F7 SMART Notes ACCA

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SMART NOTES ACCA F7 (FINANCIAL REPORTING)
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Financial Reporting
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CONTENTS Page #
Conceptual Framework & Regulatory Framework 1
4
IAS 1 Presentation of financial statements
7
IAS 16 - Tangible Non-Current Assets
IAS 20 - Accounting for government grants & disclosure of government assistance 10
11
IAS 23 – Borrowing Cost
IAS 40 – Investment Property 12
13
IAS 38 – Intangible Assets
IAS 36 – Impairment losses 14
IFRS 5 - Non-current assets held for sale and discontinued operations 15
16
IAS 8 - Accounting policies, changes in accounting estimates & errors
16
IFRS 13 – Fair Value Measurement
17
IAS 2 – Inventory
18
IAS 41 – Agriculture
IFRS 16 - LEASES 19
IAS 32, IFRS 9 - Financial Instruments 20
23
IAS 21 — the effects of changes in foreign exchange rates
23
IFRS 15 – Revenue from Contract with Customer
25
IAS 12 – Taxation
27
IAS 33 – Earning Per Share
28
IAS 37 – Provisions, contingent liabilities and contingent assets
30
IAS 10 – Events after the reporting period
31
Consolidated Statement of Financial Position
34
Consolidated Statement of Profit or Loss
35
IAS – 28 Investment in Associate
DISPOSAL OF INVESTMENT IN SUBSIDIARY 36
37
IAS – 7 Statement of Cash Flow
Interpretation of Financial Statements 40
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Conceptual Framework
The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial
statements for external users. A conceptual framework can be seen as a statement of generally accepted accounting
principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new
ones.
Purpose of framework
• Assist in the development of future IFRS and the review of existing standards by setting out the underlying
concepts
• Promote harmonisation of accounting regulation and standards
• Assist the preparers of financial statements in the application of IFRS and dealing with accounting transactions
for which there is not (yet ) an accounting standard
Advantages of a conceptual framework
• Financial statements are more consistent with each other
• Avoids firefighting approach and a has a proactive approach in determining best policy
• Less open to criticism of political/external pressure
• Has a principles based approach
• Some standards may concentrate on effect on statement of financial position; others on statement of
profit or loss
Disadvantages of a conceptual framework
• A single conceptual framework cannot be devised which will suit all users Need for a variety
of standards for different purposes
• Preparing and implementing standards may still be difficult with a framework
Qualitative characteristics of useful financial information
They identify the types of information likely to be most useful to users in making decisions about the reporting entity
on the basis of information in its financial report.
Fundamental qualitative characteristics
Relevance
Relevant financial information is capable of making a difference in the decisions made by users if it has
predictive value, confirmatory value, or both.
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
Faithful representation
Information must be complete, neutral and free from material error
Enhancing qualitative characteristics
 Comparability
Comparison with similar information about other entities and with similar information about the same entity
for another period or another date:
 Verifiability
It helps to assure users that information represents faithfully the economic phenomena it purports to
represent. Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement
 Timeliness
It means that information is available to decision-makers in time to be capable of influencing their decisions.
 Understandability
Classifying, characterising and presenting information clearly and concisely. Information should not be
excluded on the grounds that it may be too complex/difficult for some users to understand
The IFRS framework states that going concern assumption is the basic underlying assumption
The five elements of financial statements
Asset: An asset is 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.
Liability: A liability is 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: Equity is the residual interest in the assets of the entity after deducting all its liabilities.

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Income: Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating
to contributions from equity participants.
Expense: Expenses are 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.
Recognition of the elements of financial statements
Recognition is the process of incorporating in the statement of financial position or statement of profit or loss an item
that satisfies the following criteria for recognition:
• The item that meets the definition of an element
• It is probable that any future economic benefit associated with the item will flow to or from the entity
and
• The item’s cost or value can be measured with reliability.
Application of recognition criteria
• An asset is recognised in the statement of financial position when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
• A liability is recognised in the statement of financial position when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the amount at which
the settlement will take place can be measured reliably.
• Income is recognised in the income statement when an increase in future economic benefits related to an
increase in an asset or a decrease of a liability has arisen that can be measured reliably.
• Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an
increase of a liability has arisen that can be measured reliably.
Measurements of elements in financial statements
The IFRS Framework acknowledges that a variety of measurement bases:
• Historical cost
• 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)
• Net realisable value (The amount of cash or cash equivalents that could currently be obtained by selling an
asset in an orderly disposal)
• Present value (A current estimate of the present discounted value of the future net cash flows in the normal
course of business)
• Fair value (As per IFRS 13)
HISTORICAL COST ACCOUNTING
The application of historical cost accounting means that assets are recorded at the amount they originally cost, and
liabilities are recorded at the proceeds received in exchange for the obligation.
Advantages
• Simple to understand
• Figures are objective, reliable and verifiable
• Results in comparable financial statements
• There is less possibility for manipulation by using 'creative accounting' in asset valuation.
Disadvantages
• The carrying value of assets is often substantially different to market value
• No account is taken of inflation meaning that profits are overstated and assets understated
• Financial capital is maintained but not physical capital
• Ratios like Return on capital employed are distorted
• It does not measure any gain/loss of inflation on monetary items arising from the impact
• Comparability of figures is not accurate as past figures are not restated for the effects of inflation
STANDARD SETTING PROCESS The due process for developing an IFRS comprises of six stages:
1. Setting the agenda
2. Planning the project
3. Development and publication of Discussion Paper
4. Development and publication of Exposure Draft
5. Development and publication of an IFRS Standard
6. Procedures after a Standard is issued

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REGULATORY FRAMEWORK
International Financial Reporting Standards Foundation (IFRS Foundation)
Responsible for governance of standard setting process. It oversees, funds, appoints and monitors the operational
effectiveness of:
IFRS Advisory Council International Accounting International Financial

(IFRS AC) Standards Board (IASB) Reporting Standards
Interpretations Committee (IFRS
Provide advice to IASB on: Develop new accounting IC)
standards
their agenda and work Liaise with national Assist the IASB to establish and
prioritization standard - setting bodies to improve
the impact of proposed promote convergence of standards
standards international and national
Provides strategic accounting standards Issues Interpretations
advice ( known as IFRICs) which provi de
timely guidance on emerging
accounting issues not addressed in
full standards
Assist in the international/national

convergence process
PRINCIPLES VS RULES-BASED APPROACH

Rules-based accounting system
• Likely to be very descriptive
• Relies on a series of detailed rules or accounting requirements that prescribe how financial statements
should be prepared
• Considered less flexible, but often more comparable and consistent, than a principles-based system
• Can lead to looking for ‘loopholes’
Principles-based accounting system

• It relies on generally accepted accounting principles that are conceptually based and are normally underpinned
by a set of key objectives
• More flexible than a rules-based system
• Require judgement and interpretation which could lead to inconsistencies between reporting entities and can
sometimes lead to the manipulation of financial statements
Because IFRSs are based on The Conceptual Framework for Financial Reporting, they are often regarded as being a
principles-based system.

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PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES

IAS-1 Presentation of financial statements
A complete set of financial statements comprises:
• A statement of financial position

• either
– A statement of comprehensive income, or
– A statement of profit or loss and other comprehensive income
• A statement of changes in equity
• A statement of cash flows
• Accounting policies and explanatory notes
The Statement of Financial Position
A recommended format is as follows:
XYZ Group Statement of Financial Position as at 31 December 20X7
Assets $ $
Non-current assets:
Property, plant and equipment X
Intangible assets X
X
Current assets:
Inventories X
Trade receivables X
Cash and cash equivalents X
X
Total assets X
Equity and liabilities

Capital and reserves:
Share capital X
Retained earnings X
Other components of equity X
Total equity X
Non-current liabilities:
Long-term borrowings X
Deferred tax X
Current liabilities: X
Trade and other payables X

Short-term borrowings X
Current tax payable X
Short-term provisions X
X
Total equity and liabilities X
Current assets include all items which:

• Will be settled within 12 months of the reporting date, or Are part of the entity's normal operating cycle.
Within the capital and reserves section of the statement of financial position, other components of equity include:
• Revaluation reserve
• General reserve

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Statement of changes in equity

The statement of changes in equity provides a summary of all changes in equity arising from transactions with
owners in their capacity as owners.
This includes the effect of share issues and dividends.
XYZ Group
Statement of changes in equity for the year ended 31 December 20X7
Share Share Revaluation Retained Total
capital premium surplus Earnings equity
$ $ $ $ $
Balance at 31 December 20X6 X X X X X

Change in accounting policy (X) (X)
__ __ __ __
Restated balance X X X X X
Dividends (X) (X)
Issue of share Capital X X X
Total X X X
Comprehensive income for the year (X) X -

Transfer to retained earnings
__ __ __ __
Balance at 31 December 20X7 X X X X X

Statement Of Profit Or Loss And Other Comprehensive Income
A recommended format for the statement of profit or loss and other comprehensive income is as follows:
XYZ Group
Statement of profit or loss and other comprehensive income
For the year ended 31 December 20X6
$
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administrative expenses (X)
Profit from operations X
Finance costs (X)
Profit before tax X
Income tax expense (X)
Net Profit for the period X
Other comprehensive income
Gain on property revaluation X
Gain/loss on fair value through other comprehensive income financial assets (IFRS 9) X
Total comprehensive income for the year X

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Companies – Basic Adjustments

TYPES OF SHARES
There are a number of different types of shares which companies may issue.
Preference shares
There are two types of preference share:
• Irredeemable preference shares exist, much like ordinary shares. The amount issued in form of
Irredeemable preference shares is not payable after a fixed period.
• Redeemable preference shares are issued for a fixed term. At the end of this term, the shareholder redeems
their shares and in return is repaid the amount they initially bought the shares for (normally plus a premium).
In the meantime they receive a fixed dividend.
ACCOUNTING FOR A SHARE ISSUE

The accounting entry to record the issue of shares is:
Dr Cash Proceeds received
Cr Share capital Nominal value of shares issued
Cr Share premium Premium on issue of shares.
ACCOUNTING FOR A RIGHTS ISSUE

A rights issue is an issue of new shares to existing shareholders in proportion to their existing shareholding. The
issue price is normally less than market value to encourage shareholders to exercise their rights and buy shares.
Dr Cash Proceeds received
Cr Share premium Premium on issue of shares.
ACCOUNTING FOR A BONUS ISSUE

A bonus issue is an issue of new shares at no cost to existing shareholders, in proportion to their existing
shareholding. An issue of this type does not raise cash, but is funded by the existing share premium account (or
retained profits if the share premium account is insufficient), and accounted for by:
Dr Share premium/Retained profits Nominal value of shares issued
LOAN NOTES
A company can raise finance either through the issue of shares or by borrowing money.
An issue of loan notes is recorded by:
Dr Cash Cr Loan notes (non-current liability)

Interest paid on the loan notes is recorded by:
Dr Finance cost (interest expense) Cr Cash / accrual

• Finance cost is charged on effective rate of interest
• Cash paid is as per the nominal rate of interest
• The differential amount becomes a part of the closing liability of loan
DIVIDENDS
Ordinary dividends = No. of shares x Per share dividend
Preference dividends = Amount of preference shares x % of dividend

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NOT-FOR-PROFIT AND PUBLIC SECTOR ENTITIES

