FAC3702/103/3/2025

FAC3702/103

Tutorial Letter 103/3/2025

Distinctive Financial Reporting

FAC3702

Semesters 1 & 2

Department of Financial Accounting

IMPORTANT INFORMATION
This tutorial letter contains all the tutorial matter of all the learning units. Please
register on myUnisa, activate your myLife e-mail address and make sure that you
have regular access to the myUnisa module website, FAC3702-2025-S1/S2, as
well as your group website.

ii
 CONTENTS
INTRODUCTION iv
LECTURERS AND CONTACT DETAILS ....................................................................................... iv
LEARNING UNIT 4 – IMPAIRMENT OF ASSETS (EXCLUDING CASH-GENERATING ASSETS)
....................................................................................................................... 6
LEARNING UNIT 5 – NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS ............................................................................................. 31
LEARNING UNIT 6 – THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES ........... 70

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Dear Student

INTRODUCTION

Attached please find the following learning units:

• Learning unit 4 – Impairment of assets (excluding cash-generating assets) (IAS 36)

• Learning unit 5 – Non-current assets held for sale and discontinued operations (IFRS 5)
• Learning unit 6 – The effects of changes in foreign exchange rates (IAS 21)

LECTURERS AND CONTACT DETAILS

Use only the following e-mail address for all communication with the lecturers:

FAC3702-25-S1@unisa.ac.za
FAC3702-25-S2@unisa.ac.za

Use only the following telephone numbers for all communication with your lecturers:

Lecturers Office number Telephone number

Ms S Mahintsho Simon Radipere Building 2-58 (012) 429 3111

Mr W Molefe Simon Radipere Building 2-11 (012) 429 4268

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FAC3702
LEARNING UNIT 4
IMPAIRMENT OF ASSETS
(EXCLUDING CASH-
GENERATING ASSETS)
[IAS 36]

Distinctive Financial
Reporting
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LEARNING UNIT 4 – IMPAIRMENT OF ASSETS (EXCLUDING CASH-

GENERATING ASSETS)
LEARNING OUTCOMES
Once you have studied and completed this learning unit, you should be able to do the following:

1. Define the objective and scope of the standard.

2. Apply the definitions.

3. Apply the prescribed indications to assess whether an asset may be impaired, as well as the
timing of impairment tests, with specific reference to intangible assets with an indefinite useful
life and intangible assets not yet available for use.

4. Determine the recoverable amount through measurement of the value in use and the fair value
less costs of disposal.

5. Recognise and measure impairment losses for individual assets other than goodwill.

6. Recognise and measure the reversal of impairment losses for individual assets.

7. Disclose impairment losses and the reversal of impairment losses in the financial statements.

OVERVIEW

A ACCOUNTING TREATMENT

4.1 What is impairment?

4.2 When does impairment take place?

4.2.1 External sources of information – IAS 36.12
4.2.2 Internal sources of information – IAS 36.12
4.2.3 Evidence from internal reporting indicating that an asset may be impaired –
IAS 36.14

4.3 When should impairment be applied?

4.4 How to calculate an impairment loss
4.5 What about goodwill?

4.6 What happens if the asset was impaired in prior years, but it is now worth much more?
4.6.1 External sources of information
4.6.2 Internal sources of information

4.7 Reversal of an impairment loss – individual assets

4.8 Reversal of an impairment loss for goodwill
4.9 What are the tax implications?

B DISCLOSURE
4.10 Disclosure requirements
4.11 Model for disclosure

C COMPREHENSIVE EXAMPLES

D E-TUTOR ACTIVITY
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STUDY

PRESCRIBED:
Gripping Gaap
The relevant chapter

RECOMMENDED:
IFRS - The Annotated IFRS
IAS 36

The standard can be accessed online at https://www.ifrs.org/

A ACCOUNTING TREATMENT

4.1 WHAT IS IMPAIRMENT?

Impairment will occur when the carrying amount of the asset in the books of the entity exceeds the
asset's recoverable amount. This will lead to an impairment loss.

The impairment loss may be reversed if there is any indication that an impairment loss recognised
for an asset in prior years may no longer exist or may have decreased. (Refer to 4.6.)

4.2 WHEN DOES IMPAIRMENT TAKE PLACE?

An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. An
entity should assess at the end of each reporting period whether or not there is any indication that
an asset may be impaired. If there is any such indication, the entity should estimate the recoverable
amount of the asset (IAS 36.08–09).

If there is no indication of a potential impairment loss, then the standard does not require an entity
to make a formal estimate of the recoverable amount.

Irrespective of whether there is any indication of impairment, an entity shall also

• test an intangible asset with an indefinite useful life or intangible asset not yet available for use
for impairment annually by comparing its carrying amount with its recoverable amount
• test goodwill acquired in a business combination for impairment annually

In assessing whether or not there is any indication that an asset may be impaired, an entity should
consider, as a minimum, the following indications:

4.2.1 External sources of information – IAS 36.12

• During the period, an asset's market value has declined significantly more than would be
expected as a result of the passage of time or normal use.
• Significant changes with an adverse effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic or legal environment
in which the entity operates or in the market to which an asset is dedicated.
• Market interest rates or other market rates of return on investments have increased during the
period, and those increases are likely to affect the discount rate used in calculating an asset's
value in use and decrease the asset's recoverable amount materially.
• The carrying amount of the net assets of the reporting entity is more than its market
capitalisation.

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4.2.2 Internal sources of information – IAS 36.12

• Evidence is available of obsolescence of or physical damage to an asset.
• Significant changes with an adverse effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, an
asset is used or is expected to be used. These changes include the asset becoming idle, plans
to discontinue or restructure the operation to which an asset belongs, plans to dispose of an
asset before the previously expected date and reassessing the useful life of an asset as finite
rather than indefinite.
• Evidence is available from internal reporting that indicates that the economic performance of
an asset is, or will be, worse than expected.

4.2.3 Evidence from internal reporting indicating that an asset may be

impaired – IAS 36.14
Evidence from internal reporting indicating that an asset may be impaired includes

• cash flows for acquiring the asset or subsequent cash needs for operating or maintaining it
that are significantly higher than those originally budgeted
• actual cash flows or operating profit or loss flowing from the asset that are significantly worse
than those budgeted
• a significant decline in budgeted net cash flows or operating profit or a significant increase in
budgeted loss, flowing from the assets
• operating losses or net cash outflows for the asset, when current period figures are aggregated
with budgeted figures for the future

This list is not comprehensive.

The concept of materiality applies in identifying whether or not the recoverable amount of an asset
needs to be estimated. For example, if previous calculations show that an asset's recoverable
amount is significantly greater than its carrying amount, the entity need not re-estimate the asset's
recoverable amount if no events have occurred that would eliminate that difference. Similarly,
previous analysis may show that an asset's recoverable amount is not sensitive to one or more of
the indicators of possible impairments (IAS 36.15).

To illustrate the above, if market interest rates or other market rates of return on investment have
increased during the period, an entity is not required to make a formal estimate of an asset's
recoverable amount in the following cases:

• If the discount rate used in calculating the asset's value in use is unlikely to be affected by the
increase in these market rates. For example, an increase in short-term interest rates may not
have a material effect on the discount rate used for an asset that has a long remaining useful
life.
• If the discount rate used in calculating the asset's value in use is likely to be affected by the
increase in these market rates but previous sensitivity analysis of the recoverable amount
shows that
− it is unlikely that there will be a material decrease in the recoverable amount because future
cash flows are also likely to increase (e.g. in some cases, an entity may be able to
demonstrate that it adjusts its revenues to compensate for any increase in market rates), or
− the decrease in the recoverable amount is unlikely to result in a material impairment loss
(IAS 36.16)

If there is an indication that an asset may be impaired, this may indicate that the remaining useful
life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed
and adjusted in accordance with the standard applicable to the asset, even if no impairment loss is
recognised for the asset (IAS 36.17).

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4.3 WHEN SHOULD IMPAIRMENT BE APPLIED?

This standard shall be applied in accounting for the impairment of all assets EXCEPT

• inventories
• construction contracts
• deferred tax assets
• assets arising from employee benefits
• financial assets that are included in the scope of the statement on financial instruments:
disclosure and presentation
• investment property that is measured at fair value
• biological assets related to agricultural activity that are measured at fair value less estimated
point-of-sale costs
• deferred acquisition costs, and intangible assets, arising from an insurer's contractual rights
under insurance contracts
• non-current assets (or disposal groups) classified as held for sale (IAS 36.02)

The recognition and measurement of these assets are dealt with by specific applicable standards.

