CHAPTER 1: INRODUCTION

1.0 Introduction
International Accounting Standards (IASs) were issued by the antecedent International
Accounting Standards Council (IASC), and endorsed and amended by the International
Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it
considers it appropriate. The international accounting standards (IAS) were an older set of
standards stating how particular types of transactions and other events should be reflected in
financial statements. In the past, international accounting standards were issued by the Board of
the International Accounting Standards Committee (IASC); since 2001, the new set of standards
has been known as the international financial reporting standards (IFRS) and has been issued by
the International Accounting Standards Board (IASB). Although IASC has no authority to require
compliance with its accounting standards, many countries require the financial statements of
publicly-traded companies to be prepared in accordance with IAS.

1.1. Origin of the Study

Being the students of BBA, BUP, we understand the fact that we must think beyond our course
syllabus and thrive through personal study and research. So when we were assigned with the term
paper topic of Summaries of Three IAS Related Articles we became very glad and worried at
the same time. Our beloved Zobaida Khanam Madam has taught us several IAS rules. But
unfortunately all of these known rules were already taken by other groups. So we had to deal with
some unknown IAS rules like IAS 2, IAS 20.

We particularly focused on three articles introduced by CPA Ireland to get all the necessary
information. During the whole process of the preparation of this report, we came across so much
information regarding IAS. These information helped us to understand the related IAS ruled
deeply.

We expect that this report will provide a clear idea about IAS 2, IAS 18 and IAS 20 in the light
of the articles that we choose.

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Thus, we are confident that this report will fulfill the requirements and purpose of the task we
were assigned with for our Introduction to Accounting Standards course.

1.2 Purpose of the Study

This paper seeks to:
Provide an understanding of IAS 2, IAS 18 and IAS 20.
Provide an analysis of the three articles.
Understand the practice of these IAS rules on various sectors.

1.3 Scope of the Study

This paper mainly talks about IAS 2, IAS 18 and IAS 20 in the light of the three articles that we
choose. We didnt collect any extra information regarding these standards from other sources.

1.4 Limitations of the Study

Although we tried our level best to prepare this research the most sincere way, we are still aware
of its limitations and shortcomings.

First of all, all the data based on which we prepared this paper, are from secondary sources. We
could not verify if the information provided here 100% accurate. But we relied mainly on the
three articles from CPA Ireland.

Secondly, we sincerely think we could use more time to finish a term paper on such a broad topic
like International Accounting Standards.

Finally, although we in the final year of our BBA course, we still consider ourselves immature to
write great quality reports. So we might overlook some important aspects of these accounting
standards that might be very crucial in the eyes of the professionals.

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CHAPTER 2: METHODOLOGY
2.0 Research Method
This research study is descriptive in nature. We mainly collected data from the secondary sources
which are the three articles on IAS 2, IAS 18 and IAS 20. As the primary sources the first one
would be the lectures from our madam regarding IAS. We had the opportunity to inquire some
of our seniors to know about IAS. We also talked to some of our friends and relatives who keep
knowledge about IAS. But our main sources of information are secondary, the three articles.

Firstly, we collected the suitable articles that matches our intention and purpose. Then we
discussed among ourselves to choose the most appropriate articles. After that we analyzed the
articles and did almost everything of the rest from those articles.

2.1 Collecting Information

To ensure the dependability and authenticity of this research, we tried to collect data from many
reliable sources. But the source of primary data is very limited. Lectures of our class teachers
were the main source of primary information. We talked to our respected seniors about IAS. We
also talked to some of our friends and relatives who keep knowledge about the stocks, shares,
audits and other related subjects. The secondary data were mainly collected from reports from
reliable websites, especially from the IPA Irelands website. We collected the three articles from
there.
So in short, our:
Primary Sources:
Class Lectures of our respected teachers.
Discussions with seniors, friends and relatives who have knowledge on IAS.

Secondary Sources:
IPA Irelands website.
Different research reports on IAS

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2.2 Organizing the Information
In the course of gathering data, we collected both necessary and unnecessary information. So we
had to organize the information in such a way that let us present only the most useful and
dependable information and expel the unnecessary ones. This enabled us to minimize the size of
this report to the lowest yet serving the purpose of this report perfectly.

2.3 Analyzing of Information

After selecting the articles we had to analyze them thoroughly to find suitable summaries of these
articles. We tried to find out only the key information and we weeded out the unimportant ones.

