CertIFR Textbook

Welcome to the Certificate in
International Financial Reporting

Primary objectives:
▪ To help you understand how International Financial Reporting Standards
(IFRS® Standards) are used around the world
▪ To explain the workings of the International Accounting Standards Board (IASB®, 'the
Board') To examine the fundamental requirements of IFRS Standards on a standard-
bystandard basis, for the benefit of preparers, auditors and users of financial
statements
▪ To provide guidance on how to use IFRS Standards in practice, with the aid of
questions, cases and exercises.
The course includes questions and interactive exercises which you should complete
before moving on.
CONTENTS
CERTIFICATE INTRODUCTION ...................................................................................... 1
MODULE 1: THE NATURE AND OPERATIONS OF THE IASB ............................................ 3
Formation of the Board ....................................................................................................... 4
Structure of the IFRS Foundation ........................................................................................ 5
Standards in issue ................................................................................................................ 6
The Conceptual Framework for Financial Reporting .......................................................... 8
Financial reporting guide - a summary .............................................................................. 10
Exercise - assets and liabilities........................................................................................... 11
MODULE 2: THE STATUS AND USE OF IFRS STANDARDS AROUND THE WORLD .......... 12
Introduction: Where have IFRS Standards been adopted? .............................................. 13
IFRS for Small and Medium-sized Entities (IFRS for SMEs Standard)................................ 15
The annual bound volume of IFRS Standards and its use ................................................. 16
Frequently asked questions............................................................................................... 17
Quick Quiz .......................................................................................................................... 18
MODULE 3: REVENUE, PRESENTATION AND PROFIT .................................................. 19
IAS 1 Presentation of Financial Statements ...................................................................... 20
IFRS 15 Revenue from Contracts with Customers ............................................................ 28
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors ......................... 36
Frequently asked questions............................................................................................... 38
Quick quiz .......................................................................................................................... 39
MODULE 4: ACCOUNTING FOR ASSETS AND LIABILITIES – PART 1 .............................. 42
Introduction ....................................................................................................................... 43
IAS 16 Property Plant and Equipment ............................................................................... 44
IAS 38 Intangible Assets..................................................................................................... 48
IAS 40 Investment Property............................................................................................... 52
IAS 36 Impairment of Assets ............................................................................................. 55
IAS 23 Borrowing Costs...................................................................................................... 62
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance... 65
IAS 2 Inventories ................................................................................................................ 67
IFRS 16 Leases .................................................................................................................... 69
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations ........................... 75
MODULE 5: ACCOUNTING FOR ASSETS AND LIABILITIES - PART 2 .............................. 78
IFRS 13 Fair Value Measurement ...................................................................................... 79
Financial Instruments ........................................................................................................ 84
IAS 32 Financial Instruments: Presentation ...................................................................... 85
IFRS 7 Financial Instruments: Disclosures ......................................................................... 89
IFRS 9 Financial Instruments.............................................................................................. 90
IAS 37 Provisions, Contingent Liabilities and Contingent Assets ...................................... 94
IAS 10 Events After the Reporting Period ....................................................................... 102
IAS 19 Employee Benefits ................................................................................................ 104
IAS 12 Income Taxes ........................................................................................................ 108
IFRS 2 Share-Based Payment ........................................................................................... 113
IAS 41 Agriculture ............................................................................................................ 116
IFRS 6 Exploration for and Evaluation of Mineral Resources .......................................... 117
Frequently asked questions............................................................................................. 118
MODULE 6: GROUP ACCOUNTING ............................................................................119
IFRS 10 Consolidated Financial Statements .................................................................... 120
IAS 27 Separate Financial Statements ............................................................................. 126
IFRS 3 Business Combinations ......................................................................................... 127
IAS 28 Investments in Associates and Joint Vent ............................................................ 133
IFRS 11 Joint Arrangements............................................................................................. 134
IFRS 12 Disclosure of Interests in Other Entities ............................................................. 136
IAS 21 The Effects of Changes in Foreign Exchange Rates .............................................. 137
IAS 29 Financial Reporting in Hyperinflationary Economies ........................................... 142
Quick Quiz ........................................................................................................................ 144
MODULE 7: DISCLOSURE STANDARDS ......................................................................149
Introduction ..................................................................................................................... 150
IAS 7 Statement of Cash Flows ........................................................................................ 151
IFRS 8 Operating Segments ............................................................................................. 156
IAS 24 Related Party Disclosures ..................................................................................... 158
IAS 33 Earnings per Share ................................................................................................ 162
IAS 34 Interim Financial Reporting .................................................................................. 165
IFRS 1 First-time Adoption of International Financial Reporting Standards ................... 166
IFRS 4 Insurance Contracts .............................................................................................. 168
Quick Quiz ........................................................................................................................ 170
MODULE 8: PRINCIPAL DIFFERENCES BETWEEN IFRS® STANDARDS & UK GAAP/US GAAP
................................................................................................................................175
UK GAAP and FRS 102 ...................................................................................................... 176
Principal differences between IFRS Standards and UK GAAP ......................................... 177
Exercise - UK GAAP vs. IFRS Standards ............................................................................ 180
Principal differences between IFRS Standards and US GAAP 1 ...................................... 181
Exercise - US GAAP vs. IFRS Standards ............................................................................ 185
Principal differences between IFRS Standards and US GAAP 2 ...................................... 187
Quick quiz ........................................................................................................................ 192
MODULE 9: CURRENT ISSUES IN IFRS® STANDARD ...................................................194
The FASB and the future for US financial reporting ........................................................ 195
The FRC and UK financial reporting ................................................................................. 196
New UK GAAP .................................................................................................................. 198
Exercise - New UK GAAP .................................................................................................. 199
The Board and updating accounting standards .............................................................. 200
The Board's work plan at 7 November 2018 ................................................................... 201
Quick quiz ........................................................................................................................ 203
CERTIFICATE INTRODUCTION
About ACCA
ACCA (the Association of Chartered Certified Accountants) is the global body for
professional accountants. We offer business relevant, first-choice qualifications to
people of application, ability and ambition around the world, who seek a rewarding
career in accountancy, finance and management.
We support our 208,000 members and 503,000 students in 179 countries, helping them
to develop successful careers in accounting and business, with the skills required by
employers. We work through a network of 104 offices and centres and 7,300 Approved
Employers worldwide, who provide high standards of employee learning and
development. Through our public interest remit, we promote appropriate regulation of
accounting and conduct relevant research to ensure accountancy continues to grow in
reputation and influence.
The ACCA Qualification
The ACCA Qualification is the world-leading accountancy qualification, providing
students with a unique blend of skills, real-world focus and specialisation options which
will super-charge careers, impress employers and, upon completion, make you eligible
for ACCA membership. On becoming a member, you will be recognized globally as a
strategic, forward thinking professional accountant, opening doors to the most sought
after job roles and becoming part of the largest network or professional accountants in
the world.
ACCA also offers a range of separate qualifications which give choice, flexibility and
global career opportunities.
Foundation level qualifications
ACCA offers foundation level qualifications for those new to accountancy or who are
working in finance with no qualifications. They allow students to achieve certificates
and diplomas on their way to progressing onto the ACCA qualification.
Certificates and diplomas
To support finance professionals to quickly top up their knowledge and understanding
of specialist finance subjects ACCA offers several certificates and diplomas covering:
▪ Diploma in IFRS - designed to develop knowledge and understanding of the IFRS
beyond the certificate level
▪ International Auditing - Certificate in International Auditing (in English and Spanish)
covering an introduction to the International Auditing standards
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▪ IPSAS - Certificate in IPSAS (in English and Arabic) designed to help meet the
challenges of implementing the International Public Sector Accounting Standards
▪ Business Valuations - Certificate in Business Valuations (in English and French)
covering the principles of business valuations.
Counting towards CPD
Studying for a qualification can be a great way to improve your professional
development. If you are an ACCA member, studying for another qualification can count
towards your continuing professional development (CPD). The qualification must be
relevant to your learning and development needs. One hour of learning is equal to one
unit of CPD. So if you complete the course and pass the assessment, you could achieve
your verifiable CPD for a year. Please visit the ACCA website for more information about
ACCA’s CPD programme.
2
MODULE 1: THE NATURE AND OPERATIONS OF THE IASB
What you will learn
▪ The origins of the International Accounting Standards Board (IASB®, 'the Board')
▪ The structure of the IFRS Foundation
▪ International Accounting Standards (IAS®Standards) and International Financial
Reporting Standards (IFRS®Standards) that are currently in issue
▪ The purpose of financial statements – The Conceptual Framework for Financial
Reporting.
3
FORMATION OF THE BOARD
The International Accounting Standards Committee was founded in 1973 after a

conference in Sydney in 1972. The IASC was formed through an agreement made by
the professional accountancy bodies from Australia, Canada, France, Germany, Japan,
Mexico, the Netherlands, the United Kingdom with Ireland, and the United States of
America.
In considering the requirements for international accounting standards, it was regarded
as too difficult for governments to reach agreement - so the accountancy bodies have
worked together to try to devise a consistent set of global guidelines.
From 1973 to 2001 the number of accountancy bodies with membership of the IASC
increased to over 140. These accountancy bodies represented over 100 countries,
including China, represented by the Chinese accountancy body from 1997.
Accounting standards were set by a part-time, volunteer IASC Board that had 13
country members and up to 3 additional organisational members. Each member was
generally represented by two "representatives" and one "technical advisor". The
individuals came from a wide range of backgrounds - accounting practice, multinational
businesses, financial analysis, accounting education, and national accounting standard-
setting. The Board also had a number of observer members.
The IASC concluded in 1997 that, to continue to perform its role effectively, there
must be convergence between national accounting standards and practices and
global accounting standards. The IASC saw, therefore, a need to change its structure.
A new constitution took effect from 1 July 2000 under which was established a
requirement for full constitutional review every five years. At this point a new
standards-setting body was formed, named the International Accounting Standards
Board (IASB, 'the Board').
On 1 April 2001, the Board took over from the IASC the responsibility for setting
International Accounting Standards.
4
STRUCTURE OF THE IFRS FOUNDATION
The IASB sits under the wider parent body the ‘IFRS Foundation’ and is supported by a
number of other groups and advisory panels. Since its creation in 2000, there have been
three constitutional reviews. The latest was completed in January 2016. The key
elements of the resulting structure, operational now, are illustrated in the diagram
below.
5
STANDARDS IN ISSUE
The list below outlines the standards as they currently exist.
** IFRS 4 is replaced by IFRS 17 for accounting periods beginning on or after 1 January

2021.
The new insurance contracts standard (IFRS 17) forms part of the Certificate in IFR
qualification.
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You will note that a number of standards seem to be missing,
e.g. IAS Standards 3, 4, 5, and 6.
This is because they have been replaced by later standards, e.g. IAS 3 (which related
to consolidated financial statements) was replaced by the much more detailed
standards IAS 27, 28 and (more recently) IFRS 10, 11 and 12
Individual IAS and IFRS Standards are examined in more detail in later modules.
IAS and IFRS Standards are frequently changed in order to improve and remove
options and establish more detailed rules in certain areas. Sometimes standards are
amended retaining the same standard number where the scope of the standard has
remained broadly the same.
The latest IFRS Standard (IFRS 17) was issued in May 2017.
The application dates of standards (ie when companies start to use the guidance they
contain) are normally somewhat after their date of publication, e.g. this latest standard
will come in to force for accounting years beginning on or after 1 January 2021. Early
application is possible though.
7
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
An important publication is the Conceptual Framework for Financial Reporting (“the

Conceptual Framework”) This was revised in 2018 and became effective immediately
as a reference document for the Board. The Conceptual Framework establishes the
purpose of financial statements and the major principles that underlie their
preparation.
The Conceptual Framework suggests that the main purpose of financial statements is
to give information to users (particularly investors and creditors) so that they can
make financial decisions. To make such decisions, users consider both prospects for
future cash inflows and management’s stewardship of economic resources.
Information should therefore be provided on:
The Conceptual Framework has a number of purposes, including:

▪ To assist the Board to develop IFRS Standards based on consistent concepts
▪ To assist preparers of financial statements to apply IFRS Standards and develop
accounting policies on topics that are not the subject of an IFRS Standard or choose
a policy when an IFRS Standard allows a choice.
▪ To assist users to understand and interpret IFRS Standards.
The Conceptual Framework suggests that in order for financial information to be
useful, it must possess certain qualitative characteristics. They are:
Information must be relevant and faithfully represented in order to be useful.

▪ It is relevant if it has predictive value, confirmatory value or both. It is faithfully
represented if it is complete, neutral and free from error.
▪ Faithful representation also means that the substance of a transaction is reflected;
this many not be in line with its legal form.
Its usefulness is enhanced if the information is comparable with other similar
information, verifiable as a faithful representation, produced on a timely basis and
understandable to users.
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The Conceptual Framework also explores the concept of a reporting entity. It concludes
that a reporting entity is any entity that is required to or chooses to prepare financial
statements. A reporting entity need not be a legal entity and may be:
Depending on the reporting entity financial statements may be unconsolidated,

consolidated (a parent and subsidiaries) or combined (two or more entities that are not
linked by a parentsubsidiary relationship).
The underlying assumption when preparing financial statements is that an entity is a
going concern and will continue in operation for the foreseeable future.
One of the key components of the Conceptual Framework is the definition of the
five main elements of financial statements.
In the statement of financial position, three elements can be found:
▪ “An asset is a present economic resource controlled by the entity as a result of

past events; an economic resource is a right that has the potential to produce
economic benefits.
▪ A liability is a present obligation of the entity to transfer an economic resource
as a result of past events; an obligation is a duty or responsibility that the entity
has no practical ability to avoid.
▪ Equity is the residual interest in the assets of the entity after deducting all its
liabilities
▪ Income is increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims
▪ Expenses are decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of equity
claims.”
(Conceptual Framework Chapter 4)
Equity does not need to be defined separately because it is just the arithmetical
difference between total assets and total liabilities.
9
FINANCIAL REPORTING GUIDE - A SUMMARY
International accounting guidance exists in the Board's Conceptual Framework, IFRS

Standards and IFRIC Interpretations. The Board published the Conceptual Framework
to outline the concepts that underlie the financial reporting process and revised it to
provide extended guidance in 2018. The Conceptual Framework is used as a guide by
both international and national standard setters to set consistent and logical
accounting standards. It also assists preparers and auditors in interpreting standards
and dealing with issues that IFRS Standards do not cover.
Accounting standards provide guidance for preparers to deal with the recognition,
measurement, presentation and disclosure requirements for transactions and events.
Most IAS Standards and IFRS Standards are intended for application across industries.
A second tier of guidance comes from the IFRIC Interpretations developed by the IFRS
Interpretations Committee. These pronouncements clarify or interpret the standards
where there is a need for improved guidance.
The following hierarchy, in decreasing authority of guidance within IFRS Standards, is
followed in developing and applying an accounting policy where no IFRS
Standard specifically deals with a transaction:
▪ The requirements and guidance in the IFRS Standards and IFRIC Interpretations
dealing with similar and related issues
▪ The Conceptual Framework
▪ The most recent pronouncements from other standard setting bodies that use a
similar conceptual framework to develop accounting standards, other accounting
literature and accepted industry practice to the extent that these do not conflict
with (a) and (b) above.
10
EXERCISE - ASSETS AND LIABILITIES
Classify the following as an Asset, Liability or Neither, applying the definition of each
that is given in the Conceptual Framework.
11
MODULE 2: THE STATUS AND USE OF IFRS STANDARDS AROUND
THE WORLD
What you will learn
▪ A brief summary of the adoption of International Financial Reporting Standards
(IFRS ® Standards) in different jurisdictions
▪ The growth of the International Accounting Standards Board (IASB ®, 'the Board')
and IFRS Standards
▪ IFRS Standards and small and medium-sized entities.
12
INTRODUCTION: WHERE HAVE IFRS STANDARDS BEEN ADOPTED?
In many countries, stock exchange listing requirements or national securities legislation

permit (or sometimes require) foreign companies that issue securities in those
countries to prepare their consolidated financial statements using IFRS Standards.
In North America, Canada adopted IFRS Standards in full with effect from 2011. In the
USA, domestic listed companies are not permitted to use IFRS Standards. Although the
US standard-setter FASB has recently worked on a number of projects with the IASB
and has publicly stated its commitment to IFRS Standards, it is unlikely that the
Securities and Exchange Commission will allow domestic listed companies to use IFRS
Standards in the near future. This is discussed further in Module 9.
Several South American economies require the use of IFRS Standards for domestic
listed companies. These include Brazil, Chile, Mexico, Peru, Uruguay and
Ecuador. Other countries, such as Argentina, require some listed companies to prepare
financial statements in accordance with IFRS Standards. Paraguay allows but does not
require the use of IFRS Standards for domestic listed companies.
Since 1 January 2005, all publicly listed companies in the European Union have been
required to prepare their financial statements in conformity with IFRS Standards. In the
UK, whilst fully listed and AIM listed companies must prepare their financial statements
in accordance with IFRS Standards, other companies may choose to do so.
African countries are split between those that require the use of IFRS Standards, those
that permit their use and those that prohibit their use. Countries that require domestic
listed companies to use IFRS Standards include South Africa, Ghana and Kenya.
India has developed Ind-AS which are similar to IFRS Standards (although not fully
converged); all domestic listed companies are required to use Ind-AS as well as other
companies meeting certain thresholds.
In China IFRS Standards may not be applied, however Chinese Accounting Standards
are substantially converged and it is intended that remaining differences will be
eliminated over time.
In Asia, Hong Kong, Malaysia and Singapore have issued national standards that are
identical to IFRS. Korea has translated IFRS Standards word for word to become Korean
GAAP . Domestic listed companies in Japan may report under US GAAP , Japanese
GAAP , IFRS Standards or Japan’s Modified International Standards (JMIS). JMIS are
developed based on IFRS Standards with certain deletions or modifications where
considered necessary.
13
In Australasia both Australia and New Zealand have adopted national standards that
are IFRS Standards-equivalents. These must be used by all domestic listed companies
and some large unlisted companies, whilst they are permitted for other companies.
14
IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES (IFRS FOR SMES STANDARD)
Publication of the IFRS for SMEs

Because full IFRS Standards were designed to meet the needs of investors in public
companies, they are very detailed and fairly burdensome to implement for smaller
companies. In July 2009 the Board published an IFRS Standard designed for use by small
and medium-sized entities (SMEs).
This IFRS for SME's is designed for non-publicly accountable entities, meaning it cannot
be applied by listed companies. Other non-eligible companies include banks, insurance
companies and securities brokers/dealers. The Standard reflects an important
development in international reporting, since SMEs are estimated to represent more
than 95 per cent of all companies.
The IFRS for SMEs Standard is derived from full IFRS Standards with appropriate
modifications based on the needs of users of SME financial statements and cost-benefit
considerations (simplifications generally allow only more straightforward accounting
policy options and a more concise written style is used throughout). The IFRS for SMEs
Standard is reviewed periodically, with amendments made to address issues arising in
the Standard itself and reflect changes in IFRS Standards. Amendments resulting from
an initial comprehensive review of the IFRS for SMEs were issued in 2015.
The IFRS for SMEs Standard is available for any jurisdiction to adopt, whether or not it
has adopted full IFRS Standards. The only restriction is that it may not be used by public
entities or financial institutions. As at November 2018, 86 jurisdictions required or
permitted use the IFRS for SMEs Standard to be applied by eligible companies.
15
THE ANNUAL BOUND VOLUME OF IFRS STANDARDS AND ITS USE
It would be useful for reference purposes to have with you a copy of the bound
volume of International Financial Reporting Standards 2018 as, from time to time, this
course will direct you towards particular standards to carry out short exercises.
IFRS are available in three formats: the Red Book, the Blue Book and the Green Book.
▪ The 2018 Red Book includes all Standards and Interpretations as issued at 1 January
2018, including those not yet effective;
▪ The 2018 Blue Book includes all Standards and Interpretations effective on or before
1 January 2019;
▪ Annotated Issued IFRS Standards and Annotated Required IFRS Standards are also
available.
➢ Annotated Issued IFRS Standards is an annotated and cross-referenced
version of the Red Book for a given year, and
➢ Annotated Required IFRS Standards is an annotated and cross-referenced
version of the Blue Book for a given year
The Red Book is most applicable to this course.
16
FREQUENTLY ASKED QUESTIONS
1. Which national standards are closest to IFRS Standards?

Answer:
Several countries have adopted IFRS Standards to be their own national standards,
without any modification. These countries include South Korea, Australia, Singapore
and Hong Kong.
2. Is it necessary to adhere to all requirements of IFRS Standards for financial

statements to state compliance?
Answer:
Yes, in order to claim compliance with IFRS Standards, all the requirements of the IFRS
Standards must be met. There are no exceptions. Use of local GAAP and IFRS Standards
together is not allowed.
17
QUICK QUIZ
1. Which of the following countries prohibits the use of IFRS Standards by domestic
listed companies?
A. Brasil
B. Russia
C. Australia
D. China
The correct answer is D.
Chinese companies may not apply IFRS Standards, however Chinese Accounting
Standards (CAS) are substantially converged with IFRS Standards and it is expected that
remaining differences will be eliminated in the future.
2. Which of the following type(s) of entity is (are) eligible to use the IFRS for SMEs?
(1) An unlisted bank
(2) A listed company that meets size thresholds for a small entity
(3) An unlisted company of any size.
A. 2 only
B. 3 only
C. 1 and 3
D. 2 and 3
The correct answer is B.
The IFRS for SMEs Standard may only be applied by non-publicly accountable entities
i.e. unlisted entities. It may not be applied by financial institutions.
3. Which of the following statements is true?