This standard applies to financial assets classified as

• investments in subsidiaries, associates and joint ventures, as they are excluded from the scope
of the standard on financial instruments: disclosure and presentation (IAS 36.04)
• assets that are carried at revalued amounts in accordance with other standards such as the
revaluation model in IAS 16 Property, plant and equipment (IAS 36.05)

A cash-generating unit (not part of this module)

This is the smallest identifiable group of assets that generates cash inflows from continuing use that
are largely independent of the cash inflows from other assets or groups of assets (IAS 36.06).

Corporate assets (not part of this module)

These are assets other than goodwill that contribute to future cash flows of both the cash-generating
unit under review and other cash-generating units. They include group or divisional assets such as
a building of a headquarters or a division of the entity, EDP equipment or a research centre.
Corporate assets do not generate cash inflows independently of other assets or group of assets (IAS
36.06).

4.4 HOW TO CALCULATE AN IMPAIRMENT LOSS

Step 1: Understand the basic principle

After identifying an asset that may be impaired at the end of the reporting period (refer to 4.2), the
impairment loss must be calculated.

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Definitions
Impairment loss

Carrying amount Recoverable amount

Less
The amount at which an asset is The higher of an asset's fair value less costs
recognised in the statement of financial to sell and its value in use.
position after deducting any
accumulated depreciation (amortisation)
and accumulated impairment losses
thereon (IAS 36.06).

Depreciation (amortisation) Fair value less costs to sell

The systematic allocation of the The amount obtainable from the sale of an
depreciable amount of an asset over its asset in an arm's length transaction between
useful life. Note: in the case of an knowledgeable, willing parties, less the costs
intangible asset, the term "amortisation" of disposal.
is generally used instead of
"depreciation". Both terms have the
same meaning.

Depreciable amount Value in use

The cost of an asset, or other amount The present value of future cash flows
substituted for cost in the financial expected to be derived from an asset.
statements, less its residual value.

Useful life is either Costs of disposal

• the period of time over which an Incremental costs directly attributable to the
asset is expected to be used by the disposal of an asset, excluding finance costs
entity, or and income tax expense. Examples of costs
• the number of production or similar are legal costs, stamp duty, transaction
units expected to be obtained for taxes, costs of removing the asset and direct
the asset by the entity incremental costs to bring an asset into
condition for sale.

Step 2: Calculate the asset's carrying amount

Refer to learning unit 1 of your study material where we discussed the calculation of carrying
amounts in detail.

Step 3: Calculate the asset's recoverable amount

The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use
(IAS 36.18).

It is not always necessary to determine both an asset's fair value less costs to sell and its value in
use. For example, if either of these amounts exceeds the asset's carrying amount, the asset is not
impaired (IAS 36.19).

If there is no reason to believe that an asset's value in use materially exceeds its fair value less costs
to sell, the asset's recoverable amount may be taken to be its fair value less costs to sell. This will
often be the case for an asset that is held for disposal. This is because the value in use of an asset
held for disposal will consist mainly of the net disposal proceeds as the future cash flows from
continuing use of the asset until its disposal are likely to be negligible (IAS 36.21).

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A. Fair value less costs to sell

This is determined by one of the following:

• a binding sale agreement in an arm's length transaction adjusted for incremental costs of
disposal (IAS 36.25)
• if the asset is traded in an active market, the current market price less the costs of disposal
(IAS 36.26)
• based on the best available information of the most recent transaction(s) for similar assets
within the same industry

Note that fair value less costs to sell does not reflect a forced sale unless management is compelled
to sell immediately (IAS 36.27).

B. Value in use

The following elements shall be reflected in the calculation of an asset's value in use (IAS 36.30):

• an estimate of the future cash flows the entity expects to derive from the asset
• expectations about possible variations in the amount or timing of those future cash flows
• the time value of money, represented by the current market risk-free rate of interest
• the price for bearing the uncertainty inherent in the asset
• other factors, such as illiquidity, that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset

Estimating the value in use of an asset involves the following steps (IAS 36.31):

• estimating the future cash inflows and outflows to be derived from the continuing use of the
asset and from its ultimate disposal
• applying the appropriate discount rate to these future cash flows

The elements identified above can be reflected as adjustments either to the future cash flows or to
the discount rate (IAS 36.32).

The basis for estimates of future cash flows in measuring value in use is as follows (IAS 36.33):

• Cash flow projections shall be based on reasonable and supportable assumptions that
represent management's best estimate of the set of economic conditions that will exist over
the remaining useful life of the asset. Greater weight should be given to external evidence.
• Cash flow projections shall be based on the most recent financial budgets/forecasts that have
been approved by management, but shall exclude any estimated future cash inflows or
outflows expected to arise from future restructurings or from improving or enhancing the
asset's performance. Projections based on these budgets/forecasts shall cover a maximum
period of five years, unless a longer period can be justified.
• Cash flow projections beyond the period covered by the most recent budgets/forecasts are
estimated by extrapolating the projections based on the budgets/forecasts using a steady or
declining growth rate for subsequent years unless an increasing rate can be justified.

Management must assess the reasonableness of the assumptions on which its current cash flow
projections are based by examining the causes of differences between past cash flow projections
and actual cash flows.

In using information from financial budgets/forecasts, an entity considers whether or not the
information reflects reasonable and supportable assumptions, and represents management's best
estimates of the set of economic conditions that will exist over the remaining useful life of the asset
(IAS 36.38).

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Estimates of future cash flows shall include

• projections of cash inflows from the continuing use of the asset

• projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and that can be directly attributed, or allocated on a reasonable
and consistent basis to the asset
• net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its
useful life (IAS 36.39)

To avoid double-counting, estimates of future cash flows do not include

• cash inflows from assets that generate cash inflows from continuing use that are largely
independent of cash inflows from the asset under review (e.g. receivables)
• cash outflows that relate to obligations that have already been recognised as liabilities (e.g.
payables, pensions and provisions) (IAS 36.43)

Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash
flows shall not include estimated cash inflows or outflows that are expected to arise from

• a future restructuring to which an entity is not yet committed

• improving or enhancing the asset's performance (IAS 36.44)

Estimates of future cash flows shall not include

• cash inflows or outflows from financing activities

• income tax receipts or payments (IAS 36.50)

The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its
useful life shall be the amount that the entity expects to obtain from the disposal of the asset in an
arm's length transaction between knowledgeable willing parties after deducting the estimated costs
of disposal (IAS 36.52).

C. Discount rate

The discount rate (or rates) shall be a pre-tax rate that reflects current market assessments of

• the time value of money

• the risk specific to the asset for which future cash flow estimates have not been adjusted
(IAS 36.55)

A rate that reflects current market assessments of the time value of money and the risks specific to
the asset is the return that investors would require if they were to choose an investment that would
generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to
derive from the asset. This rate is estimated from the rate implicit in current market transactions for
similar assets or from the weighted average cost of capital of a listed entity that has a single asset
(or a portfolio of assets) similar in terms of service potential and risks to the asset under review.
However, the discount rate used to measure an asset's value in use shall not reflect risks for which
the future cash flow estimates have been adjusted (IAS 36.56).

When an asset-specific rate is not directly available from the market, an entity uses surrogates to
estimate the discount rate (IAS 36.57).

As a starting point in making such an estimate, the entity might take the following into account (IAS
36 Appendix A.A17):

• the entity's weighted average cost of capital determined using techniques such as the capital
asset pricing model

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• the entity's incremental borrowing rate

• other market borrowing rates

These rates are adjusted

• to reflect the way that the market would assess the specific risks associated with the projected
cash flows
• to exclude risks that are not relevant to the projected cash flow

Consideration is given to risks such as country risk, currency risk, price risk and cash flow risk (IAS
36 Appendix A.A18).

The discount rate is independent of the entity's capital structure and the way the entity financed the
purchase of the asset (IAS 36 Appendix A.A19).

An entity normally uses a single discount rate for estimating an asset's value in use. However, an
entity uses separate discount rates for different future periods where value in use is sensitive to a
difference in risk for different periods or to the term structure of interest rates (IAS 36 Appendix
A.A21).

Step 4: Recognise the impairment loss in the financial statements

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is referred to as an
impairment loss (IAS 36.59).

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at a
revalued amount under another standard (e.g. in accordance with the revaluation model in IAS 16
Property, plant and equipment). Any impairment loss of a revalued asset shall be treated as a
revaluation decrease under that other standard (IAS 36.60).

An impairment loss on a non-revalued asset is recognised in profit or loss. However, an impairment

loss on a revalued asset is recognised in other comprehensive income to the extent that the
impairment loss does not exceed the amount in the revaluation surplus for that same asset. Such
an impairment loss on a revalued asset reduces the revaluation surplus for that asset (IAS 36.61).

When the amount estimated for an impairment loss is greater than the carrying amount of the asset
to which it relates, an entity recognises a liability if, and only if, it is required by another standard (IAS
36.62). This, however, falls outside the scope of this module.

