2019

One-page
summary of each
IFRS
Only basic IFRSs

Compiled By
Usidamen Israel
 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

About this publication

The objective of this publication is to help students and professionals get an overview
of what the IFRS entails. If you already have a good knowledge of the IFRSs, this
publication would give you a “bird’s eye view” of each IFRS and an avenue to better
appreciate its’ usefulness in our everyday accounting. If you are a student, who is
preparing for one accounting exam or the other, while using this publication alone
would likely not be sufficient for preparation, it would be useful for revising and
retaining the knowledge already gained during intensive study, as it provides a
foundation on which a more comprehensive study of the IFRS can be built.
This publication is part of an annual compilation on financial reporting and auditing
put together by the author, Usidamen Israel. It is updated every year to reflect
developments in the IFRSs and feedback from readers.
Should you find any error, technical or grammatical, or have any suggestion(s) on
how we can improve this material for its next publication, do feel free to contact me
(contact details can be found on the next page). Also feel free to share this material
with as many persons as possible. Print and distribute it as you deem fit; however,
note that it is not for sale!

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About the author
Usidamen Israel is a professional accountant and mentor. His career as a professional accountant
majorly cuts across teaching and public practice.
Israel teaches Financial Reporting at Wyse Associates Limited. He is also a visiting teacher at
Widerange Professionals, Arepo, Ogun State. Before joining Wyse, he taught Financial Reporting
and Corporate Reporting at Students Pye, Yaba, Lagos. He assists students preparing for
examinations conducted and organized by the Institute of Chartered Accountants of Nigeria (ICAN)
and is well known for his patient, explanatory, jovial, pictorial and simple teaching style.
As a professional accountant in practice, Israel started his career with Ayodele Olatunji & Co.
(AOPS) before joining J. A. Olawin & Co. (Chartered accountants), whose Managing Partner, JAO, is
popular among ICAN students and professional accounting practitioners alike. He worked with JAO
for two and a half years during which he gained majority of his experience in taxation and auditing.
He currently works in the audit line of service in one of the big 4 accounting firms.
As an ICAN student, he won three prizes with the Institute, including a prize for the 2nd best overall
qualifying student during the May 2013 professional examinations (PE 2). These days, he considers
himself a mentor and friend to younger, up and coming professional accountants, most of whom
are his professional students, who look up to him to share his experiences, knowledge,
methodologies and tips as they strive towards acing their examinations and forging their
respective careers. So far, he has been able to build excellent relationships with a lot of them, which
has helped shape their lives and careers positively.
He is the co-founder of Accounting Yard, a professional accounting movement (See next page).
You can follow him on LinkedIn, where he frequently shares tips about learning and acquiring
technical accounting knowledge and skills.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

Accounting Yard (AY)

Accounting Yard (AY) is a professional accounting movement with the objective(s) to:
 Motivate and encourage professionals (particularly accountants) to inculcate a culture of
learning
 Share current updates in the world of accounting and finance.
 Share current job updates specifically relating to accounting and finance
 Share knowledge relating to accounting and finance.
 Provide a platform for accountants to connect and network with one another, build and
nurture valuable relationships.
Since its inception, AY has been able to touch the lives of a number of accountants and continues
to represent a platform to meet and reunite with fellow professional colleagues. AY is constantly
evolving from a learning movement to a valuable network of key professionals within the
accounting and finance practice and you need to be a part of it.
To be a part of this movement, you can join through any of the following means:
1. Join any of our Whatsapp/Telegram groups.
2. Follow our Whatsapp Stories (if you are interested, send a chat to 07066171338 with the
word “Interested”) or
3. Follow Accounting Yard on Instagram, Twitter or Facebook

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CONTENTS
A BRIEF INTRODUCTION TO IFRS ......................................................................................................................... 6
NEW STANDARDS/CHANGES INTRODUCED IN 2017 ............................................................................................7
STANDARDS THAT ARE EFFECTIVE FROM 1 JANUARY 2018 ............................................................................... 9
AMENDMENTS THAT ARE EFFECTIVE FROM 1 JANUARY 2018 .......................................................................... 9
THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) .................................................................... 11
OFF THE RECORD: OTHER INTERNATIONAL INFLUENCES ................................................................................ 12
THE IASB CONCEPTUAL FRAMEWORK (ICF) ...................................................................................................... 13
OFF THE RECORD: THE APPLICATION OF THE ICF IN THE DEVELOPMENT OF IFRSS ..................................... 14
IASB PROPOSED REVISION TO THE CONCEPTUAL FRAMEWORK .................................................................... 15
OFF THE RECORD: DIFFERENCES BTW THE EXISTING CF & THE PROPOSED CF .............................................. 16
IAS 8: ACCOUNTING POLICES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS........................................ 17
CHANGING APs RETROSPECTIVELY .................................................................................................................... 17
IAS 1: PRESENTATION OF FINANCIAL STATEMENTS (FSs) ................................................................................ 19
IAS 2: INVENTORIES ............................................................................................................................................. 20
IAS 7: STATEMENT OF CASH FLOWS ...................................................................................................................22
OFF THE RECORD: DIRECT METHOD (DM) VS INDIRECT METHOD ..................................................................23
IAS 10: EVENTS AFTER THE REPORTING PERIOD (EARP) ................................................................................. 24
COMMON PITFALL 1: IDENTIFYING THE AUTHORISATION DATE OF THE FS ...................................................25
IAS 12: INCOME TAXES ........................................................................................................................................ 26
COMMON PITFALL: COMPUTATION OF DEFERRED TAX (DT) ..........................................................................27
IAS 16: PROPERTY, PLANT AND EQUIPMENT .................................................................................................... 28
IAS 17: LEASES ...................................................................................................................................................... 29
IFRS 16: LEASES .................................................................................................................................................... 30
OFF THE RECORD: SOME DIFFERENCES BETWEEN IAS 17 & IFRS 16 ................................................................ 31
IAS 18 REVENUE (HAS BEEN SUPERSEDED BY IFRS 15) .....................................................................................32
IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS (EFFECTIVE FROM 1 JANUARY 2018) ..................33
DIFFERENCES BETWEEN IAS 18 (AND OTHER REVENUE RECOGNITION IFRSS) AND IFRS 15 ........................ 34
IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE .....35
OFF THE RECORD: ACCOUNTING TREATMENT OF GOVERNMENT GRANTS .............................................35
IAS 23: BORROWING COSTS ................................................................................................................................37
THE COMPUTATION OF BORROWING COSTS (BC) ELIGIBLE FOR CAPITALISATION ......................................37
IAS 24: RELATED PARTY DISCLOSURES ............................................................................................................. 39
IDENTIFYING RELATED PARTY RELATIONSHIPS ............................................................................................... 40
RELATED PARTY DISCLOSURES.......................................................................................................................... 40
IAS 27: SEPARATE FINANCIAL STATEMENTS ..................................................................................................... 41
IAS 28: INVESTMENT IN ASSOCIATES AND JOINT VENTURES (JVs) ................................................................ 42
IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION......................................................................................... 43
A BASIC UNDERSTANDING OF WHAT FIs MEAN. .............................................................................................. 44
SPLITTING COMPOUND FIs ................................................................................................................................. 44
IAS 33: EARNINGS PER SHARE (EPS) .................................................................................................................. 45
IAS 36: IMPAIRMENT OF ASSETS ....................................................................................................................... 46
IAS 37: PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS ...................................................... 47

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

HOW TO IDENTIFY AN OBLIGATION .................................................................................................................. 48

MEASUREMENT OF PROVISION WHEN THE TIME VALUE OF MONEY IS MATERIAL..................................... 48
IAS 38: INTANGIBLE ASSETS (IAS) ...................................................................................................................... 49
IAS 39: FINANCIAL INSTRUMENTS: RECOGNITION & MEASURMENT ............................................................. 50
EFFECTIVE INTEREST RATE (EIR) VS COUPON RATE ......................................................................................... 51
IFRS 9: FINANCIAL INSTRUMENTS ......................................................................................................................52
OFF THE RECORD: DIFFERENCES BETWEEN IAS 39 AND IFRS 9 .......................................................................53
IAS 40: INVESTMENT PROPERTY (IP) ..................................................................................................................53
IFRS 1: FIRST TIME ADOPTION OF IFRSS .............................................................................................................55
IFRS 3: BUSINESS COMBINATIONS (BCS) .......................................................................................................... 56
COMPUTATION OF GOODWILL .......................................................................................................................... 56
IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (DOS) ........................ 58
COMMON PITFALL 1: CLASSIFICATION OF NON-CURRENT ASSETS AS HELD FOR SALE ............................... 58
IFRS 7: FINANCIAL INSTRUMENTS: DISLCOSURES............................................................................................ 60
IFRS 8: OPERATING SEGMENTS ........................................................................................................................... 61
RELATIONSHIP BETWEEN AN OPERATING SEGMENT & A REPORTABLE SEGMENT ..................................... 62
AGGREGATION OF THE QUANTITATIVE THRESHOLD....................................................................................... 62
IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS ......................................................................................... 63
IFRS 11: JOINT ARRANGEMENTS ......................................................................................................................... 64
IFRS 12: DISCLOSURE OF INTERESTS IN OTHER ENTITIES ................................................................................ 65
HOW TO JOIN THE WHATSAPP GROUP ................................................................ Error! Bookmark not defined.

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A brief introduction to IFRS
I will start this section by making this clear: the IFRSs are not bastards! They have parents just like you,
where Mr. IASB (International Accounting Standards Board) is the father and Mrs. Conceptual Framework
is the mother. Together, they conceive the accounting standards (IFRSs: International Financial Reporting
Standards and IASs: International Accounting Standards). As of date, there are over 40 of them and chances
are there will be even more as time goes on.
In technical terms, the IASB “primarily” follows a principle based approach in developing and amending
accounting standards, and the principle it applies is referred to as the Conceptual Framework (CF). The CF
is, therefore, not an accounting standard, rather it puts the accounting standards in context and
significantly informs the way and manner in which they are developed.
In summary, the IASB in conjunction with the CF conceive the IFRSs, which are then applied in the
preparation and presentation of financial statements. However, on some occasions the CF is applied
directly in preparing and presenting the financial statements (See IAS 8).
See diagram below:

The The The

Parent IFRSs Financial
Statements

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

Quick catch-up!

Changes introduced in 2018

Areas affected Brief description of the change Effective date

IAS 19, Employee Amendments relate to Plan Amendment, Curtailment or Settlement Applicable to annual
benefits are as follows: reporting periods
 If a plan amendment, curtailment or settlement occurs, it beginning on or after 1
is now mandatory that the current service cost and the net January 2019.
interest for the period after the remeasurement are
determined using the assumptions used for the Early application is
remeasurement. permitted but must be
 In addition, amendments have been included to clarify the disclosed.
effect of a plan amendment, curtailment or settlement on
the requirements regarding the asset ceiling.

Issued 7 February 2018

The major changes (compared to the 2010 IASB Conceptual

IASB Conceptual Framework) are: The revised CF is effective
Framework (CF)  Objectives of financial statements and the definition of a immediately for the IASB
reporting entity. and the IFRSIC.
 Revised definitions of an asset and a liability.
 New guidance on measurement and derecognition, It has an effective date of
presentation and disclosure. 1 January 2020—with
earlier application
The revised IASB Conceptual Framework has eight (8) chapters. permitted—for
companies that use the
Issued 29 March 2018. CF to develop accounting
policies when no IFRS
applies to a particular
transaction.

IFRS 3, Business Amendment to the definition of a business Companies are required

combinations to apply the amended
 Previous definition of a business: An integrated set of definition of a business to
activities and assets that is capable of being conducted acquisitions that occur on
and managed for the purpose of providing a return in the or after 1 January 2020.
form of dividends, lower costs or other economic benefits Earlier application is
directly to investors or other owners, members or permitted.
participants.

 New definition of a business: An integrated set of

activities and assets that is capable of being conducted
and managed for the purpose of providing goods or
services to customers, generating investment income (such
as dividends or interest) or generating other income from
ordinary activities.

Issued 22 October 2018

The changes in Definition of Material
Amendments to IAS The amendments are
1 and IAS 8 Previous definition: Material Omissions or misstatements of items effective for annual
are material if they could, individually or collectively, influence the reporting periods
economic decisions that users make on the basis of the financial beginning on or after 1
statements. January 2020. Earlier
application is permitted.
New definition: Information is material if omitting, misstating or
obscuring it could reasonably be expected to influence decisions
that the primary users of general purpose financial statements
make on the basis of those financial statements, which provide
financial information about a specific reporting entity.

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 At its meeting held in London, the IASB discussed the effective
Tentative decision to date of IFRS 17 'Insurance Contracts' and tentatively decided to
defer the IFRS 17 defer it to annual periods beginning on or after 1 January 2022.
effective date The IASB also tentatively decided to defer the fixed expiry date
for the temporary exemption to IFRS 9 in IFRS 4 by one year so
that all insurance entities must apply IFRS 9 for annual periods on
or after 1 January 2022.

The previous effective date for IFRS 17 was annual reporting

periods beginning on or after 1 January 2021.

Issued 14 November 2018

The Constitution sets out the objectives and governance
Amendment to the arrangements of the IFRS Foundation and its standard-setting Effective from 1
IFRS Foundation’s body, the International Accounting Standards Board. December 2018.
Constitution
The amendments to the Constitution set the maximum tenure of
the Trustee Chair and Vice-Chairs to nine years, clarify that the
Chair can be appointed either from among the Trustees or
externally, and specify that the Vice-Chairs must be appointed
from the Trustee ranks. Previously, in accordance with paragraph
10 of the Constitution, both the Chair and the Vice-Chair shall be
appointed by the Trustees from among their number.

Issued 29 November 2018

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

Get ready!!
Accounting standards that are effective from 1 January 2019
Standard Brief description
IFRS 16, Leases IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The
standard provides a single lessee accounting model, requiring lessees to recognise assets and
liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a
low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to
lessor accounting substantially unchanged from its predecessor, IAS 17.

Issued 13 January 2016

Interpretation standards that are effective from 1 January 2019

Interpretations Brief description
IFRIC 23 Uncertainty
over Income Tax The interpretation specifically addresses:
Treatments  Whether tax treatments should be considered collectively
 Assumptions for taxation authorities' examinations
 The determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits
and tax rates
 The effect of changes in facts and circumstances

Issued 7 June 2017

Amendments that are effective from 1 January 2019

Interpretations Brief description

Prepayment Amends the existing requirements in IFRS 9 regarding termination rights in order to allow
Features with measurement at amortised cost (or, depending on the business model, at fair value through other
Negative comprehensive income) even in the case of negative compensation payments.
Compensation
(Amendments to Issued on 12 October 2017.
IFRS 9)

Long-term Interests Clarifies that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate
in Associates and or joint venture that form part of the net investment in the associate or joint venture but to which
Joint Ventures the equity method is not applied.
(Amendments to IAS
28) Issued on 12 October 2017

Annual Makes amendments to the following standards:

Improvements to
IFRS Standards  IFRS 3 and IFRS 11 - The amendments to IFRS 3 clarify that when an entity obtains control of
2015–2017 Cycle a business that is a joint operation, it remeasures previously held interests in that business.
The amendments to IFRS 11 clarify that when an entity obtains joint control of a business
that is a joint operation, the entity does not remeasure previously held interests in that
business.
 IAS 12 - The amendments clarify that all income tax consequences of dividends (i.e.
distribution of profits) should be recognised in profit or loss, regardless of how the tax arises.
 IAS 23 - The amendments clarify that if any specific borrowing remains outstanding after the
related asset is ready for its intended use or sale, that borrowing becomes part of the
funds that an entity borrows generally when calculating the capitalisation rate on
general borrowings.

Issued 12 December 2017

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IAS 19, Employee Amendments relate to Plan Amendment, Curtailment or Settlement are as follows:
benefits  If a plan amendment, curtailment or settlement occurs, it is now mandatory that the
current service cost and the net interest for the period after the remeasurement are
determined using the assumptions used for the remeasurement.
 In addition, amendments have been included to clarify the effect of a plan amendment,
curtailment or settlement on the requirements regarding the asset ceiling.

Issued 7 February 2018

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

BRIEF HISTORY OF THE IASB
 The journey started in June 1973 when the International Accounting Standards Committee (IASC) was established by
accountancy bodies from ten (10) countries.
 By year 2000, the IASC expanded to accommodate over 100 countries with 163 bodies
 The Standards developed and issued by the IASC were referred to as International Accounting Standards (IAS) while
the interpretation standards (i.e. SIC interpretations) were developed by the Standing Interpretations Committee (SIC).
 The IASC developed and issued 41 accounting standards
 In 2001, the IASC was replaced by the International Accounting Standards Board while the SIC was replaced by the
International Financial Reporting Interpretation Committee (IFRIC)-now referred to as IFRS Interpretations Committee
(IFRSIC). This change was done to improve the independence, legitimacy and quality of the standard setting process.
 The IASB is part of an independent commission referred to as the IFRS Foundation.
 The Standards developed and issued by the IASB are called IFRS, while interpretation standards issued by the IFRSIC
are IFRSIC interpretations.
 At its first meeting in 2001, the IASB adopted all outstanding IASs issued by the IASC as its own Standards, although,
some of these Standards have been superseded, therefore, when referring to IFRS, that term includes IFRS, IAS,
SIC and IFRSIC interpretations.

Differences between the IASB and the IASC

Areas of differences IASB IASC

Independence of A group of Trustees with diverse geographic Governed by an IASC Board which combined
the governing body and functional background who are the work of standard setting with the overall
independent of the accounting profession operations of the IASC.
Members of the Individuals are appointed based on Appointment is based on representatives of
Board technical skills & background experience special national accountancy bodies or other
organisations
Board meetings The IASB usually meets each month The IASC usually meets four times in a year
Number of staff The IASB have more technical and Lesser technical and commercial staff
commercial staff

STRUCTURE OF THE IASB

 The IASB has a three-tier governance structure made up of the IFRS Monitoring Board (for public accountability), the
IFRS Foundation trustees (for governance) and the IASB (the independent standard setting body).
 IFRS Monitoring Board is a group of capital market authorities and provides a formal link between the Trustees and
public authorities in order to enhance the public accountability of the IFRS Foundation.
 The Trustees are responsible for the governance and oversight of the IASB, including Constitution and due process for
development of the accounting Standards. It’s part of their duty to source for fund and involve in day to day operations.
 The IASB is the independent standard-setting body of the IFRS Foundation. The IFRS Interpretations Committee is
the interpretative body of the IASB, which works with the Board in supporting the application of IFRS Standards.
 Supporting the IASB and Trustees is the IFRS Advisory Council which provides advice and counsel to the Trustees and
the IASB, whilst the IASB also consults extensively with a range of other standing advisory bodies and groups.

OBJECTIVES OF THE IASB

1. To develop, in the public interest, a single set of high quality financial reporting standard based on a “clearly
articulated principles”. The IASB Conceptual Framework (ICF) represents the principle in the IFRS.
2. To promote the use and rigorous application of those standards.
3. In fulfilling objectives (a) and (b) to take account of the needs of a range of sizes and types of entities in diverse
economic settings. This objective gave rise to IFRS for SMEs.
4. To work with national accounting standards (NASs) setters to converge NASs with the IFRSs.

IASB STANDARD SETTING PROCESS

1. The staff are asked to identify and review all the issues associated with the topic and consider the ICF.
2. Consult the Trustees and the Advisory Council about the advisability of adding the topic to the IASB agenda.
3. Publishing for public comment a discussion document (DD) and an exposure draft (ED)
4. Publishing an ED containing basis for conclusions and the alternative views of IASB members who opposes the ED.
5. Consideration of all comments received within the comment period on the DD and the ED.
6. Approval and publishing of a standard. The published standard would contain a basis of conclusion and dissenting
opinions of other IASB members.

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 OFF THE RECORD: OTHER INTERNATIONAL INFLUENCES
Apart from the IASB and the Conceptual Framework, other international bodies still have one or two ingredients they add
to the IFRS. Under this section, we would be identifying some of these international bodies as well as specific areas of the
IFRS in which they have added their ingredient.

International Their influence on the IFRS

bodies

Financial Accounting The FASB is the American Accounting standard setter. In May 2005, the FASB signed an agreement
Standards Board with the IASB called the “Norwalk Agreement”. It was called such because the place where it was
(FASB) signed was Norwalk in South Western Connecticut, USA. Through the agreement, both parties
worked on the IFRS to converge it with the American Account Standards (Financial Accounting
Standards). The Americans have an accounting culture of making their standards rules based,
whereas, IFRS is majorly (not entirely) principles based.

As a result of the “American Flavor”, IFRS 8, Operating Segment set some specific quantitative
threshold in determining a reportable segment, although, it still gave some room for discretion
when determining operating segments.

The International IOSCO represents the world’s securities markets regulators, it currently has over 200 members from
Organisation of over 115 jurisdictions regulating over 95% of the world’s securities market. Financial statements are
Securities Commission very vital to the integrity of the securities market, hence, the need for the IOSCO to work with the
(IOSCO) IASB.

In 1995, a "core standard agreement” was signed between IOSCO and the defunct IASC. The
agreement committed the IASC to the completion of revisions to the standards that IOSCO deemed
essential if it was to permit IAS based financial reporting in the securities market under its members
control and after the fulfilment of this agreement in 1998, in year 2000, the IOSCO recommended
to all its members that they allow multinational users to submit FSs based on IFRS.

The IOSCO works closely with the IASB in developing IFRSs, it particularly played a key role in the
development of IAS 39, Financial instruments: Recognition and measurement the predecessor to IFRS
9.

