash฀flow฀฀
Associate฀to฀subsidiary,฀266฀ approach,฀367฀
Available฀for฀use,฀65฀ dividends฀paid฀to฀non-controlling฀interests,฀
฀ 361฀
B฀ dividends฀received฀from฀associates฀and฀
Balanced฀scorecard,฀413฀ joint฀ventures,฀363฀
Bargain฀purchase,฀252฀ effect฀of฀assets/liabilities฀of฀subsidiaries฀
Basic฀EPS,฀407฀ acquired/disposed,฀366฀
Bearer฀plants,฀70฀ indirect฀method,฀357฀
Benchmarking,฀411฀ Consolidated฀financial฀statements,฀459฀
Best฀estimate,฀115฀ Consolidated฀retained฀earnings,฀245฀
Consolidated฀statement฀of฀cash฀flows,฀360฀
Biological฀assets,฀70฀
Consolidated฀ statement฀ of฀ financial฀ position,฀
Biological฀transformation,฀70฀
244฀
Borrowing฀costs,฀69,฀455฀
Consolidated฀statement฀of฀profit฀or฀loss฀and฀
commencement฀of฀capitalisation,฀69฀
other฀comprehensive฀income,฀247,฀248฀
Borrowing฀costs฀eligible฀for฀capitalisation,฀69฀
฀
Business฀combination฀achieved฀in฀
stages,฀265฀
฀ 879฀

lOMoARcPSD|6256454
฀฀
Consolidation฀ Derivative,฀150฀
consideration฀transferred,฀252฀ Development฀costs,฀455฀
contingent฀consideration,฀252฀ Development฀phase,฀63฀
deferred฀consideration,฀252฀ Diluted฀EPS,฀407฀
Fair฀value฀of฀the฀identifiable฀assets฀acquired฀฀฀฀฀ Disclosure฀Initiative,฀471฀
฀฀฀and฀liabilities฀assumed,฀253฀ Disclosure฀ Initiative฀ –฀ Principles฀ of฀ Disclosure,฀
Consolidation฀technique,฀243,฀245,฀247฀ 472฀
Contingent฀asset,฀119฀ Discontinued฀operation,฀315,฀316,฀319฀
Contingent฀consideration,฀252฀ Discounting,฀83฀
Contingent฀liabilities,฀118฀ Discounting฀of฀provisions,฀116฀
Contract,฀10฀ Disposals,฀287฀
Contract฀asset,฀10฀ Disposal฀group,฀311,฀313฀
Contract฀costs,฀13฀ Disposal฀of฀foreign฀operations,฀349฀
Contract฀liability,฀10฀ Disposal฀ where฀ control฀ is฀ retained,฀
Control,฀12,฀13,฀241฀ 298฀
Control฀achieved฀in฀stages,฀266฀ Disposals฀where฀control฀or฀significant฀
Control฀lost,฀288฀ influence฀is฀lost,฀287฀
Corporate฀assets,฀53฀ Distinct,฀11฀
Cost,฀453฀ ฀
Costs฀versus฀benefits,฀453฀
Credit฀loss,฀161฀
E฀
Earnings฀per฀share,฀406,฀454฀
Credit฀risk,฀158฀
EBITDA,฀410฀
Credit-impaired฀financial฀assets,฀164฀
Economic฀resource,฀7฀
Crossing฀an฀accounting฀boundary,฀265,฀287฀
Economic฀value฀added฀(EVA),฀410฀
Current฀cost,฀6฀
ED/2015/3฀Conceptual฀Framework฀for฀
Current฀developments,฀6,฀191฀
Financial฀Reporting,฀6฀
Current฀service฀cost,฀83฀
ED/2016/1฀Definition฀of฀a฀Business฀and฀
Current฀tax,฀127฀
Accounting฀for฀Previously฀Held฀Interests฀
Current฀value,฀8฀
(Proposed฀amendments฀to฀IFRS฀3฀and฀IFRS฀
Curtailment,฀85฀
฀฀฀฀฀฀11),฀469฀
Customer,฀10฀
Effective฀interest฀rate,฀154฀
฀
Elements฀of฀financial฀statements,฀5,฀7฀
D฀ Embedded฀derivatives฀
Debt฀versus฀equity฀distinction,฀475฀ Derivatives,฀159฀
Deemed฀disposals,฀301฀ Employee฀benefits,฀79฀
Deferred฀consideration,฀252฀ Enhancing฀qualitative฀characteristics฀
Deferred฀tax฀฀ Qualitative฀characteristics,฀5฀
calculation,฀130,฀131฀ Environmental฀and฀social฀reporting,฀415฀
group฀financial฀statements,฀136฀ EPS฀Earnings฀manipulation,฀408฀
measurement,฀136฀ Equity฀instrument,฀150฀
presentation,฀142฀฀ Equity฀instrument฀granted,฀199฀
principles,฀128฀ Equity฀method,฀240,฀241,฀249฀
recognition,฀135฀฀ Ethical฀theories,฀29฀
on฀leases,฀184฀ Ethics,฀25฀
share-based฀payment,฀211฀ Ethics฀in฀organisations,฀30฀
undistributed฀profits,฀137฀ Events฀after฀the฀reporting฀period,฀119฀
unrealised฀profits฀on฀intragroup฀trading,฀ Exchange฀differences,฀338,฀342฀
฀฀฀฀฀138฀ Exchanges฀of฀assets,฀48฀
Defined฀benefit฀plans,฀83฀ Exclusion฀ of฀ a฀ subsidiary฀ from฀ the฀
Defined฀contribution฀plans,฀82฀ consolidated฀financial฀statements,฀242฀
Depreciation,฀48฀
880฀