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CHAPTER 3: IAS
3.1 What is IAS?
International Accounting Standards (IASs) were issued by the antecedent International
Accounting Standards Council (IASC), and endorsed and amended by the International
Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it
considers it appropriate. The Established IAS rules, names, issue dates are given below:

# Name Issued
IAS 1 Presentation of Financial 2007*
Statements
IAS 2 Inventories 2005*
IAS 3 Consolidated Financial 1976
Statements
Superseded in 1989 by IAS 27
and IAS 28
IAS 4 Depreciation Accounting
Withdrawn in 1999
IAS 5 Information to Be Disclosed in 1976
Financial Statements
Superseded by IAS 1 effective 1
July 1998

IAS 6 Accounting Responses to

Changing Prices
Superseded by IAS 15, which
was withdrawn December 2003
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in 2003
Accounting Estimates and
Errors
IAS 9 Accounting for Research and
Development Activities
Superseded by IAS 38 effective
1 July 1999
IAS 10 Events After the Reporting 2003
Period
IAS 11 Construction Contracts 1993
Will be superseded by IFRS 15
as of 1 January 2017
IAS 12 Income Taxes 1996*
IAS 13 Presentation of Current Assets
and Current Liabilities

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 # Name Issued
Superseded by IAS 1 effective 1
July 1998

IAS 14 Segment Reporting 1997

Superseded by IFRS 8 effective
1 January 2009

IAS 15 Information Reflecting the 2003

Effects of Changing Prices
Withdrawn December 2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases 2003*
IAS 18 Revenue 1993*
Will be superseded by IFRS 15
as of 1 January 2017
IAS 19 Employee Benefits (1998) 1998
Superseded by IAS 19 (2011)
effective 1 January 2013
IAS 19 Employee Benefits (2011) 2011*
IAS 20 Accounting for Government 1983
Grants and Disclosure of
Government Assistance
IAS 21 The Effects of Changes in 2003*
Foreign Exchange Rates
IAS 22 Business Combinations 1998*
Superseded by IFRS 3 effective
31 March 2004
IAS 23 Borrowing Costs 2007*
IAS 24 Related Party Disclosures 2009*
IAS 25 Accounting for Investments
Superseded by IAS 39 and IAS
40 effective 2001
IAS 26 Accounting and Reporting by 1987
Retirement Benefit Plans
IAS 27 Separate Financial Statements 2011
(2011)
IAS 27 Consolidated and Separate 2003
Financial Statements
Superseded by IFRS 10, IFRS 12
and IAS 27 (2011) effective 1
January 2013
IAS 28 Investments in Associates and 2011
Joint Ventures (2011)
IAS 28 Investments in Associates 2003

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 # Name Issued
Superseded by IAS 28 (2011)
and IFRS 12 effective 1 January
2013
IAS 29 Financial Reporting in 1989
Hyperinflationary Economies
IAS 30 Disclosures in the Financial 1990
Statements of Banks and
Similar Financial Institutions
Superseded by IFRS 7 effective
1 January 2007
IAS 31 Interests In Joint Ventures 2003*
Superseded by IFRS 11 and IFRS
12 effective 1 January 2013
IAS 32 Financial Instruments: 2003*
Presentation
IAS 33 Earnings Per Share 2003*
IAS 34 Interim Financial Reporting 1998
IAS 35 Discontinuing Operations 1998
Superseded by IFRS 5 effective
1 January 2005
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent 1998
Liabilities and Contingent
Assets
IAS 38 Intangible Assets 2004*
IAS 39 Financial Instruments: 2003*
Recognition and Measurement
Superseded by IFRS 9 where
IFRS 9 is applied
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001
IAS 34 Interim Financial Reporting 1998
IAS 35 Discontinuing Operations 1998
Superseded by IFRS 5 effective
1 January 2005
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent 1998
Liabilities and Contingent
Assets
IAS 38 Intangible Assets 2004*
IAS 39 Financial Instruments: 2003*
Recognition and Measurement
Superseded by IFRS 9 where
IFRS 9 is applied
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001

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3.2 IAS 2: Inventories
Inventories, per paragraph 6 of IAS 2 are assets that are:
a) Held for sale in the ordinary course of business
b) In the process of production for such sale; or
c) In the form of materials or supplies to be consumed in the production process or in the rendering
of services.
Inventories per IAS 2 comprise:
a) Merchandise
b) Production Supplies
c) Materials
d) Work in Progress
e) Finished Goods
In the case of a service provider, inventories include the costs of the service for which the entity
has not yet recognized the related revenue. These costs consist primarily of the labor and other
costs of personnel directly engaged in providing the service, including supervisory personnel and
attributable overheads. Labor and others costs relating to sales and general administrative
personnel are not included but are recognized as expenses in the period in which they are incurred.