European Union (EU) EU Directives issue directives from time to time and such Directives brought about the development
of certain IFRSs e.g. SIC 7, Introduction of the Euros, IFRIC Interpretation 6, Liabilities arising from
specific market-waste electrical and electronic equipment

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

THE IASB CONCEPTUAL FRAMEWORK (ICF)

To ensure that the IASB develops IFRSs in a logical manner this conceptual framework was developed.

PURPOSE AND STATUS

a. To assist the IASB in the development of future IFRSs and in its review of existing IFRSs.
b. To assist national standard-setting bodies in developing national standards.
c. To assist auditors in forming an opinion on whether financial statements (FSs) comply with IFRSs.
d. To assist preparers of FSs in applying IFRSs & in dealing with topics yet to be covered by any IFRS.
e. To provide interested parties with information about the IASB’s approach to the development of IFRSs.

CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING (GPFR)

The objective of GPFR is to provide financial information about the reporting entity that is useful to users in making decisions
about providing resources to the entity. Under the IFRS, users are existing and potential investors, lenders and other
creditors. You may not know, but everything you will do as a financial reporter/auditor is targeted at achieving this objective.

Content of GPFR
GPFR contains the entity’s economic resources (assets), claims against the entity (liability) & changes in resources & claims
(changes in financial position). Changes in financial position can be broken down into changes arising from financial
performance and changes not arising from financial performance. Changes arising from financial performance represents
the entity’s performance relating to profit or loss and cash flows while changes not relating to financial performance may
arise if the owner(s) of the company contribute to, or take from the business in their capacity as owners.

CHAPTER 2: THE REPORTING ENTITY (yet to be added)

CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION (FI)

This can be broken down into fundamental and enhancing qualitative characteristics.

Fundamental qualitative characteristics

a) Relevance: relevant financial information is capable of making a difference in the decisions made by users. Financial
information is capable of making a difference in decisions if it has predictive value, confirmatory value or both.
Materiality is an entity specific aspect of relevance, no need to state it as a separate concept.
b) Faithful representation: for a financial information to have this trait it must be complete, neutral and free from error.
Substance over form is subsumed in faithful representation, thus, there is no need to state it as a separate concept.

Enhancing qualitative characteristics

a. Comparability: allows users make proper comparison by ensuring the information is consistent with each other.
Consistency is required to achieve comparability, but is not the same as comparability.
b. Verifiability: an information verified by independent & knowledgeable observers (IKOs) usually have higher quality. A
financial information would be of high quality if IKOs can reach same/almost same conclusion on it.
c. Understandability: FI must be presented in a clear and concise manner. However, to achieve understandability, FI should
not exclude complex phenomena because an expert can be hired by the user for that purpose.
d. Timeliness: means having information available to decision-makers in time to be capable of influencing their decisions.

Cost constraints on financial reporting

According to a popular adage ‘the soup wey sweet na money kill am”, in this context, this means that quality comes with a
cost. In order to ensure the integrity, quality and stability of financial reporting, all parties (from preparers to users) involved
in financial reporting (FR) incur considerable costs on FR. These costs are taken into account in developing IFRSs as the IASB
brings preparers of FS, auditors, users, academicians etc. into the standard setting process.

CHAPTER 4: THE REMAINING TEXT: THE IASC FRAMEWORK FOR PREPARATION & PRESENTATION OF FS.
 Underlying assumption: FSs shall be prepared on the going concern basis
 Elements of FSs are assets, liabilities, equity, income and expenses.
 Recognition: an item shall be recognised in the FSs if it meets the definition of an element and:
i. It is probable that economic benefits would flow in or out of the entity
ii. It is capable of being reliably measured.
 Measurement: is the process of determining the monetary amount of an item that has passed the recognition criteria
above. It may be at historical cost, current value, realisable (or settlement value) & present value
 Concept of capital and capital maintenance: this is broken down into physical and financial capital maintenance. The
physical capital maintenance (CM) uses operating capacity as an entity’s capital and a change in operating capacity
represents either profit or loss while the financial capital maintenance regards net asset as the capital and a change in
net assets represents either profit or loss. IFRS applies the concept of financial capital maintenance.

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 OFF THE RECORD: THE APPLICATION OF THE ICF IN THE DEVELOPMENT OF IFRSs
As already stated, the IASB represents the “father figure” while the “Conceptual Framework” (CF) represents the mother
figure. So that whenever the IASB needs a child, he goes to his wife (the Conceptual Framework) and then they both give
birth to children called IFRSs. The CF contains principles used by the IASB in developing IFRSs.

Going by the above, it is a mistake to think that the IASB Conceptual Framework (ICF) is “purely” theoretical and is not really
applied practically. Aside the fact that IAS 8 provides that an entity can make use of the conceptual framework (on certain
occasions - see IAS 8) when developing its accounting policies, it is important to note that the ICF was applied in developing
the IFRSs. Let’s examine how the ICF was applied in developing “certain” IFRSs (this list is not exhaustive)

Accounting How the IASB Conceptual Framework (ICF) was applied

standards

IAS 1, Chapter 1 of the ICF states the following as being contents of useful information;
Presentation 1. economic resources (ER) and claims against the entity,
of financial 2. changes in ER and claims against the entity arising from financial performance; presented using
statements accrual accounting and cash flow information,
3. changes not arising from financial performance.

Content 1 represents assets and liabilities which gave birth to the SFP as a content of financial statements,
content 2 relating to accrual accounting gave birth to profit or loss account, while cash flow information
gave birth to statement of cash flows (IAS 7). Content 3 gave rise to statement of changes in equity (SCE)
presenting the entity’s financial position as a result of intervention from the owners e.g., through payment
of dividends. Of course the SCE also presents “capital maintenance adjustments” relating to other
components of equity e.g. revaluation surplus.

IAS 12, The ICF states relevance & faithful representation as qualitative characteristics of useful financial
Income taxes information. For an information to be relevant it must have either predictive value or confirmatory value
and IFRS 5, or both. Predictive value is the value that aids users in forecasting about certain aspects of the entity.
Non-current
assets held  The concept of predictive value was applied by IAS 12 in the need for a recognition of “deferred” tax.
for sale and Deferred tax represents “future” tax effect of the entity’s current financial position, which helps a user
discontinued forecast the entity’s future tax position.
operations
 The concept of predictive value was applied by IFRS 5. The Standard requires that when an entity
intends selling one or more of its asset in the future (within the next one-year), such an asset should
be presented separately. This separate disclosure is to make the user aware of what the entity’s future
cash flows will be like within the next one year because if the NCA is eventually sold, cash may flow
into the entity. So you can decide to invest in the company now as their future cash looks favourable.

IAS 32, The ICF defines equity as the residual interest in an entity’s assets after deducting all its liabilities. This brief
Financial definition was applied in IAS 32 to help split compound financial instruments into their liability and equity
instruments: components (See IAS 32). It was also applied in IFRS 2 to split compound financial instruments arising
Presentation from share based payment arrangement in which the counterparty has the option of selecting either shares
& IFRS 2 or cash as a means of settling the arrangement.
IAS 38, The ICF defines an asset as a resource controlled by the entity, it is such that the ICF intends that an item
Intangible is recognised as an asset if it is controlled by the entity (as part of other criteria). This principle was applied
assets in IAS 38, which prohibits the recognition of staff training cost as an asset because the entity does not
have control over the staff.
IAS 37 Under the ICF, a liability (as well as an asset) arises from past event and not from a future event, thus,
IAS 37 prohibits the recognition of “future” operating losses as a liability because it does not arise from a
past event.

CONFLICT BETWEEN THE IFRS AND THE CONCEPTUAL FRAMEWORK

As much as the IFRSs are not “bastards” because they tend to take some resemblance from their mother, there still exist
some IFRSs that conflict with their ICF. IAS 17, Leases is at the top of that list as it does not require an asset and a
corresponding liability to be recognised under an operating lease even though the entity has control over an asset for the
lease term and an obligation to settle a lease liability, however, this conflict has been eliminated after its replacement by
IFRS 16.

NB: all the IFRSs should be studied in conjunction with the Conceptual Framework i.e. try to find any link (no matter
how small) between any IFRS you have studied and the Conceptual Framework.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

THE REVISED IASB CONCEPTUAL FRAMEWORK (ICF)

In March 2018, the IASB published a revised Conceptual Framework to replace the CF that was published in 2010. The
revised ICF is effective immediately for the IASB and the IFRSIC. It has an effective date of 1 January 2020 — with earlier
application permitted — for companies that use the CF to develop accounting policies when no IFRS applies to a
particular transaction.

CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

This remained largely unchanged from the 2010 version. However, the IASB reinstated the term stewardship. This chapter
states that the users of financial statements need information to help them assess ‘how efficiently and effectively the
entity’s management and governing board have discharged their responsibilities to use the entity’s resources. This
assessment helps users make decisions about providing resources to the entity (which is the objective of GPFR).

CHAPTER 2: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

This also remained largely unchanged. This chapter reintroduces explicit references to substance over form, prudence and
measurement uncertainty (MU). Faithful representation is achieved when a transaction is treated based on their
substance and not merely its legal form. Secondly, this chapter clearly relates prudence with neutrality by stating that
since neutrality means ‘depiction without bias’ prudence is not biased towards recognising fewer assets and more
liabilities, hence, prudence is the exercise of caution when making judgment under conditions of uncertainty. Chapter 5 and
6 talk more about MU.

CHAPTER 3: FINANCIAL STATEMENTS AND THE REPORTING ENTITY (RE)

This is new to the CF. This indicates that FSs are prepared from the perspective of the entity as a whole and not the user.
FSs are prepared on a going concern assumption. It also made mention of another form of FSs, namely, combined FSs. These
are FSs prepared by a RE comprising two or more entities that are not linked by a parent-subsidiary relationship.

It also states that a reporting entity is an entity that chooses, or is required to prepare FSs. The key issue with identifying
a RE is determining its boundaries. The most obvious example of a RE is a legal entity (Ltd, Plc etc.). If an RE is not a legal
entity, it may be difficult to determine its boundaries, in such a case, the boundaries of a RE should be set by focusing on
the information needs of the primary users.

CHAPTER 4: ELEMENTS OF FINANCIAL STATEMENTS

Same as the existing Conceptual Framework with some changes in the definition of some elements (see next page).

CHAPTER 5: RECOGNITION AND DERECOGNITION

Elements are now recognised if such recognition provides users of FSs with relevant information and faithful
representation about the underlying transaction. In addition, this chapter still links recognition to measurement.
Measurement uncertainty forms an important factor when determining if an information is material.

Derecognition should aim to represent faithfully both:

 Any assets and liabilities retained after the transaction that led to the derecognition; and
 The change in the entity’s assets and liabilities as a result of that transaction.

CHAPTER 6: MEASURMENT
This defines measurement as the process of quantifying, in monetary terms, information about an entity’s assets, liabilities,
equity, income and expenses. It describes 2 measurement bases: historical costs and current value. The selection of an
appropriate measurement basis is primarily driven by relevance and faithful representation.

CHAPTER 7: PRESENTATION AND DISCLOSURE

This chapter explains “high-level” concepts about how information should be presented and disclosed in the FSs. The chapter
also includes “high-level” principles on the use of other comprehensive income (OCI).The Framework states that including
presentation and disclosure objectives in IFRSs can support effective communication. As for OCI, determining items that are
presented under OCI is not a conceptual thing, hence, it would be determined at the level of developing standards.

CHAPTER 8: THE CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

This chapter remains unchanged.

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 OFF THE RECORD: DIFFERENCES BTW THE EXISTING CF & THE PROPOSED CF

Areas of differences Existing IASB CF Proposed IASB CF

The concept of a The guidance on reporting entity is yet to Chapter 3 defines what a reporting entity is and
reporting entity be added in chapter 2 what can be used to determine the boundary.

Definition of an asset An asset is a resource controlled by the An asset is a present economic resource
entity as a result of past events and from controlled by the entity as a result of past
which future economic benefits are events. An economic resource is a right that has
expected to flow to the entity. the potential to produce economic benefits.

Definition of a liability A liability is a present obligation of the A liability is a present obligation of the entity
entity arising from past events, the to transfer an economic resource as a result of
settlement of which is expected to result past event.
in an outflow from the entity of resources
embodying economic benefits.

Recognition criteria An element shall be recognised in the FSs An entity would recognise an asset or a liability
if it meets the definition of an element if such recognition provides financial
and: statements users with:
a) It is probable that economic benefits a) Relevant information about the asset or
would flow in or out of the entity; the liability and about any income,
expenses or changes in equity.
b) It is capable of being reliably b) A faithful representation of the asset or the
measured. liability and of any income, expenses or
changes in equity.
c) Information that results in benefits
exceeding the cost of providing that
information.

Derecognition There is very little guidance about Defines derecognition and stipulates indicators
derecognition of assets or liability from that an entity may not derecognise an item.
the SFP
Measurement Identifies four (4) measurement bases: Identifies to (2) measurement bases:
a) Historical costs a) Historical costs &
b) Current value b) Current value
c) Realisable (settlement) value
d) Present value
Other comprehensive Limited guidance on comprehensive Extensive guidance on CI and OCI in chapter 7.
income income (CI) and other comprehensive
income (OCI)

SIMILARITIES

Areas of similarities Brief explanation

Objective of general purpose GPFR is still aimed at providing useful information to the users of financial
financial reporting statements.

Qualitative characteristics of useful Both classifies this as fundamental and enhancing although additional
financial information guidance was included in the revised CF but no change to the classification.

Definitions of income, expenses and The definitions of income, expenses and equity remained same.
equity

Concept of capital and capital This remained the same i.e. physical and financial capital maintenance.
maintenance

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 8: ACCOUNTING POLICES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS

The objective of this IFRS is to achieve relevance, faithful representation & comparability. This represents a means of
achieving the fundamental qualitative characteristics explained in the Conceptual Framework.

ACCOUNTING POLICIES (APs)

These are specific principles, rules, bases, conventions and practices applied by an entity in preparing & presenting FSs.
 Selection & application of accounting policies
a) Specific IFRSs shall be the APs for specific transactions/events e.g. IAS 16 is the AP for accounting for PPE
b) In the absence of a specific IFRSs, the entity should apply judgement, ensure that APs applied are relevant, reliable and
take the following into account (in the following order):
i. Use requirements in IFRSs dealing with similar & related issues.
ii. In the absence of a similar IFRS, consider the principles in the Conceptual Framework (CF).
iii. Use the recent pronouncements of another standard setting body using the same CF.
iv. Other accounting literature and accepted industry practices as long as they don’t conflict with i and ii.

 Consistency and changes in accounting polices

An entity shall be consistent with the application of APs, but may change its APs due to the following reasons:
a) If change is required by an IFRS
b) If the change would result in FSs that are more reliable and relevant.
(a) above is treated by applying the specific transitional provision (STP) in that IFRS, In the absence of STP, apply
retrospectively (i.e. as if the new AP had always been applied). Retrospective adjustment also applies to (b) above.

The following are not changes in accounting policies:

a) application of an AP for transactions, other events/conditions that differ in substance from those previously occurring;
b) the application of a new AP for transactions, other events or conditions that did not occur previously or were immaterial.
CHANGES IN ACCOUNTING ESTIMATES (AE)
An AE is an approximation of monetary amount used in the absence of a precise means of measurement e.g. allowance for
doubtful debts, inventory obsolescence, useful life, warranty obligations, estimated litigation losses & provisions.

Changes in AEs arise from obtaining more reliable information and they are treated prospectively i.e. from the year of change
and in future periods, if applicable.

ERRORS
This arise from misuse or failure to use reliable information. FSs are not in line with IFRSs if they contain material errors
therefore potential material errors relating to the current period should be corrected in the current period while prior period
errors should be corrected retrospectively i.e. going back to the past FSs and correcting as if the error(s) never occurred.
Examples of errors include: fraud, mathematical mistake & oversight or misinterpretation of facts, mistakes in applying APs.

IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE APPLICATION (RA) & RETROSPECTIVE RESTATEMENT (RR)

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For
a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
a. the effects of the retrospective application or retrospective restatement are not determinable
b. the RA or RR requires assumptions about what management’s intent would have been in that period;
c. the RA and RR requires significant estimates.

SOME DISCLOSURE REQUIREMENTS

1. On initial application of an IFRS, disclose the following:
a) the title of the IFRS
b) the nature and change in accounting policy
c) when applicable, a description of the transitional provision
2. An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current
period or is expected to have an effect in future periods, except if impracticable to estimate the effect.
3. Disclosures for errors: nature of prior period errors, the amount of the correction at the beginning of the earliest prior
period presented etc.

COMMON PITFALL: CHANGING APs RETROSPECTIVELY

ILLUSTRATIVE EXAMPLE
Banse Co. Inc. changed its accounting policy in 2002 with respect to the valuation of inventories. Up to 2001, inventories
were valued using a weighted-average cost (WAC) method. In 2002 the method was changed to first-in, first-out (FIFO.
The impact on inventory valuation was determined to be

At December 31, 2000: an increase of N10,000

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At December 31, 2001: an increase of N15,000
At December 31, 2002: an increase of N20,000
The income statement prior to adjustment are
2002 2001
N'000 N'000
Revenue 250 200
Cost of sales (100) (80)
Gross profit 150 120
Administration Expenses (60) (50)
Distribution expenses (25) (15)
Net Profit 65 55

Required: present the change in accounting policy (AP) in the income statement and the statement of changes in equity
in accordance with IAS 8. Assume retained earnings as at 1 January 2001 is N300,000.

Solution
Banse Co
Statement of profit or loss for the year ended 31 December 2002

Statement of changes in equity for the year ended 31 December 2002

Retained earnings (N’000)
At 1 January 2001 300
Effect of change in accounting policy (Step 2a) 10
At 1 January 2001-Restated 310
Net profit for the year 31 December 2001-Restated 60
At 31 December 2001 370
Net profit for the year 70
At December 2002 440

Workings
Step 1: identify the relevant dates
Reporting date: 31 December 2002, Comparative date: 31 December 2001, and Beginning of the comparative period
(BECP): 1 January 2001 (same as 31 December 2000)

Step 2: Determine the effect of the change on each of the relevant accounting periods
The effect always affects at least two elements. We have already know how it affects inventory on each of these dates, the
next set of effects we usually need to identify is how it affects profit or loss for each of those periods.
a. Effect on the profit or loss for the year ended 31 December 2000 (i.e. 1 January 2001)
The higher the closing inventory, the higher the profit. If closing inventory increases by N10,000, profit would also need to
be increased by that same amount. However, on this date, the retained earnings (RE) as at 1 January 2001 is usually taken
as the representative of P or L (i.e. increase RE by N10,000).
b. Effect on profit or loss for the year ended 31 December 2001 & 31 December 2002
The profit or loss for these periods are available, hence, no need to restate retained earnings. However, we have to
determine the particular line item in P or L that would be affected. The affected line item is “cost of sales”.

31 December 31 December
2001 (N) 2002 (N)
Cost of sales 100 80
Increase in opening inventory 10 15
Increase in closing inventory (15) (20)
Restated cost of sales 95 75

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 1: PRESENTATION OF FINANCIAL STATEMENTS (FSs)

This IFRS prescribes the structure, content of financial statements in order to achieve comparability. It breaks down the
structure and content into general features and specific features.

OBJECTIVE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

GENERAL FEATURES OF FINANCIAL STATEMENTS

1. Fair presentation and compliance with IFRS: this requires that a financial statement in line with IFRS shall show a true
and fair view (TFV). “Basically”, TFV can be achieved by complying with all applicable IFRSs.
2. Going concern (GC): prepare FSs on GC basis. If GC assumption is not appropriate, make use of “a disclosed basis”.
3. Accrual basis: prepare FSs on accrual basis except for cash flow information.
4. Materiality & aggregation: aggregation is prohibited for material items, if material, disclose separately.
5. Consistency of presentation: presentation method shall be consistent from one year to the other.
6. Comparative information (CI): minimum CI as: 2 statement each for SFP, SPLOCI, SCE, SCF & the related notes.
7. Frequency of reporting: FSs shall be presented covering a 12-month period (i.e. a year).
8. Offsetting: do not offset income and expenses, assets and liabilities except if required by another IFRS.

SPECIFIC FEATURES OF FINANCIAL STATEMENTS

The specific content is broken down into: content required for identifying the FSs and complete content of a FS.

Identification of financial statements

To differentiate the FSs from “other information” the following disclosures are required:

a) Name of the reporting entity

b) Period covered
c) Whether it is an individual FS or a consolidated FS
d) Level of rounding (e.g. N’000 or N’m or N)
e) Presentation currency

Content of a complete set of financial statements

a) a statement of financial position (SFP) as at the end of the period;
b) a statement of profit or loss and other comprehensive income (SPLOCI) for the period;
c) a statement of changes in equity (SCE) for the period;
d) a statement of cash flows for the period;
e) notes, comprising significant accounting policies and other explanatory information;
f) comparative information in respect of the preceding period
g) a third (SFP) as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or
makes a retrospective restatement of items in its FSs, or when it reclassifies items in its financial statements.

Brief explanation of the basic content of financial statements

 SFP distinguishes assets & liabilities into current and non-current with the aid of the definition of current assets and
liabilities as stipulated in IAS 1. IAS 1 also provides a minimum disclosure to be presented on the face if the SFP or notes.
 SPLOCI: IAS 1 stipulates information to be presented in the SPLOCI. SPLOCI can be presented either by combining
profit or loss and OCI under one statement or presenting profit or loss under a separate statement from OCI. IAS
1 also stipulates that profit or loss may be presented either by nature or by function. A presentation by nature shows
the “raw” source of the expense while by function shows the role played by the expense to the.
 SCE: for each component of equity; this shows a reconciliation between the balance at the beginning to the balance at
the end of the reporting period. It also shows the effect of retrospective adjustment on equity.
 Statement of cash flows: see IAS 7
 Notes to the FSs: this provides: the basis on which the FSs were prepared, selected and applied accounting policies,
any information not provided elsewhere in the FSs and any additional information required for understanding the FSs.

