IAS 1 - Presentation of Financial Statements

IAS 1 provides little specific guidance on the presentation of line items in financial
statements, such as the level of detail or number of line items that should be presented in
the financial statements.

Furthermore, IAS 1’s objective is to set out ‘the overall requirements for the presentation of
financial statements, guidelines for their structure and minimum requirements for their
content’.

In doing so, IAS 1 sets out minimum levels of required items in the financial statements by
requiring certain items to be presented on the face of, or in the notes to, the financial
statements and in other required disclosures. The current requirements do not provide a
definition of ‘gross profit’ or ‘operating results’ or many other common subtotals.

The absence of specific requirements arises from the fact that the guidance in IAS 1 relies on
management’s judgement about which additional line items, headings and subtotals: (a) are
relevant to an understanding of the entity’s financial position/financial performance; and (b)
should be presented in a manner which provides relevant, reliable, comparable and
understandable information.

IAS 1 allows entities to include additional line items, amend descriptions and the ordering of
items in order to explain the elements of financial performance due to various activities,
which may differ in frequency and predictability.

Transactions like business combinations may have a significant impact on profit or loss and
these transactions are not necessarily frequent or regular. However, the practice of
presenting non-recurring items may be interpreted as a way to present ‘extraordinary items’
in the financial statements despite the fact that ‘extraordinary items’ are not allowed under
IAS 1. It can also be argued that additional lines and subtotals, as permitted by IAS 1, may
add complexity to the analysis of the financial statements, which may become difficult to
understand if entities use sub-totals and additional headings to isolate the effects of
nonrecurring transactions from classes of expense or income.

IAS 2 – Inventories

Valued at lower of cost and estimated selling price less selling costs (i.e. NRV) for each
separate item or product

The ‘cost’ of inventory includes all costs of getting the item or product to current
location and condition
IAS 7 – Statement of cash flows

Reconciles cash and cash equivalents year-on-year

A cash equivalent is short-term, highly liquid and readily convertible to a known
amount of cash.

Three standard headings

Operating activities
Investing activities
Financing activities.

Cash generated from operations can be derived using the direct method or the indirect
method

The indirect method begins with profit before tax and then adjusts it for non-cash
items, as well as for items that relate to investing or financing activities.

IAS 8 – Accounting policies, changes in accounting estimates and

errors

Accounting policies should be appropriate and relevant, be consistently applied and be
disclosed

Changes in estimates are taken to statement of profit or loss in current and future
periods – e.g. change in depreciation method

Changes in accounting policy and the correction of prior period errors require the
restatement of comparative information and opening reserves

IAS 10 – Events after the reporting period


Definition – those events between the reporting date and date of approval of financial
statements

Adjusting events – those which provide additional evidence of the situation existing at
the SOFP date e.g. insolvency of major debtor notified shortly after the reporting date

Non-adjusting events – those which do not provide evidence of the situation at the SOFP
date e.g. share issue after the reporting date. Disclose only, but may become adjusting
event if going concern basis threatened.

Current Tax

Current tax is the amount of income taxes payable or recoverable in respect of the
taxable profit or loss for a period.

At the period end, an estimated amount is therefore accrued based on the year’s profits

Dr Income statement tax charge

Cr Tax payable

When the tax is actually paid some months later, it is unlikely to be the same amount as
that accrued. An over or under provision is therefore left on the tax payable account.

An overprovision arises where the actual tax paid is less than the estimated tax charge.

This reduces the following year’s tax charge in the income statement.

An under-provision arises where the actual tax paid is more than the estimated charge.

This increases the following year’s tax charge in the income statement.

Deferred Tax

Deferred tax is not a liability to the tax authorities, but rather an accounting adjustment.

It arises because the profit before tax for accounting purposes is not the same amount
as taxable profits for taxation purposes.

This is due to permanent and temporary differences.

Permanent differences are amounts which represent income, or an expense, for
accounting purposes, but are not taxable / allowable for tax purposes e.g. client
entertaining.

Temporary differences are amounts which represent income or an expense for
accounting purposes, and also for tax purposes, but in different periods e.g. depreciation vs
capital allowances.

Deferred tax adjusts for the effects of temporary differences, but not permanent
differences.

Deferred tax should be dealt with by:
1. calculating the temporary difference
2. applying the tax rate to the temporary difference
3. accounting for the resulting deferred tax asset or liability

A temporary difference is calculated by comparing the carrying value of an asset or
liability with its ‘tax base’.

The ‘tax base’ of an asset or liability is the amount attributed to that asset or liability for
tax purposes

If the carrying value > tax base, this is a taxable temporary difference and results in a
deferred tax liability.

If the tax base > carrying value, this is a deductible temporary difference and results in a
deferred tax asset.

The tax rate applied to the temporary difference should be that which is expected to
apply to the period when the asset is realised or the liability is settled, based on tax laws in
place by the reporting date.


The change in a deferred tax asset or liability is accounted for in the financial
statements:

Deferred Tax Liability Deferred Tax Asset

Increase Dr tax charge Dr deferred tax asset
Cr deferred tax liability Cr tax charge
Decrease Dr deferred tax liability Dr tax charge
Cr tax charge Cr deferred tax asset

A deferred tax asset or liability may not be discounted

Where the item to which the deferred tax relates is recorded as part of other
comprehensive income, the deferred tax relating to that item is also recorded as part of
other comprehensive income e.g. revaluations.

IAS 12 notes that it is appropriate to offset deferred tax assets and liabilities in the
statement of financial position as long as:
1. the entity has a legally enforceable right to set off current tax assets and current
tax liabilities
2. the deferred tax assets and liabilities relate to tax levied by the same tax authority.