After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall
be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value
(if any), on a systematic basis over its remaining useful life (IAS 36.63).

If an impairment loss is recognised, any related deferred tax assets or liabilities are determined in
accordance with IAS 12 Income taxes, by comparing the revised carrying amount of the asset with
its tax base (IAS 36.64).

Journal entry for asset that is carried at cost less accumulated depreciation

Dr Cr
Date Description R R
Impairment loss (P/L) XXXXX
Accumulated impairment loss (Statement of financial XXXXX
position (SFP))
Recording of impairment loss of asset where no revaluation
was done on asset

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Journal entry for asset that is carried at revalued amount

Dr Cr
Date Description R R
Revaluation surplus (Other comprehensive income (OCI)) XXXXX
Impairment loss (P/L) XXXXX
Accumulated impairment loss (SFP) XXXXX
Impairment following a revaluation from previous year.
The impairment will first reduce the revaluation surplus to
the extent that the impairment loss does not exceed the
amount held in the revaluation surplus. The rest is an
impairment loss recognised in profit or loss.

4.5 WHAT ABOUT GOODWILL?

For the purpose of impairment testing, goodwill acquired in a business combination shall from the
acquisition date be allocated to each of the acquirer's cash-generating units, or groups of cash-
generating units that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each
unit or group of units to which the goodwill is so allocated shall

• represent the lowest level within the entity at which the goodwill is monitored for internal
management purposes
• not be larger than a segment based on either the entity's primary or secondary reporting format
determined in accordance with IFRS 8 Operating segments (IAS 36.80)

Goodwill acquired in a business combination represents a payment made by an acquirer in

anticipation of future economic benefits from assets that are not capable of being individually
identified and separately recognised. Goodwill does not generate cash flows independently of other
assets or groups of assets, and often contributes to the cash flows of multiple cash-generating units.
Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual cash-generating units,
but only to groups of cash-generating units. As a result, the lowest level within the entity at which the
goodwill is monitored for internal management purposes sometimes comprises a number of cash-
generating units to which the goodwill relates, but to which it cannot be allocated (IAS 36.81).

Although cash-generating units fall outside the scope of this module, it is important that you take
note of the following basic concepts:

• Goodwill shall be allocated to each of the acquirer’s cash-generating units or groups of cash-
generating units that are expected to benefit from the synergies of the business combination
(IAS 36.80).
• Goodwill shall be tested for impairment annually and an impairment loss recognised accordingly
(IAS 36.10(b)).

4.6 WHAT HAPPENS IF THE ASSET WAS IMPAIRED IN PRIOR YEARS,

BUT IS NOW WORTH MUCH MORE?
This may lead to a reversal of an impairment loss.

An entity shall assess at each reporting date whether or not there is any indication that an impairment
loss recognised for an asset in prior years may no longer exist or may have decreased. If any such
indication exists, the entity shall estimate the recoverable amount of that asset (IAS 36.110).

In assessing whether or not there is any indication that an impairment loss recognised for an asset
in prior years may no longer exist or may have decreased, an entity shall consider, at a minimum,
the following indications:
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4.6.1 External sources of information

• The asset's market value has increased significantly during the period.
• Significant changes with a favourable effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic or legal environment in
which the entity operates or in the market to which the asset is dedicated.
• Market interest rates or other market rates of return on investments have decreased during the
period, and those decreases are likely to affect the discount rate used in calculating the asset's
value in use and increase the asset's recoverable amount materially.

4.6.2 Internal sources of information

• Significant changes with a favourable effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, the
asset is used or is expected to be used. These changes include capital expenditure that has
been incurred during the period to improve or enhance an asset in excess of its originally
assessed standard of performance or a commitment to discontinue or restructure the operation
to which the asset belongs.
• Evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected (IAS 36.111).

If there is an indication that an impairment loss recognised for an asset other than goodwill may no
longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation
(amortisation) method or the residual value may need to be reviewed and adjusted in accordance
with the standard applicable to the asset, even if no impairment loss is reversed for the asset
(IAS 36.113).

4.7 REVERSAL OF AN IMPAIRMENT LOSS – INDIVIDUAL ASSETS

An impairment loss recognised for an asset in prior years shall be reversed if, and only if, there has
been a change in the estimates used to determine the asset's recoverable amount since the last
impairment loss was recognised. If this is the case, the carrying amount of the asset shall be
increased to its recoverable amount. That increase is a reversal of an impairment loss (IAS 36.114).

A reversal of an impairment loss reflects an increase in the estimated service potential of an asset,
either from use or from sale, since the date when an entity last recognised an impairment loss for
the asset.

Remember to distinguish between a change in estimate and other reasons for the increase in the
asset's value. Examples of changes in estimates are

• a change in the basis of the recoverable amount (i.e. whether the recoverable amount is based
on fair value less costs to sell or value in use)
• a change in the amount or timing of estimated future cash flows or in discount rate if the
recoverable amount was based on value in use
• a change in estimate of the components of fair value less costs to sell, if the recoverable amount
was based on the fair value less costs to sell (IAS 36.115)

An asset's value in use may become greater than the carrying amount simply because the present
value of future cash inflows increases as they become closer. However, the service potential of the
asset has not increased. The impairment loss should not be reversed just because of the passage
of time (IAS 36.116).

The increased carrying amount of an asset other than goodwill due to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net
of amortisation or depreciation) had no impairment loss been recognised for the asset in
prior years.
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The amount in excess of what the original carrying amount would have been is a revaluation. In
accounting for such a revaluation, an entity applies the standard applicable to the asset (IAS 36.117-
.118).

A reversal of an impairment loss for an asset shall be recognised immediately in profit or loss, unless
the asset is carried at a revalued amount. Any reversal of an impairment loss on a revalued asset
shall be treated as a revaluation increase in accordance with the other standard (IAS 36.119).

A reversal of an impairment loss on a revalued asset is recognised in other comprehensive income

and increases the revaluation surplus for that asset. However, to the extent that an impairment loss
on the same revalued asset was previously recognised in profit or loss, a reversal of that impairment
loss is also recognised in profit or loss (IAS 36.120).

After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the
asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining useful life (IAS 36.121).

Journal entry for asset that is carried at cost less accumulated depreciation
Dr Cr
Date Description R R
Accumulated impairment loss (SFP) XXXXX
Reversal of impairment loss (P/L) XXXXX
Reversal of impairment loss of asset. The reversal of
impairment loss is limited to what the carrying amount of
the asset would have been had there been no impairment
previously.

Journal entry for asset carried at revalued amount

Dr Cr
Date Description R R
Accumulated impairment loss (SFP) XXXXX
Reversal of impairment loss (P/L) XXXXX
Revaluation surplus (OCI) XXXXX
Reversal of impairment loss of revalued asset. To the
extent that an impairment loss was previously recognised
in profit or loss, the reversal of an impairment loss is also
recognised in profit or loss. If the reversal is more than that,
the remainder will be credited to the revaluation surplus in
other comprehensive income.

4.8 REVERSAL OF AN IMPAIRMENT LOSS FOR GOODWILL

An impairment loss recognised for goodwill shall not be reversed in a subsequent period
(IAS36.124).

IAS 38 Intangible assets prohibits the recognition of internally generated goodwill. Any increase in
the recoverable amount of goodwill in the periods following the recognition of an impairment loss for
that goodwill is likely to be an increase in internally generated goodwill, rather than a reversal of the
impairment loss recognised for the acquired goodwill.

4.9 WHAT ARE THE TAX IMPLICATIONS?

Impairment losses and the reversal thereof are not recognised as tax deductions in terms of the
Income Tax Act. Consequently, temporary differences and therefore deferred tax arise. Refer to
IAS 12 regarding the disclosure requirements.

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B DISCLOSURE

4.10 DISCLOSURE REQUIREMENTS

A class of assets is a grouping of assets of similar nature and use in an entity's operations.

(a) An entity shall disclose the following for each class of assets:

• the amount of impairment losses recognised in profit or loss during the period and the
line item(s) of the statement of profit or loss and other comprehensive income in which
those impairment losses are included
• the amount of reversals of impairment losses recognised in profit or loss during the
period and the line item(s) of the statement of profit or loss and other comprehensive
income in which those impairment losses are reversed
• the amount of impairment losses on revalued assets recognised in other
comprehensive income during the period
• the amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period

The information required above may be presented with the other information disclosed for
the class of assets. For example, this information may be included in a reconciliation of the
carrying amount of PPE, at the beginning and end of the period, as required by IAS 16
Property, plant and equipment.

(b) An entity that reports segment information in accordance with IFRS 8 Operating segments
shall disclose the following for each reportable segment based on an entity's primary
reporting format:
• the amount of impairment losses recognised in profit or loss and in other
comprehensive income during the period
• the amount of reversals of impairment losses recognised in profit or loss and in other
comprehensive income during the period

(Note: Segment reporting does not form part of this module.)