A THIRD SPLOCI

Do you know that IAS 1 permits but does not require an entity to present a third SPLOCI
annually? (See IAS 1 paragraph 38D).

Stay Alert

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COMMON PITFALL: THE MEANING OF OTHER COMPREHENSIVE INCOME (OCI)
The following represents the common challenge/misconceptions impeding most learners from understanding the
meaning of OCI:

1. Is other income (OI) same as other comprehensive income

2. What is the “principle” to be applied in distinguishing between profit or loss and OCI
3. Once a particular gain or loss is still unrealised, then, it should be taken to OCI.

Firstly, other income and OCI may be same in that they both arise from activities “other than the entity’s ordinary
activities”. However, technically speaking, the two of them serve completely different purposes in the FSs. Within the
profit or loss, OI shows income generated from non-ordinary activities, however, the OCI is used to preserve the
integrity of profit or loss and entirely arise from remeasurement of assets and liabilities (unlike OI).

Secondly, as noted from Chapter 7 of the revised conceptual framework, distinguishing between profit or loss and OCI
“is not a conceptual thing”. Items are recognised under OCI based on the requirement “of a specific IFRS” and very little
discretion (or principle) is involved which is why the IASB has decided to include items under OCI at the level of
developing the IFRSs and not at the level of developing the principles in the Conceptual Framework.

Thirdly, do you know that “unrealised” exchange differences (from revaluing foreign currency - monetary balances) are
taken to profit or loss as required by IAS 21 paragraph 28? My point is that saying OCI are “unrealised gain and losses”
may not be completely correct because some unrealised items are also recognised in profit or loss account. It is safer to
explain that the items “permitted” for presentation under OCI are “primarily driven” by the requirements of a specific
IFRS with very little regard to the Framework. I see it as a rule-based aspect of the IFRS.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 2: INVENTORIES
Inventories are assets:

 held for sale in the ordinary course of business,

 in the process of production for such sale or
 in the form of materials to be consumed in the production process or in rendering of services.

The major issue dealt with in this IFRS is the measurement of inventories.

MEASUREMENT OF INVENTORIES
Inventories shall be measured at the lower of cost and net realisable value (NRV).

COST
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.

 Cost of purchase: purchase price, import duties, non-refundable taxes, transport/handling costs less trade discounts
and rebates.
 Conversion costs: costs directly related to unit of production plus fixed and variable production overheads.
 Other cost: costs incurred in the process of bringing the inventory to its present location and condition e.g. non-
production overheads/costs of designing products for specific customers in the cost of inventories, IAS 23 Borrowing
Costs identifies limited circumstances where borrowing costs are included in the cost of inventories.
 When inventories are purchased on deferred settlement terms, the difference between the purchase prices for normal
credit terms and the amount paid, is recognised as interest expense over the period of settlement.

Costs excluded from the cost of inventories

a) abnormal amounts of wasted materials, labour or other production costs;
b) storage costs, unless those costs are necessary in the production process before a further production stage;
c) selling costs;
d) administrative overheads that do not contribute to bringing inventories to their present location and condition.

Costs of agricultural produce harvested from biological assets

In accordance with IAS 41 Agriculture, inventories comprising agricultural produce that an entity has harvested from its
biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest. This is the
cost of the inventories at that date for application of this Standard.

Techniques for measurement of costs

This includes standard cost method which takes into consideration normal activity level and the retail method which
is used in the retail industry for large quantity of inventory. Standard cost is reviewed on a regular basis.

Cost formulas
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.

The cost of other inventories shall be assigned using First-in-first-out (FIFO) or weighted average cost (WAVCO) formular.
LIFO is not permitted by the revised IAS 2! A uniform formular should be used for inventory that are similar in nature and
use while a different formular may be justified dissimilar inventories.

NET REALISABLE VALUE

This is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to make the sale. To avoid carrying inventories at a value greater than the value that would be recovered
from selling the inventory, an entity may need to write down its inventories to NRV.

Write-down of inventory is always carried on an item-by-item basis.

RECOGNITION OF EXPENSE
a) Inventories shall be recognised as expense when the related revenue is earned.
b) The amount of any write-down of inventories to NRV shall be recognised as an expense
c) Reversal of any write-down arising from increase in NRV shall be recognised as a reduction in cost of sales.
d) Inventories that serve as a component of other assets (e.g. PPE) are recognised as an expense over the assets useful life.

SOME DISCLOSURE REQUIREMENTS

a. the carrying amount of inventories carried at fair value less costs to sell.
b. the amount of inventories recognised as an expense during the period
c. the accounting policies adopted in measuring inventories, including the cost formula used
d. the carrying amount of inventories pledged as security for liabilities.
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IAS 7: STATEMENT OF CASH FLOWS (SCF)
The objective of IAS 7 is to require the provision of information about the historical changes in cash and cash equivalents
of an entity by means of a SCF which classifies cash flows during the period from operating, investing and financing activities.

THE CONCEPT OF CASH AND CASH EQUIVALENTS

 Cash means cash in hand and at bank. This does not include cash which the entity has restricted access to.
 Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and
are subject to insignificant risk of changes in value. Such an investment must be held to meet short-term (or working
capital) commitment and maturity date should normally be within 3-months from its acquisition date.

Items classified as cash or cash equivalent usually form a significant part of the entity’s cash management policies/practices.

PRESENTATION OF STATEMENT OF CASH FLOWS (SCF)

The SCF shall report cash flows classified by operating, investing & financing activities.

 Operating activities: this relates to the principal revenue producing activities of the entity. This is a key indicator
of the extent to which the entity’s operations have generated sufficient cash to repay loans, pay dividends and make
new investments without recourse to external sources of finance. Cash flows from this activity is presented using
either the direct method or the indirect method.
 Investing activities: this relates to acquisition and disposal of long-term assets and other investments not included
in cash equivalents. These represent the extent to which expenditures have been made for resources intended to
generate future income and cash flows. Only expenditures that result in a recognised asset in the statement of
financial position are eligible for classification as investing activities.
 Financing activities: these relates to changes in the size and composition of borrowings and contributed equity. It
is useful in predicting claims on future cash flows by providers of capital to the entity

INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid shall be disclosed separately. Interest paid, dividends and interest
received may be classified as either operating, investing or financing cash flows while dividend paid may be classified as
either operating or financing cash flows.

TAXES ON INCOME
Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating
activities unless they can be specifically identified with financing and investing activities.

NON-CASH TRANSACTIONS (NCT)

NCT shall be excluded from the SCF. Examples of NCT includes: acquisition of an entity by issue of shares, acquisition of an
asset by means of finance lease, & conversion of debt to equity.

BENEFITS OF CASH FLOW INFORMATION

a) It helps users evaluate the changes in an entity’s net assets and financial structure.
b) It helps users in assessing the entity’s ability to adapt to changes circumstances and opportunities.
c) It is useful in assessing the entity’s ability to generate cash and cash equivalents
d) Helps in developing models to assess/compare the present value of future cash flows of different entities
e) By eliminating accrual accounting, it aids in comparability of the operating performance of different entities.

COMPONENTS OF CASH AND CASH EQUIVALENTS

 The components of cash and cash equivalents should be disclosed and a reconciliation should be presented showing
the amounts in the SFP and the equivalent amounts reported in the statement of cash flows.
 Considering the wide range of cash management practices all over the world, it is required for an entity to disclose the
accounting policy it applies in determining item(s) included as part of its cash and cash equivalent.

OTHER DISCLOSURES
a) Restriction on the use of or access to any part of cash equivalents.
b) The amount of undrawn borrowing facilities which are available
c) Cash flows which increased operating capacity compared to cash flows which merely maintained operating capacity.
d) Disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances
held by the entity that are not available for use by the group.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

OFF THE RECORD: DIRECT METHOD (DM) Vs INDIRECT METHOD

Even though both methods usually result into the same net cash flow from operating activities, the presentation is different
under each of the methods (See below for the presentation). Take note that this presentation affects only the operating
activities, it does not affect the investing and financing activities.

Direct method (DM) Indirect method (IM)

Cash flows from operating activities Cash flows from operating activities
Cash receipts from customers XX Profit before taxation XX
Cash paid to suppliers and employees XX Adjustments for:
Cash generated from operations XX Depreciation XX
Interest received XX Foreign exchange loss XX
Income taxes paid XX Investment income XX
Interest expense XX
Increase in trade and other receivables XX
Decrease in inventories XX
Decrease in trade payables XX
Cash generated from operations XX
Interest paid XX
Income taxes paid XX

Net cash flow from operating activities XX Net cash flow from operating activities XX

IAS 7 paragraph 19 encourages entity to report cash flows from operating activities using the direct method (DM). The
DM provides information which may be useful in estimating future cash flows and which is not available under the IM.
However, in practice, the indirect method is often used than the direct method because:

1. The indirect method reflects the quality of earnings by reconciling profitability to liquidity. If an entity earns profit and
has little liquid resources to show for such profit, then the profit may be off low quality. The reconciliation even shows
how well the entity balances its profit and liquid resources based on its financial management policies.
2. The indirect method is easier to prepare than the direct method
3. It is argued that the indirect method is less costly than the direct method
4. The IM provides entities the opportunity to mask certain anomalies through the adjustments of profit to cash flow.
This opportunity is even more pronounced considering that most users do not understand the adjustments.

TIPS FOR PREPARATION OF SCF

STEP 1: Prepare/obtain your profit or loss, SFP and the notes for both the comparative and current year. For exam purpose,
your additional information represents your notes.

STEP 2: For each line item in the SFP, calculate the differences between comparative and the current year figures to get
the movements during the year.

Assets: Increase should be negative & vice versa

Liabilities: Increase should be positive & vice versa
Equity: Increase should be positive & vice versa

STEP 3: Sum up the movements. The total of the movements ought to be zero. This is just an accuracy check!

STEP 4: Obtain a breakdown for each difference (except cash and its equivalents) and identify the following for each break
down:

a. Items that are not cash flows but were used in getting profit/loss
b. Actual cash flows

E.g. movement in PPE: additions during the year, rev. surplus and depreciation. Rev. surplus is not either (a) or (b).

STEP 5: for (a) if they were deducted in getting profit/loss add them back in the SCF and vice versa. For (b) deduct outflows
and add inflows. Take note of items that require separate disclosure e.g. tax paid.

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IAS 10: EVENTS AFTER THE REPORTING PERIOD (EARP)
The objective of IAS 10 is to identify when an entity should adjust its FSs for EARP and certain other disclosures. IAS 10 also
requires that an entity should not prepare its FSs on going concern basis if going concern assumption is not appropriate.

EVENTS AFTER THE REPORTING PERIOD (EARP)

These are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when
the financial statements are authorised for issue. Two types of events can be identified:

 Adjusting events (AE): are those that provide evidence of conditions that existed at the end of the reporting period.
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events.
 Non-adjusting events (NAE): those that are indicative of conditions that arose after the reporting period. An entity
shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting
period. If a NAE is material disclose: the nature and an estimate of its financial effect.

 Authorisation date of financial statements (FSs)

If the entity issues it FSs to shareholders or a supervisory board (made up solely of non-executives) for approval, the FSs are
authorised on the date of issue, not the date when the shareholders or supervisory board approve the FSs.

DIVIDENDS
If an entity declares dividends to holders of equity instruments (as defined in IAS 32) after the reporting period, the entity
shall not recognise those dividends as a liability at the end of the reporting period.

GOING CONCERN
An entity shall not prepare its FSs on a going concern basis if management determines after the reporting period either that
it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

OTHER DISCLOSURES
 Date of authorization for issue: an entity shall disclose the authorisation date & who gave that authorisation. If the
entity’s owners or others have the power to amend the FSs after issue, the entity shall disclose such.
 Updating disclosure about conditions at the end of the reporting period
If an entity receives information after the reporting period about conditions that existed at the end of the reporting
period, it shall update disclosures that relate to those conditions, in the light of the new information.

EXAMPLES OF ADJUSTING EVENTS EXAMPLES OF NON-ADJUSTING EVENTS

Settlement of a court case at the end of the reporting period Announcing a plan to discontinue an operation
that confirms the entity has a present obligation

The receipt of information after the reporting period indicating Destruction of a major plant by fire after the reporting
that an asset was impaired at the end of the reporting period. period

Discovery of fraud or errors that show that the FSs are incorrect Announcing/commencing a major restructuring after
year end

Determination after the reporting period of cost of asset Abnormally large changes after the reporting period in
purchased asset prices or foreign exchange rates;

The determination after the reporting period of the amount of Changes in tax rates or tax laws enacted or announced
profit-sharing or bonus payments if the entity had an after the reporting period that have a significant effect
obligation at the end of the reporting period on current and deferred tax assets and liabilities.

Information after the reporting period that the amount of a Commencing major litigation arising solely out of
previously recognised impairment loss needs adjustment. events that occurred after the reporting period.

SOME DISCLOSURE REQUIREMENTS

a) The date when the financial statements were authorised for issue and who gave that authorisation. If the entity’s
owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact.
b) As it relates to material non-adjusting event, an entity shall disclose the nature of the event and an estimate of its
financial effect, or a statement that such an estimate cannot be made.

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Compiled by Usidamen Israel

COMMON PITFALL 1: identifying the authorisation date of the FS

IAS 10 identifies the authorisation date as the date that the FSs are issued to the shareholders or, if applicable, a
supervisory board

ILLUSTRATIVE EXAMPLE
The preparation of the financial statements of FAB Ltd for the accounting period ended 31 December 2009, was completed
by the management on 15 March 2010. The draft financial statements were considered at the meeting of the board of
directors held on 20 March 2010, on which date the board approved them and authorized them for issuance. The annual
general meeting (AGM) was held on 10 April 2010, after allowing for printing and the requisite notice period mandated by
the corporate statute. At the AGM the shareholders approved the financial statements. The approved financial statements
were filed by the corporation with the Corporate Affairs Commission (CAC) Law on 20 April 2010.

Required: identify the authorisation date in accordance with IAS 10.

Solution
The date of authorization of the financial statements of FAB Ltd for the year ended 31 December 2009, is March 20, 2010,
the date when the board approved them and authorized them for issue (and not the date they were approved in the AGM
by the shareholders). Thus, all post – reporting period events between December 31, 2009, and March 20, 2010, need to
be considered by FAB Ltd for the purposes of evaluating whether they are to be accounted for or reported under IAS 10.

ILLUSTRATIVE EXAMPLE
Suppose in the above-cited case, the management of FAB Ltd was required to issue the financial statements to a
supervisory board (consisting solely of nonexecutives including representatives of a trade union). The management of FAB
Ltd had issued the draft financial statements to the supervisory board on 16 March 2010. The supervisory board approved
them on 17 March 2010, and the shareholders approved them in the AGM held on 10 April 2010. The approved financial
statements were filed with the Company Law Board on 20 April 2010.

Required: would the new facts have any effect on the date of authorization?
Solution
In this case, the date of authorization of financial statements would be 16 March 2010, the date the draft financial
statements were issued to the supervisory board. Thus, all post – reporting period events between 31 December 2009, and
16 March 2010, need to be considered by FAB Ltd for the purposes of evaluating whether they are to be accounted for or
reported under IAS 10.

COMMON PITFALL 2: Differentiating between AE and NAE

ILLUSTRATIVE EXAMPLE

The statutory audit of ABC Inc. for the year ended 30 June 2009, was completed on 30 August 2009. The financial
statements were signed by the managing director on 8 September 2009, and approved by the shareholders on 10 October
2009. The following events after the reporting period events have occurred:
1. On 15 July 2009, a customer owing N900,000 to ABC Inc. filed for bankruptcy. The financial statements include an
allowance for doubtful debts pertaining to this customer of only N50,000.
2. ABC Inc.’s issued capital comprised 100,000 equity shares. The company announced a bonus issue of 25,000 shares on
1 August 2009.
3. Specialized equipment costing N545,000 purchased on March 1, 2009, was destroyed by fire on 13 June 2009. On 30
June 2009, ABC Inc. has booked a receivable of N400,000 from the insurance company pertaining to this claim. After
the insurance company completed its investigation, it was discovered that the fire took place due to negligence of the
machine operator. As a result, the insurer’s liability was zero on this claim by ABC Inc.
Required
How should ABC Inc. account for these three events after the reporting period?
Solution
1. ABC Inc. should increase its allowance for doubtful debts to N900,000 because the customer’s bankruptcy is indicative
of a financial condition that existed at the end of the reporting period. This is an “adjusting event.”
2. IAS 33, Earnings Per Share, requires a disclosure of transactions as “stock splits” or “rights issue,” which are of significant
importance after the reporting period. This is a non-adjusting event, and only disclosure is needed.
3. This is an adjusting event because it relates to an asset that was recognized at the end of the reporting period. However,
as the insurance company’s liability is zero, ABC Inc. must adjust its receivable on the claim to zero.

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IAS 12: INCOME TAXES
Tax expense (tax income) is the aggregate amount used in the determination of P or L for the period in respect of current
& deferred taxes. The principal issue dealt with by IAS 12 is the treatment of current & deferred taxes.

CURRENT TAX
This is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.

1. An entity is required to make appropriate provisions for current tax at the end of every reporting period.
2. An entity is also required to identify whether or not there is an over/under provision of current tax relating to prior
year(s). An over provision shall be recognised as a tax income while an under provision shall be recognised as
additional tax expense. Both shall be included in the P or L of the period they were identified.

Accounting entries: for current tax liability: Dr: Income tax expense and Cr: Current tax liability.

DEFERRED TAX
This represents the future tax effect of the entity’s current financial position. Deferred tax involves comparing the carrying
amount (CA) of assets and liabilities with their tax bases (TB). Tax base is the amount attributed to assets and liabilities for
tax purposes.

The difference between carrying amount (CA) and tax base (TB) is referred to as temporary difference (TD).

Step 1: Determine the carrying amount of assets and liabilities

Step 2: Determine their TBs: the TB of an asset represents future allowable tax deduction, while the TB of a liability
represents future non-allowable tax deduction (i.e. CA less future amount deductible for tax purpose).

Step 3: compare the CA with the TB: for assets: if the CA>TB= Taxable TD, CA<TB= Deductible TB. For liabilities: if
CA>TB=Deductible TD, if CA <TB= taxable TD.

Step 4: apply the appropriate tax rate on the TD: IAS 12 requires the tax rate to reflect:

a) Tax rates that are expected to apply to the period in which the asset is realised or the liability is settled based on
the enacted or substantively enacted tax rate as at reporting date.
b) The rate that reflects the expected manner of recovery of assets or settlement of liabilities.

Step 5: allocate deferred tax: taxable TD = deferred tax liability while a deductible TD = deferred tax asset.

 For deferred tax asset: Dr: Deferred tax asset and Cr: Income tax expense. For deferred tax liability: Dr: Income tax
expense and Cr: Deferred tax liability.
 If the deferred tax is attributable to other comprehensive income (OCI): for deferred tax asset: Dr: deferred tax
asset & Cr: OCI. For deferred tax liability: Dr: OCI & Cr: deferred tax liability.

RESTRICTION ON THE RECOGNITION OF DEFERRED TAX ASSETS

In allocating deferred tax, if the aggregate deferred tax results into a deferred tax asset,
the entity should recognise the asset to the extent it is probable that taxable profit will be
available against which the deductible temporary difference can be utilized. (IAS 12:24).
Stay Alert

Step 6: determine whether to offset deferred tax assets & liabilities: offset only if the entity:

a) has a legally enforceable right to set off the recognised amounts; &
b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Discounting of deferred tax

IAS 12 states that deferred tax assets and liabilities should not be discounted due to the difficulties involved.

SOME DISCLOSURE REQUIREMENTS

a. The major components of tax expense (income) shall be disclosed separately;
b. Explanation of the relationship between tax expense (income) & accounting profit.
c. an explanation of changes in the applicable tax rate(s) compared to the previous accounting period;
d. the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for
which no deferred tax asset is recognised in the statement of financial position.

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Compiled by Usidamen Israel

COMMON PITFALL: COMPUTATION OF DEFERRED TAX (DT)

Deferred tax is basically the future tax effect of the entity’s current financial position. The mistake made by most students
and professionals is that they usually view deferred tax from just one portion (asset only or liability only) of the FSs and fail
to view it from perspective of the whole of the FSs.

To calculate deferred tax, you may require a basic knowledge of current tax (CIT) computation. During the time you learnt
taxation, you would have been taught a format which involves adding back certain disallowable expenses to profit before
tax, deducting capital allowance and the likes. The summary of that format is seen below:

N
A Net taxable income/loss X
B Less: Net taxable loss (X)
C Less: net allowable expenses (X)
D Add: net disallowable expense X
Taxable profit/(loss): A + B +C + D XX

We shall be making use of the above to compute DT. “A” & “B” can be derived from DT assessment of the entity’s asset, “C”
& “D” can be derived from the entity’s liability. They are all derived by comparing carrying amount (CA) with tax base (TB).

Illustration 1 (Net future taxable income and net future taxable loss)
As at the reporting date, the carrying amount of Novato Plc’s PPE was N20m and trade receivables was N14m. the tax
bases of these assets were N12m and N15m respectively.
Required
Calculate the temporary difference

Solution Carrying amount Tax base Taxable/(deductible) TD

PPE N20m N12m N8m
Trade receivables N14m N15m (N1m)

NB: The carrying amount of an asset represents future economic benefit i.e. future income while the tax base represents
future allowable expenses, hence, the difference between the two would result into a “net future taxable income (N8M)
and loss (N1m)”. If the CA > TB = net future taxable income because this indicates that the income is higher than expense.