• Not-for-profit and public sector entities are not expected to show a profit but must ensure that they have
managed their funds efficiently
• Not-for-profit and public sector entities do not exist to make profits, but they do have a diverse range of
stakeholders, many of whom have a legitimate interest in the body’s financial stewardship.
• Corporate objectives of businesses are very different from those of not-for-profit and public sector entities.
• Companies exist largely to make profits.
• Accounting policies adopted by not-for-profit and public sector entities are increasingly similar.
• Not-for-profit and public sector entities include government agencies, healthcare agencies, schools, colleges
and charities
• Even though not-for-profit entities do not report to shareholders, they must be able to account for the funds
received and the way they have been allocated
• Their objective is to provide goods and services to various recipients and not make a profit
• A public sector entity such as local government will have the aim of providing services to its local community
such as fire services, refuse collection, libraries, theatres and sports facilities
• A charity will have the aim of providing assistance to a particular cause, for example poverty aid in developing
countries, child protection, animal rescue
Performance measurement
• The performance of a public sector or not-for-profit entity will be in terms of measuring whether its stated
Key performance indicators have been achieved
• One measure of performance for public sector entities is the 3 Es – economy, efficiency and effectiveness
• Another performance consideration is whether the entity has achieved value for money
• Charities must focus on demonstrating that they have made proper use of the funds received and whether
they have achieved their stated aims
IAS 16 - Tangible Non-Current Assets

Definition of Property Plant & Equipment: These are tangible non-current assets which are:
• Held for use in production or • rendering of services or • rental to others or • use in administration
Initial Recognition
PP &E should be recognized as an asset when it:
a) Meets definition of PP&E (as Above)
b) Satisfy Recognition Criteria of Asset as per IASB’s Framework
• Probable inflow of economic benefits & • Cost can be measured Reliably
Application of Initial Recognition
Spare Parts: Normally treated as inventory and its cost charged to P&L when these are consumed.
However these will be capitalized as PP&E if these are specific in nature, having material cost and economic benefits are
for more than one economic period.
Safety Equipment: (e.g Sound proof equipment, Fire Alarms, Smoke Fibers)
Normally cost of safety equipment is charged to P&L because it don’t enhance the economic benefit of related asset.
However Cost will be capitalized as PP&E if these enhance the economic benefits of related asset.
Segmentation of Complex Assets: (If a non-current asset has different components which are different in nature and
each component has different useful life than each component will be recognized as a separate non-current asset and
depreciated separately on respective useful life.)
Aggregation: (If the cost of individually insignificant items (e.g. Dyes, repair tools) becomes material in aggregate than
this will be taken as PP&E at aggregate cost.)
Subsequent Expenditure (Expenditures during the life of an asset)
Recorded as an Expense: if incurred to maintain the capacity, efficiency, useful life or economic benefit.
Dr Expense a/c Cr Cash/Payable a/c
Recorded as an Asset (PP&E): These expenditures will be capitalized only if:
 It enhances useful life, economic benefits, earning capacity or efficiency of an asset
Depreciation = (Existing carrying Value + enhancement cost – residual Value)/Remaining Useful life
 Overhaul or major inspection (Useful life (depreciation) will be the number of years until next overhaul)
 Replacement of a scraped component of a complex Asset (recorded separately and depreciated separately)

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Initial Measurement (Valuation)

PP&E should initially be measured at cost (all costs necessary to bring asset into management’s desired working
condition)
Purchase Price (after trade discount) XX Initial Recognition:
Plus: transportation cost XX Dr PP&E a/c
Cr Cash/Payable a/c
Plus: import duties and sale tax (if not refundable) XX At Payment Date (credit
Plus: Legal Charges (stamp paper, lawyer fee) XX Transaction only):
Plus: Handling Charges XX Dr Payable
Cr Cash a/c
Plus: Site Preparation cost XX
Cr Cash Discount a/c
Plus: Installation Cost XX
Plus: Professional Fee (e.g engineers) XX Cash or Settlement Discount
Plus: Pre-Production Testing Cost (Net of any income from samples) XX will not affect cost of asset but
Plus: Any modification Cost (e.g. in building for that PP&E) XX will be credited as income on
Plus: Restoration or Dismantling cost @ Present Value XX payment date.
(Dr Asset a/c Cr Provision a/c.)
Total Cost of Asset XX
Self constructed asset: Cost of self-constructed assets will be the cost of its production
Excluded Costs: These cost will never be capitalized and charged to P&L as expense.
Testing cost, insurance cost, repair & maintenance cost, relocation cost, initial operating losses, rectification cost of
errors, administration & general overheads.
Extended Credit Period: If an asset is purchased on extended credit period than the asset will be recorded at cash
equivalent value (market value) and any excess amount paid over the cash equivalent value will be recorded as interest
cost and it will be recognized at end of the period.
Subsequent Measurement
a) Cost Model
Property Plant & Equipment should be recorded at carrying value
Carrying Value = Cost – accumulated depreciation – Accumulated impairment loss (sudden decrease in value of asset)
Depreciation
Why Charge Depreciation: It is application of matching concept (to generate benefit the value of asset has decreased
due to its usage)
Definitions:
“Decrease in value of an asset due to its usage or wear & tear or obsolescence (outdated asset), or legal restriction.”
“Systematic allocation of depreciable Amount of an asset over its useful life.”
Depreciable Amount = cost – Residual Value Accumulated Depreciation= Total depreciation of all years
Residual Value is the estimated amount that an entity can obtain when disposing of an asset after itsuseful life has
ended. When doing this the estimated costs of disposing of the asset should be deducted
Depreciation Method:
Straight Line Basis: Depreciation = (cost – Residual value)/Useful Life
Reducing Balance Basis: Depreciation = (Carrying Value – Accumulated Depreciation) X % age
Machine Hours Basis: Depreciation = {(Cost – Residual Value) X Hours Used}/Total life in hours
Accounting Estimates and Change in Accounting Estimates
Depreciation method, Useful Life and Scrap Value are all accounting estimates. Accounting estimates are reviewed at
each reporting date and if there is a change in accounting estimate then the change will be applied on prospective basis
(current year and future years)
Straight Line to Reducing balance method Dep. = (Carrying value – acc. Dep after change in estimate) X %age
Reducing Balance Method to Straight Line Dep. = (Carrying Value – Residual Value)/Remaining useful life @
change
Change in Useful Life Dep. = (Carrying Value – Residual Value)/Revised Useful life
Change in Residual Value Dep. = (Carrying Value – Revised Residual Value)/Revised Useful life

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b) Revaluation Model
PP&E should be recorded at Revalued Amount (Current Market value) less subsequent accumulated depreciation less
subsequent accumulated impairment loss
Once an asset is revalued the whole class of assets to which asset belongs must be revalued.
Accounting for Revaluation
Example: cost = 100,000 useful life = 20 years Acc dep (after 5 years) = 25,000 (5,000/annum) Revalued amount=
110,000
Step 1: Restate Asset from Cost to Revaluation (Revalued Amount – Cost) e.g 110,000 – 100,000 = 10,000
Step 2: Remove Existing Accumulated Depreciation
Combine Entry for step 1 and step 2: Dr Non-Current Asset 10,000
Dr Acc. Depreciation 25,000
Cr Revaluation Surplus 35,000
Step 3: Calculate Depreciation on Revalued Amount over remaining useful life e.g. (110,000 – 0)/15 = 7333
Dr Depreciation 7,333 Cr Accumulated Depreciation 7,333
Step 4: Transfer of Excessive Depreciation every year (Dep on Revalued amount – Dep. on original cost)
e.g. 7,333 – 5,000 = 2,333 Dr Revaluation Surplus 2,333 Cr Retained Earnings 2,333
This transfer does not get taken to other comprehensive income, it is done in the SOCIE only.
Revaluation Loss:
Example: cost = 100,000 useful life = 20 years Acc dep (after 5 years) = 25,000 (5,000/annum) Revalued amount=
60,000
Combine Entry: Dr Revaluation Loss 15,000
Dr Acc. Depreciation 25,000
Cr Non-Current Asset 40,000
Calculation of Revaluation gain or loss through carrying value:
If Revalued Amount > Carrying Value = Revaluation Surplus
If Revalued Amount < Carrying Value = Revaluation Loss
Asset Revalued has impairment loss in previous years:
Dr Non-Current Asset
Dr Acc. Depreciation
Cr P&L
Cr Revaluation Surplus
Note: Revaluation gains are recorded as a component of other comprehensive income either within the statement of
P&L and other comprehensive income or in a separate statement.
Disposal of PP&L
Disposal of Non-Revalued Asset
Calculate profit or loss on disposal: Profit/Loss = Sale Proceeds ― Carrying Value
Dr Cash XX
Dr Acc Depreciation XX
Cr PP&E (cost) XX
Cr P&L (Profit) XX
Disposal of Revalued Asset
Step 1: Calculate profit or loss on disposal: Profit/Loss = Sale Proceeds ― Carrying Value
Dr Cash XX
Dr Acc Depreciation XX
Cr PP&E (cost) XX
Cr P&L (Profit) XX
Step 2: The remaining revaluation surplus relating to this should be transferred to retained Earnings.
Dr Retained Earnings Cr Revaluation Surplus

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IAS 20 - Accounting for government grants & disclosure of government

assistance
Government assistance: provision of economic benefits by government to a specific entity or range
of entities which meet specific criteria.
Examples include free of cost business advice, tax free zone and grant of local operating license. Exact Amount of
government assistance is not measured so Only disclosed in the notes.
Government Grant: transfer of resources to an entity, from government, in return for compliance
with certain conditions. these have exact value measureable. Recognize under IAS 20.
Grant related to income: the grant which is available for developments and improvements. Examples include
improvement of working conditions, improvement of internal control, availability of job vacancies, training purpose.
Grant related to Asset: Grant which is available for construction or acquisition of an asset.
Examples include 20% contribution for the purchase of energy saving equipment, free of cost piece of land, free of cost
operating license.
Initial Recognition
Government grant will be recognized only if:
a) It has been received or it is certain that it will be received.
b) The predetermined conditions related to the grant has be satisfied or it is probable that those will be satisfied.
Dr Cash/Receivable/Asset Cr Defer income (liability)
Measurement of Govt. Grant
Grant in Cash: Dr Cash/Receivable Cr Deferred Income
Grant in Kind: Dr Asset (FV @ Asset) Cr Deferred Income
Presentation and Amortization of Govt. Grant
Grant Related to Income
Initial Recognition: Dr Cash Cr Deferred Income
Amortisation of Govt. grant (Every Year): Dr Deferred income Cr amortization of Govt. grant (income in
P&L)
Grant Related to Asset
Depreciating Asset Non-Depreciating Asset

Method 2: Asset will be recognized at its gross cost. Initial Recognition:
Initial recognition: Dr Cash Cr Deferred Income
Dr Asset Cr Deferred income(non-current liability) Every Year:
Amortisation of Govt. grant (Every Year): Dr Deferred income
Dr Deferred income (liability) Cr amortization of Govt. grant (income in P&L)
Cr amortization of Govt. grant (income in P&L)
Remaining Govt. grant will be divided between current
liability and non-current liability.
Method 1: On initial recognition, deduct the grant from
the cost of the non-current asset and depreciate the
reduced cost.
Repayment of Govt. Grant
Govt. grant needs to be repaid if the conditions of the grant are breached.
Repayment of grant related to income: Repayment of grant related to Asset: (net method)
Dr Defer Income (unamortized Govt Grant) Add repayable amount into carrying value of asset
Dr P&L (bal fig) Dr Asset
Cr Payable Cr Payable