(c) If the impairment loss for an individual asset recognised or reversed during the period is
material, an entity shall disclose the following information in the note:

• the events and circumstances that led to the recognition or reversal of the impairment
loss
• the amount of the impairment loss recognised or reversed
• for an individual asset
− the nature of the asset
− if the entity reports segment information in accordance with IFRS 8 Operating
segments, it shall disclose the reportable segment to which the asset belongs,
based on the entity's primary format (IAS 36.130 (a)–(c))
• whether the recoverable amount of the asset is its fair value less costs to sell or its
value in use (IAS 36.130(e))
• if the recoverable amount of the asset is its fair value less costs to sell, the basis used
to determine fair value less costs to sell (such as whether selling price was determined
by reference to an active market or in some other way) (IAS 36.130(f))
• if the recoverable amount of the asset is its value in use, the discount rate(s) used in
the current estimate and previous estimate (if any) of value in use (IAS 36.130(g))

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 FAC3702/103

(d) If impairment losses recognised/reversed during the period are material in aggregate to the
financial statements of the reporting entity as a whole, an entity shall disclose a brief
description of the following:

• the main classes of assets affected by impairment losses (reversals of impairment

losses) for which no information is disclosed under the above paragraphs
• the main events and circumstances that led to the recognition/reversal of these
impairment losses for which no information is disclosed under the above paragraphs
(IAS 36.131)

4.11 MODEL FOR DISCLOSURE

If an asset is impaired, the financial statements should disclose the following:

X LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 MARCH 20.X
R
Revenue XXX
Cost of sales (XXX)
Gross profit XXX
Other income (xx + impairment loss reversal)1 XXX
Other expenses (xx + impairment loss)2 (XXX)
Investment income received XXX
Finance charges (XXX)
Profit before tax XXX
Income tax expense (XXX)
Profit for the period XXX
Other comprehensive income:
Impairment loss3 (XXX)
Reversal of impairment loss4 XXX
Other comprehensive income, net of tax XXX
TOTAL COMPREHENSIVE INCOME FOR THE YEAR XXX

1
Refer to IAS 36.126(b)
2 Refer to IAS 36.126(a)
3 Refer to IAS 36.126(c) – impairment loss on revalued assets
4 Refer to IAS 36.126(d) – reversal of impairment loss on revalued assets

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 FAC3702/103

X LTD

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 MARCH 20.X
Non-
distribu-
Share table Accumu-
capital reserve lated profits Total
R R R R
Balance at beginning of year XXX XXX XXX XXX
Changes in equity
Profit for the year/Total compre- XXX
hensive income for the year
Balance at end of year XXX XXX XXX XXX

X LTD
NOTES FOR THE YEAR ENDED 31 MARCH 20.X

2. Property, plant and equipment

R
Carrying amount beginning of year XXX
Gross carrying amount XXX
Accumulated depreciation (XXX)
Depreciation
Reversal of impairment loss through profit or loss (included in other income)1 XXX
Impairment loss1 (XXX)
Included in other expenses (XXX)
Recognised in other comprehensive income during the year (XXX)
Carrying amount at end of year XXX
Gross carrying amount XXX
Accumulated depreciation and impairment losses (XXX)

3. Profit before tax

Profit before tax is arrived at after taking into account the following:
R
Reversal of impairment loss – Machine A2 XXX
Impairment loss recognised – Machine B3 (XXX)

Machine A is a manufacturing machine that is used in the manufacturing segment.4 The recoverable
amount is its fair value less costs to sell and is based on an arm's length transaction.5 The reversal
of the impairment loss of the machine of Rxxx was caused by a significant increase in the market
value of the asset during the period.6

Machine B is a manufacturing machine that is used in the manufacturing segment.4 The recoverable
amount is its fair value less costs to sell and is based on an arm's length transaction.5 The impairment
of the machine of Rxxx was caused by the occurrence of technological advances that affected this
specific machine.6
1
Refer to IAS 36.126(a) and (b) IAS 36.128
2 Refer to IAS 36.126(b)
3 Refer to IAS 36.126(a)
4 Refer to IAS 36.130(c) (for each material impairment loss recognised or reversed during the
period)

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 FAC3702/103

5 Refer to IAS 36.130(e) and (f) (for each material impairment loss recognised or reversed during
the period)
6 Refer to IAS 36.130(a) (for each material impairment loss recognised or reversed during the
period)

C COMPREHENSIVE EXAMPLES

EXAMPLE 1

Blanch Ltd is a company which produces and sells wine. The company has a 31 March year-end.

On 1 April 2019, they purchased Blanch Veritas, a brand name, for R4 250 000. The asset had a
definite useful life of 8 years and a residual value of Rnil. The brand name was ready to be used, as
intended by management, on acquisition date.

Due to employee strike action during the current financial year, the Gauteng bottling plant had to use
temporary workers to enable the plant to meet its current volume demands.

The temporary workers were not sufficiently trained in the operation of the machinery. This resulted
in 20 000 bottles, filled during July and August 2020, becoming spoilt as they had not been properly
sealed. Management only became aware of this problem after the brand received negative publicity
and subsequently decided to recall all those bottles of wine. On 31 March 2021, the impact of the
negative publicity on the brand name was assessed and the fair value less costs to sell on that date
was estimated to be R2 200 000. Due to the negative publicity, possible impairment had to be
assessed.

Management expects the brand to generate the following cash flows over its remaining useful life:

Year Net cash inflow

R
1 April 2021 – 31 March 2022 1 200 000
1 April 2022 – 31 March 2023 1 000 000
1 April 2023 – 31 March 2024 800 000
1 April 2024 – 31 March 2025 500 000
1 April 2025 – 31 March 2026 500 000

A pre-tax discount rate of 15% is considered to be appropriate.

REQUIRED
Calculate the impairment loss on 31 March 2021.

SOLUTION 1
Calculate the asset's carrying amount

Cost price R4 250 000

Useful life 8 years
Accumulated amortisation (R4 250 000 x 2/8) R1 062 500
Carrying amount R3 187 500

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Calculate the asset's recoverable amount

The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Fair value less costs to sell

Amount given R2 200 000

Value in use

Using HP10bii financial calculator Using Sharp financial calculator

CF0 0 N0 0
CF1 1 200 000 N1 1 200 000
CF2 1 000 000 N2 1 000 000
CF3 800 000 N3 800 000
CF4 500 000 N4 500 000
CF5 500 000 N5 500 000
‘i = 15% ‘i = 15%
Comp NPV = R2 860 100 Comp NPV = R2 860 100

OR:

FV = 1 200 000 FV = 1 000 000 FV = 800 000 FV = 500 000 FV = 500 000
N=1 N=2 N=3 N=4 N=5
‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15%
PV = ? PV = ? PV = ? PV = ? PV = ?
R1 043 478 R756 144 R526 013 R285 877 R248 588

Total PV R2 860 100

Therefore, recoverable amount is R2 860 100 as it is the higher of value in use or fair value less
costs to sell.

Impairment loss
R
Carrying amount 3 187 500
Recoverable amount (2 860 100)
Impairment loss 327 400

EXAMPLE 2
Toys For You Ltd is a company listed on the JSE. The company has a 31 March year-end. The
primary segments of the business operations are the manufacturing and selling of toys and infant
clothing.

On 1 April 2020 Toys For You Ltd obtained a licence to sell Bogus Toys for 25 years. The total cost
of the licence amounted to R2 500 000. The licence is amortised on the straight-line basis over a
period of 25 years, as economic benefits relating to the licence are expected to flow to the entity over
this period.

On 31 March 2022 it is estimated that the licence will generate cash inflows amounting to R750 000
per annum. The annual cash outflow required to generate the inflow amounts to R325 000. Assume
that all cash flows occur annually at 31 March. A pre-tax discount rate of 20% is regarded as
appropriate.

However, the expected future cash flow is now less than the original estimate because a second
licence to sell Bogus Toys was awarded to a major competitor on 30 September 2021. The original
estimated useful life remains unchanged. The licence can be sold for R2 000 000 on 31 March 2022.
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 FAC3702/103

For the year ended 31 March 2021 the recoverable amount exceeded the carrying amount of the
licence.

Deferred tax is provided for on all temporary differences by using the statement of financial position
approach. There are no temporary differences other than those identified in the question.

The company regards all impairment losses or the reversal thereof above R100 000 as material.

The tax rate has remained unchanged at 28%. 80% of all capital gains are taxable.

According to section 11(gC) of the Income Tax Act, the South African Revenue Service (SARS)
allows a tax allowance on the licence on the straight-line method over 20 years. This allowance is
not apportioned for a part of the year. Toys For You Ltd had a profit before tax of R269 080, before
the impairment was taken into account, for the year ended 31 March 2022.