Specific situations
Situation Explanation
Revaluations Revaluation gains are
recorded in other
comprehensive income and
so any deferred tax arising
on the revaluation must also
be recorded in other
comprehensive income.
Investment properties IAS 12 presumes that the
carrying amount of
investment properties
measured at fair value will
be recovered from a sales
transaction, unless there is
evidence to the contrary.
Treatment
Normally carrying value
exceeds the tax base
temporary difference will
give rise to a deferred tax
liability
Normally carrying value
exceeds the tax base
Temporary difference will
give rise to a deferred tax
liability
Share option schemes Tax relief is not normally
granted until the share
options are exercised.
The amount of tax relief
granted is based on the
intrinsic value of the options
(the difference between the
market price of the shares
and the exercise price of the
option).
Unused tax losses
Fair value adjustments A temporary difference is
created, giving rise to
deferred tax in the
consolidated financial
statements.
Provisions for Upon consolidation
unrealised profit unrealised profits remaining
within the group at the
reporting date must be
eliminated.
This adjustment reduces the
carrying amount of inventory
in the consolidated financial
statements but the tax base
of the inventory remains as
This delayed tax relief means
that equity-settled
sharebased payment
schemes give rise to a
deferred tax asset.
Carrying amount of SBP NIL
Tax Base of SBP (X)
Tax Rate % X
Deferred Tax Asset X
Where the amount of the
estimated future tax
deduction exceeds the
accumulated remuneration
expense, this indicates that
the tax deduction relates
partly to the remuneration
expense and partly to equity.
Dr Deferred tax asset
Cr Equity
Cr Profit or loss
Where an entity has unused
tax losses, IAS 12 allows a
deferred tax asset to be
recognised only to the extent
that it is probable that future
taxable profits will be
available against which the
unused tax losses can be
utilised.
A deferred tax liability must
be recognised in the
consolidated financial
statements.
This creates a deductible
temporary difference,
giving rise to a deferred tax
asset in the consolidated
financial statements.
 its cost in the individual
financial statements of the
purchasing company.

IAS 16- Property, plant and equipment

IAS 16 states that property, plant and equipment are tangible items which:
1. are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
2. are expected to be used during more than one period.
A tangible non-current asset is initially recorded at cost which may include: purchase
price after any trade discounts, transport and handling costs, non-refundable tax such as
import duties, site preparation, installation costs, professional fees, labour costs of the
entity’s own employees (Where asset is self-constructed), borrowing costs, future
dismantling and restoration costs.
Any abnormal costs such as wastage and costs arising from errors do not form part of
the cost of the asset, and must be expensed as incurred
Subsequent expenditure on a non-current asset may be capitalised where it enhances
the economic benefits of the asset in excess of its current standard of performance.
A complex asset is one which is made up of several constituent parts, each with a
different useful life. Each part of the complex asset is depreciated over its useful life and,
after this time, the cost of the replacement part is capitalised.
Where the useful life or residual value of an asset changes, the change is applied on a
prospective basis
A change in the method of depreciation is allowed only where the new method is more
appropriate. The change is applied prospectively
IAS 16 allows non-current assets to be measured using either the cost model or the
revaluation model.
Where the revaluation model is applied, it must be applied consistently to all assets in
the same class, and the valuation must be kept sufficiently up to date so that it is not
significantly different from fair value
An upwards revaluation is credited to other comprehensive income (other than where it
reverses a previous downwards revaluation recognised in the income statement)
A downwards revaluation is charged to the income statement (other than where it
reverses a previous upwards revaluation recognised in other comprehensive income)
Depreciation is charged on a revalued asset as normal, based on a depreciable amount
of valuation less residual value spread over the remaining useful life.
A reserves transfer may be made to transfer the difference between the actual
depreciation charge and the historical cost depreciation charge from the revaluation reserve
to retained earnings
Where a previously revalued asset is disposed of, any balance remaining in the
revaluation reserve relating to this asset is transferred to retained earnings and disclosed in
the statement of changes in equity.
Dismantling Under IAS 16 Property, Plant and Equipment (PPE), the cost of an item
of property, plant and equipment includes the initial estimate of the costs of dismantling
and removing the item and restoring the site on which it is located.
Costs related to major inspection and overhaul are recognised as part of the carrying
amount of property, plant and equipment if they meet the asset recognition criteria in IAS
16 Property, Plant and Equipment. The major overhaul component will then be
depreciated on a straight-line basis over its useful life (i.e. over the period to the next
overhaul) and any remaining carrying amount will be derecognised when the next overhaul
is performed. Costs of the day-to-day servicing of the asset (i.e. routine maintenance) are
expensed as incurred.

IAS 19 - Employee Benefits

Accounting for defined contribution plans is normal accruals accounting, whereby the
employer has an obligation to pay a fixed percentage of an employee’s salary into a pension
plan for their future benefit when they retire.

1. Contributions to a defined contribution plan should be recognised as an expense

in the period they are payable (except to the extent that labour costs may be
included within the cost of assets).
2. Any liability for unpaid contributions that are due as at the end of the period
should be recognized as a liability (accrued expense).
3. Any excess contributions paid should be recognised as an asset (prepaid
expense), but only to the extent that the prepayment will lead to, eg a reduction in
future payments or a cash refund.

Accounting for defined benefit plans requires an employer to make regular

assumptions and estimates to account for the future obligation to pay a retirement benefit
pension, based upon a percentage of final salary at the date of retirement.

Measurement of defined benefit pension assets and liabilities

IAS 19 requires that:

plan assets are measured at their fair value at the end of the reporting period
plan liabilities are measured on an actuarial basis and are discounted to present value
to reflect the time value of money at the end of the reporting period.
It is unlikely that the plan obligation will exactly match the plan assets at any reporting
date; there is likely to be either a net liability or net asset reported at each reporting date.
Note that where there is a net asset, the asset ceiling test may apply which will
restrict the value of the net asset reported to the extent that it is regarded as recoverable in
the form of reduced future contributions and/or refunds from the plan.
A curtailment arises when there is a significant reduction in the number of employees
covered by a plan, which will typically result in employees being made redundant. Any gain
or loss on curtailment is part of the service cost component.
A settlement arises when an entity enters into a transaction to terminate all or part of
the benefits due to one or more employees under a plan. This may arise when an employee
transfers their entitlement from one plan to another, perhaps when they move job from
one employer to another.