Valuation of Inventories:
Inventories are measured at the lower of-
a) Cost
Or
b) Net Realizable Value (NRV)

Each item of inventory is valued separately.

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Allowable Costs per IAS 2

Per paragraph 10 of IAS 2, the cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and
condition.

a) Costs of purchase comprise purchase price, import duties and other taxes and transport,
handling and other costs directly attributable to the acquisition of finished goods, materials and
services, less trade discounts, rebates and other similar items

b) Costs of conversion include:

i) Costs which are directly related to units of production i.e. direct labour, direct expenses
and sub-contracted work

ii) Systematic allocation of fixed and variable production overheads incurred in

converting materials into finished goods

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c) Other costs can be included in the cost of inventories to the extent incurred in bringing the
inventories to their present location and condition i.e. non-production overheads of designing a
product for a specific customer.

Paragraph 16 of IAS 2 outlines examples of costs which are excluded from the cost of inventories
and instead recognized as expenses in the period in which they are incurred i.e.

a) Abnormal amounts of wasted materials, labor or other production costs;

b) Storage costs unless these costs are necessary in the production process before a further
production stage;

c) Administrative overheads that do not contribute to bringing inventories to their present location
and condition; and

d) Selling costs.

Techniques for the Measurement of Cost

Estimation techniques may be used for convenience if the results approximate to actual costs.
Examples of potential estimation methods include:

a) Standard Cost: Cost is based on normal levels of materials and supplies, labor efficiency and
capacity utilization. They are regularly reviewed and revised where necessary

b) Retail Method: Cost is determined by reducing the sales value of the inventory by the
appropriate percentage gross margin. The percentage used takes into consideration inventory that
has been marked down to below its original selling price. This method is often used in the retail
industry for measuring inventories of rapidly changing items that have similar margins.

Example 2

Bacon Timothy (BT) is a new luxury retail company located in Grafton Street in Dublin. Its
accountant previously worked abroad and is not familiar with international financial reporting
standards and has asked you, the trainee accountant, to give advice on the accounting treatment
necessary for the following items;

a) One of BTs product lines is beauty products, particularly cosmetics such as lipsticks,
moisturizers and compact make-up kits. BT sells hundreds of different brands of these products.
Each product is quite similar, is purchased at similar prices and has a short lifecycle before a new
similar product is introduced. The point of sale and inventory system in BT is not yet fully
functioning in this department. The sales manager of the cosmetic department is unsure of the

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cost of each product but is confident of the selling price and has reliably informed you that BT,
on average, make a gross margin of 65% on each line.

b) BT also sells handbags. BT manufactures their own handbags as they wish to be assured of
the quality and craftsmanship which goes into each handbag. The handbags are manufactured in
the UK in the head office factory which has made handbags for the last fifty years. Normally,
BT manufactures 100,000 handbags a year in their handbag division which uses 15% of the space
and overheads of the head office factory. The division employs ten people and is seen as being
an efficient division within the overall company.

In accordance with IAS 2 - Inventories, explain how the items referred to in a) and b) should be
measured

Solution Example 2

The retail method can be used for measuring inventories of the beauty products. The cost of the
inventory is determined by taking the selling price of the cosmetics and reducing it by the gross
margin of 65% to arrive at the cost.

The handbags can be measured using standard cost especially if the results approximate cost.
Given that BT has the information reliably on hand in relation to direct materials, direct labour,
direct expenses and overheads, it would be the best method to use to arrive at the cost of
inventories.

Cost Formulas

Per paragraph 23 of IAS 2, the cost of inventories of items that are not ordinarily interchangeable
and goods or services produced and segregated for specific projects shall be assigned by using
specific identification of their individual costs.

