ACCA – APPLIED SKILLS

FINANCIAL REPORTING

BISC TRAINING CENTER

Mr. Ha Long Giang, FCCA, CPA
halonggiang@gmail.com
www.bisc.edu.vn
085 8822 168
training@bisc.edu.vn

ACCA - OUTLINE

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 OVERVIEW – F7
A - The conceptual and Regulatory framework for
Financial Reporting

B - Accounting for transactions in Financial Statements

C - Preparation of Financial Statements

D - Analyzing and Interpreting Financial Statements

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Examination Format
3 hours exam+ 10 minutes
OT = Objective Test Question
A short question, capable of a discrete response
(Multiple choice/ Multiple Response/ Number Entry)

15 MCQ
x 2 marks 2 constructed
questions x 20
30% 40% marks

15 Objective
Questions x 2
30%
marks
(3 scenarios)
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 GLOBAL PASSRATE

Examinable Documents

PRACTICE QUESTION
(3 types of examination question for each part)

SPECIMEN ON ACCA WEBSITE

PAST EXAM

REVISION KIT (BPP + KAPLAN)

Hockiemtoanonline.edu.vn 5

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 Chapter
01 CONCEPTUAL FRAMEWORK

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

Advantages & Disadvantages

ADVANTAGES

 Standardizing accounting  Single conceptual framework

practice can be devised for variety of
users.

 Less open to criticism  Report produced for a different

purpose.

 Concentrate on profit or loss  Not clear that apply conceptual

or Valuation of net asset framework will be easier

DISADVANTAGES

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 IASB’s Conceptual Framework
• Development of future IFRSs
• Promoting harmonization PURPOSE
• Assist national standard-setting bodies
• Preparers of financial statements
• Assist auditors
• Assist in interpreting the information in F/S

• The objective of financial statements

• Qualitative characteristics
• Definition, recognition and measurement of
the elements from F/S
SCOPE • Concepts of Capital and capital maintenance

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Going concern Accrual basis

ACCOUNTING ASSUMPTIONS

Economic entity Monetary unit

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 Going Concern Assumption
Concept assumes: the business will continue
A normal
to operate in approximately the same
set of
manner for the foreseeable future (at least accounts
the next 12 months).

UNLESS:

 The entity is being liquidated or

BREAK - UP has ceased trading, or
Basis
 The directors either intend to liquidate the
entity or to cease trading
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Going Concern Assumption

 Assets: Net book value A normal

set of
 No provisions for future operating loss accounts

BREAK - UP  Assets: Scrap Value

Basis  Provisions for future operating loss

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 Accrual Basis Assumption
Items are recognized as assets, liabilities, equity, income and expenses
(the elements of financial statements) WHEN they satisfy the
definitions and recognition criteria for those elements in the
Framework. (IAS 1)

Record when:
Profit / Revenue earned must
Revenues or expenses are
be matched against the
earned or incurred in the
expenditure incurred in
accounting period, to which
earning it.
they relate, NOT as the cash is
paid or received MATCHING CONVENTION

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Economic Entity Assumption

Keep the sole proprietor's

business transactions separate
from the owner's personal
transactions even though a sole
proprietorship is not legally
separate from the owner.

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 Monetary Unit Assumption

Only record business

transactions that can be
expressed in terms of a
currency

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QUALITATIVE CHARACTERISTICS
Fundamental Enhancing
Comparability

Relevance Verifiability

Faithful
Timeliness
Representation

Understandability
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 QUALITATIVE CHARACTERISTICS
Fundamental

The ability to influence decisions

- Predictive value
 Input for predictions
Relevance - Confirmatory value
 Feedback about previous
evaluations

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QUALITATIVE CHARACTERISTICS
Fundamental

The ability to influence decisions

- Predictive value
 Input for predictions
Materiality Relevance - Confirmatory value
 Feedback about previous
Omission or misstatement could evaluations
influence decisions
- Entity specific
- Based on
 Magnitude
 Nature; or Both
- Subjective – no specific values,
professional judgement

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 Materiality
The accountant should strive for complete accuracy
in financial reporting.

All errors that are discovered should be corrected.

The business will not pass an audit if material error

are found.

The general rule for materiality is 5% of Net Income.

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QUALITATIVE CHARACTERISTICS
Fundamental

Materiality Relevance
Information faithfully represents
what it purports to represent
- Completeness
Faithful
 Substance over form
Representation - Neutrality
- Reliability (Free from material
error)

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 QUALITATIVE CHARACTERISTICS
Information is more useful if it
can be compared Enhancing
- Similar information
 Other entities
Comparability
 Same entities for
different date

NOT the same as:

- Consistency
- Uniformity

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QUALITATIVE CHARACTERISTICS
Enhancing
Consensus could be reached Comparability
amongst different, knowledgeable,
independent observers
- Does not mean complete
agreement
- Direct
Verifiability
 Observation
- Indirect
 Check assumptions of
models

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 QUALITATIVE CHARACTERISTICS
Enhancing
Comparability

Verifiability
 Information available in time
to influence decisions
 Newer information is more
useful Timeliness
 Balance between timelines
and the provision of reliable
information

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QUALITATIVE CHARACTERISTICS
Enhancing
Comparability

Verifiability

 Classifying, characterizing and

Timeliness
presenting information clearly
and concisely
 Reasonable knowledge and
diligence assumed Understandability
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 Cost constraint

Costs must be justified

by the benefits of reporting

Not possible to satisfy

every user

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ELEMENT of Financial Statements

Measurement of
Financial Position
 Income

 Assets  Expensces

 Liabilities

 Equity Measurement of
Performance

RECOGNISE ?
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 ELEMENT of Financial Statements

RECOGNISE ?

Probability of future Reliability of

economic benefits measurement

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RECOGNITION of the Element of FSs

ITEM Recognised in When

The statement It is probable that the future

economic benefits will flow to the
of Financial entity and the asset has a cost or
ASSET Position value that can be measured reliably.

It is probable that an outflow of

resources embodying economic
The statement benefits will result from the
of Financial settlement of a present obligation
LIABILITY Position and the amount at which the
settlement will take place can be
measured reliably.

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 RECOGNITION of the Element of FSs
ITEM Recognised in When

The statement An increase in future economic

of profit or loss benefits related to an increase in
INCOME and other an asset or a decrease of a
comprehensive liability has arisen that can be
income measured reliably

The statement A decrease in future economic

of profit or loss benefits related to a decrease in
EXPENSE and other an asset or an increase of a
comprehensive liability has arisen that can be
income measured reliably

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MEASUREMENT of the Element of FSs

History cost

Realisable Present value

(settlement) of future cash
value flow

Current cost

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 Fair presentation & Compliance
with IFRS

IAS 1 state requirement for a fair presentation

 Selection and application of accounting policies

 Presentation of information which relevant, reliable, comparable

and understandable information.

 Additional disclosures where required

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Chapter
02 THE REGULATORY FRAMEWORK

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 The need for a regulatory framework

ENSURE RELEVANT

Financial Reporting
RELIABLE

 A body overall responsible for producing financial

To enforce
compliance with reporting standards (the IASB), and
GAAP there  A frame work of general principles within which
need to be
reporting standards can be produced

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PRINCIPLES-based versus RULES-based systems

Principles-based System Rules-based System

Work within a laid down principles Regulates for issue as they arise

• Framework provides with • Used in the absence of

background of principles within reporting framework
which standards can be developed
• Leads to the development of
• This ensure that standards
the large number of
produced should not be in conflict
regulations for every
with each other
eventuality
• Any departure from standards can
be judged whether / not it is in
keeping with principles set out in
framework

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 Problems of a principles-based systems
Out of date
• Produced in 1989 by IASC & adopted by IASB in 2001
• Is in danger of out of date due to constant changes taking place in
Financial Reporting
• e.g. FV concept is not referred in this framework
• IFRS are running ahead of framework

Continuous process of review

• Some machinery should be setup for review & updating of
framework & and to deal with issues which arise between reviews

IASB and FASB are now working to produce a joint

framework which should combine the best of
both approaches

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Setting of IFRSs

Establish
Advisory Committee Exposure Draft

Step 1 Step 2 Step 3 Step 4

Discussion Papers Final IFRS

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 Criticism of the IASB
 Accounting standards and choice

 Political problems

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The need for a regulatory framework

ADVANTAGES
 Present F/S on the same
basic
 Cross-border listing will
be facilitated
 Group company have a  Cost of implementing IFRS
common, company-wide
accounting language  The lower level of detail
in IFRS

DISADVANTAGES

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 IASB
Key IFRS Foundation
Appoint (22 Trustees)
Reports to

Membership links

Advises International Accounting

Standard Board
(15 Board members)

National IFRS Advisory IFRS

standard Council Interpretations
setters and Advisory Committee
other Committees (12 members)
interested
parties Director of Technical
Director of Operations
Activities
And non-technical staff
And technical staff

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PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 Chapter
03 IAS 1 – PRESENTATION OF FINANCIAL STATEMENT

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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1. IFRS statement
Scope

IAS 1 Presentation of Financial Statements applies to the preparation and

presentation of general- purpose financial statements in accordance with
IFRS Standards.

Financial statements

A complete set of Financial Statements comprises:

 A Statement of Financial position at the end of the period
 A Statement of Comprehensive income for the period
 A Statement of changes in equity for the period
 A Statement of cash flows for the period
 Notes

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 2. Statement of Financial Position
Format

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2. Statement of Financial Position

The current/non-current distinction

Exam focus point

You should appreciate the distinction between current and non-current
assets and liabilities and the affect this has on the wag they are recorded in
the financial Statements. OT questions will frequently ask candidates to
calculate, for example, the current portion of a lease liability or the non-
current portion Of a provision. It is important that you read the question
requirement carefully to ensure that you understand whether it is the
current or non-current portion of an asset, or more commonly, a liability you
are being asked to calculate

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 2. Statement of Financial Position
The current/non-current distinction ASSET

Current asset: An asset should be classified as a current asset when it:

• Is expected to be realized in, or is held for sale or consumption in, the
normal course of the entity's operating cycle; or
• Is held primarily for trading purposes or for the short-term and expected
to be realized within 12 months of the end of the reporting period; or
• Is cash or a cash equivalent asset which is not restricted in its use.
 All Other assets should be classified as non-current assets.
(IAS 1: Para. 66)

Non-current assets include tangible, intangible, operating and financial

assets of a long-term nature. Other terms with the same meaning can be
used (e.g. “fixed”, “long-term”). (IAS l: Para. 67)

Operating cycle: The time between the acquisition of assets for processing
and their realisation in cash Or cash equivalents. (IAS 1: Para. 68)
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2. Statement of Financial Position

The current/non-current distinction LIABILITY

Current liabilities: A liability should be classified as a current liability when it:

• Is expected to be settled in the normal course of the entity's operating
cycle; or
• Is held primarily for the purpose of trading; or
• Is due to be settled within 12 months after the end Of the reporting
period; or when
• The entity does not have the right at the end of the reporting period to
defer settlement of the liability for at least 12 months after the end Of
the reporting period.
 All Other liabilities should be classified as non-current liabilities.
(IAS 1: para. 69)

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 3. Statement of Comprehensive income
Format

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3. Statement of Comprehensive income

Exam focus point
In the exam, if a ‘statement of profit or loss and other comprehensive
income’ is referred to, this will always relate to the single statement format.
If a ‘statement of profit or loss’ is referred to, this relates to the statement
from ‘revenue’ to ‘profit for the year’.

Exams may refer to 'other comprehensive income' which relates to the ‘other
comprehensive income’ section of the statement. In practice, the item of
‘other comprehensive income’ you are most likely to meet is a revaluation
surplus.

Where the phrase ‘statement of profit or loss’ is used in this Workbook, this
can be taken to refer to the profit or loss section of the full statement or the
separate statement of profit or loss

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 4. Statement of Change in Equity
Format

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5. Chapter Summary

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 Chapter
04 NON – CURRENT ASSETS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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CONTENT
 IAS 16:
Property, Plant and Equipment

 IAS 40
Investment property

 IAS 23:
Borrowing costs

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 IAS 16
SCOPE
• IAS 16 covers all aspects of accounting for property, plant
and equipment.
This represents items called “tangible” non-current assets.

• IAS 16 does NOT apply to:

assets classified as held for sale in accordance with IFRS 5
exploration and evaluation assets (IFRS 6)
biological assets related to agricultural activity (see
IAS 41) or
mineral rights and mineral reserves such as oil, natural
gas and similar non-regenerative resources

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IAS 16 KEY DEFINITION

Property, plant and equipment
Are tangible assets that:
• Are held for use in the production or supply of goods or services, for rental
to others, or for administrative purposes AND;
• Are expected to be used during more than one period
Cost
is the amount of cash or cash equivalents paid OR the fair value of the other
consideration given to acquire an assets at the time of its acquisition or
construction
Residual Value
is the estimated amount that an entity would currently obtain from disposal
of the asset, after deducting the estimated costs of disposal, IF the asset were
already of the age and in the conditions expected at the end of its useful life.
 Other words: estimated net amount receipt when assets disposed at the
end of useful life
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 IAS 16 KEY DEFINITION
Fair Value
is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.

Carrying amount
is the amount at which an asset is recognized after deducting any
accumulated depreciation and impairment losses (Net book value)

Recoverable amount
is the amount which the entity expected to recover from the future use of
an asset, including its residual value on disposal. This is the HIGHER of net
selling price or value in use.
(Value in use: Net present value of Discounted Cash flows earned from using
assets in the remaining periods).

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IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition

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 IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition
At Cost
The cost of an item of property, plant and equipment comprises:
 Purchase price, less any trade discount or rebate
 Initial estimate of the costs of dismantling and removing the
item and restoring the site on which it is located.
 Directly attributable costs of bringing the asset to working
condition for its intended use, eg:
 Cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Professional fees (architects, engineers)
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IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition
At Cost
The cost of an item of property, plant and equipment comprises:
 Purchase price, less any trade discount or rebate

If exchange or part exchange of assets occurs frequently

for items of property, plant and equipment
 IAS 16 states that the cost of an item obtained through
(part) exchange is the FAIR VALUE of the asset received
UNLESS this CANNOT be measured reliably.

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 IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition
At Cost

Costs are NOT part of the cost of property, plant or equipment:

 Expenses of operations that are incidental to the construction or
development of the item
 Administration and other general overhead costs
 Start-up and similar pre-production costs
 Initial operating losses before the asset reaches planned
performance

EXPENSES

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IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition
At Cost
Subsequent Expenditure
Added to the carrying amount of the asset but only subsequent
expenditure which improves condition of asset beyond the
previous performance (probable future economic benefits) should
be recognized as assets. Some examples of such improvements:
 MODIFICATION of an item of plant to extend its useful life,
including increased capacity
 UPGRADE of machine parts to improve the quality of output
Other subsequent expenditures (repair, maintenances…)  EXPENSES
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 IAS 16 MEASUREMENT of PPE

Initial measurement
• Measurement subsequent to initial recognition

2 options

Cost model Revaluation Model

Carry the asset at its cost less Carry the asset at a revalue amount:
fair value less any subsequent
accumulated depreciation and accumulated depreciation and any
any accumulated impairment accumulated impairment losses.
This model should be used only if
losses the item can be measured regularly
and reliably.

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IAS 16 DEPRECIATION
 Depreciation is the allocation of the depreciable amount of an
asset over its estimated useful life
charge to net profit and loss for the period

 Depreciation begins when the asset is available for

WHEN ? use and continues until the asset is derecognized,
even if it is idle.

USEFUL LIFE is either:

HOW LONG ?  Period over which depreciable asset is expected to
be used, or
 Numbers of production or similar units expected to
be obtained from the asset
 Consider the physical wear and tear, obsolescence,
other legal or limits on the use of the assets.

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 IAS 16 DEPRECIATION
 Depreciation is the allocation of the depreciable amount of an
asset over its estimated useful life
charge to net profit and loss for the period

HOW MUCH?

Depreciation charged COST – RESIDUAL VALUE

in the period USEFUL LIFE

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IAS 16 DEPRECIATION
 Depreciation is the allocation of the depreciable amount of an
asset over its estimated useful life
charge to net profit and loss for the period

HOW MUCH? Depreciable Amount

Depreciation charged COST – RESIDUAL VALUE

in the period USEFUL LIFE

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 IAS 16 DEPRECIATION METHOD
REQUIREMENTS:
 Depreciation: systematic basic over its useful life
 The depreciable method should reflect the pattern in which the
asset’s economic benefits are consumed by the entity.
 A review of the useful life of property, plant and equipment should
be carried out at least annually.
 The depreciation method should also be reviewed periodically and
if there has been a significant change in the expected economic
benefits from those assets, the method should be changed to suit
this changed pattern and taken into account as change in
accounting estimate.

Straight line The reducing balance Sum of digit

Method Method Method

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IAS 16 DEPRECIATION METHOD

Straight line The reducing balance Sum of digit
Method Method Method

 The total depreciable amount is charged in equal instalments

to each accounting period over expected useful life of asset

Annual Cost of asset – Residual Value

Depreciation charge Expected useful life of asset

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 IAS 16 DEPRECIATION METHOD
Straight line The reducing balance Sum of digit
Method Method Method

 The reducing balance method of depreciation calculates the

annual depreciation charge as a fixed percentage of Net book
value of the asset.
Depreciation of this year % x NBV of last period

Accumulated Accumulated of past period

end of this year + Depr. charge in this year

Example:
Non-current asset cost is $10,000. Its expected useful life is 3 years and its
estimated residual value is $2,160. Company wishes to use reducing
balance of 40%. What is NBV of asset at the end of year 1, year 2, year 3?
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IAS 16 DEPRECIATION METHOD

Straight line The reducing balance Sum of digit
Method Method Method
Example:
Non-current asset cost is $10,000. Its expected useful life is 3 years and its
estimated residual value is $2,160. Company wishes to use reducing
balance of 40%. What is NBV of asset at the end of year 1, year 2, year 3?

Acc dep
Asset at cost 10,000
Depr end y1 (10,000*40%) -4,000 4,000
NBV at end of year 1 6,000
Depr end y2 (6,000*40%) -2,400 6,400 (= 4,000 + 2,400)
NBV at end of year 2 3,600
Depr end y3 (3,600 *40%) -1,440 7,840 (= 6,400 + 1,440)
NBV at end of year 3 2,160

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 IAS 16 DEPRECIATION METHOD
Straight line The reducing balance Sum of digit
Method Method Method

NOTE for reducing balance method

 DO NOT DEDUCT the residual value from the cost before
depreciating. Instead, we depreciate the asset using the
percentage given, until we reach the residual value, and
then we stop depreciating.

 There are different ways to apply the reducing balance

method when the asset has a residual value. However, the
method mentioned above is the one preferred by the examiner.

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IAS 16 DEPRECIATION METHOD

Straight line The reducing balance Sum of digit
Method Method Method
Example: Same example above but residual value = 3,000
Acc dep
Asset at cost 10,000
Depr end y1 (10,000*40%) (4,000) 4,000
NBV at end of year 1 6,000
Depr end y2 (6,000*40%) (2,400) 6,400 (= 4,000 + 2,400)
NBV at end of year 2 3,600
Depr end y3 = lower [(3,600 *40%)
(600) 7,000 (= 6,400 + 600)
and (NBV - Residual Value)]
NBV at end of year 3 3,000

Depreciate until NBV = Residual value  Normally, at the end of useful life
we will depreciate with the amount = NBV – residual value
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 IAS 16 DEPRECIATION METHOD
Straight line The reducing balance Sum of digit
Method Method Method
 This method is similar to Reducing balance method, only different is the percentage.
Example: : ABC Co purchases a non-current asset for $10,000 on 1 Jan
2006. Useful life is 5 years, residual value is $1,000. What is depreciation
charge for each year?
SOLUTION: The sum of digit = 5 year + 4yr +3yr +2yr+1yr = 15.
Year Calculation Dep. charge Accum. Depr
2001 5/15*(=10,000-1,000) 3,000 3,000
2002 4/15* 9,000 2,400 5,400
2003 3/15 *9,000 1,800 7,200
2004 2/15 *9,000 1,200 8,400
2005 1/15*9,000 600 9,000
NOTE: Sum of digit = number of ALL years sum together
There is always same NBV to use when calculate the allocation of depreciation (i.e.
9,000)
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IAS 16 DEPRECIATION METHOD

NOTE
 Depreciation method should apply consistency from year to year
 Change in depreciation method:
Change useful life  Change accounting estimation
 the remaining life will be used for remaining NBV.
Example: If ABC Co has asset cost $12,000, useful life is 4 yrs,
after 2 year and now want to move to useful life 7 yrs

SOLUTION:
 After 2 years: NBV = 12,000 – ((12,000/4)*2) = 6,000
 If move to 7 years: more 5 year to come, new depreciation is
= 6,000/5 = $1,200 (DO NOT DIVIDE TO 7 because
no Retrospective permitted)

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 IAS 16 DEPRECIATION

Accounting entries for depreciation expense charge

DR I&E account (depreciation expense)

CR Accumulated depreciation (balance sheet)
Shown as negative figures in the BS

 Depreciation for current year  charge as expense, Income

Statement
 Accumulated depreciation up to current period  presents
in Balance sheet
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IAS 16 DEPRECIATION
Complex Assets
There are assets which are made up of separate components.
Each components is separately depreciated over their useful life.

Example: An aircraft could be have the following components:

Cost Useful life
$'000
Fuselage 20,000 20 years
Undercarriage 5,000 500 landings
Engines 8,000 1,600 flying hours

Depreciation at the end of the first year, in which 150 flights totaling 400 hours
were made would then be:
$'000
Fuselage 1,000
Undercarriage (5,000 x 150/500) 1,500
Engines (8,000 x 400/1,600) 2,000
4,500

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 IAS 16 DEPRECIATION
Overhauls
Where an asset requires regular overhauls in order to continue to operate,
the cost of the overhaul is treated as an additional component and
depreciated over the period to the next overhaul.

Example: In the case of the aircraft above, an overhaul was required at the
end of year 3 and every third year thereafter at a cost of $1.2m this would
be capitalized as a separate component. $1.2m would be added to the cost
and the depreciation (assuming 150 flights againg) would therefore be:
$'000
Fuselage 1,000
Undercarriage (5,000 x 150/500) 1,500
Engines (8,000 x 400/1,600) 2,000
Overhaul($1,200,000/3) 400
4,900

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IAS 16 IMPAIRMENT – Fall in value

Carrying value (NBV) Recoverable amount

HIGHER:
 NRV = Fair value – cost to sell
 Value in use (the present value
of the future cash flows
expected to be derived from
an asset)

IMPAIRMENT: Write down Carrying value to Recoverable amount

(impairment loss  charge to PL)
(Prudence concept)

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 IAS 16 REVALUATION of NCA
Selection of Revaluation model

KEY PRINCIPLES OF REVALUATION MODEL

Revaluations should be carried out regularly, so that the carrying amount of an
asset does not differ materially from its fair value at the balance sheet date
If an item is revalued, the entire class of assets to which that asset belongs
should be revalued
When a non-current asset is revalued, depreciation is charged on the
revalued amount
Revaluation  increase in value  credit to other comprehensive income and
accumulated in equity under the heading "revaluation surplus"
Unless it represents the reversal of a revaluation decrease of the same asset
previously recognised as an expense, in which case it should be recognised in PL
Revaluation  Decrease in value  Recognize as an expense to the extent that
it exceeds any amount previously credited to the revaluation surplus relating to
the same asset.
When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings, or it may be left in equity under the heading
revaluation surplus. The transfer to retained earnings should not be made
through profit or loss.
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IAS 16 REVALUATION of NCA

Example:
Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5
years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is
$75,000.
How such revaluation was treated?
SOLUTION:
 Before revaluation:
Premises $30,000  depr over 30 yrs  depreciation per annum = $1,000
Land $20,000  No depreciation
End of 5 years  Premises + land = (30,000 – (30,000/30)*5yrs) + 20,000 = $45,000

 After revaluation: The gain on revaluation is

Premises + land = $75,000+75,000 = 150,000 recognized in the Statement
NBV before revalue 45,000 of Comprehensive Income
Increase revaluation amount 105,000 (under other comprehensive
 Double entry: income), but not in the
Dr Non-current asset 105,000 Income Statement as it has
Cr Revaluation reserve 105,000 not been realized.