REQUIRED
Prepare the notes to the annual financial statements of Toys for You Ltd for the
year ended 31 March 2022. Your answer must comply with International
Financial Reporting Standards.

Comparative figures are not required.

Round off all calculations to the nearest rand.

SOLUTION 2

TOYS FOR YOU LTD

NOTES FOR THE YEAR ENDED 31 MARCH 2022
1. Accounting policy
1.1 Intangible assets
Licences have a finite useful life, are disclosed at cost less accumulated amortisation and impairment
losses and are amortised on the straight-line basis over the expected useful life of 25 years.

1.2 Deferred tax

Deferred tax is recognised for all temporary differences by using the statement of financial position
approach and based tax rates that have been enacted by the reporting date. The measurement of
deferred tax reflects the tax consequences that would follow from the manner in which the company
expects to recover or settle the carrying amount of its assets and liabilities at the reporting date.

Temporary differences are differences between the carrying amounts of assets and liabilities (used
in the financial statements) and the corresponding tax bases used in the calculation of taxable profit.

Deferred tax liabilities are recognised for all taxable temporary differences, unless the deferred tax
liability arises from

• the initial recognition of goodwill, or

• the initial recognition of an asset and liability in a transaction which
− is not a business combination and
− at the time of the transaction affects neither accounting profit nor taxable profit (tax loss)
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Deferred tax assets are recognised for deductible temporary differences to the extent that it is
probable that taxable profit will be available against which the deductible temporary difference can
be utilised, unless the deferred tax asset arises on the initial recognition of an asset and liability in a
transaction which
• is not a business combination and
• at the time of the transaction affects neither accounting profit nor taxable profit (tax loss)

The carrying amount of deferred tax assets is reviewed at each reporting date and is reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to utilise the benefit.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current
tax assets and liabilities and when they relate to income taxes levied by the same taxation authority
on either the same taxable entity or different taxable entities (when the taxable entities intends to
settle current tax assets and liabilities on a net basis).

1.3 Impairment of non-financial assets

Non-financial assets are assessed at each reporting date to determine whether there is an indication
that the carrying amount may be impaired. If there is such an indication, the recoverable amount of
the asset is determined. The recoverable amount of goodwill, indefinite-life intangible assets and
intangible assets which are not available for use is determined annually irrespective of whether there
is an indication of impairment or not.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in
use. In determining the value in use, the estimated future cash flows of the asset are discounted to
their present value based on pre-tax discount rates. The pre-tax discount rate reflects the current
market assessments of the time value of money and the risks that are specific to the asset.

An impairment loss is recognised in profit or loss when the carrying amount of an asset exceeds its
recoverable amount. If the loss relates to the reversal of a previous revaluation surplus, it is
recognised in other comprehensive income.

Impairment losses are reversed if there has been a change in the estimates used to determine the
recoverable amount of the asset. Impairment losses are reversed only to the extent that the carrying
amount of the asset does not exceed the carrying amount that would have been determined if no
impairment loss had been recognised in the past. Reversals of impairment losses are recognised
directly in profit or loss.

2. Intangible assets
Purchased
R
Carrying amount at beginning of year 2 400 000
Cost 2 500 000
Accumulated amortisation (100 000)
Amortisation (2 500 000/25) (100 000)
Impairment loss through profit or loss (included in other expenses)1 (calc 3) (207 077)
Carrying amount at end of year (calc 1) 2 092 923
Cost 2 500 000
Accumulated amortisation and impairment loss (407 077)

3. Impairment loss2
The intangible asset, a licence for the selling of Bogus Toys, was impaired during the year due to a
licence also being awarded to a major competitor of Toys For You Ltd. The impairment loss
amounted to R207 077 and is part of the toys segment of the primary business operations of the
company.

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 FAC3702/103

The recoverable amount of the asset is based on the value in use and a pre-tax discount rate of
20%. There was no impairment of the asset in the previous year.

1
The information may also be disclosed as part of the profit before tax note (IAS 36.128).
2
This note is only required if the impairment loss recognised or reversed was material .

4. Profit before tax

Included in profit before tax are the following items:
Expenses R
Amortisation of intangible asset (licence) – included in line item "other expenses"
(calc 1) 100 000
Impairment loss (calc 3) – included in “other expenses” 207 077

5. Income tax expense

R
Major components of tax expense
Current tax expense (calc 4) 68 342
Deferred tax expense (calc 5) (50 982)
Tax expense 17 360

6. Deferred tax
R
Analysis of temporary differences:
Accelerated tax allowance 43 982
Deferred tax asset (calc 5) 43 982

CALCULATIONS

1. Carrying amount and tax base

Adjusted for
Historical impairment Tax base
R R R
Cost price 1 April 2020 2 500 000 2 500 000 2 500 000
Amortisation/tax allowance
(2 500 000/25); (2 500 000/20) (100 000) (100 000) (125 000)
Carrying amount 31 March 2021 2 400 000 2 400 000 2 375 000
Amortisation/tax allowance
(2 500 000/25); (2 500 000/20) (100 000) (100 000) (125 000)
Impairment loss (calc 3) – (207 077) –
Carrying amount 31 March 2022 2 300 000 2 092 923 2 250 000

2. Recoverable amount
R
Fair value less costs to sell (given) 2 000 000

Value in use
i = 20%
n = 23 years remaining
PMT = 425 000 (R750 000 – R325 000)
PV = 2 092 923

Recoverable amount is therefore 2 092 923

3. Impairment loss
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 FAC3702/103

R
Carrying amount on 31 March 2012 [2 500 000 – (2 500 000/25 x 2)] (calc 1) 2 300 000
Recoverable amount (calc 2) (2 092 923)
Impairment loss 207 077

4. Current tax expense

R
Profit before tax (given) 269 080
Impairment loss (not taken into account) (207 077)
Profit before tax 62 003
Temporary differences 182 077
Amortisation 100 000
Impairment loss 207 077
Tax allowance (125 000)
Taxable profit 244 080

Current tax expense (244 080 x 28%) 68 342

5. Deferred tax expense

Deferred
Carrying Temporary Tax asset/
amount Tax base difference (liability)
R R R R
Beginning of the year 1 April 2021 2 400 000 2 375 000 (25 000) (7 000)
End of the year 31 March 2022 2 092 923 2 250 000 157 077 43 982

Movement for the year:

Deferred tax liability at beginning of the year (7 000)
Deferred tax asset at the end of the year 43 982

Movement for the year (7 000 + 43 982) (or to P/L) 50 982

EXAMPLE 3
The same information as for example 2 applies.

The following details relate to the licence:

Carrying
amount (based
on carrying
amount on
31/03/2022) Value in use Selling price
Date R R R
31/03/2023 (calc 1) 2 001 926 2 001 926 1 900 000
31/03/2024 (calc 1) 1 910 929 2 200 000 1 850 000

During 2024 the competitor to whom the licence was also awarded ran into financial difficulties and
had to be liquidated. This had a positive effect on the cash inflows of Toys For You Ltd which resulted
in the value in use to be R2 200 000 on 31 March 2024.

Profit before tax before any impairment losses or the reversal thereof was R40 929 for the year
ended 31 March 2024.

It is not the policy of the company to revalue its assets.

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REQUIRED

Prepare the notes to the annual financial statements of Toys For You Ltd for the
year ended 31 March 2024. Your answer must comply with the requirements of
International Financial Reporting Standards.

• Comparative figures are not required.

• Round off all calculations to the nearest rand.
• Accounting policy notes are not required.

SOLUTION 3

TOYS FOR YOU LTD

NOTES FOR THE YEAR ENDED 31 MARCH 2024

1. Intangible assets
Purchased
R
Carrying amount at beginning of year 2 001 926
Cost 2 500 000
Accumulated amortisation and impairment loss (calc 3) (498 074)
Amortisation (calc 2) (90 997)
Reversal of previous impairment loss through profit or loss (included in other
income) (calc 4) 189 071
Carrying amount at end of year 2 100 000
Cost 2 500 000
Accumulated amortisation (400 000)

2. Reversal of previous impairment loss of intangibles

The previous impairment loss of the licence has been reversed due to the liquidation of the major
competitor to whom the licence to sell Bogus Toys had also been awarded. The reversal of the
impairment loss amounted to R189 071. The reversal was limited to the carrying amount that would
have been determined had no impairment loss been recognised for the asset in prior years. It forms
part of the toys segment of the primary business operations.