If various batches of inventories have been purchased at different times during the year and at
different prices, it may be impossible to determine precisely which items are still held at the year-
end and therefore, what the actual purchase cost of the goods was.

In such circumstances, the following estimate methods are allowed under IAS 2;

a) FIFO (First In First Out)

The calculation of the cost of inventories is on the basis that the quantities in hand represent the
latest purchases or production and those items of inventory that were purchased or produced first
are sold first.

OR

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 b) Weighted Average Cost

The calculation of the cost of inventories is determined by using a weighted average price
computed by dividing the total cost of items by the total number of such items. The price is
recalculated on a periodic basis or as each additional shipment is received and items taken out of
inventory are removed at the prevailing weighted average cost

The use of LIFO (Last in First Out) is not permitted.

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Net Realizable Value

This is the estimated selling price in the ordinary course of business less:

a) Estimated costs of completion

b) Estimated costs necessary to make the sale i.e. marketing, selling and distribution costs

Estimates of NRV are based on the most reliable evidence available at the time the estimates are
made of the amount the inventories are expected to realize. These estimates take into
consideration fluctuations of price or cost directly relating to events occurring after the end of the
period to the extent that such events confirm conditions existing at the end of the period.

A new assessment is made of net realizable value in each subsequent period. When the
circumstances that previously caused inventories to be written down below cost no longer exist
or when there is clear evidence of an increase in net realizable value because of changed economic
circumstances, the amount of the write down is reversed (i.e. the reversal is limited to the amount
of the original write down) so that the new carrying amount is the lower of the cost and the revised
net realizable value.

NRV < Cost

The principal situations in which net realizable value is likely to be less than cost is where there
has been;

a) An increase in costs or a fall in selling price

b) Physical deterioration of inventories

c) Obsolescence of Products

d) A decision as part of a companys marketing strategy to manufacture and sell products at a loss

e) Errors in production or purchasing

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Example 4

Inventory at 31 December is 146,000. This includes obsolete inventory costing 4,240 which
will be given away free to a local childrens charity.

Example 5

Ramona Limiteds year-end inventory amounted to 142,800 valued at cost. Included in this
amount is some timber garden furniture which has been damaged by a forklift and is beyond
repair. The cost of this damaged inventory was 4,650. Ramona limited sold it to a local wood
chip company for 1,200 and incurred transport costs of 170.

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Disclosure

Per paragraph 36, an entity shall disclose:

a) The accounting policies adopted in measuring inventories, including the cost formula used;

b) The total carrying amount of inventories and the carrying amount in classifications appropriate
to the entity;

c) The carrying amount of inventories carried at fair value less costs to sell

d) The amount of inventories recognized as an expense during the period;

e) The amount of any write down of inventories recognized as an expense in the period in
accordance with paragraph 34;

f) The amount of any reversal of any write down that is recognized as a reduction in the amount
of inventories recognized as expense in the period in accordance with paragraph 34;

g) The circumstances or events that led to the reversal of a write down of inventories in
accordance with paragraph 34; and

h) The carrying amount of inventories pledged as security for liabilities.

Paragraph 34 states that when inventories are sold, the carrying amount of those inventories shall
be recognized as an expense in the period in which the related revenue is recognized. The amount
of any write down of inventories to net realizable value and all losses of inventories shall be
recognized as an expense in the period the write down or loss occurs. The amount of any reversal
of any write down of inventories, arising from an increase in net realizable value, shall be
recognized as a reduction in the amount of inventories recognized as an expense in the period in
which the reversal occurs.

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3.3 IAS 18: Revenue
IAS 18 prescribes the accounting treatment of revenue recognition in common types of
transaction. Generally, revenue should be recognized when it is probable that future economic
benefits will flow to the enterprise and that these benefits can be measured reliably. Income, as
defined by the IASBs Framework, includes both revenues and gains. IAS 18 covers revenues
from the sale of goods, rendering of services and use by others of entity assets yielding interest,
royalties and dividends. The standard explicitly excludes various streams of revenue arising from
leases, insurance contracts, changes in value of financial instruments or other current assets,
natural increases in agricultural assets and mineral ore extraction.