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IAS 23 – Borrowing Cost

Borrowing Cost: Costs which are incurred in connection with borrowing of funds are called borrowing cost.
E.g. Interest expense
Recognition of Borrowing Cost
• Borrowing cost is incurred for non-qualifying asset. It will be charged to P&L. Dr Interest expense (P&L) Cr Payable
• Borrowing cost is incurred for qualifying asset. It will be capitalise in the cost of qualifying Asset and named as eligible
borrowing cost. Dr Asset Cr Cash/Payable
• Qualifying Asset: The asset which takes substantial or longer time period to get ready for sale or intended use.
− Depending on the circumstances, any of the following may be qualifying assets. Inventories, Manufacturing
plants, Power generation facilities, Intangible assets, Investment properties
− If asset is ready for use or sale at date of purchase the it will not be a qualifying asset.
Measurement of Eligible Borrowing Cost
Capitalisation of Borrowing Cost:
Capitalisation of borrowing cost will commence when the following conditions are met:
• When expenditure on asset has started. • Borrowing cost is being incurred.
• Activities necessary to complete the asset are in progress.
Specific Loan: Loan which is taken for qualifying asset only.
Eligible bor. cost = Borrowing Cost – income from temporary investment of loan
General Loan: Loan which is taken for multiple purposes (Qualifying asset and other purposes)
Eligible borrowing cost: (Amount invested in C.Y x Interest rate x months of investment in C.Y/12
C.Y = Current year
More than one General Loan: Eligible borrowing cost will be calculated as follows:
= (Amount invested in C.Y x Weighted average interest rate x months of investment in C.Y/12
Weighted average interest rate: If a company had a $10million 6% loan and a $2million 8% loan, the weighted average
cost of borrowing would be: {($10m × 6%) + ($2m × 8%)}/$12m = 6.33%
Cessation of Capitalisation: Borrowing cost will cease when the physical construction of asset has been complete.
Suspension of capitalization: if the active development to complete the asset is interrupted for a material time period
(more than 30 days) than borrowing cost of such period will be charged to P&L a/c as an expense.

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IAS 40 – Investment Property

Investment Property: It is land and or building held to earn rentals, or for capital appreciation or both, other than
owner occupied property for use in entity (IAS 16) or for sale in the ordinary course of business (IAS 2).
Excluded Property: It will not become part of investment property.
• Owner occupied property for use in business (IAS 16) • Held for sale in normal course of business (IAS 2)
• Property being constructed on behalf of 3rd party (IFRS 15) • Property leased out under finance lease (IAS 17)
Dual Purpose Property: If a company occupies a building for business use but rents out certain floors to other
companies, then portion held for rental earning
Dual Purpose If a company occupies a building for business use but rents out certain floors to other
companies
Property: Portion held for rental earnings – IAS 40 Portion held for business use – IAS 16
Initial Recognition
Investment property should be recognized as an asset when it:
a) Meets definition of Investment property (as Above)
• Probable inflow of economic benefits & • Cost can be measured Reliably
Subsequent Recognition or Recognition of subsequent Expenditure
• If revenue expenditure then recorded as an expense
• If capital expenditure then recorded as an asset and added in carrying value of investment property.
Initial Measurement
Initially be measured at cost. Cost = purchase price + Transaction cost (commission + agent fee + legal charges)
Cost Model: Recorded at carrying value = Cost – Accumulated Depreciation – Accumulated Impairment Loss.
Fair Value Model: Investment property under this model will be measured at Fair Value on every reporting date and
change in carrying value will be charged to P&L.
Fair Value Gain = Dr Investment Property Cr FV gain (P&L)
Fair Value Loss = Dr FV Loss (P&L) Cr Investment Property
Note: investment property under fair value model is not depreciated.
Changes in Use of Property (Transfer from 1 acc standard to other acc. Standard )
Change in Use of Property Cost Model in IAS 40 Fair Value Model in IAS 40
IAS 2 IAS 40 No gain or loss will arise on Difference between carrying value under IAS 2 and its
the date of reclassification Fair Value under IAS 40 on date of reclassification will
be charged to P&L a/c.
IAS 16 IAS 40 No gain or loss will arise on Difference between carrying value under IAS 16 and
the date of reclassification its Fair Value under IAS 40 on date of reclassification
will be treated as Revaluation Surplus/Loss
De-recognition of Investment Property
a) Disposal of investment property: Profit/loss = Disposal Proceeds ― carrying value
b) De-recognize when no economic benefit are expected either from use of asset or from its sale

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IAS 38 – Intangible Assets

Intangible asset: An intangible asset is an identifiable non-monetary asset without physical substance held for use in
the production or supply of goods or services, for rental to others, or for administrative purposes.
Examples include; Licences and quotas, intellectual property, e.g. patents and copyrights, brand names, trademarks.
Identifiable: asset will be identifiable if:
 is separable or
 arises from contractual or other legal rights
Non-Monitory: Economic benefits from the asset are not measured in fix number of currency units (no exact value).
Initial Recognition
Intangible assets should be recognized as an asset when it:
a) Meets definition of intangible asset (as Above)
• Controlled by the entity • Probable inflow of economic benefits & • Cost can be measured reliably
Initial Measurement
Intangible assets are initially measured at cost or @ Fair Value
Internally generated intangible assets which are not allowed to recognise as an asset:
Internally generated goodwill, internally Brand name, Training cost, technical know-how, advertisement, list of
customer, market share.
Goodwill
Goodwill is not normally recognised in the accounts of a business at all. The reason for this is that goodwill is
considered inherent in a business and it does not have any objective value.
Purchased Goodwill
There is one exception to the principle that goodwill has no objective value, this is when a business is sold.
Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no tangible
substance, and so it is an intangible non-current asset.
Research and Development:
Research: Research is original and planned investigation undertaken with the prospect of gaining new scientific
knowledge and understanding. Charged as an expense to P&L.
Development: is the application of research findings or other knowledge to a plan or design for the production of new
or substantially improved materials, devices, products, processes, systems or services before the start of commercial
production or use.
Development expenditure will be recognise as an intangible asset if it fulfills the criteria of PIRATE:
• Probable future economic benefits from the asset, whether through sale or internal cost savings.
• Intention to complete the intangible asset and use or sell it.
• Resources available to complete the development and to use or sell the intangible asset.
• Ability to use or sell the intangible asset.
• Technical feasibility of completing the intangible asset so that it will be available for use or sale.
• Expenditure on development can be measured.
Note:
• If criteria of PIRATE is satisfied then cost incurred will be recorded as intangible asset and amortised over useful
life.
• If capitalised development cost has unlimited useful life then don’t amortise but apply impairment test annually.
• If capitalised development cost has limited useful life than amortise using appropriate method.
• If criteria of PIRATE is not satisfied it will be charged to p&L as an expense. Remember once charged to P&L it can
never be reinstated as intangible asset in future.
• If research is being conducted on behalf of 3rd party than it will be treated as inventory (IAS 2).
Subsequent Recognition
• If revenue expenditure then recorded as an expense
• If capital expenditure then recorded as an asset and added in carrying value of investment property.
Cost model: Cost – Acc. Amortization (straight line basis method) – Acc. Impairment loss
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• If intangible asset has unlimited useful life then don’t amortise but apply impairment test annually.
• If intangible asset has limited useful life than amortise using appropriate method.
Revaluation model: same as IAS 16
Disposal of intangible assets
Same as IAS 16
IAS 36 – Impairment losses

Objective of IAS 36: No asset should be stated @ more than its Recoverable value.
Identification of impairment loss: Impairment test must be applied when there is an indication of impairment.
Internal External
• Damage/Destruction of asset • Adverse technological change
• Reduction in efficiency of asset • Decrease in demand of product related to asset
• Assets cash inflows are worse than expected • Decrease in market value of asset
• Frequent repair & maintenance of asset
• Operating losses
Note: IAS 36 states that impairment test must be applied on following assets annually irrespective of any indicator.
a) Goodwill b) Intangible asset having indefinite life c) intangible asset under development
IAS 36 is not Applicable: it is not applicable on following assets
• Inventories (IAS 2) • Construction contracts (IAS 11) • Deferred tax assets (IAS 12)
• Investment property measured at fair value (IAS 40) • Noncurrent assets classified as held for sale (IFRS 5)
• Assets arising from employee benefits (IAS 19 not in F7) • Financial assets included in the scope of IAS 32
Impairment loss:
Definition: If carrying value of an asset exceeds it recoverable value the excess is known as impairment loss.
Impairment Loss = Carrying Value – Recoverable Value
Calculate Recoverable Value: Higher of: a) Value in use b) Value in sale
Value in Use: It is present value of future net cash inflows that an entity would obtain from continuous use of asset and
from its ultimate disposal. (Calculated at present value)
Value in sale/Fair Value less cost to sell/ Net selling Price: it is calculated as follows:
Market value of asset – selling expense (e.g. commission, agent fee, advertisement cost)
Charge Impairment Loss:
If Asset is under Cost Model If Asset is under Revaluation Model
Dr P&L Dr Revaluation Surplus
Cr Acc. Impairment loss (deduct from carrying value) Dr P&L
Cr Acc. Impairment loss (deduct from carrying value)
Calculate Depreciation after Impairment Loss:
Depreciation = (Recoverable Value – Residual Value)/Remaining useful life
Cash Generating Unit (CGU):
IAS 36 states that impairment test should be applied upon single asset however sometimes it becomes impossible to
apply impairment test on a specific single asset because it depends upon other assets to generate economic benefit.
Definition: A CGU is smallest identifiable group of assets which generates cash inflows independent of those of other assets
Impairment Loss = Total carrying Value of all assets in CGU – Total recoverable Value of all assets in CGU
Charge of Impairment loss to a CGU:
a) First to specifically damaged asset in CGU.
b) Then to purchased goodwill in CGU till it comes to Zero.
c) Then Third, to all other assets in the CGU on a pro rata basis based on carrying value
Note: Value of Individual Assets (except goodwill) after charging impairment loss should not be less than their recoverable
value
Don’t charge impairment loss to current assets or those assts whose carrying value is more than recoverable value.