Defined benefit plan movement

Net deficit/(asset) brought forward X/(X)

(Obligation bfd – assets bfd)
Net interest component X/(X)
Service cost component X
Contributions into plan (X)
Benefits paid -
Curtailment gain/loss (X)/X
X/(X)
Remeasurement component (bal. fig) X/(X)
Net deficit/(asset) carried forward X/(X)
(Obligation cfd – assets cfd)

Other employee benefits

Other long-term employee
benefits
Account for in similar way
to defined benefit pension
plans
spread cost over service
period
Short-term employee Termination benefits
benefits
Normal accruals Recognise when an
accounting obligation or when related
Cumulating or restructuring costs
noncumulating recognised

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

A grant is recognised in the financial statements only when there is reasonable assurance
that:
1. The entity will comply with the conditions attached to the grant, and
2. The grants will be received
A revenue grant is held as deferred income and released to the income statement over the
period in which the related expenditure is incurred
A capital grant is either :
1. netted off against the cost of the asset with the net amount spread over the asset’s useful
life and charged to the income statement as depreciation; or
2. held as deferred income and released to the income statement over the useful life of the
asset.
Grants which relate to costs already incurred should be recognised in the income statement
in the period in which they become receivable.
A grant in the form of a non-monetary asset may be valued at fair value or a nominal value.
Repayment of government grants should be accounted for as a revision of an accounting
estimate.

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 21 deals with:

the definition of functional and presentation currencies
accounting for individual transactions in a foreign currency
translating the financial statements of a foreign operation.

The functional currency is the currency of the primary economic environment in which the
entity operates.

Factors (primary indicators) in determining its functional currency:

the currency which mainly influences sales prices for goods and services
the currency of the country whose competitive forces and regulations mainly determine
the sales prices of goods and services; and
the currency which mainly influences labour, material and other costs of providing goods
and services.

Secondary factors and group factors:

Additional factors are considered in determining the functional currency of a foreign

operation and whether its functional currency is the same as that of the reporting entity.

a) the autonomy of a foreign operation from the reporting entity

b) the level of transactions between the two
c) whether the foreign operation generates sufficient cash flows to meet its cash needs; and
d) whether its cash flows directly affect those of the reporting entity.

When the functional currency is not obvious, management uses its judgement to
determine the functional currency which most faithfully represents the economic effects of
the underlying transactions, events and conditions.

The presentation currency is defined by IAS 21 as the currency in which the entity
presents its financial statements. This can be different from the functional currency.
Accounting for individual transactions designated in a foreign currency

Transaction must be translated into the functional currency before it is recorded. The
exchange rate used to initially record transactions should be either:
the spot exchange rate on the date the transaction occurred, or
an average rate over a period of time, providing the exchange rate has not fluctuated
significantly.

Cash settlement

The settled amount should be translated into the functional currency using the spot
exchange rate on the settlement date.
Exchange gains or losses on settlement of individual transactions are recognised in profit
or loss in the period in which they arise.
Treatment of year-end balances

Monetary Items Non-Monetary Items

e.g. cash, receivables, payables and loan Non-current assets, inventory, investments
Retranslate using the closing rate Do not retranslate
If carried at FV, FV should be translated on
the date it was determined
Exchange differences arising on retranslation No Gain/Loss
of monetary assets and liabilities must be
recognised in profit or loss

Consolidation of a foreign operation

The method of translation requires monetary and non-monetary assets and liabilities to
be translated at the closing rate, and income and expense items to be translated at the rate
ruling at the date of the transaction or an average rate that approximates to the actual
exchange rates.

All exchange differences relating to the retranslation of a foreign operation’s opening

net assets and goodwill to the closing rate will have been recognised in other
comprehensive income and presented in a separate component of equity.

Overseas loan

The overseas loan should initially be translated into the functional currency using the
historic (spot) rate. The finance cost is translated at the average rate because it
approximates to the actual rate. The cash payment should be translated at the historic
(spot) rate (which, because the payment occurs at the reporting date, is the year-end rate).

A loan is a monetary liability so is retranslated at the reporting date using the closing rate.
Any exchange gain or loss is recognised in profit or loss.

IAS 23 Borrowing Costs

IAS 23 Borrowing Costs requires that borrowing costs to be capitalised if the asset
takes a substantial period of time to be prepared for its intended use or sale.
Borrowing costs should be capitalised during construction and include the costs of funds
borrowed for the purpose of financing the construction of the asset, and general borrowings
which would have been avoided if the expenditure on the asset had not occurred.
Capitalisation of borrowing costs should commence when all of the following apply:
– Expenditure for the asset is being incurred
– Borrowing costs are being incurred
– Activities that are necessary to get the asset ready for use are in progress.
Capitalisation of borrowing costs should cease when substantially all the activities that
are necessary to get the asset ready for use are complete.
Capitalisation of borrowing costs should be suspended during extended periods in
which active development is interrupted.
Where a loan is taken out specifically to finance the construction of an asset, IAS 23 says
that the amount to be capitalised is the interest payable on that loan less income earned on
the temporary investment of the borrowings.
The general borrowing costs are determined by applying a capitalisation rate to the
expenditure on that asset. The capitalisation rate will be the weighted average of the
borrowing costs applicable to the general pool.

IAS 24 Related Party Disclosures

IAS 24 Related Party Disclosures requires an entity’s financial statements to contain the
disclosures necessary to draw attention to the possibility that its financial position and profit
or loss may have been affected by the existence of related parties and by transactions and
outstanding balances with such parties.