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 IAS 16 REVALUATION of NCA
Example:
Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5
years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is
$75,000.
How such revaluation was treated?
SOLUTION:
If asset are sold at carrying amount of $150’000, the profit would be realized but The
transfer of Revaluation Surplus to retained earnings should not be made through
profit or loss.

 Accounting Entries:
Dr Cash 150,000
Cr Non-current asset 150,000
Dr Revaluation reserve 105,000
Cr RE 105,000

After the revaluation, depreciation of the building will be charged at the new rate:
$75,000/25 years = $3,000 per year.

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IAS 16 REVALUATION of NCA

Example:
Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5
years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is
$75,000.
How such revaluation was treated?
Excess depreciation
 The difference between the new depreciation charge based on the revalued
carrying amount and the old depreciation charge based on the original cost of
the asset is known as the excess depreciation.
 IAS 16 allows entities to transfer an amount equal to the excess depreciation
from the revaluation surplus to retained earnings in the equity section of the
SOFP, if they wish to do so.

Dr Depreciation expense (IS) $3’000 To record new

Cr Acc. Depreciation account (BS) $3’000 annual dep.

Dr Revaluation Surplus $2’000 To record transfer of

Cr Retained Earning $2’000 excess dep.

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 IAS 16 REVALUATION of NCA
Example:
Premises cost $30,000, land cost $20,000. Useful life is 30 years. After the end of 5
years, ABC Co decided to revalue assets as follow: Premises is $75,000, land is
$75,000.
How such revaluation was treated?

Revaluation downwards
Example as above. The carrying amount of the building five years after the
revaluation is $60’000 (75’000 - 3’000 x 5). The market value of the building has
fallen to $40’000. We assume that the entity does not transfer the excess
depreciation from revaluation surplus to REs.

Dr Revaluation surplus $20’000 Less than Reserve surplus:

Dr Building – acc. Depreciation $15’000 $105’000

Cr Building - cost $35’000

In case: the decrease amount = 110’000 > 105’000
 Dr Revaluation reserve: maximum =105’000
 Dr Expense = 110’000 – 105’000 = 5’000 (the excess amount of Revaluation Surplus)
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IAS 16
Derecognition of PPE

No future economic
On disposal
benefits expected

GAIN / LOSS

Net Disposal Proceeds Carrying Amount

Gain or loss are included in Profit or Loss, but not as Revenue

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 CONTENT
 IAS 16:
Property, Plant and Equipment

 IAS 40
Investment property

 IAS 23:
Borrowing costs

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IAS 40 DEFINITIONS

Investment Property
is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for
capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for
administrative purposes; or
b. sale in the ordinary course of business.

Owner – occupied Property

is property held (by the owner or by the lessee under a finance lease)
for use in the production or supply of goods or services or for
administrative purposes.

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 IAS 40 DEFINITIONS
Not Meets definition of
Property description
investment property
Owned by the company and leased out under an operating lease O
Held under a finance lease and leased out under an operating lease O
Held under a finance lease and to be leased out in the future
under an operating lease O
Held under a finance lease and leased out under a finance lease P
Owned by the company and leased out under a finance lease P
Owner-occupied property used in the production or supply of
goods, services or for administrative purposes P
Held for sale in the ordinary course of business P
Held under operating lease P
operating lease, unless
A property comprising a piece of land and a building constructed
expected to pass to lessee at
on it leased out to a third party
end of lease
Property partly owner-occupied and partly leased out under an the 2 portions accounted for
operating lease separately if they can be sold
separately; if not, to be treated
as PPE, unless the owner-
occupied portion is insignificant.
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IAS 40 RECOGNITION

• Investment property shall be recognised as an asset

when, and only when:

a. it is probable that the future economic benefits that

are associated with the investment property will flow
to the entity; and

b. the cost of the investment property can be measured

reliably.

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 IAS 40 RECOGNITION

Initial measurement
• An investment property shall be measured initially at its
cost. 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 as
prescribed for a finance lease, i.e. the asset shall be
recognised at the lower of the fair value of the property
and the present value of the minimum lease payments. An
equivalent amount shall be recognised as a liability.

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IAS 40 MEASUREMENT

Subsequent measurement
Fair Value Model Cost Model
• A gain or loss arising from a change in If an entity chooses the
the fair value of investment property
cost model, it shall
shall be recognized in profit or loss for
the period in which it arises. measure all of its
• The fair value of investment property investment property in
shall reflect market conditions at the
accordance with IAS 16’s
balance sheet date
• No depreciation if apply FV model. requirements.

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 IAS 40 MEASUREMENT

Subsequent measurement
Special case
When a property interest held by a lessee under an operating
lease is classified as an investment property, treatment is NOT
ELECTIVE. The fair value model is to be applied.
• Property held under an operating lease. A property interest that is
held by a lessee under an operating lease MAY BE classified and
accounted for as investment property provided that: [IAS 40.6]
• The rest of the definition of investment property is met
• The operating lease is accounted for as if it were a finance lease in
accordance with IAS 17 Leases
• The lessee uses the fair value model set out in this Standard for
the asset recognised
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IAS 40 MEASUREMENT

Subsequent measurement
• If an entity has previously measured an investment property
at fair value, it shall continue to measure the property at fair
value until disposal (or until the property becomes owner-
occupied property or the entity begins to develop the
property for subsequent sale in the ordinary course of
business) even if comparable market transactions become
less frequent or market prices become less readily available.

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 IAS 40 TRANSFERS
Transfers to, or from, investment property shall be made
when, and only when, there is a change in use, evidenced by:
a. commencement of owner-occupation, for a transfer from
investment property to owner-occupied property;
b. commencement of development with a view to sale, for a
transfer from investment property to inventories;
c. end of owner-occupation, for a transfer from owner-
occupied property to investment property;
d. commencement of an operating lease to another party, for
a transfer from inventories to investment property; or
e. end of construction or development, for a transfer from
property in the course of construction or development
(covered by IAS 16) to investment property.
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IAS 40 TRANSFERS

C ost m odel

From To Treatm ent

PPE IP No change in cost

Inventory IP No change in cost
IP PPE No change in cost
IP Inventory No change in cost

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 IAS 40 TRANSFERS

IP at fair value

From To Treatment

Value IP at date of transfer in

accordance in IAS16
PPE at cost IP (revaluation)
Inventory IP Change to P&L
IP PPE No change in value
IP Inventory No change in value

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IAS 40 DISPOSALS

• An investment property shall be derecognised (eliminated

from the balance sheet) on disposal OR when the
investment property is permanently withdrawn from use
and no future economic benefits are expected from its
disposal.
• Gains or losses arising from the retirement or disposal of
investment property shall be determined as the difference
between the net disposal proceeds and the carrying amount
of the asset and shall be recognised in profit or loss in the
period of the retirement or disposal.
• Compensation from third parties for investment property
that was impaired, lost or given up shall be recognised in
profit or loss when the compensation becomes receivable

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 IAS 40 DISPOSALS

Fair Value Model Cost Model

An entity shall disclose:
a. whether it applies the fair value model or the cost model.
b. if it applies the fair value model, whether, and in what
circumstances, property interests held under operating
leases are classified and accounted for as investment
property.
c. when classification is difficult, the criteria it uses to
distinguish investment property from owner-occupied
property and from property held for sale in the ordinary
course of business.

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IAS 40 DISPOSALS

Fair Value Model Cost Model

An entity shall disclose:
d. the methods and significant assumptions applied in
determining the fair value of investment property.
e. the extent to which the fair value of investment property is
based on a valuation by an independent valuer. If there
has been no such valuation, that fact shall be disclosed.
f. the amounts recognised in profit or loss

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 PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

96

CONTENT
 IAS 16:
Property, Plant and Equipment

 IAS 40
Investment property

 IAS 23:
Borrowing costs

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 IAS 23

BORROWING COSTS

Qualifying Assets Other Borrowing Costs

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IAS 23 KEY DEFINITION

Borrowing Costs
Interest and other cost incurred for the borrowing of funds

Borrowing cost may include:

• Interest on bank overdraft, and short term and long term
Borrowings.
• Finance charges related to Finance Lease.
• Exchange Difference arising from Foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.

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 IAS 23 KEY DEFINITION

Qualifying Assets
The asset which take substantial period of time to get ready
for its intended use or sale.
• Constructions to be used for operations;
• Inventories that need substantial time to bring them to their
saleable condition;
• Manufacturing Plants;
• Power generation facilities

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IAS 23 KEY DEFINITION

Qualifying Assets
NOT A QUALIFYING ASSET
• Inventories that are normally manufactured or produced in
large quantities on a repetitive basis and over a short period
of time;
• Assets which are ready for use or sale when acquired.

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 IAS 23 RECOGNITION
• Borrowing cost that are directly attributable to the
acquisition, construction or production of a qualifying asset
shall be CAPITALIZED as a part of the cost of the asset;

• Such borrowing cost can be capitalized when:

• It is probable that they will result in future economic benefit

to the entity; and

• These costs can be measured reliably.

• Entity shall recognize OTHER borrowing costs as an expense

in the period it incurs them.
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IAS 23 RECOGNITION
Eligibility for capitalization
• Borrowing cost that would have been avoided if the
expenditure on qualifying asset had not been made should
be capitalized.

• The amount OF cost eligible for capitalization shall be of

borrowing determined as:

• Borrowing Cost Eligible for Capitalization = Actual Borrowing

Cost Incurred – Investment income on the temporary
investment of those borrowings
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 IAS 23

QUALIFYING ASSET

Specific Borrowing cost General Borrowing cost

to be Capitalised to be Capitalised

Borrowing Cost Capitalisation Rate

less x
Income from Investment Expenditure Incurred

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IAS 23 RECOGNITION
Capitalization Rate
• In some instance, amount of borrowing cost eligible for
capitalization shall be determined by applying a capitalization
rate to the expenditure on that asset.

Capitalization Rate = Weighted Average of the borrowing Cost

• The amount of borrowing cost capitalized during the period

shall not exceed the amount of borrowing cost it incurred
during the period.

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 IAS 23 RECOGNITION
Capitalization Rate

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IAS 23 RECOGNITION
Commencement of Capitalization
The capitalization process shall begin when:

• Expenditure for asset are being incurred;

• Borrowing costs are being incurred;

• Activities that are necessary to prepare the asset for its

intended use or sale are in progress.

• Capitalisation should be suspended during periods in which

active development is interrupted

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 IAS 23 RECOGNITION
Cessation of Capitalization
• Capitalization of borrowing costs shall CEASE when
substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.

• When the construction of a qualifying asset is completed in

parts and each part is capable of being used while
construction continues on other parts, capitalization of
borrowing costs shall cease when substantially all the
activities necessary to prepare that part for its intended use
or sale are completed.
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IAS 23 DISCLOSURE

Following shall be disclosed:

 The amount of borrowing cost capitalized during the period;

 The capitalization rate used to determine the amount of

borrowing cost eligible for capitalization.

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 PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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110

On 1/1/20X6 stream co. borrowed 1.5m to finance the

production of two assets, both of which were expected
to take a year to build. Work started during 20X6. The
loan facility was drawn down and incurred on
1/1/20X6, and was utilized as follows:

Asset A Asset B
1/1/20X6 ₤250,000 ₤500,000
1/7/20X6 ₤250,000 ₤500,000

The loan rate was 9% and steam co. can invest surplus fund at 7%

Required:
a. Calculate borrowing cost, which may be capitalized for each asset
31/12/20X6
b. Total cost of each asset at 31/12/20X6

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 ANSWER
• Borrowing cost to be capitalized
Asset A Asset B
1/1/20X6 to 31/12/20X6
(₤500,000 x 9%) ₤45,000
(₤1,000,000 x 9%) ₤90,000
Less: Investment Income
1/1/20X6 to 30/6/20X6 (₤250,000 x 7% x 6/12) ₤(8,750) -
1/1/20X6 to 30/6/20X6 (₤500,000 x 7% x 6/12) - ₤(17,500)
Net borrowing cost ₤36,250 ₤72,500
Cost of power generation facilities:
Total expenditure ₤500,000 ₤1,000,000
Total cost ₤536,250 ₤1,072,500

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Chapter
05 IAS 38 - INTANGIBLE ASSETS

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HALONGGIANG@GMAIL.COM

091 266 1988

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 Definition
 An intangible asset is an “identifiable” non-monetary ASSET
without physical substance

3 CRITICAL ATTRIBUTES of an intangible assets:

FUTURE
IDENTIFIABILITY CONTROL ECONOMIC
BENEFITS

(These criteria's applies to both internally generated and

purchased intangible assets)

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Definition
3 CRITICAL ATTRIBUTES of an intangible assets:
is separable from the entity and sold,
transferred, licenced or rented either
IDENTIFIABILITY individually or combined

arises from contractual or other legal rights

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 Definition
3 CRITICAL ATTRIBUTES of an intangible assets:

 If the entity has the power to obtain the

future economic benefits flowing from
CONTROL the asset and to restrict the access of
others to those benefits.
 This can stem from legal rights. In the
absence of legal rights, it is more difficult
to demonstrate control.
 However, legal enforceability is not a
necessary condition for control because
an entity may be able to control the
future economic benefits in some other
way.

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Definition
3 CRITICAL ATTRIBUTES of an intangible assets:

FUTURE
ECONOMIC
BENEFITS Revenues

Reduce future costs

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 Recognition
 An intangible asset, whether purchased or self-created,
is recognised if and only if:
 it is probable that the future economic benefits that are
attributable to the asset will flow to the enterprise; and
 the cost of the asset can be measured reliably

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Initial Measurement AT COST

 Internally-generated goodwill, brands, mastheads,
publishing titles, customer lists, start-up costs, training
costs, advertising costs and relocation costs are never
recognised as assets.
 If an intangible item does not meet both the definition and
the recognition criteria: recognised as an expense when it is
incurred,
 Except if the cost is incurred as part of a business
combination, in which case it forms part of the amount
recognised as goodwill at the acquisition date.
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 Initial Measurement AT COST

Expenditures  NOT part of the cost - expense

 Costs of introducing a new product or service (including

costs of advertising and promotional activities);
 Costs of conducting business in a new location or with a
new class of customer (including costs of staff training); and
 Administration and other general overhead costs.

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Separate Acquisition
Cost of a separately acquired intangible asset comprises:
 Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts
and rebates; and
 Any directly attributable cost of preparing the asset for its
intended use.

 Employment costs arising directly from bringing the asset to

its working condition;
 professional fees arising directly from bringing the asset to its
working condition; and
 costs of testing whether the asset is functioning properly
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 Capitalisation
Criterias for capitalisation: Development expenditure
 The technical feasibility of completing the intangible asset
so that it will be available for use or sale
 Its intention to complete the intangible asset and use or sell it
 Its ability to use or sell the intangible asset
 how the intangible asset will generate probable future
economic benefits
 the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset;
 its ability to measure the expenditure attributable to the
intangible asset during its development reliably

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Capitalisation
Costs that may be included:
Only those costs that have been incurred after the date that the
capitalisation criteria were first met can be included.
 The cost comprises all directly attributable costs necessary to
create, produce, and prepare the asset to be capable of
operating in the manner intended by management. Examples
are:
 costs of materials and services used or consumed
 costs of employee benefits arising from the generation of the
intangible asset
 other direct costs such as fees to register a legal right; and
 amortisation of patents and licences that are used to generate
the intangible asset.
 Borrowing costs, if capitalised under IAS 23 (IF incurred on QA)
 earlier expense written off may not be reinstated
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 Recognition of an Expense
Expenditure on an intangible item shall be recognised as an
expense when it is incurred unless:
 It forms part of the cost of an intangible asset that meets the
recognition criteria or
 The item is acquired in a business combination and cannot be
recognised as an intangible asset. If this is the case, this
expenditure (included in the cost of the business combination)
shall form part of the amount attributed to goodwill at the
acquisition date.

IAS 38 also expressly requires the following to be expensed:

 start up costs
 training costs
 advertising and promotional costs
 relocation and reorganisation costs
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Measurement
MODEL:
carried at its cost less any accumulated amortization and
any accumulated impairment losses.

If Active market exists (very rare):

Carried at a revalued amount being its fair value at the date of
the revaluation less any subsequent accumulated amortization
and any subsequent accumulated impairment losses

Such active markets are expected to be uncommon for

intangible assets.
Examples where they might exist:
• Milk quotas.
• Stock exchange seats.
• Taxi medallions/licences
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 ACTIVE MARKET
Active market has the following CHARACTERISTICES
 Product is homogenous
 There are willing buyers and suppliers
Generally, intangible assets (e.g. brand), are UNIQUE in nature
and therefore active market does not exist….
So, revaluation model is NOT applicable.

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ACTIVE MARKET
REVALUATION MODEL is only permissible if the conditions
below are met:
1. Fair value should be determined by reference to an active
market
2. Revaluations should be made with sufficient regularity
such that the carrying amount does not differ materially
from that which would be determined using fair value at
the balance sheet date
3. If an intangible asset is revalued, all the other assets in its
class should also be revalued. revaluations are carried out
regularly. (unless there is no active market for a particular
asset).

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 ACTIVE MARKET
REVALUATION MODEL is only permissible if the conditions
below are met:
4. Revaluation increases are recognised in other
comprehensive income and accumulated in equity.
5. Revaluation decreases are charged first against the
revaluation surplus in equity related to the specific asset,
and any excess against profit or loss.
6. When the revalued asset is disposed of, the revaluation
surplus remains in equity and is NOT reclassified to profit
or loss.

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Amortisation

USEFUL
LIFE

FINITE INDEFINITE
(limited) (unpredictable)

AMORTISE, NO AMORTISATION
normally SL method (But, checked for
impairment)

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 Amortisation
 Intangible assets with indefinite useful lives are not
amortised but are tested for impairment on an annual basis.
 If recoverable amount is lower than the carrying amount, an
impairment loss is recognised. The entity also considers
whether the intangible continues to have an indefinite life.
 Normally, subsequent expenditure on an intangible asset
after its purchase or completion is recognised as an
expense. Only rarely are the asset recognition criteria met.

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GOODWILL
 The difference between the cost of the acquisition and the
fair values of the net assets acquired

INTERNALLY GENERATED PURCHASED GOODWILL

NO recognition CAPITALISED and CHECKED

FOR IMPAIRMENT
 NO amortisation
(because it has indefinite
useful life)

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 Computer Software
Purchased: CAPITALISE
 Operating system for hardware: include in hardware cost

Internally developed
 whether for use or sale): charge to expense until
technological feasibility, probable future benefits, intent and
ability to use or sell the software, resources to complete the
software, and ability to measure cost.
Internally developed
 over useful life, based on pattern of benefits (straight-line is
the default

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PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 Chapter
06 IAS 36 – IMPAIRMENT OF ASSETS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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IAS 36 OBJECTIVE
• Ensure that assets are carried at no more than their
recoverable amount
• Define how the recoverable amount is determined

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 IAS 36 DEFINITION

Carrying amount Recoverable amount

(Accounting records) Higher (NRV=FV-cost to sell

and Value in use)

CA- RA Impairment Loss

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Impairment: What to do?

Intangibles with indefinite useful life

Annual Test
Intangibles not yet available for use

Goodwill Annual Test

Test when Indicators

Other assets: @ reporting date
exist

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 Indications of impairment

External sources Internal sources

 Decline in market value  Obsolescence/physical
 Significant changes damage
(market, technology,  Significant changes
legal, economic) (restructuring,
 Increase in interest discontinuing)
rates  Internal reporting
 CA > market evidence
capitalization

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138

IAS 36 – Impairment of Assets

Recoverable amount

Higher of asset’s/CGU’s

NRV = Fair value - cost to sell Value in use

- If RA> CA No impairment

- If NRV impossible to set Use value in use

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 IAS 36 – Impairment of Assets
Value in use calculation

1. Future CF 2. Discounting 3. Present value

Year Future cash flow Discount factor at 10% Present value

1 3,000 0.909 2,727
2 2,800 0.826 2,314
3 2,500 0.751 1,878
4 2,000 0.683 1,366
5 1,200 0.621 745
∑ 11,500 9,031

Discount factor: Market rate (if no market rate: weighted Value in use
average cost of capital/ other borrowing rate

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IAS 36 – Impairment of Assets

Impairment loss

Carrying amount Recoverable amount

Cost Model Revaluation Model

Debit: Credit: Debit:

P/L-Impairment Asset OCI-Revaluation
Credit:
loss (adjustment) surplus
Asset
Debit: (adjustment)
P/L-impairment loss

Adjust depreciation for future periods to new CA!

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 IAS 36 – Impairment of Assets
Impairment loss

• Specific asset
• CGU:
• To any GW allocated to CGU
• The remaining should pro-rate to remaining assets

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IAS 36 – Impairment of Assets

CGU

Definition: Smallest identifiable group of assets that

generates cash inflows largely independent from other
assets

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 IAS 36 – Impairment of Assets

Business combinations

Testing of CGU with goodwill:

= test annually or whenever there is
an indication of impairment
GOODWILL
Allocated to CGUs
CA of CGU+GW RA of CGU

Impairment loss

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IAS 36 – Impairment of Assets

CGU with goodwill: impairment loss

1. Reduce CA of any goodwill allocated to CGU

2. Reduce CA of other assets of CGU pro-rata

BUT
Do not reduce CA of an asset below the highest of:

Recoverable Zero
amount
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 IAS 36 – Impairment of Assets

Reversal of impairment loss

Is there any indication that impairment loss no longer exists?

External sources Internal sources

- Increase in market value - Significant changes

- Significant changes (market, (restructuring, enhancement)
technology, legal, economic) - Internal reporting evidence
- Decrease in interest rates

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IAS 36 – Impairment of Assets

Reversal of impairment loss
Only when change in estimates to determine Recoverable amt
Sequence

1st: Individual asset 2nd: Cash generating unit 3rd: Goodwill

- Increased CA ≤ original CA - Allocation to assets pro rata - No reversal

- P/L, or revaluation increase (NO goodwill)
- Adjustment depreciation - CA of asset – not increase

RA Original CA

Lower of
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 PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

148

148

Chapter
07 REPORTING FINANCIAL PERFORMANCE

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 IAS 08 OBJECTIVE

It prescribes the criteria for:

 Selection of accounting policies;
 Changes in accounting policies;
 Accounting treatment;
 Disclosure of changes in accounting policies;
 Changes in accounting estimates;
 Correction of errors;

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IAS 08
IAS 8 - Enhancement of:
 Relevance and reliability of financial statements;
 Comparability of financial statements with the financial
statements of other entities and of prior periods of the same
entity.

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 IAS 08 KEY CONCEPTS

Retrospective
 Retrospective application is applying a new policy to
transactions, other events & Conditions as if that policy had
always been applicable.

Retrospective Restatement
 It is basically the after effect of Retrospective application on
the Prior Periods presented along the current year’s Financial
Statement.

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IAS 08 KEY CONCEPTS

Prospective Application
 Prospective Application means applying the changes on
current and future periods only.
 In the past what’s done is done no such alteration is required
in the books of the accounts.