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IFRS 5 - Non-current assets held for sale and discontinued operations

Classification & Recognition as held for sale:
A non-current asset should be classified as held for sale if carrying value of a non-current asset is expected to be
recovered through its sale rather than its use.
Condition: following conditions must be satisfied for an asset to be classified as held for sale:
 Asset must be available for immediate sale in its present condition
 The sale is expected in next 12 months of its classification as held for sale.
 It is unlikely that the plan will be significantly changed or will be withdrawn.
 Sale is highly probable
− Management are committed to a plan to sell the asset
− There is an active program to locate a buyer, and
− The asset is being actively marketed at a reasonable price
Discontinued Operations:
A discontinued operation includes the following criteria:
 is a separately identifiable components
 must represent a major line of the entity’s business
 is part of a plan to dispose of a major line of business or a geographical area
 is a subsidiary acquired with a view to resell
Measurement of non-current held for sale:
Measured at the lower of: a) Carrying amount b) Fair value less costs to sell.
Non-Current Asset not sold in 12 months: It will no longer be classified as held for sale instead it will be recorded as
normal non- current asset and measured at lower of:
a) Carrying value before held for sale & adjustment for depreciation for consumed useful life
b) Recoverable value at date when classify as not held for sale.
SUBSEQUENT REMEASUREMENT
 Whilst a non-current asset/disposal group is classified as held for sale it should not be depreciated or amortised.
 Any impairment loss will be recognized to statement of profit or loss.
 At each reporting date where a non-current asset classified as held for sale it should be re-measured at fair value
less costs to sell at that date.
 This may give rise to further impairments or a reversal of previous impairment losses. In either case recognise in
the income statement.
Presentation of non-current held for sale:
Held for sale non-current assets should be:
• Presented separately on the face of the statement of financial position under current assets • not depreciated.
Presentation & Disclosure of discontinued Operations
Presentation: Disclosure:
Statement of profit or loss presentation (with a discontinued • the revenue, expenses and pre-tax
operation) profit or loss of discontinued
Continuing operations: operations
Revenue X • the related income tax expense
Cost of sales (X) • the gain or loss recognised on the
Gross profit X measurement to fair value less costs
Distribution costs (X)
to sell, or on the disposal, of the assets
constituting the discontinued
Administration expenses (X) operation.
Profit from operations X
Finance costs (X)
Profit before tax X
Income tax expenses (X)

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Profit for period from continuing operations X

Discontinued operations:
Profit for the period from discontinued operations X
Total profit for the period X
Note: profit from discontinued operations should be disclosed in
single amount which include post tax profit or loss from discontinued
operations and Fair value gain or loss or gain or loss on disposal.
IAS 8 - Accounting policies, changes in accounting estimates & errors

Accounting Policy:
Definition: Accounting policies are principles, basis, conventions, rules and practices applied by the entity in preparing
& presenting financial statements.
Selection and application of accounting policies: Entity should select & apply accounting policies set by IAS, IFRS &
IFRS interpretations to ensure that info in F/S should be
Relevant to decision making of users
Reliable means • Represent faithfully • Complete • Consider substance over form • Neutral • Are prudent
Consistency One accounting policy applied to all same transactions
Change in Accounting Policy
IAS 8 requires accounting policies to be changed only if the change:
• is required by IFRSs or • will result in a reliable and more relevant presentation of events or transactions
Accounting Implication: Change in accounting policy is applied retrospectively (applied on Current, Past & future
periods). Adjustment for past periods must be in opening balance of retimed earnings.
The entity will adjust the opening balance of each affected component of equity for the earliest prior
period presented and the other comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied.
Accounting Estimate:
“Methods adopted by entity to calculate an estimated amount.”
Change in Accounting Estimate
Estimates depend upon judgment which in turn based on latest available information. Estimates may need to be changed
upon availability of latest information, experience and latest developments.
Change in accounting estimate must be applied prospectively (applied in period of change and future periods but not
on past periods)
Examples of estimates: useful life of non-current asset, residual value, depreciation method, provisions.
Prior Period Errors:
Reasons or Errors: mathematical, wrong of accounting policy, misinterpretation of facts, omission or fraud.
Correction: Retrospective application means opening balance of asset, liability, capital & retained earnings are adjusted.
Disclosure of errors:
• Nature, • Amount,
• Impact of correction of errors on F/S at end of current year, end of previous year and beginning of previous year.
IFRS 13 – Fair Value Measurement

Fair Value: it is the amount which could be received to sell an asset or to be paid to transfer a liability in an orderly
transaction (independent party) between the market participants (buyer & seller) at measurement date.
Fair value may be measured on recurring basis (fair value to be measured on and ongoing basis e.g. IAS 40) or non-
recurring basis (in certain circumstances. Business combinations).
Fair Value Hierarchy:
Level 1 (Most Reliable):
Level 1 inputs comprise quoted prices (‘observable’) in active markets for identical assets and liabilities at the
measurement date. This is regarded as providing the most reliable evidence of fair value
and is likely to be used without adjustment.

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Level 2 (Less reliable than Level 1)

Level 2 inputs are observable inputs, other than those included within Level 1 above, which are observable directly or
indirectly. This may include quoted prices for similar (not identical) assets or liabilities in active markets, or prices for
identical or similar assets and liabilities in inactive markets. Typically, they are likely to require some degree of
adjustment to arrive at a fair value measurement.
Level 3 (Least Reliable):
Level 3 inputs are unobservable inputs for an asset or liability, based upon the best information available, including
information that may be reasonably available relating to market participants. An asset or liability
is regarded as having been measured using the lowest level of inputs that is significant to its valuation.
Disclosure:
• Valuation techniques and inputs used to develop those measurements.
• Effect of the measurements on profit or loss or other comprehensive income for the period
IAS 2 – Inventory
Inventories shall be measured at the lower of : (a) Cost (b) Net realizable value
Cost of Inventory
The cost of inventories shall comprise all of the costs of purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition.
a) Costs of purchase comprise purchase price, import duties and other taxes and transport, handling and other costs
directly attributable to the acquisition of finished goods, materials and services, less trade discounts, rebates and
other similar items.
b) Costs of conversion include:
(i) Costs which are directly related to units of production, e.g. direct labour, direct expenses and sub-contracted
work
(ii) Systematic allocation of fixed and variable production overheads incurred in converting materials into finished
goods
The allocation of fixed production over heads to units of production is based on normal capacity (average over
a number of seasons under normal circumstances). In periods of abnormally high production fixed overhead
unit allocations are reduced to avoid valuing inventories above cost.
c) Other costs can be included in the cost of inventories to the extent incurred in bringing the inventories to their
present location and condition e.g. non-production overheads of designing a product for a specific customer.
Excluded Cost: Following costs are excluded and charged as expenses in the period in which they are incurred
• abnormal waste
• storage costs
• administrative overheads which do not contribute to bringing inventories to their present location and condition
• selling costs.
Net realisable value:
the estimated selling price in the ordinary course of business less:
a) Estimated costs of completion, and
b) Estimated costs necessary to make the sale (e.g. marketing, selling and distribution costs).
NRV is less than cost
The principal situations in which net realisable value is likely to be less than cost are where there has been:
(a) An increase in costs or a fall in selling price
(b) Physical deterioration of inventories
(c) Obsolescence of products
(d) A decision as part of a company’s marketing strategy to manufacture and sell products at a loss
(e) Errors in production or purchasing.
Interchangeable items
If various batches of inventories have been purchased at different times during the year and at different prices, it may
be impossible to determine precisely which items are still held at the year end and therefore what the actual purchase
cost of the goods was.
In such circumstances, the following estimation methods are allowed under IAS 2:

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(a) FIFO (first in, first out): The calculation of the cost of inventories on the basis that the quantities in hand represent
the latest purchases or production. OR
(b) Weighted average cost: The calculation of the cost of inventories by using a weighted average price computed by
dividing the total cost of items by the total number of such items. The price is recalculated on a periodic basis or as each
additional shipment is received and items taken out of inventory are removed at the prevailing weighted average cost.
An entity must use the same cost formula for all inventories having a similar nature and use to the entity.
IAS 41 – Agriculture
The standard applies to the three elements that form part of, or result from, agricultural activity.
• Biological assets • Agricultural produce at the point of harvest • Government grants
The standard does not apply to agricultural land (IAS 16) or intangible assets related to agricultural activity
(IAS 38). After harvest, IAS 2 is applied.jm
Definitions:
• Agricultural activity is the management by an entity of the biological transformation of biological assets for sale,
into agricultural produce or into additional biological assets.
• 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 changes in a biological asset.
• Harvest is the detachment of produce from a biological asset or the cessation of a biological asset's life processes.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. (IFRS 13)
Recognition of biological Assets
a) The entity controls the asset as a result of past events.
b) It is probable that the future economic benefits associated with the asset will flow to the entity.
c) The fair value or cost of the asset to the entity can be measured reliably.
Initial Measurement of biological assets
Initially Biological assets are measured at Fair value less any estimated 'point of sale' costs but If there is no fair value,
then use the cost model.
Subsequent Measurement of biological assets
Subsequently fair value should be measured at each year end and any gain or loss to statement of profit or loss.
Agricultural produce
• At the date of harvest the produce should be recognised and measured at fair value less estimated costs to sell.
• After produce has been harvested, IAS 41 ceases to apply. Agricultural produce becomes an item of inventory. Fair
value less costs to sell at the point of harvest is taken as cost for the purpose of IAS 2
Inventories, which is applied from then onwards.
Agricultural produce
• Unconditional government grants received in respect of biological assets measured at fair value are reported as
income when the grant becomes receivable.
• If such a grant is conditional (including where the grant requires an entity not to engage in certain agricultural a
ctivity), the entity recognises it as income only when the conditions have been met.
IAS 20 does not apply to a government grant on biological assets measured at fair value less estimated point-of-sale
costs. However if a biological asset is measured at cost less accumulated depreciation and accumulated impairment
losses then IAS 20 does apply.

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IFRS 16 - LEASES
Lease: 'A lease is 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.'
Lessor: Lessor is the 'entity that provides the right to use an underlying asset in exchange for consideration.'
Lessee: Lessee is the 'entity that obtains the right to use an underlying asset in exchange for consideration.'
Right-of-use asset: A right-of-use asset 'represents the lessee's rights to use an underlying asset for the lease term.'
Inception Date: It is the date when lessor and lessee both agree on regarding the material terms and conditions of lease
contract.
Commencement Date: It is the date when lessee starts the use of asset and both lessor and lessee start lease accounting
in their respective books.
Lease term: It is the period of lease contract
a) Non-Cancelable Part: It is the primary period of lease contract for which lease is non-cancellable.
b) Secondary Part: It is secondary part of lease which is allowed by lessor and will become the part of lease term, if
on the date of inception it is reasonably certain that lessee will avail the option.
c) Periods covered by an option to terminate the lease if these are reasonably certain not to be exercised.
Recognition exemptions for Short-life and low value assets
Lease payments will be recorded as an expense in the following two types of leases:
i) Leases with a lease term of 12 months or less and containing no purchase options – or
ii) Leases where the underlying asset has a low value when new (such as tablets, telephone, personal
computers or small items of office furniture)
Initial Measurement of Lessee
At the commencement of the lease, the lessee should recognize a lease liability and a right-of-use asset.
The right-of-use asset
The right-of-use asset is initially recognised at cost.
The initial cost of the right-of-use asset comprises:
• The amount of the initial measurement of the lease liability
• Lease payments made at or before the commencement date
• Any initial direct costs
• The estimated costs of removing or dismantling the underlying asset as per the conditions of the lease.
Lease Liability:
The lease liability is initially measured at the present value of the lease payments that have not yet been paid.
Lease payments should include the following:
• Fixed payments
• Amounts expected to be payable under residual value guarantees (guaranteed value at the end of lease term)
• Options to purchase the asset that are reasonably certain to be exercised
• Termination penalties, if the lease term reflects the expectation that these will be incurred
Present Value is calculated at the discount rate mentioned in the lease. If this cannot be determined, then the entity
should use its incremental borrowing rate (the rate at which it could borrow funds to purchase a similar asset).
The right-of-use asset
Charge depreciation over shorter of the useful life and lease terms.
Lease Liability:
Non-Current Liability: balance outstanding immediately after the payment of next year.
Current Liability = Total Liability at current year end less non-current liability.
Payment in Arrears:
P.V of Lease Payments = 5,710 interest rate = 15% annual installment in arrears = 2,000
Year Liability b/d interest expense@ 15% payment liability c/d
2002 5,710 857 (2,000) 4,567
2003 4,567 685 (2,000) 3,251

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For 2002: Depreciation = 1/4 × $5,710 = $1,428