lOMoARcPSD|6256454
฀ ฀ Index฀
Exemption฀ from฀ presenting฀ consolidated฀ Hedged฀items,฀165฀

financial฀statements,฀240฀ Hedging,฀164฀
Expected฀credit฀losses,฀161,฀163฀ Hedging฀instruments,฀165฀
Expected฀loss,฀161฀ Held฀for฀sale,฀311,฀312,฀319฀
฀ Held฀for฀trading,฀154฀
Highest฀and฀best฀use,฀61฀
F฀ Highly฀probable,฀311฀
Fair฀presentation฀
Historical฀cost,฀6,฀8฀
true฀and฀fair฀view,฀4฀
holiday฀pay,฀80฀
Fair฀value,฀8,฀59,฀199฀
฀
hedge,฀166฀
hierarchy,฀60฀ I฀
less฀costs฀of฀disposal,฀50฀ IAS฀1฀Presentation฀of฀Financial฀Statements,฀6฀
measurement,฀59฀ IAS฀7฀Statement฀of฀Cash฀Flows,฀357฀
of฀a฀liability,฀61฀ IAS฀8฀Accounting฀Policies,฀Changes฀in฀
of฀the฀identifiable฀assets฀acquired฀and฀ Accounting฀Estimates฀and฀Errors,฀23,฀68,฀
liabilities฀assumed,฀253฀ 409฀
Finance฀lease,฀185,฀186฀ IAS฀12฀Income฀Taxes,฀128฀
Financial฀asset,฀150,฀155฀ IAS฀19฀Employee฀Benefits,฀79฀
Financial฀ guarantee฀ contract,฀ 154,฀ IAS฀20฀Government฀Grants฀and฀Disclosure฀of฀
158,฀161฀ Government฀Assistance,฀68฀
Financial฀instrument,฀150,฀161,฀456฀ IAS฀ 21฀ The฀ Effects฀ of฀ Changes฀ in฀ Foreign฀
Financial฀liability,฀150,฀157฀ Exchange฀Rates,฀337฀
Financial฀performance฀measures,฀403฀ IAS฀24฀Related฀Party฀Disclosures,฀32฀
Finite฀useful฀life,฀64฀ IAS฀27฀Separate฀Financial฀Statements,฀240฀
Foreign฀operation,฀340,฀349฀ IAS฀ 28฀ Investments฀ in฀ Associates฀ and฀ Joint฀
Framework฀for฀the฀Preparation฀and฀ Ventures,฀240฀
Presentation฀of฀Financial฀Statements,฀5฀ IAS฀ 32฀ Presentation฀ of฀ Financial฀ Instruments,฀
FRS฀102฀The฀Financial฀Reporting฀Standard฀ 149฀
applicable฀in฀the฀UK฀and฀Republic฀of฀ IAS฀33฀Earnings฀Per฀Share,฀406฀
Ireland,฀467฀ IAS฀34฀Interim฀Financial฀Reporting,฀15฀
FRS฀104฀Interim฀Financial฀Reporting,฀467฀ IAS฀36฀Impairment฀of฀Assets,฀49฀
FRS฀105฀The฀Financial฀Reporting฀Standard฀ IAS฀ 37฀ Provisions,฀ Contingent฀ Liabilities฀ and฀
applicable฀to฀the฀Micro-entities฀Regime,฀ Contingent฀Assets,฀115฀
467฀ IAS฀38฀Intangible฀Assets,฀62฀
Full฀disposal,฀287,฀288฀ IAS฀40฀Investment฀Property,฀66฀
Functional฀currency,฀337,฀338,฀340฀ IAS฀41฀Agriculture,฀70฀
Fundamental฀qualitative฀characteristics฀ Identifiable,฀62฀
Qualitative฀characteristics,฀5฀ IFRS฀1฀First-time฀Adoption฀of฀International฀
Future฀operating฀losses,฀116฀ Financial฀Reporting฀Standards,฀477฀
฀ IFRS฀2฀Share-based฀Payment,฀199฀
IFRS฀5฀Non-current฀Assets฀Held฀for฀Sale฀and฀
G฀ Discontinued฀Operations,฀311฀
Global฀Reporting฀Initiative฀(GRI),฀415฀ IFRS฀8฀Operating฀Segments,฀423฀
Going฀concern,฀5,฀7,฀119฀ IFRS฀9฀Financial฀Instruments,฀153,฀154,฀159,฀
Goodwill,฀251฀ 160,฀164,฀240฀
Government฀grants,฀68,฀455฀ IFRS฀10฀Consolidated฀Financial฀Statements,฀
Grant฀date,฀199,฀200฀ 240฀
Group฀reorganisations,฀301฀ IFRS฀12฀Disclosure฀of฀Interests฀in฀Other฀
฀ Entities,฀330฀
H฀ IFRS฀13฀Fair฀Value฀Measurement,฀59฀
Hedge฀effectiveness,฀165฀
฀ 881฀