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 IAS 08 KEY CONCEPTS

Impracticable Applying
 Applying a requirement is impracticable when the entity
cannot apply it after making every possible effort.

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IAS 08 ACCOUNTING POLICIES

 Basis;
 Rules;
 Conventions;
 Practices;
 Specific Principles;
 That are applied in preparing and presenting financial
Statements

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 IAS 08 ACCOUNTING POLICIES

Reasons for Change in Accounting Policies

 Change in International Financial Reporting Standard
 Change in Local Legislation
 For More True & Fair View

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IAS 08 ACCOUNTING POLICIES

Accounting Treatment of Change in Accounting Policy

• Retrospective • Impracticable
• When a change in accounting • When it is impracticable to
policy is applied retrospectively, determine the cumulative effect,
the entity shall adjust the at the beginning of the current
opening balances of each period, of applying a new
accounting policy to all prior
affected component of equity for periods, the entity shall adjust
the earliest prior period the comparative information to
presented and the other apply the new accounting policy
comparative amounts disclosed prospectively from the earliest
for each prior period presented date practicable.
as if the new accounting policy
had always been applied.

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 IAS 08 ACCOUNTING POLICIES

Disclosure requirements of change in accounting policy

 Nature of change
 Description of transitional provision if any
 For the current period and each prior period presented, to the
extent practicable, the amount of adjustment:
 For each financial statement line item affected;
 Earnings per share – revised

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IAS 08 ACCOUNTING ESTIMATES

Change in Accounting Estimates is an Adjustment in:

 Carrying value of an Asset ;
 or a liability;
 Or the amount of Periodic consumption of an Asset;
As a Result of Present Conditions and Circumstances

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 IAS 08 ACCOUNTING ESTIMATES

Reasons for Estimation

When an item of financial statements cannot be measured
precisely, it can only be estimated. This is because of:
 Uncertainties inherent in the business;
 Where judgments are involved;

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IAS 08 ACCOUNTING ESTIMATES

Where Estimation is Required?

Estimates may be required of:
 Bad Debts
 Inventory obsolescence
 Fair value of financial assets or financial liabilities
 The useful lives of, or expected pattern of consumption of the
future economic benefits embodied in, depreciable assets
 Warranty Obligations etc.

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 IAS 08 ACCOUNTING ESTIMATES

When Change in Accounting Estimate Becomes Necessary?

If changes occur in the circumstances on which the estimate was
based:
 As a result of a new information
 As a result of new development
 More Experience

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IAS 08 ACCOUNTING ESTIMATES

What is the Recognition Criteria of Change in

Accounting Estimate?
 Adjusting the carrying amount of the related asset, liability or
equity item in the period of change recognizes a change in an
accounting estimate

Example: Management estimated that provision for doubtful debts

up to 5 percent of the total population of trade debts. However,
upon identifying the age of the trade debts, it revealed that bad
debts are about 6.5 percent of total population of trade debts.
Management immediately recognizes the increase in bad debts
expense in the books of accounts

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 IAS 08 ACCOUNTING ESTIMATES

IAS 08 requires recognizing the effect of the change in the

accounting estimate in the:
 Current;
 future periods;
 affected by the change.

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IAS 08 ACCOUNTING ESTIMATES

Disclosures Required
 If the effect of a change in estimate is immaterial (as is usually
the case for changes in reserves and allowances), we do not
disclose the alteration.
 However, we disclose the change in estimate if the amount is
material. Also, if the change affects several future periods,
e.g., the effect on income from continuing operations, net
income, and per share amounts.

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 IAS 08 ERRORS

What are Errors?

 Errors are Mistakes by literal meanings. They can be Classified
as shown:

ERRORS

Prior Period Current Period

Errors Related To Errors Related To

Prior Reporting Current Reporting
Periods Periods

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IAS 08 ERRORS

What are Prior Period Errors?

 Failure to use or misuse of reliable information that was
available when financial statements for those periods were
authorized for issue.
 Failure to use or misuse of reliable information that could
reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements
ERRORS

Prior Period Current Period

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 IAS 08 ERRORS

What are the Examples of Prior Period Errors?

 Effect of mathematical mistakes
 Mistakes in applying accounting policies
 Oversight
 Misinterpretation of facts
 Fraud
Change in accounting estimates result from New information or
New developments are NOT corrections of errors

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IAS 08 ERRORS

What is the Accounting Treatment for Rectification

of Errors??
An entity shall correct material prior period errors
retrospectively in the first set of financial statements authorized
for issue after their discovery by:
 Restating the comparative amounts for the prior period(s)
presented in which the error occurred; or
 If the error occurred before the earliest prior period
presented, restating the opening balances of assets, liabilities
and equity for the earliest prior period presented

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 IAS 08 DISCLOSURE

What are the Disclosure Requirements of IAS-8?

 Nature of the prior period error
 To the extent practicable, the amount of the correction:
For each financial statement line item affected; and
Revision in earnings per share (EPS)

The amount of the correction at the beginning of the earliest

prior period presented; and
If retrospective restatement is impracticable for a particular
prior period, the circumstances that led to the existence of that
condition and a description of how and from when the error has
been corrected.

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 IAS 8:
CONTENT Accounting Policies,
Changes in Accounting Estimates
& Errors

 IFRS 5
Non-current Assets Held for Sale
and Discontinued Operation

 IAS 10
Events after the reporting period
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 IFRS 5 OBJECTIVE & SCOPE
 Standards for non-current assets with carrying values to be
recovered through sale rather than use
 Covers classification, measurement, presentation of assets
held for sale, and reporting of discontinued operations
 Assets held for sale: refers to all such recognized non-
current assets, and includes cash-generating units called
disposal groups that may include current and non-current
assets and liabilities
 Discontinued operation: a component of an entity that
either has been disposed of or is classified as held for sale

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IFRS 5 CLASSIFICATION

Conditions:
1. Available for immediate sale in existing condition
2. Sale must be highly probable
3. Likely that significant change will not be made to the plan
4. Sale transaction will take place within one year from
classification as held for sale

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 IFRS 5 MEASUREMENT
On reclassification as held for sale:
 Measure at LOWER of carrying amount and fair value less
costs to sell
 Write-down is an impairment loss
 Impairment loss is recognized in profit or loss
 No depreciation is taken while classified as held for sale

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IFRS 5 MEASUREMENT

Re-measure at each balance sheet date

 Increase in fair value less costs to sell is recognized as a gain
in profit or loss
 Increase limited to cumulative impairment losses previously
recognized

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 IFRS 5 MEASUREMENT

Changes to a plan of sale:

 Item is reclassified
 Re-measured to LOWER of:
a) Carrying amount before classified as held for sale less
any depreciation that would have been taken if it had
not been held for sale, and
b) Its recoverable amount (i.e., higher of fair value less
costs to sell and value in use)
 Difference is recognized in profit or loss from continuing
operations

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IFRS 5 PRESENTATION & DISCLOSURE

Objective of presentation and disclosure on income statement:

 To provide useful information separately about continuing
operations and discontinued operations so that users can
assess the potential for future returns and operating cash
flows

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 IFRS 5 PRESENTATION & DISCLOSURE

Discontinued operation must be a component of an entity

that:
a. Represents a separate major line of business or geographic
area of operation
b. Has clearly distinguishable operations and cash flows from
the rest of the entity
c. Is part of a single coordinated plan to dispose of the
component, or
d. Is a subsidiary acquired exclusively with a view to resell

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IFRS 5 PRESENTATION & DISCLOSURE

Income statement related disclosures:

 Revenues, expenses, pre-tax profit/loss from operations,
related income tax expense
 Gain/loss on disposal from remeasurements and related
income tax
 Total of after-tax amounts from above
 Net cash flows from operations, investing, and financing re
discontinued operations

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 IFRS 5 PRESENTATION & DISCLOSURE

Other:
 Restate to make prior period’s income statement comparable
 Report adjustments to amounts reported as discontinued in
prior periods

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IFRS 5 PRESENTATION & DISCLOSURE

Objective of presentation and disclosure on the statement of

financial position:
 To allow financial statement readers to assess the effects of
items whose cash flows will come from their sale rather than
their use

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 IFRS 5 PRESENTATION & DISCLOSURE

Statement of financial position:

 Do not reclassify assets and liabilities on comparative
financial statements of prior years
Notes to the statements:
 Descriptive information about the assets and disposal groups,
amounts of write-downs and remeasurements and where
they are reported, information about removal of assets and
groups from the held-for-sale category

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IFRS 5 PRESENTATION & DISCLOSURE

INCOME STATEMENT extract
CONTINUING OPERATION
Revenue XX
Cost of sales (XX)
Gross profit XX
Distribution costs (XX)
Administrative expenses (XX)
Other expenses XX
Finance costs (XX)
Profit before tax XX
Income tax expense (XX)
Profit from continuing operation 96
Loss from discontinued operation (NET OF TAX) (30)
Profit for the period 66
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  IAS 8:
CONTENT Accounting Policies,
Changes in Accounting Estimates
& Errors

 IFRS 5
Non-current Assets Held for Sale
and Discontinued Operation

 IAS 10
Events after the reporting period
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IAS 10 DEFINITION

Reporting date FS authorized

(i.e 31.12.2018) (31.03.2019)

Events after reporting date

Example: Year end reporting 30 Sep 2008. FS were sent for audit
on 31 Oct 2008. Audit was finalised on 5th Nov 2008 and sent
back to the company for authorisation. BOD signed the report on
20 Nov 2008

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 IAS 10
Adjusted events Non-adjusting events

 Adjust the financial  Do not adjust the

financial statement
statements  But, provide disclosures if
 No disclosures material event

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IAS 10
Adjusting events
 Those that provide further evidence of conditions that existed
at the balance sheet date”.
 They require changes in amounts to be included in financial
statements, because financial statements should reflect all
available evidence as to conditions existing at the balance sheet
date

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 IAS 10 EXAMPLES: Adjusting Events

1. Non current assets:

 The subsequent determination of the purchase price or
the proceeds of sale of assets purchased or sold before
the year end.
2. Property:
 A valuation which provides evidence of a permanent
diminution in value
3. Investments:
 The receipt of a copy of the financial statements or other
information in respect of an unlisted company which
provides evidence of a permanent diminution in the
value of the long term investment

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IAS 10 EXAMPLES: Adjusting Events

4. Inventories and work in progress:

 The receipt of proceeds of sales after the balance sheet
date or other evidence concerning the net realisable
value (if NRV is lower)of inventories.
 The receipt of evidence that the previous estimate of
accrued profit on a long-term construction contract was
materially inaccurate.
5. Receivables:
 The renegotiation of amounts owing by customers, or the
insolvency of a customer. (write off the irrecoverable
amount as bad debts)

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 IAS 10 EXAMPLES: Adjusting Events

6. Taxation:
 The receipt of information regarding rates of taxation (only
change the current tax estimation, NOT the deferred tax)
7. Claims:
 Amounts received or receivable in respect of insurance claims,
which were in the course of negotiation at the balance sheet
date.
8. Obligations:
 The settlement after the balance sheet date of a court case
that confirms that the entity had a present obligation at the
balance sheet date. The determination of an incentive or
bonus payment after the balance sheet when an entity has a
constructive obligation at the balance sheet date.

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IAS 10 EXAMPLES: Adjusting Events

9. A deterioration in the financial position (recurring losses)

and operating results (working capital deficiencies) of an
entity that has a bearing on the entity's continuance (going
concern is affected)
10. Discoveries:
 The discoveries of errors or frauds which show that the
financial statements were incorrect.

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 IAS 10
Non - Adjusting events
 Those that are indicative of conditions that arose subsequent to
the balance sheet date”.
 Consequently, they do not result in changes in amounts in
financial statements. But rather should be disclosed by note, if
material

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IAS 10 EXAMPLES: Non-Adjusting Events

1. Mergers and acquisitions

2. Reconstruction and proposed reconstructions
3. Issue of shares and loan notes
4. Purchases and sales of non current assets and investments
5. Losses of fixed assets or inventories as a result of fire or
flood.
6. Opening new trading activities or extending existing trading
activities.
7. Closing a significant part of the trading activities if this was
not anticipated at the year-end.

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 IAS 10 EXAMPLES: Non-Adjusting Events

8. (temporary) decline in the value of property and

investments held as non-current assets, if it can be
demonstrated that the decline occurred after the year end
9. changes in rates of foreign exchange
10. government action, such as nationalisation
11. strikes and other labour disputes
12. augmentation of pension benefits

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194

IAS 10
Going Concern Issues Arising After Balance Sheet Date
An entity shall not prepare its financial statements on a going
concern basis if management determines after the balance sheet
date either that it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so.

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 IAS 10
Proposed dividends
IAS 10 prevents proposed equity dividends being recognised as
liabilities unless they are declared before the balance sheet
date.(very rare) Declared means that the dividend is
appropriately authorised, and is no longer at the discretion of
the enterprise.

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IAS 10 SUMMARY
Non
Adjusting
Events after the balance sheet date adjusting
events
events
a. mergers and acquisitions
b. the subsequent determination of the purchase price or
the sale proceeds of assets purchased or sold before the
balance sheet date
c. the valuation of a property which provides evidence of a
permanent diminution in value before the year end
d. reconstructions and reorganisations
e. issue of shares and debentures
f. opening new trading activities
g. the receipt of a copy of the financial statements in respect
of a company which provides evidence of a permanent
diminution in value before the year end
h.The receipt of proceeds of sale after the balance sheet
date concerning the NRV of closing inventory(NRV is lower)
i.Extending existing trading activities

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 IAS 10 SUMMARY
Non
Adjusting
Events after the balance sheet date adjusting
events
events
j.Closing part of the trading activities it this was not
anticipated at the year end
k.The renegotiation of amounts owing by trade customers
l.purchases or sale of fixed assets or investments
m.Losses of fixed assets or stocks as a result of fire or
flood
n.Knowledge of insolvency of a debtor at the year end
o.Amounts received in respect of insurance claims which
were in the course of negotiation at the balance sheet
date
p.Discovery of errors or frauds which show that the
financial statements were incorrect at the year end
q.Decline in the value of property and investments after
the year end
r.Changes in foreign exchange rate
s.Strikes and labour disputes
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PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

199

100
199
 Chapter
Consolidated Financial Statement

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

200

Group & Consolidation

20% GROUP
A1

P 80%
S1
100% 80%
S2 S2.1

IAS 27 – Consolidated and separate FS

 Subsidiary: An entity that is controlled by another entity
(known as parent). [S1, S2]
 Sub – Subsidiary: S2.1

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 Group & Consolidation
20% GROUP
A1

P 80%
S1
100% 80%
S2 S2.1

IAS 27 – Consolidated and separate FS

 Parent: An entity that has one or more subsidiaries
 Group: A Parent and all its subsidiaries
 Non – controlling interest: The equity in subsidiary not
attributable, directly or indirectly to a parent
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Group & Consolidation

CONTROL The power to govern the financial and
operating policies of an entity so as to
obtain benefits from its entity.

In general: A owns > 50% voting power of B

 A controls B  A: Parent; B: Subsidiary

Other cases:
 By statue or an agreement
 Has power to appoint or remove a majority of members of
BOD
 Has power to cast a majority of votes at meetings of BOD
 Has power over 50% voting rights by agreement with other
investors

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 Group & Consolidation
20% GROUP
A1

P 80%
S1
100% 80%
S2 S2.1

IAS 28 – Investment in associate

 Associate : An entity in which an investor has significant
influence [A1]
 Trade investment: is a simple investment in the shares of
another entity, that is not an associate or a subsidiary.
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Group & Consolidation

SIGNIFICANT The power to participate,
INFLUENCE but NOT to control

In general: Hold > 20% of voting rights

Other cases:
 Representation on the BOD of the investee;
 Participation on the policy making process;
 Material transaction between investor and investee;
 Interchange of management personnel;
 Provision of essential technical information.

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 Group & Consolidation
20% GROUP
A1

P 80%
S1
100% 80%
S2 S2.1

CONSOLIDATION
 From the legal point of view, the results of the group must
be presented as a whole.
 Consolidation means presenting the results of a group of
companies as if they were a single company.
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Group & Consolidation

 IAS 27: Consolidated and separate financial
INTER -
NATIONAL statements
ACCOUNTING  IAS 28: Investments in associates
STANDARDS
&  IFRS 3: Business combination
GROUP  IFRS 10: Consolidated financial statements
ACCOUNTS
 IFRS 11: Joint Arrangements

IFRS3 defines a business combination as “a transaction … in which an

acquirer obtains control of one or more businesses.”
The effect of business combinations is to bring together separate entities
or businesses into one reporting entity, which produces consolidated
financial statements for the group of entities as a whole.

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 Principles for Consolidation

CONSOLIDATION means adding together

CONSOLIDATION means cancellation of

like items internal to the Group

CONSOLIDATION as if you own everything

then show the extent to which you do not own.

NCI

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Principles for Consolidation

Example 1: basic principles of consolidation
There are two companies, Pleasant and Sweet. Pleasant owns
80% of the shares in Sweet. Pleasant has a head office building
worth $100,000. Sweet has a factory worth $80,000.
Remember that consolidation means presenting the results of
two or more companies as if they were one

Adding together
You add together the values of the head office building and
factory to get an asset, land and buildings, in the group
accounts of $100,000 + $80,000 = $180,000. So far so good;
this is what you would expect consolidation to mean

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 Principles for Consolidation
Example 2: Intra – group debts
Suppose Pleasant has receivables of $40,000 and Sweet has receivables
of $30,000. Included in the receivables of Pleasant is $5,000 owed by
Sweet. Remember again that consolidation means presenting the
results of the two companies as if they were one
Do we then simply add together $40,000 and $30,000 to arrive at the
figure for consolidated receivables? We cannot simply do this, because
$5,000 of the receivables is owned within the group. This amount is
irrelevant when we consider what the group as a whole is owed.
Suppose further that Pleasant has payables of $50,000 and Sweet has
payables of $45,000. We already know that $5,000 of Sweet’s payables
is a balance owed to Pleasant. If we just added the figures together, we
would not reflect fairly the amount the group owes to the outside
world. The outside world does not care what these companies owe to
each other – that is an internal matter for the group.

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Principles for Consolidation

Example 2: Intra – group debts

Cancellation of like items

To arrive at a fair picture we eliminate both the receivable of
$5,000 in Pleasant’s books and the payable of $5,000 in
Sweet’s book. Only then do we consolidate by adding together.
Consolidated receivables = $40,000 + $30,000 - $5,000 =
$65,000
Consolidated payables = $50,000 + $45,000 - $5,000 = $90,000
So far we have established that consolidation means adding
together any items that are not eliminated as internal to the
group. Going back to the example, however, we see that
Pleasant only owns 80% of Sweet. Should we not then add
Pleasant’s assets and liabilities to 80% of Sweet’s?

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 Principles for Consolidation
Example 2: Intra – group debts

Consolidate as if you owned everything

The answer is NO. Pleasant controls Sweet, its subsidiary. The
directors of Pleasant can visit all of Sweet’s factory, if they wish, not
just 80% of it. So the figure for consolidated land and buildings is
$100,000 plus $80,000 as stated above

Show the extent to which you do not own everything

However, if we just add the figures together, we are not telling the
whole story. There may well be one or more shareholders who own
the remaining 20% of the shares in Sweet Ltd. These shareholders
cannot visit 20% of the factory of tell 20% of the workforce what to
do, but they do have an interest in 20% of the net assets of Sweet.
The answer is to show this non-controlling interest separately in the
equity section of the consolidated statement of financial position

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Question 1: Apple Co owns 60% of Pear Co. Apple has non-

current assets of $80,000 and Pear has non-current assets of
$50,000
Consolidated non-current assets is calculated as

$
Apple 80,000
Pear 60% x $50,000 30,000
110,000
True or False? Explain your answer.

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 Question 2: Apple Co owns 60% of Pear Co. Apple has
receivables of $60,000 and Pear has receivables of $40,000.
Pear owes Apple $10,000. What are consolidated receivables?

A $74,000

B $84,000

C $90,000

D $100,000

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Question 3: Apple Co owns 60% of Pear Co. Pear has payables

of $90,000 of which $10,000 is owed to Apple. Apple has
payables of $120,000

Required: Calculate the consolidated payables balance

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 The effect of the parent/subsidiary relationship
on the financial statements

$10/unit
Market
Arm’s length transaction

GROUP
$12/unit
Parent Subsidiary
 NOT Arm’s length transaction

TRANSFER PRICING !!!

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The effect of the parent/subsidiary relationship

on the financial statements
In all these situations, the financial performance and financial
position reported by the separate financial statements of the
subsidiary is affected, so that:
 the information could be misleading to users who not
aware of the existence and effect of the related party
relationship; and
 it may NOT be possible to make meaningful comparisons
between the subsidiary’s financial statements and those of
a similar entity that (for example) makes all its sales to third
parties on normal commercial terms (at ‘arm’s length’).

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 The effect of the parent/subsidiary relationship
on the financial statements
The consolidated financial statements are also affected.
Because they present the activities of the group as a single
entity, transactions between the subsidiary and the parent are
eliminated (not included). Amounts owed by one entity to
another are also eliminated.

To sum up:
Intra Group transactions & balances  Eliminated

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Accounting treatment for consolidation

Subsidiaries Associate Other Investment

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 Accounting treatment for consolidation
Subsidiaries Associate Other Investment

FULL CONSOLIDATION

 IAS27 requires a parent to present consolidated financial

statements (also referred to as group account) in which the
account of the parent and subsidiary(ies) are combined and
presented as a single company

 IAS 27 requires that when a parent issues consolidated

financial statements, it should consolidate all subsidiaries,
both foreign and domestic, except in certain circumstances

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Accounting treatment for consolidation

Subsidiaries Associate Other Investment

EQUITY METHOD

 The basic principle of equity accounting is that the investing

company (P Co) should take account of its share of earnings
of the associate (A Co).

INCOME STATEMENT SOFP

Show “Group share of Investment in associate
associate’s Profit after Cost of investment x
tax”: before Group Share of RE x
profit before tax Investment (show in BS) x
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 Accounting treatment for consolidation
Subsidiaries Associate Other Investment

 Trade investment is a simple investment in the shares of

another entity, that is not an associate or a subsidiary.

 Trade investments are simply shown as investments under

Non-Current Assets in the consolidated statement of financial
position of the group.

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Question 4: Socket Co has 100,000 shares of $1 each. On 1

January 20X3, Power Co acquired 45,000 of these shares. In
addition, Power Co is able to appoint four out of the five
directors of Socket Co, thus exercising control over their
activities. How should Socket Co be treated in the
consolidated financial statements of Power Co?

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 Question 5: P Co, acquires 25,000 of the 100,000 $1 ordinary
shares in A Co for $60,000 on 1 January 20X8. In the year to 31
December 20X8, A Co earns profits after tax of $30,000, from
which it pays a dividend of $6,000
How will A Co’s results be accounted for in the individual and
consolidated accounts of P Co for the year ended 31
December 20X8?

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Question 6: Which TWO of the following investments would

be treated as an associate in the consolidated financial
statements of Smith Co?

Smith Co owns 15% of the ordinary shares of Red Co and

A has significant influence over Red Co
Smith Co owns 45% of the ordinary shares of Pink Co and
B can appoint 4 out of 5 directors to the Board of Directors
of Pink Co
Smith Co owns 40% of the preference shares (non-voting)
C and 15% of the ordinary shares of Yellow Co

Smith Co owns 60% of the preference shares (non-voting)

D and 40% of the ordinary shares of Aquamarine Co
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 Acquiring a subsidiary after incorporation

Pre – acquisition Post – acquisition

profit of Subsidiary profit of subsidiary

NOT included as retained earnings Included in group profits in the

in the consolidated financial consolidated statement of
statements – they are dealt with as comprehensive income, as a part
part of the purchased goodwill of the profits of the entire group.
calculation They are also included in the
retained earnings of the group,
and so are included in the
consolidated statement of financial
position.