A. The IFRS for SMEs may only be adopted by jurisdictions that have no national
standards.
B. The IFRS for SMEs was developed by the Board based on a number of existing
national standards for SMEs.
C. The IFRS for SMEs may be adopted by any jurisdiction, regardless of whether it
has adopted full IFRS Standards.
D. The IFRS for SMEs allows the same accounting options as full IFRS Standards but
reduces the level of required disclosures significantly.
The correct answer is C.
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MODULE 3: REVENUE, PRESENTATION AND PROFIT
What you will learn
This module begins the process of looking at IFRS ® Standards on a topic-by-topic
basis. It deals with three introductory Standards:
▪ Presentation of financial statements - IAS 1
▪ Revenue from contracts with customers - IFRS 15
▪ Accounting policies, changes in accounting estimates, and errors - IAS 8.
19
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
IAS 1 contains several aspects that reflect the Conceptual Framework, including the
purpose of financial statements. The Standard identifies the objective and content of a
set of financial statements and then primarily deals with:
▪ General features of financial statements
▪ Structure and content of financial statements
The objective of general purpose financial statements is to provide information about
the financial position, financial performance, and cash flows of an entity that is useful
to a wide range of users in making economic decisions.
"To meet that objective, financial statements provide information about an entity's:
a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by and distributions to owners, in their capacity as owners
f. Cash flows".
(IAS 1, paragraph 9)
That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing
and certainty.
A complete set of financial statements should include:

a. "A statement of financial position at the end of the period,
b. A statement of profit or loss and other comprehensive income (see below)
for the period,
c. A statement of changes in equity for the period
d. A statement of cash flows for the period,
e. Notes, comprising a summary of accounting policies and other explanatory
information
f. Comparative information in respect of the preceding period, and
g. A statement of financial position at the beginning of the preceding period
where retrospective adjustment is made in accordance with IAS 8".
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Entities are not required to use the titles listed above in their financial statements (for
example, they may instead use 'old' titles such as balance sheet and income statement),
but all existing Standards and Interpretations reflect the terminology referred to above.
General features of financial statements (IAS 1)
General features of financial statements:

Fair presentation
Going concern
Accrual basis
Materiality and aggregation
Offsetting
Frequency of reporting
Comparative information
Consistency of presentation
IAS 1 requires that financial statements should present fairly the financial position,
performance, and cash flows of an entity. This will nearly always be achieved by
compliance with the requirements of IFRS Standards. In extremely rare circumstances,
it may be necessary to depart from an IFRS Standard.
Financial statements should be prepared on a going concern basis unless management

intends to liquidate an entity or cease trading or has no realistic alternative but to do
so. Disclosure is required where financial statements are not prepared on the going
concern basis.
Financial statements, other than cash flow information, should be prepared on the
accrual basis.
Each material class of similar items should be presented separately. Line items that
are not material individually should be aggregated with other line items. This aids
understandability.
21
“Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements which provide financial
information about a specific reporting entity.
Materiality depends on the nature or magnitude of information, or both.”
(IAS 1, paragraph 7 (amended October 2018))
Assets and liabilities and income and expenses should not be offset unless this is
required or permitted by another IFRS Standard.
A complete set of financial statements should be prepared at least annually. Reasons
for a reporting period of more or less than a year should be disclosed.
Comparative information should be presented for the preceding period for all
amounts reported in the current year financial statements. Additional comparative
information may be presented provided that it is prepared in accordance with IFRS
Standards. If the presentation or classification of items is changed, comparative
information should be reclassified on the same basis.
Consistent presentation and classification should be retained unless a change is
required by an IFRS Standard or another presentation and classification would be more
appropriate.
22
Content of financial statements (IAS 1)
Structure and content of financial statements:

▪ Statement of financial position
▪ Statement of profit or loss and other comprehensive income
▪ Statement of changes in equity
▪ Notes
IAS 1 does not lay down particular formats for financial statements but does have
minimum requirements for the presentation of items on the face of the financial
statements.
a. Statement of financial position (SOFP)
Certain line items MUST be presented in the statement of financial position. They are:
a. "property, plant and equipment

b. investment property
c. intangible assets
d. financial assets
e. equity accounted investments
f. biological assets
g. inventories
h. trade and other receivables
i. cash and cash equivalents
j. assets held for sale
k. trade and other payables
l. provisions m. financial liabilities
m. current tax amounts
n. deferred tax amounts
o. liabilities held for sale
p. non-controlling interests
q. issued capital and reserves".
It is necessary to present assets and liabilities on the basis of the distinction between
current items and non-current items except where a presentation based on liquidity is
reliable and more relevant.
23
Current items are those:
▪ Expected to be realised/settled in an entity's normal operating cycle, or
▪ Held primarily for the purpose of trading, or
▪ Expected to be realised/due to be settled within 12 months, or
▪ In the case of an asset is unrestricted cash or cash equivalent, or
▪ In the case of a liability has no unconditional right to defer settlement for at least
12 months.
A liability may need to be split for presentation purposes into a current and non-
current element, for example:
Additional information should be disclosed either in the statement of financial

position or in the notes, for example:
▪ Classes of property, plant and equipment
▪ Classifications of inventory
▪ Types of provision
▪ Details of classes of share capital
▪ A description of reserves within equity.
24
b. Statement of profit or loss and other comprehensive income (SPLOCI)
▪ Profit or loss includes most items of income and expenses.
▪ Other comprehensive income (OCI) is items of income and expense that are
not recognised in profit or loss, as stipulated by other IFRS Standards. It
includes:
In accordance with other IFRS Standards this may or may not be reclassified to profit or
loss at a later date.
▪ The statement of profit or loss and other comprehensive income may be
presented as one single statement or two separate statements (a statement of
profit or loss and a statement disclosing OCI and total comprehensive income).
Profit or loss and total comprehensive income must be allocated between amounts
attributable to:
▪ The non-controlling interest, and
▪ Owners of the parent (see module 6).
Minimum disclosure requirements in the statement of profit or loss are as follows:
▪ Revenue
▪ Gains / losses on derecognition of financial assets measured at amortised cost
▪ Finance costs Impairment losses (and reversals)
▪ Share of profit or loss of associates/joint ventures
▪ Gains/losses on reclassification of financial assets
▪ Tax expense
▪ Single amount for discontinued operations.
Items in OCI are split between those that can be reclassified to profit or loss and those
that cannot be reclassified.
25
Sometimes, items of OCI that are not currently recognised in profit or loss may be
recognised there at a later date. They should be analysed as follows:
▪ OCI that will not be reclassified subsequently to profit or loss
▪ OCI that may be reclassified to profit or loss
▪ Share of OCI of associate/JV that will not be reclassified to profit or loss
▪ Share of OCI of associate/JV that may be reclassified to profit or loss.
Items of OCI can be shown net of tax or gross, with a tax amount relating to OCI
presented in aggregate.
Expenses in profit or loss may be analysed using either the 'nature of expense' or the
'function of expense' method.
Examples of each are as follows:
When an item of income or expense is material, its nature and amount should be
disclosed separately in the statement of profit or loss or in the notes to the accounts.
No item may be presented as extraordinary.
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c. Statement of changes in equity (SOCIE)
The statement of changes in equity must include:
▪ "Total comprehensive income for the period

▪ For each component of equity, the effects of changes in accounting policies
and corrections of errors recognised in accordance with IAS 8
▪ For each component of equity, a reconciliation between the carrying amount
at the beginning and end of the period resulting from:
o Profit or loss
o Other comprehensive income
o Transactions with owners in their capacity as owners" (e.g. share issues
and dividends paid).
A typical SOCIE for the current and comparative accounting periods is presented as
follows:
d. Notes to the financial statements

These should:
▪ Present information about the basis of preparation and accounting policies
▪ Disclose information required by IFRS Standards that is not disclosed elsewhere
▪ Provide other relevant information not presented elsewhere
27
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
The objective of IFRS 15 is to establish principles in relation to the nature, amount,

timing and uncertainty of revenue and cash flows arising from a contract with a
customer (paragraph 1). IFRS 15 replaced IAS 11 Construction Contracts and IAS 18
Revenue with effect from January 2018.
IFRS 15 applies a five-step model for recognising and measuring revenue:

1. "Identify the contract with the customer
2. Identify the separate performance obligations in the contract
3. Determine the contract price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation"
(IFRS 15, paragraph IN7)
1. Step 1: Identify the contract with the customer:

The following conditions must be satisfied for IFRS 15 to apply:
▪ The contract must be approved by all parties
▪ The rights in relation to the goods and services to be transferred can be
identified
▪ Payment terms can be identified
▪ The contract has commercial substance
▪ Collection of consideration to which the entity is entitled in relation to the
exchange of goods and services is probable.
(IFRS 15 paragraph 9)
2. Step 2: Identify the performance obligations in the contract
At the contract’s inception, the entity should assess the goods and services promised
to the customer, and identify as a performance obligation each promise to transfer
either:
▪ A good or service that is distinct, or
▪ A series of distinct goods or services that are substantially the same and have
the same pattern of transfer to the customer.
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A good or service is distinct if both the following criteria apply:
▪ The customer can benefit from the good or service on its own or in conjunction
with other readily available resources
▪ The entity's promise to transfer the good or service is separately identifiable
from other promises in the contract.
A series of distinct goods or services is transferred to the customer in the same pattern
if both the following are satisfied:
▪ Each distinct good or service in the series that the entity promises to transfer
consecutively to the customer would be a performance obligation that is
satisfied over time
▪ A single method of measuring progress would be used to measure the entity's
progress towards complete satisfaction of the performance obligation to
transfer each distinct good or service in the series to the customer.
Example
Steadman Construction Co is contracted to build an office for a customer. It will
design the building, purchase materials, prepare the site, construct the property,
install wiring and air condihhtioning and finish the property.
Although each element of the construction process is capable of being distinct (e.g.
Steadman Construction Co could sell only the design part of the service), in the
context of the contract, the company provides a significant service in integrating the
input processes to produce a property. Therefore, there is a single performance
obligation, being the construction of the property
3. Step 3: Determine the transaction price

The transaction price is the amount that the entity expects to be entitled in exchange
for the transfer of goods and services. In determining the transaction price, the entity
should consider the contract terms and past customary business practices. It should
adjust the transaction price for the effects of the time value of money if the timing of
payments provides the customer or the seller with a financing benefit.
In certain circumstances, the consideration may not be fixed and may vary (known as
variable consideration). This may be due to the use of discounts, refunds, credits,
29
concessions, incentives, bonuses penalties etc. Variable consideration also arises if
there is contingent consideration.
Variable consideration is included in the transaction price only to the extent that it is
highly probable that its inclusion will not result in a significant revenue reversal in the
future when any uncertainty has been subsequently resolved.
4. Step 4: Allocate the transaction price to the performance obligations in the

contracts
Where a contract has multiple performance obligations, an entity will allocate the
transaction price to the performance obligations in the contract by reference to their
relative standalone selling prices.
If a standalone price is not available it should be estimated using methods such as:
▪ Adjusted market assessment (i.e. estimating the price that the customer would
be willing to pay in the market in which it operated)
▪ Expected cost plus a margin
▪ Residual approach (i.e. taking the total transaction price less the sum of the
standalone selling prices of other promises in the contract).
Any overall discount compared to the aggregate of standalone selling prices is allocated
between performance obligations on a relative standalone selling price basis. In certain
circumstances, it may be appropriate to allocate the discount to some but not all of the
performance obligations.
5. Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
Revenue is recognised as control is passed, either:
▪ Over time, or
▪ At a single point in time.
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a. Control
Control is the ability to direct the use of and obtain substantially all the remaining
benefits of an asset. This includes preventing others from directing the use of and
obtaining the benefits of the asset. The benefits are the potential cash flows that may
be obtained directly or indirectly, including:
▪ Using the asset to produce goods or services
▪ Using the asset to enhance the value of other assets
▪ Selling/exchanging the asset
▪ Pledging the asset as security for a loan
▪ Holding the asset.
(IFRS 15 paragraphs 31-33)
Control passes over time
A performance obligation is satisfied over time if one of the following is met:
▪ The Customer simultaneously receives and consumes all the benefits provided
by the entity as the entity performs
▪ The Entity's performance creates or enhances as asset that the customer
controls as the asset is created
▪ The Entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.
Control passes at single point in time
Where control is passed at a single point in time, factors considered in determining that
time include:
▪ Entity has a present right to payment for the asset
▪ Customer has legal title to asset
▪ Entity has transferred physical possession of the asset
▪ Customer has significant risks and rewards related to ownership of the asset
▪ Customer has accepted the asset.
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Exercise - IFRS 15 Questions 1
EF Co provides a wireless router and 12 months’ superfast broadband package to a
customer for $220 payable in advance. A customer buying the router separately
would pay $30 and a customer buying the broadband package separately would pay
$20 per month. How much of the transaction price is allocated to the performance
obligation to provide the router?
Answer:
The total transaction price is allocated prorata to standalone selling prices.
The sum of the standalone selling prices is $270 ($30 + (12 x $20))
Therefore: $30/$270 x $220 = $24.44
Exercise - IFRS 15 Question 2

EF Co provides a wireless router and 12 months' superfast broadband package to a
customer for $220 payable in advance. A customer buying the router separately
would pay $30 and a customer buying the broadband package separately would pay
$20 per month.
When is the transaction price allocated to the broadband package recognised?
A. Immediately, when the $220 payment is received
B. Over the 12 month period
C. At the end of the 12 month period
D. $30 immediately with the remaining spread over the contract period
The correct answer is B.
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6. Contract costs (IFRS 15)
IFRS 15 considers the costs of obtaining a contract and the costs of fulfilling a contract
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7. Presentation of contracts with customers (IFRS 15)
Presentation in financial statements
Contracts with customers are presented in the statement of financial position as either
a contract asset, a receivable or a contract liability, depending on the relationship
between the entity's performance and the customer's payment.
A contract asset arises where the entity has transferred a good or service to the
customer and its right to consideration is conditional on something other than the
passage of time (e.g. performance).
A receivable is recognised when an entity's right to consideration is unconditional
because only the passage of time is required before payment of the consideration is
due.
The entity can use alternative descriptions for these assets as long as they are
distinguishable from each other.
A contract liability arises where a customer has paid consideration to an entity (or is
due to) prior to the transfer of the related goods or services.
Any impairment relating to contracts with customers should be measured according to
IFRS 9.
Any difference between the initial recognition of a receivable and the corresponding
amount of revenue recognised should be presented as an expense, for example, an
impairment loss.
(IFRS 15 paragraphs 107-8)
34
Example - IFRS 15
Revenue from contracts with customers
On 1 January 20X5, Escot Co enters into a contract to sell computers at $600 per unit
to Holla Co. If Holla Co purchases more than 300 units in a calendar year the prices
falls to $575 per unit.
By 31 March 20X5 Escot Co has sold 40 units to the Holla Co and estimates that it
will not sell 300 units by 31 December 20X5.
What revenue should Escot Co recognise in the quarter ended 31 March 20X5?
Applying IFRS 15:
Escot Co must consider Holla Co's buying pattern in the first three months of the
year in order to determine whether Holla Co will purchase sufficient units to achieve
the volume discount.
Based on sales to March, it is highly probable that the volume discount will not be
achieved by Holla Co and there will not be a significant reversal of the cumulative
amount of revenue recognised for Escot Co.
Therefore, Escot Co should recognise revenue of $24,000 (40 x $60h0) in the first
quarter.
During the next quarter, Holla Co is acquired by another entity, that revises Holla
Co's purchasing strategy. As a result, Holla Co buys a further 200 computers during
the quarter ended 30 June 20X5. Escot Co now estimates that Holla Co's purchases
will exceed the 300 unit annual threshold, and so it should retrospectively reduce
the price charged.
What revenue should Escot Co recognise in the quarter ended 30 June 20X5?
Applying IFRS 15:
Escot Co should recognise revenue of $114,000 for the quarter ended 30 June 20X5.
This is calculated as $115,000 (200 x $575) less the change in transaction price of
$1,000 (40 x $25) for the sales in the period to 31 March 20X5.
35
IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND
ERRORS
IAS 8 deals with:

▪ The selection of accounting policies
▪ Changes in accounting policy
▪ Changes in accounting estimates
▪ Errors
1. Selection of accounting policies

▪ Accounting policies should be determined by applying the relevant IFRS
Standard or Interpretation
▪ In the absence of a Standard or an Interpretation, management must use its
judgement in developing and applying an accounting policy that results in
information that is relevant and reliable
▪ Management must refer to, and consider the applicability of, the following
sources in descending order:
o The requirements and guidance in IFRS Standards and interpretations dealing
with similar and related issues
o The definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Conceptual Framework.
"Management may also consider the most recent pronouncements of other

standardsetting bodies that use a similar conceptual framework to develop
accounting standards, other accounting literature and accepted industry practices,
to the extent that these do not conflict with paragraph 11".
(IAS 8 paragraph 12)
Changes in accounting policy

▪ An entity should select and apply its accounting policies consistently for similar
transactions, other events and conditions
▪ Changes in accounting policies are rare and should only be made if they:
o Are required by a Standard or interpretation, or
o Result in the financial statements providing reliable and more relevant
information
▪ A change in accounting policy must be accounted for retrospectively, as if the
new policy had always been in place
36
▪ This requires restatement of comparative amounts and a prior period
adjustment in respect of the cumulative effect of the change as at the start of
the earliest comparative period
▪ The change in accounting policy must also be disclosed.
(IAS 8 paragraphs 13, 14, 22, 28, 29)
2. Changes in accounting estimate
▪ Accounting estimates include methods of depreciation, residual values and
amounts of provisions
▪ Where an estimate is changed, the change is accounted for prospectively by
including its effect in the period of the change (and future periods, if relevant)
▪ Changes in accounting estimates must also be disclosed.
(IAS 8 paragraphs 36, 39)
3. Errors
▪ The general principle in IAS 8 is that an entity must correct all material prior
period errors retrospectively in the first set of financial statements authorised
for issue after their discovery
▪ This is achieved by restating the comparative amounts for the prior period(s)
presented in which the error occurred, or, if the error occurred before the
earliest period presented, restating the opening balances of assets, liabilities and
equity for the earliest prior period presented
▪ Details of errors should also be disclosed.
37
1. Is there a "true and fair override" in IFRS Standards?

Answer:
IAS 1 talks of fair presentation rather than true and fair view. However, there is an
override option available, which is said to be necessary only in very rare circumstances.
Substantial disclosures are required
2. What is the status of interpretations?

Answer:
IAS 1 gives Interpretations the same status as Standards. That is, they must be complied
with.
3. Suppose that a company has entered into a binding contract to sell an asset soon
for a fixed amount. Can revenue be recorded?
Answer:
IFRS 15 requires that revenue is recognised only when control is passed. In this case
control of the asset has not been transferred to the buyer and so the gain cannot be
recorded yet
38
QUICK QUIZ
Question 1
During the year to 30 September 20X8, the following events occurred in relation to Pipe
Co. All were material to the company's financial statements:
1. A claim for tax relief, submitted in 20X5, was rejected by the tax authorities. No
appeal will be made. The resulting liability of $15,000 was not provided for at 30
September 20X7, since when the 20X7 financial statements had been authorised
for issue. The company had expected the claim to succeed.
2. A cut-off error in respect of inventory was discovered, which would have
reduced the carrying amount of inventory by $24,000 at 30 September 20X7.
3. Obsolete inventory was written down to its estimated net realisable value of
$17,000 at 30 September 20X7. Due to further falls in the selling price of the
inventory after 30 September 20X7 the inventory was subsequently sold for
$7,000 after the financial statements were authorised for issue.
The retained earnings at 30 September 20X7, as reported in the 20X7 financial
statements was $530,000. What is the restated retained earnings balance at 30
September 20X7 as reported in the 20X8 financial statements?
A. $496,000
B. $506,000
C. $515,000
D. $516,000
The correct answer is B
(1) and (3) represent a change in accounting estimate rather than a change in
accounting policy. These are therefore accounted for prospectively rather than
retrospectively, and do not require restatement of the retained earnings balance at 30
September 20X7.
(2) is an accounting error and therefore must be accounted for retrospectively by
restating the 20X7 comparative amounts:
▪ decrease reported inventory at 30 September 20X7 by $24,000
▪ increase reported cost of sales for the year ended 30 September 20X7 by
$24,000. This will in turn result in a $24,000 decrease to reported profits and a
$24,000 decrease to the retained earnings balance as at 30 September 20X7
The restated retained earnings balance is therefore $530,000 - $24,000 = $506,000.
39
Question 2
Which of the following does IAS 1 not require to be disclosed in the Statement of
Changes in Equity (SOCIE)
A. Total comprehensive income for the period
B. A reconciliation between the carrying amount at the beginning and the end of
the period for each component of equity
C. Each item of other comprehensive income
D. The cumulative effect of changes in accounting policy and the correction of
material errors
The correct answer is C
Individual items of other comprehensive income are presented in the statement of
profit or loss and other comprehensive income. Total of comprehensive income is
disclosed as a single line item in the SOCIE; each item is not disclosed separately.
Question 3
Which line item must be disclosed separately on the face of the Statement of Financial
Position (SOFP)?
A. Intangible assets
B. Work in progress
C. Prepayments
D. Accruals
The correct answer is A
Intangible assets must be disclosed separately. Although the other line items may be
disclosed on the face of the SOFP, they do not have to be and are usually relegated to
a note.
Question 4
Which of the following line items could be included in a statement of profit or loss and
other comprehensive income prepared using the 'nature of expense' method?
1. Changes in inventories of finished goods and work in progress
2. Raw materials and consumables used
3. Consulting expense.
A. 1 and 2
B. 1 and 3
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C. 2 and 3
D. 1, 2 and 3
The correct answer is D
The 'nature of expense' method aggregates expenses according to their nature (e.g.
depreciation, transport costs etc.) and does not reallocate them between functions of
a company.
Question 5
Does the Job Co, a software company, has an accounting year end of 31 December. It
makes a sale for $500,000 on 30 June 20X4, to a customer, Brady. This amount includes
$470,000 for software and $30,000 for support services for the two years commencing
1 July 20X4. How much revenue should Does the Job Co recognise in the statement of
profit or loss in the year ended 31 December 20X4?
A. $500,000
B. $485,000
C. $477,500
D. $470,000
The company should take the five step approach per IFRS 15.
Step 1: A contract exists with Brady
Step 2: There are two performance obligations, one to supply a software and the
second to supply support services for two years
Step 3: The transaction price is the amount that is expected to be received, which is
$500,000
Step 4: Allocate the transaction price to the performance obligations, so $470,000 is
allocated to the software supply and $30,000 to the support services
Step 5: Recognise revenue when performance obligations are satisfied. At 31
December 20X4 the whole performance obligation in relation to the software supply
has been satisfied, and $7,500 ($30,000 x 6/24 has been supplied in relation to the
support services.
41
MODULE 4: ACCOUNTING FOR ASSETS AND LIABILITIES – PART 1
What you will learn
In this module you will look at the following Standards:
▪ Property plant and equipment - IAS 16
▪ Intangible assets - IAS 38
▪ Investment property - IAS 40
▪ Impairment of assets - IAS 36
▪ Borrowing costs - IAS 23
▪ Accounting for government grants and disclosure of government assistance - IAS
20
▪ Inventories - IAS 2
▪ Leases - IFRS 16
▪ Non-current assets held for sale and discontinued operations – IFRS 5.
42
INTRODUCTION
“An asset is a present economic resource controlled by the entity as a result of past
events. An economic resource is 'a right that has the potential to produce economic
benefits.”
(Conceptual Framework, paragraphs 4.3, 4.4)
The accounting treatment of assets involves a three-stage process:

1. Determining whether an item meets the definition of an asset
2. Determining whether the asset should be recognised in the statement of
financial position
3. Determining how the assets should be measured.
Definition of an asset
It should be noted that an asset is not necessarily something which is owned but which
is controlled. For example, a company that leases an item to use normally records an
asset because it controls that item. Of course, for an item to be an asset at all, it must
produce some future benefit to the entity.
Recognition of an asset
Not all of an entity's assets should be recognised in the statement of financial position.
Some of them cannot be measured with sufficient reliability to be included. It is
necessary to have some measure of either cost or value.
Measurement of an asset
Having decided to recognise an asset there might then be several ways in which it could
be measured, such as depreciated cost or current market value.
Each IFRS ® Standard that deals with assets addresses both the recognition and
measurement criteria as well as disclosure. This module considers several Standards
related to assets.
43
IAS 16 PROPERTY PLANT AND EQUIPMENT
IAS 16 defines property plant and equipment (PPE) as:

"tangible items that:
a. are held for use in the production or supply or goods or services, for rental to
others, or for administrative purposes, and
b. are expected to be used during more than one period."
a. Recognition
IAS 16 recognition criteria do not reflect the new Conceptual Framework (Module 1).
PPE is recognised if:

▪ "It is probable that future economic benefits associated with the item will
flow to the entity and
▪ The item's cost can be measured reliably".
b. Measurement
PPE is initially recognised at its cost, which includes all those costs of bringing it to its
present condition and location including:
(IAS 16 paragraph 15,16)