Under IAS 12, the differences (N8m & N1m) are referred to as a temporary difference (See step 3 under IAS 12)

Illustration 3 (net future allowable expenses & net future disallowable expenses)
The CA of Novato’s 8% convertible debt was N89m and trade payable was N30m. TB was N95m and N27m respectively.
Required
Calculate the deferred tax assuming tax rate of 30%
Solution
Carrying amount Tax base Taxable/(Deductible) TD
Convertible debt N89m N95m N6m
Trade payable N30m N27m (N3m)

The carrying amount of a liability represents future allowable expenses while the tax base represents future disallowable
expenses, therefore, if the future allowable expense (CA) > future disallowable = net future allowable expense & vice-versa.

BRINGING THE TWO ASSESSMENTS TOGETHER

DT computation is not complete until the DT assessments done for both asset and liability above are integrated into one

N’m
Net taxable income (PPE) 8
Net taxable loss (Trade receivables) (1)
Less: net allowable expenses (trade payable) (3)
Add: net disallowable expense (convertible debt) 6
Taxable temporary difference (Taxable profit/(loss)) 10
Assuming tax rate is 30%, deferred tax liability (30% X N10m) 3

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IAS 16: PROPERTY, PLANT AND EQUIPMENT (PPE)
The principal issues in accounting for PPE are the recognition of the assets, the determination of: their carrying amounts
(CA), depreciation charges, the impairment losses (See IAS 36) to be recognised in relation to them.

RECOGNITION
The cost of an item of PPE shall be recognised as an asset if, and only if:

a) it is probable that future economic benefits (FEB) associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.

DETERMIING THE CARRYING AMOUNT (CA) OF AN ITEM OF PPE

Carrying amount (CA) = Cost (or fair value) – accumulated depreciation – accumulated impairment loss
Deriving this carrying amount would require us to take a look at each of its ingredients.

MEASUREMENT AT RECOGNITION
An item of PPE that qualifies for recognition as an asset shall be measured at its cost.
Elements of cost
a) its purchase price, including import duties & non-refundable purchase taxes, less trade discounts & rebates.
b) any costs directly attributable to bringing the asset to the required location and condition.
c) initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located (where
there is an obligation).

 Directly attributable costs include: installation & assembly costs, borrowing costs, professional fees, direct
employee benefit costs, site preparation cost, initial delivery & handling costs, initial testing cost etc.
 Directly attributable costs exclude: admin. & general overhead, cost of opening a new facility, cost of conducting
a business in a new location or with new customers, cost of introducing a new product etc.

The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of
credit unless such interest is capitalised in accordance with IAS 23.

MEASUREMENT AFTER RECOGNITION

PPE is subsequently measured using either:

Cost model:
PPE is measured cost less accumulated depreciation less any accumulated impairment loss.

Revaluation model:
PPE is measured at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount
does not differ materially from that which would be determined using fair value at the end of the reporting period.

Depreciation:
This is the systematic allocation depreciable amount over the useful life of an asset.

 Depreciable amount = Cost (as determined above) less residual value.

 The residual value (RV) and the useful life (UL) of an asset shall be reviewed at least at each financial year-end.
 Each part of PPE with a cost that is significant in relation to the total cost shall be depreciated separately.
 The depreciation shall be recognised in P or L unless it is included in the carrying amount of another asset.
 The depreciation method (DM) used shall reflect the pattern in which the asset’s future economic benefits are expected
to be consumed by the entity.
 Depreciation method (DM) shall be reviewed at least at each year end.
 Changes in RV, UL and DM shall be treated as a change in accounting estimates (in accordance with IAS 8).
 Depreciation commences once the PPE is “available for use” and continues even when the asset is idle
 Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a
disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised.

DERECOGNITION
 The CA of an item of PPE shall be derecognised: on disposal or when no FEB are expected from its use or disposal.
 Gain or loss on disposal shall be recognised in profit or loss account.

SOME DISCLOSURE REQUIREMENTS

a) the existence and amounts of restrictions on title, and PPE pledged as security for liabilities;
b) the amount of contractual commitments for the acquisition of property, plant and equipment (PPE);
c) the amount of expenditures recognised in the carrying amount of an item of PPE in the course of its construction
d) for revalued assets: effective date of revaluation, whether an independent valuer was used, the carrying amount that
would have been recognised if the PPE was carried at cost model.

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Compiled by Usidamen Israel

IAS 17: LEASES

IAS 17 prescribes, for lessees & lessors, the appropriate accounting treatment to apply in relation to leases.

CLASSIFICATION OF LEASES
Classify as finance lease (FL) if all substantial risks & rewards is transferred or if not, as an operating lease (OL).

LEASES IN THE FINANCIAL STATEMENTS OF LESSEES

Finance leases (FL): initial recognition
 At the commencement of the lease, recognise assets & liabilities in SFP at fair value of the leased asset or, if lower, the
present value (PV) of the minimum lease payments (MLP), each determined at inception of the lease.
 The discount rate to be used in calculating the PV of the MLP is the interest rate implicit in the lease, if not practicable,
the lessee’s incremental borrowing rate shall be used.
 Any initial direct costs of the lessee are added to the amount recognised as an asset.

Subsequent measurement:
 MLPs shall be apportioned between the finance charge and the reduction of the outstanding liability.
 Allocate finance charge to each period in the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability.
 Contingent rents shall be charged as expenses in the periods in which they are incurred.
 Depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned
(and apply IAS 16 & IAS 38). Depreciation is based on the shorter of the lease term and useful life.

Operating leases
Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term
unless another systematic basis is more representative of the time pattern of the user’s benefit

LEASES IN THE FINANCIAL STATEMENTS OF LESSORS

Finance lease (FL):

Initial recognition: Lessors shall recognise a lease receivable measured at the net investment in the lease (NIIL).

Subsequent measurement:
 Recognise finance income on a pattern reflecting a constant periodic rate of return on the lessor’s NIIL.
 Manufacturer or dealer lessors shall recognise selling profit or loss in the period, by applying the accounting policy for
outright sales. Market interest rates shall be used determining selling profit/loss. Costs incurred in connection with
negotiating & arranging a lease are recognised as expense when selling profit is recognised.

Operating leases
 Recognise lease income on a straight-line basis over the lease term, unless another systematic basis that is more
representative of the time pattern within which the asset is consumed.
 Initial direct costs incurred by lessors relating to an operating lease shall be added to the carrying amount of the leased
asset & recognised as an expense over the lease term on the same basis as the lease income.
 The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy for
similar assets, & depreciation shall be calculated in accordance with IAS 16 & IAS 38.

SALE AND LEASEBACK TRANSACTIONS (SALT)

FL: If SALT results in a finance lease, any gain on disposal shall be deferred and amortised over the lease term.

Operating lease
 If sale price is equal to fair value, any profit or loss shall be recognised immediately.
 If the sale price is below fair value, any profit or loss shall be recognised immediately except that, if the loss is
compensated for by future lease payments at below market price, it shall be deferred and amortised in proportion to
the lease payments over the period for which the asset is expected to be used.
 If the sale price is above fair value, the excess over fair value shall be deferred and amortised.
 If the fair value at the time of a SALT is less than the carrying amount of the asset, a loss equal to the amount of the
difference between the carrying amount and fair value shall be recognised immediately

SOME DISCLOSURE REQUIREMENTS

a) Both lessee and lessors are required to disclose a general description of the lease arrangements.
b) Lessors are required to disclose the total contingent rent recognised as an income while the lessee discloses the total
contingent rent discloses as an expense.

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IFRS 16: LEASES (Effective from 1 Jan 2019)
IFRS 16 ensures that lessees & lessors faithfully represents the effect of lease transactions.

IDENTIFYING A LEASE
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of
time in exchange for consideration. The entity is required to identify only the component(s) that contain a lease and apply
IFRS 16 on those component(s).

Lease term: The lease term is the non-cancellable period of a lease. IFRS 16 sets out how to determine LT.

LEASES IN THE FINANCIAL STATEMENTS OF LESSEES: LEASE ACCOUNTING MODEL (LAM)

Recognition: at the commencement date, a lessee shall recognise a right-of-use asset (ROU) and a lease liability.

Measurement-Right to use asset (ROU) is initially measured at cost as determined in IFRS 16 (not IAS 16).

Subsequent measurement: after the commencement date, a lessee shall measure the ROU asset by applying a cost model.
Other measurement models that should be considered are as follows:
 Fair value model, if the ROU asset meets the definition of an investment property and the entity uses the FV model.
 May use revaluation model if ROU asset relates to a class of PPE measured using revaluation model (IAS 16).

Lease liability (LL)

Initial measurement: At the commencement date, a lessee shall measure the lease liability (LL) at the present value of the
lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the
lease, if not determinable, the lessee’s incremental borrowing rate shall be used (same as IAS 17).

Subsequent measurement: After the commencement date, a lessee shall measure the lease liability by:
 increasing the carrying amount to reflect interest on the lease liability;
 reducing the carrying amount to reflect the lease payments made; and
 remeasuring the carrying amount to reflect any reassessment or lease modifications

PRESENTATION
 SFP: present ROU assets & LL separately, if not, disclose the particular line item they have been included.
 Profit or loss: present interest expense (as part of finance costs) and depreciation of ROU asset separately.
 SCF: the following are taken to operating activities: variable lease payments not included in LL and payment for short
term/low value lease, while principal paid is taken to financing activities, interest paid is treated like other interest paid.

RECOGNITION EXEMPTION
Lessee can elect not apply the above model to: short term lease (<12 months) or for lease of low value items.

LEASES IN THE FINANCIAL STATEMENTS OF LESSEES: treatment is significantly similar to IAS 17.

SALE AND LEASEBACK TRANSACTION (SALT)

First apply IFRS 15 to determine if there is a sale and treat as follows:

Lessee (Seller) Lessor (Buyer)

If SALT is  Derecognise underlying asset (UA) & use lease Recognise the UA & apply the LAM to the
a sale accounting model (LAM) on the leaseback. leaseback.
 Measure the ROU asset at the retained portion of the
previous carrying amount.
 Recognise a gain/loss related to the rights transferred to
the lessor.

if SALT is  Continue to recognise the underlying asset  Do not derecognise the UA.
not a  Recognise a financial liability under IFRS 9 for any amount  Recognise a financial asset for the
sale received from the buyer-lessor. amount paid to the seller-lessee.

SUB-LEASES
A sub-lease is a transaction in which a lessee (or intermediate lessor) grants a right to use the underlying asset to a third
party, while the ‘head lease’ between the original lessor and lessee remains in effect. Accounting for sub-lease usually
affects only the “intermediate lessor”. The following summarises the accounting to be carried out::
 Intermediate lessor classifies as finance or an operating lease with reference to the ROU from the head-lease
 Intermediate lessor treats the head lease and sub-lease as two different contracts.
 Treat sub-lease as operating lease if the head lease is a short-term lease.

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Compiled by Usidamen Israel

OFF THE RECORD: SOME DIFFERENCES BETWEEN IAS 17 & IFRS 16

IAS 17 IFRS 16

There is very little focus on control over the use There is more emphasis on control both over the use of the identified
of the leased asset, more emphasis is placed on asset and the economic benefits generated from the use of the asset.
control over the economic benefits from the use
of the asset.

Classification into finance or operating leases is Classification into finance or operating leases is considered only in
considered in financial statements of both the the FSs of the lessor. By default, leases are treated as finance lease in
lessor and lessee. the FSs of the lessee subject to the recognition exemption.

Under finance lease in the FSs of a lessee, the Under finance lease in the FSs of a lessee, the “ROU asset” is initially
leased asset is initially measured at the lower of measured at cost.
the present value of minimum lease payment and The cost is as determined by IFRS 16 and not in line with IAS 16 and
fair value 38. Cost includes following:
 The amount of initial measurement of the lease liability
 Any lease payments made at or before the commencement date
less any lease incentives received
 Any initial direct costs incurred by the lessee
 An estimate of costs to be incurred by the lessor for dismantling
and removing the underlying asset where there is an obligation.

A lessee is not required to remeasure lease The lessee is required to reassess the lease liability to reflect changes
liability to reflect changes in the lease payments, in lease payments, lease term and other key judgements
lease term and other key judgements.

The lessee is required to make lesser disclosures Extensive disclosures are required for finance and operating leases.
under finance and operating leases The Standard also requires the need to assess whether additional
information is necessary to meet the overall objective.

IAS 17 requires assessment of whether or not an Instead, IFRS 16 requires testing the ROU asset for impairment.
operating lease has become onerous

Under a sale and leaseback transaction (SALT), Under a SALT, the seller-lessee shall treat the lease back as a finance
the seller-lessee may treat the lease back as lease subject to the recognition exemption i.e. if it is short-term or
either an operating or finance lease the underlying asset is of low value.

There is very little guidance on lease Extensive guidance on lease modifications.

modifications

SIMILARITIES BETWEEN IFRS 16 AND IAS 17

 The lease accounting model for lessors in both IFRSs are similar.
 Under both IFRSs, lessees cannot choose to measure lease liabilities subsequently at fair value.
 Under both IFRSs, the discount rate used to by a lessee to discount a lease liability is the interest rate implicit to the
lease or if not determinable, the lessee’s incremental borrowing rate.

PRACTICAL EFFECTS OF APPLYING IFRS 16

 IFRS 16 would significantly improve the quality of financial reporting for companies with material off balance sheet
leases and transparency is improved as a lot of off balance sheet finance would be brought into the FSs.
 Companies with material off-balance sheet lease are expected to incur some costs on initially implementing IFRS 16
and on an on-going basis.
 Considering the recognition exemption for short-term leases and leases of low value items, this may lead to cost
reliefs in applying IFRS 16.
 Deterioration of some debt ratios due to increased gearing, in addition, total assets would increase etc.

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IAS 18 REVENUE (Has been superseded by IFRS 15)
Revenue is the gross inflow of economic benefits during the period from the entity’s ordinary activities when those inflows
result in increases in equity, other than increases relating to contributions from equity participants.

The primary issue in accounting for revenue is determining timing of revenue. Generally, revenue is recognised when (The
general revenue recognition criteria):

a) it is probable that future economic benefits will flow to the entity and
b) these benefits can be measured reliably.

MEASUREMENT OF REVENUE
 Revenue shall be recognised at the fair value of the consideration received or receivable.
 The trade discounts and rebates allowed by the entity are taken into consideration in revenue measurement.
 When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is
determined by discounting all future receipts using an imputed rate of interest.
 Revenue is not recognised when similar goods or services are swapped or exchanged.
 If goods exchanged are dissimilar, revenue is measured at the fair value of goods received, if impracticable, it is
measured at the fair value of the goods or services given up.

IDENTIFICATION OF TRANSACTIONS
 The recognition criteria are applied on separately to each transaction
 It may also be necessary to apply the RC on separately identifiable components of a single transaction.
 Conversely two or more transactions may be combined and the RC applied on the combined transaction.

RECOGNITION OF REVENUE
Sale of goods
Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor
effective control over the goods sold;
c) the amount of revenue can be measured reliably;
d) it is probable that the economic benefits associated with the transaction will flow to the entity; and
e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Rendering of services
When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with
the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting
period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

a) the amount of revenue can be measured reliably;

b) it is probable that the economic benefits associated with the transaction will flow to the entity;
c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; &
d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be
recognised only to the extent of the expenses recognised that are recoverable.

Interests, royalties and dividends

Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised when
the general RC above is met on the following bases:

a) interest shall be recognised using the effective interest method as set out in IFRS 9;
b) royalties shall be recognised on an accrual basis in line with the substance of the relevant agreement; &
c) dividends shall be recognised when the shareholder’s right to receive payment is established.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS (Effective from 1 January 2018)
The core principle is that an entity shall recognise revenue to depict the transfer of promised goods or services (GOS) to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those GOS.

 IFRS 15 replaces the following IFRSs: IASs 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, SIC 31.
 IFRS 15 applies a 5-step model for revenue recognition and measurement, as described below.

THE FIVE-STEP REVENUE MODEL

Recognition
Step 1: identify the contract with customers: a contract exists if all the following criteria are met:
 Collection of consideration is probable
 Rights of goods or services and payment terms can be identified
 It has commercial substance
 It is approved and the parties are committed to the obligation

Step 2: identify the performance obligation (PO): a PO is the unit of account for revenue recognition. An entity assesses
the goods or services (GOS) promised in a contract with a customer and identifies as a PO either:
 A good or service (or a bundle or goods or services) that is distinct; or
 A series of distinct GOS that are substantially the same & that have same pattern of transfer to the customer.

It is important to note that “only” promises (including implied promises) that transfer GOS to the customer can be PO.

Measurement
Step 3: determine transaction price (TP): the TP is the amount of consideration to which an entity expects to be entitled
in exchange for transferring the GOS to a customer, excluding amounts collected on behalf of 3rd parties.

Variable consideration, significant finance component, non-cash consideration, consideration payable to a customer should
all be taken into consideration in determining TP.

Customer credit risk is considered in step 1 and not in step 3, but if there is a significant finance component provided to the
customer the entity shall consider credit risk in determining the appropriate discount rate.

Step 4: Allocate the TP to PO in the contract: the TP is allocated to each PO or distinct GOS to depict the amount of
consideration to which the entity expects to be entitled in exchange for transferring the promised GOS.

An entity generally allocates the TP to each PO in proportion to its stand-alone selling price (SASP). However, when specified
criteria are met, a discount or variable consideration is allocated to one or more, not all POs,

Step 5: recognise revenue when or as the entity satisfies a performance obligation (PO): an entity recognizes revenue
when or as it satisfies a PO by transferring a GOS to a customer, either at a point in time (when) or over time (as). A GOS
is transferred when or as the customer obtains control.

 If the PO is satisfied at a point in time, recognise revenue at the point in time at which control of the GOS is transferred.
 If the PO is satisfied over time, an entity is expected to identify an appropriate method to recognise revenue over
time. IFRS 15 talks about the output and input methods

CONTRACT COSTS = Costs of obtaining the contract + Costs of fulfilling the contract + amortisation and impairment of
assets arising from costs to obtain or fulfill the contract.

CONTRACT MODIFICATION (CM)

A contract modification (CM) occurs when the parties to a contract approve a change in scope, price or both.
 If the CM adds additional GOS that are distinct from those already transferred, account for it prospectively as follows:
o Account for it as a separate contract if the price of the additional GOS is commensurate with their SASP
o If the price of the additional GOS is not commensurate with their SASP, account for CM as termination of existing
contract and creation of new contract.
 If the CM does not give rise to additional GOS that is distinct from those already transferred, account for CM as part of
the original contract (cumulative catch-up adjustment).
 A change in price is allocated to the performance obligation in the modified contract (except in certain scenarios).
 Do not account for contract modification until it is approved by the parties

PRESENTATION AND DISCLOSURE: When either party to a contract has performed, present the contract in the SFP as a
contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s
payment. An entity shall present any unconditional rights to consideration separately as a receivable.

Quantitative and qualitative disclosures are required to enable users of FSs to understand the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers.
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 OFF THE RECORD: DIFFERENCES BETWEEN IAS 18/IAS 11 AND IFRS 15
Some areas of IAS 18/IAS 11 IFRS 15
differences

Dividend income Dividend is recognised when an Absence of a guidance on the accounting for
entity’s right to collection has been dividend income. Instead, guidance that is
established consistent with IAS 18 has been incorporated into
the financial instruments standards.

Separating components of a Limited guidance on identifying Extensive guidance on identifying separate

contract separate components that applies to components that applies to all revenue
all revenue generating transactions. generating transactions.

Estimation uncertainty Under IAS 18, an entity recognizes IFRS 15 uses these criteria as ceiling for the
revenue only if it can estimate the recognition of revenue. It limits rather than
amount reliably. preclude revenue recognition.

Advance receipt from IAS 18 is silent on the treatment of IFRS 15 require that an interest expense should be
customers revenue when customers make recognised on any payments received from
payments on advance. customers.

Trade discounts granted to IAS 18 does not include specific IFRS 15 includes specific guidance on allocating
customers guidance on the allocation of trade discounts.
discounts to each components of
the transaction

Transfer of goods or services IAS 18 focuses on the transfer of risk IFRS 15 applies a control-based approach
and reward in the recognition of (whereby control can be transferred over time or
revenue on sale of goods or services at a point in time) regardless of the industry.

SIMILARITIES BETWEEN CURRENT REVENUE ACCOUNTING PRACTICES IFRSs (IASs 11 & 18) & IFRS 15

Areas of similarities Similarities

Contracts at their early stages Both IAS 11 and IFRS 15 requires that revenue recognised is restricted to costs incurred
which are expected to be recoverable and no profit is recognised.

Contract modification IAS 11 includes guidance on contract variations and claims which is similar to IFRS 15

Amounts collected on behalf Under IFRS 15 and IAS 18, amounts collected on behalf of a 3 rd party cannot be
of a 3rd party recognised as a revenue. However, the guidance for determining a principal and agent
is different in both Standards.

Customer loyalty programme The guidance by IFRS 15 is similar to existing IFRSs, however, there is a difference in the
allocation of consideration.

SOME KEY PRACTICAL IMPACTS OF IFRS 15

Areas of impact Further explanation

Need to update IT systems Entities may need to capture additional data required under the new standard – e.g. data
used to make revenue transaction estimate and to support disclosures.

Revenue recognition may be This may affect revenue transactions with multiple components, variable consideration
accelerated or deferred or licenses. This may in turn affect financial measures and ratios, analysts expectations,
compensation arrangements, contractual covenants etc.

Reconsideration of sales and Some entities may wish to reconsider the current contract terms to achieve or maintain
contracting processes a particular revenue profile.

Revision of internal controls Entities will need to revise internal controls as it relates to completeness, occurrence and
accuracy.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT

ASSISTANCE
The core principle in accounting for government grant is to match the grant income with the cost of fulfilling the condition
tied to the grant. This method of accounting for government grant is called the income approach.