Acquisition date
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Acquiring a subsidiary after incorporation

Example:
A parent P acquired 100% of the share capital of subsidiary S
on 1 January Year 3. The net assets of S (total assets minus
total liabilities) were valued at $200,000 at the date of
acquisition and P paid $200,000 to acquire the shares in S.
(Note: This means that there is no purchased goodwill.
Goodwill is explained later).
The summary statements of financial position of both entities
at 1 January Year 3 and at 31 December Year 3 are as follows

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 Acquiring a subsidiary after incorporation
Example:

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Acquiring a subsidiary after incorporation

Example:
A parent P acquired 100% of the share capital of subsidiary S
on 1 January Year 3. The net assets of S (total assets minus
total liabilities) were valued at $200,000 at the date of
acquisition and P paid $200,000 to acquire the shares in S.
(Note: This means that there is no purchased goodwill.
Goodwill is explained later).
The summary statements of financial position of both entities
at 1 January Year 3 and at 31 December Year 3 are as follows

Required: Calculate consolidated Profit, consolidated RE?

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229
 Acquiring a subsidiary after incorporation

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230

Acquiring a subsidiary after incorporation

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 Consolidated Financial Statement

• Financial Statements of the parent company

• Consolidated Statement of Financial Position
• Consolidated Statement of Comprehensive
Income
• Consolidated Statement of Cash Flows
Consolidated Package

Provide information to shareholders

of parent on all the companies
controlled by the parent

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The Consolidated Statement

of Financial Position

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

233

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 Basic Principles

1. Cancelling out items which appear as an Asset in

one company and a Liability in another company
(like items).

2. Adding together all the un-cancelled items assets

and liabilities on a line-by-line basis

3. Consolidation as if you own everything then show

the extent to which you DO NOT OWN (NCI).

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Key Steps
Combine items of BSs (P&S) and add GW + NCI in the
Step 1
consolidated BS (To list down all items of consolidated BS)

Step 2 Lump-sum items on the line by line basis

Step 3 Consolidated adjustments:

 Cancel like items (Investment vs Equity of Sub; internal
AR-AP; inventory);
 Fair value adjustment for net assets of subsidiaries
 Calculate RE of the Group;
 Calculate GW;
 Calculate NCI;
 …

Step 4 Prepare consolidated FS (= Lump-sum + adjustment)

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 Key Steps
Step 1 Step 2 Step 3 Step 4

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Items required to cancel

INVESTMENT SHARE CAPITAL
(Parent FS) (Subsidiary FS)

Investment in
subsidiary *

Share capital *

NOTE: This is the parent company’s share capital only.

The subsidiary’s has been cancelled
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 Items required to cancel
AR/AP AR/AP
(Parent FS) (Intra-Group trading) (Subsidiary FS)

NOTE: P Co bank balance is not netted off with S Co’s bank

overdraft

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Goodwill $ $
Consideration transferred XXX
Less value of identifiable assets acquired
and liabilities assumes:
- Ordinary shares capital X
- Share premium X
- Retained earnings at acquisition X
(XX)
Goodwill X
Goodwill:
The excess of considerations transferred over % of Net asset –
Subsidiaries.

Goodwill arising on consolidation is recognized as an INTANGIBLE

asset in the consolidated statement of financial position.
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 Goodwill $ $
Consideration transferred XXX
Less value of identifiable assets acquired
and liabilities assumes:
- Ordinary shares capital X
- Share premium X
- Retained earnings at acquisition X
(XX)
Goodwill X
Goodwill:
The excess of considerations transferred over % of Net asset –
Subsidiaries.

Negative Goodwill: recognised immediately in the income

statement as a gain
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Goodwill
Example 1:
P Co purchased all of the share capital (40,000 $1 shares) of S
Co for $60,000 in cash. The statements of financial position of
P Co and S Co prior to the acquisition are as follows:
P Co S Co
$’000 $’000
Non-current assets
Property, plant and equipment 100 40
Cash at bank 60 -
Total assets 160 40

Equity and liabilities - -

Share capital 160 40
Total equity and liabilities 160 40
Required:
(i) Prepare separate FS of P Co. after acquisition of S.
(ii) Prepare consolidated FS of P Co. after acquisition of S.
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 Goodwill
Example 2:
Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when
the draft statements of financial position of each company were as
follows:
SING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1
$
Asset
Non-current assets
Investment in 50,000 shares of Wing Co at cost 80,000
Current assets 40,000
Total Assets 120,000

Equity and Liabilities

Equity
Ordinary shares 75,000
Retained earnings 45,000
Total equity and liabilities 120,000
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Goodwill
Example 2:
Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when
the draft statements of financial position of each company were as
follows:

WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1
$
Current assets 60,000

Equity
50,000 ordinary shares of $1 each 50,000
Retained earnings 10,000
Total equity and liabilities 60,000

Required: Prepare the consolidated statement of financial

position as at 31 March 20X1
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 Goodwill
Example 3:
A parent P acquired 100% of the share capital of entity S on 1 January Year
3. P paid $230,000 to acquire the shares in S. The summary statements of
financial position of both companies at 31 December Year 3 are as follows:
P S
Assets: $ $
Investment in S at cost 230,000 -
Other assets 570,000 240,000
800,000 240,000

Equity 740,000 195,000

Equity shares 200,000 50,000
Share premium 100,000 20,000
Retatined earnings at 1 January Year 3 400,000 100,000
Retained profit for year to 31 December Year 3 40,000 25,000
Current liabilities 60,000 45,000
800,000 240,000
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Goodwill
Example 3:
At the date of acquisition, the fair value of the net assets of S were
$170,000. Expenses directly related to the acquisition were $75,000 but
these have not been included in the figures above for P. There has been no
impairment of goodwill during Year 3.

Required
Prepare the consolidated statement of financial position as at 31
December Year 3.

NOTE:
Acquisition cost must be expensed!!!

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 Goodwill
Example 4: Goodwill and mid-year acquisition:
Parent entity P acquired 100% of the equity of entity S on 1 May Year 2 at
a cost of $500,000. The statement of financial position of Entity S, which
did not pay any dividend during the year, was as follows at the beginning
and at the end of Year 2. The values of the assets and liabilities shown in
the statement of financial position of Entity S are assumed to represent
fair values. Require: Calculate Goodwill
At 1 Jan At 31 Dec
$ $
Non-current assets:
Property, plant and equipment 370,000 400,000
Current assets 100,000 145,000
470,000 545,000
Equity 450,000 510,000
Equity shares 100,000 100,000
Share premium 50,000 50,000
Retained earnings 300,000 360,000
Current liabilities 20,000 35,000
470,000 545,000
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Goodwill
In some questions, Assets of Subs at acquisition has not been
revalued at Fair Value
 adjust FS of sub at acquisition before calculating GW.
$ $
Consideration transferred XXX
Less net acquisition date FV of
identifiable assets acquired and
liabilities assumes:
- Ordinary shares capital X
- Share premium X
- Retained earnings at acquisition X
- FV adjustments at acquisition X
(XX)
Goodwill X
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 Cost of Investment
Cost of investment includes:
 Cash paid
 Fair value (i.e. Market value) of any other consideration (e.g.
shares-for-share exchange, deferred or contingent
consideration, loan note)
Professional fees & other acquisition – related costs
The IFRIC has received requests to clarify the treatment of acquisition-related costs that the
acquirer incurred before it applies IFRS 3 Business Combinations (as revised in 2008) that
relate to a business combination that is accounted for according to the revised IFRS.
In accordance with the revised IFRS 3, because acquisition-related costs are not part of the
exchange transaction between the acquirer and the acquiree (or its former owners), they are
not considered part of the business combination. Therefore, except for costs to issue debt or
equity securities that are recognized in accordance with IAS 32 and IAS 39, the revised IFRS 3
requires an entity to account for acquisition-related costs as expenses in the periods in which
the costs are incurred and the services are received.

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Cost of Investment
 Cost of investment in Sub are accounted for at cost which is
the fair value of consideration given
Consideration given

By Cash By Share Exchange

If paid NOW: (based on current market
DR investment in Sub value on acquisition date)
CR Cash
DR Investment in Sub
If paid LATER (in P’s book:
CR Share Capital
DR investment in Sub
CR Share Premium
CR Deferred Consideration
Interest on Deferred P issues loan note as part of
Consideration purchase consideration
DR Parent’s retained earnings DR Investment
CR Deferred Consideration CR Liabilities
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 IFRS 3: Business Combinations (Revised)
Contingent consideration
IFRS 3 defines contingent consideration as: “Usually, an
obligation of the acquirer to transfer additional assets or
equity interests to the former owners of an acquiree as part of
the exchange for control of the acquiree if specified future
events occur or conditions are met. However, contingent
consideration also may give the acquirer the right to the return
of previously transferred consideration if specified conditions
are met”.

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IFRS 3: Business Combinations (Revised)

 Previous IFRS 3: contingent consideration is accounted for
only if it was probable that it would become payable.
 Revised standard requires the acquirer to recognise the
acquisition-date fair value of contingent consideration as
part of the consideration for the acquiree.
 This ‘fair value’ approach is consistent with the way in which
other forms of consideration are valued, and
 Fair value is defined as: ‘the amount for which an asset
could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction

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 IFRS 3: Business Combinations (Revised)
 Highly unlikely that the acquisition date liability for
contingent consideration could be or would be settled by
“willing parties in an arm’s length transaction”.
 Exam question, the acquisition date fair value (or how to
calculate it) of any contingent consideration would be given.
 The payment of contingent consideration may be in the
form of equity or a liability (issuing a debt instrument or
cash) and should be recorded as such under the rules of
IAS 32 or other applicable standard

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Acquired intangible assets

Entity (S Co.) is not allowed to recognize intangible assets
internally generated
i.e. “market-related”, “customer-related”, “artistic-related” or
“technology-related” intangible assets,…

If P acquired S and identify above intangible assets with

reliable measurement.
 These assets should be included in the consolidated
statement of financial position as intangible assets, and
accounted for as such. (They should be amortised and might
also be subject to impairment.)

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 Acquired intangible assets
Example:
Parent entity P acquired 100% of the equity of entity S on 14 July Year 6 at
a price of $9 million. The fair value of the net assets of S at this date was
$6.5 million, but in addition P recognizes a market-related intangible asset
of S which it values at $900,000.
This intangible asset should be included in the consolidated statement of
financial position, initially at cost but then at cost less accumulated
amortisation and impairment.
Require: Calculate Goodwill

SOLUTION:
Fair value of net assets acquired 6,500,000
Plus value of market-related intangible asset 900,000
7,400,000

Cost of acquisition 9,000,000

Goodwill 1,600,000
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Acquired intangible assets

The calculation of the goodwill must be based on the fair
value of the consideration transferred. The fair value of
shares is their market price on the date of acquisition.

Example:
P Co has acquired all of the share capital of S Co (12,000 $1
shares) by issuing 5 of its own $1 shares for every 4 shares in S
Co. The market value of P Co’s shares was $6 at the date of
acquisition. The fair value of the net assets of S Co at the date
of acquisition was $75,000
Require: Calculate Goodwill

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 Non – controlling Interests
Principle
Consolidation as if you own everything then show the extent
to which you do not own.
Definition
A proportion of the net assets of the Sub. Co in fact belongs to
investors from outside the group which we call
Non-controlling Interests (NCI)
Recognition
NCI is shown in the equity section of the consolidated
statement of financial position
Measurement
At its fair value plus the NCI’s share of post-acquisition
retained earnings and other reserves.
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Non – controlling Interests

2 methods allowed by IFRS 3 to calculate NCI
Method 1: Proportionate method Method 2: Fair value method
NCI should be valued at a $
proportionate share of the FV of NCI at acquisition X
identifiable net assets of the Plus NCI’s share of post-acquisition retained X
subsidiary. earnings (& other reserves
NCI at reporting date XX
Not recognise any goodwill for the Recognise the goodwill attributable
NCI in the consolidated statement of to the NCI in the consolidated
financial position. statement of financial position, as at
the date of acquisition. This goodwill
Example: if the NCI in a subsidiary is cannot subsequently be re-valued,
30% and the identifiable net assets of unless there is impairment and the
the subsidiary are $1,000,000, the goodwill should then be written down
NCI should be included in the in value.
consolidated statement of financial
position at $300,000.
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 Non – controlling Interests
GW calculation when apply FV method

Example: P Co acquired 90% of S Co for $10,000,000. At this

date the fair value of S Co’s net assets are $8,000,000 and the
fair value of the NCI is $1,000,000. Calculate goodwill

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Intra – Group Trading

A consolidation adjustments is required to
remove unrealized-profit on intra-group trading.
When Parent Co sells goods to Sub. Co for profit, there are two
matters arising:
 Parent Co makes a profit but the group does not make a sale or
achieve a profit until an outside customer buys the goods from
Sub. Co.
 Any purchases unsold by Sub Co at year end will be included in
Sub Co’s inventory, which is not the same as their cost to the
group.
Accounting treatment:
Consolidation adjustment is required with the profit unrealized by
the group.
Dr Group RE
Cr Group inventory (statement of financial position)
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 Intra – Group Trading
Example:
Suppose that a holding company P Co buys goods for $ 1,600
and sells them to a wholly owned subsidiary S Co for $2,000.
The goods are all still in S Co’s inventory at the year end and
appear in S Co’s statement of financial position at $2,000.

Require:
• Inventory amount should be shown in Consolidated FS?
• Consolidated adjustment entry?

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Intra – Group Trading

NCI and Intra-group trading (adjustment require when S sold
products to P)
Where a subsidiary company which is not wholly owned is involved
in intra-group trading within the group, remove the whole profit
loading, charging the non-controlling interest with their
proportion.
Dr Group retained earnings
Dr NCI
Cr Group Inventory (statement of financial position)

If P  sold product to S  just remove URP in the RE of Group

(as Unrealized profit is include in RE of Parent that will not being
shared attributed to NCI when calculation (URP in this case will not
related to NCI)

Example: Same above example but in case P owned 80% of S

& S sold products to P
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 Inter – company Transactions
Unrealised profit in non current asset transferred within the group

1. If non current asset is sold by parent to subsidiary:

To eliminate unrealised profit:
Dr Group accumulated Profits (full amount of the profit)
Cr Consolidated Non current Asset(full amount of the profit)
To reduce the excess depreciation due to the profit loading:
Dr Non current Asset (full amount of the excess depreciation)
Cr Group Acc. Profits (parent’s share of the excess depreciation)
Cr Non Controlling Interest (NCI share of the excess depreciation)
Or just adjust the net URP by
Dr Parent’s profit
Cr Asset

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Inter – company Transactions

Unrealised profit in non current asset transferred within the group

2. If the non current asset is sold by subsidiary to parent:

To eliminate unrealised profit:
Dr Group accumulated Profits (parent’s share of the profit)
Dr NCI
Cr Consolidated Non current Asset (full amount of the profit)
To reduce the excess depreciation due to the profit loading:
Dr Non current Asset (full amount of the excess depreciation)
Cr Group Acc. Profits (full amount of the excess depreciation)

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 Inter – company Transactions
Illustration:
P, the holding company had acquired its 90% interest in S
some years ago. During the current year P sold a motor
vehicle of book value $10,000 to S for $15,000. The remaining
useful life of the asset is 5 years and the group depreciates
fixed assets on a straight-line basis.
P had made a profit of $5,000 on the sale. From the point of
view of P as a separate entity, this $5,000 is realised profit. S,
on the other hand would have debited the motor vehicle
account at $15,000 and charged $3,000 as depreciation. The
book value of the motor vehicle for S at the end of the current
year will be $12,000.
However, in the consolidated accounts the depreciation
charge should be $10,000/5 years = $2,000 and the book
value of the asset should be $8,000.
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Inter – company Transactions

Consolidation Adjustments
Dr Group Reserves $5,000
Cr Motor Vehicles $5,000
To eliminate transfer profits and reduce the motor vehicle to reflect its
book value to the group i.e. as if there were no sale of the asset to S. The
above entries will reduce the group's profit; and the motor vehicle will be
entered at book value to the group.
Adjustment for over-provision of depreciation
Dr Accumulated depreciation $1,000
Cr Group reserves $900
Cr Non controlling interest $100
However, if the asset were purchased from P two years ago then the
depreciation adjustment would be $1000 x 2 = $2,000, accordingly
adjusted against group reserves and non controlling interest based on their
respective shareholdings in subsidiary.
After the fifth year, adjustments for unrealised profits and for depreciation
will not be required, as the asset will be fully depreciated by then. Then
reduce the seller's retained profits by $5,000 and increase the buyer's
retained profits by $5,000.
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 Acquisition of Sub Co part way through the year

If a Parent Co purchases a Sub. Co during the year, for

consolidation purpose, it will be necessary to distinguish:
• Profit earned before acquisition --> calculation of goodwill
• Profit earned after acquisition --> calculation of retained
earnings of group
We always ASSUME that the Sub’s profits accrue evenly over
the year.

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Consolidated Statement of Financial Position

SUMMARY of KEY LEARNING POINTS
 Purpose: To show the net assets which P controls and the
ownership of those assets
 Net Assets, Share capital: Always 100% P plus 100% S
providing P holds a majority of voting rights. Parent Co.
only (simply reporting to the parent company’s
shareholders in another form)
 Retained Earnings: 100% Parent Co. plus group share of
post-acquisition retained reserves of Sub. Co. less
consolidation adjustments (show the extent to which the
group actually owns total assets less liabilities)
 NCI: NCI share of Sub. Co’s consolidated net assets
(including goodwill) (show the extent to which other
parties own net assets that are under the control of the
parent company)
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 The Consolidated Statement
of Comprehensive Income

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

268

268

Key Steps
Combine items of PLs (P&S) in the consolidated PL
Step 1
Add 2 items:
Profit attributable to:
 Owners of the parent
 Non-controlling interest
(To list down all items of consolidated PL)

Step 2 Lump-sum items on the line by line basis

Step 3 Consolidated adjustments:

 Cancel like items (Investment vs Equity of Sub; internal
AR-AP; inventory);
 …

Step 4 Prepare consolidated FS (= Lump-sum + adjustment)

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 Pre- and post-acquisition profits

When a parent acquires a subsidiary during a financial year,

the profits of the subsidiary have to be divided into
pre-acquisition and post-acquisition profits.
• The pre-acquisition profit is used to calculate the goodwill.
• The post-acquisition profit (or loss) is included in the
consolidated profit for the year

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Pre- and post-acquisition profits

Example:
Entity P acquired 80% of the equity shares of Entity S at a cost
of $750,000 on 1 October Year 2, when the net assets of
Entity S were $600,000. Entity P prepares its financial
statements to 31 December each year. The income statement
for each entity for the year to 31 December Year 2 was as
follows.

Require:
Prepare a consolidated income statement for the year to 31
December Year 2, assuming there is no impairment of
goodwill during the year.

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 Pre- and post-acquisition profits
P($) S($)
Revenue 400,000 260,000
Cost of sales -200,000 -60,000
Gross profit 200,000 200,000
Other income 20,000 -
Distribution costs -50,000 -30,000
Administrative expenses -60,000 -80,000
Other expenses -20,000 -10,000
Finance costs -10,000 -5,000
Profit before tax 80,000 75,000
Income tax expense -30,000 -15,000
Profit for the period 50,000 60,000
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Non-controlling interest
in the consolidated income statement
When there is a non-controlling interest (minority interest) in
a subsidiary, the consolidated income statement should show:
• The post-acquisition profit for the year for the group as a
whole, including all the post-acquisition profit of the
subsidiary, and
• The amount of this total profit that that is attributable to
the parent’s equity shareholders and the amount that is
attributable to the non-controlling interest in the
subsidiary.
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 Non-controlling interest
in the consolidated income statement
Example:
Entity P acquired 300,000 shares in Entity S on 1 August Year
2. The total net assets of Entity S at 1 January Year 2 were
$1,310,000. The statement of financial position of entity S at
31 December Year 2 was as follows.

There has been no dividend payment by S in the year. The

profit after tax of Entity P for the year was $250,000. There
has been no impairment of goodwill.
Required: Calculate the consolidated profit for the year to 31
December Year 2, and the allocation of this profit between
the equity holders of the parent and the non-controlling
interest in S.

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274

Non-controlling interest
in the consolidated income statement
$000
Property, plant and machinery 1,200
Current assets 550
1,750
Equity and liabilities
Equity shares of $1 each 500
Share premium 300
Retained earnings 600
1,400
Liabilities 350
1,750
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 Intra – Group Trading
Intra-group sales and purchases are eliminated from the
consolidated income statement.

Example 1: A parent company and its subsidiary had the following revenue
and cost of sales in the year just ended. The parent has owned the
subsidiary for several years.
Parent P Subsidiary S
$000 $000
Revenue 500 300
Cost of sales 200 200
––– –––
Gross profit 300 100
Included in these figures are sales of $50,000 by subsidiary S to parent P.
The cost of these sales was $30,000. P has used all the items bought from
S to make sales outside the group.
Require: Prepare consolidated IS

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Intra – Group Trading

Intra-group sales and purchases are eliminated from the
consolidated income statement.

Example 2: : Unrealised profit: 100%-owned subsidiary

The revenue and cost of goods sold for a parent entity P and its 100%-
owned subsidiary S are shown below, for the year to 31 December Year 6.
P S
Revenue 750 500
Cost of goods sold 300 200
Gross profit 450 300

The subsidiary S made sales of $100,000 to P during the year. Of these

sales, $30,000 is still held as inventory by P at the year-end. The mark-up
on goods sold by S to P is 150% of cost.
Required: Calculate the revenue and cost of goods sold for the
consolidated income statement.
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 Acquisition of part way through the year
If a Sub. Co is acquired during the year, only the
post-acquisition element of income statement balances are
included on consolidation. The REs in the consolidated
statement of financial position comprise:
• 100% REs of the Parent Co
• The group’s share of post-acquisition REs in the Sub. Co.
It is necessary to split the entire income statement of the Sub.
Co between pre-acquisition and post-acquisition proportions.
Only the post-acquisition figures are included in the
consolidated income statement.
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Acquisition of part way through the year

Example: Prepare the consolidated income statement and movements
on retained earnings.

P Co S Co S Co (9/12)
$ $ $
Revenue 170,000 80,000 60,000
Cost of sales 65,000 36,000 27,000
Gross profit 105,000 44,000 33,000
Administrative expenses 43,000 12,000 9,000
Profit before tax 62,000 32,000 24,000
Income taxes 23,000 8,000 6,000
Profit for the year 39,000 24,000 18,000
Note:
Retained earnings brought forward 81,000 40,000
Retained earnings carried forward 108,000 58,000

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 Consolidated Income Statement
SUMMARY of KEY LEARNING POINTS
 Purpose: To show the result of the group for an accounting
period as if it were a single entity.
 Sales: 100 Parent Co + 100% Sub. Co excluding adjustment
for intra-group trading (to show the result of the group
which were controlled by the Parent Co.)
 Intra – Group Sales: Strip out intra-group activity from
both sales revenue and cost of sales
 Un-realized profit on intra-group trading: Goods sold by
Parent Co. increase cost of sales by unrealized profit.
Goods sold by Sub. Co increase cost of sales by full amount
of un-realized profit and decrease NCI by their share of
unrealized profit
 NCI: (Sub. Co’s profit after tax – unrealized profit) x NCI %

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Exemption from preparing consolidated FS

 The parent is itself a wholly-owned subsidiary or it 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
parent not presenting consolidated financial statements
 Its securities are not publicly traded
 It is not in the process of issuing securities in public
securities markets; and
 The ultimate or intermediate parent publishes consolidated
financial statements that comply with International
Financial Reporting Standards

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 Point to note in preparing consolidated FS
 In most cases, all group companies will prepare accounts to
the same reporting date.
 if note the subsidiary may prepare additional statements
for consolidation purposes. If this is b, the subsidiary
provided the gap between the reporting dates is three
months or less.
 Consolidated financial statements should be prepared
using the same accounting policies for like transactions and
other events in similar circumstances.