Capitalisation of subsequent expenditure should occur when it is probable that the
asset will produce future benefits in excess of the originally assessed standard of
performance.
44
After initial measurement, an entity may choose which measurement model to apply
to PPE:

c. Revaluation model (IAS 16)
Where the revaluation model is applied there are a number of requirements:
1. The model must be applied to all assets within the same class (e.g. all land and
buildings)
2. Revaluations must be carried out with sufficient regularity to ensure that the
carrying amount at each reporting date is not materially different from fair value
at that date.
Fair value is defined by IFRS 13 as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
Accounting for a revaluation
The fair value of a property may increase or decrease; the accounting entries depend
upon whether the fair value has previously increased or decreased:
▪ An increase in fair value is usually recognised in other comprehensive income
(OCI)
▪ A decrease in fair value is usually recognised in profit or loss
▪ Where an increase in fair value reverses a previous decrease, it is first recognised
in profit or loss to the extent of the previous decrease
▪ Where a decrease in fair value reverses a previous increase, it is first recognised
in OCI to the extent of the previous increase.
Amounts recognised in other comprehensive income in respect of revaluations are
accumulated in the revaluation reserve (revaluation surplus) in equity.
This is an example of other comprehensive income that will not be reclassified to profit
or loss.
45
Example
Acom Co bought land for $500,000 on 1 March 20X1, accounting for it using
revaluation model. The land had a fair value of $600,000 at 31 December 20X1,
however this had dropped to $450,000 at 31 December 20X2.
At 31 December 20X1 the revaluation increase is accounted for by:
DEBIT Land $100,000
CREDIT OCI (revaluation surplus) $100,000
At December 20X2 the revaluation decrease is accounted for by:
DEBIT OCI (revaluation surplus) $100,000
DEBIT Profit or loss $50,000
CREDIT Land $150,000
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d. Depreciation and disposal (IAS 16)
Depreciation
All assets other than land must be depreciated.
The depreciable amount of an asset should be recognised as an expense (depreciated)
over its useful life beginning when it is available for use.
The depreciable amount of an asset is cost less residual value expected at the end of
the asset's useful life.
Residual value is the amount currently expected to be obtained from a disposal of the
asset if the asset were already at the age and condition expected at the time of disposal.
The depreciation method should reflect the expected pattern of the consumption of
the economic benefits of an asset by an entity. Methods may include straight line and
reducing balance methods.
Residual value, useful life and depreciation methods are all accounting estimates that
should be reviewed at each year end. Any changes are applied prospectively in line with
IAS 8. A revalued asset is depreciated by spreading its fair value over its remaining
useful life.
(IAS 16 paragraphs 6, 50, 51, 60,61)
Disposal
The gain or loss on the disposal of an asset is calculated as the difference between
the proceeds and the carrying amount.
Since the latter could be based on either cost or revaluation, the gain on sale would be
lower if an asset had been revalued upwards.
When a revalued asset is disposed of, any revaluation surplus in respect of that asset is
considered to be realised and may be transferred to retained earnings. This is a reserves
transfer and is disclosed in the statement of changes in equity.
47
IAS 38 INTANGIBLE ASSETS
“An intangible asset is an identifiable non-monetary asset without physical

substance.”
To be recognised in the financial statements, an intangible asset must:
i. meet this definition, and
ii. meet the IAS 38 recognition criteria.
1. Definition
In order to be considered for recognition as an intangible asset, an item must be:
Identifiable The item must either be capable of being sold as a single item or
must arise from contractual rights
Non- The item must not be cash or an asset to be settled in a fixed amount
monetary of cash
An Asset The item must be controlled by the entity as a result of past events
and result in probable future economic benefits
Therefore:
▪ Internally generated goodwill is not identifiable and cannot be recognised as an
intangible asset
▪ A receivable is monetary and cannot be recognised as an intangible asset
▪ Staff members are not controlled by an entity (an asset) and so cannot be
recognised as an intangible asset and nor can the costs of training them.
2. Recognition
The basic IAS 38 recognition criteria are the same as those in IAS 16:
▪ It is probable that future economic benefits associated with the item will flow to
the entity and
▪ The item's cost can be measured reliably.
It is usually more difficult for intangible assets to meet these criteria than tangible
assets.
48
Generally the cost of most internally generated intangibles cannot be distinguished
from the cost of developing a business as a whole.
Certain items are therefore not recognised. IAS 38 prohibits the recognition of
internally generated:
▪ Brands
▪ Mastheads
▪ Publishing titles
▪ Customer lists
Development expenditure
As a result of the difficulties of applying the basic recognition criteria to internally
generated assets, IAS 38 provides additional criteria to be applied to research and
development expenditure
(IAS 38 paragraph 8, 54, 57)
49
3. Measurement of Intangible assets (IAS 38)
a. Initial measurement
Intangible assets are initially measured at cost.
▪ In the case of acquired assets this is purchase cost and directly attributable costs
incurred in making the asset ready for use
▪ In the case of development costs this is costs incurred after the six recognition
criteria are all met until the asset is ready for use
b. Subsequent measurement
In common with IAS 16, IAS 38 includes both a cost and revaluation model.
The revaluation model can, however only be applied to assets for which fair value
can be measured by reference to an active market. This is a market with many
buyers and sellers of identical items and publicly available prices.
Most intangibles are unique and therefore not part of an active market. The
following intangible assets cannot be revalued:
Intangible assets that can be revalued include airport landing rights and taxicab
licences.
(IAS 38 paragraphs 74,75)
c. Amortisation
Amortisation (depreciation) depends on the useful life of an intangible asset
An asset may have:
▪ An indefinite life: no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity
▪ A finite life: a limited period of benefit to the entity.
Intangible asset with indefinite useful life:
▪ The asset is not amortised
▪ It's useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life
assessment for that asset
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▪ If they do not, the change in the useful life assessment from indefinite to finite
should be accounted for as a change in an accounting estimate
▪ The asset should be assessed for impairment annually.
(IAS 38 paragraphs 107-109)
Exercise - IAS 38 Question 1
At 1 January 20X5, Moor Labs Co has capitalised development costs with an original
cost of $10million and carrying amount of $5million.
The company started a new R&D project on 1 January 20X5, incurring $1.6 million costs
during the research phase, which lasted until 31 August 20X5. From that date, average
development costs incurred on the project were $750,000 per month.
On 1 November 20X5, the management of Moor Labs Co became confident that the
project would be a commercial success and make good profits. The project is still in
development at 31 December 20X5.
Capitalised development expenditure is amortised at 25% per annum using the straight
line method.
What amount is recognised as an expense in terms of R&D in the year ended 31
December 20X5?
51
IAS 40 INVESTMENT PROPERTY
"Investment property is property held to earn rentals or capital gain, rather than
being owner occupied or held for sale in the ordinary course of business."
1. Definition
The definition of investment property includes and excludes the following:

Example
Spruce Co acquires a 5 storey property by way of a lease. Each storey is a self-contained
office space. Spruce Co had the option of acquiring any number of storeys of the
building, however decided to acquire all 5, using one for its sales and marketing
function, and renting the remaining 4 to other companies under operating leases.
Spruce Co has acquired the property by way of a finance lease. IAS 40 is clear that the
definition of investment property includes property that is that is leased and held as a
rightof-use asset.
Spruce Co occupies 1/5 of the property and rent out 4/5 of the property. In this case
IAS 40 requires split-accounting if each portion could be sold or leased out separately.
It is clear that this is the case because Spruce Co had the option of acquiring any number
of storeys of the building.
Therefore:
▪ 1/5 of the property is accounted for as owner-occupied property in accordance
with IAS 16
▪ 4/5 of the property is accounted for as investment property in accordance with
IAS 40.
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2. Recognition
IAS 40 recognition criteria are the same as those of IAS 16.
3. Measurement
Investing in properties is a way for a company to utilise surplus cash and therefore the
accounting treatment applicable to other properties is not necessarily relevant.
IAS 40 allows a choice of applying measurement models:
(IAS 40 paragraphs 30, 33-35)

The choice must be applied consistently for all investment properties and a change in
model is only permitted where it results in more relevant information. This is unlikely
to be the case for a change from the fair value to cost model.
If the fair value model is applied, individual properties whose fair value cannot be
reliably measured should be measured at cost.
Entities that apply the cost model must disclose the fair value of investment properties
in the notes to the financial statements.
4. Transfers
Transfers to or from investment property arise where there is a change in use.
In order for there to be a change in use:
1. A property must meet or cease to meet the definition of investment property,
and
2. There must be evidence of a change in use.
In isolation, management's intentions are not evidence of a change in use.
When a property is transferred from investment property under the fair value model
to owner occupied property or inventory, the property's deemed cost is its fair value at
the date of its change of use.
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When an owner-occupied property is transferred to investment property measured at
fair value, it should be revalued in line with IAS 16 immediately prior to transfer.
When inventory is transferred to investment property measured at fair value, the
difference between its carrying amount and fair value is recognised in profit or loss.
(IAS 40 paragraphs 57, 60, 61, 63)
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IAS 36 IMPAIRMENT OF ASSETS
An asset should not be measured in the financial statements at an amount in

excess of its value to the reporting entity, whether this is net sales value or
value achieved through continued use.
When the carrying amount of an asset in the financial statements is greater than its
value to the business (its recoverable amount), then the asset is impaired and should
be written down. The reduction in carrying amount is an impairment loss.
Scope of IAS 36
Despite the name of the Standard, Impairment of Assets, IAS 36 is not relevant to all
assets. It does not apply to the following (largely because the individual Standards deal
with relevant impairment themselves)
▪ Inventories (IAS 2)
▪ Receivables and contract assets (IFRS 15)
▪ Deferred tax assets (IAS 12)
▪ Pension assets (IAS 19)
▪ Financial assets (IFRS 9)
▪ Biological assets (IAS 41)
▪ Investment property measured at fair value (IAS 40)
▪ Assets within the scope of IFRS 4
▪ Non-current assets held for sale (IFRS 5)
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How often to test for impairment
An impairment test should be performed:
1. Testing for impairment

Testing for impairment involves comparing:
▪ The carrying amount of an asset with
▪ The recoverable amount of the asset.
The recoverable amount of an asset is the higher of:
(IAS 36 paragraphs 6, 33, 55)
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2. Accounting for impairment
An impairment exists if carrying amount exceeds recoverable amount; the loss is the
difference between these amounts and it is usually recognised immediately in profit or
loss.
An exception to this rule exists if there is a revaluation surplus related to the impaired
asset. In this case the loss is first recognised in OCI (and debited to the revaluation
surplus) and any excess is recognised in profit or loss.
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3. Cash generating units (IAS 36)
Cash-generating units
For many assets it is impossible to measure specific cash flows relating to them.
Therefore, it becomes necessary to perform impairment testing for the smallest group
of assets for which independent cash flows can be measured. This group of assets is
called a cash-generating unit (CGU).
The carrying amount of the CGU is compared with its recoverable amount. Any
impairment loss is allocated:
1. To any goodwill in the CGU
2. To other assets of the CGU (that are within the scope of IAS 36) on a pro rata
basis.
Although not specifically mentioned in IAS 36, it is normal practice to reduce the
carrying amount of any damaged or obsolete asset before pro-rating the remaining loss
across remaining assets.
The carrying amount of an individual asset should not be reduced "below the highest
of:
a. Its fair value less costs of disposal
b. Its value in use, and
c. Zero".
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Case study - Impairment of Assets
This case study is loosely based on a real example. Suppose that a Malaysian company,
Goodtimes Co, prepares its statements according to IFRS Standards. It had a flow of net
profit as follows:
What sort of estimates are involved in impairment tests?

An impairment test is conducted in accordance with IAS 36.
The test requires a comparison of carrying amount with recoverable amount, which is
the higher of fair value less costs to sell and value in use.
In order to determine fair value, IFRS 13 should be applied. This requires that fair value
is an 'exit price' i.e. the price that could be achieved for an asset on sale. In some cases
(e.g. for a listed investment) this amount can be determined based on quoted prices,
and little estimation is required. In other cases such as the oil and gas pipelines it must
be determined based on unobservable inputs, in which case there is a greater degree
of estimation. A fair value will be more difficult to determine where there is a limited
market, which is probably the case for pipelines. Costs to sell is also an estimated
amount based on market knowledge. Estimates of value in use rely on knowing the life
of the pipelines to the present owner, the disposal proceeds, the cash flows in and out
over the future life, and a suitable pre-tax discount rate. IAS 36 discusses this, but there
is still considerable room for manoeuvre.
Do you think that there is any incentive for management to overstate or understate
the impairment loss?
The impairment loss for 20X8 is so large in the context of the five year run of profits
that analysts may decide to ignore it on the grounds of "unusual" / "abnormal" / "non-
recurring". Once the management realises this, they might be tempted to make the loss
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as big as possible so that future depreciation expenses are lower and gains on disposal
higher.
This answer is written in the context of countries where impairment losses are not
treated as tax deductible expenses. Of course if they are tax deductible, then a
company would usually want to maximise them.
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IAS 23 BORROWING COSTS
Eligible borrowing costs associated with the acquisition, construction or

production of a qualifying asset are capitalised as part of the cost of that asset.
Eligible borrowing costs

These include simple interest, interest calculated using the effective interest method
(IFRS 9), finance charges on lease liabilities and exchange differences to the extent they
are an adjustment to interest costs on foreign currency loans.
Borrowing costs eligible for capitalisation are those that would have been avoided if
expenditure on the qualifying asset had not been incurred.
Qualifying assets
These are assets that necessarily take a substantial period of time to get ready for
intended use or sale. They may include property, plant and equipment, intangible
assets, investment properties and inventories.
Capitalisation period
The capitalisation of eligible borrowing costs:
(IAS 23 paragraphs 17, 19, 20, 22)

Borrowing costs as an expense
Borrowing costs that are not capitalised are recognised in profit or loss as incurred.
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Calculation of capitalised borrowing costs
The calculation depends on whether funds are borrowed specifically for the
development of a qualifying asset or are drawn down from a pool of general
borrowings.
Specific borrowings
Where a business borrows specifically to fund a project, the borrowing costs that may
be capitalised will be those actually incurred less investment income from the
temporary investment of the funds.
General borrowings
Where an entity funds an asset using general borrowings, the borrowing costs that are
capitalised are calculated by applying the weighted average cost of borrowing to the
expenditure on that specific asset.
The weighted average cost of borrowing is based on all borrowings in the general pool.
Specific borrowings are added to the general borrowings pool when the specific asset
that they financed is ready for use or sale.
Example
Hazlenut Co has the following borrowings outstanding throughout the year ended 31
December 20X4:
▪ $1million 5% bank loan
▪ $3 million 7% loan notes
On 1 August 20X4 it drew down $1,500,000 borrowings for the purpose of constructing
a new warehouse. Architects began designing the building on this date and construction
began on 1 September 20X4.
The property was completed on 30 November 20X4.
The weighted average cost of capital is calculated as:
($1m/$4m x 5%) + ($3m/$4m x 7%) = 6.5%
Borrowing costs are capitalised from 1 August 20X4 to 30 November 20X4. Therefore
the amount to be capitalised is:
6.5% x $1,500,000 x 4/12 months = $32,500
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Exercise - IAS 23 Question
Woodward Co is a property construction company, which is currently building a
property for its own use. Building activities began on 1 July 20X5 and at the year-end of
31 December 20X5, the property is still incomplete. The project is running late as a
result of a month of strike action by contractors in November 20X5. The project has
largely been funded by way of a $15million loan, which was provided by National Bank
on 1 May 20X5. The loan carries annual fixed interest of 5%.
What interest is capitalised in the year ended 31 December 20X5?
Answer:
The capitalisation period commences on 1 July 20X5, when building activities started.
Capitalisation ceases during November when building was suspended.
Therefore: $15million x 5% x (6-1)/12m = $312,500
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IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE
The objective of IAS 20 is to prescribe the accounting for, and disclosure of,
government grants and other forms of government assistance.
1. Types of grant
2. Recognition
A grant is only recognised in the financial statements if there is "reasonable

assurance that:
▪ The entity will comply with...[grant conditions]
▪ The grant will be received".
A grant is recognised as income in profit or loss in the period in which the expenditure
to which is contributes is recognised:
▪ A capital grant is recognised over the useful life of the asset as depreciation is
recognised
▪ A revenue grant is recognised when the costs of complying with the grant are
recognised.
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3. Presentation
Government assistance
Significant government assistance is disclosed as a note in the financial statements.
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IAS 2 INVENTORIES
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It

provides guidance for determining the cost of inventories and for subsequently
recognising an expense, including any write-down to net realisable value. It also
provides guidance on the cost formulas that are used to assign costs to inventories.
1. Measurement of closing inventory

Closing inventory is measured on a line-by-line basis at the lower of:

Cost
Cost includes:
▪ Costs of purchase (including import duties, taxes, transport, and handling costs)
net of trade discounts received
▪ Costs of conversion (including a systematic allocation of fixed and variable
manufacturing overheads. The allocation of fixed overheads is based on normal
production capacity; the allocation of variable overheads is based on actual
production capacity)
▪ Other costs incurred in bringing the inventories to their present location and
condition.
Cost excludes abnormal waste, storage costs, selling costs and administrative
overheads unrelated to production.
Writing down to net realisable value (NRV)
Inventories are written down to NRV item by item.
Raw materials held for use in the production of inventories are not written down below
cost if the finished goods into which they will be incorporated are expected to be sold
at or above cost.
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Recognition of an expense
The carrying amount of inventories is recognised as an expense when those
inventories are sold.
Any write-down to NRV is recognised as an expense in the period in which the write-
down occurs.
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IFRS 16 LEASES
IFRS 16 was issued in January 2016. It adopts a single accounting model for all leases by
lessees, whilst requiring lessors to classify leases as either operating or finance in
nature.
1. Lessee accounting
All leases, other than those to which simplified accounting applies (see below) are
accounted for in the same way.
At the start of the lease, the lessee recognises:
1. A lease liability, representing the obligation to make lease payments, and
2. A right of use asset, representing the right to use the asset that has been leased.
Lease liability
The lease liability is initially measured at the present value of future lease payments,
discounted at the rate implicit in the lease. Subsequently it:
▪ Increases due to interest at a constant rate on the outstanding obligation
▪ Decreases to reflect payments made
▪ Is remeasured to reflect changes to lease payments or lease modifications that
do not result in a separate lease.
(IFRS 16 paragraphs 26, 39, 45)
The depreciation term is the shorter of the useful life of the underlying leased asset and
lease term. If ownership of the leased asset is transferred at the end of the term, the
depreciation term is always useful life.
Simplified accounting
A lessee can recognise lease payments on a straight line basis over the lease term if:
▪ The lease term is 12 months or less
▪ The underlying asset is of a low value (not defined but suggested to be US$5,000
when new in IFRS 16 Basis for Conclusions).
The election to use simplified accounting is made on a lease-by-lease basis for low value
assets and by class of underlying asset for short-term leases.
(IFRS 16 paragraphs 5,6,8)
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Right of use asset
The right of use asset is initially measured at cost:

The asset is subsequently measured at cost less accumulated depreciation and
impairment losses unless:
▪ The underlying asset is property, plant or equipment that belongs to a class of
assets measured using the IAS 16 revaluation model and the lessee elects to
apply the revaluation model to the right of use assets relating to that class
▪ The underlying asset is an investment property and the lessee adopts the fair
value model.
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Example - IFRS 16
Shop Co enters into a 10 year lease on 1 January 20X5 in order to acquire a property
from Building Co. Details are as follows:
▪ Lease payments are €50,000 per annum payable in advance
▪ Shop Co incurs initial direct costs of €20,000, being €5,000 paid as commission
to the property agent that arranged the lease and €15,000 paid to the former
tenant of the property
▪ As an incentive, Building Co agreed to reimburse Shop Co with the property
agent's fees
▪ The interest rate implicit in the lease is 5% and the present value of the lease
payments at 1 January 20X5 is €355,391
Lease liability - initial measurement
On commencement of the lease, 1 January 20X5, the present value of the lease
payments is recognised as the lease liability: €355,391.
Right of use asset - initial measurement
Lease liability - subsequent measurement - 31 December 20X5 and 31 December 20X6
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Asset - subsequent measurement - 31 December 20X5
2. IFRS 16 - Lessor accounting

Lessor accounting
Leases are classified as either operating or finance leases.
A finance lease transfers substantially all of the risks and rewards incidental to
ownership of the underlying asset to the lessee. Other leases are operating leases.
(IFRS 16 paragraph 61,62)
IFRS 16 states that the following situations (individually or together) would normally
indicate a finance lease:
▪ Transfer of ownership of the asset by the end of the lease term
▪ The lessee has the option to purchase the asset at end of the lease term and
pricing means this is reasonably certain to be exercised
▪ The lease term is for the major part of the asset's useful life
▪ At the start of the lease the present value of minimum lease payments is
substantially all of the fair value of the asset
▪ The asset is so specialised that only the lessee can use it without major
modification
Note that there is no numerical indicator of a finance lease; a lease term for the major
part of useful life or minimum lease payments substantially equal to fair value indicate
a finance lease, but these terms are not quantified.
Operating leases
A lessor retains an asset leased under an operating lease in its statement of financial
position. The carrying amount of the asset is increased by any initial direct costs
incurred in arranging the lease.
Lease income is recognised as income on a straight line basis (or another systematic
basis if more appropriate) over the lease term.
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(IFRS 16 paragraphs 81, 83)
Example - lessor accounting for operating lease

Roost Co leases plant and machinery to manufacturing companies. It has a year-end of
30 September. On 1 June 20X8 it leased a machine to a customer for a 6 year period.
The agreed lease payments were $400 per calendar month payable in arrears. In
addition, the customer was required to pay an initial non-refundable amount of $1,200.
The total lease payments over the 6-year term amount to:
$30,000 ($1,200 + (6 x 12 x $400))
The annual lease income recognised in profit or loss by Roost is therefore:
$5,000 ($30,000/6 years)
The income recognised in the year ended 30 September 20X8 is:
$1,667 (4/12m x $5,000)
Finance leases
Although the lessor owns an asset leased out under a finance lease, the statement of
financial position shows a receivable rather than the leased asset.
Lessors recognise finance income as a constant return on the net investment in the
lease.
3. IFRS 16 - Sale and leaseback transactions
Sale and leaseback transactions
Sale and leaseback transactions Companies may sell assets and then lease them back
in order to realise cash. IFRS 15 Revenue from Contracts with Customers should be
applied to determine whether a sale has taken place (see Module 3).
If transfer is a sale:
▪ The seller retains a proportion of the carrying amount of the transferred asset,
being an amount equal to the right of use retained. The remainder of the
carrying amount of the transferred asset is derecognised and gives rise to a gain
or loss on disposal.
▪ The buyer accounts for the purchase of the asset by applying relevant Standards
(e.g. IAS 16 for property, plant or equipment) and applies IFRS 16 lessor guidance
in respect of the leaseback.
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If transfer proceeds are not equal to the fair value of the transferred asset, or lease
payments are not at market rate:

If transfer is not a sale:
▪ The seller continues to recognise the asset. Proceeds received are recognised as
a finance liability (IFRS 9)
▪ The buyer does not recognise a lease asset, but does recognise a financial asset
(IFRS 9).
Example
Cape Co sells a property to Banco Co on 1 June 20X8 for $5million. The property has a
carrying amount of $4.3million on that date. Cape Co then leases the property back
over a 20 year term at $550,000 per annum. The transfer does not qualify as a sale.
▪ Cape Co continues to recognise the property at its carrying amount of
$4.3million and depreciates it.
▪ It recognises the receipt of $5million as a financial liability.
▪ Lease payments are treated as loan repayments including capital and interest
elements.
▪ Banco Co does not recognise the property.
▪ It recognises a financial asset at $5million and subsequently recognises lease
payments as receipts of capital and interest.
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IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS
IFRS 5 defines a non-current asset held for sale and discontinued operations and
states the accounting and presentation requirements for each.
Non-current assets held for sale and discontinued operations should be identified in
financial statements in order to provide information to users that is relevant to
predictions of future performance.
1. Definition of non-current assets held for sale (HFS)
A non-current asset is classified as HFS if:
▪ Management is committed to a plan to sell
▪ The asset is available for immediate sale in its present condition, and its sale
must be highly probable
To be highly probable:
▪ Management must be committed to a disposal plan
▪ An active programme to locate a buyer is initiated
▪ The asset is being marketed for sale at a price reasonable in relation to its fair
value
▪ The sale is highly probable, within 12 months of classification as held for sale
(subject to limited exceptions)
▪ It is unlikely that significant changes will be made to the disposal plan; and
▪ Actions required to complete the disposal plan indicate that it is unlikely that the
plan will be significantly changed or withdrawn.
2. Measurement of non-current assets
HFS Immediately before transfer to the HFS category, a non-current asset must be
measured in accordance with applicable IFRS Standards (e.g. a property held under the
IAS 16 revaluation model is revalued to fair value).
On transfer to HFS, a non-current asset is measured at the lower of carrying amount
and fair value less costs to sell.
Any resulting impairment loss is recognised in profit or loss.
Depreciation ceases on classification as HFS.
At subsequent reporting dates an asset HFS is remeasured to the lower of carrying
amount and fair value less costs to sell.
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Example
Archway Co owns and occupies a property measured using the IAS 16 revaluation
model. Its carrying amount and fair value at 1 April 20X6 is $890,000 and at 31 March
20X7 its carrying amount after depreciation is $845,500 and its fair value is $910,000.
Costs to sell are 10% of eventual selling price. The property becomes classified as held
for sale on 31 March 20X7.
▪ At 31 March 20X7, immediately prior to transfer to held for sale the property is
revalued to $910,000 in line with IAS 16.
▪ A revaluation surplus of $64,500 ($910,000 - $845,500) is recognised in other
comprehensive income.
▪ On transfer to held for sale the property is measured at the lower of carrying
amount ($910,000) and fair value less costs to sell ($910,000 x 90% = $819,000).
▪ An impairment loss of $91,000 ($910,000 - $819,000) is therefore recognised in
profit or loss on transfer
Presentation of non-current assets