3. Profit before tax

Included in profit before tax are the following items:
Income R
Reversal of previous impairment loss of licence (calc 4) (included in “other
income”) 189 071

Expenses
Amortisation of intangible asset (licence) – included in line item "other expenses"
(calc 2) 90 997

4. Income tax expense

R
Major components of tax expense

Current tax expense (calc 5) 1 939

Deferred tax expense (calc 6) 62 461
Tax expense 64 400

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 FAC3702/103

5. Deferred tax
Analysis of temporary differences: R
Accelerated tax allowance – Intangible asset 28 000
Deferred tax liability (calc 6) 28 000

CALCULATIONS

1. Carrying amount and tax base

Adjusted for
Historical impairment Tax base
R R R
Carrying amount 31 March 2022 2 300 000 2 092 923 2 250 000
Amortisation/Tax allowance (calc 2) (100 000) (90 997) (125 000)
Carrying amount 31 March 2023 2 200 000 2 001 926 2 125 000
Amortisation/Tax allowance (100 000) (90 997) (125 000)
Carrying amount 31 March 2024 before
impairment 2 100 000 1 910 929 2 000 000
Impairment loss reversed (calc 4) – 189 071 –
Carrying amount 31 March 2024 2 100 000 2 100 000 2 000 000

2. Amortisation for the year

R
Carrying amount at 31 March 2022 (given) 2 092 923
Amortisation is therefore [2 092 923/23] 90 997

3. Accumulated amortisation on 31 March 2023

R
Accumulated amortisation on 31 March 2022 (from example 1) 407 077
Amortisation for 2023 (calc 2) 90 997
498 074

4. The amount of impairment loss to be reversed

R
2023
Carrying amount 2 001 926
Recoverable amount 2 001 926

Therefore no impairment loss or reversal thereof.

2024 R
Carrying amount 1 910 929
Recoverable amount 2 200 000
Reversal of previously accounted for impairment loss 189 071
Limited to the historical carrying amount 2 100 000
Therefore the impairment loss to be reversed (2 100 000 – 1 910 929) 189 071

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 FAC3702/103

5. Current tax expense

R
Profit before tax (given) 40 929
Reversal of impairment loss (calc 4) 189 071
Profit before tax 230 000
Temporary differences (223 074)
Amortisation (calc 2) 90 997
Tax allowance (125 000)
Reversal of impairment loss (189 071)
Taxable profit 6 926
Current tax expense (6 926 x 28%) 1 939

6. Calculation of deferred tax

Temporary Deferred
Carrying diffe- Tax asset/
amount Tax base rence (liability)
R R R R
Beginning of the year
1 April 2023 (calc 1) 2 001 926 2 125 000 123 074 34 461
End of the year 31 March 2024
(calc 1) 2 100 000 2 000 000 100 000 (28 000)

Movement for the year:

Deferred tax asset at beginning of the year 34 461
Deferred tax liability at the end of the year 28 000
Movement for the year (34 461 + 28 000) (debit to the SCI) 62 461

D E-TUTOR ACTIVITY

Try to answer the following question on your own. You may discuss the solution
with your e-tutor and obtain it from him/her.

Art4U Ltd is a company based in Pretoria that specialises in the retail of exclusive art collectibles.
The company has a 31 March year-end.

On 1 April 2019, Art4U Ltd bought the sole distribution rights of the artwork of a new Dutch artist,
Van Slow, in South Africa. There is a high demand for Van Slow’s art as it is widely known. Art4U
Ltd bought the distribution rights for a period of 10 years for an amount of R600 000. A residual value
of Rnil was allocated to the distribution rights. The distribution rights were available for use, as
intended by management, on acquisition date.

During the 2021 financial year, various successful campaigns launched locally to promote South
African arts and crafts resulted in a significant decrease in the demand for Van Slow’s artworks in
South Africa.
On 31 March 2021, the fair value of the sole distribution rights was estimated to be only R420 000.
Legal and other administration fees to sell the sole distribution rights were estimated to amount to
R12 000. The value in use of the sole distribution rights on 31 March 2021 was estimated to be
R450 872. The useful life and residual value of the sole distribution rights remained unchanged
throughout the period.

Accounting policies

The following is an extract from the accounting policies of Art4U Ltd:

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 FAC3702/103

1. Intangible assets are accounted for in accordance with the cost model.

2. Amortisation on intangible assets is provided for according to the straight-line method over the
expected useful lives of the assets.

REQUIRED
Disclose all the notes relating to the distribution rights in the annual financial statements of Art4U
Ltd for the year ended 31 March 2021.

Note:

• Your answer must comply with the requirements of International Financial Reporting
Standards.
• Show all calculations.
• Round off all amounts to the nearest rand.
• Accounting policy notes are not required.
• Ignore comparative information.

ASSESSMENT CRITERIA
After having studied this learning unit, you should be able to

1. define the objective and scope of the standard

2. apply the definitions

3. apply the prescribed indications to assess whether an asset may be

impaired, as well as the timing of impairment tests, with specific reference to
intangible assets with an indefinite useful life and intangible assets not yet
available for use

4. determine the recoverable amount through measurement of the value in use

and the fair value less costs of disposal

5. recognise and measure impairment losses for individual assets other than
goodwill

6. recognise and measure the reversal of impairment losses for individual

assets

7. disclose impairment losses and the reversal of impairment losses in the

financial statements

Note that the application of the revaluation model in relation to depreciable

assets of PPE is excluded from the syllabus. Therefore, impairment losses
recognised in other comprehensive income for depreciable assets are excluded
from the syllabus.

If you battle to do any of the above, you need to revisit the content.

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 FAC3702/103

FAC3702
LEARNING UNIT 5
NON-CURRENT ASSETS
HELD FOR SALE AND
DISCONTINUED
OPERATIONS [IFRS 5]

Distinctive Financial
Reporting

Distinctive Financial
30
Reporting
 FAC3702/103

LEARNING UNIT 5 – NON-CURRENT ASSETS HELD FOR SALE AND

DISCONTINUED OPERATIONS
LEARNING OUTCOMES
Once you have studied and completed this learning unit, you should be able to do the following:

1. Identify the purpose and scope of IFRS 5.

2. Apply the definitions.

3. Apply the criteria to identify a non-current asset or disposal group as held for sale in terms of
IFRS 5.

4. Apply the first measurement rule of IFRS 5 to individual non-current assets and disposal
groups to determine the carrying amounts of individual non-current assets or disposal groups
immediately after being classified as held for sale.

5. Apply the measurement requirements of IFRS 5 to individual non-current assets and disposal
groups to determine the fair value less costs to sell of individual non-current assets or disposal
groups classified as held for sale.

6. Calculate the impairment loss arising on initial classification as held for sale for an individual
non-current asset or disposal group and allocate the impairment loss according to the rules
contained in IFRS 5.

7. Remeasure an individual asset or disposal group subsequently and account for the additional
impairment loss or reversal of impairment loss according to the rules contained in IFRS 5.

8. Present and disclose non-current assets and disposal groups held for sale as well as
associated statement of profit or loss and other comprehensive income items according to
IFRS 5.

9. Disclose discontinued operations on the face of the statement of profit or loss and other
comprehensive income and in the notes to the financial statements according to IFRS 5.

OVERVIEW
Objective

PART I: NON-CURRENT ASSETS HELD FOR SALE

5.1 Introduction
5.2 Definitions (IFRS 5 Appendix A)

5.3 Classification of a non-current asset (or disposal group) as held for sale
5.3.1 Criteria to qualify as held for sale
5.3.2 Extension of period required to complete a sale
5.3.3 Other matters to consider with regard to classification as held for sale

5.4 Criteria are met after the reporting period (IFRS 5.12)

5.5 Scope of IFRS 5

5.5.1 Included in the scope
5.5.2 Items excluded from the scope of IFRS 5 regarding measurement requirements
5.5.3 Disposal group containing both items included and excluded from the measurement
requirements of IFRS 5

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 FAC3702/103

5.6 Measurement of a non-current asset held for sale (or disposal group)
5.6.1 Measurement immediately before initial classification as held for sale
5.6.2 Application of IFRS 5 to an existing individual asset
5.6.3 Application of IFRS 5 to a disposal group at initial classification as held for sale
5.6.4 Other matters in respect of measurement
5.6.5 Subsequent remeasurement of an individual asset or disposal group

5.7 Recognition of impairment losses and reversals

5.7.1 Impairment loss for an individual non-current asset
5.7.2 Impairment loss for a disposal group
5.7.3 Reversal of an impairment loss/gain on remeasurement of an individual asset
5.7.4 Recognition of gains and losses at date of sale of a non-current asset

5.8 Non-current assets to be abandoned

5.9 Changes to a plan of sale

5.9.1 General
5.9.2 Individual assets no longer classified as held for sale
5.9.3 Individual item part of disposal group, no longer classified as held for sale

5.10 Presentation and disclosure of a non-current asset or disposal group classified as held for
sale
5.10.1 Presentation
5.10.2 Additional disclosures - IFRS 5.41

PART II: DISCONTINUED OPERATIONS

5.11 Introduction
5.11.1 Objective
5.11.2 Definition
5.11.3 Classification as discontinued operation

5.12 Presentation and disclosure

5.13 Gains or losses relating to continuing operations

5.14 Model for disclosure
5.15 Comprehensive examples
5.16 E-tutor activity

STUDY

PRESCRIBED:
Gripping Gaap
The relevant chapter

RECOMMENDED:
IFRS - The Annotated IFRS
IFRS 5

The standard can be accessed online at https://www.ifrs.org/

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Objective
The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation
and disclosure of discontinued operations. In particular, the IFRS requires

• assets that meet the criteria to be classified as held for sale to be measured at the lower of
carrying amount and fair value less costs to sell, and depreciation on such assets to cease
• assets that meet the criteria to be classified as held for sale to be presented separately on the
face of the statement of financial position and the results of discontinued operations to be
presented separately in the statement of profit or loss and other comprehensive income

Since discontinuing an operation would by implication comprise, among other things, disposing of
current and non-current assets and associated liabilities, it appears logical to combine this issue with
discontinued operations in IFRS 5. However, for purposes of studying the two issues, we have split
them.