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Intra Group transactions (Associates)

IAS 28 states that the investor's share of unrealized profits and
losses on transactions between investor and associate should be
eliminated in the same way as for transactions between a parent and
its subsidiaries (para. 28). It is important to remember that only the
group's share is eliminated.

Exam focus point

The Financial Reporting syllabus was amended for exams from
September 2022 to make it clear that a distinction must be made
between upstream and downstream transactions. You must pay
attention to the direction of the transaction and ensure that you
prepare the journal entries as will be shown bellow.

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 Intra Group transactions (Associates)
UPSTREAM

DR Group share profit of Associates (SOPL)

Group % x URP
CR Inventory (SOFP)

DOWNSTREAM

DR Cost of sales (SOPL)

Group % x URP
CR Investment in Associate (SOFP)

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Disposal
1. Parent’s separate financial statements
This calculation is straightforward: the proceeds are compared with
the carrying amount of the investment sold. The investment will be
held at cost or at FV if held as an investment in equity instruments:
FV of consideration received X
Less carrying amount of investment disposed of (X)
Profit/Loss on disposal X/(X)

2. Group financial statements

(a) Statement of profit/loss and other comprehensive income
Consolidate results and NCI to the date of disposal
Show the group Profit/Loss on disposal
(b) Statement of Financial Position
There will be no NCI and no consolidation as there is no subsidiary
at the date the SOFP is being prepared
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 Disposal
3. Group Profit/Loss on disposal
The group Profit/Loss on disposal is the difference between the
sales proceeds and the group’s investment in the subsidiary. This
investment consists of the group’s share of the subsidiary’s net
assets up to the date of disposal, plus any remaining goodwill in the
subsidiary, minus any dividends received from the subsidiary during
the period.
The basis pro-forma is as follows:
FV of consideration received X
Less:
Share of Net assets at date of disposal X
Goodwill X
Less NCI (X)
(X)
Profit/Loss in disposal X/(X)

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Disposal
DISPOSAL OF SUBSIDIARIES

SEPARATE FS CONSOLIDATED FS

Gain/Loss on Disposal CONSOLIDATED PL

= Fair Value of CONSOLIDATED BS (i) Consol for the period
Consideration received Remove GW, NCI & prior date of disposal
– Carrying amount of no consolidation (ii) Show Profit/ Loss on
Invesment Disposal

Dr Cash
Cr Investment
Cr Gain on Disposal

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 Disposal

CONSOLIDATED FS

Fair Value of Consideration received

CONSOLIDATED PL
Show Profit/ Loss on (Net assets of Subsidiary – NCI)
Disposal

Goodwill

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Disposal
Example: Horse Co bought 80% of the share capital of Hoof Co for
$648,000 on 1 Oct 20X5. At the date Hoof Co’s retained earnings balance
stood at $360,000. The SOFP at 30 Sep 20X8 and the summarized
statement of profit or loss to that the date are given below (There is no
other comprehensive income)
Horse Co Hoof Co
$000 $000
Non - current assets 720 540
Investment in Hoof Co 648 -
Current assets 740 740
2,108 1,280
Equity
$1 ordinary shares 1,080 360
Retained Earnings 828 720
Current liabilities 200 200
2,108 1,280
Profit before tax 306 252
Tax (90) (72)
Profit of the year 216 180
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 Disposal
Assume that profits accrue evenly throughout the year and no
dividends have been paid.
It is the group’s policy to value the NCI at its proportionate
share of the FV of the subsidiary’s identifiable net assets
Ignore taxation.
Required:
Calculate Gain/loss on Disposal of Investment in Subsidary
on Separated FS and Consolidated FS.
Assuming that Horse Co sells its entire holding in Hoof Co for
$1,300,000 on 30 Sep 20X8 (Assume no impairment of GW)

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PRACTICE QUESTIONS

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HALONGGIANG@GMAIL.COM

091 266 1988

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 Chapter
12 INVENTORY AND BIOLOGICAL ASSETS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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CONTENT  IAS 02: Inventories

 IAS 41: Agriculture

 IAS 20: Government Grant

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 IAS 02
OBJECTIVE
• The determination of cost of inventory
• Subsequent recognition as an expense
• The cost formulas that are used to assign costs to inventories*

SCOPE

Inventories include assets Inventories exclude:

held for sale in the ordinary • Work in progress arising
course of business: under construction contracts
• Finished goods • Financial instruments
• Work in process • Biological assets relating
• Raw materials agriculture
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IAS 02

Fundamental Principle

Inventories are required to be stated:

• Cost, or
• Net realisable value
Which ever is lower
• Quantity = physical count at reporting date

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 IAS 02 COST
 Costs of purchase
- Less discounts/rebates
 Costs of conversion
NOTE: Fixed Production cost should be allocated at normal
capacity
 Other cost incurred in bringing the inventories to their
present location and condition

Cost EXCLUDES:
• Abnormal waste • Administrative overheads
• Storage costs unrelated to production
• Selling costs • Foreign exchange
• Interest cost differences arising directly
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IAS 02 COST METHODS

First
In
First
Out

Weighted
average
method

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 IAS 02 DISCLOSURE
• Accounting policy for inventories
• Carrying amount of any inventories carried at fair value less
costs to sell
• Carrying amount of inventories pledged as security for
liabilities
• Cost of goods sold

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CONTENT  IAS 02: Inventories

 IAS 41: Agriculture

 IAS 20: Government Grant

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 IAS 41
SCOPE

Agricultural activity:
• Management of biological transformation
• Harvest of biological assets into agricultural produce

Excludes
• Land (IAS 16)
• Intangible assets (e.g. quotas) (IAS 38)
• Once harvested  IAS 2 Inventories

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IAS 41 RECOGNITION

• Recognize Biological assets if

 Probable future economic benefits
 Cost can be measured reliably
 Control

• Recognise at:
 Fair value (“FV”) minus costs to sell (NRV)
If FV cannot be determined, use cost less depreciation/
impairment

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 IAS 41 MEASUREMENT

• Biological assets within the scope of IAS 41 are measured

on initial recognition and at subsequent reporting dates
at fair value less estimated costs to sell, unless fair value
cannot be reliably measured. [IAS 41.12]
• Agricultural produce is measured at fair value less
estimated costs to sell at the point of harvest.
[IAS 41.13] Because harvested produce is a marketable
commodity, there is NO 'measurement reliability'
exception for produce.

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IAS 41 MEASUREMENT

• The gain on initial recognition of biological assets at fair

value less costs to sell, and changes in fair value less
costs to sell of biological assets during a period, are
included in profit or loss. [IAS 41.26]
• A gain on initial recognition (e.g. as a result of
harvesting) of agricultural produce at fair value less costs
to sell are included in profit or loss for the period in
which it arises. [IAS 41.28]
• All costs related to biological assets that are measured at
fair value are recognised as expenses when incurred,
other than costs to purchase biological assets.

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 IAS 41 DISCLOSURE

• Different class of asset: Neither Current asset Nor Non-

current asset
• Disclose
 Gain/loss on agricultural assets
 Description
 Methods and assumptions used in determining FV

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CONTENT  IAS 02: Inventories

 IAS 41: Agriculture

 IAS 20: Government Grant

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 IAS 20
• Government grants are assistance by government in the
form of transfers of resources to an enterprise in return
for past or future compliance with certain conditions
relating to the operating activities of the enterprise
• Grants related to assets are government grants whose
primary condition is that an enterprise qualifying for
them should purchase, construct or otherwise acquire
long-term assets. Subsidiary conditions may also be
attached restricting the type or location of the assets or
the periods during which they are to be acquired or held
• Grants related to income are government grants other
than those related to assets.

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IAS 20
Accounting Treatment of Grants
Government grants, including non-monetary grants at fair
value, should NOT be recognised until there is reasonable
assurance that:
(a) the enterprise will comply with the conditions
attaching to them; and
(b) the grants will be received.

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 IAS 20
Grant relating to income
Based on accruals concept
Either treat as

As deferred income: other income Deduct from related expense

IF IT BECOMES REPAYABLE, treated as a change in estimate (IAS 8)

• repayment should be applied first against any related unamortised

deferred credit (remaining balance in deferred income a/c),
• and any excess should be dealt with as an expense.

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IAS 20
Example 1: The following expenses were incurred after a
natural disaster
Year 2002 : 40,000
Year 2003: 50,000
Year 2004: 60,000
Government provided a grant of $75,000 to compensate the
damages

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 IAS 20
SOLUTION:
Deferred Income Approach: recognise as other income
(1st approach)
1. Record grant received: in 2002:
2. Amortisation (transfer) of government grant (make a
transfer from Def Income to I/S every year)

If deducted from the related expenses Approach

1. Record grant received: Dr Cash 75,000
Cr Def income 75
2. Amortisation = 75/3yrs: 25,000
DR Def income 25,
CR I/S: expense

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IAS 20
SOLUTION:
I/S extract
Y2002 Y2003 Y2004
Expense (15,000) (25,000) (35,000)

SOFP
NCL 25,000 - -
CL 25,000 25,000 -

Lets say, government requires a repayment of 30,000 in

year 2, as the entity failed to comply with conditions.
The repayment is first applied against the unamortised
def income amounting to 25,000 and the excess of 5,000
is charged to P&L as an expense.
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 IAS 20
Example 2: The entity bought a machinery for $300,000, with a
useful life of 4 years. The govt provided a grant of $120,000 to
compensate

What if govt requires a repayment of 70,000 at the end of Y2?

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IAS 20 SUMMARY of ACCOUNTING TREATMENT

GRANT RELATED TO ASSET

as deferred income, by deducting the grant from the asset's

DR Cash carrying amount
CR Deferred income/govt grant DR CASH
And amortised by:
CR ASSET
DR Deferred income
CR I/S
results in reduced depreciation charge
Income Statement extract
Income: amortisation of govt grant
Income Statement extract
Expense: depreciation
Expenses: depreciation (reduced amt)
Balance sheet extract
Non current asset Balance sheet extract
Cost
Non current asset
Less: Accumulated depreciation
NCL: Deferred Income/ GG Cost
CL: Deferred Income / GG Less: Accumulated depreciation
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 IAS 20
Grant relating to ASSET: If a grant becomes repayable
treated as a change in estimate

grant related to an grant related to an asset – if deducted from

asset – if deferred asset

- The repayment should be treated as

Dr Deferred income increasing the carrying amount of the asset.
Dr Income Dr Asset
statement Cr Cash
Cr cash, - Cumulative depreciation which would
No additional have been charged had the grant not been
depreciation received should be charged as an expense
(DR I/s CR Asset

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PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 Chapter
13 PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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IAS 37
OBJECTIVE
To ensure that:
 appropriate recognition criteria
 and measurement bases
 are applied to:
• Provisions
• contingent liabilities and
• contingent assets and
 that sufficient information is
 disclosed in the notes to the financial statements
• to enable users to understand their nature, timing
and amount.

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 IAS 37
CONCEPT

a provision should be recognised

only when there is a liability

planned future expenditure

is excluded from recognition

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IAS 37
SCOPE

EXCLUDE: Obligations and contingencies arising from:

• financial instruments carried at fair value
• non-onerous executory contracts
• insurance company policy liabilities
Items covered by other standards
 Construction Contracts - IAS 11
 Income Taxes - IAS 12
 Leases - IAS 17
 Employee Benefits – IAS 19

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 IAS 37 DEFINITIONS
Provision
• A liability of uncertain timing or amount.

Liability
• Present obligation as a result of past events
• Settlement is expected to result in an outflow of resources
(payment)
Contingent liability
• a possible obligation depending on whether some uncertain
future event occurs, or
• a present obligation but payment is not probable or the
amount cannot be measured reliably
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IAS 37 DEFINITIONS
Provision
• A liability of uncertain timing or amount.

Liability
• Present obligation as a result of past events
• Settlement is expected to result in an outflow of resources
(payment)

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 IAS 37 DEFINITIONS
Contingent liability
• a possible obligation depending on whether some uncertain
future event occurs, or
• a present obligation but payment is not probable or the
amount cannot be measured reliably

Contingent asset
• a possible asset that arises from past events, and
• whose existence will be confirmed only by
 the occurrence or non-occurrence of one or more
uncertain future events
 not wholly within the control of the enterprise.

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IAS 37 DEFINITIONS
An obligating event
is an event that:
• creates a legal or constructive obligation and, therefore,
• results in an enterprise having no realistic alternative but to
settle the obligation

A constructive obligation
• arises if past practice creates a valid expectation on the part
of a third party

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 IAS 37
RECOGNITION CONDITION

PROVISION CONTINGENT LIABILITY

• a present obligation • (A possible obligation ) is
(legal or constructive) has • disclosed but not accrued .
arisen • disclosure - not required if
• as a result of a past event payment is remote
(the obligating event),
• payment is probable CONTINGENT ASSETS
('more likely than not'), and • not to be recognised
• the amount can be • be disclosed where an
estimated reliably inflow of economic benefits
is probable
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IAS 37 MEASUREMENT
PROVISION
• the best estimate of the expenditure required
• to settle the present obligation at the balance sheet date
For one – off events For large populations of events
• measured at the most • measured at a probability-
likely amount weighted expected value
Example: restructuring, Example: warranties, customer
environmental clean-up, refunds
settlement of a lawsuit

• To be used for the purpose for which they were originally

recognised
• Review and adjust provisions at each balance sheet date
• If outflow no longer probable, reverse the provision to income.
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 IAS 37 ADJUSTMENTS

Best estimate
• take into account the risks and uncertainties that surround
the underlying events.
• should be discounted to their present values, where the
effect of the time value of money is material.

Reimbursement by another party

• recognised as a reduction of the required provision if the
reimbursement is virtually certain

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IAS 37 Future Events

 Reasonable changes in applying existing technology

 Possible gains on sale of assets
 Changes in legislation
 Forecast
 Ignore
 Consider only if virtually certain to be enacted

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 IAS 37 Restructurings
Restructuring: A programme that is planned and is controlled by
management and materially changes one of two things.
• The scope of a business undertaken by an entity
• The manner in which that business is conducted
(IAS 37: para. 10)

A restructuring is:
 Sale or termination of a line of business
 Closure of business locations
 Changes in management structure
 Fundamental reorganization of company

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IAS 37 Restructurings
Restructuring Provisions:
PROVISION TO BE MADE
Sale of operation only after a binding sale agreement
(If after B/S date, disclose but do not
accrue)

Closure or only after a detailed formal plan is

Re-organisation adopted and announced publicly-
board decision -not enough

Should include only direct expenditures caused by the

restructuring, not costs that associated with the ongoing
activities of the enterprise
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 IAS 37 Restructurings
Restructuring Provisions:
PROVISION TO BE MADE
Future operating • should not be recognised for
losses future operating losses, even in a
restructuring
Restructuring • for terminating employees,
provision on closing facilities, and eliminating
product lines
acquisition
• CONDITIONS announced at
(merger) acquisition and,
• a detailed formal plan is adopted 3
months after acquisition

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IAS 37 Decommissioning or other environmental costs

These costs usually arise at the end of the useful life of an asset. A provision
should only be recognized if there is a present obligation as a result of a past
event, eg if the future decommissioning costs are legally required. If the
provision relates to an asset, then it can be capitalized as part of the cast of the
asset. The decommissioning or other environmental costs often occur many
years in the future, and so the future cost should be discounted to present
value.

For example, when an Oil Company initially purchases an oilfield it is put under
a legal obligation to decommission the site at the end of its life.

IAS 37 considers that a legal obligation exists on the initial expenditure on the
field and therefore the provision should be recognized immediately. The view is
taken that the cost of purchasing the field in the first place is not only the cost
of the field itself but also the costs of putting it right again. Thus, the costs Of
decommissioning mag be capitalized.

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 IAS 37 Decommissioning or other environmental costs

Exam focus point

Questions in Part B of your exam may ask multiple questions about a topic, and
as we have already seen in earlier examples, the questions mag cover more
than one area. The following activity tests both your understanding Of
provisions (IAS 37) and also the effect on the non- current assets (IAS 16).

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IAS 37 Onerous contracts

An Onerous contract is a contract entered into with another party under
which the unavoidable costs of fulfilling the terms Of the Contract exceed
any revenues expected to be received from the goods or services supplied
or purchased directly or indirectly under the contract and where the
entity would have to compensate the Other party if it did not fulfil the
terms of the contract (IAS 37: para. 6B).

An example might be a three-year contract to make and supply a service

to a third party. The seller can no longer provide the service, so it
becomes ‘onerous’, and the costs to the seller would be the costs of
outsourcing the provision of the service or any penalties for non-
provision.

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 IAS 37 Onerous contracts

If an entity has a contract that is onerous, the present obligation under the
contract should be recognised as a provision (IAS 37: Para. 66). The
obligation is measured as:

Unavoidable costs of meeting an

obligation are the lower of:

Penalties from failure

Cost of fulfilling the contract
to fulfil the contract

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IAS 37 DISCLOSURES

Reconciliation for each class of provision:

Opening balance xxx
Add: Additions xxx
Less: Used (amounts charged against the provision) xxx
Released (reversed) xxx
Add: Unwinding of the discount xxx
Closing balance xxx
Prior year reconciliation is not required

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 IAS 37 DISCLOSURES
For each class of provision, a brief description of
• Nature
• Timing
• Uncertainties
• Assumptions
• Reimbursement

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PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 Chapter
14 FINANCIAL INSTRUMENT
GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

338

CONTENT  IAS 32: Financial Instrument

- Presentation

 IFRS 7: Financial Instrument

- Disclosure

 IFRS 9: Financial Instrument

- Measurement, Recognition

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 Financial Instrument DEFINITIONS
Any contract Financial Liability/
Financial Asset
Equity
(Entity A)
(Entity B)
A financial asset is any asset that is:
• Cash
• A contractual right to receive cash or another financial asset
from another entity
• A contractual right to exchange financial assets/liabilities with
another entity under conditions that are potential favourable

A financial liability is any liability that is a contractual obligation:

• To deliver cash or another financial asset to another entity, or
• To exchange financial instruments with another entity under
conditions that are potentially unfavourable, or
• That will or may be settled in the entity’s own equity
instruments
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Financial Assets MEASUREMENT

Initial measurement  @ FV
• Transaction costs are excluded if the asset is fair value
through profit or loss and included if categorised at fair
value through other comprehensive income or
amortised cost

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 Financial Assets MEASUREMENT
Equity Instruments <purchases of shares in other entities>
Default May select
Fair value through Fair value through
profit or loss other comprehensive income
Transaction costs are capitalized.
Transaction costs associated
The investments are revalued to fair value
with the purchase of these
each year end, with the gain/loss being
investments are expensed,
taken to an investment reserve in equity
not capitalised
and shown in other comprehensive income.
similar to a revaluation of PPE. The main
difference is that there can be a negative
investment reserve
FVOCI investment is sold, the investment
reserve is taken to PL
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Financial Assets MEASUREMENT

<purchase of bonds and
Debt Instruments redeemable preference shares>

Normally May select

Fair value through AMORTIZED COST
profit or loss If 2 test passed:
(1) business model test:
entity's business model is to hold the financial asset
to collect the contractual cash flows (rather than to
sell
(2) contractual cash flow characteristics test:
contractual terms of the financial asset give rise on
specified dates to cash flows that are solely
payments of principle and
interest on the principle outstanding.

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 Financial Assets
Example 1: A company invests $5,000 in 10% loan notes. The loan
notes are repayable at a premium after 3 years. The effective rate of
interest is 12%. The company intends to collect the contractual cash
flows which consist solely of repayments of interest and capital and
have therefore chosen to record the financial asset at amortised
cost. What amounts will be shown in the statement of profit or loss
and statement of financial position for the financial asset for years
1–3?

Example 2: A company invested in 10,000 shares of a listed company

in November 20X7 at a cost of $4.20 per share. At 31 December
20X7 the shares have a market value of $4.90. Prepare extracts from
the statement of profit or loss for the year ended 31 December
2007 and a statement of financial position as at that date.

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Financial Assets
Example 3: A company invested in 20,000 shares of a listed company
in October 20X7 at a cost of $3.80 per share. At 31 December 20X7
the shares have a market value of $3.40. The company are not
planning on selling these shares in the short term and elect to hold
them as fair value through other comprehensive income.
Prepare extracts from the statement of profit or loss for the year
ended 31 December 20X7 and a statement of financial position as
at that date.

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 Financial Liabilities MEASUREMENT

Initial measurement  @ FV

Subsequent
• Should classify all financial liabilities (other than liabilities
held for trading and derivatives that are liabilities) at
amortised cost
• The amortised cost method is the same as for debt
instruments under financial assets, but instead of having
interest income and a year end asset there will be a
finance cost and year end liability

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Financial Liabilities
Example 1: A company issues 5% loan notes at their nominal value of
$20,000 with an effective rate of 5%. The loan notes are repayable at
par after 4 years.
1. What amount will be recorded as a financial liability when the
loan notes are issued?
2. What amounts will be shown in the statement of profit or loss
and statement of financial position for years 1–4?

Example 2: A company issues 0% loan notes at their nominal value of

$40,000. The loan notes are repayable at a premium of $11,800 after
3 years. The effective rate of interest is 9%.
1. What amount will be recorded as a financial liability when the
loan notes are issued?
2. What amounts will be shown in the statement of profit or loss
and statement of financial position for years 1–3?
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 Preference Share

IRREDEEMABLE REDEEMABLE
classified as EQUITY (unless the classified as
terms of the share carries a fixed FINANCIAL LIABILITIES
dividend, in which case they are
considered to be a financial liability) DIVIDENDS  P/L

Example: On 1 April 20X7, a company issued 40,000 $1 redeemable

preference shares with a coupon rate of 8% at par. They are
redeemable at a large premium which gives them an effective
finance cost of 12% per annum.
How would these redeemable preference shares appear in the
financial statements for the years ending 31 March 20X8 and
20X9?

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Compound Instrument DEFINITION

• A compound instrument is a financial instrument that has
characteristics of both equity and liabilities, such as a
convertible loan.

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 Compound Instrument SPLIT ACCOUNTING

LIABILITIES
• Based on present value of future cash flows assuming on
conversion – Apply discount rate equivalent to interest on
similar nonconvertible debt instrument (i.e. discount the
cash flows at the market rate of interest).

EQUITY ELEMENT (OPTIONS)

• Equity = remainder (i.e. deduct the present value of the
debt from the proceeds of the issue).

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Compound Instrument
Example: A company issues 2% convertible bonds at their nominal
value of $36,000.
The bonds are convertible at any time up to maturity into 40
ordinary shares for each $100 of bond. Alternatively the bonds will
be redeemed at par after 3 years.
Similar nonconvertible bonds would carry an interest rate of 9%.
The present value of $1 payable at the end of year, based on rates of
2% and 9% are as follows:
End of year 2% 9%
1 0.98 0.92
2 0.96 0.84
3 0.94 0.77
1. What amounts will be shown as a financial liability and as
equity when the convertible bonds are issued?
2. What amounts will be shown in the statement of profit or loss
and statement of financial position for years 1–3?
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 Factoring of Receivable
The transaction is in substance a
genuine sale of the debts for less than Trade receivable
market price, with the entity retaining no is derecognized
continuing interest in the debts

Trade receivable is not

The transaction is in substance a secured
derecognized and a
loan if the risk of non-payment remains
corresponding liability is also
with the entity that sold the debts
recognized

Factors that tend to indicate a secured

loan:
• The debt factoring company can claim
back unpaid amounts.
• Interest is charged on monies advanced
by the debt factoring company.