A person or a close member of that person’s family is related to a reporting entity if that
person:

(i) has control or joint control over the reporting entity

(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.

An entity is related to a reporting entity if any of the following conditions

apply:

(i) The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others)

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member)

(iii) Both entities are joint ventures of the same third party
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the
third entity

(v) The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself
such a plan, the sponsoring employers are also related to the reporting entity

(vi) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.'

Disclosure of personal guarantees given by directors in respect of borrowings by the
reporting entity should be disclosed in the notes to the financial statements.
IAS 24 deems that parties are not related simply because they have a director or key
manager in common.
Government related entities
1. Government-related entities are defined as entities which are controlled, jointly
controlled or significantly influenced by the government.
2. A reporting entity is exempt from the above disclosures in respect of transactions
and balances that they have with a government that has control, joint control or
significant influence over the reporting entity
3. If this exemption is applied, IAS 24 requires that the following disclosures are made
instead:
details of the government and a description of its relationship with the reporting entity
details of individually significant transactions
an indication of the extent of other transactions that are significant in aggregate.

IAS 27 (revised) – Separate financial statements

In separate (non-consolidated) financial statements, subsidiaries, associates and joint

arrangements can be accounted for:

at cost, or
as a financial instrument, or
using the equity method

IAS 28 Investments in Associates

According IAS 28 Investments in Associates, significant influence is the power to

participate in the financial and operating decisions of the investee but is not control or joint
control over the policies.

Where an investor holds 20% or more of the voting power of the investee, it is presumed
that the investor has significant influence unless it can be clearly demonstrated that this is
not the case.
If the investor holds less than 20% of the voting power of the investee, it is presumed that
the investor does not have significant influence, unless such influence can be clearly
demonstrated.

IAS 28 states that the existence of significant influence by an investor is usually evidenced in
one or more of the following ways:

(i) representation on the board of directors or equivalent governing body of the investee

(ii) participation in the policy-making process

(iii) material transactions between the investor and the investee

(iv) interchange of managerial personnel; or

(v) provision of essential technical information.

IAS 32 - Financial Instruments – Presentation

The fundamental principle of IAS 32 Financial Instruments: Presentation is that a financial

instrument should be classified as either a financial liability or an equity instrument
according to the substance of the contract, not its legal form, and the definitions of financial
liability and equity instrument.

IFRS 7 – Financial Instruments – Disclosures

IFRS 7 provides the disclosure requirements for financial instruments.

The main disclosures required are:

1. Information about the significance of financial instruments for an entity’s financial

position and performance.

2. Information about the nature and extent of risks arising from financial instruments.

IFRS 9 - Financial Instruments

Financial liabilities classified as:


Fair value through profit or loss - this includes derivatives for speculation and
financial liabilities held for trading

Note: - IFRS 9 requires gains and losses on financial liabilities designated to be measured at
fair value through profit or loss to be split into the amount of change in the fair value which
is attributable to changes in the credit risk of the liability, which is shown in other
comprehensive income, and the remaining amount of change in the fair value of the liability
which is shown in profit or loss.
IFRS 9 allows the recognition of the full amount of change in the fair value in the profit or
loss only if the recognition of changes in the liability’s credit risk in other comprehensive
income would create an accounting mismatch in profit or loss.

Amounts presented in other comprehensive income are not subsequently transferred to

profit or loss, and the entity may only transfer the cumulative gain or loss within equity.

Amortised cost – for all other financial liabilities

Note – entities can opt to measure liabilities at fair value through profit or loss to
eliminate or reduce an accounting mismatch

Split compound instruments (those with characteristics of liabilities and equity) into
liability and equity elements at inception.

Liability = present value of repayments

Equity = cash proceeds less liability

Classification of financial assets:

Investments in shares can be categorised as:

Fair value through profit or loss

Fair value through other comprehensive income – as long as they are not for short-term
trade and have been designated as such

Investments in debt can be categorised as


Amortised cost – if the business model is to hold to maturity

Fair value through other comprehensive income – if the business model involves
holding financial assets to maturity and selling them

Fair value through profit or loss if business model is to sell or if the contractual cash
flow characteristics test is failed

Impairments of financial assets:


A loss allowance should be recognised for all investments in debt measured at
amortised cost or fair value through other comprehensive income

If credit risk has not increased significantly, the loss allowance should be equal to 12
month expected credit losses.

If credit risk has increased significantly, or for trade receivables, the loss allowance
should be equal to lifetime expected credit losses

If the asset is credit impaired, the loss allowance should equal the difference between
the asset’s gross carrying amount and the present value of the expected future cash receipts

IFRS 9 says that a credit loss is the difference between the contractual cash flows from
an asset and what the entity expects to receive. These credit losses should be discounted to
present value and weighted by the risks of a default occurring.

IFRS 9 defines lifetime losses as ‘the expected credit losses that arise from all
possible default events over the life of the instrument’

Hedge accounting criteria IFRS 9 Financial Instruments permits hedge accounting

provided that the hedging relationship meets the following criteria:

– The hedging relationship consists only of eligible hedging instruments and hedged
items
– At the inception of the hedge there must be formal documentation identifying the
hedged item and the hedging instrument
– The hedging relationship meets all effectiveness requirements.

Hedge effectiveness IFRS 9 requires hedge effectiveness to be assessed

prospectively. The hedge effectiveness requirements are as follows:

‘There must be an economic relationship between the hedged item and the hedging
instrument

The effect of credit risk must not dominate the value changes that result from that
economic relationship

The hedge ratio of the hedging relationship is the same as that resulting from the
quantity of the hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that quantity of hedged item’.

Fair value hedge A fair value hedge is a ‘hedge of the exposure to changes in fair
value of a recognised asset or liability or firm commitment to buy that is attributable to a
particular risk and could affect profit or loss (or other comprehensive income if the hedged
item is an investment in equity that has been designated to be measured at fair value
though other comprehensive income (FVOCI))’.