Right-of-use asset (NCA) = (5,710 – 1,428) 4,282
Non-Current liability = 3,251
Current Liability = (4,567 – 3,251) = 1,316
Interest expense = 857
Payment in Advance:
P.V of Lease Payments = 69,738 interest rate = 10% annual installment in advance = 20,000
Year Liability b/d Payment outstanding interest @ 10% Liability c/d
2003 69,738 (20,000) 49,738 4,974 54,712
2004 54,712 (20,000) 34,712 3,471 38,183
For 2002: Depreciation = (69,738/4) 17,435
Right-of-use asset (NCA) = (69,738 – 17,435) 52,303
Non-Current liability = 34,712
Current Liability = (54,712 – 34,712) = 20,000
Interest expense = 4,974
Sale and Leaseback
Seller must apply IFRS 15 Revenue from Contracts with Customers to decide whether a performance obligation has
been satisfied. This normally occurs when the buyer obtains control of the asset.
Control of an asset refers to the ability to obtain substantially all of the remaining benefits.
Transfer is not a sale:
If the transfer is not a sale then the seller continues to recognise the transferred asset and will record transfer
proceeds as loan.
Transfer is a sale Seller will recognise a profit or loss based only on the rights transferred to the buyer.
Financial Instrumets
Accounting Standards:
IAS 32 Financial instruments: deals with the classification of financial instruments and their
Presentation presentation in financial statements
IFRS 7 Financial instruments: deals with how financial instruments are measured and when they
disclosures should be recognised in financial statements
IFRS 9 Financial instruments deals with the disclosure of financial instruments in financial statements
IAS 32 Financial instruments: Presentation

It is applicable from issuer’s perspective.
Definition: Financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity
Examples:
Contract of sale & Purchase Contract of loan Contract of Issue of shares
Supplier Buyer Lender Borrower Share Holder Company
Receivable Payable Loan Receivable Loan Payable Investment Share issued
Fin Asset Fin. Liability Fin. Asset Fin. Liability Fin. Asset Equity Instrument
Financial Asset: It is any asset which is:
• Cash
• Gives contractual right to receive cash (e.g. trade receivable, loan receivable, bank deposit, purchase of loan notes)
• Equity instrument of other party (purchase of ordinary shares)
Financial Liability:
It is contractual right to pay cash (e.g. Trade payable, loan payable, expense payable, issue of loan notes/debentures,
issue of redeemable (returnable) preference shares.
Equity Instrument:
It gives holder the right to participate in the net assets of the entity in event of liquidation but it doesn’t contain any
contractual obligation to pay cash. (e.g. issue of ordinary or irredeemable shares)

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Compound/ Hybrid Financial instrument:

It contains more than one components
E.g. Convertible Loan Notes
One is the entity’s obligation to pay 2nd is the holder’s option to convert into ordinary shares
Financial Liability Equity instrument
Accounting treatment
Split into Equity and liability component both.
Equity: F.V of consideration received – Present value of loan discounted at market interest rate
Dr Cash Cr Equity Cr Loan (balancing fig)
• Any interest income or dividend income on financial asset will be charged to P&L.
• Any interest expense on financial liability will be charged to P&L.
• Dividend paid or issuance cost in relation to equity instrument (ord shares) will be deducted from retained earnings.
IFRS 9 Financial instruments: Recognition & Measurement
Initial Recognition & Initial Measurement of Asset
Initial Recognition: A financial asset should be recognised in the statement of financial position when the reporting
entity becomes a party to the contract.
Derecognition: An entity should derecognise a financial liability when it is extinguished – ie when the obligation
specified in the contract is discharged or cancelled or expires.
Initial Measurement: Financial asset is initially measured at fair value of consideration received (ie, purchase price)
plus transaction cost for acquisition.
Exception for transaction cost: If a financial asset is subsequently measured at fair value through profit or loss than
transaction costs are not added to fair value at initial recognition (recorded as an expense).
Subsequent Measurement of Financial Asset
Classification of Financial Asset:
a) At fair value through Profit & Loss a/c.
b) At fair value through other comprehensive income
c) At amortised cost
At fair value through Profit & Loss a/c (FVPL)
Investment in debt instrument (loans, debentures) or equity instrument (shares) which are held for the purpose of trading
(sale) or short term profit making (interest or dividend income) will be classified under this category.
Accounting Treatment:
• Transaction costs are not added in financial asset instead charged to P&L as an expense.
• At each reporting date these are re-measured at Fair Value on reporting date and change in value will be charged
to P&L a/c.
− If Fair Value gain Dr Investment Cr P&L a/c
− If Fair Value Loss Dr P&L a/c Cr Investment
• Any interest or dividend income will be charged to P&L.
• Any gain or loss on disposal will be charged to P&L.
At fair value through Other Comprehensive income (FVOCI)
Investment in equity instrument which are held for long term purpose will be charged under this category.
Investment in debt instrument if they meet contractual cash flow test but don’t meet business model test.
• At each reporting date these are re-measured at Fair Value on reporting date, the change in value will be charged
to other comprehensive income (OCI) and then it will be shown in a separate column of statement of changes in
equity (SOCIE) it will remain there, till the disposal of related investment.
− If Fair Value gain Dr Investment Cr OCI
− If Fair Value Loss Dr OCI Cr Investment
• Any dividend income will be charged to P&L a/c.
• Any gain or loss on disposal will be charged to P&L, however any previous Fair Value gain or loss held in the separate
column of SOCIE will be transferred to retained earning upon disposal.

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At Amortized Cost (AC)

Only investment in debt instrument which are held by entity till maturity date (complete life) will be classified under this
category and it should also satisfy the following two conditions:
a) Investment is held by entity to collect contractual cash-flows over the life of instrument (business model test)
b) Contractual cash-flows of investment are only payment of interest and principles (contractual cash flow test)
Examples: loan receivable, purchase of loan notes/debentures/bonds.
Accounting Treatment: At each reporting date these are measured at amortised cost.
b/d Fin Asset + interest income (b/d fin asset x effective Int rate) – interest received (Debt par value x actual interest
rate) = c/d Fin Asset
• Any interest income will be charged to P&L a/c.
Summary Subsequent measurement:
Investment in Debt instrument Investment in Equity instrument
Initial recognition @ FVPL Initial recognition @ FVPL
Subsequent recognition Subsequent recognition
Continue @ Other options Continue @ Other option
FVPL FVPL
Business mode test Met & Business mode test Not Met & If financial asset
Contractual cash flow test Met Contractual cash flow test Met is not held for
trading
At amortised cost FVOCI FVOCI
Initial Recognition & Initial Measurement of Financial Liability
Initial Recognition: A financial liability should be recognised in the statement of financial position when the reporting
entity becomes a party to the contract. E.g. trade payable, loan payable, issue of loan notes/debentures, issue of
redeemable preference shares.
Derecognition: An entity should derecognise a financial liability when it is extinguished – ie when the obligation
specified in the contract is discharged or cancelled or expires.
Initial Measurement: Financial asset is initially measured at fair value of consideration received (ie, purchase price)
less transaction cost for issuing liability.
Subsequent Measurement of Financial Liability
At Amortized Cost (AC)
• At each reporting date these are measured at amortised cost.
b/d Fin Liability + interest expense (b/d fin Liability x effective Int rate) – interest paid (Debt par value x actual interest
rate) = c/d Fin Liability
• Any interest expense will be charged to P&L a/c.
Factoring:
Definition: The process of selling out receivables is called factoring.
Non-Recourse Factoring:
Receivable are sold along with the related risk & reward. Entity will not be liable upon bad debts by customers.
• Immediately de-recognise receivable as risk & reward has been transferred.
• Any difference between the value of receivable and amount received from factor will be interest cost and it will
recognized immediately.
Dr Cash Dr Interest expense Cr receivable
With Recourse Factoring:
Receivables are sold without related risk & reward. Entity will be liable upon bad debts by customers.
• Don’t derecognize receivables instead it will be treated as loan arrangement.
− Dr Cash (cash received from factor) Cr Loan
− At year end: Dr Interest Expense Cr Interest payable

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IAS 21 — the effects of changes in foreign exchange rates

Key definitions
Functional currency: The currency of the primary economic environment in which the entity operates.
Presentation currency: The currency in which financial statements are presented.
Foreign currency: It is a currency other than the functional currency of the entity.
Exchange difference: The difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.
Closing rate: It is the spot exchange rate at the end of the reporting period.
Exchange difference: It is the difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.
Exchange rate: It is the ratio of exchange for two currencies.
Monetary items: They are 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: It is the exchange rate for immediate delivery.
Foreign currency transactions:
A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of
averages is permitted if they are a reasonable approximation of actual).
At each subsequent reporting date:
• Foreign currency monetary amounts should be reported using the closing rate
• Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the
transaction
• Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were
determined
• Exchange differences arising when monetary items are settled or when they are translated at different rates from
initial recognition or previous financial statements are reported in profit or loss in the period
• If a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, a property
revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognised in other
comprehensive income.
IFRS 15 – Revenue from Contract with Customer

Transfer of goods: Goods are transferred on transfer of control
Transfer of control: Ability to use has transferred and transferred all of the remaining benefits of asset.
IFRS 15 is not applicable: in following situations:
• Lease transactions (IAS 17) • Financial Instruments
• Group arrangement • Insurance contracts
Contracts: Agreement between two or more parties which create right & obligation.
Contracts Asset: Consideration against goods & services transferred.
Contracts Liability: Obligation to transfer goods & services.
Performance Obligation: Promise in the contract (e.g. deliver goods & services)
Stand-alone Selling Price: Price set for a specific customer other than normal selling price.
Recognition & Measurement (5 steps):
Step 1: Identify the contract with customer
Revenue will be recorded if contract meets following conditions:
• I: Identify Rights: of each party
• C: Commercial Substance (commercial value)
• A: Approved: Parties in contract approved it & committed to fulfill their obligation.
• P: Payment Terms: for goods & services are identified.
• P: Probable: that consideration for goods & services will be received.
Step 2: Identify the separate performance obligation (SPO)
SPO must be distinct (sold separately) and must follow business practices, policies of entity because it creates expectations
Nature of performance Objective:
• As Principal: produce and sold directly to customers as principal
• As Agent: Purchase from 3rd party & sold to customer as agent. Revenue will be commission on sale.

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• Single performance Objective: Good & services sold in one transaction.

• Multiple performances Objective: Sold goods & one year free repair.
Step 3: Determine Transaction Price
Consideration to be received: Amount collected on behalf of 3rd party exclusive of vat.
Transaction Price = Fixed amount + Variable consideration + financing component + non cash consideration –
consideration payable to customer.
Step 4: Allocate Transaction Price
Stand-alone selling Price is Observable Stand-alone selling Price is Not Observable
Record each SPO at stand-alone selling price Record at estimated stand-alone selling price
Discount is allocated to each separate performance objective.
Step 5: Recognise Revenue
Satisfy Performance Objective at Point in time
Performance Objective satisfied when controls of goods & services transfer to customer.
Indicator of Transfer of control:
• Entity has right to receive payment and transfer asset physically.
• Customer has legal title of asset, significant risk & reward of asset and accepted the asset.
Consignment Inventory
One party legally owns and 2nd party physically retain inventory.
Consider majority of points of control
Party which has maximum points will record inventory
Repurchase Agreement
• Asset sold but still has the right to re-purchase in future.
• Entity will not record it as a sale & continue to record as asset (because Sale at below FV or repurchase below FV,
entity still has risk & reward & right to use asset)
• Example: asset sold for 10m and has option to repurchase for 12m after 4 years.
Sol: Dr Cash 10m Cr Loan 10m interest expense 2m (12m – 10m) over 4 years.
Bill & Hold Agreement
• Entity provide bill for product to customer and promise to deliver the product in future (stull hold after bill but
can’t use or sell to other party)
− Customer must request for it − Product belong to customer
− Ready to transfer physically − Entity can’t use or sell to 3rd party.
• There may be a fee for custodial service and sale will be recorded inclusive of custodial charges @ billing date.
Satisfy Performance Objective over time
• Control of goods & services satisfy over time.
• Recognise revenue over time if:
− Customer receive and entity provide benefit at the same time
− Entity creates and customer controls asset at same time or
− Didn’t create asset but right to receive payment for completion to date.
• Entity recognises revenue over time by measuring %age completion of that performance obligation.
% age completion can be measure by two methods:
− Output based:
− Input based (cost to date out of total cost)
Contract Cost
Capitalised Cost:
Incremental cost to obtain contract + cost of fulfilling contract (if not fall in any other standards)
The capitalised costs will be amortised as revenue is recognised. This means that they will be expensed to cost of sales
as the contract progresses.