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Chapter
15 IFRS 15 - REVENUE FROM CONTRACTS
WITH CUSTOMERS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 IFRS 15
• IFRS 15 has replaced the previous IFRS on revenue recognition, IAS
18 Revenue and IAS 11 Construction Contracts.
• It uses a principles-based 5-step approach to apply to contact with
customers.

Step 1 Identification of contracts

Identification of performance obligations

Step 2
(goods, services or a bundle of goods and services)

Step 3 Determination of transaction price

Step 4 Allocation of the price to performance obligations

Recognition of revenue when/as performance

Step 5
obligations are satisfied
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IFRS 15 DEFINITIONS
Contract
• An agreement between two or more parties that creates
enforceable rights and obligations.
Income
• Increases in economic benefits during the accounting period
in the form of increasing assets or decreasing liabilities

Performance obligation
• A promise in a contract to transfer to the customer either:
o a good or service that is distinct; or
o a series of distinct goods or services that are
substantially the same and that have the same pattern
of transfer to the customer
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 IFRS 15 DEFINITIONS
Revenue
• Income arising in the course of an entity’s ordinary
activities.

Transaction price
• The amount of consideration to which an entity expects to
be entitled in exchange for transferring promised goods or
services to a customer.

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IFRS 15
Identification of contracts
The contract does not have to be a written one, it can be
verbal or implied. In order for IFRS 15 to apply the following
must all be met:
 The contract is approved by all parties
 The rights and payment terms can be identified
 The contract has commercial substance
 It is probable that revenue will be collected

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 IFRS 15
Identification of contracts
If the goods or services that have agreed to be exchanged
under the contract are distinct (i.e. could be sold alone) then
they should be accounted for separately. If a series of goods or
services are substantially the same they are treated as a single
performance obligation.

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IFRS 15
Identification of contracts
Illustration – Performance obligations
LiverTech is a computer business that primarily sells computer
hardware. As well as selling computers, it also supplies and
installs the software to its customers and provides a technical
support package over a number of years. The business
commonly sells the supply and installation, and technical
support in a combined goods and services contract. The
combined goods and services contract has two separate
performance obligations, which would need to be separated
out and recognized separately. The installation of software
would be recognized once complete and the provision of
technical services over the period of the support service.

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 IFRS 15
Determination of transaction price
The amount the selling party expects to receive is the
transaction price. This should consider the following:
• Significant financing components
• Variable consideration
• Refunds ad rebates (paid to the customer!)
Example 1 – Transaction price
Luckers Co. sells a car to a customer for $10,000, offering
interest-free credit for a three-year period. The car is delivered
to the customer immediately. The annual market rate of
interest on the provision of consumer credit to similar
customers is 5%.
What is the transaction price?
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IFRS 15
Determination of transaction price
Example 1 – Transaction price - SOLUTION
The three-year interest-free credit period suggests that the
$10,000 selling price includes a significant financing
component.
The selling price is therefore discounted to present value based
on a discount rate that reflects the credit characteristics of the
party (customer) receiving the financing i.e. 5%.
Therefore the transaction price is $10,000/(1.05)3 = $10,000 x
0.8638 = $8,638.

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 IFRS 15
Allocation of the price
The price is allocated proportionately to the separate
performance obligations based upon the stand-alone selling
price.

Example 2 – Allocation of price

Richer Co. sells home entertainment systems including a two-
year repair and maintenance package for $10,000. The price of
a home entertainment system without the repair and
maintenance contract is $9,000 and the price to renew a two-
year maintenance package is $2,000.
How is the $10,000 contract price allocated to the separate
performance obligations?
Note: Ignore any discounting and time value of money
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IFRS 15
Allocation of the price
The price is allocated proportionately to the separate
performance obligations based upon the stand-alone selling
price.

Example 2 – Allocation of price - SOLUTION

The performance obligations and allocation of total price are
as follows:
Provision of home cinema system (9,000/11,000 × $10,000)
= $8,182
Provision of maintenance contract (2,000/11,000 × $10,000)
= $1,818

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 IFRS 15
Recognition of revenue
• Once control of goods or services transfers to the customer,
the performance obligation is satisfied and revenue is
recognized. This may occur at a single point in time, or over
a period of time.
• If a performance obligation is satisfied at a single point in
time, we should consider the following in assessing the
transfer of control:
o Present right to payment for the asset
o Transferred legal title to the asset
o Transferred physical possession of the asset
o Transferred the risks and rewards of ownership to the
customer
o Customer has accepted the asset.

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IFRS 15
Recognition of revenue
Example 3 – IFRS 15 (1)
Telephonica sells mobile phones, selling them for “free” when
a customer signs up for a 12 month contract. The contract
costs the customer $45 per month.
Explain how the revenue should be recognized in
Telephonica’s financial statements
Note: Vodaphone sells mobile phones without a monthly
contract, selling the handset for $480. Call and data charges
are $20 per month. Ignore discounting and the time value of
money

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 IFRS 15
Recognition of revenue
Example 3 – IFRS 15 (1) - SOLUTION
1. Identify the contract: Signed agreement
2. Identify the separate performance obligations:
 Sale of handset
 Provision of calls and data service
3. Determine the transaction price: $540 = $45 x 12 months
4. Allocate transaction price to performance obligations:
 Standalone prices (using Vodaphone):
$720 (= $480 + (12 months x $20)
 Handset = 480/720 x 540 = $360
 Calls and data = 240/720 x 540 = $180
5. Recognise revenue as each performance obligation is satisfied
Handset (goods) = at Calls and data (services) = over 12 months

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IFRS 15
Recognition of revenue
Example 4 – IFRS 15 (2)
LiverTech is a computer business that primarily sells computer
hardware. As well as selling computers, it also supplies and
installs the software to its customers and provides a technical
support package over two years. The business commonly sells
the supply and installation, and technical support in a
combined goods and services contract.
The combined goods and services contract sells for $1,600, but
if sold separately the supply and installation is sold for $1,500
and the technical support for $500.
If LiverTech sold a combined contract on 1 July 20X7,
demonstrate how the transaction would be presented in the
financial statements for the year ended 31 December 20X7.
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 IFRS 15
Recognition of revenue
Example 4 – IFRS 15 (2) - SOLUTION
1. Identify the contract: Signed agreement
2. Identify the separate performance obligations:
- Supply and installation service
- Technical support
3. Determine the transaction price: Combined contract price = $1,600
4. Allocate transaction price to performance obligations:
- Standalone price(supply and installation) = $1,500
- Standalone price (technical support) = $500
- Supply and installation = 1,500/2,000 x 1,600 = $1,200
- Technical support = 500/2,000 x 1600 = $400
5. Recognise revenue as each performance obligation is satisfied
- Supply and installation = on installation (1 July 20X7)
- Technical support = over two years (1 July 20X7 to 30 June 20X9)

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IFRS 15
Recognition of revenue
Example 4 – IFRS 15 (2) - SOLUTION
SFP (extract)
Non-current liabilities
Deferred income: 100
Current liabilities
Deferred income: 200
(=12/24 x 400)

SPL (extract)
Revenue 1,300
(=1,200 + (6/24 x 400)

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 IFRS 15
Performance obligations over time
If a performance obligation is transferred over time, the
completion of the performance obligation is measured using
either of the following methods:
 Output method – revenue is recognized based upon the
value to the customer, i.e. work certified.
Work certified to date
Output method = Total contract revenue
 Input method – revenue is recognized based upon the
amounts the entity has used, i.e. costs incurred or labor
hours.
Costs to date
Input method (cost based) = Total estimated costs

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IFRS 15
Performance obligations over time
Calculate contract assets or contract liabilities:

$
Revenue recognized to date X
Less: Amount invoiced to date (X)
Contract asset/ (liabilities) X/(X)

If the entity cannot reasonably measure the outcome of a performance

obligation (e.g. at the early stage of a contract) but the entity expects to
recover the costs incurred  Recognize revenue only to the extent of costs
incurred

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 IFRS 15
Performance obligations over time
Example 5 – Performance obligations over time and the
statement of profit or loss (1)
Alex commenced a three year building contract during the
year-ended 31 December 20X4 and continued the contract
during 20X5. The details of the contract are as follows: $m
Total contract value 45
Costs incurred to date @ 20X5 20
Estimated costs to completion 12
Work certified as completed in 20X5 15
Stage of completion @ 20X5 70%
Profit recognized to date @ 20X4 3.3
Amount invoiced 20

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IFRS 15
Performance obligations over time
Example 5 – Performance obligations over time and the
statement of profit or loss (1)
Show how this contract would be dealt with in the statement
of profit or loss for the year ended 31 December 20X5.
Where not profit can be calculated if contracts spanning more
than one accounting period, i.e. it is loss making, then the
revenue is limited to the recoverable costs.

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 IFRS 15
Performance obligations over time
Example 5 – Performance obligations over time and the
statement of profit or loss (1) – SOLUTION
$m
Revenue (= work certified in year) 15.0
Cost (Balancing) (9.2)
Profit (9.1 (W) – 3.3) 5.8
Working: $m
Total revenue 45
Total costs (20.0 + 12.0) 32
Profit 13
x 70% (Stage of completion @ 20X5) 9.1

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IFRS 15
Performance obligations over time
Example 5 – Performance obligations over time and the
statement of profit or loss (1) – SOLUTION
$m
Revenue (Recognized to date: 70% * 45) 31.5
Amount billed(AR) (20)
Contract asset 11.5

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 IFRS 15
Specifics
1. Principal vs agent
When a third party is involved in providing goods or services to a
customer, the seller is required to determine whether the nature of
its promise is a performance obligation to:
• Provide the specified goods or services itself (principal) or
• Arrange for a third party to provide those goods or services
(agent)
2. Repurchase agreements
When a vendor sells an asset to a customer and is either required, or
has an option, to repurchase the asset. The legal form here is always
a sale followed by a purchase at a later date. The economic
substance is more likely to be a loan secured against an asset that is
never actually being sold.
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IFRS 15
Specifics
3. Bill and hold arrangements
An entity bills a customer for a product but the entity retains
physical possession of the product until it is transferred to the
customer at a point in time in the future

4. Consignments
Arises where a vendor delivers a product to another party, such as a
dealer or retailer, for sale to end customers. The inventory is
recognized in the books of the entity that bears the significant risk
and reward of ownership (e.g. risk of damage, obsolescence, lack of
demand for vehicles, no opportunity to return them, the showroom-
owner must buy within a specified time if not sold to public)

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 IFRS 15
Specifics
5. Sales with a right of return
In some contracts, a company sells goods to customers and transfers
control of that product to the customer and also grants the customer the
right to return the product. The right to return may be in respect of, for
example. dissatisfaction with the products or expected levels of sales being
below expectations. When goods are sold With a right of return. IFRS 15
requires an entity to recognise all of the following:
(a) Revenue for the transferred products in the amount Of consideration to
which the entity expects to be entitled (i.e. revenue is not recognised for
products expected to be returned);
(b) A refund liability (in respect of the-products that are expected to be
returned); and
(c) An asset (and corresponding adjustment to cost of sales) for the right to
recover products from Customers on settling the refund liability.
(IFRS 15: para. 821)
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IFRS 15
Specifics
6. Warranties

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 IFRS 15
Specifics
Example 1 - Agent or not?
An entity negotiates with major airlines to purchase tickets at
reduced rates.
It agrees to buy a specific number of tickets and must pay
even if unable to resell them.
The entity then sets the price for these ticket for its own
customers and receives cash immediately on purchase.
The entity also assists the customers in resolving complaints
with the service provided by airlines. However, each airline is
responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the
service.
How would this be dealt with under IFRS 15?
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IFRS 15
Specifics
Example 1 - Agent or not? - Answer
1. Identify the contract: when the ticket is purchased
2. Identify the separate performance obligations:
- Look at the risks involved: If the flight is cancelled the airline pays to
reimburse, If the ticket doesn't get sold - the entity loses out
- Look at the rewards - the entity can set its own price and thus
rewards
On balance therefore the entity takes most of the risks and rewards
here and thus controls the ticket - thus they have the obligation to
provide the right to fly ticket
3. Determine the transaction price: set by the entity
4. Allocate transaction price to performance obligations: The price here
is the GROSS amount of the ticket price (they sell it for)
5. Recognize: revenue as each performance obligation is satisfied:
Recognise the revenue once the flight has occurred
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 IFRS 15
Specifics
Example 2 - Loyalty discounts
An entity has a customer loyalty program that rewards a
customer with one customer loyalty point for every $10 of
purchases.
Each point is redeemable for a $1 discount on any future
purchases
Customers purchase products for $100,000 and earn 10,000
points
The entity expects 9,500 points to be redeemed, so they have
a stand-alone selling price $9,500
How would this be dealt with under IFRS 15?
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IFRS 15
Specifics
Example 2 - Loyalty discounts - Answer
1. Identify the contract: when the goods are purchased
2. Identify the separate performance obligations: The promise to provide
points to the customer is a performance obligation along with, of course,
the obligation to provide the goods initially purchased
3. Determine the transaction price: $100,000
4. Allocate transaction price to performance obligations:
Stand alone selling price: 100,000 + 9,500 = 109,500
Product $91,324 [100,000 x (100,000 / 109,500]
Points $8,676 [100,000 x 9,500 /109,500]
5. Recognize:
- Product: on purchase
- Points: Let’s say at the end of the first reporting period, 4,500 points
(out of the 9,500) have been redeemed
+ Revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676]
+ Contract liability of $4,566 (8,676 – 4,110) for the unredeemed points
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 IFRS 15
Specifics
Example 3 – Sales with a right of return
Quirky Co is an online clothing retailer. Customers are entitled to return
items within 28 days of purchase for a full refund if they do not fit or ore
otherwise not suitable. In the last week of December 20X8. Quirky co sold
200 dresses for $400 each. The dresses cost $250 each. Quirky Co has an
expected average level of returns of 25%. None of the dresses sold in the
final week of December 20XB have been returned by the end of the month.

Required
What are the accounting entries required to record the sale of the dresses
in Quirky Co's financial statements the ended 31 December 20X8?

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IFRS 15
Specifics
Example 3 – Sales with a right of return – Answer
Quirky receives cash of $80,000 (200 dresses x $400).
Ouirku should recognise revenue only in respect of the 75% of dresses not
expected to be returned: 200 dresses x 75% x $400 = $60,000.
Quirky should recognise a refund liability for the 25% of dresses expected
to be returned: 200 dresses x 25% x $400 = $20,000
The journal entry to record the sale with the right of return is:
Dr Cash $80,000
Cr Revenue $60,000
Cr Refund Liability $20,000

The 200 dresses sold had a purchase cost Of $50,000 (200 dresses x $250).
This amount will be included in purchases, within cost of sales. As none of
these 200 dresses are held at the year end, none of them will be included in
closing inventory.
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 IFRS 15
Specifics
Example 3 – Sales with a right of return – Answer <cont>
Therefore, the total amount in cost of sales relating to the dresses is an expense of
$50,000.
However, no revenue has been recognized in relation to 25% of the dresses.
Therefore, the purchase expense in relation to the dresses that are expected to be
returned that is included within cost of sales needs to be reversed and an asset
should be recognized for the right to recover the dresses: 200 dresses x 25% x
$250= $12,500

Dr Asset for right to recover dresses $12,500

Cr Cost of sales $12,500

This leaves a correct expense within cost of sales for the 75% of the dresses which
are not expected to be returned: 200 dresses x 75% x $250 = $37,500 which
matches the revenue to be recognized. This can also be calculated as total
purchases of $50,000 less cost of dresses expected to be returned of $12,500.
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Chapter
16 IFRS 16 – LEASES

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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 IFRS 16
• IFRS 16 Leases is to be adopted for accounting periods starting on
or after 1 January 2019. It can be adopted earlier but only if the
entity has already adopted IFRS 15 Revenue from contracts with
customers.

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IFRS 16
The new standard on leases is replacing the old standard (IAS 17)
where the existence of operating leases meant that significant
amounts of finance were held off the balance sheet.
In adopting the new standard all leases will now be brought on to
the statement of financial position, except in the following
circumstances:
• leases with a lease term of 12 months or less and containing no
purchase options – this election is made by class of underlying
asset; and
• leases where the underlying asset has a low value when new (such
as personal computers or small items of office furniture) – this
election can be made on a lease-by-lease basis. The accounting for
low value or short-term leases is done through expensing the
rental through profit or loss on a straight-line basis
The accounting for low value or short-term leases is done through
expensing the rental through profit or loss on a straight-line basis.
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 IFRS 16
Example 1: Low – value assets
Banana leases out a machine to Mango under a four year lease
and Mango elects to apply the low-value exemption. The terms
of the lease are that the annual lease rentals are $2,000
payable in arrears. As an incentive, Banana grants Mango a
rent-free period in the first year.
Explain how Mango would account for the lease in the
financial statements

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IFRS 16
Example 1: Low – value assets - ANSWER
An expense of $1,500 would be recognised through profit or
loss for each of the four year lease. At the end of year one an
accrual of $1,500 would be recognised on the statement of
financial position of which $500 would be released over the
remaining three years of the lease.
$2,000 x 3
Expense (p.a.) = 4 = $ 1,500

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 IFRS 16 KEY DEFINITION
Lease
A contract that gives the right to use an asset for a period of time in
exchange for consideration
• There's 3 tests to see if the contract is a lease.
• The asset must be identifiable
• This can be explicitly - it's in the contract
Or implicitly - the contract only makes sense by using this asset
(There is no identifiable asset if the supplier can substitute the asset
(and would benefit from doing so)
• The customer must be able to get substantially all the benefits while it
uses it
• The customer must be able to direct how and for what the asset is
used

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IFRS 16
Example 2: Lease contract
A contract gives you exclusive use of a specific airplane
You can decide when it flies and what you fly (passengers,
cargo etc)
The airplane supplier though operates it using its own staff
The airplane supplier can substitute the airplane for another
but it must meet specific conditions and would, in practice,
cost a lot to do so
So does the contract contain a lease?

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 IFRS 16
Example 2: Lease contract - Answer
1. Is there an Identifiable asset?
Yes the airplane is explicitly referred to and the substitution
right is not substantive as they would incur significant costs
2. Does the customer have substantially all benefits during
the period?
Yes it has exclusive use
3. Does the customer direct the use?
Yes the customer decides where and when the airplane will fly
So, yes this contract contains a lease because it's...
A contract that gives the right to use an asset for a period of
time in exchange for consideration

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IFRS 16
Lessee accounting - Initial recognition
At the start of the lease the lessee initially recognises
a right-of-use asset and a lease liability

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 IFRS 16
Lessee accounting - Initial recognition
Right of use asset Lease liability
Measured at the amount of Measured at the present value of the lease
the lease liability plus any payments payable over the lease term,
initial direct costs incurred by discounted at the rate implicit in the lease
the lessee.
• Lease liability • Fixed payments less incentives
• Initial direct costs • Variable payments (e.g. CPI/rate)
• Estimated costs for • Expected residual value guarantee
dismantling • Penalty for terminating (if reasonably
• Payments less incentives certain)
before commencement • Exercise price of purchase option (if
date reasonably certain)
Note: if the rate implicit in the lease cannot
be determined the lessee shall use their
incremental borrowing rate
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IFRS 16
Lessee accounting - Subsequent measurement
Right of use asset Lease liability
Cost less accumulated depreciation Financial liability at amortized
cost
Note: Depreciation is based on the
earlier of the useful life and lease
term, unless ownership transfers,
in which case use the useful life.

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 IFRS 16
Lessee accounting - Subsequent measurement

Non-current portion

Current portion

Non-current portion

Current portion
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IFRS 16
Lessee accounting - Subsequent measurement
Example 3 – Lessee accounting
On 1 January 2015, Plum entered into a five year lease of
machinery. The machinery has a useful life of six years. The
annual lease payments are $5,000 per annum, with the first
payment made on 1 January 2015. To obtain the lease Plum
incurs initial direct costs of $1,000 in relation to the
arrangement of the lease but the lessor agrees to reimburse
Pear $500 towards the costs of the lease.
The rate implicit in the lease is 5%. The present value of the
minimum lease payments is $22,730.
Demonstrate how the lease will be accounted in the financial
statements over the five year period.

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 IFRS 16
Lessee accounting - Subsequent measurement
Example 3 – Lessee accounting – Answer
Initial recognition
Record the right of use asset and lease liability
DR Right-of-use asset $22,730
CR Lease liability $22,730
Record the initial direct costs
DR Right-of-use asset $1,000
CR Cash $1,000
Record the incentive payments received
DR Cash $500
CR Right-of-use asset $500
Right-of-use asset = 22,730 + 1,000 – 500 = 23,230

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IFRS 16
Lessee accounting - Subsequent measurement
Example 3 – Lessee accounting – Answer
Subsequent measurement
Depreciate the asset over the earlier lease term of five years.
$23,230
Expense (p.a.) = = $4,646
5
Record finance lease payments and interest using the rate implicit in the
lease
Year B/f Payment Capital balance Finance cost (5%) C/f
1 22,730 (5,000) 17,730 887 18,617
2 18,617 (5,000) 13,617 681 14,298
3 14,298 (5,000) 9,298 465 9,763
4 9,763 (5,000) 4,763 237 5,000
5 5,000 (5,000) - - -

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 IFRS 16
Sale and leaseback
• A sale and leaseback transaction occurs when one entity (seller)
transfers an asset to another entity (buyer) who then leases the
asset back to the original seller (lessee).
• The companies are required to account for the transfer contract
and the lease applying IFRS 16, however consideration is first
given to whether the initial sale of the transferred asset is a
performance obligation under IFRS 15.
• If the transfer of the asset is not a sale then the following rules
apply:
Seller-Lessee Buyer-Lessor
Continue to recognise the asset Do not recognise the asset
Recognise a financial liability Recognise a financial asset
(= proceeds) (= proceeds)

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IFRS 16
Sale and leaseback
• If the transfer of the asset is a sale then the following rules apply:
Seller-Lessee Buyer-Lessor
• Derecognise the asset • Recognise
• Recognise the sale at fair value purchase of
the asset
• Recognise lease liability (PV of lease rentals) • Apply lessor
accounting
• Recognise a right-of-use asset, as a proportion
of the previous carrying value of underlying
asset
= Previous Carrying value x Lease liabilities/Proceeds
• Gain/loss on rights transferred to the buyer

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 IFRS 16
Sale and leaseback
Example 4 – Sale and leaseback (1)
Apple required funds to finance a new ambitious rebranding
exercise. It’s only possible way of raising finance is through the sale
and leaseback of its head office building for a period of 10 years. The
lease payments of $1 million are to be made at the end of the lease
period
The current fair value of the building is $10 million and the carrying
value is $8.4 million. The interest rate implicit in the lease is 5%.
Advise Apple on how to account for the sale and leaseback in its
financial statements if the office building were to be sold at the fair
value of $10 million and:
(a) Performance obligations are not satisfied; or,
(b) Performance obligations are satisfied.

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IFRS 16
Sale and leaseback

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 IFRS 16
Sale and leaseback
Example 4 – Sale and leaseback (1) - Answer
(i) Transfer of asset is not a sale
Seller Lessor
• Continue to recognise the asset at • Do not recognise the asset as it has
$8.4 million and depreciate. not been sold to the buyer.
• Recognise a financial liability at • Recognise a financial asset at
transfer proceeds of $10 million. transfer proceeds of $10 million.