As long as the hedged item is not an investment in equity measured at FVOCI, then the
gain or loss from the change in fair value of the hedging instrument is recognised
immediately in profit or loss.

At the same time the carrying amount of the hedged item is adjusted for the
corresponding gain or loss with respect to the hedged risk, which is also recognised
immediately in profit or loss.

Cash flow hedge A cash flow hedge is a ‘hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with a recognised asset or liability or
a highly probable forecast transaction, and could affect profit or loss’.

The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in OCI and reclassified to profit or loss when the hedged cash
transaction affects profit or loss.

Embedded derivatives IFRS 9 defines an embedded derivative as ‘a component of

a hybrid instrument that also includes a non-derivative host contract, with the
effect that some of the cash flows of the instrument vary in a way similar to a
stand-alone derivative’.

A foreign currency denominated contract contains an embedded derivative unless it
meets one of the following criteria:
(i) the foreign currency denominated in the contract is that of either party to the
contract,

(ii) the currency of the contract is that in which the related good or service is
routinely denominated in commercial transactions,

(iii) the currency is that commonly used in such contracts in the market in which the
transaction takes place.

Financial guarantee contracts IFRS 9 Financial Instruments says that an entity
should classify all financial liabilities as subsequently measured at amortised cost using the
effective interest method, unless it is a derivative, held for trading, or designated to be
measured at fair value through profit or loss. An entity shall present in profit or loss all gains
and losses on financial guarantee contracts that are designated as at fair value through
profit or loss.

IAS 33 – Earnings per share

Basic EPS = Profit after tax attributable to the parent – irredeemable preference dividends
Weighted average number of equity shares

Consider:

Market issue at full price – calculate the weighted average number of equity shares

Bonus issue– treat as if these had always been in issue and restate the comparative EPS

Rights issue – treat partly as bonus issue and partly as issue at full market price

Diluted EPS – relevant if there is convertible debt or share option schemes

IAS 34 – Interim financial reporting

Interim reports are not mandatory but are recommended

If prepared, interim reports should include:

A condensed statement of financial position with comparatives dated at end of previous
financial year-end.

A condensed statement of profit or loss, plus cumulative for year to date, plus
comparatives

A condensed statement of changes in equity and a statement of cash flows, plus
comparatives for each statement

Selected explanatory notes – including any change in accounting policy or significant
adjustments from interim to annual financial statements
IAS 36 - Impairment of Assets

IAS 36 Impairment of Assets states that an asset is impaired when its carrying amount
will not be recovered from its continuing use or from its sale. An entity must determine at
each reporting date whether there is any indication that an asset is impaired. If an indicator
of impairment exists then the asset’s recoverable amount must be determined and
compared with its carrying amount to assess the amount of any impairment.

An impairment occurs if the carrying amount of an asset is greater than its recoverable
amount.

The recoverable amount is the higher of fair value less costs to sell and value in use.

Fair value is defined in IFRS 13 as the price received when selling an asset in an orderly
transaction between market participants at the measurement date.

Costs to sell are incremental costs directly attributable to the disposal of an asset.

Value in use is the present value of future cash flows from using an asset, including its
eventual disposal.

If the asset has previously been revalued upwards, the impairment is recognised as a
component of other comprehensive income and is debited to the revaluation reserve until
the surplus relating to that asset has been reduced to nil.
The remainder of the impairment loss is recognised in profit or loss.

• The recoverable (impaired) amount of the asset is then depreciated/amortised over its
remaining useful life.

A reversal of an impairment loss is recognised immediately as income in profit or
loss. If the original impairment was charged against the revaluation surplus, it is recognised
as other comprehensive income and credited to the revaluation reserve.
 (i) The reversal must not take the value of the asset above the amount it would
have been if the original impairment had never been recorded. The depreciation
that would have been charged in the meantime must be taken into account.

(ii) The depreciation charge for future periods should be revised to reflect the
changed carrying amount.

Indicators of impairment may arise from either the external environment in which the
entity operates or from within the entity’s own operating environment.

Assets should be tested for impairment at as low a level as possible, at individual asset
level where possible. However, many assets do not generate cash inflows independently
from other assets and such assets will usually be tested within the cash-generating unit
(CGU) to which the asset belongs.
Cash flow projections should be based on reasonable assumptions that represent
management’s best estimate of the range of economic conditions that will exist over the
remaining useful life of the asset.

The discount rate used is the rate, which reflects the specific risks of the asset or CGU.

IAS 37 - Provisions, Contingent Liabilities and Contingent Assets


Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity must
recognize a provision if, and only if:

(i) a present obligation (legal or constructive) has arisen as a result of a past event
(the obligating event),

(ii) payment is probable (‘more likely than not’), and the amount can be estimated
reliably.

An obligating event is an event that creates a legal or constructive obligation and,
therefore, results in an entity having no realistic alternative but to settle the obligation.

If a provision has been discounted to present value, then the discount must be unwound
and presented in finance costs in the statement of profit or loss

At the reporting date, a provision should be reversed if it is no longer probable that an
outflow of economic benefits will be required to settle the obligation.

A contingent liability is defined by IAS 37 as:

a possible obligation that arises from past events and whose existence will be confirmed by
the outcome of uncertain future events which are outside of the control of the entity, or

• a present obligation that arises from past events, but does not meet the criteria for
recognition as a provision.
This is either because an outflow of economic benefits is not probable or (more rarely)
because it is not possible to make a reliable estimate of the obligation.

A contingent liability is disclosed, unless the possibility of a future outflow of economic
benefits is remote.

A contingent asset should not be recognised:

(i) A contingent asset should be disclosed if the inflow of future economic benefits
is at least probable

(ii) If the future inflow of benefits is virtually certain, then it ceases to be a
contingent asset and should be recognised as a normal asset.