Under IAS 20, Government refers to government, government agencies and similar bodies whether local, national or
international.

ACCOUNTING FOR GOVERNMENT GRANTS: THE FOUR STEP MODEL

Government grants 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.

1) Identify the condition tied to the grant

Government grants usually have conditions tied to them. These conditions are the criteria the entity must satisfy before the
entity can obtain access to the grant.

2) Determine the grant income and the cost of fulfilling the condition
a. Grant income
The grant may be either monetary or non-monetary.
i. Monetary grant: government transfers cash to the entity. Value of the grant is equal to the cash transferred.
ii. Non-monetary grant: this is in form of a transfer of a non-monetary asset (NMA), such as land or other resources,
for the use of the entity. Account for both grant and asset at the fair value of the NMA.

b. Cost of fulfilling the condition

The cost of fulfilling the condition may give rise to either ‘an asset’ or ‘an expense’ for the entity.

i. Grant related to asset (GRA): are government grants whose primary condition is that an entity qualifying for them
should purchase, construct or otherwise acquire “long-term” assets. GRA are accounted for using:
 Deferred income approach: recognise grant as deferred income & spread over the useful life of asset.
 Reduction from cost: deduct the grant in calculating the carrying amount of the asset. The grant is recognised in
profit or loss over the life of a depreciable asset as a reduced depreciation expense.
ii. Grant related to income (GRI): are government grants other than those related to assets. GRI are presented as part of
profit or loss, either separately or under a general heading such as ‘other income’; alternatively, they are deducted in
reporting the related expense.

3) Determine when to recognise the grant

Government grants shall not be recognised until there is reasonable assurance that:
i. the entity will comply with the conditions attaching to them; and
ii. the grants will be received.

The above recognition criteria shall be strictly followed regardless of the manner in which the grant is received and whether
or not it has been received from the government.

4) Match the grant income and the cost on a systematic basis

REPAYMENT OF GOVERNMENT GRANT

A government grant that becomes repayable shall be accounted for as a change in accounting estimate (IAS 8).

DISCLOSURE OF GOVERNMENT ASSISTANCE

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of
entities qualifying under certain criteria. Excluded from the definition of government grants are certain forms of government
assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity. These government assistances should be disclosed.

OFF THE RECORD: ACCOUNTING TREATMENT OF GOVERNMENT GRANTS

ILLUSTRATIVE EXAMPLE
Amadi Plc obtained a government grant of N100bn towards the acquisition of a machinery which costs N250bn. Amadi
Plc depreciates its machinery using 40% reducing balance over a 4-year useful life.
Required: show the treatment of the above in the profit or loss and the statement of financial position.

Answer
Method 1; Deferred income approach

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Amadi Plc
Statement of profit or loss
1 2 3 4
N’m N’m N’m N’m
Depreciation (Wk 4) (100) (60) (36) (54)
Grant income 40 24 14.4 21.6

Amadi Plc
Statement of financial position
1 2 3 4
Machinery N’m N’m N’m N’m
Cost 250 250 250 250
Accumulated depreciation (100) (160) (196) (250)

Non-current liabilities
Deferred income (Wk 5) 36 21.6 nil nil

Current liabilities
Deferred income (Wk 5) 24 14.4 21.6 nil

Method 2: reduction from cost method

Amadi Plc
Statement of profit or loss 1 2 3 4
Depreciation (Working 5) 60 36 21.6 32.4
Statement of financial position
Machinery
Cost 150 150 150 150
Accumulated depreciation (60) (96) (117.4) (150)

Workings
1. The grant was obtained for the purpose of acquiring a machinery
2. The condition would lead to acquisition of a machinery of N250bn, hence, this is a grant related to asset.
3. The value of the grant is N100bn which is monetary grant.
4. The cost of the machinery (N250bn) is matched against the grant (N100bn) on a systematic basis:
Method 1: the deferred income approach
Years Annual depreciation (N’m) Annual grant income released to profit or loss (N’m)
1 250 x 40% = 100 100 x 40% = 40
2 (250 – 100) x 40% = 60 (100 – 40) x 40% = 24
3 (250 – 100 – 60) x 40% = 36 (100 – 40 – 24) x 40% = 14.4
4 250 – 100 – 60 – 36 = 54 100 – 40 – 24 – 14.4 = 21.6
5. Deferred income
1 2 3 4
(N’m) (N’m) (N’m) (N’m
Opening balance 100 60 36 21.6
Release to profit or loss (40) (24) (14.4) (21.6)
Closing balance 60 36 21.6 nil
Split the closing balance into current and non-current as required by IAS 1
Current portion (i.e. the amount that would be released to profit or loss next year) 24 14.4 21.6 Nil
Non-current portion - balancing figure 36 21.6 Nil Nil

Method 2: reduction from cost method

Depreciable amount: N250bn – N100bn = N150bn
Years Annual depreciation
1 150 x 40% = 60
2 (150 - 60) x 40% = 36
3 (150 – 60 – 36) x 40% = 21.6
4 150 – 60 – 36 – 21.6 = 32.4

36 | P a g e
 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 23: BORROWING COSTS

The core principle of this IFRS is to capitalise only directly attributable borrowing costs (DABC) as part of the cost of a
qualifying asset (QA). The Standard plays around the concept of QA and borrowing costs including how they are related.

QUALIFYING ASSETS (QAs)

These assets necessarily take a substantial period of time to get them ready for their intended use or sale e.g.

a) Intangible assets
b) Investment property
c) Manufacturing plants
d) Power generating facilitates
e) inventories

The following are not QAs:

a) Inventories that would take short period of time to manufacture

b) Assets that are ready for use or sale immediately after purchase
c) Financial assets

BORROWING COSTS (BCs)

BCs are interest and other cost incurred in connection with borrowing of funds. Examples include: effective interest (IAS 39),
finance charges under finance lease (IAS 17).

Borrowing costs eligible for capitalisation

 Specific borrowing: the entity borrows funds specifically for the purpose of obtaining a particular QA, the amount
of BCs eligible for capitalisation is the actual borrowing costs incurred on that borrowing less any investment income
(on the temporary investment of those borrowings).
 General borrowings: here, the funds are taken from a pool of funds. This pool of funds is usually meant for general
use and are not specific to the qualifying asset. Borrowing costs are calculated by using weighted average cost of
capital (WACC) relating to the pool of funds.

Period of capitalisation
This is broken down into commencement, suspension and cessation of capitalisation

 Commencement of capitalisation: an entity shall begin capitalising BCs when the entity first meets all of the
following conditions:
a) it incurs expenditures for the asset;
b) it incurs borrowing costs; and
c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Activities are not
restricted to only physical work. Preparation for physical work also represents an activity.
 Suspension of capitalisation: an entity shall suspend capitalisation of borrowing costs during extended periods in
which it suspends active development of a qualifying asset. However, an entity does not normally suspend
capitalising borrowing costs:
a) During a period when it carries out substantial technical and administrative work
b) a temporary delay is a necessary to get an asset ready for its intended use or sale.
c) If the asset is undergoing maturity during the period of suspension
 Cessation of capitalisation: an entity shall cease capitalising borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.

EXCESS OF CARRYING AMOUNT OF THE QA OVER RECOVERABLE AMOUNT

When the carrying amount or the expected ultimate cost of the QA exceeds its recoverable amount or net realisable value,
the carrying amount is written down or written off in accordance with the requirements of IAS 36.

DISCLOSURE REQUIREMENTS
An entity shall disclose:
(a) the amount of borrowing costs capitalised during the period; and
(b) the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

COMMON PITFALL: The computation of borrowing costs (BC) eligible for capitalisation
Capitalisation of BC is based on the principle explained under the “period of capitalisation”. A common pitfall is that
borrowing costs are capitalised based on how the funds are incurred on the qualifying asset, this is not correct!! Let’s
illustrate.

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ILLUSTRATION
On 1 January 20X6 Damobrazil Plc borrowed N12bn (at 10% per annum) to finance the construction of an asset. Work
started during 20X6. The loan facility was fully drawn down on 1 January 20X6, and was utilised as follows.
N'bn
1 January 20X6 (half of architect’s fees) 2
1 April 20X6 (the remaining half) 2
Commencement of physical work 4
31 July 20X6 4

The architect started the architectural design of the building on 1 March 20X6 and concluded his work on 30 April 20X6,
then physical work commenced on 2 May 20X6.

Due to security issues, there was suspension of work from 1 August 20X6 after which work resumed on 16 Nov 20X6.

As at 28 February 20X7, what was left for the building to be totally completed were minor modifications, but the building
was totally completed on 7 March 20X7 and Damobrazil started using the building on 10 March 20X7.

Required
Ignoring compound interest and investment income, calculate the total borrowing costs which may be capitalised for the
asset and the total amount of borrowing costs to be expensed as at 17 March 20X7.

Answer
Period Expense Capitalised Total
(N’bn)
1 Jan 20X6 – 28 Feb 20X6 2/12 x 10% x N120bn = N2bn Nil 2
1 Mar 20X6 – 31 July 20X6 Nil. (See step 1) 5/12 x 10% x N120bn = N5bn 5
1 August 20X6 – 15 Nov 20X6 3.5/12 x 10% x N120bn = N3.5bn Nil. (See step 2). 3.5
16 Nov 20X6 – 28 Feb 20X7 Nil. (See step 3). 3.5/12 x 10% x N120bn = N3.5bn 3.5

N’bn
Total amount expensed (N2bn + N3.5bn) 5.5
Total amount capitalised (N5bn + N3.5bn) 8.5
TOTAL BORROWING COSTS 14

Explanation
When a loan is drawn down, interests start accruing on the amount drawn down regardless of when the borrower starts
applying the funds towards the project, hence, capitalising the interest with the cost of the asset is not dependent on how
the funds are expended on the project but on the principle of period of capitalisation in IAS 23.

Step 1: Identify when to commence capitalisation i.e. when all 3 criteria for commencement are fulfilled
Date Brief explanation
1  Criteria 1: Are expenditures being incurred?
January Yes, the company incurred N1bn on architect’s fees.
20X6  Criteria 2: Are borrowing costs being incurred?
Yes, interests started accruing from 1 January 20X6.
 Criteria 3: Have activities commenced?
No, Damobrazil was yet to commence any activity on the project.
Conclusion: Capitalisation cannot commence as all three (3) criteria must be met. Only 2 were met.
1 March Criteria 1 & 2 have already been met since 1 January 20X6, however, criteria 3 was fulfilled on 1 March
20X6 20X6 when the architect started design. Activities are not restricted only to physical work.
Conclusion: Commence capitalisation from 1 March 20X6!

Step 2: Check if any incident occurred that would warrant suspension of capitalisation.
There was suspension of work from 1 August 20X6 to 15 November 20X6 representing three and half months. Since the
asset was not undergoing maturity during this period, BCs incurred during this period shall be expensed!

Step 3; identify when to cease capitalisation i.e. then the asset is “substantially complete”
Capitalisation ceases when the asset is “substantially” complete. The building was substantially complete on 28 February
20X7 because the remaining activities were minor modifications. Capitalisation should cease from this date!

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 24: RELATED PARTY DISCLOSURES

A related party transaction (RPT) is a transfer of resources, services or obligations between a reporting entity and a related
party, regardless of whether a price is charged.

The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention
to the possibility that its financial position & profit or loss may have been affected by the existence of related parties & by
transactions & outstanding balances, including commitments, with such parties.

EXAMPLES OF RELATED PARTY RELATIONSHIPS

The following represents “persons” that are related to a reporting entity:

a) A person that has control or joint control of the reporting entity (RE) and a close member of the person’s family (CMPF).
b) A person that has significant influence over the RE and a close member of the person’s family (CMPF).
c) A person that is a member of the key mgt. personnel (KMP) of the reporting entity or of a parent of the RE & a CMPF.

Two entities are related to each other if:

d) Both entities are within the same group.
e) 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).
f) The entity is controlled by a person identified in a, b and c above.
g) Both entities are joint ventures of the same third party.

Scope exclusions and exemptions (the following are not related parties)

 Providers of finance, trade unions, public utilities, and government departments and agencies (that do not control, jointly
control, or significantly influence the reporting entity) are not necessarily related parties (RPs) simply by virtue of their
normal dealings with an entity, even if they participate in decision-making processes or affect freedom of action.
 Customers, suppliers, franchisors, distributors, or general agents with whom an entity transacts a significant volume of
business are not related to an entity solely because the entity is economically dependent on them.
 Two entities are not RPs simply because they have common directors or other members of KMP in common.
 Two venturers are not related parties simply because they share joint control over a joint venture.

KEY DISCLOSURES
1. Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been
transactions between them.
2. An entity shall disclose KMP compensation in total and for each of the following categories: short-term employee
benefits; post-employment benefits; other long-term benefits; termination benefits; and share-based payment.
3. If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose:
a) the amount of the transactions;
b) the amount of outstanding balances, including commitments,
c) provisions for doubtful debts related to the amount of outstanding balances; and
d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.
e) incurred by the entity for the provision of key management personnel services that are provided by a
separate management entity shall be disclosed.

Examples of transactions that are disclosed if they are with related party:

a) purchases or sales of goods (finished or unfinished);

b) purchases or sales of property and other assets;
c) rendering or receiving of services;
d) leases;
e) transfers of research and development;
f) transfers under licence agreements

FACTORS AFFECTING THE LEVEL OF DETAILS FOR DISCLOSURES OF RPTs

a) Significance of the transaction in terms of size;
b) carried out on non-market terms;
c) outside normal day-to-day business operations, such as the purchase and sale of businesses;
d) disclosed to regulatory or supervisory authorities;
e) reported to senior management;
f) subject to shareholder approval.

39 | P a g e
 COMMON PITFALL 1: identifying related party relationships
Although, IAS 24 provides a long list of parties that could be related to the reporting entity, but sometimes in practice certain
relationships may be so complex that the list may not be enough to identify a related party. When such is the case, it boils
down to the principle which involves answering the complex question of “What is the extent of influence the other party has
over the reporting entity”? A correct answer to this question (based in the substance over its legal form) is usually the key
to resolving most complex relationships. Also take note of the effect of the scope exclusions in the answering this question.

ILLUSTRATIVE EXAMPLE
Bum Inc. is a manufacturer of automobile spare parts. The following relates to Bum Inc:
1. Bum Inc. purchases everything it needs from Excellent Inc., a well-known supplier. Due to the high quality of the material
that Y Inc. has provided over the last ten years, Bum Inc. has never purchased from any other supplier. Thus it may be
considered economically dependent on Y Inc.
2. Bum Inc. sells 70% of its output to a company owned by a director and the balance to an entity that is its “associate” by
virtue of Bum Inc. owning 35% of the share capital of that company.
3. Bum Inc. stores inventory in a warehouse that is leased from the wife of its director. The lease rentals are at arm’s length.

Required
Based on the requirements of IAS 24, identify which transactions would need to be disclosed as related-party transactions.

Solution

1. IAS 24 clearly states that a party is not related to the entity simply because it carries out a significant level of transaction
with the entity, thus, for the purpose of IAS 24, purchases made from Y Inc. are not considered related-party transactions.
2. 70% of the sales are to an entity owned by a “director” (i.e., an entity controlled by a key management person), and 30%
of the sales are made to an entity that Bum Inc. has “significant influence” over. Thus both sales are to related parties as
defined in IAS 24 and would need to be disclosed as such.
3. The lease of the warehouse, although at arm’s length, has been entered into with the wife (a “close member of the
family”) of a “director” (a key management person) and thus needs to be disclosed as a related-party transaction.

FURTHER EXAMPLE
From the following analyse and identify all the related party relationships (if any)
a. Mr. M is the manager and sole owner of entity M. He has fathered no children. However, following the death of his sister,
he is raising his sister’s daughter (Miss N)
b. Entities F, G and H own 45%, 45% and 10% respectively of the ordinary shares that carry voting rights of entity Z

Solution
a. Mr. M is a related party of entity M. in the absence of evidence to the contrary, it appears that Miss N is a close family
member of Mr. M because it seems reasonable that Mr. M may be influenced by Miss N in his dealing with entity M (and
Miss N may be influenced by Mr. M in her dealing with entity M). Miss N is a related party to entity M.
b. In the absence of evidence to the contrary, entities F and G are not related parties of each other considering that they
are joint venturers (See scope exclusion) based on their percentage holdings. Entity H is not a related party to entity Z
considering its shareholding of 10% (except other evidences indicate otherwise).
However, entities F and G both have more than one half of the ordinary shares and each party has joint control over
entity Z, hence, entities F and G are each related parties to entity Z.

COMMONT PITFALL 2: Related party disclosures

Identifying related party relationships is not enough. The entity must make appropriate disclosures of existence of such
relationships, transactions and balances with these parties.

ILLUSTRATIVE EXAMPLE
An entity issued 100,000 of its own ordinary shares to its key management personnel (KMP) as compensation for services
rendered to the entity during the period.
Required: Should the entity disclose the above as a related arty transaction?

Solution
The KMP is a related party considering the level of influence he has over the entity and the specific requirements of IAS 24.
Therefore, the entity should disclose any transaction with the KMP including the shares issued to the KMP.

NB: the entity may aggregate the KMP’s compensation with the compensation paid to all other KMPs.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 27: SEPARATE FINANCIAL STATEMENTS

Separate financial statements are those presented by an entity in which the entity could elect, subject to the requirements
in this Standard, to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance
with IFRS 9 Financial Instruments, or using the equity method as described in IAS 28 Investments in Associates and Joint
Ventures.

The objective of this Standard is to prescribe the accounting and disclosure requirements for investments in subsidiaries,
joint ventures and associates when an entity prepares separate financial statements.

PREPARATION OF SEPARATE FINANCIAL STATEMENTS

General preparation requirements

a) Separate financial statements shall be prepared in accordance with all applicable IFRSs.
b) When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures
and associates either:
i. at cost;
ii. in accordance with IFRS 9; or
iii. using the equity method as described in IAS 28.

c) The entity shall apply the same accounting for each category of investments. Investments accounted for at cost or
using the equity method shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations when they are classified as held for sale or for distribution (or included in a disposal group
that is classified as held for sale or for distribution). The measurement of investments accounted for in accordance
with IFRS 9 is not changed in such circumstances.
d) Dividends from a subsidiary, a joint venture or an associate are recognised in the separate financial statements of
an entity when the entity’s right to receive the dividend is established. The dividend is recognised in profit or loss
unless the entity elects to use the equity method, in which case the dividend is recognised as a reduction from the
carrying amount of the investment.
e) entity shall apply all applicable IFRSs when providing disclosures in its separate financial statements.

Specific requirements
Investment in associate or joint ventures
If an entity elects, in accordance with IAS 28, to measure its investments in associates or joint ventures at fair value through
profit or loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial
statements.

Investment in subsidiary
If a parent is required, in accordance with paragraph 31 of IFRS 10, to measure its investment in a subsidiary at fair value
through profit or loss in accordance with IFRS 9, it shall also account for its investment in a subsidiary in the same way in its
separate financial statements.

SOME DISCLOSURE REQUIREMENTS

a. An entity shall apply all applicable IFRSs when providing disclosures in its separate financial statements
b. When a parent, in accordance with IFRS 10, elects not to prepare consolidated FSs and instead prepares separate FSs,
it shall disclose in those separate FSs:
i. the fact that the FSs are separate financial statements; that the exemption from consolidation has been used;
ii. the name and principal place of business (and country of incorporation, if different) of the entity whose consolidated
FSs that comply with IFRSs have been produced for public use; and the address where those consolidated FSs are
obtainable.
c. a list of significant investments in subsidiaries, joint ventures and associates, including:
i. the name of those investees.
ii. the principal place of business (and country of incorporation, if different) of those investees.
iii. its proportion of the ownership interest (and its proportion of the voting rights, if different) held in those investees.

d. a description of the method used to account for the investments listed above.

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IAS 28: INVESTMENT IN ASSOCIATES AND JOINT VENTURES (IIAAJV)
The objective of this Standard is to prescribe the accounting for investments in associates and to set out the requirements
for the application of the equity method when accounting for investments in associates and JVs.

An associate is an entity over which the investor has significant influence while a joint venture is a joint arrangement whereby
the parties that have joint control of the arrangement have rights to the net assets of the arrangement (See IFRS 11, Joint
arrangements for more information).

SIGNIFICANT INFLUENCE (SI)

When an entity has 20% or more voting power over the investee this gives rise to significant influence. A substantial or
majority ownership by another investor does not necessarily preclude an entity from having significant influence.The
existence of significant influence by an entity is usually evidenced in one or more of the following ways:

a) representation on the board of directors or equivalent governing body of the investee;

b) participation in policy-making processes, including participation in decisions about dividends or other distributions;
c) material transactions between the entity and its investee;
d) interchange of managerial personnel; or
e) provision of essential technical information.

An entity loses SI when it loses the power to participate in the financial and operating policy decisions of that investee.

APPLICATION OF THE EQUITY METHOD (EM)

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter
for the post-acquisition change in the investor’s share of the investee’s net assets.

 Exemptions from applying the equity method

Investment in associate and joint ventures shall be accounted for using the equity method except:
a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not
applying the equity method.
b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets).
c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other
regulatory organisation, for the purpose of issuing any class of instruments in a public market.
d) The ultimate/intermediate parent of the entity produces FSs available for public use that comply with IFRSs, in which
subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.
 Discontinuing the use of the equity method (EM)
The entity shall discontinue the use of EM if its investment ceases to be an associate or JV as follows:

a) If the investment becomes a subsidiary

b) If the retained interest becomes a financial asset

If an investment in JV becomes an investment in associates and vice-versa, the entity continues to apply the equity method
and does not remeasure the retained interest.