Non-current assets held for sale are dealt with in Part I and discontinued operations
(including associated non-current assets now held for sale) are dealt with in Part II of this
learning unit.

PART I: NON-CURRENT ASSETS HELD FOR SALE

5.1 INTRODUCTION
In terms of IAS 1 assets and liabilities should be classified between current and non-current on the
face of the statement of financial position. IFRS 5 prescribes how non-current non-financial assets
that are to be disposed of in the near future should be treated. It states that these assets and
associated liabilities to be recovered and settled through sale shall be remeasured to the lower of
carrying amount and fair value less costs to sell and carried as current items on the face of the
statement of financial position.

EXAMPLE 1
Bang Ltd holds an item of PPE with a historical cost carrying amount of R120 000 at 31 December
2020. On that date management decides to sell the asset for R130 000 (fair value) by 31 March
2021 and concludes a valid uncancellable sales contract (using fair prices) to this effect with a buyer.
Costs to sell the asset will amount to R12 000. Assume all amounts involved are material and that
the criteria for classification as held for sale have been met.

In short, applying IFRS 5 will have the following effect:

The carrying amount of the PPE item at 31 December 2020 should be determined.

Since the decision to sell was taken at year-end, the carrying amount is R120 000.

Next the fair value less costs to sell of the PPE item should be determined.

Fair value is R130 000 and costs to sell amount to R12 000. Consequently the fair value less costs
to sell is R118 000.

The PPE item initially classified to hold for sale should now be transferred from non-current assets
to current assets and should then be measured at the lower of its carrying amount and fair value less
costs to sell.

The PPE item with a carrying amount of R120 000 shall thus be transferred from non-current to
current assets on the face of the statement of financial position and be described as "held for sale".
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This "held for sale" asset shall then be written down from R120 000 to R118 000 and an impairment
loss of R2 000 shall be recognised in the statement of comprehensive income of 2020.

5.2 DEFINITIONS (IFRS 5 Appendix A)

Study the definitions set out below carefully before working through the content of the rest of the
material and standard to ensure that you understand clearly what you are dealing with. Note that
some of the definitions will be familiar to you, as you have encountered them in other learning units.
However, since these definitions are also important in this standard, we have repeated them here.

Cash-generating unit
The smallest identifiable group of assets generating cash inflows that are largely independent of the
cash inflows from other assets or groups of assets. This definition is also used in IAS 36 and is dealt
with in learning unit 4.

Component of an entity
Operations and cash flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.

Costs to sell
The incremental costs directly attributable to the disposal of an asset (or disposal group), excluding
finance costs and the income tax expense.

Current asset
An asset that satisfies any of the following criteria:

• It is expected to be realised in, or is intended for sale or consumption in, the entity's normal
operating cycle.
• It is held primarily for the purpose of being traded.
• It is expected to be realised within 12 months after the reporting period.
• It is cash or a cash equivalent asset unless it is restricted from being exchanged or used to settle
a liability for at least 12 months after the reporting period.

Discontinued operation
A component of an entity that either has been disposed of or is classified as held for sale and

• represents a separate major line of business or geographical area of operations,

• is part of a single coordinated plan to dispose of a separate major line of business or geographical
area of operations, or
• is a subsidiary acquired exclusively with a view to resale

Disposal group
A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction,
and liabilities directly associated with those assets that will be transferred in the transaction. The
group includes goodwill acquired in a business combination if the group is a cash-generating unit to
which goodwill has been allocated in accordance with the requirements of paragraphs 80 to 87 of
IAS 36 Impairment of assets or if it is an operation within such a cash-generating unit.

Fair value
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.

Firm purchase commitment

An agreement with an unrelated party, binding on both parties and usually legally enforceable, that

• specifies all significant terms, including the price and timing of the transactions
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• includes a disincentive for non-performance that is sufficiently large to make performance highly
probable

Highly probable
Significantly more likely than probable.

Non-current asset
An asset that does not meet the definition of a current asset. Note that current assets were defined
earlier in this section.

Probable
More likely than not.

Recoverable amount
The higher of an asset's fair value less (minus) costs to sell and its value in use.

Value in use
The present value of estimated future cash flows expected to arise from the continuing use of an
asset and from its disposal at the end of its useful life.

5.3 CLASSIFICATION OF A NON-CURRENT ASSET (OR DISPOSAL

GROUP) AS HELD FOR SALE
An entity shall classify a non-current asset (or disposal group) as held for sale if the carrying
amount of that asset or group will be recovered principally through a sale transaction rather
than through continuing use (IFRS 5.06).

5.3.1 Criteria to qualify as held for sale

IFRS 5 requires non-current assets that are to be disposed of to be reclassified from non-current to
current. The standard makes it clear that items should only be classified as held for sale once they
have met all the following criteria as set out in IFRS 5.07 to .11:

• The asset (or disposal group) must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets (or disposal groups)
and its sale must be highly probable.
• For the sale to be highly probable, the appropriate level of management must be committed to
a plan to sell the asset (or disposal group), and an active programme to locate a buyer and
complete the plan must have been initiated.
• The asset (or disposal group) must be actively marketed for sale at a price that is reasonable in
relation to its current fair value.
• The sale should be expected to qualify for recognition as a completed sale within one year from
the date of classification, except if there are acceptable grounds for extension of the sales period
beyond 1 year as permitted by IFRS 5.09. (Refer to 5.3.2.)
• Actions required to complete the plan should indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn.

5.3.2 Extension of period required to complete a sale – IFRS 5 Appendix

B (Application supplement)
As noted in 5.3.1 above, an extension of the period required to complete a sale beyond one year
does not preclude an asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity's control and if there is sufficient evidence that
the entity remains committed to its plan to sell the asset (or disposal group).
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An exception to the one-year requirement mentioned in 5.3.1 shall therefore apply in the following
situations in which such events or circumstances arise:

• At the date an entity commits itself to a plan to sell a non-current asset (or disposal group) it
reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset
(or disposal group) that will extend the period required to complete the sale and

− actions necessary to respond to those conditions cannot be initiated until after a firm
purchase commitment is obtained
− a firm purchase commitment is highly probable within one year

OR

• An entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly
impose conditions on the transfer of a non-current asset (or disposal group) previously classified
as held for sale that will extend the period required to complete the sale and

− timely actions necessary to respond to the conditions have been taken

− a favourable resolution of the delaying factors is expected

OR

• During the initial one-year period, circumstances arise that were previously considered unlikely
and, as a result, a non-current asset (or disposal group) previously classified as held for sale is
not sold by the end of that period and

− during the initial one-year period the entity took action necessary to respond to the change
in circumstances
− the non-current asset (or disposal group) is being actively marketed at a price that is
reasonable, given the change in circumstances
− the criteria in 5.3.1 above are met

5.3.3 Other matters to consider with regard to classification as held for

sale
Sale transactions include exchanges of non-current assets for other non-current assets when the
exchange has commercial substance in accordance with IAS 16 Property, plant and equipment
(IFRS 5.10).

When an entity acquires a non-current asset (or disposal group) exclusively with a view to its
subsequent disposal, it shall classify the non-current asset (or disposal group) as held for sale at the
acquisition date, only if the one-year or a permitted extended period requirement is met and it is
highly probable that any other criteria in 5.3.1 above that are not met at acquisition date will be met
within a short period following the acquisition (usually limited to three months) (IFRS 5.11).

5.4 CRITERIA ARE MET AFTER THE REPORTING PERIOD (IFRS 5.12)
If the criteria in 5.3.1 are met after the reporting period, an entity shall not classify a non-current
asset (or disposal group) as held for sale in those financial statements when issued.