Provisions and contingencies: specific situations

Future operating losses IAS 37 says that provisions should not be
recognised for future operating losses.
Onerous contracts If an entity has an onerous contract, a
provision should be recognised for the
present obligation under the contract.
Future repairs to assets Provisions cannot normally be recognised for
the cost of future repairs or replacement
parts.
Environmental provisions A provision is recognised if a past event has
created an obligation to repair
environmental damage
Restructuring According to IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, a
constructive obligation to restructure arises
only when an entity:

(a) Has a detailed formal restructuring plan

identifying at least:

i. the business activities, or part of the

business activities, concerned

ii. the principal locations affected

iii. the location, function and approximate

number of employees who will be
compensated for terminating their services

iv. the expenditure that will be undertaken

v. the implementation date of the plan;

 and, in addition,

(b) Has raised a valid expectation among the

affected parties that it will carry out the
restructuring by starting to implement that
plan or announcing its main features to
those affected by it.
For a plan to be sufficient to give rise to a
constructive obligation when communicated
to those affected by it, its implementation
needs to be planned to begin as soon as
possible and to be completed in a timeframe
that makes significant changes to the plan
unlikely.

IAS 38 Intangible Assets

According to IAS 38, the three critical attributes of an intangible asset are:

(i) Identifiability

(ii) control (power to obtain benefits from the asset)

(iii) future economic benefits (such as revenues or reduced future costs).

(iv) the cost of the asset can be measured reliably.


An intangible asset is identifiable when it is separable or arises from contractual or other
legal rights, regardless of whether those rights are transferable or separable from the entity
or from other rights and obligations.

Measurement

When an intangible asset is initially recognised, it is measured at cost.


After recognition, an entity must choose either the cost model or the revaluation model
for each class of intangible asset.

IAS 38 Intangible Assets states an intangible asset with a finite useful life should be
amortised on a systematic basis over that life.

An asset has an indefinite useful life when there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows. It should not be amortised,
but be subject to an annual impairment review.

A change in amortisation method is adjusted prospectively as a change in estimate
under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

IAS 36 states that an entity should assess at the end of each reporting period whether
there is any indication that an asset may be impaired. If any such indication exists, the entity
should estimate the recoverable amount of the asset.

Research and development expenditure

Research expenditure cannot be recognised as an intangible asset. It should be expensed

out. (although tangible assets used in research should be recognised as plant and
equipment).

IAS 38 says that development expenditure should only be recognised as an intangible
asset if the entity can demonstrate that:

P- the intangible asset will generate future economic benefits

I- the entity intends to complete the intangible asset, and then use it or sell it

R- it has adequate resources to complete the project

A- it has ability to complete the project

T- the project is technically feasible

E- it can reliably measure the expenditure on the project.

IAS 40 - Investment Property


IAS 40 Investment Property relates to 'property (land or buildings) held (by the
owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both'.

On recognition, investment property shall be recognised at cost. The cost of an
investment property comprises its purchase price and any directly attributable expenditure,
such as professional fees for legal services.

After recognition an entity may choose either:


the cost model - held at cost less accumulated depreciation

the fair value model – re-measures its investment properties to fair value each
year, No depreciation is charged, all gains and losses on revaluation are reported in
the statement of profit or loss.

Change from one model to the other is permitted only if this results in a more
appropriate presentation.

Transfers to or from investment property can only be made if there is a change of use.

IAS 41 – Agriculture

Biological assets are living plants and animals


They are Initially valued at fair value less costs to sell

They are revalued to fair value less costs to sell at the reporting date with the
gain or loss in profit or loss.





Agricultural produce is the harvested product on a biological asset

It is initially measured at fair value less costs to sell.

It is subsequently accounted for under IAS 2 Inventories.

IFRS 1 – First-time adoption of International Financial Reporting

Standards

When adopting IFRS Standards for the first time, an opening SFP must be produced at
the date of transition in which the entity must:

Recognise assets and liabilities in accordance with IFRS Standards

Derecognise assets and liabilities that do not comply with IFRS Standards

Measure assets and liabilities in accordance with IFRS Standards

Classify assets in accordance with IFRS Standards.

Gain and losses arising at the date of transition are recorded in retained earnings.

IFRS 2 Share based payments

A share-based payment is where an entity receives goods or services in exchange for
shares, share options or cash based on a share price.

The expense of a share-based payment scheme is recognised in profit or loss over the
vesting period based on the number of share-based payments expected to vest. If there are
no vesting conditions, then the expense is recognised immediately.
Grant date: the date a share-based payment transaction is entered into.

Vesting date: the date on which the cash or equity instruments can be received by the
other party to the agreement.

There are two types of share based payment transactions:

(1) Equity-settled share based payment transactions where a company receives goods or
services in exchange for equity instruments (e.g. shares or share options).

(2) Cash-settled share based payment transactions, where a company receives goods and
services in exchange for a cash amount paid based on its share price.

Equity-settled share-based payments


This should be recognised in profit or loss over the vesting period based on the number
of shares or options that are expected to vest.

The accounting entry posted at each reporting date is:

Dr Profit or loss

Cr Equity

Modifications

If a modification to an equity-settled share-based payment scheme occurs:


the entity continues to recognise the grant date fair value of the equity instruments in
profit or loss

the entity also recognised an extra expense based on the difference between the fair
value of the new arrangement and the fair value of the original arrangement (the
incremental fair value) between the date of the change and the vesting date.

Cancellations

If an entity cancels or settles a share option scheme before the vesting date:

the entity immediately recognises the amount that would otherwise have been
recognised for services received over the vesting period (an acceleration of vesting)

Any payment made to employees up to the fair value of the equity instruments granted
at cancellation or settlement date is accounted for as a deduction from equity.

Any payment made to employees in excess of the fair value of the equity instruments
granted at the cancellation or settlement date is accounted for as an expense in profit or
loss.

Cash-settled share-based payments

Cash-settled schemes are often referred to as share-appreciation rights (SARs).