When an entity discontinues the equity method any previously recognised OCI shall be recognised on the same basis as
would have been if the investor had directly disposed of the related assets/liabilities.

 Classification as held for sale (HFS)

 An entity shall apply IFRS 5 to an investment, or a portion of an IIAAJV that meets the criteria to be classified as HFS.
 Any retained portion that has not been classified as HFS sale shall be accounted for using the equity method (EM) until
disposal of the portion that is classified as HFS takes place.
 After the disposal takes place, an entity shall account for any retained interest in accordance with IFRS 9 unless the
retained interest continues to be an associate or a joint venture, in which case the entity uses the equity method.
 When an investment, or a portion of an IIAJV previously classified as HFS no longer meets the criteria to be so classified,
it shall be accounted for using the EM retrospectively as from the date of its classification as HFS. FSs for the periods
since classification as held for sale shall be amended accordingly.

 Changes in ownership interest

If an entity’s ownership interest in an associate or a joint venture is reduced, but the investment continues to be classified
either as an associate or a joint venture respectively, the entity shall reclassify to profit or loss the proportion of the gain or
loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if
that gain or loss would be required to be reclassified to profit or loss on the disposal of the related assets or liabilities.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION

The objective of IAS 32 is to establish principles for presenting financial instruments (FIs) as liabilities or equity and for
offsetting financial assets and financial liabilities. It applies to the classification of FIs, from the perspective of the issuer.

MEANING OF FINANCIAL INSTRUMENTS (FIs)

FI is any contract that gives rise to a financial asset of one entity & a financial liability or equity instrument of another entity.

FINANCIAL ASSETS FINANCIAL LIABILITIES

Cash Bank overdraft

An equity instrument of another entity Issued debt instrument

A contractual right: to collect cash or another FA A contractual obligation: to deliver cash or another FA to another
or to exchange FA under potentially favourable entity or to exchange FAs or FLs under conditions that are
conditions potentially unfavourable.

A contract that will or may be settled in the A contract that will or may be settled in the entity’s own equity
entity’s own equity instrument. instrument.

Equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

PRESENTATION
The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial
liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and
the definitions of a financial liability, a financial asset and an equity instrument.

Compound financial instruments

These are financial instruments that contain both a liability and an equity component. Both components shall be separated
from each other using the definition of equity in the Framework. Separation is done as follows:

Total proceeds X

Fair value of the liability component (X)

Equity component X

The split above shall not be revised!! The liability component shall be determined by discounting the principal and the
interest using the market interest rate of a similar liability with no conversion rights (or option).

Interests, dividends, gains and losses

Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be
recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by
the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity.

Treasury shares
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted from equity. No
gain or loss shall be recognised in profit or loss account.

OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY

A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position
when, and only when, an entity:
a) currently has a legally enforceable right to set off the recognised amounts; and
b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

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 COMMON PITFALL 1: A basic understanding of what financial instruments mean
Let’s put aside the “plenty grammar” definition of financial instruments (FI) in IAS 32, there is a common pitfall in town
and it is the fact that some of us still don’t understand the meaning of a FI. My dear friend, let me show you the trick!

“Basically”, a FI plays around cash or shares. A financial asset is an asset in which the ultimate economic benefit attached
to it is either cash or shares while a financial liability is an obligation that would be settled using either cash or a variable
number of shares. You will agree with me that trade receivables as an asset has a very different nature from property, plant
& equipment, while trade receivables would usually give an entity a contractual right to collect cash from its customers,
PPE would not create such rights, the economic benefit tied to PPE is either it is used or sold if it is no longer needed.

EXAMPLES
Explain if the following items are financial instruments
a. Trade payable
b. Equity investment in Gaji bank
c. Loan receivable
d. Prepaid rent
e. Deferred income
f. 10% loan from Mayor bank

Answers
a. Trade payable would most likely create an obligation to the supplier that would be settled using cash. This is a FI.
b. An equity investment would give the holder the right to collect dividend in form of cash or shares, hence, it is a FI.
c. Loan receivable would give rise to a right to collect principal and even interest usually in form of cash. This is a FI.
d. The economic benefit tied to a prepaid rent is for the entity to enjoy the rent that has been paid for, an enjoying
the rent would most likely not give rise to collection of cash or shares, hence, this is not a FI.
e. Deferred income is a liability. A common form in which a deferred arises is when an entity collects cash from its
customers before delivering goods or services. Therefore, once this liability is recognised it becomes the entity’s
obligation to deliver the goods or service and not deliver cash or shares, hence, a deferred income is not a FI.
f. 10% loan from bank would create an obligation to pay back the principal & settle the interest, hence, this is a FI.

COMMON PITFALL 2: SPLITTING COMPOUND FIs

The common pitfall is that the contractual interest rate may be erroneously used for discounting. Contractual interests
represents the cash payments and should not be used for discounting for calculating the liability component.

EXAMPLE
Clifford Plc has issued N100bn 4% three-year convertible loan on 1 January 20x6. The market rate of interest for a
similar loan without conversion right is 8%.
Required
Split the proceeds between equity and debt component.

Answer
2. First calculate the annual interest cash payment = N100bn x 4%
= N4bn
3. Calculate the annuity factor using the formular 1-(1 + r)-n
r
= 1 – (1 + 0.08)-3
0.08
= 2.577
4. Calculate the value of the liability
N’bn N’bn
Interest cash flows (N4bn x 2.577) 10.31
Principal (N100bn x 1.08-3) 79.38
Total value of liability (89.69)

5. Split the loan into its liability and equity components

N’bn
Total proceeds 100
Less: Value of liability (89.69)
Value of equity 10.31

Accounting entry:
Dr: Bank/cash N100bn
Cr: Liability N89.69bn
Cr: Equity N10.31bn

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 33: EARNINGS PER SHARE (EPS)

The objective of this Standard is to prescribe principles for the determination and presentation of earnings per share to
improve comparability. The focus of this Standard is on the number of shares used for EPS calculation.

The Standard mainly talks about the measurement of basic and diluted EPS and is applicable to entities whose ordinary
shares or potential ordinary share (POS) are publicly traded or in process of being traded.

EPS is attributable to only ordinary shareholders.

BASIC EPS
Earnings

Profit or loss (after tax) from continuing operations adjusted for:

a) Non-controlling interest’s share of profit

b) Dividends on preference shares (even if the preference shares are classified as equity under IAS 32).
c) Differences arising in settlement of preference shares

Shares

 Time weighted average number of shares issued from the date the consideration becomes receivable
 Additional shares where no consideration receivable (e.g. bonus issue): weighted from beginning of the year

DILUTED EPS
This is based on the fact that some instruments may reduce EPS in the future (dilutive instruments). Examples include: share-
based payment, written put options, contingently issuable share, and potential ordinary shares.

Earnings
Earnings as calculated under basic EPS is adjusted for:

a) any dividends or other items related to dilutive potential ordinary shares (DPOS)
b) any interest recognised in the period related to dilutive potential ordinary shares; and
c) other changes in income/expense that would result from the conversion of the DPOS.

Shares
 Start with the basic EPS
 Adjust for the number of shares that will be issued on conversion
 Adjust presuming conversion at the beginning of the year/date of issue of potential ordinary shares
 Diluted EPS are presented for only instruments that would lead into reduction of EPS while those that are anti-
dilutive (increase EPS) are excluded.

RETROSEPCTIVE ADJUSTMENTS
 Adjust basic & diluted EPS of prior year FSs for effect of bonus issue, share split, decrease due to reverse split.
 If (i) occurs after the reporting period but before FSs are authorised for issue, adjust the basic & diluted EPS of
current and prior year FSs.
 Basic and diluted EPS of all periods presented shall be adjusted for the effects of errors and adjustments resulting
from changes in accounting policies accounted for retrospectively.

PRESENTATION
 Present in the statement of P or L & OCI basic & diluted EPS attributable to the parent and to the ordinary
shareholders.
 Present basic & diluted EPS with equal prominence for all periods presented.
 Where an entity also presents discontinued operations. Basic and diluted EPS are required to be presented for
continuing and discontinued operations
 An entity shall present basic & diluted EPS even if the amounts are negative (i.e. loss per share).

SOME DISCLOSURES REQUIREMENTS

a. The amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those amounts to
profit or loss attributable to the parent entity for the period. The reconciliation shall include the individual effect of each
class of instruments that affects EPS.
b. The weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per
share, and a reconciliation of these denominators to each other. The reconciliation shall include the individual effect of
each class of instruments that affects EPS.

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IAS 36: IMPAIRMENT OF ASSETS
The objective of IAS 36 is to ensure that an entity is not carrying its asset higher than its recoverable amount (RA).
Impairment loss (IL) arises when an asset’s CA is higher than it RA. IAS 36 also states when to reverse IL.

STEPS FOR RECOGNISING IMPAIRMENT LOSS (IL)

1. Identify an asset that is impaired: an entity shall assess at the end of each reporting period if there is any indicator
of impairment. If any such indicator exists, the entity shall estimate the RA of the asset, however, irrespective of
whether there is an indicator, an entity shall test the following for impairment annually:

 Intangible asset (IA) with an indefinite useful life or an IA not yet available for use.
 Goodwill acquired in a business combination

Indicators of impairment:
External sources: (a) unexpected significant changes in the value of an asset (b) the CA of an entity’s net asset is higher
than it market capitalisation. (c) increase in market interest rate which will likely affect value in use.

Internal sources: (a) physical damage or obsolescence of an asset (b) evidence that the economic performance of an
asset is or will be worse than expected.

2. Determine RA of an asset: RA is the higher of fair value less cost of disposal (FVLCD) and value in use (VIU). RA shall
be calculated for an individual asset, if impracticable, that individual asset shall be traced to a cash-generating unit
(CGU), then RA shall be calculated for the CGU. IAS 36 mentions corporate asset as one of such “individual asset” that
should be traced to their CGU.

 FVLCD: fair value is market-based, while costs to disposal are direct incremental costs to bring an asset into a
condition intended for its sale e.g. legal costs, stamp duty, costs of removing the asset.
 VIU: this is the present value of future cash flows to be generated from using an asset. Determining VIU requires
a discount rate and future cash flows. The discount rate shall be based on time value of money & risk specific
to the asset while future cash flows shall be based on reasonable and supportable assumptions.

3. Recognise impairment loss: If, and only if, the RA of an asset is less than its carrying amount (CA), the CA of the
asset shall be reduced to its RA. That reduction is an impairment loss. An impairment loss shall be recognised
immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for
example, in accordance with the revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated
as a revaluation decrease in accordance with that other Standard.

Allocating impairment loss to a CGU

If the impairment loss is attributable to a CGU, the impairment loss shall be allocated to reduce the carrying amount of the
assets of the unit in the following order:

 first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit
 then, to the other assets pro rata on the basis of the carrying amount of each asset in the CGU.

REVERSAL OF IMPAIRMENT LOSS

An entity shall assess at the end of every reporting period if there is an indicator that any previously recognised
impairment loss no longer exist or has been decreased. The following are indicators that IL may have reversed:

 External sources: (a) significant increase in the value of the asset (b) decrease in market interest.
 Internal sources: evidence that the economic performance of an asset would be better than expected.

Impairment loss on goodwill can never be reversed!

SOME DISCLOSURE REQUIREMENTS

a. The amount of impairment losses recognised in profit or loss during the period and the line item(s) in which those
impairment losses are included.
b. The amount of reversals of impairment losses recognised in profit or loss during the period and the line item(s) of the
statement of comprehensive income in which those impairment losses are reversed.
c. Impairment losses on revalued assets recognised in other comprehensive income (OCI) during the period.
d. The amount of reversals of impairment losses on revalued assets recognised in OCI during the period.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 37: PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS

The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to
provisions, contingent liabilities and contingent assets and that the related disclosures are sufficient.

RECOGNITION
Provisions
A provision shall be recognised when and only when all of the following criteria are satisfied:

a) an entity has a present obligation (PO) (legal or constructive) as a result of a past event (PE);
b) it is probable that an outflow of economic benefits will be required to settle the obligation; and
c) a reliable estimate can be made of the amount of the obligation.

Contingent liabilities (CLs)

a) a possible obligation that arises from past events & whose existence will be confirmed only by the occurrence/non-
occurrence of one/more uncertain future events not wholly within the entity’s control; or
b) a present obligation that arises from past events but is not recognised because:
 it is not probable that an outflow of economic benefits will be required to settle the obligation; or
 the amount of the obligation cannot be measured with sufficient reliability.

CL shall not be recognised. CLs are disclosed in the notes to the financial statements except the likelihood of outflow
of economic benefit is remote. They are assessed continually to determine whether an outflow of economic benefits has
become probable. If it becomes probable, a provision should be recognised.

Contingent assets
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A
contingent asset is not recognised instead it is disclosed if the inflow of economic benefits is probable, however, if the inflow
become virtually certain an asset should be recognised.

MEASUREMENT
 Best estimate: recognise provision at the best estimate of the amount required to settle the obligation.

 Risks and uncertainties: the risks and uncertainties shall be taken into account in reaching the best estimate.

 Present value: Where the effect of the time value of money is material, the amount of a provision shall be the present
value of the expenditures expected to be required to settle the obligation.

 Future events: future events that may affect the amount required to settle an obligation shall be reflected in the amount
of a provision where there is sufficient objective evidence that they will occur.

 Gain on expected disposal of assets: this shall not be taken into account in measuring a provision.

 Use of provision: a provision is used only for expenditures for which the provision was originally recognised.

 Changes in provision: assess provision at the end of each reporting period to revise its best estimate or even
derecognise the provision if it is no longer probable that economic benefits would flow out.

APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES

 Reimbursements: recognise reimbursement as a separate asset in the SFP only if virtually certain, but may be used to
offset the provision expense in P or L. Reimbursement shall not exceed the related provision.

 Future operating losses: provision shall not be recognised for FOL since there is no PO from PE.

 Onerous contract: this is a contract in which its unavoidable cost exceeds its benefit. If an entity has a onerous contract,
the PO under the contract shall be recognised and measured as a provision.

 Restructuring: this is when an entity materially changes its scope or manner in which it is conducted. Recognition:
recognise restructuring provision if and only if:

(i) There is a detailed formal plan for restructuring

(ii) If the entity has informed the affected parties of the plan or have started implementing the plan.

Measurement: a restructuring provision shall include only directly attributable restructuring costs. Such costs shall exclude:
Retraining/relocation cost, marketing cost, investment on new distribution system.

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 COMMON PITFALL 1: How to identify an obligation
To identify an obligation, of course a present obligation must first arise from a past event afterwards, the simple trick is to
ask yourself these three (3) questions:

 Is it arising from a contract or law?

 Is it a constructive obligation (CO)? A CO arises from an entity’s pattern of past practice or published statement.
 Can it be avoided?

ILLUSTRATION 1
As it relates to the following explain if an obligation exists:
a. An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of
production and restore the seabed.
b. An airline is required by law to overhaul its aircraft once every three years.

ANSWERS
a. The obligation is a legal obligation as it is arising from a contract and cannot be avoided as the contract requires
removal of the oil rig. The only way to avoid this is to do it! Therefore, this is an obligation.
b. Going by the requirement of the law, the airline must be overhauled every three (3) years, however, this duty can be
avoided by simply selling the aircraft, as such, there is no obligation. Instead the depreciation of the aircraft takes
account of the future incidence of maintenance costs, i.e. an amount equivalent to the expected maintenance costs
is depreciated over three years.

COMMON PITFALL 2: Measurement of provision when the time value of money is

material.
ILLUSTRATION 2
An entity is involved in the extraction of mineral resources. The entity’s mineral extraction rights would expire in 8 years
and there is a law requiring the making good of mineral extraction sites. To make good the mineral extraction sites the
entity would incur N50bn at the end of the 5th year.
Required
Assuming a discount rate of 8%, explain how the above should be treated.

ANSWER
There exist a present legal obligation arising from the extraction of minerals. The entity should recognise a provision for
the cost of making good the site. This obligation would be settled in 5 years’ time, the entity should discount the cost to
its present value as follows:
Initial measurement
Present value of provision: N50bn x 1.08-5 = N34.03bn (This amount is also capitalised as an asset because it relates to a
right to extract mineral resources for 5 years - obtain economic benefit. The asset would then be depreciated over 5 years)

Subsequent measurement
Subsequently, the difference between the N50bn and N34.03bn i.e. N15.97bn is spread over 5 years as a finance cost
using the concept of unwinding of discount as follows:

Years Opening balance of the provision Unwinding of discount Closing balance of the provision
N’bn N’bn N’bn
C=A+B
A B = 8% x A
1 34.03 2.72 36.75

2 36.75 2.94 39.69

3 39.69 3.18 42.87

4 42.87 3.43 46.3

5 46.3 3.7 50

TOTAL 15.97

For each of the respective years, the unwinding of discount is used to increase the opening balance of the provision and
also recognised as a finance cost in the profit or loss account.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IAS 38: INTANGIBLE ASSETS (IAs)

IAS 38 prescribes the recognition criteria for IAs & measurement requirements for their carrying amount (CA).

DEFINITION OF AN INTANGIBLE ASSET (IAs)

An IA is an identifiable non-monetary asset without physical substance & has the following characteristics:

Identifiability
The definition of an intangible asset requires an IA to be identifiable to distinguish it from goodwill i.e.
 is separable, i.e. is capable of being separated or divided from the entity and transferred separately; or
 arises from contractual/legal rights, regardless of whether those rights are separable from the entity.

Control
An item can be recognised as an intangible asset if the entity has the power to obtain the future economic benefits flowing
from the underlying resource and to restrict the access of others to those benefits.

Future economic benefits

For an item to be recognised as an IA it must be capable of generating economic benefits such as cost savings.

RECOGNITION CRITERIA
a) the definition of an intangible asset (above);
b) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; &
c) the cost of the asset can be measured reliably.

MEASUREMENT
Initial: IAs shall be measured initially at cost. IAS 38 discusses initial measurement under the following scenarios:

a) Separate acquisition: the cost of IA acquired separately is same with cost elements (i) & (ii) in IAS 16.
b) Internally generated IAs: Split project phase into research and development phases:

Research phase: any costs incurred at this phase shall be expensed. Development phase: capitalise any cost incurred at
this phase if the entity has all of the following in place: (i) Technical feasibility of completion. (ii) intention to complete (iii)
adequate technical, financial and other resources to complete (iv) ability to use/sell the IA (v) probable future economic
benefits (vi) if expenditure can be reliably measured.

c) Acquisition as part of a business combination: cost is equal to fair value at the acquisition date (see IFRS 3).
d) Acquisition by way of government grant: cost is equal to fair value (FV)/nominal amount (see IAS 20).
e) Exchanges of asset: measure acquired assets at FV, if not possible, measure at the CA of asset given up.
f) Internally generated goodwill: can never be recognised as it is not identifiable & can’t be measured reliably.

Subsequent measurement: this is dependent on if the IA has a finite or indefinite useful life:

IAs with finite useful life: apply either the cost model or the revaluation model.

Cost model: similar to IAS 16, in addition, the residual value of an IA is equal to zero (except in certain instances).

Revaluation model: similar to IAS 16, except that fair value must be based on an active market. If no active market, use the
cost model. It is uncommon for an active market to exist for an IA because of their unique nature.

IAs with indefinite useful life: these IAs have no foreseeable limit to future expected economic benefits. They are not
amortised but are tested for impairment annually in accordance with IAS 36. The entity shall carry out annual assessment to
determine if the IA should be transferred from indefinite to finite useful.

Factors affecting useful life of an IA: legal restrictions, industry stability, product life cycle, expected usage.

Amortisation & amortisation methods: similar to depreciation under IAS 16.

RECOGNITION OF AN EXPENSE
The following shall be recognised as an expense: expenditure on start-up activities, training, advertising & promotional
activities, relocating or reorganising.

In addition, previously expensed cost shall not be recognised as an intangible asset at a later date.

DERECOGNITION: (same with IAS 16)

SOME DISCLOSURE REQUIREMENTS

a. a description, the carrying amount and remaining amortisation period of any individual intangible asset
that is material to the entity’s financial statements.

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IAS 39: FINANCIAL INSTRUMENTS: RECOGNITION & MEASURMENT (Has been superseded by
IFRS 9)
RECOGNITION & DERECOGNITION
Recognition: An entity shall recognise a financial asset (FA) or a financial liability (FL) in its statement of financial position
when, & only when, the entity becomes a party to the contractual provisions of the instrument.

Derecognition: an entity should derecognise a FA when: (i) the contractual right to the cash flows from the FA expire or (ii)
it transfers all the risk and reward of the FA ownership to another party.

A FL is derecognised when the obligation is extinguished i.e. when it is discharged or cancelled or expires.

MEASUREMENT
 Initial measurement: FA & FL are initially measured at the fair value (FV) of the consideration given or received. For FA
& FL not at fair value through profit or loss (FVTPL) transaction costs are included as part of FV, for others transaction
cost is expensed. FV is usually equal to transaction price (TP) any difference between FV and TP is taken to P or L.

If fair value cannot be measured reliably, measure at cost.

 Subsequent measurement
Financial assets: subsequent measurement of FAs is dependent on classification as follows:

 FA at FVTPL: are held for speculative/trading purposes, measured at FV & changes in FV taken to P or L.
 Held to maturity (HTM): are acquired with the intention of holding till maturity. They’ve fixed or determinable
payments & fixed maturity date. They are measured at amortised cost using the effective interest rate (EIR) method.
 Loans and receivables: same with HTM but no fixed maturity date and are not traded in an active market.
 Available for sale: are designated as such and do not meet the characteristics of the first three. They are measured
at fair value & changes in fair value is taken to other comprehensive income (OCI).

Financial liabilities: after initial measurement, these are generally measured at amortised cost. However, to avoid
accounting mismatch financial liabilities (and financial assets) may be measured at FVTPL.