Measurement
When a transaction takes place, the amount of revenue is usually decided by the agreement
between the buyer and seller. The revenue, however, should be measured at the fair value, of the
consideration received or receivable. The fair value will take into account any trade discounts and
volume rebates allowed by the seller. In straightforward situations the requirement to measure
revenue at fair value provides few problems. So sales on credit terms of thirty days will be
measured at amounts receivable in thirty days net of all sales allowances such as quantity
discounts. Normally, it will be possible to look at each transaction as a whole. Sometimes,
however, transactions are more complex, and it may be necessary to break down a transaction
into its component parts. For example, a particular sale may include the transfer of goods and
provision of future maintenance (servicing), the revenue for which should be deferred over the
period the maintenance is to be performed.

Sale of goods
Revenue should only be recognized when all of the following conditions are satisfied:
The entity has transferred the significant risks and rewards of ownership of the goods to
the buyer;
The seller no longer has management involvement or effective control over the goods;
The amount of revenue can be measured reliably

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 It is probable that the economic benefits associated with the transaction will flow to the
entity; and
The costs incurred in respect of the transaction can be measured reliably.

It may be the case that the seller retains only an insignificant risk of ownership and for the sale
and revenue to be recognized. The main example here is where the seller retains title only to
ensure collection of what is owed on the goods. This is a common commercial situation, and
when it arises the revenue should be recognized on the date of sale. Furthermore, the probability
of the entity receiving the revenue must be assessed. For example, in the majority of cases revenue
in relation to credit sales is recognized before payment is received. However, where collectability
is doubtful and recovery is not probable, then the amount should be recognized as an expense and
not an adjustment to revenue previously recognized. Finally, matching should take place, i.e.
the revenue and expenses relating to the same transaction should be recognized at the same time.
It is normally easy to estimate expenses at date of sale (e.g. warranty costs, shipment costs, etc.).

Example 1
Cambridge Ltd publishes a monthly magazine, which is sold for 4 per issue with costs of 2 per
issue to produce. Cambridge Ltd received 60,000 in annual subscriptions and had produced four
issues by the year end of 31 January 2013.

In accordance with IAS 18 Revenue what revenue in relation to the magazines should be
recognized by Cambridge Ltd for the year ended 31 January 2013?

Revenue for the magazines should be recognized over the period in which the magazines are
dispatched, provided the items are of similar value in each time period. The revenue recognized
in the year ended 31 January 2013 is therefore 60,000 x 4/12 = 20,000

In some sectors of the retail industry it is common practice to provide interest-free credit to
customers in order to encourage sales of, for example, new cars. Where an extended period of
credit is offered, the revenue receivable has two separate elements:

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 The fair value of the goods on date of sales (cash selling price)
Financing income.
In order to separate these two elements the future receipts are discounted to present value at an
imputed interest rate.

Example 2
A car retailer sells new cars by requiring a 20% deposit followed by no further payments until the
full balance is due after two years. The price of cars is calculated using 10% per annum finance
charge. On 1 January 2013 a car was sold to a customer for 30,000.
How should the revenue be recognized in the year ended 31 December 2013 and what should the
carrying amount of the customer receivable be on that date?

Rendering of services
When the outcome of a transaction involving the rendering of services can be estimated reliably,
the associated revenue should be recognized by reference to the stage of completion of the
transaction at the end of the reporting period. The outcome of a transaction can be measured
reliably when all of the following conditions are met:
The amount of revenue can be measured reliably;
It is probable that economic benefits associated with the transaction will flow to the entity;
The stage of completion of the transaction at the end of the reporting period can be
measured reliably; and
The costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.

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These recognition criteria are similar to those for sale of goods. However, a key difference is the
need to be able to determine the stage of completion of the transaction. This is particularly
important when the completion of a contract extends beyond more than one reporting period.
Methods of assessing the stage of completion referred to in IAS 18 include: surveys of work
performed; services performed to date as a percentage of total services to be performed; and the
proportion that costs incurred to date bear to the estimated costs of the transaction. In uncertain
situations, when the outcome of the transaction involving the rendering of services cannot be
estimated reliably, IAS 18 recommends a no loss/no gain approach. Revenue is only recognised
to the extent of the expenses recognised that are recoverable. This is more likely during the early
stages of a transaction, but it is still probable that the entity will recover the costs incurred.
Therefore, the revenue recognised in such a period will be equal to the expenses incurred, with
no profit.