There are two key differences between the accounting treatment of SARs and an equity
settled share-based payment scheme:

For a cash scheme, the expense is valued using the fair value of the SARs at the
reporting date.



The accounting entry required is

Dr Profit or loss
Cr Liabilities
Performance conditions can be classified as either market conditions or non-market
conditions.

The impact of performance conditions • Market based conditions have
already been factored into the fair value of the equity instrument at the grant date.

Therefore, an expense is recognised irrespective of whether market conditions are satisfied.

• Nonmarket based conditions must be taken into account in determining whether an

expense should be recognised in a reporting period.

IFRS 3 - Business Combinations

IFRS 3 Business Combinations must be applied when accounting for business

combinations, but does not apply where the acquisition is not of a business.

Business combinations apply acquisition accounting
Identify the acquirer
Identify the acquisition date
Measure the identifiable net assets at fair value
Recognise goodwill and the non-controlling interest.

The non-controlling interest at acquisition can be measured at fair value or at its
proportion of the fair value of the subsidiary’s identifiable net assets at the acquisition date.

Acquisition costs are expensed to profit or loss.

A gain on a bargain purchase is recognised in profit or loss.
IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations

An asset or disposal group is classified as held for sale if its carrying amount will be
mainly

recovered through a sale and the sale is highly probable. To qualify, the following criteria
should be met:

The asset must be available to sell in its present condition

The asset must be marketed at a reasonable price


The sale is expected within 12 months
Assets held for sale are measured at the lower of carrying amount and fair value less
costs to sell. They are not depreciated.

A gain for any subsequent increase in fair value less costs to sell of an asset is recognised
in the profit or loss to the extent that it is not in excess of the cumulative impairment loss
which has been recognised in accordance with IFRS 5 or previously in accordance with IAS
36.

Assets classified as held for sale are presented separately on the face of the statement of
financial position.

Separate disclosure of discontinued operation in statement of profit or loss – defined as
a component of a business which has either been disposed of or is classified as held for sale
and:

represents a separate major line of business or geographical area of business

is part of a single co-ordinated plan to dispose, or

is a subsidiary acquired exclusively with a view to sale.

IFRS 8 Operating Segments

IFRS 8 Operating Segments states that an operating segment is a component of an

entity which engages in business activities from which it may earn revenues and incur costs.

In addition, discrete financial information should be available for the segment and these
results should be regularly reviewed by the entity’s chief operating decision maker (CODM)
when making decisions about resource allocation to the segment and assessing its
performance.

According to IFRS 8, an operating segment should be reported if it meets any of the
following quantitative thresholds:
1. Its reported revenue, including both sales to external customers and intersegment sales
or transfers, is 10% or more of the combined revenue, internal and external, of all operating
segments.

2. The absolute amount of its reported profit or loss is 10% or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments which did
not report a loss and (ii) the combined reported loss of all operating segments which
reported a loss.

3. Its assets are 10% or more of the combined assets of all operating segments.

Aggregation of one or more operating segments into a single reportable segment is
permitted (but not required) where certain conditions are met, the principal condition being
that the operating segments should have similar economic characteristics. The segments
must be similar in each of the following respects:

the nature of the products and services


the nature of the production processes

the type or class of customer

the methods used to distribute their products or provide their services • the
nature of the regulatory environment.

At least 75% of the entity’s external revenue should be included in reportable segments.
So if the quantitative test results segmental disclosure of less than this 75%, other segments
should be identified as reportable segments until this 75% threshold is reached.

IFRS 10 Consolidated Financial Statements


IFRS 10 Consolidated Financial Statements sets out the criteria for determining if an
investor controls an investee.

Control exists if the investor has all of the following elements:

(i) power over the investee, that is, the investor has existing rights which give it the
ability to direct the relevant activities (the activities which significantly affect the
investee’s returns);

(ii) exposure, or rights, to variable returns from its involvement with the investee;

(iii) the ability to use its power over the investee to affect the amount of the
investor’s returns. Where a party has all three elements, then it is a parent. Where at
least one element is missing, then it is not.

IFRS 10 Consolidated Financial Statements says that: ‘An investor controls an
investee when the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power
over the investee’.

Any transaction in which an entity obtains control of one or more businesses qualifies as
a business combination and is subject to the measurement and recognition requirements of
IFRS 3 Business Combinations.

IFRS 3 defines a ‘business’ as ‘an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing a return in the form of
dividends, lower costs or other economic benefits directly to investors or other owners,
members or participants’. A business consists of inputs and processes applied to those
inputs which have the ability to create outputs.

IFRS 11 - Joint arrangements

IFRS 11 classes joint arrangements as either joint operations or joint ventures. The
classification of a joint arrangement as a joint operation or a joint venture depends upon the
rights and obligations of the parties to the arrangement.

Joint venture – where parties have joint control and have rights to net assets of a
separate entity formed for the joint venture

Joint operation – parties have joint control and have rights to the assets and obligations
for the liabilities of the joint operation IFRS 11 requires that a joint operator recognises line
by-line the following in relation to its interest in a joint operation:

a) Its assets, including its share of any jointly held assets

b) Its liabilities, including its share of any jointly incurred liabilities
c) Its revenue from the sale of its share of the output arising from the joint operation
d) Its share of the revenue from the sale of the output by the joint operation
e) Its expenses, including its share of any expenses incurred jointly

This treatment is applicable in both the separate and consolidated financial statements
of the joint operator.

In its consolidated financial statements, IFRS 11 requires that a joint venturer recognises its
interest in a joint venture as an investment and accounts for that investment using the
equity method in accordance with IAS 28 Investments in associates and joint ventures
unless the entity is exempted from applying the equity method.