 Impairment and uncollectability of financial assets: an entity shall assess at the end of each reporting period whether
there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or principal payments;
c) the lender grants concession to the borrower as a result of the borrower’s financial difficulty;
d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
e) the disappearance of an active market for that financial asset because of financial difficulties

Once there is an objective evidence, test for impairment.

 For FAs measured at amortised cost: compare the FAs carrying amount and the present value of the estimated
future cash flows discounted at the original effective interest rate.
 For FAs measured at cost: compare the FAs carrying amount and the present value of the estimated future cash
flows discounted at the current market rate of return for a similar financial instrument.
 For available for sale FAs: reclassify the cumulative loss from equity (OCI) to P or L as a reclassification adjustment.
The amount of the cumulative loss that is reclassified from equity to profit or loss shall be the difference between
the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment
loss on that financial asset previously recognised in profit or loss.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

COMMON PITFALL: EFFECTIVE INTEREST RATE (EIR) & CONTRACTUAL INTEREST RATE
Basically, the effective interest rate (EIR) is the rate that discounts the estimated future cash payments or receipts to an
amount that is equal to the carrying amount of the financial asset or financial liability. On the other hand, the contractual
interest rate (CIR) is usually the contractually agreed interest rate between the lender and the borrower. This is the
interest rate used for determining the interest cash payments or receipts between the lender and the borrower.

Another difference between the EIR and the CIR is that; EIR takes into consideration other additional costs or income
associated with the transaction while the CIR does not take such into consideration.

In addition, the IASB Conceptual Framework states that transactions should be accounted for by taking into consideration
the substance of the transaction over its legal form. The EIR represents the rate that shows the economic reality
(substance) while the CIR shows the legal form & if you also remember “lawyers are liars”, hence, the “truthful accountant”
recognises interest income/expense based on the EIR (substance) & not based on the CIR (the lie). CIR is only used for
cash flow accounting.

ILLUSTRATIVE EXAMPLE
JB Omoye Plc issued a N500bn 10% loan note. The company incurred transaction costs N10bn in order to secure the
loan. The loan is to be paid back after 5 years at N550bn (a premium of N50bn).

Required: with the aid of proper explanation, calculate the effective interest and contractual interest.

Answers
JB Omoye Plc
Calculation of effective interest rate

N’bn N’bn

Inflow: Amount borrowed 500

Outflows:

Annual interest (10% x N500bn) x 5 years 250

Transaction cost 10

Principal to be paid back 550

Less: total outflows (810)

Effective interest 310

From the above, the effective interest is N310bn while the contractual interest is N250bn, the difference of N60bn was
as a result of the N10bn transaction cost and the premium of N50bn. If not for the transaction cost and premium, the
effective interest and the contractual interest would have been the same. The effective interest of N310bn can be
converted into percentage form called effective interest rate (EIR). In practice, the EIR can be obtained using the ‘goal
seek” function in Microsoft excel which makes it faster. It can also be calculated manually as follows:

EIR is the rate would discount the total outflow of N810 to exactly N500. So we can reduce It to the following (using the
-n
discounting factor formular i.e. (1+r) . Don’t forget that the bone of contention is “r”
-5
N810 x (1+r) = N500
5
N810 x 1/(1+r) = N500
N810
/(1+r)5 = N500
Cross multiply
500(1+r)-5 = N810
(1+r)5 = N810/N500
(1+r)-5 = 1.62
1+r = 1.10129 (the fifth root of 1.62)
r = 1.10129 – 1
r = 0.10129 i.e. 10.129%

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IFRS 9: FINANCIAL INSTRUMENTS (Effective from 1 January 2018)
RECOGNITION AND DERECOGNITION
 IFRS 9 incorporates without substantive amendments the requirements of IAS 39 for the recognition and derecognition
of financial assets and financial liabilities

 However, as it relates to derecognition, IFRS 9 includes the new guidance on write-offs of financial assets. IFRS 9 states
that an entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable
expectations of recovering a financial asset in its entirety or a portion thereof. Simply, a write-off is a derecognition
event.

MEASUREMENT
Initial measurement: IFRS 9 generally retains IAS 39’s requirement at initial recognition.

Subsequent measurement
Financial assets (FAs): subsequent measurement of financial assets is dependent on their classification and classification is
dependent on the following tests:

 Sole payment of principal and interest (SPPI) criterion: this refers to financial assets that give rise on specified dates
to cash flows that sole payment of principal and interest based on principal outstanding. Contractual cash flows that
meet the SPPI criterion are consistent with basic lending arrangement i.e. consideration for time value of money and
credit risk are typically the most significant elements of interest.

 Business model: this relates to how an entity manages it FAs in order to generate cash flows. The entity’s business
model may be to sell, hold, or to sell and hold the FAs.

Classification and measurement

 Financial assets (FAs) measured at amortised cost: these are FAs held within a business model whose objective is to
collect contractual cash flows (hold) and the contractual terms of the FAs give rise to cash flows that are sole payment
of principal and interest (SPPI criterion).

 Financial assets (FAs) measured at fair value through OCI: these FAs meets the SPPI criterion and are held in a
business model whose objective is achieved by both collecting contractual cash flows and selling FAs. Typically, this
category would involve a greater frequency and value of sales than held-to-collect business model. One of the examples
given in the Standard was a financial institution holding financial assets to meet its everyday liquidity needs i.e. they
hold to sell it only when they need cash for liquidity purposes.

 Financial assets (FAs) measured at fair value through profit or loss (FVTPL): all FAs other than the above are
classified as FVTPL. This category is also applied to avoid accounting mismatch.

Financial liabilities (FLs): the measurement principle in IAS 39 was substantially retained, however, under IFRS 9, as it relates
to FLs at FVTPL, the amount of change in the fair value that is attributable to changes in credit risk of the liability is presented
in OCI and the remaining amount of change in the fair value is presented profit or loss.

Financial liabilities are subsequently measured at amortised cost (AC), except for the following instruments:

 FLs that ae held for trading (including derivatives)

 FLs that are designated as at FVTPL on initial recognition
 FLs that arise when transfer of FA doesn’t qualify for derecognition/when the continuing involvement approach applies
 Financial guarantee contracts
 Commitments to provide a loan at a below-market interest rate.
 Contingent consideration recognised by an acquirer in a business combination.

IMPAIRMENT OF FINANCIAL ASSETS

While IAS 39 applies the incurred loss approach, IFRS 9 applies the expected loss approach for assessing impairment loss.
Under IFRS 9, impairment is measured as either of the following (where applicable):

 The 12-month ECL represent the cash shortfalls that will result if a default occurs in the 12-months after the
reporting date (or for a shorter date if the expected life of a financial instrument (FI) is less than 12-months).
This includes only expected losses that would cover the next 12-months, it excludes losses beyond 12-months.

 Lifetime ECL represents the ECL that result from all possible default events over the expected life of the FI.

ECLs are a probability-weighted estimate of credit losses over the expected life of the financial instruments. The
measurement of ECL should reflect:

 An unbiased and probability-weighted amount

 The time value of money
 Reasonable and supportable information that is available without undue cost or effort.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

OFF THE RECORD: DIFFERENCES BETWEEN IAS 39 AND IFRS 9

Areas of IAS 39 IFRS 9
differences

Derecognition Absence of a guidance as regards write-off of IFRS 9 contains a guidance which stipulates that a
a financial asset write-off of the gross carrying amount of a financial
assets represents a derecognition event.

Subsequent Subsequent classification and measurement of Subsequent distinction is based on the business model
classification financial assets into FVTPL, HTM, loans and and the SPPI criterion.
of financial receivables and available for sale
assets

Subsequent For financial liabilities measured at FVTPL, all As it relates financial liabilities measured at FVTPL, the
measurement changes in fair value are taken to profit or loss. amount of change in the fair value that is attributable
of financial to changes in credit risk of the liability is presented in
liabilities OCI and the remaining amount of change in the fair
value is presented profit or loss.

Impairment IAS 39 applies an incurred loss approach where IFRS 9 applies an expected loss approach which
loss impairment loss is recognised only when a loss recognizes impairment loss based on an assessment
event occurs of the 12-month expected credit losses and lifetime
expected credit losses.

Presentation Lesser disclosures when compared with IFRS 9 IFRS 9 introduces extensive disclosure requirements
and compared to IAS 39.
disclosures

SIMILARITIES BETWEEN IAS 39 AND IFRS 9

Recognition Both IFRSs require that an entity shall recognise a financial instrument when the entity becomes
party to the contractual arrangement.

Initial measurement IFRS 9 retains the requirement of IAS 39 that financial instrument shall be recognised at fair value.

Derecognition Both IFRSs have very similar requirements on derecognition of FAs and FLs.

Measurement bases Both IFRSs make use of same measurement bases i.e. amortised cost, FVTPL and FVTOCI.

Hedge accounting Hedge accounting is optional under both IFRSs.

OFF THE RECORD: PRACTICAL IMPLICATIONS OF IFRS 9

1 New processes will be needed to allocate financial assets to the appropriate measurement category.

2 The requirements regarding ECL (as it relates to impairment) would require expanded data and calculation. An
entities may have to design and implement new systems, databases and related internal controls.

3 The new Standard may have significant impact on the way FAs are classified and measured, resulting in changes in
volatility within profit or loss and equity, which in turn are likely to impact key performance indicators (KPIs).

4 The initial application of the new impairment model may result in large negative impact on equity (including the
regulatory capital) for banks, insurance and other financial services entities.

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IAS 40: INVESTMENT PROPERTY (IP)
IP is land or a building, or both held to earn rentals or for capital appreciation or both. The objective of IAS 40 is to prescribe
the accounting treatment for investment property & their disclosures.

CLASSIFICATION OF PROPERTY AS INVESMENT PROPERTY (IP) OR OWNER-OCCUPIED

 IP is held to earn rentals or for capital appreciation or both while owner occupied is held for the production or supply
of goods or services (or the use of property for administrative purposes).

 An IP generates cash flows largely independently of the other assets held by an entity, while owner-occupied generates
cash flows that are attributable not only to the property, but also to other assets used in the production or supply
process. IAS 16 applies to owner occupied.

 A property held by a lessee under an operating lease may be classified & accounted for as IP if, & only if, the property
would otherwise meet the definition of an IP & the lessee uses the fair value model.

EXAMPLES OF INVESTMENT PROPERTY EXAMPLES OF ITEMS THAT ARE NOT INVESTMENT

PROPERTY

Land held for long-term capital appreciation rather than Property intended for sale in the ordinary course of business
for short-term sale in the ordinary course of business. or in the process of construction or development for such
sale (IAS 2)

Property that is being constructed or developed for future Property being constructed or developed on behalf of third
use as investment property. parties

A building that is vacant but is held to be leased out under Property that is leased to another entity under a finance
one or more operating leases. lease.

Land held for a currently undetermined future use. Owner-occupied property

A building held under a finance lease

RECOGNITION (Same with IAS 16)

MEASUREMENT
Initial measurement

 An IP shall be measured initially at its cost. The following are also important in measuring costs:
 Transaction costs shall be included in the initial measurement.
 The initial cost of a property interest held under a lease and classified as an investment property shall be the lower
of the fair value of the property and the present value of the minimum lease payments.
 The cost of a purchased IP comprises its purchase price and any directly attributable expenditure.
 If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this
amount and the total payments is recognised as interest expense over the period of credit.
 If the acquired asset was obtained through exchanges of asset (see exchange of asset under IAS 38).

Subsequent measurement
Use either the cost model (same with IAS 16) or fair value model.

Fair value model: After initial recognition, an entity that chooses the fair value model shall measure all of its investment
property at fair value. When a property interest held by a lessee under an operating lease is classified as an investment
property the fair value model must be applied. A gain or loss arising from a change in the fair value of investment property
shall be recognised in profit or loss for the period in which it arises.

TRANSFERS
Transfers to, or from, investment property shall be made when, and only when, there is a change in use.

DERECOGNITION
An investment property shall be derecognised (eliminated from the statement of financial position):

 on disposal or
 when the investment property is permanently withdrawn from use and
 no future economic benefits are expected from its disposal.

SOME DISCLOSURE REQUIREMENTS

a) whether it applies the fair value model or the cost model.
b) the existence and amounts of restrictions on the realisability of IP or the remittance of income and proceeds of disposal.
c) contractual obligations to purchase, construct or develop IP or for repairs, maintenance or enhancements.

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

IFRS 1: FIRST TIME ADOPTION OF IFRSs

The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part
of the period covered by those financial statements, contain high quality information that:

a) is transparent for users and comparable over all periods presented;

b) provides a suitable starting point for accounting in accordance with International Financial Reporting Standards; and
c) can be generated at a cost that does not exceed the benefits.

IFRS 1 does not apply to entities already reporting under IFRS. IFRS 1 does not apply to changes in accounting
policies made by an entity that already applies IFRS.

RECOGNITION AND MEASUREMENT

Opening IFRS SFP: An entity shall prepare and present an opening IFRS statement of financial position at the date of
transition to IFRSs. This is the starting point for its accounting in accordance with IFRSs.

Accounting policy: An entity shall use the same accounting policies in its opening IFRS statement of financial position and
throughout all periods presented in its first IFRS financial statements. Those accounting policies shall comply with each IFRS
effective at the end of its first IFRS reporting period,

An entity shall not apply different versions of IFRSs that were effective at earlier dates. An entity may apply a new IFRS that
is not yet mandatory if that IFRS permits early application.

Except for the exemptions stated below, an entity shall in its Opening IFRS SFP:
a) Recognise all assets and liabilities whose recognition is required by IFRSs;
b) not recognise items as assets or liabilities if IFRSs do not permit such recognition;
c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of
equity, but are a different type of asset, liability or component of equity in accordance with IFRSs; and
d) apply IFRSs in measuring all recognised assets and liabilities.

The exception principle: This IFRS establishes two categories of exceptions to the principle that an entity’s opening IFRS
statement of financial position shall comply with each IFRS:

1. prohibit retrospective application of some aspects of other IFRSs: Certain adjustments to these items shall be
prospective: estimates, derecognition of financial assets & financial liabilities, hedge accounting, govt loans & NCI.
2. grant exemptions from some requirements of other IFRSs: some (not all) of such IFRSs are stated below. IFRS 1 does
not permit these to be applied by analogy to other items. IFRS 1 also provides specific exemption in each case

Severe Hyperinflation Share-based payment Compound financial Insurance contracts Fair value or revaluation
transactions instruments as deemed cost
Borrowing costs Leases Joint arrangements Business combinations Government loans

PRESENTATION AND DISCLOSURE

An entity’s first set of IFRS financial statements are required to present at least 3 SFP and 2 statements each of SPLOCI,
statement of P or L (if presented), SCF, SCE, related notes and in relation to the adoption of IFRSs, the following:

 A reconciliation of equity reported under previous GAAP to equity under IFRSs: at the date of transition to IFRSs & at
the end of the latest period presented in the entity’s most recent annual FSs under previous GAAP.
 A reconciliation of total comprehensive income reported under previous GAAP to total comprehensive income under
IFRSs for the entity’s most recent annual FSs under previous GAAP·
 Explanation of how transition to IFRS affected financial position, performance and cash flows.
 For interim financial reports: In addition to the reconciliations above, the entity is also required to provide:
o A reconciliation of equity reported under its previous GAAP to equity under IFRSs at the end of the
comparable interim period, and
o A reconciliation of total comprehensive income reported under its previous GAAP to total comprehensive
income under IFRSs for the comparative interim period, and
o Explanations of the transition from its previous GAAP to IFRS.
 Any errors made under the previous GAAP must be separately distinguished·
 Additional disclosure requirements are set out in IFRS 1.

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IFRS 3: BUSINESS COMBINATIONS (BCs)
The objective of this IFRS is to prescribe the accounting for BCs using the acquisition method.

IDENTIFYING A BUSINESS COMBINATION

A business is an integrated set of activities and assets capable of being conducted and managed to provide returns. If the
assets acquired are not a business, it shall be accounted as an asset acquisition and not as a BC!! (See next page)

STEPS IN APPLYING ACQUISITION METHOD

1. Identifying the acquirer: the acquirer is the combining entity that obtains control (see IFRS 10 for control).
2. Determine the acquisition date: this is the date on which the acquirer obtains control of the acquiree.
3. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling
interest (NCI) in the acquiree: recognise assets and liabilities if all the following criteria are met:
a. The items must meet the definition of an asset or liability per the Framework
b. The item must be part of what is exchanged
c. The item must be identifiable i.e. it must exist at acquisition date.

The acquirer shall measure identifiable assets acquired & liabilities assumed at their acquisition-date fair values.

 Exceptions to the recognition principle: contingent liabilities are recognised (unlike under IAS 37).

 Exceptions to the measurement principle: the following shall be measured by applying the related IFRSs: share-based
payment transactions (IFRS 2), assets held for sale (IFRS 5) and not necessarily at fair value.

 Exceptions to the recognition and measurement principle: the following shall be recognised and measured in
accordance with their related IFRSs: income taxes (IAS 12), employee benefits (IAS 19).

NCI: This is the portion not controlled by the acquirer. This can be measured using either the full (or fair value) method or
the proportionate method.

4. Recognise and measure goodwill (or gain on a bargain purchase): this is arrived at thus: Fair value of consideration
transferred plus value of NCI less fair value of net asset at acquisition. If this equation results into a positive figure, it is
goodwill, if negative, it is referred to as a gain on a bargain purchase. Goodwill is recognised as an intangible asset in
the SFP while gain on a bargain purchase as an income in the P or L.

Measurement period
On the acquisition date, some figures used in calculating goodwill may be based on estimates. IFRS 3 establishes a
measurement period during which these initial estimates may be retrospectively adjusted if actual information is obtained.
The measurement period shall not exceed one year from the acquisition date.

If the actual information relates to facts and circumstances that existed as of the acquisition date then the acquirer would
retrospectively adjust the initial estimates and recalculate goodwill, if it doesn’t relate to the acquisition date, then it would
be prospectively adjusted.

After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an
error in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

SUBSEQUENT MEASUREMENT AND ACCOUNTING

In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity
instruments issued in a business combination in accordance with other applicable IFRSs for those items, depending on their
nature. However, reacquired rights, contingent liabilities, indemnification assets and contingent considerations shall all be
accounted for subsequently by applying IFRS 3.

Additional guidance for applying the acquisition method to particular types of business combinations
IFRS 3 provides guidance for business combinations achieved in stages and on business combination achieved without the
transfer of consideration.

SOME DISCLOSURE REQUIREMENTS

a) the name and a description of the acquiree.
b) the acquisition date.
c) the percentage of voting equity interests acquired.
d) the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.

COMMON PITFALL: COMPUTATION OF GOODWILL

One of the primary objective of IFRS 3 is to provide guidance on the computation of goodwill. The calculation of goodwill
requires the following ingredients: FV of consideration transferred + value of NCI less fair value of net assets at acquisition.

ILLUSTRATIVE EXAMPLE
One year ago Damobrazil Plc purchased 1,800m shares in AjokeAde Ltd. On the date of acquisition AjokeAde had a
retained earnings of N2,250m and share capital of N3,000m. The acquisition was settled through the following:

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 One-page summary of each IFRS (A basic guide), 2019.
Compiled by Usidamen Israel

 A share for share exchange of one share in Damobrazil for every six in AjokeAde. Both companies have shares with
a par value of N1 each. The market value of Damobrazil’ shares at acquisition was N3 and AjokeAde N2.5.
 A cash payment of N4,000m and will also pay N2,000m in cash three years after the date of acquisition. Damobrazil
cost of capital is 10%.
 Additional consideration if the cumulative profit of AjokeAde exceeds N20m within the next 3 years. The fair value
of this consideration is N5,000m.
 A piece of Land at Magodo is to be transferred to the former owners of AjokeAde. On the date of acquisition, the
carrying amount of the piece of land was N1,000m while its fair value was N2,550m

Further information
i. Damobrazil has a policy of accounting for the NCI at acquisition at fair value. For this purpose, the AjokeAde’s
share price at that date can be deemed to be representative of the fair value of the shares held by the NCI.
Following an impairment review, the goodwill is impaired by N300m.
ii. AjokeAde had established a line of products under the brand name of “Apola”. Acting on behalf of Damobrazil
a firm specialist had valued the brand at a value of N950m with an estimated useful life of 10 years as at the
date of acquisition. The brand is not recognised in AjokeAde’s statement of financial position.

Required: compute the goodwill at acquisition and at reporting.

Answer
Damobrazil Plc
Goodwill in AjokeAde Ltd
N’m N’m
Share exchange (1/6 x 1,800 x N3) 900
Cash 4,000
Deferred consideration (2,000 x 1.1-3) 1,503
Contingent consideration 5,000
Land 2,550
Total fair value of consideration transferred 13,953
Value of NCI (1,200 x N2.5) 3,000
Less: fair value of net assets at acquisition
Share capital 3,000
Retained earnings 2,250
Fair value adjustment: brand 950
(6,200)
Goodwill at acquisition 10,753
Less: impairment loss (300)
Goodwill at reporting 10,453

TRY THIS OUT

Blue acquired 65% of the equity shares of Red one year ago. On the date of acquisition, Red had N50m shares in issue
and its retained earnings was N200m. The following information are relevant as regards the acquisition:

i. The fair value of NCI on that date is to be calculated with reference to Red’s share price on the acquisition date.
ii. The consideration transferred comprise of cash of N50m, a land (with fair value of N10m and carrying amount
of N8m), additional cash of N25m to be paid in three years’ time, 10m shares. The parent is entitled to a refund
of part of this consideration if certain performance target is met, the fair value of this entitlement on the
acquisition date was N3m.
iii. On the date of acquisition, the fair value of the identifiable net assets of red were equal to their carrying amount
with the exception of plant which had a fair value of N20m above its carrying amount and building with fair
value of N8m below its carrying amount.
iv. The share price of Blue and Red were N5 and N3 respectively and the discount rate was 8%.
Required
Calculate the goodwill at acquisition.