lOMoARcPSD|6256454
฀฀
IFRS฀15฀Revenue฀from฀Contracts฀with฀ Lease฀term,฀181฀
Customers,฀10฀ Lessee฀accounting,฀179฀
IFRS฀16฀Leases,฀179,฀185,฀188฀ Lessor฀accounting,฀185฀
IFRS฀for฀SMEs,฀453฀ Liability,฀7฀
omissions,฀454฀ Lifetime฀ expected฀ credit฀ losses,฀ 161,฀
transitional฀rules,฀453฀ 162,฀163,฀164฀
IFRS฀for฀SMEs฀transition,฀454฀ Linkage,฀7฀
IFRS฀Practice฀Statement,฀417฀ Liquidity฀analysis,฀405฀
Impairment฀evidence฀of,฀49฀ Low-value฀assets,฀183฀
Impairment฀loss,฀50฀ ฀
recognition,฀53฀
Impairment฀of฀assets,฀49฀
M฀
Management฀commentary,฀417,฀471฀
Impairment฀of฀financial฀assets฀
Manufacturer฀or฀dealer฀lessors,฀187฀
Impairment,฀160฀
Market฀ conditions฀ (share-based฀ payment),฀
Impairment฀reversal฀of,฀58฀
207฀
Income,฀10฀
Market-based฀measure,฀60฀
Indefinite฀useful฀life,฀65฀
Material,฀453฀
Influences฀on฀ethics,฀30฀
Material฀(IAS฀1),฀470฀
Intangible฀asset,฀62,฀455,฀458฀
Materiality,฀470฀
Integrated฀report,฀418฀
Measurement฀period,฀252฀
Integrated฀reporting฀<IR>,฀418฀
Modifications,฀208฀
Interim฀financial฀report,฀15฀
Modifications฀(share-based฀payment),฀208฀
Interim฀financial฀statements,฀15฀
Monetary฀items,฀337฀
Interim฀reporting,฀455฀
Monetary฀ items฀ forming฀ part฀ of฀ a฀ net฀
Internally฀generated฀intangible฀assets,฀63,฀64฀
investment฀in฀a฀foreign฀operation,฀349฀
International฀convergence,฀467฀
Moral฀philosophy,฀29฀
Intragroup฀transactions,฀243฀
Most฀advantageous฀market,฀60฀
associates,฀249฀
฀
Investment฀entities,฀242฀
Investment฀property,฀68,฀66,฀455฀ N฀
Investment฀to฀associate,฀266฀ Net฀investment฀in฀a฀foreign฀operation,฀
Investment฀to฀subsidiary,฀266฀ 349฀
Investments฀in฀associates,฀249฀ Non-controlling฀interests,฀244฀
Investments฀in฀debt฀instruments,฀155,฀160฀ measuring,฀244฀
Investments฀ in฀ equity฀ instruments,฀ 155,฀ 157,฀ Non-current฀assets฀
166฀ depreciation,฀48฀
Irrevocable฀election,฀155,฀157฀ measurement฀at฀recognition,฀47฀
฀ recognition,฀47฀
revaluations,฀48฀฀
J฀ to฀be฀abandoned,฀314฀
Joint฀arrangement,฀327฀
Non-current฀ assets฀ classified฀ as฀ held฀ for฀ sale,฀
Joint฀control,฀327฀
312฀
Joint฀operations,฀327,฀328฀
Non-current฀assets฀held฀for฀sale,฀311,฀313฀
Joint฀ventures,฀327,฀328฀
Non-financial฀ performance฀ indicators฀ (NFPIs),฀
฀
412฀
K฀ Non-financial฀reporting,฀414฀
Key฀management฀personnel,฀32฀ Non-refundable฀upfront฀fees,฀15฀
฀ ฀
L฀ O฀
Lease,฀160,฀163,฀179฀ Offsetting,฀159฀
Lease฀liability,฀181฀ Onerous฀contracts,฀116฀
882฀