In its separate financial statements, a joint venturer should account for its interest in a
joint venture in accordance with IAS 27 (2011) Separate financial statements, namely:

a) At cost, or
b) In accordance with IFRS 9 Financial instruments
IFRS 12 – Disclosure of interests in other entities

Single source of disclosure requirements in financial statements applicable to interests in

subsidiaries, associates and joint arrangements

Disclose assumptions and judgements made in determining status of investment(s)

Disclose restrictions on ability to exercise control or influence

IFRS 13 - Fair value measurements

Fair value is defined as the amount received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.

In IFRS 13, fair value measurements are categorised into a three-level hierarchy based
on the type of inputs.

The three levels are as follows:

Level 1 inputs are unadjusted quoted prices in active markets for items identical to the
asset being measured.

Level 2 inputs are inputs other than quoted prices in active markets included within
Level 1 that are directly or indirectly observable.

Level 3 inputs are unobservable inputs that are usually determined based on
management’s assumptions.

IFRS 13 Fair Value Measurement requires the fair value of a non-financial asset to be
measured based on its highest and best use. This is determined from the perspective of
market participants. It does not matter whether the entity intends to use the asset
differently. The highest and best use takes into account the use of the asset which is
physically possible, legally permissible and financially feasible.

IFRS 13 allows management to presume that the current use of an asset is the highest
and best use unless market or other factors suggest otherwise.

IFRS 13 sets out the concepts of principal market and most advantageous market. Fair
value should be measured based on prices in principal market, which is the market with the
greatest volume and level of activity for the inventory. In the absence of a principal market,
the most advantageous market should be used.

In evaluating the principal or most advantageous markets, IFRS 13 restricts the eligible
markets to only those which can be accessed at the measurement date. If there is a
principal market for the asset or liability, IFRS 13 states that fair value should be based on
the price in that market, even if the price in a different market is higher. It is only in the
absence of the principal market that the most advantageous market should be used.

IFRS 15 – Revenue from contracts with customers

Revenue recognition is a five step process:

1. Identify the contract

2. Identify the separate performance obligations within the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) a performance obligation is satisfied
(1) Identify the contract

A contract is an agreement (not necessarily written) between two or more parties that
create enforceable rights and obligations.

(2) Identify the separate performance obligations within a contract

Performance obligations are promises to transfer distinct goods or services to a customer.

(3) Determine the transaction price

The transaction price is the amount of consideration to which an entity expects to be

entitled.

If the consideration promised in a contract includes a variable amount, an entity must

estimate the amount which the entity will be entitled to. The estimated amount of variable
consideration can only be included in the transaction price if it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will not occur when the
uncertainty is resolved.

(4) Allocate the transaction price to the performance obligations in the

contract

The total transaction price should be allocated to each performance obligation in proportion
to stand-alone, observable, selling prices.

(5) Recognise revenue when (or as) a performance obligation is satisfied.

For each performance obligation identified, an entity must determine whether it satisfies
the performance obligation over time or satisfies the performance obligation at a point in
time.
An entity satisfies a performance obligation and recognises revenue over time, if one of the
following criteria is met:

the customer simultaneously receives and consumes the benefits provided by
the entity’s performance as the entity performs

the entity’s performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced, or

the entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.

For a performance obligation satisfied over time, an entity recognises revenue over time by
measuring the progress towards complete satisfaction of that performance obligation.

If a performance obligation is not satisfied over time then it is satisfied at the point in time
at which the customer obtains control of a promised asset. The following are indicators of
the transfer of control:

The entity has a present right to payment for the asset
The customer has legal title to the asset
The entity has transferred physical possession of the asset
The customer has the significant risks and rewards of ownership of the asset
The customer has accepted the asset.

IFRS 16 LEASES

Identifying a lease

Lessees are required to recognise an asset and a liability for all leases, unless they are
short-term or of a minimal value. As such, it is vital to assess whether a contract contains a
lease, or whether it is simply a contract for a service.

A contract contains a lease if it conveys ‘the right to control the use of an
identified asset for a period of time in exchange for consideration’ (IFRS 16, para
9).

For this to be the case, the contract must give the customer:
the right to substantially all of the identified asset’s economic benefits, and
the right to direct the identified asset’s use.

Lessee accounting

If the lease is short-term (less than 12 months at the inception date) or of a low value
then a simplified treatment is allowed. In these cases, the lessee can choose to recognise
the lease payments in profit or loss on a straight line basis.

In all other cases, the lessee should recognise a lease liability and a right-of-use asset at
the commencement of the lease:
The lease liability is initially measured at the present value of the lease payments that
have not yet been paid.

The right-of-use asset is initially recognised at cost. This will be the initial value of the
lease liability, plus any lease payments made at or before the commencement of the lease,
as well as any direct costs. The carrying amount of the lease liability is increased by the
interest charge. This interest is also recorded in the statement of profit or loss.

The carrying amount of the lease liability is reduced by cash repayments.


The right-of-use asset is measured using the cost model (unless another measurement
model is chosen). This means that it is measured at its initial cost less accumulated
depreciation and impairment losses.

Lessor accounting

Lessor accounting remains largely unchanged from IAS 17 Leases. The lessor must
assess whether the lease is a finance lease or an operating lease. A finance lease is a lease
where the risks and rewards of ownership substantially transfer to the lessee.

Sale and leaseback


The treatment of a sale and leaseback depends on whether the ‘sale’ represents the
satisfaction of a performance obligation (as per IFRS 15 Revenue from Contracts with
Customers).

If the transfer is not a sale then:

The seller-lessee continues to recognise the transferred asset and will recognise a
financial liability equal to the transfer proceeds.

The buyer-lessor will not recognise the transferred asset and will recognise a financial
asset equal to the transfer proceeds

If the transfer is a sale then:

The seller-lessee must measure the right-of-use asset as the proportion of the previous
carrying amount that relates to the rights retained

The buyer-lessor accounts for the asset purchase using the most applicable accounting
standard and for the lease by applying lessor accounting requirements