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IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (DOs)
A non-current asset HFS (or disposal group-DG) is one in which its carrying amount would be recovered principally through
sale. This IFRS specifies the accounting for assets HFS, presentation & disclosure of DOs.

NON-CURRENT ASSETS HELD FOR SALE (NCA HFS)

Classification of NCA HFS or distribution to owners
An entity shall classify a non-current asset (or disposal group) as HFS if its carrying amount will be recovered principally
through a sale transaction rather than through continuing use. The following criteria must be met:

a. the asset (or disposal group) must be available for immediate sale in its present condition subject to terms that are
usual and customary for sales of such assets.
b. Its sale must be highly probable. For the sale to be highly probable:
i. Management must be committed to the plan to sell the asset
ii. The asset must be actively marketed at a reasonable price in relation to its fair value
iii. Sale must be completed within one year of the classification date
iv. Existence of an active programme to locate a buyer
v. It is unlikely that there will be significant changes to the plan or that management would withdraw.

 NCA acquired exclusively for resale: shall be classified as HFS if the 1-year criteria is met and it is highly probable that
the other criteria would be met within a short period of time (usually 3-months).

 Non-current assets that are to be abandoned: shall not be classified as but if a disposal group to be abandoned
meets the DO criteria (see below) it shall be presented as a discontinued operation (DO).

Measurement of non-current assets (or disposal group) classified as HFS

Initial
 First measure in accordance with applicable IFRSs immediately before initial classification as HFS.
 After initial classification, measure at the lower carrying amount (CA) and fair value less cost to sell

Subsequent
 Non-current assets HFS shall not be depreciated.
 Any further change in fair value less cost to sell (FVLCS) shall be taken to profit or loss.

Recognition of impairment losses and reversals

 Impairment must be considered at initial classification (by using IAS 36) & after classification (using IFRS 5).
 Increase in FVLCS shall not exceed cumulative impairment loss previously recognised under IAS 36 & IFRS5.

Changes to a plan of sale

If an entity decides not to sell a non-current HFS, the entity shall measure the asset at the lower of:

i. The amount that should have been its current CA if the asset was not classified as HFS.
ii. its recoverable amount at the date of the subsequent decision not to sell or distribute

DISCONTINUED OPERATIONS (DOs)

A DO is a component of an entity that either has been disposed of, or is classified as HFS, and
a. represents a separate major line of business or geographical area of operations (GAOP),
b. is part of a single co-ordinated plan to dispose of a separate major line of business or GAOP or
c. is a subsidiary acquired exclusively with a view to resale.

DISCLOSURE OF NON-CURRENT ASSETS HFS AND DISCONTINUED OPERATIONS

NCA HFS:

 NCA HFS & any related liabilities are disclosed separately from other assets in the SFP.
 Description of the nature of the NCA (or DG) HFS & facts and circumstances surrounding the sale.
 A gain/loss resulting from initial/subsequent classification as HFS if not separately presented in P or L.
 Comparatives are not restated and the reportable segment relating to the NCA HFS is disclosed.

Discontinued operations:
 Results of DOs are presented as a single amount in the P or L, the single amount is further broken down in the notes
to the FSs. Cash flow effect is disclosed in the notes or the statement of cash flows
 Comparatives are restated

COMMON PITFALL 1: Classification of non-current assets as held for sale

ILLUSTRATIVE EXAMPLE
Under each of the following scenarios, identify if a non-current asset held for sale exists

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1. An entity is committed to a plan to sell a building and has started looking for a buyer for that building. The entity
will continue to use the building until another building is completed to house the office staff located in the building.
There is no intention to relocate the office staff until the new building is completed.

2. An entity is planning to sell part of its business that is deemed to be a disposal group. The entity is in a business
environment that is heavily regulated, and any sale requires government approval. This means that the sale time is
difficult to determine. Government approval cannot be obtained until a buyer is found and known for the disposal
group and a firm purchase contract has been signed. However, it is likely that the entity will be able to sell the
disposal group within one year.

3. An entity has an asset that has been designated as held for sale in the financial year to December 31, 2008. During
the financial year to December 31, 2009, the asset still remains unsold, but the market conditions for the asset have
deteriorated significantly. The entity believes that market conditions will improve and has not reduced the price of
the asset, which continues to be classified as held for sale. The fair value of the asset is $5 million, and the asset is
being marketed at $7 million.

Solution
1. The building will not be classified as held for sale as it is not available for immediate sale.
2. The disposal group would be classified as held for sale because the delay is caused by events or circumstances
beyond the entity’s control and there is evidence that the entity is committed to selling the disposal group.
3. Because the price is in excess of the current fair value, the asset is not available for immediate sale and should not
be classified as held for sale.

COMMON PITFALL 2: MEASUREMENT OF NON-CURRENT ASSETS HELD FOR SALE

ILLUSTRATIVE EXAMPLE
Pinch plc owns a building which it has used for many years as a factory. On 1 January 2012 the building had a carrying
value of N15m (annual depreciation is N1m). Pinch uses the cost model under IAS 16 to account for buildings. On 1
April 2012 Pinch plc commenced operations in a new building, and the old one was placed on the market as it was no
longer being used. The estimated proceeds of sale were N13 million, less selling costs of N0.2 million. It was seen as
highly probable at that date that the building would sell at that price. By year end, 31 December 2012, the fair value of
the building reduced to N11m and the entity adjusted its asking price to N11m as well. The estimate of selling costs
remained the same. The directors of Pinch plc believed at that date it was still highly probable the sale would occur
within 12 months at the lower price.

Required: Explain how the old building should be treated in the books of Pinch plc for year ended 31 December 2012

Solution
Classification
The building qualifies for transfer to “held for sale” on 1 April 2012 as the two conditions were met at that date:

1. It was available for immediate sale in its present condition at the date classification to “held for sale” is made; and
2. The sale was considered highly probable.

Measurement
 Initial measurement: the carrying value on 1 April 2012 was N15 million less 3 month’s depreciation (1m x 3/12) of
N0.25 million. Therefore, the carrying value was N14.75 million. The “fair value less costs to sell” on 1 April 2012
was N12.8 million (13m – 0.2m). Therefore, the initial value to be assigned to the non-current asset held for sale is
the fair value less cost to sell of N12.8 as it is lower than the carrying amount of N14.75 million. The loss in value of
N1.95 million (14.75m – 12.8m) is taken to profit or loss for the year. No depreciation is charged from 1 April 2012.

 Subsequent measurement: at 31 December 2012, the next reporting date, the asset has not been sold. The
applicability of the conditions is reviewed, and the fair value less costs to sell is also reviewed. Based on the failure
to sell the asset, the price was reduced. The conditions are still met in that: 1. It is still available for immediate sale
in its present condition; and 2. The sale is still considered highly probable. Therefore, the classification continues to
be “held for sale”, but the asset’s carrying amount is reduced to the revised “fair value less costs to sell” of N10.8
million (11m – 0.2m). The further reduction in value of N2 million (12.8m – 10.8m) is taken to profit or loss for year
ended 31 December 2012.

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IFRS 7: FINANCIAL INSTRUMENTS: DISLCOSURES
The objective of IFRS 7 is to provide disclosures in the financial statements (FSs) that enable users to evaluate:

a. the significance of financial instruments for the entity’s financial position and performance; and
b. the nature and extent of risks arising from financial instruments and how the entity manages those risks.

The principles in this IFRS complement the principles in IAS 32 and IAS 39.

CLASSESS OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE

 Where applicable, an entity shall group financial instruments into classes that are appropriate to the nature of the
information disclosed and that take into account the characteristics of those financial instruments.

 An entity shall provide sufficient information to permit reconciliation to the line items presented in the SFP

SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND FINANCIAL PERFORMANCE

Statement of financial position
a) The carrying amount of each category of financial assets and financial liabilities
b) Disclosures relating to reclassification of financial assets.
c) The effect of offsetting financial assets and financial liabilities.
d) Disclosures relating to financial assets held as collateral for liabilities or contingent liabilities
e) Reconciliation of allowance account for credit losses
f) Disclosures relating to defaults and breaches relating to financial assets and financial liabilities

Statement of profit or loss and comprehensive income

a) Net gains/losses on each category of financial assets and financial liabilities
b) Total interest income and interest expense (calculated using the effective interest rate method) recognised on
financial assets and financial liabilities not at fair value through profit or loss.
c) Amount of any impairment loss for each class of financial assets
d) Accrued interest income on impaired financial assets.

Other disclosures:
a) Accounting policies used in preparing the FSs
b) Certain hedge accounting disclosures for each type of hedge described in IFRS 9.
c) Fair value of each class of financial asset and financial liabilities

NATURE AND EXTENT OF RISK ARISING FROM FINANCIAL INSTRUMENTS.

Qualitative disclosures
For each type of risk arising from financial instruments, an entity shall disclose:

a) the exposures to risk and how they arise;

b) its objectives, policies and processes for managing the risk and the methods used to measure the risk; and
c) any changes in (a) or (b) from the previous period.

Quantitative disclosures
For each type of risk arising from financial instruments, an entity shall disclose:

a) summary quantitative data about its exposure to that risk at the end of the reporting period.
b) concentrations of risk if not apparent from the disclosures made in accordance with (a) and (b).

Types of risk
1. Credit risk: the risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge an obligation.

2. Liquidity risk: the risk that an entity will encounter difficulty in meeting obligation on financial liabilities.

3. Market risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
market prices. Market risk comprises of currency risk, interest rate risk and other price risk.

i. Currency risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates
ii. Interest rate risk: same with currency risk except that fluctuation is due to changes in market interest rates.
iii. Other price risk: same with currency risk except that fluctuation is due to changes in market prices.

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IFRS 8: OPERATING SEGMENTS

CORE PRINCIPLE
An entity shall disclose information to enable users of its FSs to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it operates.

OPERATING SEGMENT (OS)

An operating segment is a component of an entity:

(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and
expenses relating to transactions with other components of the same entity),

(b) whose operating results are regularly reviewed by the entity’s CODM to make decisions about resources to be allocated
to the segment and assess its performance, and

(c) for which discrete financial information is available.

 However, start-up operations that has not earned revenues may be referred to as an operating segment as may a
component that sells to other components within the same group.

 CODM is not a person. It is a function charged with the responsibility for assessing performance & allocating resources.

 Discrete information relates to the level of details reviewed by the CODM.

REPORTABLE SEGMENT (RS)

Quantitative threshold: An entity shall report separately information about an OS that meets any of the following
quantitative thresholds:

a) Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or
more of the combined revenue, internal and external, of all operating segments.

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

c) Its assets are 10 per cent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately
disclosed, if management believes that information about the segment would be useful to users of the financial statements.

Aggregation criteria: Two or more operating segments may be aggregated into a single operating segment if aggregation
is consistent with the core principle of this IFRS, the segments have similar economic characteristics, and the segments are
similar in each of the following respects:

a) the nature of the products and services;

b) the nature of the production processes;
c) the type or class of customer for their products and services;
d) the methods used to distribute their products or provide their services; and
e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

 Other OSs that do not meet the quantitative threshold may be aggregated with other OSs that have similar economic
characteristics and share majority of the aggregation criteria.

 When OSs increase above ten (10) the entity should consider if a practical limit has been reached.

MEASUREMENT
Measurement of RS is based on the information used internally by the CODM & not necessarily based on the IFRS, hence,
IFRS 8 requires RS amounts to be reconciled to the relevant (IFRS) amount for the entity as a whole, but only in total and
not on a segment by segment basis.

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 COMMON PITFALL 1: Relationship between an operating segment & a reportable
segment
Basically, segment reporting follows two stages, the first stage is to identify operating segments (OS) while the second stage
is to determine if the identified OS are reportable. Therefore, a reportable segment must first be identified as an OS.

COMMON PITFALL 2: Aggregation of the quantitative threshold

ILLUSTRATIVE EXAMPLE
The following segment information relates to Olowe Titi Plc
Segment Segment revenue Segment profit/(loss) Segment assets (N’m)
(N’m) (N’m)
Blogging 900 100 80
Chatting 1,400 200 750
Slaying 200 (35) 70
Total 2,500 265 900

The blogging segment includes internal sales to the chatting segment of N600m.
The slaying segment derives revenue of N160m from internal services provided to both the other two segments.

Required: With the aid of proper explanation, identify the reportable segments based on the quantitative threshold.

Answers
Step 1: calculate threshold amounts
 Total revenue: CU250 (2,500 x 10%)
 Operating results: CU30 (300 x 10%), being 10% of the greater of the absolute amount of all operating segments
not reporting a loss (100 + 200) and all operating segments reporting a loss (35)
 Total assets: CU90 (900 x 10%)

Step 2: Consider each of the operating segments in turn:

 Blogging segment exceeds the revenue threshold (900 > 250) and the result threshold (100 > 30); but not the assets
threshold (80 < 90)
 Chatting segment exceeds the revenue threshold (1,400 > 250); the result threshold (200 > 30); and the assets
threshold (750 > 90)
 Slaying segment exceeds the result threshold (35 > 30); but not the revenue threshold (200 < 250), nor the assets
threshold (70 < 90).

Accordingly, all three segments meet at least one threshold and therefore all are reportable.

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IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS

The objective of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements
when an entity controls one or more other entities.

CONTROL
In accordance with IFRS 10, control is the sole basis for the preparation of consolidated financial statements i.e. the
investor must control the investee. If control is not established an entity cannot be consolidated!!

An investor controls an investee if and only if the investor has all the following (IFRS 10:7):

a. power over the investee;

b. exposure, or rights, to variable returns from its involvement with the investee; and

c. the ability to use its power over the investee to affect the amount of the investor’s returns

INVESTMENT ENTITIES (IE)

A parent shall determine whether it is an investment entity. An investment entity is an entity that:

a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management
services;

b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation,
investment income, or both; and

c) measures and evaluates the performance of substantially all of its investments on a fair value basis.

 An IE shall not consolidate its subsidiaries or apply IFRS 3 when it obtains control of another entity. Instead, an IE shall
measure an investment in a subsidiary at fair value through profit or loss using IFRS 9.

 If an IE has a subsidiary that is not in itself an IE and whose main activities and purpose is related to the investment
activities of the IE, it shall consolidate that subsidiary.

STRUCTURED ENTITIES (SE) (See definition of structured entities under IFRS 12)

In determining if an investor controls a structured entity, the investor is required to assess the purpose and design of the SE
i.e. consideration of the risks to which the investee was designed to be exposed, the risks it was designed to pass on to the
parties involved with the investee and whether the investor is exposed to some or all of those risks.

ACCOUNTING REQUIREMENTS
Accounting policies: a parent shall prepare consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances.

Measurement: consolidation of an investee shall begin from the date the investor obtains control of the investee and cease
when the investor loses control of the investee.

Non-controlling interests (NCI): a parent shall present non-controlling interests in the consolidated statement of financial
position within equity, separately from the equity of the owners of the parent.

Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are
equity transactions (i.e. transactions with owners in their capacity as owners).

Continuous assessment: an investor shall reassess whether it controls an investee if facts and circumstances indicate that
there are changes to one or more of the three elements of control listed

Consolidation procedures: combine like items of assets, liabilities, expenses, income and equity of both the parent &
subsidiary. Offset the consideration transferred with the subsidiary’s equity at acquisition in calculating goodwill. Eliminate
intra-group transactions.

Reporting date: the difference between the reporting date of the subsidiary and the parent shall be no more than 3 months.

Loss of control: if a parent loses control of a subsidiary the parent: derecognises the net assets, goodwill, NCI, recognise
the fair value of retained interest. The gains or losses on disposal shall be recognised in profit or loss.

Changes in proportion held by NCI: is treated as a transaction within equity. No gain/loss is taken to P or L.

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IFRS 11: JOINT ARRANGEMENTS
The objective of this IFRS is to establish principles for financial reporting by entities that have an interest in arrangements
that are controlled jointly (i.e. joint arrangements).

To meet the objective, this IFRS defines joint control and requires an entity that is a party to a joint arrangement to determine
the type of joint arrangement in which it is involved by assessing its rights and obligations and to account for those rights
and obligations in accordance with that type of joint arrangement.

JOINT ARRANGEMENTS (JA)

A joint arrangement is an arrangement of which two or more parties have joint control. A JA has the following characteristics:
a. The parties are bound by a contractual arrangement.
b. The contractual arrangement gives two or more of those parties joint control of the arrangement.

Joint control (JC) is the contractually agreed sharing of control of an arrangement, which exists only when decisions about
the relevant activities require the unanimous consent of the parties sharing control.

Joint arrangements are of two types: joint operation and joint venture.

Types of joint arrangement

An entity shall determine the type of joint arrangement in which it is involved. 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.

A joint operation (JO) is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators.

A joint venture (JV) is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement. Those parties are called joint venturers.

A key distinguishing factor between the two is that a JV is usually set up through a separate vehicle while a JO is not. But
this does not prevent the “rights and obligation assessment”.

FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT

Consolidated financial statements
Joint operations: a joint operator shall recognise in relation to its interest in a joint operation:

a. its assets, including its share of any assets held jointly;

b. its liabilities, including its share of any liabilities incurred jointly;
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; and
e. its expenses, including its share of any expenses incurred jointly.

Joint ventures: A joint venturer shall recognise its interest in a joint venture as an investment and shall account 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 as specified in that standard.

A party that participates in, but does not have joint control of, a joint venture shall account for its interest in the arrangement
in accordance with IFRS 9 Financial Instruments, unless it has significant influence over the joint venture, in which case it
shall account for it in accordance with IAS 28.

Separate financial statements

 Joint operations: same as above

 Joint venture: shall account for it at cost or in accordance with IFRS 9 (See IAS 27).

ENTITIES THAT PARTICIPATE IN A JOINT ARRANGEMENT BUT DO NOT HAVE JOINT CONTROL (JC)

A party that participates in, but does not have JC of, a joint operation shall also account for its interest in the arrangement:

If the arrangement is a joint operation, it shall account for its share of assets, liabilities, expenses and revenues in both its
separate financial statements and consolidated financial statements.

If the arrangement is a joint venture, in its consolidated FS it shall assess if it has significant influence. If it does it shall
apply the equity method in IAS 28, if not it shall treat it as a financial asset under IAS 39/IFRS 9. In its separate FS, it shall
also asses if it has significant influence, if present it shall account for it at costs or in accordance with IFRS 9. If not present,
it shall treat it as a financial asset.

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IFRS 12: DISCLOSURE OF INTERESTS IN OTHER ENTITIES

The objective of this IFRS is to require an entity to disclose information that enables users of its FSs to evaluate:

a. the nature of, and risks associated with, its interests in other entities; and
b. the effects of those interests on its financial position, financial performance and cash flows.

In achieving this objective an entity is expected to disclose the significant judgements and assumptions it used in
determining the nature of its interest in another entity, classifying its joint arrangements and investment entity (IE). The
entity shall also disclose information about its interest in subsidiaries JAs & associates, uncontrolled structured entities.,

SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS

An entity shall disclose information about significant judgements and assumptions it has made (and changes to those
judgements and assumptions) in determining:

a. that it has control of another entity.

b. that it has control over another entity despite holding < 50% and how it does not control even though it holds > 50%
c. that it has joint control of an arrangement or significant influence (SI) over another entity;
d. that it has SI over another entity even though it holds < 20% and how it does not have SI even though it holds > 50%.
e. the type of JA (i.e. joint operation or joint venture) when the arrangement has been structured via a separate vehicle;
f. that it is an investment entity and/or how it is an IE even if the entity does not meet the IFRS 10 characteristics for an IE.

INTERESTS IN SUBSIDIAIRIES

An entity shall disclose information that enables users of its consolidated financial statements

a. to understand the composition of the group; and the interest that NCI have in the group’s activities and cash flows
b. to evaluate:
i. the nature and extent of significant restrictions on its ability to access or use assets, & settle liabilities, of the group;
ii. the nature of, and changes in, the risks associated with its interests in consolidated structured entities;
iii. the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control; and
iv. the consequences of losing control of a subsidiary during the reporting period.

INTERESTS IN UNCONSOLIDATED SUBSIDIARIES (UCS) (INVESMENT ENTITIES-IE)

a) An entity shall disclose the fact that it is an IE & that it doesn’t consolidate its subsidiaries but account for them at FVTPL,
b) For each UCS, an IE shall disclose: the subsidiary’s name, principal place of business and proportion held by the IE.
c) An IE shall disclose the nature and extent of any significant restrictions on the ability of UCS to transfer funds to the IE.
d) Any current commitment or intentions by the IE to financially (or non-financially) support the UCS.

INTERESTS IN JOINT ARRANGEMENTS (JAs) AND ASSOCIATES

An entity shall disclose information that enables users of its financial statements to evaluate:

a. the nature, extent and financial effects of its interests in JAs and associates, including the nature and effects of its
contractual relationship with the other investors with joint control of, or significant influence over, JAs and associates; &
b. the nature of, and changes in, the risks associated with its interests in joint ventures and associates.

INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES

An entity shall disclose information that enables users of its financial statements:
a. to understand the nature and extent of its interests in unconsolidated structured entities; and
b. to evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.

A structured entity often has some or all of the following features or attributes:
a. restricted activities.
b. a narrow and well-defined objective,
c. insufficient equity to permit the structured entity to finance its activities without subordinated financial support.
d. financing in the form of multiple contractually linked instruments to investors that create concentrations of credit
or other risks (tranches).

Examples of structured entities include, but are not limited to: securitisation vehicles, asset-backed financings.

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