HFS Non-current assets HFS are presented separately from other assets.
3. Disposal groups HFS
A disposal group is a group of assets, possibly with some associated liabilities, which
an entity intends to dispose of in a single transaction.
▪ A disposal group is classified as HFS if it meets the same criteria as those for an
asset HFS
▪ A disposal group acquired exclusively with a view to subsequent disposal is
classified as HFS if the sale is expected to take place within 12 months of
acquisition and the other conditions are met within 3 months of the acquisition
▪ The assets and liabilities of a disposal group are remeasured in accordance with
IFRS Standards before classification as HFS; on classification they are measured
at the lower of carrying amount and fair value less costs to sell
▪ Impairment losses are recognised in accordance with IAS 36 (against goodwill in
the first place and then against other non-current assets on a pro rata basis)
▪ Depreciation is not charged on the assets of a disposal group HFS
▪ Assets and liabilities of a disposal group HFS are presented separately from other
assets and liabilities in the statement of financial position. They are not offset.
Assets classified as held for sale, and the assets and liabilities included within a disposal
group classified as held for sale, must be presented separately on the face of the
statement of financial position.
4. Discontinued operations
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A discontinued operation is a component of an entity that either has been disposed
of or is classified as HFS and:
▪ Represents a separate major line of business or geographical area of operations
▪ Is part of a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations, or
▪ Is a subsidiary acquired exclusively with a view to resale
(IFRS 5, Appendix A)
5. Disclosure of discontinued operations
The main requirement is that in the statement of profit or loss and other
comprehensive income the result for the discontinued operation, combined with any
gain or loss on disposal, or on remeasurement of assets HFS, should be disclosed
separately from the results of continuing operations.
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MODULE 5: ACCOUNTING FOR ASSETS AND LIABILITIES - PART 2
What you will learn
This module deals with a number of IFRS ® Standards that give rise to the recognition
of liabilities:
▪ Fair value measurement - IFRS 13
▪ Financial Instruments: Presentation - IAS 32, Recognition and measurement - IFRS 9
and Disclosure - IFRS 7
▪ Provisions, contingent liabilities and contingent assets - IAS 37
▪ Events after the reporting period - IAS 10
▪ Employee benefits - IAS 19
▪ Income taxes - IAS 12
▪ Shared-based payment - IFRS 2
▪ Agriculture - IAS 41
▪ Exploration for and evaluation of mineral resources - IFRS 6.
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IFRS 13 FAIR VALUE MEASUREMENT
IFRS 13 establishes a single source of guidance for the fair value measurement of
assets and liabilities when this is required by other IFRS. It was issued in 2011
and became effective in 2013
Scope of IFRS 13
IFRS 13 does not prescribe when fair value should be used, only how to determine it
when required by another Standard.
This Standard is applicable to all transactions and balances requiring measurement at
fair value under another Standard, with the exception of:
▪ Share-based payments (IFRS 2)
▪ Leases falling within the scope of IFRS 16
▪ Measurements that are similar to, but are not, fair value e.g. net realisable value
(IAS 2).
1. Definition
Definition of fair value

"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 Appendix A)
2. Measurement approach
In order to measure fair value the entity must determine:
1. The asset or liability to be measured
2. For a non-financial asset, the valuation premise that is appropriate for the
measurement (highest and best use)
3. The principal market or most advantageous market for the asset or liability
4. An appropriate valuation technique to use (to reflect the assumptions market
participants would use when valuing the asset or liability).
(IFRS 13 paragraph B2)
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Measurement Approach (IFRS 13)
a. Asset or liability
The characteristics of the asset or liability being measured should be considered when
determining fair value if these would be relevant to buyers and sellers in the market.
Example
Greenfield Co owns land that is subject to a legal right for an electricity company to
run power lines across it. The land could be sold for $3million without these lines and
$2.7million with them.
The legal right would be transferred to a purchaser of the land and therefore it must
be taken into account when determining fair value. Fair value is $2.7million.
b. Highest and best use

The fair value of a non-financial asset is determined based on highest and best use
from the point of view of market participants, even if the reporting entity intends a
different use. The highest and best use must be physically possible, legally permissible
and financially feasible.
Example
Redletter Co owns land that is currently used for industrial purposes. It could be sold
for $1.5million on this basis. Nearby sites have been developed as residential sites
and there is no legal restriction to prohibit Redletter Co from selling the land for this
purpose. Such a sale would achieve a price of $1.8million.
The fair value is $1.8million, based on the highest and best use.
c. Principal or most advantageous market

The principal market is that with the most volume of activity for the asset or liability.
The most advantageous market is that which maximises the amount that would be
received to sell an asset (or paid to settle a liability) after taking into account transaction
and transport costs. Fair value is determined based on the principal market; where
there is no principal market, it is based on the most advantageous market.
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Example
Bluebell Co sells its product in China for $40 and in France for $38. Transaction costs
are $1 per item in China and $3 per item in France. Transport per item to China is $8
and transport per item to France is $5. If France were the principal market, the fair
value of Bluebell Co's product would be $33 ($38 less $5 transport costs, which form
part of fair value).
If there were no principal market, fair value is based on the most advantageous
market. In China, net proceeds per item would be $31 ($40 - $1 - $8). In France net
proceeds per item would be $30 ($38 - $3 - $5). Therefore China is the most
advantageous market. The fair value of Bluebell Co's product would be $32 ($40 less
$8 transport costs).
Note that transaction costs are taken into account when determining the most
advantageous market but are not part of fair value.
d. Valuation technique
IFRS 13 discusses three valuation approaches:
▪ Market approach - uses prices and other relevant information generated by
market transactions involving identical or similar assets or liabilities
▪ Cost approach - uses current replacement cost
▪ Income approach - uses discounted future cash flows or income and expenses.
Any one, or where appropriate a combination, of these valuation techniques should be
selected and consistently applied.
In order to use a valuation technique, 'inputs' are required. For example, an income
approach requires cash flow estimations and appropriate discount rates.
Inputs used to measure fair value are divided into three categories:
Level 1 Quoted prices in active markets for identical assets and liabilities
Level 2 Observable inputs other than those classified as level 1
Level 3 Unobservable inputs
The Standard required entities to use Level 1 inputs when the relevant information is
available (e.g. to value quoted shares). Where such information is not available then
Level 2 inputs should be used. Level 3 should only be used as a last resort.
(IFRS 13 paragraphs 61, 62, 71, 76-90)
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3. Fair Value of Financial Instruments and Disclosures (IFRS 13)
Financial instruments
IFRS 13 includes specific guidance on measuring the fair value of financial
instruments. For example:
▪ When measuring fair value, assume a transfer of a liability or own equity
instrument (i.e.assume the liability remains outstanding but is passed to a 3rd
party, not that the liability is paid off or settled)
▪ Reflect non-performance risk where a liability is concerned (including the
entity's own credit risk).
Disclosure
Detailed disclosure requirements are prescribed by the Standard, for the most part
following the fair value hierarchy described. The disclosures are both qualitative and
quantitative.
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Exercise - IFRS 13 Question
Click to identify whether the following inputs to valuation techniques are Level 1 or
Level 2 or Level 3, in the IFRS 13 fair value hierarchy.
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FINANCIAL INSTRUMENTS
The topic of financial instruments is sufficiently complex that it is split into 3

standards:
• IAS 32, which deals with presentation issues
• IFRS 9, which deals with recognition and measurement
• IFRS 7, which deals with disclosure
IFRS 9 is a new Standard, issued in full in 2014 and effective for accounting periods
beginning on or after 1 January 2018. It was developed over a number of years in
response to calls for less complex accounting for financial instruments. The Standard
replaced IAS 39 Financial Instruments: Recognition and Measurement.
1. Definitions
Key elements of definitions are provided below. For full definitions refer to paragraph
11 of IAS 32.
Financial instrument - any contract that gives rise to a financial asset in one entity and
a financial liability or equity instrument of another entity (e.g. debentures are a
financial instrument as the issuing company has a liability and the investing entity has
a financial asset, or right to receive cash).
Financial asset - cash, an equity instrument of another entity (i.e. an investment) or a
contractual right to receive cash (e.g. trade receivables).
Financial liability - a contractual obligation to deliver cash or another financial asset to
another entity.
Equity - any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Note that investments in subsidiaries, associates and joint ventures and employee
benefit obligations are excluded from the scope of IAS 32 and IFRS 7.
Financial instruments may be primary instruments (e.g. amounts receivable or payable,
loans, equity investments) or they may be derivative instruments. A derivative financial
instrument derives its value from the price or rate of an underlying item e.g. forward
contracts.
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IAS 32 FINANCIAL INSTRUMENTS: PRESENTATION
IAS 32 Presentation of Financial Instruments establishes the principles for classifying

financial instruments into financial assets, financial liabilities and equity
1. Equity or liability?
Financial instruments used to raise funds must be classified as either equity or
liability.
Determining whether an instrument is equity or a liability is not always straightforward
and IAS 32 requires that the substance of the contractual arrangement is considered.
The critical feature of a liability is an obligation to deliver cash or another financial
instrument.
Classification of shares
A contractual obligation to deliver cash may be attached to an irredeemable preference

share if, for example, dividends are cumulative.
Convertible instruments
Most convertible loan stock and convertible preference shares are classified as
compound instruments and so are 'split accounted'.
The instrument is split into a liability and an equity component at initial recognition and
each is accounted for separately. This reflects the economic reality that the instrument
has characteristics of both debt and equity. The liability component is measured at the
present value of the cash flows associated with a similar liability with no conversion
rights attached.
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The difference between this figure and the value of the compound instrument as a
whole is the value of the equity part.
Note that not all convertible instruments are split accounted; any convertible
instrument that could not result in an exchange of a fixed number of shares for a fixed
amount of debt is classified as a liability in its entirety (e.g. convertible debt
denominated in foreign currency)
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2. Interest and dividends
The presentation of the returns on financial instruments should follow the above
classifications.
For example, any instrument recognised as debt should have a return recognised as a
finance cost, even if it is legally called a dividend. Therefore:
• Dividends on redeemable preference shares classified as a liability are
recognised as a finance cost in profit or loss.
Offsetting
Offsetting of financial assets against financial liabilities is only allowed when there is
a legally enforceable right of set off which the entity intends to use.
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Simpson Co issued $2.5 million 5% convertible preference shares at par on 1 January
20X5. Dividends are payable annually in arrears. The market interest rate for similar
debt without conversion rights is 8%. On 1 January 20X5, Simpson Co's account applied
IAS 32 and split the preference shares into a liability element of $2,307,137 and an
equity element of $192,863.
1. The total charge to profit or loss in respect of the convertible preference shares
in the year ended 31 December 20X5 is…
2. The carrying amount of the liability at that date is…
3. The carrying amount of the equity element at 31 December 20X5 is…
Answer:
The carrying amount of the equity element does not change over the term of the
shares.The liability element at the year end is calculated as follows:
b/f Finance cost Dividend c/f

for year at 8% paid at 5%
Year ended 31
December $2,307,137 $184,571 ($125,000 $2,366,708
20X5
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IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES
IFRS 7 specifies financial instrument disclosures. IFRS 13 disclosures are also

relevant where a financial instrument is measured at fair value.
An entity must group its financial instruments into classes of similar instruments and,
when disclosures are required, make disclosures by class.
The two main categories of disclosures required by IFRS 7 are:
a. Information about the significance of financial instruments
b. Information about the nature and extent of risks arising from financial
instruments
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IFRS 9 FINANCIAL INSTRUMENTS
IFRS 9 deals with the recognition and measurement of financial assets and liabilities,
the impairment of financial assets and hedging.
Recognition
"An entity shall recognise a financial asset or financial liability when the entity
becomes a party to the contractual provisions of the instrument."
(IFRS 9, paragraph 3.1.1)
Note that this recognition rule differs from that seen in the Conceptual Framework for
Financial Reporting and several other Standards.
1. Measurement of financial assets
All financial assets are initially measured at fair value plus transaction costs with the
exception of 'financial assets at fair value through profit or loss', which are measured
at fair value only (no transaction costs). Fair value is usually transaction price (cost in
the case of a financial asset or proceeds in the case of a financial liability). Subsequent
measurement is at:
▪ Amortised cost if certain conditions are met
▪ Fair value through other comprehensive income (FVTOCI) if certain conditions
are met, or
▪ Fair value through profit or loss (FVTPL) otherwise or if designated as such to
avoid an accounting mismatch.
Recognition is at amortised cost if:
▪ The asset is held within a business model for which the objective is to collect
contractual cash flows
▪ The contractual terms of the asset give rise to cash flows on specific dates that
are payments of principal and interest.
Recognition at FVTOCI if:
▪ The asset is held within a business model for which the objective is to collect
contractual cash flows and sell financial assets
▪ The contractual terms of the asset give rise to cash flows on specific dates that
are payments of principal and interest.
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Therefore, normally:
▪ Investments in equity instruments must be measured at FVTPL as they do not
result in cash flows on specific dates
▪ Investments in debt instruments may be measured at amortised cost or FVTOCI
or FVTPL depending on the circumstances
▪ Derivatives are measured at FVTPL.
An irrevocable election may be made at initial recognition to measure an equity
investment at FVTOCI.
(IFRS 9 paragraphs 4.1.1-4.1.5)
Gains and losses
Interest and dividend revenue on all financial assets is recognised in profit or loss.
Impairment losses on all financial assets are recognised in profit or loss.
Other gains or losses on remeasurement to fair value are recognised as follows:
Debt investment at OCI (and reclassified to profit or loss on disposal of the

FVTOCI investment)
Equity investment at OCI (but not reclassified to profit or loss on disposal of the
FVTOCI investment)
FVTPL Profit or loss

2. Measurement of financial liabilities
There are two categories of financial liability:
▪ Those held for trading or designated at fair value through profit or loss (FVTPL)
▪ Any other financial liability.
An entity can only choose to designate a liability at FVTPL if doing so eliminates or
significantly reduces an accounting mismatch. The result is that most financial liabilities
will fall into the second 'default' category of the two listed above.
Financial liabilities are initially measured at fair value plus transaction costs with the
exception of those held for trading or designated 'at fair value through profit or loss',
which are held at fair value only (no transaction costs).
After initial recognition liabilities held for trading or those designated at FVTPL are held
at fair value. All other financial liabilities are held at amortised cost.
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3. Impairment of Financial Assets (IFRS 9)
IFRS 9 uses an expected loss approach to the impairment of financial assets. This
approach results in impairments (called credit losses by IFRS 9) being recognised before
indicators of impairment exist.
The general approach to credit losses is as follows:
▪ At initial recognition, 12 month expected credit losses are recognised.
▪ Beyond this, a 3 stage approach is taken:
Stage 1 If credit risk has not increased significantly since initial recognition,
recognise 12 month expected credit losses.
Stage 2 If credit risk (the risk of default) has increased significantly since
initial recognition, recognise lifetime expected credit losses, and
calculate interest on gross asset.
Stage 3 If there is evidence of impairment at the reporting date, recognise

lifetime expected credit losses, and calculate interest on asset net
of impairment.
12 month expected credit losses are lifetime losses expected to arise from a default
within 12 months.
Lifetime credit losses are expected losses arising from a default at any time in the life
of the asset.
Example
On 1 January 20X4, Barkers Co purchased a debt investment, measuring it at par of
$500,000. At this date there is a 3% probability that the borrower will default,
resulting in a 100% loss.
At 31 December 20X4 it is expected that the borrower will breach loan covenants and
there is a 30% probability of them defaulting over the remainder of the term.
At 1 January 20X4 an impairment allowance of 3% x $500,000 = $15,000 is recognised
(based on 12 month credit losses).
At 31 December 20X4, there is a significant increase in the risk of default and so the
impairment allowance is based on lifetime credit losses.
It is increased to 30% x $500,000 = $150,000.
Interest revenue continues to be calculated based on $500,000.
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If the loan covenants had been breached at 31 December 20X4 (i.e. stage 3 had been
reached), interest revenue would have been calculated based on:
$500,000 - $150,000 = $350,000
Credit losses are recognised in profit or loss and, depending on the asset, may be net
off against the carrying amount of the asset in the statement of financial position or
recognised as a separate credit balance.
(IFRS 9 paragraphs 5.5.8 and B8E)
4. Hedge Accounting (IFRS 9)
Hedge accounting constitutes an extra, special set of rules that can be applied to
financial instruments when an entity enters a hedging arrangement.
An entity can designate a hedging instrument so that its change in fair value is offset
against the change in fair value of a hedged item in the same statement (usually the
statement of profit or loss), thus reducing volatility in the financial statements.
For example, if an entity has committed to pay an amount of foreign currency in six
months, it might enter into a forward contract to buy the currency at a future date at a
pre-determined exchange rate. Thus it avoids the risk of the foreign currency rising in
value before the date of payment.
There are three types of hedge:
1. A fair value hedge (hedges changes in the value of a recognised asset or liability)
2. A cash flow hedge (hedges exposure to variability in future cash flows)
3. A net investment hedge (hedges exposure to changes in the value of a foreign
operation).
Hedge accounting is only allowed when certain conditions are met:
▪ The hedging relationship consists only of eligible hedged items and eligible
hedging instruments as defined by IFRS 9
▪ At the inception of the hedge there is formal documentation of the relationship
▪ Hedge effectiveness criteria are met.
(IFRS 9 paragraph 6.4.1)
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IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
IAS 37 deals with accounting for uncertainty.
1. Key definitions of IAS 37

Provision
▪ A liability of uncertain timing or amount.
Liability
▪ Present obligation as a result of past events, for which
▪ Settlement is expected to result in an outflow of resources (payment).
Contingent liability
▪ A possible obligation depending on whether some uncertain future event
occurs, or
▪ A present obligation that is not probable or cannot be measured reliably.
Contingent asset
▪ A possible asset that arises from past events, and
▪ Whose existence will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the entity
2. Provisions (IAS 37)

a. Provisions – recognition
"A provision is a liability of uncertain timing or amount."

A provision can only be recognised when three criteria are met:

1. There is a present obligation as a result of a past event
2. It will result in a probable outflow of economic benefits
3. A reliable estimate can be made of the obligation.
▪ A present obligation can be either legal or constructive. A legal obligation arises
from legal contracts, statute or other operation of the law. A constructive
obligation arises when an entity has created an expectation in others that it will
meet certain responsibilities
▪ A probable outflow of benefits is defined as 'more likely than not'. This is taken
to mean more than a 50% probability
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▪ IAS 37 clarifies how a provision should be measured. Except in rare cases, an
estimate of an obligation that is sufficiently reliable can be made.
A provision is recognised as a current or non-current liability and the corresponding
debit is usually recognised in profit or loss.
Example
Store Co operates clothes shops in a country where laws require that goods can be
returned by customers for a refund within 30 days of purchase. Store Co's advertising
slogan is 'Satisfaction guaranteed, but 90 days to return if not'.
Store Co has a liability of uncertain timing and amount: at any given date it may have
to refund goods sold in the previous 90 days. A legal obligation exists to refund goods
sold in the previous 30 days and a constructive obligation exists in respect of the
other 60 days.
The related past events are sales to customers. Therefore, assuming that customer
refunds are probable and a reliable estimate can be made of the amount (probably
based on past experience), a refunds provision should be made.
b. Provisions - measurement
A provision must be measured at the best estimate of expenditure expected to settle
the obligation at the reporting date.
▪ In the case of a single obligation, the best estimate may be the single most likely
outcome or it may be higher or lower, depending on other possible outcomes
▪ In the case of a large population of items, expected values are used.
Example
A customer has brought a lawsuit against Bone Co and is claiming $800,000 in
damages. Bone Co’s legal advisors have assessed the probability of Bone Co losing
and having to pay the damages at 80%.
There is a present legal obligation arising from a past event, payment is probable (as
it is more than 50%) and the amount can be measured reliably. Therefore a provision
should be made. There is a single obligation and therefore the provision is measured
at the single most likely outcome i.e. $800,000.
The provision is not measured at 80% x $800,000 = $640,000 based on expected
values, because there is not a large population of items.
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A provision should be discounted where the effect of this is material. The discount rate
should be a pre-tax rate reflecting market assessments of the time value of money and
risks specific to the liability.
c. Changes in and the use of provisions
If a provision is increased or decreased due to a change in estimated outflow of
economic benefits, the corresponding debit or credit entry is usually made to profit or
loss.
A provision may only be used for the purpose that it was set up.
Example
A washing machine manufacturer offers a free one year warranty with goods
supplied. In 20X1 it supplied 100,000 machines. It is expected that in 20X2 15% of
these will require minor repairs at an average cost of $50 and 4% will require major
repairs at an average cost of $150.
A provision is therefore made in the 20X1 financial statements for: (100,000 x 15% x
$50) + (100,000 x 4% x $150) = $1,350,000
d. Reimbursements
Expenditure to settle a provision may be recoverable from a third party. In this case
the reimbursement is recognised as an asset only if it is virtually certain that it will be
received if the obligation is settled.
Examples
▪ A provision may not be made for a future operating loss
▪ A provision should be made for the costs of an onerous contract (a contract in
which the unavoidable costs of fulfilling the contract exceed any revenue
expected from it)
▪ A provision is made for restructuring only if there is a constructive obligation
to restructure at the reporting date (e.g. there is a formal plan that has been
announced to employees). In this case only the direct costs of restructuring
are provided for
▪ A provision is made in respect of standard warranties (purchased extended
warranties are not within the scope of IAS 37)
▪ Where an entity that acquires or sets up operations in a certain location is
required to decommission its operations and restore the location at the end
of the operations’ useful lives, the costs of decommissioning should be
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provided for. Depending on when the damage is caused, some of the
decommissioning / restoration costs are recognised as a provision
immediately and some are recognised over the period that operations
continue. The debit entry on recognising a provision immediately is recognised
as part of the cost of the associated asset in accordance with IAS 16; the debit
entry in relation to the provision increasing as the operations continue is
recognised in profit or loss
Examples: Provisions
Transit Co operates several bus routes in a foreign country. New laws were
introduced there on 1 October 20X4 requiring seatbelts to be fitted to all public
buses. Non-compliance would result in fines. The authorities have been vigilant in
checking buses and charging fines since the law was introduced.
At the year ended 31 December 20X4, Transit Co has only installed seat belts on half
of its buses. The cost to install them in the other half is $40,000. Unless the seat belts
are installed the company is liable for fines of $25,000.
In respect of the fitting of seatbelts Transit Co does not have a present obligation to
pay $40,000 as an obligating event has not occurred (i.e. the fitting of the seatbelts).
It does, however, have a present legal obligation in respect of the fines (the
obligating event being the non-compliance of Transit Co with the law). Payment is
probable (given that the authorities have been vigilant have charged fines) and
therefore a provision of $25,000 should be made.
Examples: Provisions
Oil Co constructed an oil platform in 20X2 at a cost of $12 million. The company is
legally required to decommission the platform at the end of its useful life at a cost
with present value of $2million. The company is also legally required to restore the
seabed at this time. This is gradually eroded as oil is extracted. Restoration costs (at
present value) are estimated at $10 per barrel extracted. At 31 December 20X2,
50,000 barrels had been extracted.
A provision is recognised at the time of construction for $2 million. This is debited to
property, plant and equipment, giving a total cost of the oil platform of $14 million.
An additional provision is made as barrels of oil are extracted. This will increase
throughout the useful life of the platform. At 31 December 20X2 it amounts to $10 x
50,000 = $500,000. The corresponding entry is to profit or loss.
The appendix to IAS 37 includes several examples of situations in which provisions are
and are not made.
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Contingent Liabilities and Contingent Assets (IAS 37)
1. Contingent Liabilities
A contingent liability is defined in two different ways:
▪ Possible obligations
▪ Existing obligations at the reporting date which are not recognised as liabilities
either because they will probably not lead to an outflow or are not able to be
measured reliably.
Contingent liabilities are not recognised but are disclosed where they are material in
size and the probability of payment is greater than remote.
2. Contingent Assets
A contingent asset is defined as
▪ A possible asset that arises from past events, and
▪ Whose existence will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the entity.
Contingent assets are disclosed if they are considered probable and otherwise they are
not represented in the financial statements.
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Click to identify whether the following should be Recognised, Disclosed or Ignored
when Daleside Co is preparing the financial statements for the year ended 31 December
20X5. Assume that all amounts are material.
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Case Study - Provisions, Contingent Liabilities and Contingent Assets
Newberg is a German company. You can see Newberg's statement of profit or loss for
20X1 and 20X2 below.
On the following page you can see some accounting policies and notes. The facts are
loosely based on a real case, but the company, year and exact numbers have been
changed.
Extracts from significant accounting policies and notes