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Cost of sales will be measured as % completion × total costs.

Recognition of Revenue
Expected Profit Expected Loss Unknown
Record Cost & Record whole loss Revenue should be Contract costs should be
Revenue as %age immediately as provision recognised to the level of recognised as an expense in the
completion. (Prudence concept) recoverable costs (usually period in which they are incurred
costs spent to date)
Presentation in Financial Statement
Statement of P&L (if profitable)
Calculate Overall Profit or Loss
Contract price X
Less: costs to date (X)
Less: costs to complete (X)
Overall profit/loss X/(X)
% age Completion: There two methods to calculate progress, anyone can be used.
Input Method: %age completion = (cost to date / total cost ) x 100
Output Method: %age Completion = (Value of work completed / contract price) x 100
Note: if the progress can’t be measured revenue should be recognized only to the extent of contract cost incurred whose
recovery is probable.
Statement of P&L:
Revenue (Total price × progress (%)) less revenue recognised in previous years X
Cost of sales (Total costs × progress (%)) less cost of sales recognised in previous years (X)
Profit X
Statement of financial position
Contract asset (shown separately as current asset):
Excess of revenue recognized over cash received + Work in progress
Work in progress: If the contract costs to date exceed the cost of sales recognized.
Contract Liability (as deferred income): Excess of cash received over revenue recognized
Contract Liability (Provision for loss): If a contract is loss making, there will be a provision recorded to recognise the
full loss under the onerous contract, as per IAS 37.
IAS 12 – Taxation
Accounting profit [SPL]: The profit or loss for a period before deducting tax expense.
Taxable profit [TAX COMPUTATION]: The profit or loss for a period determined in accordance with the rules
established by the taxation authorities, upon which income taxes are payable.
Tax allowances: The tax equivalent of an accounting item (e.g. ‘Capital Allowances’ instead of Depreciation)
Current Tax
“The amount of income taxes payable in respect of the taxable profit for a period”
At every year end company estimates the amount of income tax which is charged to the Statement of Profit or Loss
and shown as a current liability in the Statement of Financial Position.
DR income tax expense (SPL)
CR income tax liability (SFP)
Often this estimate is not the exact amount that is actually paid resulting in an over provision (estimates tax is
more than actual tax) or under provision (estimated tax is less than actual tax) for income taxes.
This balance will then be incorporated into the current year’s tax charge.
Income tax expense:
Current tax charge for the year X
Under/(over) provision from previous year X / (x)
Total tax charge for the year X .
Deferred Tax
“Extra tax at the latest enacted tax rate regarding the future, on temporary differences.”
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Temporary Difference: Differences between the carrying amount of an asset or liability in SOFP and its tax base
(Carrying value calculated as per tax rules.)
Accounting Profit as per accounting Taxable profit as per tax rules
standards and accounting rules
Differences
Permanent Differences Temporary Differences
Items that would have been used in Taxable temporary differences –
calculating accounting profit but would not arises when carrying amount of an
be used in calculating taxable profit e.g. some asset exceeds it tax base
entertaining expenses Accounting Treatment: Provision
Accounting Treatment: No Provision for for Deferred tax is required.
Deferred tax is required.
Calculating Deferred Tax
Statement of P&L (extracts)
Current Tax (W-2) XX
Under /(Over) provision XX/(XX)
Deferred Tax (W-1) XX/(XX
XX
Statement of Financial Position (Extracts)
Non-Current Liability
Deferred Tax (W-1) XX
Current Liability
Current Tax (W-1) XX
Working 1 Deferred (Non-Current Liability) & Deferred tax transfer to P&L

2002
Recorded as
Carrying value per accounting rules XX Deffered tax
non-current liability.
Tax Base (XX)
Temporary Difference XX
Deferred Tax (non-current liability) (Temporary diff x Tax rate) XX Positive: Add in P&L
Dr Income tax
Opening deferred tax liability (trial balance) (XX) Cr Deferred tax a/c
Deferred Tax transfer to P&L XX/(XX) Negative: Deduct from P&L
Dr Deferred Tax
Cr Income tax
Working 2: Current Tax expense to P&L and (Current Liability)
2002
Accounting Profit XX
Add back: Depreciation XX
Less: Tax allowance or capital allowance (XX)
Taxable Profit XX
Current Tax (Taxable profit x Tax rate) XX
Revalued assets
Under IAS 16 assets may be revalued. This changes the carrying amount of the asset but 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 difference 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 asset.
Deferred Tax Asset & Deductible temporary difference
A deductible temporary difference arises when tax base of an asset exceeds it carrying value.
Deferred tax asset (same as deferred tax liability) will be recognized for all deductible temporary differences if
probable that taxable profits will be available in future. No discounting is permitted.

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IAS 33 – Earning Per Share

Basic EPS
It is calculated on the basis of issued shares or shares currently in issuance.
Basic EPS = (Earnings / weighted average no of ordinary shares) = cents
Earnings: profit attributable to ordinary shareholders (of parent co.) after tax & preference dividend.
Share issue at market value:
Simply include the new shares issued in the weighted average of existing shares.
Weighted average no of ordinary shares = (old shares x month/12) + (total shares after share issue x month/12)
Bonus Issue:
Assume Bonus issues are issued at the start of previous tax year.
Current Year EPS: EPS = earnings/no of shares after bonus issue
Previous Year Adjustment EPS: EPS = Previous year EPS x Adverse Bonus fraction
Bonus Fraction: if there are 1 for 5 bonus issue, bolus fraction will be 6/5, adverse bonus fraction = 1/Bonus fraction.
Bonus and market issues combined: Calculate weighted avg number of shares and multiply bonus fraction with
shares before bonus issue.
Right Issue:
Assume that right shares are in issuance from the start of previous year.
Current Year EPS:
Example: A company issued one new share for every two existing shares held by way of rights at $1.50 per share on 1
July 20X8. Pre-issue market price was $3.00 per share.
20X8 20X7
Profit attributable to the ordinary shareholders for the year ending 31 December $550,000 $460,000
Number of ordinary shares in issue at 31 December 1,200,000 800,000
Solution:
Step 1 – Theoretical ex-rights price (TERP)
Prior to rights issue 2 shares worth $3 = 6.00
Taking up rights 1 share cost $1.50 = 1.50
3 7.50
TERP = $7.50/3 = $2.50
Step 2 – Bonus fraction
Market price before issue/TERP = $3/$2.5
Step 3 – Weighted average number of shares (WANS)
No. Bonus fraction Time WANS
1 January 800,000 3/2.5 6/12 480,000
1 July 1,200,000 6/12 600,000
1,080,000
Step 4 – EPS 20X2
EPS = $550,000/1,080,000 = 50.9c per share
Previous Year Adjustment: EPS 20X2
Multiply with “1/Bonus fraction” with EPS of previous year and restate the EPS of previous year.
Last year, reported EPS: $460,000 ÷ 800,000 = 57.5c
20X1 Restated EPS= 57.5c × 2.5/3 = 47.9c
Diluted EPS
It is calculated on the basis existing issued shares and potentially issued shares.
Convertible loan notes in Diluted EPS
Assume that convertible loan notes have been converted into shares at the start of current year.
Earnings = Normal Earnings + after tax interest savings
Weighted Avg Shares = Weighted Average of issued shares + shares against convertible loan notes

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Share Options in Diluted EPS

Share Option: It is a contract which gives holder the right to purchase the shares of entity at a determined fixed price
on some certain future date.
Weighted Avg shares = weighted Avg. of issued shares + Free shares issued against options
Free Shares = No of options x (fair value ⎼ exercise price)/Fair value
Example: 10,000 share options exercise price $15/share exercise date 3 years
MV of a share after 3 years $20
Solution: Upon Exercise date: Shares issued @ Nil cost = 10,000 x (20 ⎼15)/20 = 2,500
IAS 37 – Provisions, contingent liabilities and contingent assets

Provision: It’s liability of uncertain timing or amount.
Recognition of provision
Provision will only be recognized if all of the following conditions are satisfied:
a) When an entity has a present obligation (legal or constructive) as a result of a past event;
b) It is probable that an outflow of economic resources will be required to settle the obligation, and
c) Amount of the obligation can be measured reliably.
Dr Expense Cr Provision
Obligating events Past event which leads to a present obligation is called an obligating event .
Present Obligation:
Legal obligation is one that derives from a contract, legislation or any other operation of law.
Constructive obligation arises as a result of entity’s policy, past action or practitioner or well-known statements of entity
Probable transfer of resources: Chances >50% but <95% (>95% is called virtually certain)
No Provision: No provision is recognized for future costs (future operating losses, future repair & maintenance cost,
future training cost.)
Measurement of provision
The amount recognised as a provision is the best estimate.
Best estimates depend upon legal advice, expert opinion, and management judgment.
Provisions should be discounted where the effect of the time value of money is material
Measurement
One off Event: Large Population:
e.g. environmental provision, legal suit, dismantling cost e.g. warranty claims, Refund claims
Recognize on the basis of most probable outcome Recognize on the basis of “expected value method”
(maximum chances) Expected value = Probability x Outcome
Subsequent Measurement of provision
At each reporting date management should re-access the value of recognized provision.
If Increase in Provision: Dr Expense Cr Provision
If Decrease in Provision: Dr Provision Cr Expense
Contingent Liability
A contingent liability is either:
a) A possible obligation arising from past OR b) A present obligation that arises from past events
events whose existence will be confirmed only but is not recognised because:
by the occurrence of one or more uncertain (i) Outflow is not probable; or
future events not wholly within the control of
(ii) Amount is not reliably measurable
the entity;
Recognition of Contingent Liability:
Probability Provision Contingent Asset
Virtually Certain >95% Recognize Recognize
Probable >50% but <95% Recognize Disclose
Possible >5% but <50% Disclose Ignore
Remote <5% Ignore Ignore

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Examples of Provisions
Warranties:
These are argued to be genuine provisions as on past experience it is probable. The provision must be estimated, on the
basis of the class as a whole and not on individual claims.
Major repairs
Now it is not allowed to recognize provision for repair.
Self -insurance
Now it is not allowed to recognize provision for self-insurance.
Environmental contamination .
If the company has an environmental policy such that other parties would expect the company to clean up any
contamination or if the company has broken current environmental legislation then a provision for environmental
damage must be made.
Decommissioning or abandonment costs.
When an oil company initially purchases an oilfield it is put under a legal obligation to decommission the site at the end
of its life. Prior to IAS 37 most oil companies set up the provision gradually over the life of the field so that no one year
would be unduly burdened with the cost.
All the costs of decommissioning may be capitalised.
Dr Asset Cr Provision
Onerous contracts
Onerous contract as one in which unavoidable costs of completing the contract exceed the benefits expected to be
received under it.
Unavoidable costs of meeting an obligation are the lower of:
a) Cost of fulfilling the contract b) Penalties from failure to fulfil the contract
If an entity has a contract that is onerous a provision should be made for the net loss.
Re-structuring/ Re-organisation:
It is a plan or program by which management changes the scope or manner of the business.
Examples include Termination of line of employees/delayering, Sale or closure of a business segment, Shift from
manufacturing to trading.
Accounting treatment:
IAS 37 requires a provision should be recognize for restructuring cost if the following two conditions are satisfied:
a) Management have a formal plan b) It is publically announced
if the above conditions are met after the reporting date, It will be treated as non-adjusting event under IAS-10 and no
provision will be recognize.
Note: The provision should be recognized only for the direct cost of restructuring (redundancy cost,
termination payments, damages to supplier and customer)
Contingent Asset
It is possible asset arising from past events the existence of which depends upon the occurrence or non-occurrence of
some uncertain future events not in the control of entity.
Recognise only if it is virtually certain to be received (chances >95%)
IAS 10 – Events after the reporting period