Example 3
A company entered into a contract for the provision of services over a two year period. The total
contract price was 300,000 and the company initially expected to earn a profit of 40,000 on the
contract. In the first year costs of 120,000 were incurred and 50% of the work was completed.
The contract did not progress as expected and management was unsure of the ultimate outcome,
but believed that the costs incurred to date would be recovered from the customer.
What revenue should be recognised for the first year of the contract?
As the outcome of the service transaction cannot be estimated reliably, revenue should only be
recognised to the extent that expenses are recoverable from the customer. In this case, contract
revenue of 120,000 should be recognised.

Goods and services provided in one contract

It is often the case that goods and services can be bundled into one transaction. For example a car
dealer may sell new or used cars with one years free servicing. While IAS 18 does not specify
how each component should be measured, general principles require that each component should
be measured at its fair value and recognised as revenue only when it meets the recognition criteria.

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Example 4
A company sells a piece of equipment to a customer on 1 January 2013 for 1.5m. Due to the
specialized nature of the equipment the entity agreed to provide free support service for the next
two years, the cost of which is estimated to be 120,000 in total. The entity has traditionally
earned a gross margin of 20% on such contracts.

Example 5
On 1 April 2013, Christy plc sold security systems to a chain of high street banks for 2,250,000
under a promotional offer. The promotion included free maintenance services for the first two
years. A two year maintenance contract would normally be sold for 500,000, and the list price
of the security systems (including installation) would be 2,500,000. The transaction has been
included in revenue at 2,250,000. Christy plc prepares financial statement for the year ending
30 June 2013.

Explain the required IFRS financial reporting treatment of the above transaction, preparing
relevant calculations and setting out the required adjustments in the form of journal entries.
Christly plc has offered the sale of goods and the service with two years maintenance. In such
cases the components of the package which could be sold separately should be identified and each
should be measured and recognized as if sold separately, unbundled.

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IAS 18 Revenue does not state specifically how each component should be measured, but as only
three month of the maintenance service has been provided, we should only recognize 3/24 of the
maintenance fee as revenue in the current reporting period. The remainder should be treated as
deferred income and recognized as the service is provided.

The sale of goods should be recognized immediately. As the total fair value exceeds the overall
price of the contract, a discount has been provided. As we do not know what has been discounted,
it would seem reasonable to apply the same discount percentage to each separate component. The
discount is 25% on listed prices [i.e. 2,250,000/ (2,500,000 + 500,000) -1].

Disclosure
The following items should be disclosed:
The accounting policies adopted for the recognition of revenue, including the methods
used to determine the stage of completions of transactions involving the rendering of
services.
The amount of each significant category of revenue recognized during the period
including revenue arising from: sale of goods; rendering of services; interest; royalties;
and dividends.
The amount of revenue arising from exchanges of goods or services include in each
significant category of revenue.

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Current developments in relation to IAS 18 Revenue
IAS 18 Revenue has been criticized for being vague, leading to an inconsistency in how it has
been applied in practice. IAS 11 Construction contracts has also been criticized and, in some cases
there has been uncertainty about which standard should be applied. More specifically the
weaknesses in the current standard include:

i. Timing of revenue recognition

Some companies remain uncertain about when they should recognize revenue because of there is
lack of clear and comprehensive guidance in both IAS 18 and IAS 11. This is particularly the case
for goods and services because goods are sold at a point in time whereas services may be provided
over time.

ii. Distinguishing between goods and services

IFRS does not make a clear distinction between goods and services, so some companies may not
be entirely sure whether to account using IAS 18 or IAS 11. Even though construction contracts
are effectively sale of goods, IAS 11 uses the stage of completion method. Under IAS 18,
however, revenue from sale of goods is only recognized when risks and rewards of ownership are
transferred to the customer. Revenue reported could vary considerably depending on which
standard is applied.

iii. Multi-element arrangements

IFRS does not provide guidance on how to deal with transactions that involve the delivery of
more than one good or service. IAS 18 states that in certain situations the revenue recognition
criteria must be applied to separately identifiable components of a transaction. However, it does
not explain the circumstances when a transaction can be broken down into separate components.
An Exposure Draft (ED) was issued in June 2010, following a 2008 discussion paper and re-
issued with some modifications in November 2011. The ED sets out a five stage approach in
relation to revenue recognition and contracts. These steps include; identify the contract with the
customer; identify separate performance obligations; determine the transaction price; allocate the
transaction price to the performance obligations; and, recognize revenue when a performance
obligation is satisfied. These proposals would mean that revenue would only be recognized on

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the transfer of goods or services to customers. Therefore, under the proposal, a company would
only apply the percentage of completion method of revenue recognition only if the company
transfers services to the customer throughout the contract. The proposed standard also provides
guidance on cost. For example, the costs of obtaining a contract (selling and marketing costs)
would be treated as expenses when incurred.