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IFRS 16
Sale and leaseback
Example 4 – Sale and leaseback (1) - Answer
(ii) Transfer of asset is sale

Seller Lessor
• Derecognise the asset at $8.4 million • Recognise purchase of the asset at
$10 million (fair value = proceeds)
• Recognise lease liability at PV of lease • Apply lessor accounting
rentals
• Recognise a right-of-use asset, as a
proportion of the previous carrying
value of underlying asset
• Gain/loss on rights transferred

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 IFRS 16
Sale and leaseback
Example 4 – Sale and leaseback (1) - Answer
(ii) Transfer of asset is sale
DR Bank $10,000,000
DR Right of use asset (W2) $6,486,257
CR Lease liability (W1) $7,721,735
CR PPE – Building $8,400,000
CR Gain on transfer $364,522
(W1) Lease liability = PV of lease rentals at rate implicit in the lease
Lease = $1 million x [1-(1+5%)^(-10)]/5% = $7,721,735 (= $1 million x
7.722= $7,721,735)
(W2)
$ $
Right-of-use retained 7,721,735 77.22% 6,486,257
Rights transferred 2,278,265 22.78% 1,913,743
Total 10,000,000 100.0% 8,400,000

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IFRS 16
Sale and leaseback
Note: If the proceeds are less than the fair value of the asset or the
lease payments are less than market rental the following
adjustments to sales proceeds apply:
• Any below-market terms should be accounted for as a
prepayment of the lease payments; and,
• Any above-market terms should be accounted for as additional
financing provided to the lessee.

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 IFRS 16
Sale and leaseback
Example 5 – Sale and leaseback (2)
Apple required funds to finance a new ambitious rebranding exercise. It’s
only possible way of raising finance is through the sale and leaseback of its
head office building for a period of 10 years. The lease payments of $1
million are to be made at the end of the lea se period
The current fair value of the building is $10 million and the carrying value is
$8.4 million. The interest rate implicit in the lease is 5%.
Advise Apple on how to account for the sale and leaseback in its financial
statements if the performance obligations are satisfied and the building is
sold for the following:
(a) $9 million; or,
(b) $11 million.

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IFRS 16
Sale and leaseback
Example 5 – Sale and leaseback (2) - Answer
(i) The proceeds of $9 million are below the $10 million fair value
of the asset and so the below-market proceeds of $1 million are
treated as a prepayment.
DR Bank $9,000,000
DR Prepayment $1,000,000
DR Right of use asset (W2) $6,486,257
CR Lease liability (W1) $7,721,735
CR PPE – Building $8,400,000
CR Gain on transfer $364,522

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 IFRS 16
Sale and leaseback
Example 5 – Sale and leaseback (2) - Answer
(ii) The proceeds of $11 million are greater than the $10 million fair
value of the asset, so the above market proceeds are treated as
additional financing provided by the buyer-lessor to the seller-
lessee.
DR Bank $11,000,000
DR Right of use asset (W2) $6,486,257
CR Lease liability ($7,721,735 (W1) + $1,000,000)
$8,721,735
CR PPE – Building $8,400,000
CR Gain on transfer $364,522

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Chapter
17 TAXATION

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 CONTENT TAXATION

IAS 12
DEFERRED TAX
INCOME TAXES

Accoungting Accounting Profit

Entries ≠ Taxable Profit

Specific Deferred Tax

Scenarios Liabilities

Deferred Tax
Assets

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IAS 12 – Income Taxes

• IAS 12 states that there are two elements of tax that will need to
be accounted for:
1. Current tax: (the amount of income taxes payable/recoverable in
respect of the taxable profit/loss for a period)
2. Deferred tax (an accounting adjustment aimed to match the tax
effects of transactions to the relevant accounting period)

To introduce tax payable by the company:

Dr Income tax expense (in statement of profit or loss)
Cr Income tax payable (in SFP as current liability)

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 Deferred Tax DEFINITION
Deferred tax is:
The estimated future tax consequences of transactions and events
recognized in the financial statements of the current and previous
periods.

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Deferred Tax
Deferred taxation is a basis of allocating tax charges to particular
accounting periods. The key to deferred taxation lies in the two quite
different concepts of profit:

Accounting Profit Taxable Profit

Is the figure of profit before
Is ther figure of profit in
tax, reported to the
which the taxation authorities
shareholders in the published
base their tax calculations
accounts

Causes:
 Permanent differences
 Temporary differences
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 Deferred Tax ACCOUNTING ENTRIES
Carrying value of non – current asset X
Tax base X
Temporary difference X

Deferred tax Temporary Different Tax rate

Increase in deferred tax provision

Dr Income tax expense/ equity X
Cr Deferred tax (SFP) X
Reduction in deferred tax provision
Dr Deferred tax (SFP) X
Cr Dr Income tax expense/ equity X
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Deferred Tax
Deferred tax assets
IAS 12 required that:
• A deductible temporary difference arises where the tax base of
asset exceeds its carrying value.
• To the extent that it is probable that taxable profit will be available
against which the deductible temporary difference can be utilized
(It as deferred tax asset arises from the company making lossed
previously, they must be able to demonstrate that sufficient
forecasted profits will be made to realise the asset).

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 Deferred Tax
Example 1: Deferred Taxation
A company’s financial statements show profit before tax of $1,000 in each
of years 1, 2 and 3. This profit is stated after charging depreciation of $200
per annum. This is due to the purchase of an asset costing $600 in year 1
which is being depreciated over its 3-year useful economic life on a straight
line basis.
The tax allowances granted for the related asset are:
Year 1 $240
Year 2 $210
Year 3 $150
Income tax is calculated as 30% of taxable profits.
Apart form the above depreciation and tax allowances there are no other
differences between the accounting and taxable profits.
Required:
Ignoring deferred tax, prepare statement of profit or loss extracts for each
of years 1, 2 and 3.
Accounting for deferred tax, prepare statement of profit or loss and
statement of financial position extracts for each of years 1, 2 and 3.
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Deferred Tax
Deferred tax assets: Revaluation of non – current assets
• When a revaluation takes place the carrying value of the asset will
change but the tax base will remain unaffected.
• The difference between the carrying amount of a revalued asset
and its tax base is an example of a temporary difference and will
give rise to a deferred tax liability or asset.

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 Deferred Tax
Example 2: Deferred Taxation – Revaluation of non-current assets
On 1 January 20X8 Simone Ltd decided to revalue its land for the first time.
A qualified property valuer reported that the market value of land on that
date was $80,000. The land was originally purchased 6 years ago for
$65,000. Simone does not make a transfer to retained earnings in respect
of excess depreciation on the revaluation of its assets.
The required provision for income tax for the year ended 31 December
20X8 is $19,400. The difference between the carrying amounts of the net
assets of Simone (including the revaluation of the property in note (above)
and their (lower) tax base at 31 December 20X8 is $27,000. The opening
balance in the deferred tax account was $2,600. Simone’s rate of income
tax is 25%
Required:
Prepare extracts of the financial statements to show the effect of the above
transactions.

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Taxation
SUMMARY
Income tax
Year end estimate X
Under/Over provision X/(X)
Increase/Decrease in deferred tax X/(X)
Charge to record in the statement of profit or loss X

Deferred tax
Balance b/f X
Balance c/f (to SOFP) X/(X)
(Temporary different x tax rate)
Increase/decrease in deferred tax X/(X)
(to either statement of profit or loss or equity)

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 Taxation
Example 3:
The following trial balance relates to Weiser, a listed company, at 31 Dec
20X8:

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Taxation
Example 3:
The following information is relevant:
(i) The directors had the leasehold property value at $24 million on 1 Jan
20X8 by an independent surveyor. The directors wish to incorporate
this value into financial statements. The property was originally
purchased 4 years ago and is being depreciated over its original useful
economic life of 20 years which has not changed as a result of the
revaluation. Weiser does not make transfer to retained earnings in
respect of excess amortization. The revaluation gain will create a
deferred tax liability (see note (ii)). Plant and equipment is being
depreciated at 20% per annum on a reducing balance basis. All
depreciation/amortization should be charged to cost of sales.
(ii) A provision for income tax for the year ended 31 Dec 20X8 of $12
million is required. At 31 Dec 20X8, the tax base of Weiser’s net assets
was $7 million less than their carrying amounts. This excludes the
effects of the revaluation of the leased property. The income taxe rate
of Weiser is 30%

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 Taxation
Example 3:
Required:
Prepare a statement of profit or loss and other comprehensive income, a
statement of changes in equity for the year ended 31 Dec 20X8, and a
statement of financial position as at that date.

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PRACTICE QUESTIONS

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HALONGGIANG@GMAIL.COM

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 Chapter
18 IAS 33 – EARNINGS PER SHARE

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HALONGGIANG@GMAIL.COM

091 266 1988

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Basic EPS - Consideration

Test your understanding 1
A Gerard’s earnings for the year ended 31 December 20X4 are $2,208,000.
On 1 January 20X4, the issued share capital of Gerard was 8,280,000
ordinary shares of $1 each. The company issued 3,312,000 shares at full
market value on 30 June 20X4.
Calculate the EPS for Gerard for 20X4

Earnings
Basic EPS =
W𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
(full market price issue)

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 Bonus Issue
A bonus issue (or capitalisation issue or scrip issue):
• does not provide additional resources to the issuer
• means that the shareholder owns the same proportion of the
business before and after the issue

In the calculation of EPS:

• The bonus shares are deemed to have been issued at the start of
the year
• Comparative figures are restated to allow for the proportional
increase in share capital caused by the bonus issue.
• Note: if you have a issue of shares at full market price and a
bonus issue, you apply a bonus fraction from the start of the year
up to the date of the bonus issue. For example, if the bonus issue
was 1 share for every 5 owned, the bonus fraction would be 6/5
(as everyone who had 5 shares now has 6)

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Basic EPS - Consideration

Test your understanding 2
Dorabella had the following capital and reserves on 1 April 20X1:

Dorabella makes a bonus issue, of one share for every seven held, on 31
August 20X2.
Dorabella plc’s results are as follows:

Calculate EPS for the year ending 31 March 20X3, together with the
comparative EPS for 20X2 that would be presented in the 20X3 accounts.
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 Rights Issue
Rights issues present special problems:
• they contribute additional resources
• they are normally priced below full market price.
Therefore they combine the characteristics of issues at full market
price and bonus issues

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Rights Issue
• Adjust for bonus element in rights issue, by multiplying
capital in issue before the rights issue by the following
fraction
Market price before issue
Theoretical ex rights price
• Calculate the weighted average capital in the issue as above
• Calculating EPS when there has been a rights issue can be
done using a four-step process.

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 Rights Issue
Step 1 Calculate theoretical ex rights price (TERP)

Start with the number of shares previously held by

an individual at their market price.
Then add in the number of new shares purchased at
the rights price. You can then find the TERP by
dividing the total value of these shares by the
number held.

For example, if there was a 1 for 3 rights issue for

$3, and the market price before this was $5:
3 shares @ $5 market price = $15
1 new share @ $3 rights price = $3
Therefore a shareholder now has 4 shares with a
value of $18. The TERP is now $18/4 = $4.50

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Rights Issue
Step 1 Calculate theoretical ex rights price (TERP)

Step 2 Bonus fraction

Market price before issue

Theoretical ex rights price
In this example, the bonus fraction would therefore be
5/4.5

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 Rights Issue
Step 1 Calculate theoretical ex rights price (TERP)

Step 2 Bonus fraction

Step 3 Weighted average number of shares (WANS)

You would draw up a table to calculate the weighted

average number of shares. When doing this, the bonus
fraction would be applied from the start of the year up
to the date of the rights issue, but not afterwards.

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Rights Issue
Step 1 Calculate theoretical ex rights price (TERP)

Step 2 Bonus fraction

Step 3 Weighted average number of shares (WANS)

Step 4 Earnings per share (EPS)

You can now calculate earnings per share (PAT/WANS).

It is important to note that if you're asked to restate the
prior year EPS, then this is simply the prior year's EPS
multiplied by the inverse of the bonus fraction

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 Rights Issue
Test your understanding 3
On 31 December 20X1, the issued share capital consisted of 4,000,000
ordinary shares of 25c each. On 1 July 20X2 the company made a rights
issue in the propotion of 1 for 4 at 50c per share and the shares were
quoted immediately before the issue at $1. Its trading results for the last
two years were as follows:

Show the calculation of basic EPS to be presented in the financial

statements for the year ended 31 December 20X2 (including the
comparative figure).

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Diluted earnings per share

• To deal with potential ordinary shares, adjust basic earnings and
number of shares assuming convertibles, options, etc. had
converted to equity shares on the first day of the accounting
period, or on the date of issue, if later.
• DEPS is calculated as follows:
Earnings + notional extra earnings
Number of shares + notional extra shares

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 Diluted earnings per share
• Diluted EPS is calculated by adjusting the net profit due to
continuing operations attributable to ordinary shareholders and
the weighted average number of shares outstanding for the effects
of all dilutive potential ordinary shares
• These securities include:
A separate class of equity shares which at present is not
entitled to any dividend, but will be entitled after some future
date
Convertible loan stock or convertible preferred shares which
give their holders the right at some future date to exchange
their securities for ordinary shares of the company, at a pre-
determined conversion rate
Options or warrants

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Diluted earnings per share

Convertibles
The principles of convertible bonds and convertible preference
shares are similar and will be dealt with together.
If the convertible bonds/preference shares had been
converted:
• the interest/dividend would be saved therefore earnings
would be higher
• the number of shares would increase

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 Diluted earnings per share
Test your understanding 4

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Diluted earnings per share

Options and warrants to subscribe for shares
An option or warrant gives the holder the right to buy shares at
some time in the future at a predetermined price.
Cash does enter the entity at the time the option is exercised, and
the DEPS calculation must allow for this.
The total number of shares issued on the exercise of the option or
warrant is split into two:
• The number of shares that would have been issued if the cash
received had been used to buy shares at fair value (using the
average price of the shares during the period)
• The remainder, which are treated like a bonus issue (i.e. as having
been issued for no consideration).[*]
[*] The number of shares issued for no consideration is added to
the number of shares when calculating the DEPS.

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 Diluted earnings per share
Options and warrants to subscribe for shares
On exercise:
• DEPS calculation must allow for cash received
• No effect on the earnings, therefore no adjustment to earnings is
required

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Diluted earnings per share

Test your understanding 5

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 Diluted earnings per share
Example – Diluted EPS
In 20X7 Farrah Co had a basic EPS of 105c based on earnings of
$105,000 and 100,000 ordinary $1 shares. It also had in issue
$40,000 15% convertible loan stock which is convertible in two
years' time at the rate of 4 ordinary shares for every $5 of stock. The
rate of tax is 30%.
Required: Calculate the diluted EPS

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Diluted earnings per share

SOLUTION
Diluted EPS is calculated as follows.
• Step 1: Number of shares: the additional equity on conversion of
the loan stock will be 40,000 × 4/5 = 32,000 shares.
• Step 2 : Earnings: Farrah Co will save interest payments of $6,000
(40,000 x 15%) but this increase in profits will be taxed. Hence the
earnings figure may be recalculated: (105,000 + (6,000 x 70%)) =
$109,200
• Step 3: Calculation: Diluted EPS = $109,200/132,000 = 82.7c
• Step 4: Dilution: the dilution in earnings would be 105c - 82.7c =
22.3c per share.

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 Importance of EPS
Price earnings ratio
The EPS figure is used to compute the major stock market indicator
of performance, the price earnings ratio (P/E ratio). The calculation is
as follows:
Market value of shares
P/E ratio =
EPS

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Importance of EPS
Although EPS is based on profit on ordinary activities after taxation,
the trend in EPS may be a more accurate performance indicator than
the trend in profit,
EPS:
• Measures performance from the perspective of investors and
potential investors
• Shows the amount of earnings available to each ordinary
shareholder, so that it indicates the potential return on individual
investments

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 Importance of EPS
DEPS is important for the following reasons:
• It shows what the current year’s EPS would be if all the dilutive
potential ordinary shares in issue had been converted
• It can be used to assess trends in past performance
• In theory, it serves as a warning to equity shareholders that the
return on their investment may fall in future periods

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Limitation of EPS
• It does not take account of inflation. Apparent growth in earnings
may not be real.
• It is based on historic information and therefore it does not
necessarily have predictive value.
• An entity’s earnings are affected by the choice of its accounting
policies. Therefore it may not always be appropriate to compare
the EPS of different companies.
• DEPS is only an additional measure of past performance despite
looking at future potential shares.

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 Presentation and disclosure of EPS
• The amounts used as the numerators in calculating basic and
diluted EPS, and a reconciliation of those amounts to the net profit
or loss for the period
• The weighted average number of ordinary shares used as the
denominator in calculating basic and diluted EPS, and a
reconciliation of these denominators to each other

An entity may present alternative EPS figures if it wishes.

The weighted average number of shares as calculated under IAS 33
must be used.
A reconciliation must be given if necessary between the
component of profit used in the alternative EPS and the line item
for profit reported in the statement of profit or loss and other
comprehensive income.
Basic and diluted EPS must be shown with equal prominence

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PRACTICE QUESTIONS

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091 266 1988

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 Chapter
19 Interpretation of Financial Statements

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

454

Needs for ratio analysis

FS Key ratios Compare

Better understanding

Making Economic Decision!

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 Key Ratios
2.1 Profitability and 2.3 Liquidity, Gearing /
Return Leverage and Working
Capital
•Gross margin •Current ratio
•Net margin •Quick ratio
•Receivable collection period
•Return on capital
•Payable payment period
employed (ROCE) •Inventory turnover period
•Asset turnover •Debt ratio
•Gearing / Leverage ratio
•Interest cover
• Dividend cover
2.2 Shareholder Ratio • Dividend yield
• Dividend per share
• EPS
• P/E
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2.1 Profitability and Return

Gross margin Net margin ROCE Asset turnover

Example

Formula Gross Profit Net Profit ABC Co.

The Statement of comprehensive
Sales Sales income for the year ended
31.12.2013
Normally, Being shown as %
Sale 1.000
COGS (700)
G&A exp (500)

Meaning How much the business earns from Gross margin: 30%
sales of $ 100 Net margin: (20%)
 Gross margin  positive  still
be good.
The ability of generating profit from  However, net margin  negative
sales  the company loss suffering
from G&A exp  indicator for
correctGIANG
action
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 2.1 Profitability and Return

Gross margin Net margin ROCE Asset turnover

Formula Profit before interest and taxation (PBIT) Usage:

Compare:
Capital employed
• The change in ROCE from one
year to the next for comparison
Capital employed = Shareholder’s equity + Non- • The ROCE being earned by other
current liabilities (or total asset – current
companies for comparison
liabilities)
• Compare with current market
PBIT = profit before tax + interest charges on
long-term loan borrowing rates to assess the
performance of the Co and the
Meaning How much the business earns from capital efficiency in using the borrowing
of $ 100 resources

To assess profits or profit growth by assess

the amount of fund (capital) that were
employed in making the profits.

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2.1 Profitability and Return

ROE (Return on
Gross margin Net margin equity) Asset turnover

Profit after tax and preference dividend (PAID)

Formula

Ordinary share capital or other equity

Meaning This ratio gives a more restricted view

of capital than ROCE, but it is based on
the same principles.

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 2.1 Profitability and Return

Gross margin Net margin ROCE Asset turnover

Profit Sales
Formula Sales ROCE = ×
Sales Capital employed
Capital employed

Gross margin Assets turnover

 To increase ROCE  increase

Gross margin or Assets turnover

Meaning How much the business generate Revenue Note for comment on these ratios:
• A high profit margin  sales prices are high
from capital of $ 1.
 sales turnover will be depressed  asset
turnover will be lower
The turnover of assets participating in the • A high asset turnover means the company is
business cycle. generating a lot of sales and it might have to
keep its prices down  low profit margin.

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2.2 Shareholder Ratios

PAT and Pref. Dividend

Dividend cover =
Ordinary share dividend
• This is the number of times the current year's dividend could have
paid out of the current year's profit available to ordinary
shareholders.
• A high figure indicates high levels of security. In other words, profits
in future years could fall substantially and the company would still
be able to pay the current level of dividends.
• An alternative view of a high dividend cover is that it indicates that
the company operates a low dividend distribution policy..

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 2.2 Shareholder Ratios

Dividends per share

Dividend yield =
Stock price
Total dividends
Dividend per share =
Number of shares outstanding
2000 2001 2002
Market price per share (given) 1188 863 780
Dividend per share 22.5 26.5 32.1
Dividend yield 1.89% 3.07% 4.12%

It is a crude measure of the return to shareholders, but it does

ignore capital growth which is often much higher than the
return for dividends.
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2.2 Shareholder Ratios

PAT & Preference Dividend
EPS =
Weighted averages no. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

EPS is basically the earnings available for distribution divided by the number
of shareholders in issue. In isolation, this ratio is meaningless for inter-
company comparisons. Its major usefulness is as part of the P/E ratio, and as a
measure of profit trends.

Price earnings ratio

The EPS figure is used to compute the major stock market indicator
of performance, the price earnings ratio (P/E ratio). The calculation is
as follows:
Market value of shares
P/E ratio =
EPS

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 2.2 Shareholder Ratios

2000 2001 2002

P/E ratio (times) 26.8 16.0 12.0

Can be useful for assessing the relative risk of an investment

(expectation of investor). Say the price of a company's shares is £2.40,
and its last reported EPS was 20p. It would have a P/E ratio of 12.

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2.3 Liquidity, Gearing/Leverage and Working Capital

Long-term Solvency

Debt ratio Gearing / Leverage

Formula Total debts Gearing

Debt ratio =
Total assets

Total long−term debt

Capital gearing =
Shareholder’s equity + total long−term debt

 Measure the % of debt in the total

capital employed (equity + debt).
Meaning Assess how much the company owes in  The high gearing ratio indicates reliance
relation to its size on debt for financing.
 More debts  more interest costs 
50% is a helpful benchmark as a safe more difficult to earn sufficient profit to
limit to debt pay for such interest.
 Normally  >50%  high-geared

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 2.3 Liquidity, Gearing/Leverage and Working Capital
Long-term Solvency

Debt ratio Gearing / Leverage

Formula Total debts Leverage

Debt ratio =
Total assets

Shareholder’s equity Shareholder’s equity

Leverage = =
Shareholder’s equity + total long−term debt Total assets – current liabilities

Leverage  converse of gearing.

Meaning Assess how much the company owes in  measures the proportion of total assets
relation to its size financed by equity, and which may be called
the equity to assets ratio.

 Gearing ratio + Leverage ratio = 100%

50% is a helpful benchmark as a safe
limit to debt Gearing/leverage  degree of financial
independence of the entity

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2.3 Liquidity, Gearing/Leverage and Working Capital

Formula Meaning

Profit before interest and tax  ability of profit to cover for interest
Interest Cover Interest charges cost.
 Low interest cover + high gearing
ratio  high financial risk (bankruptcy).

Current assets  ability to repay current debts due

Current ratio =
Current ratio Current liabilities from current assets.
 The ideal ratio is 1:1 and excess of 1
should be expected, but it will
depend on the industry

Current assets − inventory  Test of the immediate ability to

Quick ratio/ acid Current liabilities repay debt as it takes time to convert
test ratio stock into cash.
 The ideal ratio is 0.8:1, but will vary
depends on industry.

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 2.3 Liquidity, Gearing/Leverage and Working Capital
Formula Meaning

Trade receivable  Time from sales to the time payment is

Receivable ×365 days collected from debtor.
Sales
Collection  If the period is lengthening compared
with last year, it may indicate the relaxed
Period debt collection policy of the company to
encourage sales (or indication of bad
debts).