lOMoARcPSD|6256454
฀ ฀ Index฀
Operating฀lease,฀185,฀188฀ Reportable฀segments,฀423฀
Operating฀segment,฀423฀ Reporting฀entity,฀7฀
Other฀comprehensive฀income,฀9฀ Research฀and฀development,฀63฀
฀ Research฀phase,฀63฀
Restructuring,฀117฀
P฀ Revaluations,฀48฀
Partial฀disposal,฀287฀
Revenue,฀10,฀160,฀458฀
Past฀due,฀161฀
Revenue฀recognition,฀10฀
Past฀service฀cost,฀85฀
Reversal฀of฀past฀impairments,฀58฀
Pension฀actuarial฀gains฀and฀losses,฀456฀
Right-of-use฀asset,฀182฀
Performance฀conditions฀
฀
share-based฀payment,฀207฀
Performance฀measures,฀403฀ S฀
Performance฀obligation,฀10,฀11,฀13฀ Safeguard,฀26฀
Piecemeal฀acquisition,฀265฀ Sale฀and฀leaseback฀transactions,฀188฀
Plan฀assets,฀84฀ Sale฀with฀right฀of฀return,฀14฀
Possible฀obligation,฀118฀ Segment฀reporting,฀423฀
Power,฀241฀ Segmental฀reporting,฀455฀
Present฀obligation,฀115,฀118฀ Separate฀financial฀statements฀of฀investor,฀458฀
Present฀value,฀6฀ Service฀conditions฀(share-based฀payment),฀
Presentation฀&฀disclosure,฀458฀ 207฀
Presentation฀currency,฀339฀ Settlement,฀89฀
Presentation฀of฀deferred฀tax,฀142฀ Settlement฀(share-based฀payment),฀208,฀210฀
Principal฀market,฀60฀ Share฀appreciation฀rights,฀203฀
Principal฀versus฀agent,฀15฀ Share฀option,฀199฀
Prior฀period฀adjustment,฀454฀ Share-based฀payment,฀199฀฀
Prior฀period฀errors฀(IAS฀8),฀36฀ arrangement,฀199฀
Probable฀future฀economic฀benefits,฀6฀ cancellation฀or฀settlement,฀210฀
Profitability฀ratios,฀457฀ deferred฀tax฀implications,฀211฀
Profit-sharing,฀80฀ modifications,฀208฀
Projected฀unit฀credit฀method,฀83฀ modifications,฀cancellations฀and฀settlements,฀
Property,฀plant฀and฀equipment,฀47฀ 208฀
Provision,฀115฀ recognition,฀200฀฀
฀ transaction,฀199฀
Share-based฀payment฀with฀a฀choice฀of฀
Q฀ settlement,฀206฀
Qualifying฀asset,฀69฀ Short-term฀benefits,฀79฀
Qualitative฀characteristics,฀5,฀6฀ Short-term฀leases,฀183฀
฀ Significant฀influence,฀248฀
R฀ Significant฀influence฀achieved฀in฀stages,฀266฀
Ratio฀analysis,฀403,฀406฀ Significant฀influence฀lost,฀289฀
Ratio฀analysis฀points฀to฀consider,฀404,฀405฀ simplifications฀under฀IFRS฀for฀SMEs,฀458฀
Realisable฀value,฀6฀ Single฀economic฀entity,฀240฀
Rebuttable฀presumption,฀9฀ Small฀ and฀ medium-sized฀ entities฀ (SMEs),฀ 453฀
Receivable,฀10฀ relevance฀of฀IFRS,฀453฀
Reclassification฀of฀financial฀assets,฀157฀ Social฀responsibility,฀30฀
Recoverable฀amount,฀50฀ Spot฀exchange฀rate,฀337฀
Reimbursements,฀116฀ Stakeholder,฀402฀
Reliable฀estimate,฀115฀ Stand-alone฀selling฀price,฀10,฀11฀
Remeasurement฀gains฀or฀losses,฀84฀ Step฀acquisition,฀265฀
Remeasurement฀of฀lease฀liability,฀183฀ where฀control฀is฀retained,฀274฀
Replacement฀฀(share-based฀payment),฀211฀ Stewardship฀and฀management,฀407฀
฀ 883฀