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3.4 IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

Government Grants What are they?

Government grants per paragraph 3 of IAS 20 are assistance by government in the form of
transfers of resources to an entity in return for past or future compliance with certain conditions
relating to the operating activities of the entity.
Grants related to assets are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long term assets.
Grants relating to income are government grants other than those related to assets.
Per paragraph 4, government assistance takes many forms varying both in the nature of the
assistance given and in the conditions which are usually attached to it. The purpose of the
assistance may be to encourage an entity to embark on a course of action which it would not
normally have taken if the assistance was not provided.

Government grants are sometimes called by other names such as subsidies, subventions, or
premiums.

Government grants, including non-monetary grants at fair value shall not be recognised until there
is a reasonable assurance that
a) The entity will comply with the conditions attaching to them; and
b) The grants will be received.

Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled. The manner in which a grant is received does not affect
the accounting method to be adopted in regard to the grant. Thus a grant is accounted for in the
same manner whether it is received in cash or as a reduction of a liability to the government.

Paragraph 12 of IAS 20 states that government grants shall be recognized in profit or loss on a
systematic basis over the periods in which the entity recognizes as expenses the related costs for
which the grants are intended to compensate i.e. if an asset is to be depreciated over ten years,
then the government grant will be amortized to profit or loss over ten years as well.

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Two approaches to accounting for Government Grants
1. Capital Approach
This is where a grant is recognized outside profit or loss usually by crediting deferred income in
liabilities; and

2. Income Approach
This is where a grant is recognized in profit or loss over one or more periods usually as a credit
to other income.

In most cases the periods over which an entity recognizes the costs or expenses related to a
government grant are readily ascertainable. Thus grants in recognition of specific expenses are
recognized in profit or loss in the same period as the relevant expense. Similarly, grants related
to depreciable assets are usually recognized in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognized.

Grants are sometimes received as part of a package of financial or fiscal aids to which a number
of conditions are attached. In such cases, care is needed in identifying the conditions giving rise
to costs and expenses which determine the periods over which the grant will be earned. It may be
appropriate to allocate part of a grant on one basis and part on another.

A government grant may take the form of a transfer of a non-monetary asset, such as land or other
resources, for the use of the entity. In these circumstances it is usual to assess the fair value of the
non-monetary asset and to account for both grant and asset at that fair value. An alternative course
that is sometimes followed is to record both asset and grant at a nominal amount.

Presentation of Grants
Per paragraph 24, government grants related to grants, including non-monetary grants at fair
value, shall be presented in the statement of financial position either by setting up the grant as
deferred income or by deducting the grant in arriving at the carrying amount of the asset.
Two methods of presentation of government assets related to assets are permitted

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a) Recognize the grant as deferred income that is recognized in profit or loss on a systematic basis
over the useful life of the asset.
b) Deducts the grant in calculating the carrying amount of the asset. The grant is recognized in
profit or loss over the life of a depreciable asset as a reduced depreciation expense.

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Grants related to income are presented as a part of profit or loss, either separately or under a
general heading such as 'Other income' or alternatively, they are deducted in reporting the related
expense.

A government grant per paragraph 32 that becomes repayable shall be accounted for as a change
in accounting estimate. Repayment of a grant related to income shall be applied first against any
unamortized deferred credit recognized in respect of the grant and then in profit or loss.
Repayment of a grant related to an asset shall be recognized by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable. The cumulative
additional depreciation that would have been recognized in profit or loss to date in the absence of
the grant shall be recognized immediately in profit or loss.

Disclosure
a) The accounting policy adopted for government grants, including the methods of presentation
adopted in the financial statements;

b) The nature and extent of government grants recognized in the financial statements and an
indication of other forms of government assistance from which the entity has directly benefited;
and

c) Unfulfilled conditions and other contingencies attaching to government assistance that has been
recognized.