Trade accounts payable  the time from purchase of stock until

Payable × 365 days payment to supplier.
Purchases
Payment Period  If the period is lengthen compared with
last year  the company can obtain
better payment terms in dealing with
suppliers

Inventory  the time from stock purchase to the

× 365 days
Inventory Cost of Sales time it is sold.
Turnover Period  If the period is lengthen from year to
year, the reason may be slow stock
turnover, stock are out-of-fashion, in the
mature or decline phase etc.

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2.3 Liquidity, Gearing/Leverage and Working Capital

Formula Meaning

Sales
Receivable AR
Turnover

To count circles of

P𝐮𝐫𝐜𝐡𝐚𝐬𝐞/𝐂𝐎𝐆𝐒 working capital
AP turnover AP

COGS
Inventory Inventory
Turnover

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 2.3 Liquidity, Gearing/Leverage and Working Capital
Example 1
You are given the following information about Company R:
At 31 December Year 6
$000
Total assets 5,800
Share capital 1,200
Reserves 2,400
3,600
Long-term liabilities (Bank loans) 1,500
Current liabilities 700
5,800
For the year to 31 December Year 6 $000
Profit before interest and taxation 700
Interest (230)
470
Taxation (140)
Profit after taxation 330

Required: Use this data to calculate:

• the gearing ratio at 31 December Year 6
• the interest cover in Year 6.

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3.Limitation of ratio analysis

It does not make sense when
Differences in accounting policy, estimation…
comparing with others.

It is possible to calculate the same ratio in

different ways. Comparisons can be misleading if
For example, there are several variations of return different calculations are used.
on capital employed (ROCE) and gearing.

Ratios can only indicate possible strengths or They are not easy to interpret,
weaknesses in financial position and financial and changes in financial ratios
performance. They might raise questions about over time might not be easy to
performance, but do not provide answers. explain.

Using historical information Do not reflect future transactions

or events

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 3.Limitation of ratio analysis
Window dressing, Profit
Creative accounting smoothing…  manipulate
figures  inaccurate ratios

Related party relationships and transactions Not arm’s length transaction.

Misleading if the business is

Using figures in the statement of financial seasonal
position

Non – financial information Ratio analysis just uses financial

i.e. Brief of entity’s strategy, objectives, key information while there are a lot
business risks, key relationship with other of non-financial information that
entities…. is easier to understand & useful.
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4.Interpretation
Approach to interpretation

 Identify user and format required for solution

 Read question and analyse data
- Look for obvious changes/differences in the figures (no ratio calculations
get, but can consider % movements year on gear)
 Calculate keg ratios as required by the question
 Write up your answer summarising performance and position:
- Structured using your categories
- Comment on main features first
- Then bring in relevant ratios to support your arguments
- Suggest reasons for key changes
- Use any information given in the question!
 Reach a conclusion

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 4.Interpretation
Interpretation scenarios in the exam

The Financial Reporting examining team has produced several technical

articles to help students improve their performance in this area. You should
read the articles titled “Tell me a story”, “How to improve your answer to
interpretation questions” and “Financial statements interpretation” which can
be found on the ACCA website (wvm.accaglobal.com). The articles clearly
indicate that there are six different types of interpretation question you may
be faced with in Section C of the exam. Key points relating to each type of
question are provided in the sections below.

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4.Interpretation
Interpretation scenarios in the exam

- Comparison of one entity over two periods

- Comparison of two entities in the same period
- Comparison of an entity with the sector averages
- Analysis of Consolidated financial statements — acquisition of a subsidiary
- Analysis of Consolidated financial statements — disposal of a subsidiary
- Analysis of Cash flow information
- Analysis of other (including non-financial) information

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 4.Interpretation
Stakeholder perspectives

Stakeholder Potential interest

 Performance of management during the gear
Shareholders
 Decision to buy, hold or sell shares
 Future growth and profit potential
Potential investors
 Investment decision
Banks and capital  Ability to pay existing interest and loan capital
providers  Decision whether to grant further loons
 Company stability ag an employer
Employees
 Wage negotiation
 Weak performing areas that need attention
Management
 Whether targets met
Suppliers  Credit worthiness as a customer
 Statistics
Government
 Decision whether to awardGIANG
a grant
HA ACCA | 476

476

PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

477

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477
 Chapter
21 STATEMENT OF CASH FLOW

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

478

IAS 7 – Cash Flow Statement

OBJECTIVE
• Provide to users of financial statement about an entity’s ability to
generate cash and cash equivalents, as well as indicating the cash
needs of the entity.

SCOPE

• A cash flow statement should be presented as an integral part of

an entity’s financial statement. All entities are required by the
standard to produce a cash flow statement.

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 IAS 7 – Cash Flow Statement
KEY DEFINITION
Operating activities
• are the principal revenue-producing activities of the enterprise
and other activities that are not investing or financing activities

Investing activities
• are the acquisition and disposal of non-current assets and other
investments not included in cash equivalents (loans and other
borrowings)

Financing activities
• are activities that result in changes in the size and composition
of the equity capital and borrowing of the entity

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IAS 7 – Cash Flow Statement

BASIC PRINCIPLES for prepare CF
OPENING BALANCE
– Cash & Cash equivalent

Operating CF

Cash Flows in the period

Investing CF
(MOVEMENT)

Financing CF

ENDING BALANCE
– Cash & Cash equivalent

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 Cash and Cash equivalents
Cash Equivalents
• Not held for investment or other long-term purposes, but rather
to meet short-term cash commitments.
• Example: Term deposit (2 months)

An investment’s (loan, borrowing, bank

overdraft…) maturity date should normally be
three months from its acquisition date (noted:
equity investment like shares in other companies
 NOT cash equivalent)

NOTE for CF presentation: Movements between

different types of cash and cash equivalent
 NOT INCLUDED in cash flows. i.e. Term
deposits matured  transfer to bank accounts
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Presentation of Cash Flow Statement

2 Methods

DIRECT INDIRECT
(not use for current exam)

Disclose major classes of Net profit or loss is adjusted for

gross cash receipts and the effects of transactions of a
gross cash payments non-cash nature, any deferrals
or accruals, items of income or
(Rarely used in practice as expense associated with
costly to prepare) investing or financing cash flows

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 Presentation of Cash Flow Statement
Basis for Indirect method
Example 1: Example 2: ABC Co. Example 3: ABC Co.
ABC Co. Cash sale: 100 Cash sale: 100
Cash sale: 100 Expense (paid): (60) Expense (paid): (60)
Expense (paid): 60 Depreciation: (10) Depreciation: (10)
Profit: 40 = Net Profit: 30 Profit: 30
movement of cash Net CF = 100 – 60 = AR-OB: 15
account 40 = 30 + 10 AR – EB: 10
(depreciation) Net CF = 100 – 60 + (15-
Reason: 10) = 45 = 30 + 10
Depreciation  (depreciation) + 5
Non-cash items (change in AR balance)
(i) Adjust non-cash items from (ii) Add changes in working capital
Net profit + NCA + Equity (issue shares…)

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Presentation of Cash Flow Statement

3 Cash Flows for presentation
OPERATING INVESTING FINANCING
ACTIVITIES ACTIVITIES ACTIVITIES
• Cash receipts from • Cash payments to acquire • Cash proceeds from
the sale of goods NCA issuing shares
and the rendering • Cash receipts from • Cash payments to
services Disposal of FA owners to acquire
• Cash receipts from • Cash payments to acquire or redeem the
royalties, fees, shares or debentures of enterprise’s shares
commission and other enterprises • Cash proceeds from
other revenue • Cash receipts from sales issuing debentures,
• Cash payments to of shares or debentures loan, notes, bonds,
suppliers for goods of other enterprises mortgages and
and services • Loans made to other other short or long-
parties term borrowings
• Cash payment to
• Cash receipts from the
and on behalf of • Cash repayments of
repayment of loans made
employees amount borrowed
to other parties
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 Format of CF – Direct method
$ $
Cash flows from operating activities
Cash receipts from customers xxxxxxx
Cash paid to supplier and employees xxxxxxx
Cash generated from operations xxxxxxx
Interest paid xxxxxxx
Income taxes paid xxxxxxx
Net cash from operating activities xxxxxxx
Cash flows from investing activities
Purchase of property, plant and equipment xxxxxxx
Proceeds from sale of equipment xxxxxxx
Interest received xxxxxxx
Dividend received xxxxxxx
Net cash used in investing activities xxxxxxx
Cash flows from financing activities
Proceeds from issuance of share capital xxxxxxx
Proceeds from long-term borrowings xxxxxxx
Dividends paid * xxxxxxx
xxxxxxx
Cash flows from financing activities xxxxxxx
Cash receipts from shares issued xxxxxxx
Long term loan paid xxxxxxx
Net cash from financing activities
Net increase in cash and cash equivalent xxxxxxx
Cash and cash equivalent at beginning of period xxxxxxx
Cash and cash equivalent at end of period xxxxxxx
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Format of CF – Indirect method

$’m/000 $’m/000
Cash flows from operating activities
Non-Cash PL items:
Net profit before taxation XXX • Depreciation/Amortization
Adjustment for: • Provisions/Allowance
Depreciation XX
Investment income (XX) To classify  investing activities
Interest expense XX
Operating profit before working XXX To present separately 
changes interest paid as required by IAS
Increase/Decrease in trade and (XX)/XX Change in WC
other receivables Increase in trade and other receivables
Increase/Decrease in inventories (XX)/XX Subtract
Increase in inventory Subtract
Increase in trade payables Add
Increase/Decrease in trade XX/(XX) Decrease in trade and other receivables Add
Decrease in inventory Add
payable Decrease in trade payables Subtract
Cash generated from operations XXX Note: AR/AP excluded balance related to Income
Interest paid (XX) tax & interest payables as tax paid & interest
paid  presented as separate lines.
Income taxes paid (XX)
Net cash from operating activities XXX

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 Format of CF – Indirect method
Cash flows from investing activities
Purchase of property, plant and (XX)
equipment
Proceeds from sale of equipment XX
Interest received XX
Dividend received XX
Net cash used in investing activities XXX
Cash flows from financing activities May be
Proceeds from issuance of share capital XX presented as
Proceeds from long-term borrowings XX operating CF
Dividends paid * (XX)
Net cash used in financing activities XXX
Net increase in cash and cash equivalent XXX

Cash and cash equivalent at beginning of XX

period (note)
Cash and cash equivalent at end of period XX
(note)

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Cash Flow Statement

Example: Present CF with the following information

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 Cash Flow Statement
Example: Present CF with the following information

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Suggested steps to prepare a CFS

Step 1 Set out the preformed of CFS (as mentioned above)

Step 2 Begin with the reconciliation of profit before tax to

net cash from operating activities as far as possible

Step 3 Calculate the cash flow figures for dividends paid,

purchase or sale of NCAs, issues of shares and
repayment of loans

Step 4 Calculate the net profit to net CF from operating

activities (if the profit figure is not given)

Step 5 Complete the statement

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 Reporting requirements
General GROSS BASIS

Special Case NET BASIS

Cash receipts and payments on behalf of customers when

the cash flows reflect the activities of the customer rather
than those of the entity (funds held for customers by an
investment entity)

Cash receipts and payments for items in which the

turnover is quick, the amounts are large, and the
maturities are short (the purchase and sale of
investments)

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FC Cashflows
• FC cash flows arising from transactions shall be recorded in an
entity’s functional currency by applying to the foreign currency
amount the exchange rate between the functional currency and the
foreign currency at the date of the cash flow.
• The cash flows of a foreign subsidiary shall be translated at the
exchange rates between the functional currency and the foreign
currency at the dates of the cash flows.
• Unrealized gains and losses arising from changes in foreign currency
exchange rates are not cash flows
• The effect of exchange rate changes on cash and cash equivalents
held or due in a foreign currency is reported in the statement of
cash flows in order to reconcile cash and cash equivalents at the
beginning and the end of the period

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 Interest and Dividends
• Cash flows from interest and dividends received and paid shall each
be disclosed separately.
• Each shall be classified into three activities as the case may be.
• The total amount of interest paid during a period is disclosed in the
statement of cash flows whether it has been recognised as an
expense in profit or loss or capitalised in accordance with IAS 23
Borrowing Costs.

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Interest and Dividends

• Interest paid and interest and dividends received are usually
classified as operating cash flows for a financial institution.
• There is no consensus on the classification of these cash flows for
other entities.
• Interest paid and interest and dividends received may be classified
operating cash flows because they enter into the determination of
profit or loss.
• On the other hand, interest paid and interest and dividends received
may be classified as financing cash flows and investing cash flows
respectively, because they are costs of obtaining financial resources
or returns on investments.

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 Income Taxes
• 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

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Non cash items

• Investing and financing transactions that do not require the use of
cash or cash equivalents shall be excluded from a statement of cash
flows.
• Such transactions shall be disclosed elsewhere in the financial
statements in a way that provides all the relevant information about
these investing and financing activities.

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 Other disclosures
• Restrictions on the use of or access to any part of cash equivalents;
• Amount of indrawn borrowing facilities which are available; and
• Cash flows which increased operating capacity compared to cash
flows which merely maintained operating activities

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Advantages and criticism of cash flow accounting

ADVANTAGES
• Survival in business depends on the ability to generate cash. Cash flow
accounting directs attention towards this critical issue
• Cash flow is more comprehensive than “profit” which is dependent on
accounting conventions and concepts
• Creditors (long and short-term) are more interested in an enterprise’s
ability to repay them than in its profitability
• Cash flows reporting provides better mean of comparing the result of
different companies rather than traditional profit reporting
• Management: information for decision making (relevant cost, future
cash…)
• Shareholder/auditor: provide satisfactory basis for stewardship
accounting
• Cash flow forecasts are easier to prepare and more useful than profit
forecasts
• Accruals concept is confusing and cash flows are more easily understood
• Forecast can subsequently be monitored by compare actual cash flow
against the forecast.
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 Advantages and criticism of cash flow accounting

Criticism of preparing cash flow

• Cash equivalent  not easy to distinguish and unrealistic (like an
investment has to be within three months of maturity).
• No interpretation of the CFS is provided within the accounts.
• Non-cash transactions (bonus issue) are not highlighted, they are
of interest to users as they will impact future cash flows.

GIANG HA ACCA | 500

500

PRACTICE QUESTIONS

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

501

251
501
 Past Exam
• Q3. Jun, Dec 2013

GIANG HA ACCA | 502

502

Chapter
22 FOREIGN CURRENCY

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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503
 IAS 21 - The Effects of Changes in Foreign Exchange Rates
Key Definitions
• Foreign currency: A currency other than the functional currency of the
entity
• Functional currency: the currency pf the primary economic environment in
which the entity operates.
• Presentation currency: The currency in which the financial statements are
presented.
• Exchange rate: The ratio of exchange for two currencies.
• Exchange difference: The difference resulting form translating a given
number of units of one currency into another currency at different
exchange rates.
• Closing rate: The spot exchange rate at the year – end date.
• Spot exchange rate: The exchange rate for immediate delivery.
• Monetary items: Units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.

GIANG HA ACCA | 504

504

IAS 21 - The Effects of Changes in Foreign Exchange Rates

Functional Currency
• Each entity – whether an individual company, a parent of a group, or an
operation within a group (such as a subsidiary, associate or branch) –
should determine its functional currency and measure its results and
financial position in that currency.

Factors to consider
a. The currency that mainly influence sales prices for goods and services
(often the currency in which prices are denominated and settled)
b. The currency of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and services
c. The currency that mainly influences labour, material and other costs of
providing goods or services (often the currency in which prices are
denominated and settled)

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 IAS 21 - The Effects of Changes in Foreign Exchange Rates
Foreign currency transactions
1. Conversion
• Conversion is the process of exchanging amounts of one foreign currency
for another.

2. Translation
Foreign currency translation, as distinct form conversion, does not involve
the cat of exchanging one currency for another. Translation is required at
the end of an accounting period when a company still holds assets or
liabilities in its statement of financial position which were obtained or
incurred in a foreign currency.
These assets or liabilities might consist of:
a. An individual home company holding individual assets or liabilities
originating in a foreign currency “deal”
b. An individual home company with a separate branch of the business
operating abroad which keeps its own books of account in the local
currency.
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506

IAS 21 - The Effects of Changes in Foreign Exchange Rates

Foreign currency transactions
1. Conversion
• Conversion is the process of exchanging amounts of one foreign currency
for another.

Example:
1.5: Purchase goods from supplier: 10 MVND, Forex = 20.000 VND/ USD
Functional currency: USD
Entry: Dr Purchase/Cr AP: 10M/20k = 500 USD

When payment, Forex =24.000 VND/USD

Entry: Dr AP: 500 USD
Cr : 10M/24k=417 USD
Cr: Gain on conversions: 83 USD

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 IAS 21 - The Effects of Changes in Foreign Exchange Rates
Accounting for Forex transactions

Initial measurement
• IAS 21 states that a foreign currency transaction should be recorded,
on initial recognition in the functional currency, by applying the
exchange rate between the reporting currency and the foreign
currency at the date of the transaction to the foreign currency
amount.
• An average rate for a period may be used if exchange rates do not
fluctuate significantly.

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508

IAS 21 - The Effects of Changes in Foreign Exchange Rates

Accounting for Forex transactions

Reporting at subsequent year ends

• It is important to distinguish between monetary and non – monetary
items. Monetary items involve the right receive of the obligation to
deliver a fixed or determinable amount of currency. This would
include receivables, payables, loans etc. Non – monetary items would
be items such as non-current assets and inventories.
• The following rules apply at each subsequent year end.
a. Report foreign currency monetary items using the closing rate
b. Reporting non-monetary items (eg non-current assets, inventories)
which are carried at historical cost in a foreign currency using the
exchange rate at the date of the transaction (historical rate)
c. Reporting non-monetary items which are carried at fair value in a
foreign currency using the exchange rates that exists when the
values were measured.
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 IAS 21 - The Effects of Changes in Foreign Exchange Rates
Accounting for Forex transactions

Recognition of exchange differences

There are two situations to consider:
a. The transaction is settled in the same period as that in which it
occurred: all the exchange difference is recognized in that period.
b. The transaction is settled in a subsequent accounting period: the
exchange difference recognized in each intervening period up to period
of settlement is determined by the change in exchange rates during
that period.
In other words, where a monetary item has not been settled at the end of
a period, its should be restated using the closing exchange rate and any
gain or loss taken to profit or loss.

GIANG HA ACCA | 510

510

IAS 21 - The Effects of Changes in Foreign Exchange Rates

Accounting for Forex transactions

Recognition of exchange differences

• Exchange differences occur when there is a change in the exchange rate
between the transaction date and the date of settlement of monetary
items arising form a foreign currency transaction.
• Exchange differences arising on the settlement of monetary items
(receivables, payables, loans, cash in a foreign currency) or on translating
an entity’s monetary items at rates different form those at which they
were translated initially, or reported in previous financial statements,
should be recognized in profit or loss in the period in which they arise.

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 Chapter
22 ACCOUNTING FOR INFLATION

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

512

Alternative models of Historical cost

Historical cost vs. Current value

The move towards current value accounting has already taken a number of
steps. Entities are now permitted to revalue non-current assets such as
land and buildings in line with market value and financial assets and
liabilities such as securities and investments cab be carried at fair value,
defined in IFRS 13 as: “ The price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.”

Advantage? Disadvantages?

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 Alternative models of Historical cost
Current purchasing power (CPP)
• CPP accounting is a method of accounting for general (not specific)
inflation, if does so by expressing asset values in a stable monetary unit,
the $ of current purchasing power.
Example:
Rice and Price set up in business on 1 January 20X5 with no non-current assets, and
cash of $5,000. On 1 January they acquired inventories for the full $5,000, which
they sold on 30 June 20X5 for $6,000. On 30 November they obtained a further
$2,100 of inventory on credit. The index of the general price level gives the following
figures:
Date Index
1 January 20X5 300
30 June 20X5 330
30 November 20X5 350
31 December 20X5 360
Required: Calculate the CPP profits (or losses) of Rice and Price for the year to 31
December 20X5
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Alternative models of Historical cost

Current purchasing power (CPP)
• CPP accounting is a method of accounting for general (not specific)
inflation, if does so by expressing asset values in a stable monetary unit,
the $ of current purchasing power.
Answer:

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 Alternative models of Historical cost
Current cost accounting (CCA)
• CCA is based on a physical concept of capital maintenance. Profit is
recognized after the operating capability of the business has been
maintained.

Value to the business (deprival value)

Current cost accounting (CCA) reflects an approach to capital maintenance
based on maintaining the operating capability of a business. The
conceptual basis of CCA is that the value of assets consumed or sold, and
the value of assets in the statement of financial position, should be stated
at their value to the business (also known as “deprival value”).
• The deprival value of an asset is the loss which a business entity
would suffer if it were deprived of the use of the asset.

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Alternative models of Historical cost

Current cost accounting (CCA)
• CCA is based on a physical concept of capital maintenance. Profit is
recognized after the operating capability of the business has been
maintained.

Value to the business (deprival value)

Value to the business, or deprival value, can be any of the following values
a. Replacement cost: in the case of non-current assets, it is assumed that
the replacement cost of an asset would be its net replacement cost
(NRC), its gross replacement cost minus an appropriate provision for
depreciation to reflect the amount of its life already “used up”.
b. Net realizable value (NRV): what the asset could be sold for, net of any
disposal costs.
c. Economic value (EV), or value in use: what the existing asset will be
worth to the company over the rest of its useful life.

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 Alternative models of Historical cost

Concepts of capital maintenance and the determination of

profit
a. Under a financial concept of capital, such as invested money or
invested purchasing power, capital is the net assets or equity. The
financial concept of capital is adopted by most entities.
b. Under a physical concept of capital, such as operating capability,
capital is the productive capacity of the entity based on, for example,
units of output per day.

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Chapter
23 SPECIALISED, NOT-FOR-PROFIT AND
PUBLIC SECTOR ENTITIES

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 Non-for-Profit organisations
Not-for-profit and public sector entities:
1. Central government departments and agencies
2. Local or federal government departments
3. Publicly funded bodies providing healthcare and social housing
4. Further and higher education institutions
5. Charitable bodies

The first four are public sector entities. Charities are private not-for-profit
entities.

Until recently, public sector accounts were prepared on a cash basis. A

transition is still in progress which will get them operating on an accruals
basis, in line with normal practice in the private sector.

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Chapter
24 REVISIONS

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 Overall – F7 – Financial Reporting
Main capabilities?

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Overall – F7 – Financial Reporting

Main capabilities?

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 Overall – F7 – Financial Reporting
Main capabilities?

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Overall – F7 – Financial Reporting

A. The conceptual and regulatory
framework for financial reporting

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525
 Overall – F7 – Financial Reporting
A. The conceptual and regulatory
framework for financial reporting

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526

Overall – F7 – Financial Reporting

A. The conceptual and regulatory
framework for financial reporting

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 Overall – F7 – Financial Reporting
A. The conceptual and regulatory
framework for financial reporting

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

B. Accounting for transactions in
financial statements

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 Overall – F7 – Financial Reporting
B. Accounting for transactions in
financial statements

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Overall – F7 – Financial Reporting

C. Analysing and interpreting the financial
statements of single entities and groups

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 Overall – F7 – Financial Reporting
C. Analysing and interpreting the financial
statements of single entities and groups

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Overall – F7 – Financial Reporting

C. Analysing and interpreting the financial
statements of single entities and groups

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 Overall – F7 – Financial Reporting
C. Analysing and interpreting the financial
statements of single entities and groups

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Overall – F7 – Financial Reporting

D. Preparation of financial
statements

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 Overall – F7 – Financial Reporting
D. Preparation of financial
statements

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Overall – F7 – Financial Reporting

D. Preparation of financial
statements

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