lOMoARcPSD|6256454
฀฀
Structured฀entity,฀331฀ Translation฀rules,฀338,฀339,฀340฀
Subsidiaries,฀241฀ Transparency,฀414฀
Subsidiaries฀held฀for฀sale,฀319฀ Treasury฀shares,฀152฀
Subsidiary,฀241฀ ฀
to฀associate,฀288฀
U฀
to฀investment,฀289฀
Unconsolidated฀structured฀entities,฀330฀
to฀subsidiary,฀274,฀299฀
Underlying฀assumption,฀5฀
Subsubsidiary฀moved฀across,฀302฀
Unit฀of฀account,฀7฀
Subsubsidiary฀moved฀down,฀302฀
Unused฀tax฀credits,฀140฀
Subsubsidiary฀moved฀up,฀301฀
Unused฀tax฀losses,฀140฀
Sustainability฀reporting,฀415฀
฀
฀
T฀ V฀
Value฀in฀use,฀8,฀50฀
Tax฀base,฀128฀
Variable฀consideration,฀11฀
tax฀computation,฀128฀
Vest,฀199฀
Tax฀jurisdiction,฀128฀
Vesting฀conditions,฀199,฀201,฀207฀
Tax฀written฀down฀value,฀129,฀132฀
Vesting฀period,฀199฀
Taxable฀temporary฀difference,฀132฀
฀
Temporary฀differences,฀131฀
Threats฀to฀the฀fundamental฀principles,฀25฀ W฀
Transaction฀price,฀10฀ Warranties,฀14฀
Transfers฀to฀or฀from฀investment฀property,฀67฀ ฀
Translation฀methods,฀340฀
฀
884฀

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Strategic Business Reporting (SBR) (Association of Chartered Certified Accountants)

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Introduction to Strategic Business Reporting iv

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A1฀ Professional฀behaviour฀and฀compliance฀with฀accounting฀standards฀ Chapter฀2฀

A2฀ Ethical฀requirements฀of฀corporate฀reporting฀and฀the฀consequences฀of฀ Chapter฀2฀

B1฀ The฀applications,฀strengths฀and฀weaknesses฀of฀an฀accounting฀ Chapter฀1฀

C1฀ Revenue฀ Chapter฀1฀

C2฀ Non-current฀assets฀ Chapter฀3฀

C3฀ Financial฀instruments฀ Chapter฀7฀

C4฀ Leases฀ Chapter฀8฀

C5฀ Employee฀benefits฀฀ Chapter฀4฀

C6฀ Income฀taxes฀ Chapter฀6฀

C7฀ Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀ Chapter฀5฀

C8฀ Share-based฀payment฀ Chapter฀9฀

C9฀ Fair฀value฀measurement฀฀ Chapters฀3,฀7฀

C10฀ Reporting฀requirements฀of฀small฀and฀medium-sized฀entities฀(SMEs)฀ Chapter฀18฀

C11฀ Other฀reporting฀issues฀ Chapters฀1,฀3,฀8,฀

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D1฀ Group฀accounting฀including฀statements฀of฀cash฀flows฀ Chapters฀10,฀13–

D2฀ Associates฀and฀joint฀arrangements฀ Chapters฀10,฀14฀

D3฀ Changes฀in฀group฀structures฀ Chapters฀11,฀12฀

D4฀ Foreign฀transactions฀and฀entities฀ Chapter฀15฀

E1฀ Analysis฀and฀interpretation฀of฀financial฀information฀and฀measurement฀ Chapter฀17฀

F1฀ Discussion฀of฀solutions฀to฀current฀issues฀in฀financial฀reporting฀ Chapter฀19฀

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Section฀ Two฀compulsory฀scenario-based฀questions,฀totalling฀50฀marks฀ 50฀

Section฀ Two฀compulsory฀25-mark฀questions฀ 50฀

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Chapter Summary of Supplementary Reading content

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Fundamental฀ Enhancing฀qualitative฀ The฀cost฀constraint฀฀

฀ Relevance฀ ฀ Comparability฀ ฀ Benefits฀of฀reporting฀

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Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

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Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

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Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

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Chapter฀ Title฀ Summary฀of฀issues฀addressed฀