Basis of preparation of financial statements. The consolidated financial statements
of the Newberg Group are prepared in accordance with International Financial
Reporting Standards (IFRS Standards).
Consolidation policy. The consolidated financial statements of the Group include the
parent and the companies which it controls (subsidiaries). Control is normally
evidenced when the Group owns, either directly or indirectly, more than 50% of the
voting rights of a company’s share capital.
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Changes in group organisation. On 24 June 20X2, a subsidiary of Newberg entered
into an agreement with the shareholders of Orange Co to purchase all of the issued
and outstanding common shares. Completion of the transaction was not possible
until certain regulatory clearances had been obtained. In view of the overall
materiality of the transaction and the advanced state of the integration planning, the
consolidated financial statements of the Group give effect to the acquisition of
Orange Co from 31 December 20X2.
Obtaining clearance from the regulatory authorities caused a delay in completing
the transaction. These final clearances were received on 24 February 20X3 and the
purchase of the shares was completed on 10 March 20X3.
The acquisition was accounted for using the acquisition method of accounting.
Accordingly, the cost of the acquisition, including expenses incidental thereto, was
allocated to identifiable assets and liabilities and to in-process research and
development based on their estimated fair values. The portion of the acquisition cost
allocated to in-process research and development was charged in full against income.
This approach is consistent with the Group's accounting policy for research and
development costs. After consideration of these items, the excess of the acquisition
cost over the fair values was recorded as goodwill.
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IAS 10 EVENTS AFTER THE REPORTING PERIOD
IAS 10 requires that in some cases the financial statements are adjusted for events
occurring after the reporting date but before they are authorised for issue.
This provides users with relevant information in a timely fashion.
The Standard deals with two types of event that occur after the reporting date:
IAS 10 provides examples of adjusting and non-adjusting events:

Adjusting
▪ The settlement of a court case that confirms a present obligation at the reporting
date
▪ The receipt of information that confirms an asset was impaired at the reporting
date
▪ The determination of cost of an asset purchased before the reporting date (or
proceeds of an asset sold before the reporting date)
▪ The discovery of fraud or errors meaning the financial statements are incorrect.
Non-adjusting
▪ Acquisition or disposal of subsidiaries
▪ Announcement of plan to close a division
▪ Purchases or disposals of assets
▪ Destruction of property by fire or flood or similar
▪ Announcing or starting a restructuring
▪ An issue of shares
▪ Changes in tax rates
▪ Commencement of litigation
▪ Entering into commitments or issuing guarantees.
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If dividends on ordinary shares are declared after the reporting date:
These are:
▪ Non-adjusting
▪ Should not be recognised as liabilities.
However:
▪ They should be disclosed.
If an event after the reporting period results in an entity no longer being a going
concern, then the accounts should be prepared on the break up basis. This of course
does not apply if only part of the entity is not a going concern. The reporting unit is the
whole of the entity and the status of going concern should be assessed for that whole
reporting entity.
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IAS 19 EMPLOYEE BENEFITS
The Basic Principle of IAS 19:

The cost of providing employee benefits should be recognised in the period in which
the benefit is earned by the employee, rather than when it is paid or payable.
This Standard applies to all employee benefits except those to which IFRS 2 "Share
Based Payment" applies. It deals with:
▪ Short-term employee benefits
▪ Post-employment benefits (pensions)
▪ Other long-term benefits
▪ Termination benefits.
1. Short-term employee benefits

These include bonuses, sick pay, holiday pay and maternity leave, and are recognised:
▪ As an expense when the employee provides benefit, and
▪ As a liability to the extent they are unpaid.
IAS 19 deals specifically with short-term paid absences and for bonus plans. In each
case the Standard requires an entity to establish whether there is a liability at the
reporting date and to account for any liability. Only accumulating paid absences (those
that can be carried forward such as holiday pay) are recognised as a liability.
(IAS 19 paragraphs 16 and 19)
2. Long term employee benefits
Other long-term benefits are recognised in the same way as post-employee benefits
however all amounts are recognised in profit or loss, including remeasurements.
3. Termination benefits
Termination benefits are recognised as a liability and expense at the earlier of:
▪ When the entity can no longer withdraw from the offer of termination benefits,
and
▪ When the entity recognises costs for restructuring in line with IAS 37.
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4. Post-employment benefits (Pensions)
IAS 19 deals with two types of pensions: defined contribution and defined benefit
plans. In both cases the employer (and sometimes employee) contribute to a pension
plan (which invests the contributions) throughout the employee's working life. When
the employee retires, they are entitled to a pension
In a defined contribution plan, the employee's pension depends upon how well the
pension plan investments have performed.
In a defined benefit plan, the employer is advised what contributions are required in
order that the plan has sufficient assets to meet the guaranteed amount of pension.
In a country with special forms of employee benefit systems such as multi-employer
plans and government plans, these are accounted for on the basis of their legal and
institutional arrangements.
Defined contribution plans
The accounting for defined contribution plans is relatively straightforward:
contributions are recognised as an expense in the period in which they are payable. An
accrual or prepayment may result.
Defined benefit plans
The accounting treatment of defined contribution plans is not suitable for defined
benefit plans as a result of the variability of contributions.
Instead, a net defined benefit pension asset or liability is recognised in the statement
of financial position. This is calculated as the difference between:
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▪ The fair value of the pension plan assets at the reporting date, and
▪ The present value of the defined benefit obligation at the reporting date.
IAS 19 includes guidance on how to establish the present value of the obligation using
the projected unit credit method. This method is also used to determine current service
cost i.e. the increase in the pension obligation as a result of an additional year's
employee service.
Each individual element of change in the value of plan assets and defined benefit
obligation from one year to the next is accounted for separately:
Net interest is calculated on the value of the assets and obligation at the start of the
year by reference to interest rates on high quality corporate bonds. It represents:
▪ The expected return on the investments that form the plan assets
▪ The unwinding of the discount on the obligation.
Remeasurements are the difference between calculated plan assets and defined
benefit obligation having taken account of contributions, pensions paid, current
service cost and interest, and the actual year end value of each. Remeasurements
represent:
▪ The difference between the actual and expected return on plan assets, and
▪ The effect of changes in actuarial assumptions in the case of the obligation.
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These are never reclassified to profit or loss.
Actuarial assumptions are those assumptions that must be made in order to estimate
the value of the defined benefit obligation. They include salary increase, mortality rates
and retirement age.
Remeasurements of the defined benefit obligation may be referred to as actuarial gains
and losses.
Past service costs may occur in some years, for example if plan benefits are increased.
These are recognised in profit or loss immediately.
Where an entity has a surplus in a defined benefit plan, the net defined benefit asset
can be recognised but the amount is restricted to the asset ceiling, being the present
value of economic benefits available as a result of the surplus (e.g. refunds or reduction
in contributions).
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IAS 12 INCOME TAXES
IAS 12 deals mainly with deferred tax. It requires that deferred tax is recognised for
temporary differences.
1. Definition
Deferred tax is an accounting adjustment to take account of the future tax impact of
an asset or liability currently recognised in the statement of financial position.
2. Calculation of deferred tax
The IAS 12 approach to calculating deferred tax is as follows:
Tax base is the amount that is attributed to an asset or liability for tax purposes:
▪ In the case of an asset, the amount that will be deductible for tax purposes in
the future e.g. the tax written down value of a non-current asset
▪ In the case of a liability, usually the carrying amount less any amount that will be
deductible for tax purposes in the future.
Taxable temporary differences arise where the carrying amount of an item exceeds its
tax base. In other words more tax relief has already been given than the carrying
amount in the statement of financial position would suggest. Therefore future tax will
be higher than might be expected.
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Deductible temporary differences arise where the carrying amount of an item is less
than its tax base. In other words less tax relief has already been given than the carrying
amount in the statement of financial position would suggest. Therefore future tax will
be lower than might be expected.
The applicable tax rate is that which is expected to apply when the carrying amount of
the item is recovered. Normally this is a current rate although if new tax laws have been
enacted it may be future rates. The tax rate should reflect the manner of recovery (so
may be an income tax rate if an asset is to be used to generate income or a capital tax
rate if the asset will be sold to generate income).
Example
Luella Co buys an item of plant on 1 January 20X7 at a cost of $400,000. The plant has
a useful life of 10 years and benefits from a 20% writing down allowance (on a
reducing balance basis) for tax purposes. Luella has a year end of 31 December and
pays tax at a rate of 30%.
There is no deferred tax impact on acquisition of the asset because carrying amount
is equal to tax base at $400,000.
At 31 December 20X7:
▪ The carrying amount of the asset is 9/10 x $400,000 = $360,000
▪ The tax base of the asset is 80% x $400,000 = $320,000
▪ There is therefore a temporary difference of $40,000
▪ This is a taxable temporary difference because carrying amount exceeds tax
base
▪ It results in a deferred tax liability of 30% x $40,000 = $12,000
3. Accounting for deferred tax

The corresponding entry when recognising a deferred tax asset or liability is usually
profit or loss. Taking the above example, the correct entry to recognise the deferred
tax liability is:
DEBIT Tax charge in profit or loss $12,000
CREDIT Deferred tax liability $12,000
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If, however, deferred tax relates to an underlying item that is recognised in OCI or
directly in equity, then the deferred tax impact is also recognised in OCI or equity. For
example:
▪ The deferred tax impact of a revaluation is recognised in OCI
▪ The deferred tax impact of prior period error is recognised in equity.
▪ The deferred tax impact of dividends is recognised in profit or loss.
From year to year, only the change in the deferred tax amount is recognised. For
example if a deferred tax liability is $120,000 one year and $155,000 the next, a tax
charge of $35,000 is recognised in profit or loss.
Example
Continuing with the Luella Co example. At 31 December 20X8:
▪ The carrying amount of the asset is 8/10 x $400,000 = $320,000
▪ The tax base of the asset is 80% x 80% x $400,000 = $256,000
▪ There is therefore a temporary difference of $64,000
▪ This is a taxable temporary difference because carrying amount exceeds tax
base
▪ It results in a deferred tax liability of 30% x $64,000 = $19,200
▪ The deferred tax liability has increased from $12,000.
This is recorded by:
DEBIT Tax charge in profit or loss $7,200
CREDIT Deferred tax liability $7,200
An entity should calculate the deferred tax impact of all relevant items in its statement
of financial position and, providing that the tax arises in a single jurisdiction, and there
is a right of set off, present a net deferred tax asset or liability.
A deferred tax asset is only recognised to the extent that it is probable that future
taxable profits will be available to utilise the benefit.
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4. Additional points
▪ Tax losses carried forward result in a deferred tax asset to the extent that profits
are available against which the losses can be offset
▪ Deferred tax liabilities should be recognised for all temporary differences, except
those relating to non-deductible goodwill and the initial recognition of certain
assets and liabilities in transactions that affect neither accounting profit nor
taxable profit
▪ There are also special rules for investments in subsidiaries, associates and joint
ventures. They amount to saying that temporary differences that are unlikely to
reverse where the investor is in control of that process (for example, by being
able to stop the payment of dividends) need not be accounted for
▪ Deferred tax amounts should not be discounted.
(IAS 12 paragraphs 15, 24, 34, 39, 53)
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Suppose that a company, Acrobat, applies IFRS Standards. It purchases a machine for
£10,000 in early 20X8. The machine is expected to last for ten years and to have no
residual value. The accounting year is the calendar year. The company is fairly small and
is able to claim 40% tax depreciation (capital allowances) in the year of purchase.
Suppose also, that Acrobat buys land at £3m in early 20X8, and revalues it to fair value
of £5m at 31 December 20X8. Calculate the "temporary differences" in 20X8?
Model Answer
The temporary differences are:
The temporary differences total $2,003,000.
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IFRS 2 SHARE-BASED PAYMENT
IFRS 2 deals with transactions in which an entity received goods or services in return
for its own equity instruments or an amount of cash based on the value of its equity
instruments.
The basic principle of IFRS 2 is that an entity should recognise an expense related to
goods or services received when they are received, even if payment is at a future date
and made in equity instruments.
The Standard deals with three types of share-based payment:
▪ An equity settled share-based payment is a transaction in which a company
grants equity instruments to another party in exchange for goods and services.
The most common example of such a transaction is where employees receive
share options in exchange for services rendered
▪ A cash settled share based payment is where another party (again usually an
employee) receives a cash payment the amount of which depends on the share
price of the company.
▪ Share-based payments in which the entity or counterparty has a choice of cash
or equity instruments
1. Equity-settled share based payments

These are recognised by:
DEBIT Expense / asset
CREDIT Equity
The issue is how the transaction is measured and when it is recognised.

If the transaction is with an employee, it is measured by reference to the fair value of
the equity instruments granted at the grant date. If the transaction is with a third
party, it is measured at the fair value of goods or services received.
If the transaction relates to goods or services already received (i.e. the equity
instruments vest immediately), the transaction is recognised in full on the grant date.
If the transaction requires the counterparty to meet specified conditions over a future
period (vesting period), then the transaction is recognised over that period.
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Example
A company grants three directors 200 share options on 1 January 20X6, and these vest
(i.e. the director becomes entitled to them) after two years, providing that the director
still works for the company. This is expected to be the case. Each option has a fair value
of $3 at the grant date.
The total expense to be recognised is $1,800 (3 directors x 200 options x $3). This is
spread over the two year vesting period giving an expense of $900 in each year.
At the end of year 1 the balance in equity is $900; at the end of year two it is $1,800.
Assuming that the options are exercised, the equity balance is transferred to the share
capital account.
The measurement of equity-settled share-based payments must take into account

the number of instruments expected to vest (become an entitlement).
In the above example, suppose that one director left unexpectedly during the second
year. In that case the accounting entry in year one would remain the same (an expense
of $900 credited to equity). In year 2, however, the expense would be adjusted to take
account of the fact that only 2 directors' share options would vest:
▪ Total expense $1,200 (2 directors x 200 x $3)
▪ Year 2 expense therefore $300 ($1,200 - $900)
2. Cash-settled share-based payments

These are recognised by:
DEBIT Expense / asset
CREDIT Liability
The fair value of the liability is re-measured at each reporting date as the amount of
cash expected to be paid
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Example
On 1 January 20X4 a company grants a director share appreciation rights whereby she
is entitled to cash equivalent to 1,000 shares on 31 December 20X5, assuming she
remains in employment.
The share price is $3.40 on 31 December 20X4 and $4.05 on 31 December 20X5.
At 31 December 20X4 a liability and expense are recognised of $1,700 (1,000 x $3.40 x
1/2 years). At 31 December the total liability is $4,050 (1,000 x $4.05). Therefore the
year 2 expense is $2,350 ($4,050 - $1,700).
3. Share-based payments with a choice of settlement

▪ Where the counterparty has the choice of settlement, the entity is deemed to
have granted a compound instrument and a separate equity and liability
component are recognised
▪ Where the entity has the choice of settlement, the whole transaction is treated
as either equity-settled or cash-settled depending on whether the entity has an
obligation to settle in cash.
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IAS 41 AGRICULTURE
IAS 41 provides guidance on accounting for biological assets and agricultural produce.
Biological assets
"A biological asset is a living plant or animal".
Bearer plants (a plant that bears produce for more than one period such as a tea bush)
are biological assets, however are not within the scope of IAS 41. Instead IAS 16
Property, Plant and Equipment applies to these.
Agricultural produce
Agricultural produce is the harvested produce of biological assets at the point of harvest
(thereafter it becomes inventory).
Accounting treatment
Biological assets and agricultural produce are initially and subsequently measured at
each reporting date at their fair values less costs to sell.
If fair value cannot be reliably determined, then measure at cost.
Gains and losses arising on initial recognition and subsequent remeasurement of
biological assets and agricultural produce are recognised in profit or loss.
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IFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
IFRS 6 imposes few requirements on companies that are engaged in exploration for and
evaluation of mineral resources.
IFRS 6 requires entities to develop a policy for the extent to which such expenditure
should be capitalised, however does not itself specify a policy. The policy should result
in information that is relevant to the economic decision-making needs of users and is
reliable. It should be applied consistently and should be disclosed clearly in the financial
statements.
The Standard also requires entities recognising exploration and evaluation assets to
perform an impairment test carrying amount of the assets may exceed their
recoverable amount.
IFRS 6 requires disclosure of "information that identifies and explains the amounts
recognised in its financial statements arising from the exploration for and evaluation of
mineral resources"
This should include:

▪ "Its accounting policies for exploration and evaluation expenditures including
the recognition of exploration and evaluation assets
▪ The amounts of assets, liabilities, income and expense and operating and
investing cash flows arising from [those assets]".
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1. If a company's board of directors has decided to restructure part of its business

should the company not make a provision for the restructuring, redundancy costs,
etc.?
Answer:
It depends on the facts. A board decision does not of itself create an obligation to a
third party, and the board could change its mind. In such cases, IAS 37 does not allow a
provision. This may not be "prudent" but this is overridden by the need to comply with
the Conceptual Framework's definition of a liability. Only when the decision is
communicated to those affected by the restructuring would it be appropriate to
recognise a provision.
2. Surely it gives useful information to the users of financial statements to show a

proposed dividend as a liability?
Answer:
IAS 10 is based on the idea that it is not useful to show something as a liability that does
not meet the definition of a liability. The information about the proposed dividend can
be given in the notes.
3. Can a deferred tax asset be shown in the financial statements if the company is
making losses?
Answer:
It is unlikely as it must be probable that future taxable profits will be available against
which to use the asset
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MODULE 6: GROUP ACCOUNTING
What you will learn
This module covers eight IFRS ® Standards that concern the preparation of
consolidated financial statements and covers a few other issues relating to
investments within groups:
▪ IFRS 10 looks at the preparation of consolidated financial statements
▪ IAS 27 (revised 2011) considers accounting for investments in separate entity
financial statements
▪ IFRS 3 looks at the treatment of goodwill in the context of business combinations
▪ IFRS 11 defines joint arrangements (including joint ventures)
▪ IAS 28 (revised 2011) deals with accounting for both associates and joint
ventures
▪ IFRS 12 covers disclosure of interests in other entities
▪ IAS 21 and IAS 29 deal with issues related to foreign currency and what to do
when subsidiaries operate in hyperinflationary environments.
Table of contents
IFRS 10 Consolidated Financial Statements
Mechanics of Consolidation (IFRS 10)
IAS 27 Separate Financial Statements
IFRS 3 Business Combinations
Case Study - IFRS 3
IAS 28 Investments in Associates and Joint Ventures
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 29 Financial Reporting in Hyperinflationary Economies
Frequently asked questions
Quick Quiz
119
IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS
IFRS 10 defines a subsidiary and identifies principles of consolidation
Definition of a subsidiary
A subsidiary is defined as an entity controlled by another entity.
"An investor controls an investee if it has ALL the following:

▪ Power over the investee;
▪ Exposure, or rights, to variable returns from its involvement with the investee;
and
▪ The ability to use its power over the investee to affect the amount of the
investor's returns."
Note that an entity could have power over the investee without holding a majority of
the voting rights. Returns could be either positive or negative and could include
dividends, change in the value of the investment, management or service fees etc
Non-controlling interests (NCI):

Non-controlling interests are the "equity in a subsidiary not attributable, directly or
indirectly, to a parent."
For example, if a parent owns 60% of a subsidiary, then the non-controlling interest
percentage is 40%.
Principles of consolidation
A parent prepares consolidated financial statements applying uniform accounting
policies throughout.
A parent should start to consolidate from the date control is obtained and cease when
control is lost. There is just one exemption available to this under IFRS 5. Consolidation
is not required where temporary control is acquired because the subsidiary is held
exclusively with a view to its subsequent disposal in the near future.
A partial disposal of an interest in a subsidiary in which the parent retains control,
does not result in a gain or loss but an increase or decrease in equity. Purchase of some
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or all of the noncontrolling interest is treated as a treasury share-type transaction and
accounted for in equity.
Once an investment ceases to fall within the definition of a subsidiary, the parent
company should derecognise the assets and liabilities of the subsidiary, derecognise
the carrying amount of any non controlling interest and recognise the consideration
received. Any investment retained in the subsidiary should be recognised at fair value,
and treated as an associate under IAS 28, as a joint arrangement under IFRS 11 or as an
investment under IFRS 9 as appropriate.
A parent is exempted from the preparation of consolidated accounts if it is itself a
wholly or partially owned subsidiary and the ultimate or any intermediate parent
company produces consolidated financial statements that comply with IFRS.
Any difference between the reporting date of the parent and the reporting date of a
subsidiary should not exceed three months.
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Mechanics of Consolidation (IFRS 10)
To consolidate the financial statements, items of assets, liabilities, income, expenses
and cash flows are combined. The parent's investment in the subsidiary is also
eliminated against the subsidiary's equity when it was acquired, goodwill is recognised
and intragroup transactions are eliminated.
Example: Simple consolidated statement of financial position

In this example, assume that P Co acquired 75% of S Co 4 years ago when S Co had
retained earnings of $10million. S Co's share capital has not changed since acquisition.
100% of P Co's assets and liabilities and 100% of S Co's assets and liabilities are added
across on a line-by-line basis. This reflects the fact that P Co controls 100% of S Co's
assets and liabilities even though it only owns 75%.
*In adjustment 1:
▪ The $14m cost of P Co's investment in S Co is eliminated against S Co's equity at
acquisition ($6m share capital and $10m retained earnings).
▪ As P Co only acquires 75% of S Co, there is a non-controlling interest. At the date
of acquisition this is recognised as 25% of S's net assets at acquisition ($6m share
capital and $10m retained earnings) so 25% x $16m = $4m.
▪ Goodwill arises because the cost of the investment plus the NCI ($14m + $4m =
$18m) is greater than the value of net assets acquired ($10m + $6m = $16m).
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**In adjustment 2:
▪ S Co has made $20m retained earnings since acquisition. 25% of this belongs to
the NCI rather than P Co and this is reallocated here.
Example: Simple consolidated statement of profit or loss

During the year, P Co has sold $20m of goods to S Co. These have all been sold on to
third parties by the year end.
100% of P Co's income and expenses and 100% of S Co's income and expenses are
added across on a line-by-line basis. This reflects the fact that P Co controls 100% of S
Co's income and expenses even though it only owns 75%.
In the adjustment
▪ Intragroup sales of $20m are eliminated from P Co's revenue
▪ The cost of these items to S Co is eliminated from S Co's cost of sales
S Co's retained profit for the year must be allocated between the parent and the NCI at
the bottom of the consolidated statement of profit or loss.
▪ The NCI is allocated 25% of $12million i.e. $3million
▪ The parent is allocated 75% of $12million i.e. $9million.
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Unrealised profits
Assume that the above example is changed so that half of the $20m goods sold by P Co
to S Co have not been sold on to a third party by the year end. P Co charged 25% on
cost when setting its selling prices.
The total profit on the intragroup sales is therefore 25%/125% x $20m = $4m. Half of
this - $2m has been realised outside the group through onwards sales of the goods; the
other $2m profit has not been realised. As a single entity the group cannot make a profit
by selling goods to itself and therefore the profit must be eliminated.
The profit has been made by P Co and therefore the elimination is allocated to the
owners of P Co. Had the profit been made by S Co, the elimination would have been
allocated between the owners of P Co (75%) and the NCI (25%).
The revised consolidated statement of profit or loss is as follows:
Mid year acquisitions