Events after reporting period: Those events which occur after the reporting date but before the date of authorization
of financial statement for issuance are called events after reporting date.
Adjusting Events
Those events which occur after the reporting date but before the date of authorization of F/S and which provides
additional evidence of the conditions existed at reporting date.
Accounting treatment: Adjusting events require the adjustment of amounts recognised in the financial statements.
Examples:
• Invoices received in respect of goods or services received before the year end
• The resolution after the reporting date of a court case giving rise to a liability

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• Evidence of impairment of assets, such as news that a major customer is going into liquidation or the
sale of inventories below cost
• Discovery of fraud or errors showing that financial statements were incorrect
• Determination of employee bonuses/profit shares
• The tax rates applicable to the financial year are announced
• The auditors submit their fee
• The sale of a non-current asset at a loss indicates that it was impaired at the reporting date
• The bankruptcy of a customer indicates that their debt was irrecoverable at the reporting date
• The sale of inventory at less than cost indicates that it should have been valued at NRV in the accounts
• The determination of cost or proceeds of assets bought/sold during the accounting period indicates at
what amount they should be recorded in the accounts
Non-Adjusting Events
Those events which occur after the reporting date but before date of authorization of F/S and are indicative of the
conditions which arise after reporting date.
Accounting treatment: Disclose if material and ignore if immaterial.
Examples:
• Business combinations
• Discontinuance of an operation
• Major sale/purchase of assets
• Destruction of major assets in natural disasters
• Major restructuring
• Major share transactions
• Unusual changes in asset prices/foreign exchange rates
• Commencing major litigation
• A purchase or sale of a non-current asset
• The destruction of assets due to fire or flood
• The announcement of plans to discontinue an operation An issue of shares

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Consolidated Statement of Financial Position

Consolidated financial statements should be prepared when the parent company has control over subsidiary.
Parent – an entity that controls one or more entities also called holding or Acquirer co.
Subsidiary – an entity that is controlled by another entity (known as the parent) also called acquire co.
Control: Investor is deemed to have control over investee if investor has the following aspects:
a) power over the investee
b) exposure, or rights, to variable returns from its involvement with the investee
c) the ability to use its power over the investee to affect the amount of the investor's returns
Power over investee:
• exercise of the majority of voting rights in an investee;
• contractual arrangements between the investor and other parties;
• holding less than 50% of the voting shares, with all other equity interests held by a numerically large, dispersed
and unconnected group;
• Potential voting rights (such as share options or convertible loans) may result in an investor gaining or losing
control at some specific date.
Date of Acquisition: It is the date when parent co obtains the control of subsidiary co.
Exemption from preparation of group financial statements
A parent need not present consolidated financial statements if and only if:
• the parent itself is a wholly owned subsidiary or a partially owned subsidiary.
• the parent's debt or equity instruments are not traded in a public market.
• the parent did not file its financial statements with a securities commission or other regulatory organisation for the
purpose of issuing any class of instruments in a public market.
• the ultimate parent company produces consolidated financial statements that comply with IFRS and are available
for public use
Cost of investment paid for Acquisition:
It is Fair Value of consideration transferred. It can be in the form of cash, issue of own shares of parent co, issue of loan
notes/Debentures of parent co, Deferred consideration, contingent consideration.
Cash: Dr Investment (cash paid) a/c Cr Cash a/c
Issue of own shares by parent co.:
Dr Investment in Sub co. (no of share issue x M.V of P.co share) a/c
Cr Share capital a/c (no of share issue x Par value) Cr Share premium a/c(excess)
Issue of loan notes/Debentures of Parent co.:
Dr Investment in Sub co. a/c At year end:
Cr Loan notes/Debenture a/c Dr Interest Expense/CRE a/c Cr Cash a/c
Deferred consideration:
Consideration payable has been agreed but it will be paid in future
It is recorded at present value (1+r)-n. At year end:
Dr Investment in sub. Co. a/c Dr Interest expense/CRE a/c
Cr Deferred Liability a/c Cr Deferred Liability a/c
Contingent Consideration;
(If met certain conditions)
Investment in subsidiary; Any increase/decrease in the value of contingent
Dr Investment in Sub. Co. (F.V at date of Acq.) consideration at reporting date will be adjusted as:
Cr Defer Liability/Contingent Liability/payable Increase:
Dr CRE a/c Cr Defer Liability a/c
Decrease:
Dr Defer Liability a/c Cr CRE a/c
Note: The business combination expenses such as valuation fee, consolidation charges and any legal charges are
treated as the expense of parent company.
Dr CRE a/c Cr Cash a/c

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Consolidation Procedure
Single Economic entity concept: 100% addition of Assets (except investment in Sub co by Parent co), Liabilities,
incomes and expenses of parent and subsidiary company.
a) Determine Group Structure
b) Line by line addition of Assets (except investment in Sub co by Parent co), Liabilities, incomes and expenses of
parent and subsidiary company. Share capital (ordinary shares and preference shares) of only Parent company will
be recorded.
c) Eliminate Investment in Sub Co held be Parent co. and record NCI.
Dr Cost of Control a/c XX
Cr Investment in Sub. Co. XX
Cr NCI at Fair Value XX
d) Calculate Net Assets of Sub. Co. at acquisition date {Share Capital (both ordinary & preference shares + Share
Premium + Retained earnings + Revaluation Reserve)
Eliminate “Net Asset of Sub co at Acquisition date” and this will be used to calculate Goodwill.
Dr Net Assets of Subsidiary at Acquisition date XX Cr Cost of Control a/c XX
e) The reserves of sub co which arise after Date of Acquisition are called Post Acquisition reserves, these are simply
taken as income as:
Dr Subsidiary Retained Earnings (Post Acquisition) XX
Cr Consolidated Retained Earnings (Parent %) XX
Cr NCI (NCI %) XX
f) Valuation of Goodwill and Non-Controlling Interest
Measure the NCI at Fair Value
Under this method NCI will be measured at Fair value (market value) and fair value of NCI will be used to calculate
goodwill.
Dr Cost of Control a/c XX Dr Net Assets of Subsidiary at Acquisition date XX
Cr Investment in Sub. Co. XX Cr Cost of Control a/c XX
Cr NCI at Fair Value XX
Cost of Control a/c NCI a/c

Investment in Subsidiary XX Net Assets of Subsidiary at Fair Value XX
Fair Value of NCI XX Acquisition date XX
Goodwill (bal fig) XX c/d XX
Measure NCI at its Proportionate Share in Net Assets of Subsidiary Company.
This option is available, when Fair Value of NCI is not determinable. Under this method NCI will be measured at its
proportionate share in net assets of Sub co. There will be no goodwill of NCI under this method.
Dr Cost of Control a/c XX Dr Net Assets of Subsidiary at Acquisition date
Cr Investment in Sub. Co. XX XX
Cr NCI Share of Net assets at Acquisition date XX Cr Cost of Control a/c
XX
Cost of Control a/c NCI a/c

Investment in Subsidiary XX Net Assets of Subsidiary at NCI Share of Net assets at
NCI Share of Net assets at Acquisition date XX Acquisition date XX
Acquisition date XX
Goodwill (bal fig) XX
c/d XX
Negative Goodwill or Bargain purchase gain:
Arises where the cost of the investment is less than the value of net assets purchased. IFRS 3 states that first calculation
is reviewed. After such a review, any negative goodwill remaining is credited directly to consolidated retained earnings
CRE.

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Adjustments
Impairment of Goodwill
 NCI Measured at Fair Value:
Dr CRE Post Acq (Consolidated retained earnings: Parent % holding) XX
Dr NCI (Minority % holding) XX
Cr Goodwill (Cost of control a/c) XX
 NCI Measured at Proportionate Share of Net Assets:
Dr CRE Post Acq (Consolidated retained earnings) XX
Cr Goodwill (cost of control a/c) XX
Fair Value adjustment of “Depreciating Asset” is Sub. Co. has not incorporated F.Value in its F/S
Asset Exist at Reporting Date:
 If Fair Value Gain  If Fair Value Loss
Dr Asset a/c (F.V Gain) XX Dr Subsidiary Retained earnings (Pre-Acq) XX
Cr Subsidiary Retained earnings (Pre-Acq) XX Cr Asset a/c (F.V Gain) XX
 For Extra Depreciation:  For Reversal Extra Depreciation:
Dr Subsidiary Retained earnings (Post-Acq) XX Dr Asset a/c (F.V Gain) XX
Cr Asset a/c (F.V Gain) XX Cr Subsidiary Retained earnings (Post-Acq) XX
Asset does not Exist at Reporting Date:
Simply reclassify F.V gain/loss from post Act to Pre Acq Reserves.
 If Fair Value Gain at Acquisition Date  If Fair Value Loss Acquisition Date
Dr Subsidiary Retained earnings (Post-Acq) XX Dr Subsidiary Retained earnings (Pre-Acq) XX
Cr Subsidiary Retained earnings (Pre-Acq) XX Cr Subsidiary Retained earnings (Post-Acq) XX
Intra-group Receivables and Payables
If balances are equal:
Simply cancel out Dr Payable a/c Cr Receivable a/c
If balances are not equal:
Identify Reason
Cash in Transit Goods in Transit
Dr Cash a/c Cr Receivable a/c Dr Inventory a/c Cr Payable a/c
Record the entry in the books of entity which has not yet recorded the transaction.
Expense charged by one entity but not the other:
 Parent company not charged the expense:  Subsidiary company not charged the expense:
Dr CRE (Consolidated Retained Earning) XX Dr SRE (Subsidiary Retained Earning) XX
Cr Payable XX Cr Payable XX
Intra-group trading stock
Unrealized Profit (URP):
Profit on intra-group trading inventory which is still in group (not sold to 3rd party)
URP is eliminated upon goods which are present in stock at reporting date.
Who is seller?
If Parent co. is seller If Subsidiary co. is seller
Dr CRE (Consolidated Retained Earning) XX Dr SRE (Subsidiary Retained earnings) a/c
Cr Closing stock XX Cr Closing stock a/c
Investment in Debt Instrument of Subsidiary Company
If purchased at Par Value:
Dr Loan notes/Debenture (Sub co.) a/c Cr Investment in Loan notes/Debentures a/c
If purchased at more than Par Value:
Dr Loan notes/Debenture (Sub co.) a/c
Dr Cost of Control a/c Cr Investment in Loan notes/Debentures a/c

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Intra-group sale of Fixed Asset