Example 1
Ramona Limited received a government grant of 60,000 in relation to the building of an
extension to its buildings which cost 200,000 in total. Ramona Limited paid the net amount out
of its bank account. Ramona Limited believe that the grant should be amortized over twenty
years.

Required: Outline the journal entries in relation to the government grant.

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Example 2
The following issued affect Konas Limited in relation to government grants for the year-ended
31 December 2016.
1. The Irish government decided to set up a development zone in Leitrim and it offered to
compensate businesses for their relocation costs. 30,000 was received by Konas Limited for
relocating.
2. Due to Konas Limited not meeting in full grant conditions, 15,000 of a grant
previously received and credited in full to profit or loss had to be repaid in 2016.

3. 80,000 was received by Konas Limited from the government in relation to the
purchase of equipment. The equipment cost 160,000 and it is expected to be depreciated over
its useful life of eight years with no residual value at the end of the eight years.

Required: Calculate how much of the government grants should be included in the
Statement of Profit or Loss and Other Comprehensive Income and in the Statement of
Financial Position for the year ended 31 December 2016.
Solution Example 2

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Example 3
Mreeu Limited purchased some plant in June 2016 costing 1,600,000. Its useful life is expected
to be ten years and the residual value at the end of its useful will be 100,000. It received a grant
of 30% of the cost of the asset in August 2016 having received government approval before it
purchased the plant. Any grant received becomes repayable if the asset is sold within five years.
Its company policies are to depreciate in full in the year of purchase and none in the year of sale
and to maximize asset values.
Required: Prepare the relevant extracts for the financial statements for the year ended 31
December 2016.

Solution Example 3

Statement of Profit or Loss & Other Comprehensive Income (Extracts)

Other Income
Amortization of Grant (W1) 48,000
Expenses
Depreciation Expense (W2) - 150,000

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4. CONCLUSION
The adoption of International Accounting Standards (IAS) is an example of accounting
standardization among countries with different institutional frameworks and enforcement rules.
IAS, though, create a common language for defining, interpreting and publication of financial
statements in the whole world. Furthermore, their aim is to provide a standardized and coherent
sight of the companies to the shareholders and investors. IAS 2, IAS 18 and IAS 20 are very
important IAS rules. International Financial Reporting Standards, or IFRS, facilitates the
convergence and transparency of accounting practices. This boosts the flow of capital across the
international markets. Investors and other stakeholders find it more convenient to compare their
business performance with other international companies. This makes it easier and cheaper for
them to raise business capital from investors across the globe. Using IFRS frees a business from
the restrictive scope of national-level accounting standards. Financial reports become
automatically acceptable in IFRS-compliant countries, and companies don't need to prepare
alternative sets of financial statements when pursuing business interests in these countries. This
reduces a business's costs of preparing financial statements destined for international audiences.

IFRS stipulations are flexible to both expected and unexpected changes in the global business
environment because they are based on broad principles. The generalized stipulations are
designed to be applicable and accommodative to varying jurisdictional circumstances and
traditions, with minimal interventions of the IASB. For example, the IASB does not recommend
any specific formats for preparing financial statements. This gives a business the discretion of
choosing the presentation format that best suits it and users of its financial reports.

So, we can conclude that the use of IFRS enhances the quality of financial reports because it
leaves little room for undermining the objectives of the set standards. This is unlike country-
specific accounting rules that are susceptible to circumventions. Quality financial reports boost
investor confidence in a business.

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REFERENCES:
[Article: 1] IAS 2: Inventories [www.cpaireland.ie/docs/default-source/Students/Exam-Related-

Articles-2016/f2-fin-acc-ias-2.pdf]

[Article: 2] IAS 18 Revenue: Current Accounting Treatment and New Developments

[www.cpaireland.ie/docs/default-source/Students/exam-related-articles-2014/p2acr-

ias18_article_cpa13.pdf]

[Article: 3] IAS 20: Accounting for Government Grants and Disclosure of Government

Assistance [http://www.cpaireland.ie/docs/default-source/Students/exam-related-articles-

2017/f2-fin-acc-ias-20.pdf]

Other References:

[1] What Are the Benefits of International Accounting Standards?

[http://smallbusiness.chron.com/benefits-international-accounting-standards-74934.html]

[2] International Accounting Standards [https://www.iasplus.com/en/standards/ias]

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