In this example S Co was acquired several years ago and so its full results are
consolidated. If S Co had been acquired in the middle of the current year, its results
would have been prorated and only those arising post-acquisition would have been
consolidated.
124
For example, if S Co had been acquired exactly half way through the accounting year
and all intercompany sales had taken place after the acquisition, consolidated revenue
would be calculated as:
125
IAS 27 SEPARATE FINANCIAL STATEMENTS
IAS 27 prescribes the accounting treatment of investments in individual financial

statements of the investor.
In the separate financial statements of the investor, investments in subsidiaries,

associates and joint ventures are accounted for either:
▪ At cost, or
▪ In accordance with IFRS 9, or
▪ Using equity accounting.
126
IFRS 3 BUSINESS COMBINATIONS
IFRS 3 requires that the acquisition method is applied to business combinations. It

specifies the measurement of acquired assets and liabilities including goodwill.
A business combination is a transaction or other event in which an acquirer obtains

control of one or more businesses (appendix A).
A business is defined as ‘An integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing goods or services to
customers, generating investment income (such as dividends or interest) or generating
other income from ordinary activities.’ A business is distinguished from a group of
assets because it has inputs and processes that, when applied to inputs, have the ability
to create outputs.
Acquisition method
All business combinations within the scope of IFRS 3 must be accounted for using the
acquisition method.
This requires:
1. Identification of the acquirer
2. Determination of the acquisition date being the date on which the acquirer
obtains control of the business. This may be different to the date on which the
acquirer transfers consideration
3. Recognition and measurement of the identifiable assets acquired and liabilities
assumed and any non-controlling interest in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase
(negative goodwill).
Goodwill
Goodwill is measured as:
127
Consideration is measured at fair value. This includes contingent consideration. It does
not include acquisition costs, which must be recognised in profit or loss.
The non-controlling interest may be measured at either:
▪ Fair value on the acquisition date, or
▪ As a proportion of the fair value of net assets on the acquisition date
This choice is available on a transaction-by-transaction basis.
The identifiable assets acquired and the liabilities assumed should be measured at
their fair values. In general the identifiable assets acquired and liabilities assumed must
meet the definition of assets and liabilities in the 2010 Conceptual Framework (the old
Conceptual Framework).
(IFRS 3 paragraph 11, 18)
There are limited exceptions to the general recognition and measurement principles
above, which lead to some items being recognised when normally they wouldn't be, or
being recognised at an amount other than acquisition date fair value:
▪ Intangible assets of the acquiree are recognised if they are identifiable. The
other IAS 38 criteria need not be met, resulting in the recognition of intangibles
on consolidation that are not otherwise recognised
▪ Contingent liabilities are recognised even if it is not probable that there will be
an outflow of economic resources and the subsidiary has therefore not
recognised them in its financial statements (contrary to the guidance given in
IAS 37)
▪ The relevant Standard is applied to measure and recognise deferred tax (IAS 12),
employee benefits (IAS 19), share-based payments (IFRS 2) and assets held for
sale (IFRS 5).
(IFRS 3 paragraphs B31, 23, 24, 26, 30, 31, 56)
128
Full goodwill and partial goodwill
As the non-controlling interest (NCI) can be measured in one of two ways, it follows
that the resulting goodwill is one of two possible values
Accounting for goodwill or a bargain purchase
129
Missile Co acquired a subsidiary on 1 January 20X3 for $2,145 million. The fair value of
the net assets of the subsidiary acquired were $2170 million. Missile Co acquired 70%
of the shares of the subsidiary. The non controlling interest was fair valued at $683
million.Calculate goodwill based on the partial and full goodwill methods under IFRS 3.
You should refer to the text of the Standard when answering all exercises.
Exercise - IFRS 3 Answer
Model Answer
As you can see from the table below, goodwill is effectively adjusted for the difference
in the value of the non controlling interest:
Missile Co
130
Case Study - IFRS 3
This case study once again reviews Newberg Co and the details that were presented
to you in Module 5. Newberg Co is German. Its statements of profit or loss for 20X1
and 20X2 are shown right. On the following page you can see some accounting policies
and notes
Extracts from significant accounting policies and notes Basis of preparation of

financial statements.
The consolidated financial statements of the Newberg Group are prepared in
accordance with International Financial Reporting Standards.
Consolidation policy. The consolidated financial statements of the Group include the
parent and the companies which it controls (subsidiaries). Control is evidenced by
power over the investee, exposure, or rights, to variable returns from the investee and
ability to use that power to affect the amount of return to the investor. Control is
normally evidenced when the Group owns, either directly or indirectly, more than 50%
of the voting rights of a company’s share capital.
131
Changes in group organisation. On 24 June 20X2, a subsidiary of Newberg Co entered
into an agreement with the shareholders of Orange Co to purchase all of the issued and
outstanding common shares. Completion of the transaction was not possible until
certain regulatory clearances had been obtained. In view of the overall materiality of
the transaction and the advanced state of the integration planning, the consolidated
financial statements of the Group give effect to the acquisition of Orange Co from 31
December 20X2.
Obtaining clearance from the regulatory authorities caused a delay in completing the
transaction. These final clearances were received on 24 February 20X3 and the
purchase of the shares was completed on 10 March 20X3.
The combination was accounted for under the acquisition method of accounting.
Accordingly, the cost of the acquisition, including expenses incidental thereto, was
allocated to identifiable assets and liabilities and to in-process research and
development based on their estimated fair values. The portion of the acquisition cost
allocated to in-process research and development was charged in full against income.
This approach is consistent with the Group's accounting policy for research and
development costs. After consideration of these items, the excess of the acquisition
cost over the fair values was recorded as goodwill.
Case Study - IFRS 3 Question
At what date did Newberg Co start consolidating Orange Co?
You should refer to the text of the Standard when answering all exercises.
Case Study - IFRS 3 Answer
Model Answer
Newberg consolidated Orange from 31 December 20X2. That is, there was no effect
on the group operating income, but a full effect on the statement of financial position.
It seems a remarkable coincidence that there was no control on 30 December 20X2,
but full control before 1 January 20X3
132
IAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENT
IAS 28 defines an associate and prescribes the equity accounting method for
associates and joint ventures
Definition of associate
The Standard defines an associate "as an entity over which the investor has
significant influence".
This could include the power to participate in policy-making process, representation on

the Board of directors, or interchange of management personnel or provision of
essential technical information. This is presumed to exist where the investor owns 20%
or more of the voting power in the investee.
Equity method
Associates and joint ventures are to be included in consolidated financial statements
using the equity method.
The equity method requires that an investment is initially recorded at cost and is
subsequently adjusted to reflect the investor's share of the net retained post
acquisition total comprehensive income of the associate.
The investment in an associate or joint venture is tested for impairment when there
are indications of impairment.
(IAS 28 paragraph 41A)
In the statement of profit or loss and other comprehensive income, share of profit
after tax and share of other comprehensive income of an associate or joint venture are
recognised.
Unrealised profits and losses should be eliminated to the extent of the investor's
interest in the associate.
133
IFRS 11 JOINT ARRANGEMENTS
IFRS 11 defines a joint arrangement, classifies joint arrangements as joint ventures

and joint operations and prescribes the accounting treatment for each.
Definitions
A joint arrangement is "an arrangement of which two or more parties have joint
control."
Joint control is "the contractually agreed sharing of control of an arrangement which
exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control"
Note that joint control requires:

▪ A contractual arrangement, and
▪ Unanimous consent.
If either of these is absent, there is no joint control and IFRS 11 does not apply
Example 1
A Co holds 50% of Joven Co and B Co and C Co both hold 25%. An agreement
between them specifies that decisions about relevant activities require a majority of
75%.
Here A Co and B Co or A Co and C Co together could make decisions about relevant
activities. As there is more than one combination of parties that can reach 75% there
is no unanimous consent and therefore this is not joint control.
If the agreement stipulated the parties that must agree to reach 75% e.g. A Co and
B Co, then those parties would have joint control of Joven Co
134
Example 2
X Co holds 50% of Nejov Co, Y Co holds 30% and Z Co holds 20%. An agreement
between them specifies that decisions about relevant activities require a majority of
75%.
Here only X Co and Y Co can joint to achieve 75%. Although the agreement does not
stipulate which parties have joint control, it is implied.
Forms of joint arrangement

Joint arrangements are either joint ventures or joint operations. Joint arrangements
that are not structured through a separate entity are always joint operations
Accounting treatment
• IFRS 11 requires interests in joint ventures to be equity accounted in accordance
with IAS 28
• Joint operators recognise their share of assets, liabilities, revenues and expenses
in accordance with applicable IFRS Standards.
135
IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES
IFRS 12 contains disclosure requirements in respect of subsidiaries, associates and joint

ventures
An entity should disclose information that helps the users of its financial statements
to evaluate the nature of, and risks associated with, its interests in other entities. In
order to achieve this objective the disclosure requirements introduced by IFRS 12 are
extensive. However the entity must also make any additional disclosures necessary to
meet the overall objective if those required by IFRS 12 and other Standards are not
sufficient.
An entity should disclose the significant judgements and assumptions it has made in
determining whether it controls or has joint control or significant influence over an
entity and also in determining the type of joint arrangement where applicable.
The Standard outlines detailed disclosure provisions in relation to investments in each
of subsidiaries, associates, joint arrangements, and unconsolidated structured entities.
136
IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
IAS 21 prescribes how to record foreign currency transactions in individual financial

statements and how the financial statements of a foreign operation should be
translated into a presentation currency
Currency definitions
IAS 21 refers to two types of currency:
Example 1
Cantabria Co operates in Spain, paying its labour force and purchasing raw materials
in Euro. It sells its goods primarily to customers in the UK and sets selling prices in
Pounds Sterling. The company has a US Dollar loan which has funded the purchase
of a new property.
• The functional currency is likely to be either Pounds Sterling, because this is

the currency in which selling prices are set, or Euro, because this is the
currency that influences labour and material prices. A conclusion as to which
cannot be made without further information.
• The presentation currency of Cantabria Co can be any currency. The company
may present its financial statements in Euro, Pounds Sterling, US Dollars or
any other currency.
137
Foreign currency transactions
Transactions involving foreign currencies are recorded at the rate of exchange ruling
on the date of the transaction. If exchange rates do not fluctuate significantly then an
average rate may also be used.
At a subsequent reporting date treatment depends upon the item:
(IAS 21 paragraphs 21,23,28)
138
Foreign operations
A foreign operation is a subsidiary, associate, joint venture, or branch whose activities
are based in a country other than that of the reporting entity.
The financial statements of a foreign operation must be translated to group
presentation currency for the purposes of preparing consolidated financial statements.
The method is as follows:

Monetary items forming part of the net investment in a foreign operation
Where a reporting entity has, for example, made a loan to one of its foreign
subsidiaries and settlement is not likely in the future, this forms part of the net
investment in the foreign operation.
139
Exchange differences that arise on the retranslation of the loan (using the closing rate)
in the reporting entity's separate accounts are recognised in profit or loss; in the
consolidated accounts, they are however recognised in OCI and reclassified to profit or
loss on the disposal of the foreign operation.
140
On 18 August 20X5 Europe Co, which has the Euro as functional currency, bought a
property in India as a base from which to expand its Asian operations. The property
costs 220million rupees. Europe Co applies the IAS 16 revaluation model to its property,
however a valuation exercise at 31 December 20X5 reveals that the fair value of the
Indian property is not significantly different from carrying amount. 200 million rupees
of the purchase consideration was paid by Europe Co immediately on 18 August; the
remaining amount was payable on 31 October 20X5. Exchange rates at relevant dates
were:
18 August 20X5 85 rupee : €1
31 October 20X5 87 rupee : €1
31 December 20X5 88 rupee: €1
1. At what amount is the property initially recognised by Europe Co on 18 August
20X5?
Answer:
220,000,000/85 = €2,588,235
2. Should the property be retranslated at 31 December 20X5 using the closing rate?
Answer: No
A revalued property is retranslated when a revaluation takes place, using the exchange
rate at that date. No revaluation has taken place in this case as fair value is not
significantly different from carrying amount.
3. What exchange gain or loss arises on settlement of the amount payable to the
property vendor?
Answer:
Initial receivable 20,000,000/85 = €235,294 Settlement amount 20,000/87 = €229,885
Therefore a gain of €5,409
141
IAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
IAS 29 prescribes the method to restate the financial statements of an entity

operating in a hyperinflationary economy
This Standard should be applied by any entity that reports in the currency of a
hyperinflationary economy.
Hyperinflation is not specifically defined, but an indication would be where there is a
cumulative inflation rate of one hundred percent over three years. For most countries
this would not apply at present. However, groups might have a subsidiary in such a
country, which is why this Standard has been included here in this module on group
accounting.
Restatement
IAS 29 requires the financial statements of a hyperinflationary enterprise to be restated
into current measuring units.
If the entity is using historical cost financial statements, this suggests that the
application of a general price index to non-monetary items is required. Even those
entities using current cost accounting would need to re-express certain numbers using
a measuring unit current at the reporting date.
A gain or loss on the net monetary position should be included in profit or loss and
disclosed separately.
142
1. When a European company adopts IFRS Standards for its consolidated statements,
does this change its tax bills?
Answer:
Possibly; in the UK the tax authorities allow IFRS Standards to be used for tax purposes,
however you should remember that tax authorities tax individual companies, not
groups. Therefore an impact is only likely to be felt if group companies' separate
financial statements are prepared in line with IFRS Standards.
2. If a foreign subsidiary is using non-IFRS Standard policies, what happens on

consolidation?
Answer:
The policies have to be adjusted for consolidation, usually by consolidation
adjustments rather than by changing the foreign statutory accounts.
3. What are reclassification adjustments (i.e. recycling)?

Answer:
Reclassification is the practice of reporting an amount in other comprehensive
income in one period and then reversing it out of other comprehensive income and
"recycling" or reporting it again through profit or loss in another period. An example
of this is the recycling of exchange differences on the translation of a foreign subsidiary
that are held in equity through profit or loss when the subsidiary is sold.
4. Do the parties to a joint venture each need to own exactly the same proportion of
shares?
Answer:
No. For example, there is nothing to stop a 30/30/40 or some other arrangement. The
key point is that to have joint control, decisions regarding the entity must require the
unanimous consent of all parties that together control the arrangement.
143
QUICK QUIZ
Question 1
Netley Co purchased the whole of the share capital of Orell Co for $2,500,000 cash.
Shareholders’ funds of the two companies at the date of the purchase were as follows:
Netley Orell
$ $
Share capital 5,000,000 2,000,000
Retained earnings 600,000 250,000
The fair value of Orell Co’s tangible assets exceeded carrying amount by $150,000.
What balance should appear in the consolidated statement of financial position of
Netley Co for goodwill at aquisition?
A. $400,000
B. $100,000
C. $250,000
D. $500,000
Cost $2,500,000
Less Net assets acquired ($2,400,000)

(2,000 + 250 + 150)
Goodwill $100,000
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Question 2
One third of the shares, and also voting rights, in Snow White Co are held by each of
Sneezy Co, Sleepy Co and Dopey Co. Which of the following statements is true?
A. If an agreement has been drawn up specifying that decision making requires at
least 60% of the voting rights Sneezy Co would therefore have joint control.
B. If an agreement has been drawn up specifying that, as a minimum, decision
making requires unanimous agreement by Sleepy Co and Dopey Co, Sneezy Co
would have joint control due to the equal share in voting rights.
C. If an agreement has been drawn up specifying that decision making requires
unanimous consent of Sneezy Co, Sleepy Co and Dopey Co, Sneezy Co would
have joint control.
D. None of the above

In A there is a specified minimum proportion of voting rights required for decision
making (60%) that could be achieved by more than one combination of the three
shareholders. This is not a joint arrangement unless the agreement specifies which
parties are required to agree unanimously. Option B allows decisions to be made
without the agreement of Sneezy Co.
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Question 3
Harwich Co holds 70,000 $1 preference shares in Sall Co.
These are non-voting but rank equally with the ordinary shares in a winding-up.
Felixstowe Co holds 20,000 $1 voting ordinary shares in Sall Co .
The share capital of Sall Co is made up of the following:
100,000 preference shares of $1 each 100,000
30,000 ordinary shares of $1 each 30,000
130,000
Sall Co is a subsidiary undertaking of:

A. Both Harwich Co and Felixstowe Co B
B. Harwich Co
C. Felixstowe Co
D. Neither Harwich Co nor Felixstowe Co

Control is established where an investor has power over an investee, exposure to
variable returns and the ability to use its power to affect the variable returns.
Power is the current ability to direct relevant activities and can be established through
ownership of voting rights.
146
Question 4
What is disclosed in the consolidated statement of financial position of an investor
when the equity method is used to account for associates?
A. Receivables but not share of net assets of the associate.
B. Investment in associate at cost plus /minus the group's share of the associate's
post acquisition retained total comprehensive income.
C. Share of net assets of the associate and receivables.
D. Cost of investment plus goodwill on acquisition less amounts written off but not
receivables.

Investment in associate at cost plus /minus the group's share of the associate's retained
post acquisition profits or losses (less any impairment losses)
Question 5
Inveresk Co has equity shareholdings in three other companies, as shown below, and
has a seat on the board of each
Inveresk Other shareholders
Raby Co 40% No other holdings larger than 10%
Seal Co 30% Another company holds 60% of Seal Co’s equity
Toft Co 15% Two other companies hold respectively 50% and

35% of Toft Co’s equity, and each has a seat on
its board. Inveresk Co exerts significant influence
over Toft Co.
The associated undertakings of Inveresk Co, are:

A. A Raby Co only
B. Raby Co and Seal Co
C. Raby Co and Toft Co
D. Raby Co, Seal Co and Toft Co

Raby Co - over 20%, significant influence demonstrated.
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Seal Co - over 20%, but no significant influence as another party has dominant
influence.
Toft Co - less than 20%, but has a significant influence.
Therefore Raby Co and Toft Co are associated undertakings of Inveresk Co.
Question 6
Frankie Co acquired 90% of Tyler Co on 1 August 20X6 giving rise to goodwill of
$900,000. The goodwill was determined to be impaired by $100,000 at 31 December
20X7 and was written down to $800,000. At 31 December 20X8 the value of goodwill is
estimated to be $950,000.
What is the correct accounting treatment at 31 December 20X8?
A. Goodwill is increased to $950,000 and $100,000 is recognised in profit or loss as
income and $50,000 in other comprehensive income as a revaluation surplus.
B. Goodwill is increased to $950,000 and $150,000 is recognised in profit or loss as
income.
C. Goodwill is increased to $900,000 and $100,000 is recognised in profit or loss as
income.
D. No accounting entries are made because an impairment in relation to goodwill
cannot be reversed.

An impairment loss in respect of goodwill cannot be reversed.
148
MODULE 7: DISCLOSURE STANDARDS
What you will learn
This module discusses the eight IFRS ® Standards that relate to disclosure and
presentation:
• Statement of cash flows - IAS 7
• Operating segments - IFRS 8
• Related party disclosures - IAS 24
• Earnings per share - IAS 33
• Interim financial reporting - IAS 34
• First-time adoption of international financial reporting standards – IFRS 1
• Insurance contracts – IFRS 4
Table of contents
Introduction
IAS 7 Statement of Cash Flows
IFRS 8 Operating Segments
IAS 24 Related Party Disclosures
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 4 Insurance Contracts
Quick Quiz
149
INTRODUCTION
This module concerns a number of IFRS Standards that do not affect the recognition
and measurement of items in the statement of financial position and statement of
profit or loss and other comprehensive income.
However, many of them do affect the presentation of numbers in the main financial
statements. This is particularly obvious for the first Standard (IAS 7) which concerns the
major statement on cash flows. In most other accounting Standards dealt with in the
previous modules there are many disclosure requirements which on the whole have
not been discussed so far in the course, but which you could examine by looking at the
end of each accounting Standard where there is a section on disclosures.
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IAS 7 STATEMENT OF CASH FLOWS
A statement of cash flows is a primary statement required by IAS 1. IAS 7 provides

the format of a statement of cash flows and guidance on classifying cash flows for
presentation purposes.
The statement of cash flows is an ordered list of cash inflows and cash outflows which
totals net cash flow for the period.
Net cash flow for the period should be equal to the movement in cash and cash
equivalents from the start to the end of a period as shown in the statement of financial
position.
Cash equivalents are somewhat vaguely defined as "short-term highly liquid

investments that are readily convertible to known amounts of cash, and ...[carry] an
insignificant risk of changes in value."
(IAS 7 paragraph 6)
Classification of cash flows

Cash flows should be reported classified into three main headings
• Operating activities
• Investing activities
• Financing activities.
▪ Receipts from sales

▪ Receipts from royalties, fees, commissions etc.
Operating activities ▪ Payments to suppliers and employees
▪ Tax payments or refunds
▪ Payments to acquire non-current assets

▪ Proceeds of sale of non-current assets
Investing activities
▪ Cash flows associated with loans made to other
parties
▪ The proceeds of share issues

▪ The proceeds of loan stock issues
Financing activities
▪ Repayments of amounts borrowed
▪ Payments to reduce a lease obligation
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Interest and dividend payments and receipts must be disclosed separately.
Classification must be consistent but is not prescribed by IAS 7.
• Interest payments may be classified as an operating or a financing cash flow. In
the case of capitalised interest, they form part of the cost of an asset and so are
investing cash flows.
• Interest and dividend receipts may be classified as operating or investing cash
flows Dividend payments may be classified as operating or financing cash flows.
152
Cash generated from operations
Cash flows from operating activities include cash generated by operations i.e. from
conducting business. These include sales receipts, purchases and overheads.
Due to the lack of availability of cash flow information, this part of the statement of
cash flows may not be presented as a list of cash inflows and cash outflows. If that is
the case, users are presented with a reconciliation of profit before tax to cash
generated from operations (see below).
Operating cash flows can be calculated either:
▪ Directly, by observing cash receipts and payments, or
▪ Indirectly, by adjusting profit for non-cash items and the effect of accrual
accounting.
Regardless of the method used, the answer will be the same.
The following is an example of the indirect method of calculating cash flows from
operating activities by reconciling the cash flow figure from profit before tax:
Example - the indirect method
Profit before tax X
Add back finance costs X
Add back depreciation X
Decrease / (increase) in trade and other receivables X/(X)
Decrease / (increase) in inventories X/(X)
Increase / (decrease) in trade and other payables X/(X)
Cash generated from operations X
▪ Finance costs are added back as these are not relevant to operating activities
and are dealt with later in the cash flow statement
▪ Depreciation is added back as it is a non-cash expense
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▪ A decrease in receivables means that less customers owe an entity money and
it must therefore have received cash (a positive impact); an increase in
receivables means that more customers owe an entity money and it therefore
has less cash (a negative impact)
▪ A decrease in inventories means that an entity has sold goods and it therefore
has more cash (a positive impact); an increase in inventories means that an
entity has bought goods and so has less cash (a negative impact)
▪ An increase in payables means that an entity has not paid suppliers and so has
more cash (a positive impact); a decrease in payables means that an entity has
paid suppliers and so has less cash (a negative impact).
Additional points
Actual or average exchange rates should be used for cash flows from a foreign
subsidiary.
Non-cash transactions should not be included in the statement of cash flows, but
should be disclosed in the notes.
A disclosure note should show changes during the year in liabilities arising from
financing activities (e.g. bank loans). Changes may include cash transactions and non-
cash movements such as exchange differences.
(IAS 7 paragraph 44A)
154
Classify the following cash flows into operating, financing and investing cash flows by
clicking the relevant button.
155
IFRS 8 OPERATING SEGMENTS
IFRS 8 is mandatory for listed entities. It defines an operating segment, states

criteria to apply to determine whether an operating segment is reportable and
states required disclosures for reportable operating segments.
The disclosure of operating segment information means that an entity's business can
be better understood; for example the different risks it faces and its returns from
different parts of its operations.
Applicability
IFRS 8 is mandatory for companies whose debt or equity instruments are traded in a
public market or companies in the process of issuing securities in a public market.
The Standard is only applicable in the consolidated financial statements in those cases
where parent and consolidated statements are in the same financial report.
Operating segments
"An operating segment is a component of an entity:

▪ That engages in business activities from which it may earn revenues and incur
expenses
▪ Whose operating results are regularly reviewed by the chief operating
decision maker (CODM) of an entity in order to make decisions
▪ For which discrete financial information is available".
A component of an entity is not an operating segment if it cannot earn revenues (e.g. a

cost centre).
IFRS 8 clarifies that the CODM may be a function rather than an individual. It may for
example be the Board of Directors.
Aggregation
Operating segments with similar economic characteristics may be aggregated for the
purpose of applying the Standard.
Reportable operating segments
An operating segment is reportable if it has a segment total of 10% of more of:
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The total external revenue of all reportable operating segments must represent at
least 75% of the entity's external revenue. If this is not the case, additional segments
that do not meet the '10% test' must be designated as reportable.
Disclosure requirements are split into 4 types:
▪ Factors used to identify reportable segments

General
▪ Types of products and services from which each segment
information
derives revenues.
▪ A measure of profit or loss for each reportable segment

▪ Specific amounts included in this measure (e.g. internal
Information and external revenues, interest and income tax)
about profit or ▪ A measure of total assets and liabilities for each segment
loss, assets and only if these amounts are provided to the CODM
liabilities ▪ Specific amounts included in this measure (e.g.
investments in associates and additions to non-current
assets
Of each of the following items for reportable segments to entity

reported figure:
▪ Revenue
Reconciliations ▪ Profit or loss
▪ Assets (if disclosed)
▪ Liabilities (if disclosed)
▪ Other material items.
▪ External revenue by product and service