If asset exist upon Reporting Date:
Depreciating Asset
Parent co. is seller Subsidiary co. is seller
Dr CRE (URP) a/c Cr Asset a/c Dr SRE (URP) a/c Cr Asset a/c
For Reversal of Excess Depreciation: For Reversal of Excess Depreciation:
Dr Asset Cr SRE (Post Acq) a/c Dr Asset Cr CRE (Post Acq) a/c
Non-Depreciating Asset
Parent co. is seller Subsidiary co. is seller
Dr CRE (URP) a/c Cr Asset a/c Dr SRE (URP) a/c Cr Asset a/c
If asset does not exist upon Reporting Date: Simply ignore
Un-recognized intangible assets of Subsidiary co. at Acquisition date
If there is intangible asset related to subsidiary co. at the date of acquisition having fair value measureable, it will be
recorded as: Dr Intangible Asset a/c (F.V) a/c Cr SRE (Pre-Acq) a/c
For amortization: Dr SRE (Post Acquisition) a/c Cr Intangible asset a/c
Mid Year Acquisition:
Net Assets at Acquisition date = Net Assets at the start of Year of acquisition + Net Assets after start of year but before
date of acquisition.
Remaining implications are same as above.
CHAPTER
Consolidated Statement of Profit or Loss
If subsidiary company is acquired at the start of current year or in If subsidiary company is acquired during
previous year. the current year
Pre-Acquisition income & Post-Acquisition income &
expenses of subsidiary co. expenses of subsidiary co. • Consolidate Full year incomes &
expenses of subsidiary co. line by line.
• Don’t consolidate simply ignore • Consolidate line by line
Consolidated statement of profit or loss & other comprehensive income:

Sales (P + S) XX
Cost of sales (P + S) (XX)
Gross Profit XX
Operating Expenses (P + S) (XX)
Investment income (P + S) XX
Share of Associate company profit (Post Acquisition) XX
Profit Before tax XX
Tax expense (P + S) (XX)
Profit after tax XX XX
Other Comprehensive Income
Revaluation Surplus (P + S) XX
Fair Value gain on investments(P + S) XX
Total of Other comprehensive income XX XX
Total comprehensive income XX
Attributable to:
Profit after tax Total comprehensive income
Group XX XX
NCI XX XX

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Adjustments
Intra-group sale: Dr Sale a/c (selling price) Cr Cost of sale a/c
For unrealized profit: Dr Cost of Sale a/c Cr Closing stock a/c
Extra Depreciation on Fair Value Adjustment: Dr Cost of sale a/c Cr Asset a/c
Impairment loss on Goodwill: Under category of Admin/operating expenses
Share of NCI:
Current year accounting profit of subsidiary co. XX
(Time apportion if mid-year acquisition)
Adjustments:
Less: URP on stock (if subsidiary co is seller) (XX)
Less: Extra depreciation on Fair Value adjustment (XX)
Less: URP on Fixed asset (if subsidiary co is seller) (XX)
Plus: Excess depreciation on sale of fixed asset (if subsidiary co is seller) XX
Adjusted Profit XX
Share of NCI (Adjusted profit x NCI %) XX
Less: Impairment loss on Goodwill to NCI (XX)
Net Share of NCI XX
Note: Intra group interest income and dividend income will be cancelled out on the face of P&L.
IAS – 28 Investment in Associate

Investor and Associate Relationship: When an investor owns 20% or more but up to 50% voting right of another
entity it is assumed investor has significant influence over the investee and such a relationship is called investor &
associate relationship.
Investor: the entity which has significant influence over another entity is called investor.
Associate: the entity which is subject to significant influence by another entity is called associate.
Significant influence: it is the ability to participate (suggestion) in the decision making process of the investee.
Consolidation Procedure:
In Consolidated Statement of Financial Position:
• No addition of assets and liabilities of associated company
• Simply Apply “Equity Method of Accounting.”
Cost of investment XX
+ Share of Post Acq. Profit/(Loss) from associate XX Dr Investment in Ass a/c Cr CRE a/c
Carrying Value of Associate co. XX
Less: Impairment loss on investment in Associate co. (XX) Dr CRE a/c Cr Investment in Ass. a/c
Net Carrying Value in Consolidated SOFP XX
In Consolidated Statement of Profit & Loss:
• No addition of incomes and expenses of associated company.
• Simply Record share of post-acquisition Profit/loss from associated company.
Intra group trading with Associated company:
• Intra group receivable and payables with associate company are not cancelled out on consolidation.
Parent is Seller: Associate company is Seller:
Dr CRE a/c (URP x Group holding) Dr CRE a/c (URP x Group holding)
Cr Investment is associate a/c Cr Closing Stock a/c

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DISPOSAL OF INVESTMENT
Subsidiaries are consolidated until the date control is lost therefore profits need to be time-apportioned.
• Disposal occurs when control is lost over subsidiary. F7 syllabus includes only full disposal i.e.
all the holding is sold (say, 70% to nil)
• The effective date of disposal is when control is lost
• Following is the accounting treatment for full disposal
 In case of Statement of profit or loss and other comprehensive income, consolidate
results and non-controlling interests to the date of disposal.
 Show the group profit or loss on disposal
 In case of Statement of financial position, there will be no non-controlling interests
and no consolidation as there is no subsidiary at the date the statement of financial position is
being prepared.
Parent company's accounts

In the parent's individual financial statements the profit or loss on disposal of a subsidiary will be calculated as:
$
Sales proceeds X
Less: Carrying amount (cost in P's own statement of financial position) (X)
Profit (loss) on disposal X/(X)

Group accounts – Gain/loss on disposal of subsidiary
In the group financial statements the profit or loss on disposal will be calculated as:
$ $
Proceeds X
Less: Amounts recognised prior to disposal:
Net assets of subsidiary X
Goodwill X
Non-controlling interest _(X)_
Profit / loss X/(X)
• If the disposal is mid-year:

- A working will be required to calculate both net assets and the non-controlling interest at the
disposal date.
- Any dividends declared or paid in the year of disposal and prior to the disposal date must be
deducted from the net assets of the subsidiary if they have not already been accounted for.
• Goodwill recognised prior to disposal is original goodwill arising less any impairment to date.

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CHAPTER
IAS – 7 Statement of Cash Flow
CASH FLOW STATEMENTS - IAS 7
Objective
The objective of IAS 7 - Cash-flow Statements is to ensure that enterprises provide information about the
historical changes in cash and cash equivalents by means of a cash flow statement which classifies cash
flows during the period according to operating, investing and financing activities for a period.
Cash & Cash Equivalents

Cash comprises cash in hand and deposits repayable on demand less overdrafts repayable on demand.
Cash equivalents are 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. (Investments with a maturity of three
months or less from the date of acquisition)
Presentation of Cash Flow Statement

Operating Activities
Cash flows from operating activities are those that normally arise from transactions relating to trading
activities.
Cash flows from operating activities can be calculated in two ways, using the direct method or the indirect
method.
Direct method
The direct method shows operating cash receipts and payments directly. This is useful as it shows the
actual sources, and uses of cash flows by nature. The problem is that most businesses do not keep records
in this way and so it can be time consuming to gather the information. The information if available would
be presented as follows:
$
Cash receipts from customers X

Payments to suppliers (X)
Payments in relation to employees (X)
Payments in relation to other operating expenses (X)
Cash flows from Operations X
Interest paid (X)
Income taxes paid (X)
Dividends paid (might be shown in financing activities) (X)
Net cash flows from operating activities X
Whilst IAS 7 encourages the use of this method it is not mandatory.

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Indirect Method
This method starts with profit before tax and adjusts for non-cash items to arrive at cash flows from
operations. Non operating items such as interest paid, tax paid are deducted to arrive at net cash flows
from operating activities. This method allows users to assess the quality of earnings as a comparison of
profit and cash flows can easily be made. Additionally, this method is popular with preparers, as it does not
give away such sensitive information as the direct method.
Investing Activities
Investing activities are the acquisition and disposal of long term assets, and other investment that are not
considered to be cash equivalents but have been made to generate future income and cash flows.
Financing Activities
Financing activities are activities that alter the equity capital and borrowing structure (gearing) of the
entity and will comprise receipts and payments of capital/principal from or to external providers of
finance.
Proforma single Entity Cash Flow Statement

$'m $'m
Net cash inflow from operating activities
Profit before tax X
Adjustments for:
Add back interest expense X
Deduct investment income (X)
Add back depreciation X
Add back Loss on disposal of PP&E X
Add back Goodwill impairment X
Add back increase in provisions X
Deduct amortisation of government grants (X)
Operating profit before working capital changes X
(Increase) in inventory (X)
(Increase) in receivables (X)
Increase in payables X
Cash generated from operations X
Interest paid (X)
Tax paid (X)
Dividends paid (might be shown in Financing instead) (X)
Net cash flow from operating activities X/(X)

Cash flows from investing activities

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Purchase of PP&E (X)
Purchase of non-current investments (X)
Receipts from sale PP&E X
Receipts from sale of investments X
Dividends received X
Interest received X
Receipt of government grant X
Cash used for investing activities X/(X)

Cash flows from Financing activities
Issue of ordinary share capital X
Issue of loan notes X
Payment of finance lease liabilities (X)
Cash from financing activities X/(X)

Net increase/(Decrease) in cash and cash equivalents
Opening balance for cash & cash equivalents X
Closing balance for cash and cash equivalents X

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ACCA

Teaching Experience: 9 Years

Conceptual Framework & Regulatory Framework 1

IAS 20 - Accounting for government grants & disclosure of government assistance 10

IAS 40 – Investment Property 12

IAS 36 – Impairment losses 14

IFRS 5 - Non-current assets held for sale and discontinued operations 15

IAS 32, IFRS 9 - Financial Instruments 20

Interpretation of Financial Statements 40

0 CPE: Islamabad |SKANS Peshawar

1 CPE: Islamabad |SKANS Peshawar

2 CPE: Islamabad |SKANS Peshawar

IFRS Advisory Council International Accounting International Financial

Assist in the international/national

PRINCIPLES VS RULES-BASED APPROACH

Principles-based accounting system

3 CPE: Islamabad |SKANS Peshawar

PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES

• A statement of financial position

Equity and liabilities

Trade and other payables X

Current assets include all items which:

4 CPE: Islamabad |SKANS Peshawar

Statement of changes in equity

This includes the effect of share issues and dividends.

Balance at 31 December 20X6 X X X X X

Issue of share Capital X X X

Comprehensive income for the year (X) X -

Balance at 31 December 20X7 X X X X X

5 CPE: Islamabad |SKANS Peshawar

Companies – Basic Adjustments

ACCOUNTING FOR A SHARE ISSUE

Dr Cash Proceeds received

Cr Share capital Nominal value of shares issued

Cr Share premium Premium on issue of shares.

ACCOUNTING FOR A RIGHTS ISSUE

Dr Cash Proceeds received

Cr Share capital Nominal value of shares issued

Cr Share premium Premium on issue of shares.

ACCOUNTING FOR A BONUS ISSUE

Dr Share premium/Retained profits Nominal value of shares issued

Cr Share capital Nominal value of shares issued

An issue of loan notes is recorded by:

Dr Cash Cr Loan notes (non-current liability)

Dr Finance cost (interest expense) Cr Cash / accrual

Preference dividends = Amount of preference shares x % of dividend

6 CPE: Islamabad |SKANS Peshawar

NOT-FOR-PROFIT AND PUBLIC SECTOR ENTITIES

IAS 16 - Tangible Non-Current Assets

7 CPE: Islamabad |SKANS Peshawar

Initial Measurement (Valuation)

8 CPE: Islamabad |SKANS Peshawar

9 CPE: Islamabad |SKANS Peshawar

IAS 20 - Accounting for government grants & disclosure of government

Depreciating Asset Non-Depreciating Asset

10 CPE: Islamabad |SKANS Peshawar

IAS 23 – Borrowing Cost

11 CPE: Islamabad |SKANS Peshawar

IAS 40 – Investment Property