▪ External revenue by geographical area (country of
Entity wide
domicile/ other countries)
disclosures
▪ Non-current assets by geographical are (country of
domicile / other countries
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IAS 24 RELATED PARTY DISCLOSURES
IAS 24 defines related parties and prescribes the required disclosures. It provides
information to allow investors to assess the stewardship of the directors.
Definitions are key to IAS 24; especially the definition of a related party. A party that
is related to a reporting entity may be an individual or another reporting entity:
Individuals
a. A person who has control or joint control over the reporting entity
b. A person who has significant influence over the reporting entity
c. A member of key management personnel of the reporting entity or its parent
d. A close member of family of any person mentioned in a, b or c.
Note that the definitions of key management personnel and close family members are
not definitive:
▪ Key management personnel includes, but is not restricted to, directors
▪ Close family members include, but are not restricted to, spouses, domestic
partners and dependants.
Therefore judgement must be applied when determining whether an individual is
related to a reporting entity.
Reporting entities that are related
a. Members of the same group
b. Associates or joint ventures and their parents (or companies within the same
group as their parent)
c. Two joint ventures of the same third party
d. An associate and a joint venture of the same parent entity
e. A reporting entity and the post-employment benefit plan for its employees
f. An entity that is controlled or jointly controlled by an individual and an entity
that is a related party of the same individual
g. An entity that is controlled or jointly controlled by an individual and another
entity that the same individual has significant influence over or is key
management personnel of
h. An entity and an entity that provides it with key management personnel
services.
158
Despite this extensive definition, IAS 24 is clear that substance prevails and therefore
although a relationship may not meet the stated definition, it may be a related party
relationship.
(IAS 24 paragraph 9, 10)
The following are not related parties:
▪ Two entities simply because they have a director in common
▪ Two joint venturers simply because they share control of a joint venture
▪ Providers of finance, trade unions, public utilities and government departments
that do not control, jointly control or significantly influence an entity
▪ Customers and suppliers with whom an entity transacts a significant volume of
business.
Related party transactions are transfers of resources, services, obligations between
related parties, regardless of whether a price is charged.
Disclosure
The disclosure requirements of the Standard relate to three areas:
Parent-subsidiary Name of parent and ultimate controlling party, regardless of

relationship whether transactions have taken place
Totals of share-based payments, short-term, post-

Key management
employment, other long term and termination benefits paid
personnel
to key management personnel.
Amount of transactions in the period, amount outstanding at

Related party the period end, provisions for doubtful debts recognised and
transactions expense for irrecoverable debts for each type of related
party.
Note that related party transactions and outstanding balances with other entities in
a group are to be disclosed in an entity's financial statements. However, no intragroup
transactions and balances are disclosed in the consolidated financial statements as they
are eliminated.
Also note that substantiation is required if an entity discloses that related party
transactions were made on an arm's length basis.
(IAS 24 paragraphs 13, 17, 18, 19, 23)
159
Government related and state-controlled entities
The IAS 24 disclosure requirements do not apply to transactions between a reporting
entity and:
▪ A government that has control, joint control or significant influence over the
entity and
▪ Another entity that is related to the reporting entity because the same
government controls, jointly controls or significantly influences both.
Hemmens Co has three directors, Mr A, Mr B and Mr C. Mr A is also a director of Lilley
Co. Mr C's wife is a director of one of Hemmens Co's suppliers, Stead Co. Mr B's best
friend, Mr D jointly controls another of Hemmens Co's suppliers, Preece Co together
with Mr E. Hemmens Co has a subsidiary company, Knowles Co.
Identify which of the following are related parties of Hemmens Co. by clicking the
relevant button.
160
161
IAS 33 EARNINGS PER SHARE
IAS 33 is mandatory for entities with publicly traded securities. Other companies
that choose to present EPS must also apply IAS 33.
Basic earnings per share (EPS)

Calculated as:
Profit / (loss) attributable to ordinary shareholders
Weighted average number of ordinary shares
The profit attributable to ordinary shareholders is profit after tax:
▪ Attributable to the owners of the parent and
▪ After deducting preference share dividends that are not included within finance
costs (i.e. irredeemable preference shares).
Example
Plougher Co has a profit after tax of $2.8million. The company has 300,000 ordinary
shares in issue and $500,000 10% irredeemable preference shares.
The profit attributable to ordinary shareholders is $2.8million - (10% x $500,000) =
$2.75million.
The weighted average number of ordinary shares is calculated by:

• Pro-rating the number of shares outstanding where there have been share
issues in the period
• Adjusting any shares in issue before a bonus issue by a bonus fraction
• Adjusting any shares in issue before a rights issue by a bonus fraction.
The bonus fraction for a bonus issue is:
Number of shares in issue post bonus issue

Number of sharehs in issue pre bonus issue
The bonus fraction for a rights issue is:

Pre rights issue price of shares
Theoretical ex-rights price (TERP)
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The Theoretical ex-rights price (TERP) is calculated as:
Total market value of shares pre rights issue + proceeds of rights issue
Number of shares post rights issue
Example
A company reports a post tax profit of $300 million for the year ended 31 December
20X4. On 1 January 20X4 the company has 50 million shares in issue. On 1 March
20X4 there was a bonus issue of 1 new share for every 5 outstanding.
Weighted average number of shares is: 50 million x 6/5 = 60 million
Therefore basic EPS is: $300 million / 60 million = $5.00
Diluted earnings per share

Diluted earnings per share is calculated as:
Profit for basic EPS adjusted for effect of dilutive potential ordinary shares
Number of shares for basic EPS adjusted for dilutive potential ordinary shares
Potential ordinary shares are dilutive when their conversion would decrease net profit
per share.
Potential ordinary shares include options, convertible instruments (e.g. loan stock or
preference shares) and contingently issuable shares.
Where there are a number of groups of potential ordinary shares in issue, the effects
of these are added into the DEPS calculation one by one, starting with most dilutive.
Diluted EPS is the lowest EPS calculated at any stage.
Example - diluted earnings per share

A company has basic earnings per share of 40 cents based on profits of $2million for
the year ended 31 December 20X5 and 5 million ordinary shares in issue at that date.
The company also has in issue at that date $4million convertible loan stock which is
convertible into 400,000 ordinary shares at a future date at the holders' option. The
finance cost relating to the liability element of the loan stock for the year ended 31
December 20X5 was $120,000. The company pays tax at 20%.
163
What is diluted EPS?
Step 1: Assess whether potential ordinary shares are dilutive:
The post tax interest saving on conversion of the loan stock is: 80% x $120,000 =
$96,000
The net profit per share of the conversion is therefore: $96,000/400,000 new shares
= 24 cents
This is lower than basic EPS of 40 cents and so the potential ordinary shares are
dilutive.
Step 2. Bring the dilutive potential ordinary shares into the calculation of diluted
earnings per share:
$2,000,000 + $96,000 = $2,096,000
5,000,000 + 400,000 = 5,400,000
$2,096,000 / 5,400,000 shares = 38.8 cents
164
IAS 34 INTERIM FINANCIAL REPORTING
IAS 34 does not mandate the preparation of interim financial reports, but it does
prescribe minimum content and recognition and measurement principles for those
entities that do prepare them.
Publicly traded entities are encouraged to:

▪ Provide interim reports at least at the end of the first half of each financial year,
and
▪ Make these reports available not more than 60 days after the end of the interim
period.
Content of an interim report
IAS 34 requires that an interim report contains, as a minimum, condensed versions of
all four primary statements, selected explanatory notes and earnings per share.
An entity may alternatively choose to prepare full financial statements in accordance
with IAS 1 as its interim report.
Comparative figures for previous interim periods and previous full years are required.
Recognition and measurement
The same accounting policies are required in the interim reporting as for annual
reporting, although changes in accounting policy might be made at the interim stage
rather than waiting for a year end. The frequency with which interim reporting is carried
out must not be allowed to affect the annual result.
For interim reporting, the use of year end practices with respect to whether items
should be anticipated or deferred is required. That is, interim reports should largely be
seen as periods in their own right.
Disclosure
Notes to the financial statements must include disclosure of significant events and
transactions since the end of the last full period.
165
IFRS 1 FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS
IFRS 1 sets out the procedures that must be followed when a company applies IFRS
Standards for the first time.
Opening statement of financial position

An IFRS statement of financial position should be prepared at the date of transition
to IFRS Standards.
The date of transition is the beginning of the earliest period for which full comparative
information is prepared. Therefore if IFRS Standards are first adopted in the financial
statements for the year ended 31 December 20X5, the date of transition is 1 January
20X4.
The same accounting policies should apply in the opening IFRS statement of financial
position and throughout all periods presented in the first IFRS financial statements.
They should comply with IFRS Standards effective at the end of the first IFRS reporting
period (in the example above, on 31 December 20X5).
Recognition The reporting entity should eliminate previous GAAP assets and liabilities
from the opening statement of financial position if they do not qualify for recognition
under IFRS Standards.
For example, if the company's previous GAAP had allowed accrual of liabilities for
"general reserves", restructurings, future operating losses, or major overhauls that do
not meet the conditions for recognition as a provision under IAS 37, these should be
eliminated in the opening IFRS statement of financial position.
The company should recognise all assets and liabilities that are required to be
recognised by IFRS Standards even if they were not recognised under previous GAAP.
For example, IAS 37 requires recognition of provisions as liabilities including a
company's obligations for restructurings, onerous contracts, decommissioning, etc.
(IFRS 1 paragraphs 10,11)
Measurement
The company should apply IFRS Standards in measuring all recognised assets and
liabilities. Any adjustments should be recognised directly in retained earnings or equity
at the date of transition to IFRS Standards.
In preparing IFRS estimates retrospectively, the company must use the transactions and
assumptions that had been used to determine previous GAAP estimates in periods
166
before the date of transition to IFRS Standards, provided that those transactions and
assumptions are consistent with IFRS Standards.
Presentation
The company should reclassify previous GAAP opening statement of financial
position items into the appropriate classification according to IFRS Standards. For
example, IAS 10 does not permit classifying dividends declared or proposed after the
reporting date as a liability at that date. If a company had done so in its opening
statement of financial position, then the dividends would need to be reclassified as
retained earnings.
Disclosure
A first-time adopter should make an explicit and unreserved statement that its general
purpose financial statements comply with IFRSs for the first time.
Exceptions and exemptions
There are some important exceptions to the general restatement and measurement
principles set out above.
The following items must not be adjusted retrospectively on adoption of IFRSs:
▪ Derecognition of financial instruments
▪ Hedge accounting
▪ Non-controlling interests
▪ Classification and measurement of financial assets
▪ Impairment of financial assets Embedded derivatives
▪ Government loans.
(IFRS 1 appendix B)
Other optional exemptions are available in respect of several areas of accounting,
including business combinations, share-based payment transactions, leases, foreign
exchange differences, borrowing costs and compound financial instruments.
167
IFRS 4 INSURANCE CONTRACTS
IFRS 4 currently applies to all insurance contracts that an entity issues and to
reinsurance contracts that it holds.
(IFRS 4, paragraph 2)
The Standard was a temporary solution whilst the IASB® developed a new Standard
on insurance contracts; IFRS 17 was issued in 2017 and becomes effective from 1
January 2021, however it may be applied earlier.
An insurance contract is a contract under which the insurer accepts significant

insurance risk from the policyholder by agreeing to compensate the policyholder if a
specified uncertain future event adversely affects them.
A reinsurance contract is an insurance contract issued by one insurer to compensate
another insurer for losses on insurance contracts they have issued.
IFRS 4 prohibits an insurer or reinsurer from making a provision for claims not in
existence at the reporting date. It also:
▪ Prohibits the offsetting of insurance liabilities against reinsurance assets
▪ Requires that insurers and reinsurers test for the adequacy of reported liabilities
▪ Requires that insurers conduct an impairment test for reinsurance assets.
IFRS 4 does not provide guidance on the measurement of an insurance contract. As a
result measurement approaches are varied in practice.
IFRS 17 requires that insurance contracts are initially recognised in the statement of
financial position as a liability, which comprises:
168
The recognised amount is remeasured at each reporting date and the change in value
recognised in profit or loss / OCI:
▪ Revenue for coverage provided in the period
▪ Revenue for release of risk adjustment in the period
▪ Expense for expected claims and other insurance service costs
▪ Expense for change in risk adjustment
▪ Finance expense for unwinding of discount rates
If fulfilment cash flows are negative, a loss is recognised in profit or loss immediately.
169
QUICK QUIZ
Question 1
In accordance with IFRS 8 Operating Segments which of the following must be disclosed
for a reportable segment?
1. Revenue - external
2. Segment profit or loss
3. Total assets
4. Total liabilities.
Question 2
In accordance with IFRS 8 Operating Segments which of the following must be disclosed
by geographical area?
1. Revenue - external
2. Segment result
3. Total assets
4. Non-current assets
170
Question 3
A segment should be treated as reportable under IFRS 8 if it is reported internal and
external revenue is what percentage of the combined revenue (internal and external)?
Question 4
Which of the following is not a potential ordinary share when applying IAS 33 Earnings
per Share?
Question 5
A company, the shares in which currently sell at $75 each, plans to make a rights issue
of one share at $60 for every four existing shares.
What is the theoretical ex-rights price of the shares after the issue?
171
Question 6
On 1 January 20X8 a company has 10m ordinary shares in issue. On 1 April 20X8 it issues
a further 2m shares in a share for share exchange deal.
What is the number of ordinary shares to be used in the basic EPS calculation for the
year ended 31 December 20X8?
Question 7
At 31 December 20X8 a company has 1200 share options in issue. The exercise price of
these options is $5 per share. The average fair value of shares for the period was $6 per
share.
What is the number of shares that will be added to the basic EPS share figure for the
diluted EPS calculation?
Question 8
At 31 December 20X8 a company has in issue convertible loan stock. The liability
element has a carrying amount of $1,000,000 and the effective interest rate is 10%.
Income tax is charged at the rate of 30%.
By what amount will the profit figure increase in the diluted EPS calculation as a result
of including the convertible loan stock?
172
Question 9
Which of the following are related parties of Moor Co?
1. The purchasing director, Adam Webster
2. Lucy Webster, Adam's wife
3. Cake Design Co, a company in which Lucy Webster holds 100% of the shares
4. Boris Davies, who holds a controlling shareholding in Moor Co.
Question 10
How should a gain on the disposal of a non-current asset be shown in a company’s
statement of cash flows and the supporting notes?
173
Question 11
Scaffold Co has increased its bad debts provision by $25,000.
How would this be reflected in Scaffold Co’s statement of cash flows?
Question 12
A company incurs expenditure on development during the year which is capitalised.
How would this expenditure be shown in a statement of cash flows?
174
MODULE 8: PRINCIPAL DIFFERENCES BETWEEN IFRS® STANDARDS &
UK GAAP/US GAAP
What you will learn
This module will deal with the following items:
▪ Principal differences between IFRS Standards and UK GAAP
▪ Principal differences between IFRS Standards and US GAAP
Table of contents
UK GAAP and FRS 102
Principal differences between IFRS Standards and UK GAAP
Exercise - UK GAAP vs. IFRS Standards
Principal differences between IFRS Standards and US GAAP 1
Exercise - US GAAP vs. IFRS Standards
Principal differences between IFRS Standards and US GAAP 2
Frequently asked questions
Quick Quiz
175
UK GAAP AND FRS 102
Financial Reporting Standard 102, The Financial Reporting Standard Applicable in the
UK and the Republic of Ireland (FRS 102), replaced the individual Standards of UK GAAP
on 1 January 2015 (more details regarding the introduction of FRS 102 are provided in
Module 9).
The aim was to reduce the quantity and complexity of rules that existed under UK
GAAP; as FRS 102 explains:
"This FRS [FRS 102] aims to provide entities with succinct financial reporting
requirements. The requirements in this FRS are based on the …IASB’s International
Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)
issued in 2009. The IFRS for SMEs is intended to apply to the general purpose financial
statements of, and other financial reporting by, entities that in many countries are
referred to by a variety of terms including ‘small and medium-sized’, ‘private’ and ‘non-
publicly accountable'".
(FRS 102, page 3)
FRS 102 simplifies the principles of IFRS Standards for recognising and measuring
assets, liabilities, income and expenses. Often, only basic accounting treatments are
required, the number of accounting options offered (in comparison to IFRS Standards)
is reduced and fewer disclosures are required.
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PRINCIPAL DIFFERENCES BETWEEN IFRS STANDARDS AND UK GAAP
The following table highlights the main differences between IFRS Standards and FRS
102.
Topic Main differences between IFRS Standards and FRS 102
Financial IAS 1 formats for the financial statements differ from the UK
statements Companies Act formats used in FRS 102.
presentation
Cash flow No noticeable differences between FRS 102 and IAS 7.

statements
Financial FRS 102 requires that basic financial instruments are

instruments measured at amortised cost. The definition of 'basic' includes
a wide range of debt instruments for which amortised cost
measurement adequately captures the risk associated with
the instrument. More complex financial instruments (and
those designated as such) are measured at fair value through
profit or loss. IFRS 9 requires initial recognition at fair value
and applies more complex rules for subsequent measurement,
resulting in a broader range of financial instruments being
measured at fair value.
Government grants FRS 102 allows either the accruals or performance method of
recognising the grant in the statement of profit or loss. IAS 20
only permits the accruals method
Capitalisation of FRS 102 allows capitalisation or expensing of borrowing costs

borrowing costs whereas IAS 23 requires their capitalisation.
Retirement benefits No noticeable differences between FRS 102 and IAS 19.
Foreign currency No noticeable differences between FRS 102 and IAS 2
Share based Option pricing models are not always applied under FRS 102
payment whereas the IFRS 2 treatment differs.
transactions
Deferred tax FRS 102 has a 'timing differences plus' approach whereas IAS
12 uses an approach based on “temporary differences”
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Intangible assets FRS 102 does not permit assets to have indefinite lives and
other than goodwill they are all subject to amortisation. IAS 38 does permit
intangible assets to have indefinite useful lives but these must
be subject to an annual impairment review
Property, plant and No noticeable differences between FRS 102 and IAS 16.
equipment
Investment Under FRS 102, the fair value of an investment property is

property used if measureable; otherwise cost is used. The cost model
applied to PPE may be applied to investment property rented
to a group member. IAS 40 offers a choice between both these
methods
Impairment of No noticeable differences between FRS 102 and IAS 36

nonfinancial assets
Leases FRS 102 is based on the old leases Standard, IAS 17, and
requires a lessee to classify a lease as either finance or
operating. Only assets acquired under finance leases are
capitalised. IFRS 16 adopts a different model whereby lessees
do not classify a lease as one of two types, and a 'right to use'
asset is recognised for most leases.
Inventories No noticeable differences between FRS 102 and IAS 2.
Provisions and No noticeable differences between FRS 102 and IAS 37

contingencies
Events after the No noticeable differences between FRS 102 and IAS 10.
reporting period
Consolidation There is no remeasurement of pre-existing or retained stakes

under FRS 102.
Business Goodwill is not amortised under IFRS Standards but it is under

combinations FRS 102. Transaction costs are included in the acquisition cost
(including goodwill) under FRS 102 whereas under IFRS Standards they are not.
Contingent consideration is also treated differently depending
on the probability of its payment.
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Discontinued FRS 102 does not deal with assets held for sale.
operations & assets
held for sale
Investment in No noticeable differences between FRS 102 and IAS 28.

associates
Investments in joint No noticeable differences between FRS 102 and IFRS 11.
ventures
Related party No noticeable differences between FRS 102 and IAS 24.
transactions
Specialised There is a choice of measurement at cost or fair value available

activities under FRS 102 whereas IAS 41 requires measurement at fair
(agriculture) value.
Service concession FRS 102 addresses accounting by grantors whereas IFRS

arrangements Standards include a model for operators
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EXERCISE - UK GAAP VS. IFRS STANDARDS
In which three of the following areas is there no noticeable difference between the IFRS
Standards and FRS 102 accounting treatment?
A. Goodwill
B. Provisions
C. Cash flow statements
D. Investment property
E. Grants
F. Investments in associates
The correct answer is:
B Provisions
C Cash flow statements
F Investments in associates
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PRINCIPAL DIFFERENCES BETWEEN IFRS STANDARDS AND US GAAP 1
General approach
▪ US GAAP comprises more “rules-based” standards with specific application
guidance
▪ IFRS Standards are considered to be more “principles-based”.
IAS 1 Presentation of Financial Statements
▪ Unlike IFRS financial statements, US GAAP financial statements are usually
prepared on a going concern basis unless liquidation is imminent
▪ Specific line items and one year comparative financial information are required
by IAS 1
▪ No comparative information required for private companies under US GAAP
(though in practice a single year is often presented). However public companies
are subject to SEC rules and regulations, which require statements of financial
position for the two most recent years and all other statements to cover three
years
▪ SEC registrants are required to present expenses based on function. Under IFRS
Standards, expenses may be presented by nature or function
Extraordinary items
▪ Extraordinary items are prohibited by IAS 1
▪ Extraordinary items are permitted, but are restricted to items that are both
infrequent in occurrence and unusual in nature (thus rare in practice). Negative
goodwill is an extraordinary item under US GAAP.
IAS 2 Inventories
▪ IAS 2 requires that inventories are measured at the lower of cost and net
realisable value
▪ US GAAP requires that inventories are measured at the lower of cost and market
value, being current replacement cost, if LIFO or the retail inventory method is
used. Otherwise inventory is measured at the lower of cost and net realisable
value.
▪ The LIFO (last in first out) assumption is prohibited by IAS 2 but permitted (and
commonly used) by US GAAP
▪ IAS 2 allows previously recognised impairment losses to be reversed up to the
amount of the original impairment loss. US GAAP does not allow the reversal of
write downs of inventory to market value unless it relates to changes in
exchange rates.
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IAS 7 Statement of Cash Flows
Classification of items in the cash flow statement:
▪ Interest received and/or paid may be classified as an operating, investing or
financing activity under IAS 7
▪ Must be classified as an operating activity by US GAAP
▪ IAS 7 allows dividends paid to be classified as operating or financing activities
▪ They must be classified as financing activities under US GAAP.
▪ IFRS requires the classification of components of transactions as cash flows from
operating, investing or financing activities; under US GAAP cash flows are often
classified collectively.
Bank overdrafts:
▪ Included in cash under IAS 7 if they form an integral part of an entity's cash
management
▪ Excluded from cash by US GAAP, and instead treated as short-term financing
IAS 12 Income Taxes
Impact of temporary differences related to inter-company profits:
▪ Deferred tax effect is recognised at the buyer’s tax rate by IAS 12
▪ Deferred tax effect is recognised at the seller’s tax rate, as if the transaction had
not occurred under US GAAP.
Initial recognition exemption:
▪ Deferred tax not recognised for taxable temporary differences that arise from
the initial recognition of certain assets and liabilities under IAS 12
▪ No similar exemption under US GAAP.
Measurement:
▪ Use enacted or “substantively enacted” tax rate under IAS 12
▪ Use enacted tax rate under US GAAP.
Recognition of deferred tax assets:
▪ Amounts are recognised only to the extent it is probable that they will be
realised under IFRS Standards
▪ Recognised in full under US GAAP but valuation allowance reduces asset to the
amount that is more likely than not to be realised.
IAS 16 Property, Plant and Equipment:
▪ IAS 16 offers choice between revaluation and historical cost model. Under US
GAAP revaluation is not permitted
182
▪ US GAAP permits component depreciation but it is not commonly used. Under
IFRS Standards component depreciation must be used if components of an asset
have differing patterns of benefit
▪ Residual values and useful lives must be reviewed annually per IAS 16; under US
GAAP they are reviewed when events or changes in circumstances indicate they
are no longer appropriate.
IAS 19 Employee Benefits:

▪ Under IFRS Standards, actuarial gains and losses must be recognised
immediately in other comprehensive income; under US GAAP they may be
recognised immediately in profit or loss or deferred and subsequently amortised
to profit or loss.
IAS 20 Government Grants
There is no specific US GAAP guidance on accounting for grants awarded by a
government and its bodies.
IAS 27 Separate Financial Statements Basis for consolidation is different:
▪ Power to control is key under IFRS 10 (defined as exposure or rights to variable
returns from involvement with the investee and ability to affect those returns
through power over the investee)
▪ US GAAP approach depends on the type of entity. For voting interests, entities
generally look to majority voting rights. For variable interest entities (VIE), look
to a risks and rewards model coupled with consideration of which enterprise can
direct the activities of the VIE.
Different accounting policies of parent and subsidiaries:
▪ Must conform to policies under IFRS Standards
▪ No specific requirement to conform to policies under US GAAP. Consolidated
financial statements generally prepared by using uniform accounting policies for
all entities in a group but some exceptions where a subsidiary conforms to
specialised industry accounting principles.
Non-controlling interests:
▪ Under US GAAP, non-controlling interests are measured at full fair value
▪ Under IFRS Standards, there is a choice. The non-controlling interest is either
measured as a proportion of the fair value of the identifiable net assets or at full
fair value. The use of the full fair value option results in full goodwill being
recognised in the consolidated statement of financial position.
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IAS 32 Financial Instruments: Presentation
Classification of compound financial instruments:
▪ Split the instrument into its liability and equity components and measure the
liability at fair value with the equity component representing the residual under
IFRS Standards
▪ Under US GAAP compound financial instruments are not split into equity and
liability components unless certain requirements are met.
IAS 33 Earnings Per Share
▪ Basic and diluted income from continuing operations per share and net profit or
loss per share is disclosed under IFRS Standards
▪ Basic and diluted income from continuing operations, discontinued operations,
extraordinary items, cumulative effect of a change in accounting policy, and net
profit or loss per share are disclosed under US GAAP.
184
EXERCISE - US GAAP VS. IFRS STANDARDS
Select the correct word/phrase from the drop down choices to populate the relevant
fill in the blank spaces and complete the following sentences
If a last in first out flow of inventory is assumed, goods are measured

under US GAAP at the lower of cost and [fill in the blank]
Interest received and/or paid may be classified as an operating,

investing or financing activity under IAS 7. US GAAP requires that
these are classified as [fill in the blank]cash flows.
US GAAP requires that dividends are classified as [fill in the blank]

cash flow.
Under IFRS Standards there is a choice in how non-controlling

interests are measured; under US GAAP they must be measured at
[fill in the blank]
Answer
market value If a last in first out flow of inventory is assumed, goods are measured
under US GAAP at the lower of cost and [market value]
Interest received and/or paid may be classified as an operating,

operating investing or financing activity under IAS 7. US GAAP requires that
these are classified as [operating]cash flows.
financing US GAAP requires that dividends are classified as [financing] cash

flow.
185
Under IFRS Standards there is a choice in how non-controlling
fair value interests are measured; under US GAAP they must be measured at
[fair value]
186
PRINCIPAL DIFFERENCES BETWEEN IFRS STANDARDS AND US GAAP 2
IAS 36 Impairment of Assets

Determining impairment:
▪ Impairment testing performed if indicators exist under IAS 36
▪ Under US GAAP the carrying amount of the asset is compared to the sum of
future undiscounted cash flows generated through use and eventual disposition.
If it is determined that the asset is not recoverable, impairment testing must be
performed.
Measurement of impairment loss:
▪ Based on the difference between carrying amount and recoverable amount (the
higher of the asset’s value-in-use and fair value less costs to sell) under IFRS
Standards
▪ Based on the difference between carrying amount and fair value under US GAAP.
Allocation of goodwill:
▪ Goodwill is allocated to a Cash generating unit (CGU) or group of CGUs under
IFRS Standards
▪ Goodwill is allocated to a reporting unit (an operating segment or one level
below an operating segment) under US GAAP.
Impairment reversal:
▪ Under IFRS Standards subsequent reversal of an impairment loss is required for
all assets, other than goodwill, if certain criteria are met
▪ Under US GAAP impairment reversal is prohibited for all assets to be held and
used.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Recognition criteria:
▪ Both IAS 37 and US GAAP require that a provision is recognised only where a loss
is 'probable'. IAS 37 defines this as 'more likely than not' (which refers to a
probability of over 50%), whereas US GAAP defines it as 'likely', which is widely
interpreted as a probability of more than 70%.
Measurement of provisions:
▪ IAS 37 allows a provision to be discounted to reflect the time value of money
▪ US GAAP allows discounting only in limited cases and specific requirements
apply that differ from IFRS Standards IAS 37 measures a provision at the best
estimate of the obligation. This is typically an expected value where a large
population of items is being measured. Where a single obligation is measured,
187
best estimate should consider the most likely outcome, which may be adjusted
for higher and lower possible outcomes
▪ US GAAP requires that a provision is measured at the most likely outcome;
where there is no single most likely outcome, the minimum amount in the range
of outcomes forms the measurement.
IAS 38 Intangible Assets
Development costs are:
▪ Capitalised if certain criteria are met under IFRS Standards, but
▪ Expensed (except for certain website development costs and certain costs
associated with developing internal use software) under US GAAP.
Revaluation of intangible assets is:
▪ Permitted only if the intangible asset trades in an active market under IFRS
Standards (fairly uncommon)
▪ Revaluation prohibited under US GAAP.
IAS 40 Investment Property
Measurement basis for investment property:
▪ Under IFRS Standards there is an option to use either the historical cost model
or the fair value model (with value changes through profit or loss)
▪ Investment property is not separately defined under US GAAP and so is
accounted for as property, plant and equipment (measured using the historical
cost basis) unless it meets the criteria to be held for sale.
IAS 41 Agriculture
Measurement basis of agricultural crops, livestock, orchards, forests is:
▪ At fair value less costs to sell with changes recognised in profit or loss under IFRS
Standards
▪ Generally at historical cost under US GAAP. However, fair value less costs to sell
is used for harvested crops and livestock held for sale under US GAAP
IFRS 1 First-time Adoption of International Financial Reporting Standards
First time adoption:
▪ General principle is retrospective application of IFRS Standards in force at the
time of adoption
▪ No specific Standard under US GAAP.
IFRS 2 Share Based Payments
188
▪ Under IFRS Standards the fair value of a transaction should be based on the value
of the goods or services received and only on the fair value of the equity
instruments if the fair value of the goods and services cannot be reliably
determined
▪ Under US GAAP either the fair value of (1) the goods or services received, or (2)
the equity instruments is used to value the transaction, whichever is more
reliable
▪ If employee may opt for equity repurchase, liability classification is required
under IFRS Standards, but is not required under US GAAP if employee bears risks
and rewards of equity ownership for at least six months from the date the equity
is issued or vests.
IFRS 3 Business Combinations
▪ Treatment of contingent consideration, contingent liabilities and intangible
assets different in acquisition accounting under US GAAP.
IFRS 11 Joint Arrangements
▪ IFRS Standards define a joint arrangement as an arrangement over which two or
more parties have joint control. Joint arrangements may be 'joint operations' or
'joint ventures'. A joint venture exists where the venturers have rights to the net
assets of the arrangement
▪ US GAAP does not define 'joint arrangement' or 'joint operation'. The definition
of a joint venture refers to a jointly controlled activity conducted with the use of
a legal entity. Joint control is not defined.
• In line with IFRS Standards, US GAAP requires that joint ventures are generally
accounted for using the equity method.
IFRS 15 Revenue from Contracts with Customers
Only minor differences exist relating to:
▪ Collectability thresholds
▪ Interim disclosure requirements
▪ Early application and effective dates
▪ Impairment loss reversal; and
▪ Non-public entity requirements.
IFRS 16 Leases
▪ Under IFRS Standards all leases, other than those for low value assets and those
for less than 12 months, result in a lessee recognising an asset and liability in the
statement of financial position. The asset is depreciated and a finance charge
recognised on the liability
189
▪ US GAAP requires a lessee to classify a lease as an operating or finance lease. An
asset and liability is recognised in both cases, however whilst depreciation and
the finance costs are recognised separately in profit or loss for a finance lease,
they are presented net for an operating lease.
▪ US GAAP does not specifically exclude low value assets from this treatment
190
1. Have the differences between the UK, US and IFRS Standards requirements been
growing or shrinking recently?
2. What is the difference between "incompatible" and "inconsistent"?
Answer:
1. On a number of recent Standard-setting issues, there has been a concerted US/IFRS
Standards or UK/IFRS Standards effort. For example, IAS 33 (earnings per share) was
written jointly with the FASB; and IAS 37 (provisions) was written jointly with the UK's
Accounting Standards Board. Also IAS 12 (income tax) is based closely on the US rules.
The UK influenced the IASB ® on IAS 36 (impairment) and IAS 38 (intangibles). More
recently, IFRS 15 was developed with FASB, which issued a substantially converged US
Standard at the same time. The new UK GAAP Standard, FRS 102, is based on the IFRS
for SMEs ® Standard, so meaning that differences between UK GAAP and IFRS Standards
have reduced in recent years.
2. "Incompatible" means that it is impossible to obey both instructions at the same
time. "Inconsistent" means that the rules allow different choices.
191
QUICK QUIZ
Question 1
When preparing financial statements in accordance with FRS 102 rather than IFRS
Standards, which of the following statements is true?
A. Negative goodwill is released to the statement of profit and loss over 20 years
B. Goodwill is amortised in the statement of profit and loss
C. Goodwill can be revalued upwards after acquisition
D. Goodwill should be measured at fair value
IFRS Standards require that goodwill is subject to an annual impairment review, but FRS
102 requires that it is amortised. Where a reliable estimate of the useful economic life
cannot be made, the useful economic life for amortisation must not exceed ten years.
Question 2
When considering the differences between IFRS Standards and US GAAP which of the
following statements are true?
1. IFRS Standards do not allow the use of extraordinary items; US GAAP does and
includes the recognition of negative goodwill under this heading
2. The LIFO method of inventory valuation is not permitted under IFRS Standards
or US GAAP
3. In the IFRS statement of cash flows, interest received or paid may be classified
under any of the 3 main headings; US GAAP specifies interest as an operating
cash flow.
A. 1 only
B. 2 and 3
C. 1 and 3
D. All of the above
The second statement is false because the LIFO assumption is permitted under US
GAAP
Question 3
When preparing consolidated financial statements, which of the following statements
are true:
1. US GAAP requires that a non-controlling interest in a subsidiary is measured at
full fair value
192
2. IFRS Standards permit a non-controlling interest in a subsidiary to be measured
at full fair value or as a proportion of the fair value of the identifiable net assets
of the acquiree
3. US GAAP requires that joint ventures are generally accounted for using the
equity method.
A. 3 only
B. 1 and 3
C. None of the above
D. All of the above
193
MODULE 9: CURRENT ISSUES IN IFRS® STANDARD
What you will learn
This last module will look at the following items:
▪ Convergence of IFRS ® Standards with US GAAP
▪ Convergence of IFRS Standards with UK GAAP
▪ The work plan of the International Accounting Standards Board (IASB ®, 'the
Board').
Table of contents
The FASB and the future for US financial reporting
The FRC and UK financial reporting
New UK GAAP
Exercise - New UK GAAP
The Board and updating accounting standards
The Board's work plan at 7 November 2018
Course conclusion
Quick Quiz
194
THE FASB AND THE FUTURE FOR US FINANCIAL REPORTING
“In September 2009 the G20 leaders stated 'We call on our international accounting
bodies to redouble their efforts to achieve a single set of high quality, global
accounting standards within the context of their independent standard setting
process, and complete their convergence project by June 2011.'”
After their joint meeting in September 2002, the US Financial Accounting Standards
Board (FASB) and the International Accounting Standards Board (the Board) issued
the Norwalk Agreement in which they each acknowledged their commitment to the
development of high quality, compatible accounting Standards that could be used for
both domestic and crossborder financial reporting. At that meeting, the FASB and the
Board pledged “to use their best efforts to make their existing financial reporting
standards fully compatible as soon as is practicable and to co-ordinate their future work
programmes to ensure that once achieved, compatibility is maintained.”
In 2006 FASB and the Board produced a joint memorandum of understanding (MoU)
outlining the projects that would be addressed as a priority as part of a joint work
programme to achieve convergence. This work was identified as a priority by the G20
leaders in September 2009.
Under the original agreement the aim was to achieve full convergence i.e. a set of
common standards, by June 2011. Following concerns raised regarding the the volume
of draft standards due for issue in a short time, the Board and FASB announced jointly
in 2010 that the scope of the project would be reduced. By June 2011 a converged
solution would be found for all the areas identified by the original MoU, plus for other
issues not in the MoU where a solution was urgently required.
This project was largely completed on time, although the joint standards on revenue
recognition were not finalised until 2014 and a collaboration to develop new standards
for leasing was not completed until 2016.
A long-awaited SEC report released in July 2012 contained no recommendation on
the adoption of IFRS Standards for US public companies, although at this time it was
suggested that the next logical step would be a recommendation on IFRS Standards.
In 2015, the SEC's chief accountant said that he was unlikely to recommend that the
SEC make IFRS Standards mandatory or even suggest that US companies have the
choice of reporting under IFRS Standards. He did however confirm continued support
for the objective of a single set of high-quality accounting standards.
Therefore, despite several years of co-operation between FASB and the Board, it
currently seems unlikely that US companies will adopt IFRS Standards.
195
THE FRC AND UK FINANCIAL REPORTING
The current financial reporting model in the UK is that listed companies (in
accordance with EU regulations) prepare accounts under IFRS Standards, whilst other
companies choose to apply either UK GAAP or IFRS Standards.
The UK Financial Reporting Council (FRC) is committed to eliminating differences
between UK accounting Standards and IFRS Standards. In August 2009, it announced
a draft policy for implementation of the IFRS for SMEs ® Standard in place of the existing
UK GAAP.
In response to public consultation the FRC modified its approach and in late 2012/early
2013 the FRS for Small Entities (FRSSE) was updated and three new Standards were
published:
▪ FRS 100 Application of Financial Reporting Requirements
▪ FRS 101 Reduced Disclosure Framework
▪ FRS 102 The Financial Reporting Standard applicable in the UK and Republic of
Ireland
These new Standards took effect for accounting periods beginning on or after 1 January
2015.The FRC issued three further Standards which form part of new UK GAAP in
2014/2015:
▪ FRS 103 Insurance Contracts
▪ FRS 104 Interim Financial Reporting
▪ FRS 105 The FRS applicable to the Micro-entities Regime
FRS 103 and 104 became effective for accounting periods beginning on or after 1
January 2015 and FRS 105 for accounting periods beginning on or after 1 January 2016.
In changes made in 2015 the FRSSE was withdrawn and instead small entities may use
a new section 1A of FRS 102.
196
FRS 100 outlines the new financial reporting framework and sets out which of the new
Standard(s) should be applied by which companies. Although all companies may apply
IFRS Standards, it is anticipated that most companies will apply Standards as follows:
197
NEW UK GAAP
FRS 101 Reduced Disclosure Framework may be applied to the separate financial
statements of entities that are included in publicly available consolidated financial
statements. The standard cannot be applied to consolidated financial statements. FRS
101 requires that EU-adopted IFRS Standards are applied however with:
▪ Certain amendments to the requirements of IFRS Standards in order to comply
with the Companies Act, and
▪ Exemptions from a number of disclosures required by IFRS Standards.
FRS 102 The Financial Reporting Standard is based upon the IFRS for SMEs Standard
but with some significant modifications. These modifications ensure compliance with
UK company law and also allow inclusion of certain accounting treatments permitted
by full IFRS Standards but not by the IFRS for SMEs Standard. FRS 102 is split into 36
sections and uses terminology from the IFRS Standards such as receivables and
inventory instead of old UK terminology such as debtors and stock. FRS 102 was
amended in 2014 to bring the Standard closer to IFRS 9 in relation to financial
instruments. (See Module 8 for a more detailed comparison). It was further amended
in 2015 to add Section 1A. This is applicable to small entities only. It requires that such
entities apply the recognition and measurement requirements of full FRS 102, however
reduces significantly the necessary disclosures. The first triennial review of FRS 102
resulted in some amendments to the standard in 2018. Most of these were editorial in
nature, and they did not reflect amendments to IFRS as the FRC felt it was important
for FRS 102 to bed in before fundamental changes were made. Future triennial reviews
are likely to amend FRS 102 to reflect relevant new and amended IFRS Standards.
FRS 103 Insurance Contracts provides the specific accounting requirements for entities
that have insurance contracts and are applying FRS 102.
FRS 104 Interim Financial Reporting is based on IAS 34 and provides guidance for those
entities that choose to prepare interim reports. It is intended for use by entities that
apply FRS 102, but may also be used by entities that apply FRS 101.
FRS 105 The FRS applicable to the Micro-entities regime is for use by companies
defined as micro-entities under UK law. It is based on FRS 102, but with certain changes
to reflect the smaller size and more simple nature of micro-entities. For example, the
standard includes no guidance on deferred tax or equity-settled share-based payments,
and removes all accounting policy choices, requiring all assets to be measured based
on historical cost.
198
EXERCISE - NEW UK GAAP
Select which Standard(s) the following UK companies may apply when preparing their
financial statements and which they may not use.
Answer
199
THE BOARD AND UPDATING ACCOUNTING STANDARDS
The Board and the other bodies of the IFRS Foundation are involved in projects to issue
new IFRS Standards and improve existing IAS and IFRS Standards on a continuing basis.
In addition to projects that are initiated as a result of requests from constituents, some
projects are the result of post-implementation reviews of new and revised standards.
Such a review takes place approximately two years after an IFRS Standard has become
mandatory, to ensure that it meets its objectives and is being applied in the intended
manner.
Minor amendments to existing standards are dealt with through the annual
improvements programme. In order to qualify for this programme, an amendment
should clarify or correct existing guidance; it should not deal with a change in principles.
A new cycle of annual improvements is initiated every year and lasts two years. Each
set of proposed amendments is issued in an omnibus exposure draft before being
finalised as amendments to individual standards.
Due process
When amending an existing IFRS Standard or issuing a new or revised IFRS Standard,
the Board follows a six-step due process:
1. Issues are added to the work plan
2. The project is planned, in particular whether it will be a joint project with
another standardsetter
3. A discussion paper may be developed and published
4. An exposure draft is developed and published
5. The final IFRS Standard is developed and published
6. After an IFRS Standard is issued, its practical implementation is monitored.
The issue of a discussion paper is a non-mandatory step in the process, however one is
normally issued on any major new topic to explain the issue and solicit comment from
constituents.
Publication of an exposure draft is a mandatory step in due process; an exposure draft
takes the form of proposed amendments or a proposed IFRS Standard and is the
Board's main vehicle for consulting the public on proposed change. Following the issue
of an exposure draft, the document will be open for comment for a period, during
which interested parties may present their views on the proposals to the Board.
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THE BOARD'S WORK PLAN AT 7 NOVEMBER 2018
Standard-setting projects:
Upcoming Exposure Drafts or Discussion Papers
▪ Rate regulated activities
▪ Management commentary
▪ Primary Financial Statements
Maintenance projects that relate to IFRS Standards:
▪ Accounting Policies and Accounting Estimates (Amendments to IAS 8)
▪ Accounting policy changes (Amendments to IAS 8)
▪ Availability of a refund (Amendments to IFRIC 14)
▪ Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
▪ Costs considered in Assessing whether a Contract is Onerous (Amendments to
IAS 37)
▪ Deferred tax related to assets and liabilities arising from a single transaction
(Amendments to IAS 12)
▪ Disclosure Initiative - Accounting Policies
▪ Disclosure Initiative - Targeted Standards-level Review of Disclosures
▪ Fees in the ’10 per cent’ test for derecognition ( Amendments to IFRS 9)
▪ Improvements to IFRS 8 Operating Segments (Amendments to IFRS 8 and IAS 34)
▪ Lease Incentives (Amendment to Illustrative Example 13 accompanying IFRS 16)
▪ Property, Plant and Equipment: Proceeds before Intended Use (Amendments to
IAS 16)
▪ Subsidiary as a First-time Adopter (amendments to IFRS 1)
▪ Taxation in Fair Value Measurements (Amendments to IAS 41)
▪ Updating a Reference to the Conceptual Framework (Amendments to IFRS 3)
Research projects:
▪ Business Combinations under Common Control
▪ Disclosure Initiative - Principles of Disclosure
▪ Discount Rates
▪ Dynamic Risk Management
▪ Extractive Activities
▪ Financial Instruments with Characteristics of Equity
▪ Goodwill and Impairment
▪ IBOR Reform and the Effects on Financial Reporting
▪ Pension Benefits that Depend on Asset Returns
▪ Post-implementation Review of IFRS 13 Fair Value Measurement
201
Course conclusion
In pursuing its goal of creating a global set of accounting standards, the Board has
come a long way. Many of the largest economies in the world now apply IFRS
Standards, with others planning to adopt, or currently in the process of adopting,
these standards.
It currently seems unlikely that the USA will adopt IFRS Standards. However, in the
future if it were to adopt them, that would really complete the international accounting
jigsaw. The world will watch and wait to see whether the current thinking of the SEC is
reversed.
202
QUICK QUIZ
Question 1
Which of the following statements is true?
A. US public companies may apply IFRS Standards
B. UK public companies may apply IFRS Standards
C. US public companies will all be required to apply IFRS Standards in the future on
a date to be determined by the SEC
D. UK private companies may apply IFRS Standards
S companies may not apply IFRS Standards and UK public companies MUST apply IFRS
Standards.
Question 2
Under what circumstances is a UK entity eligible to use FRS 101 Reduced Disclosure
Framework?
A. If the entity is an unlisted member of a group and is preparing publicly available
consolidated financial statements for that group
B. If the entity is a listed member of a group for which consolidated financial
statements are publicly available and is preparing its separate financial
statements
C. If the entity is an unlisted member of a group for which consolidated financial
statements are publicly available and is preparing its separate financial
statements
D. If the entity is listed and preparing publicly available consolidated financial
statements for that group
Question 3
Which UK entities should apply FRS 103?
A. Entities that have insurance contracts and apply FRS 101
B. Entities that have insurance contracts and apply FRS 102
C. Entities that prepare interim reports and apply FRS 101
D. Entities that prepare interim reports and apply FRS 102
203
204

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Welcome to the Certificate in

International Financial Reporting

The International Accounting Standards Committee was founded in 1973 after a

The list below outlines the standards as they currently exist.

** IFRS 4 is replaced by IFRS 17 for accounting periods beginning on or after 1 January

An important publication is the Conceptual Framework for Financial Reporting (“the

The Conceptual Framework has a number of purposes, including:

Information must be relevant and faithfully represented in order to be useful.

Depending on the reporting entity financial statements may be unconsolidated,

In the statement of financial position, three elements can be found:

▪ “An asset is a present economic resource controlled by the entity as a result of

International accounting guidance exists in the Board's Conceptual Framework, IFRS

In many countries, stock exchange listing requirements or national securities legislation

Publication of the IFRS for SMEs

The Red Book is most applicable to this course.

1. Which national standards are closest to IFRS Standards?

2. Is it necessary to adhere to all requirements of IFRS Standards for financial

3. Which of the following statements is true?

A complete set of financial statements should include:

General features of financial statements:

Financial statements should be prepared on a going concern basis unless management

Structure and content of financial statements:

a. "property, plant and equipment

Additional information should be disclosed either in the statement of financial

▪ "Total comprehensive income for the period

d. Notes to the financial statements

The objective of IFRS 15 is to establish principles in relation to the nature, amount,

IFRS 15 applies a five-step model for recognising and measuring revenue:

1. Step 1: Identify the contract with the customer:

3. Step 3: Determine the transaction price

4. Step 4: Allocate the transaction price to the performance obligations in the

Exercise - IFRS 15 Question 2

IAS 8 deals with:

1. Selection of accounting policies

"Management may also consider the most recent pronouncements of other

Changes in accounting policy

1. Is there a "true and fair override" in IFRS Standards?

2. What is the status of interpretations?

The accounting treatment of assets involves a three-stage process:

IAS 16 defines property plant and equipment (PPE) as:

PPE is recognised if:

(IAS 16 paragraph 15,16)

(IAS 16 paragraph 30,31)

DEBIT Land $100,000

CREDIT OCI (revaluation surplus) $100,000

At December 20X2 the revaluation decrease is accounted for by:

DEBIT OCI (revaluation surplus) $100,000

DEBIT Profit or loss $50,000

CREDIT Land $150,000

“An intangible asset is an identifiable non-monetary asset without physical

(IAS 38 paragraph 8, 54, 57)

(IAS 40 paragraphs 8,9)

(IAS 40 paragraphs 30, 33-35)

An asset should not be measured in the financial statements at an amount in

1. Testing for impairment

(IAS 36 paragraphs 6, 33, 55)

What sort of estimates are involved in impairment tests?