However, when the criteria in 5.3.1 are met after the reporting period but before the authorisation of

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the financial statements for issue, the entity shall disclose the following information by way of a note:

• a description of the non-current asset (or disposal group)

• a description of the facts and circumstances of the sale, or leading to the expected disposal, and
the expected manner and timing of that disposal
• if applicable, the reporting segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8 Operating segments

5.5 SCOPE OF IFRS 5

5.5.1 Included in the scope

The classification and presentation requirements of IFRS 5 apply to all recognised non-current
assets and disposal groups of an entity.

The measurement requirements of IFRS 5 apply to all recognised non-current assets and disposal
groups except for those listed in 5.5.2 below, which shall continue to be measured in accordance
with the standard noted (IFRS 5.2).

Assets classified as non-current assets in accordance with IAS 1 Presentation of financial statements
shall not be reclassified as current assets until they meet the criteria to be classified as held for sale
in accordance with IFRS 5 (refer to 5.3.1). Assets of a class that an entity would normally regard as
non-current that are acquired exclusively with a view to resale shall not be classified as current
assets until they meet the criteria to be classified as held for sale in accordance with IFRS 5 (refer
to 5.3.1) (IFRS 5.3).

Sometimes an entity disposes of a group of assets, possibly with some directly associated liabilities,
together in a single transaction. Such a disposal group may be a group of cash-generating units, a
single cash-generating unit or part of a cash-generating unit (IFRS 5.4).

EXAMPLE 2
You may decide to sell any of the following:

• a factory comprising three manufacturing plants with carrying amounts of R200 000, R300 000
and R400 000, respectively, representing a group of three cash-generating units, OR
• one of the three manufacturing plants representing a single cash-generating unit, e.g. the plant
with a carrying amount of R200 000, OR
• two machines with carrying amounts of R80 000 each forming part of one manufacturing plant
and replace it with two more modern machines

Each of the above alternatives will represent a disposal group as defined in 5.2.

If a non-current asset within the scope of the measurement requirements of IFRS 5 is part of a
disposal group, the measurement requirements apply to the group as a whole, so that the group is
measured at the lower of its carrying amount and fair value less costs to sell (IFRS 5.4).

The requirements for measuring the individual assets and liabilities within the disposal group are
set out below:

• Immediately before the initial classification of the asset (or disposal group) as held for sale,
the carrying amounts of the asset (or all the assets and liabilities within the group) shall be
measured in terms of the IASs normally applicable to them (IFRS 5.18).

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For instance, if a company wants to sell a machine (PPE item) carried at historical cost, the
carrying amount of the machine must be determined immediately before the initial classification
as held for sale. Depreciation will have to be written off on the machine right up to the point of
reclassification, to determine its carrying amount in terms of IAS 16 Property, plant and
equipment, the applicable standard.

• On subsequent measurement of a disposal group, the carrying amounts of any assets and
liabilities that are not within the scope of the measurement requirements of IFRS 5, but are
included in a disposal group classified as held for sale, shall be remeasured in accordance
with the applicable IFRSs before the fair value less costs to sell of the disposal group is
remeasured (IFRS 5.19).

In terms of certain standards, some non-current items are already measured at fair value with fair
value adjustments being included in profit or loss. For other non-current items it could be difficult to
determine the fair value less costs to sell. IFRS 5 excludes several items from the measurement
requirements contained in IFRS 5.

5.5.2 Items excluded from the scope of IFRS 5 regarding measurement

requirements
Assets already carried at fair value with changes in fair value recognised in profit or loss are
excluded. The assets affected are

• financial assets within the scope of IFRS 9 Financial instruments

• non-current assets that have been accounted for using the fair value model in IAS 40 Investment
property
• non-current assets that have been measured at fair value less costs to sell in accordance with
IAS 41 Agriculture (not part of your syllabus)

Assets for which there might be difficulties in determining their fair value are excluded. The assets
affected are

• deferred tax assets from IAS 12 Income taxes

• assets arising from employee benefits in terms of IAS 19 Employee benefits (not part of your
syllabus)
• assets arising from insurance contracts as defined in IFRS 4 (not part of your syllabus)

The above assets will be carried at the values determined by applying their applicable standards.

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5.5.3 Disposal group containing both items included and excluded from
the measurement requirements of IFRS 5
A disposal group may include any assets and any liabilities of an entity – therefore current and non-
current assets and liabilities as well as some assets that are excluded from the measurement
requirements of IFRS 5 (see 5.5.2) could form part of a disposal group.

EXAMPLE 3
A disposal group could consist of the following items:

Item R
– Land: cost 120 000
– Factory building: carrying amount 450 000
– Plant: carrying amount 200 000
– Inventories: carrying amount 55 000
– Payables associated with the plant, inventory and factory building 40 000
– Share investments: fair value 120 000

The first three items listed above would be non-current assets included in the scope of measurement
requirements of IFRS 5, being the lower of carrying amount and fair value less costs to sell. The next
item, inventories, is a current asset being disposed of as part of the disposal group.

The payables represent an associated liability, whereas the share investment represents a non-
current asset excluded from the scope of measurement requirements of IFRS 5. Irrespective of the
diverse nature of the items in the disposal group, the items involved still comprise a single disposal
group.

5.6 MEASUREMENT OF A NON-CURRENT ASSET HELD FOR SALE

(OR DISPOSAL GROUP)

5.6.1 Measurement immediately before initial classification as held for

sale
According to IFRS 5.18 (refer to 5.5.1), the carrying amount of a non-current asset (or all the assets
and liabilities in a disposal group) shall, immediately before the initial classification as held for sale,
be measured in accordance with the applicable IFRSs.

An entity shall measure a non-current asset (or disposal group) classified as held for sale at
the lower of its carrying amount (at the moment of reclassification) and fair value less costs
to sell – this adjustment is an impairment loss (IFRS 5.15).

If a non-current asset held for sale (or disposal group) falls outside the scope of IFRS 5 in respect
of measurement requirements, the individual item shall not be restated to the lower of carrying
amount and fair value less costs to sell, but shall instead be carried at the value determined by
applying the relevant standard relating to that asset.

5.6.2 Application of IFRS 5 to an existing individual asset

The following examples illustrate the principles of IFRS 5 applicable to individual assets:

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EXAMPLE 4
Individual asset carried at historical cost

Chuck Ltd has a PPE item with a cost of R400 000 and a historical cost carrying amount of R320 000
at 1 January 2022. PPE is depreciated at 10% per annum on the straight-line basis. Chuck Ltd has
a 31 December year-end.

On 30 June 2022 management decides to dispose of the asset within the next year and all other
criteria to facilitate the classification of the asset as a non-current asset held for sale are met. The
fair value of the PPE item amounts to R290 000 and the direct costs to sell amount to R15 000.

SOLUTION 4
Applying the requirement in IFRS 5.18 (refer to 5.5.1) that non-current assets to be reclassified as
held for sale need to have their carrying amounts measured in terms of applicable standards
immediately before initial classification as held for sale would mean that IAS 16 would be applied to
determine the carrying amount on 30 June 2022 of the PPE item involved. Consequently the carrying
amount of the PPE item should be calculated as R300 000 (R320 000 – (R400 000 x 10% x 6/12))
raising a depreciation expense of R20 000 in respect of this asset in 2012 at point of initial
classification as held for sale.

In terms of IFRS 5.15 (refer to 5.6.1), this newly determined carrying amount of R300 000 should be
compared to the fair value less costs to sell of the PPE item involved of R275 000, and be shown at
the lower of the two. In this case it will result in an impairment loss of R25 000 as prescribed by IFRS
5.20.

LECTURER’S COMMENT

Guidelines on applying IFRS 5 to an individual asset carried at historical

cost

• The carrying amount of the asset to be disposed of is measured at date of

initial classification in accordance with the applicable standard, for
instance by applying IAS 16 – the standard applicable – to the type of item
(PPE) disposed of.
• Once the item has been classified as held for sale, no further depreciation
is written off on the specific asset.
• The comparison of the newly measured carrying amount with the fair value
less costs to sell will result in the recognition of an impairment loss.

EXAMPLE 5
Individual asset carried at fair value

On 1 January 2022 (beginning of the year) Digit Ltd owns a property which is rented out under an
operating lease agreement (investment property) and is carried at fair value of R500 000. The fair
value of the investment property is R510 000 at 30 June 2022, and costs to sell at that date would
amount to R15 000. Assume all amounts to be material.

On 30 June 2022 management decides to dispose of the investment property within the next year
and all other criteria to facilitate the classification of the asset as a non-current asset held for sale
have been met.

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SOLUTION 5
Applying the requirement in IFRS 5 that non-current assets to be classified as held for sale need to
have their carrying amounts measured in terms of applicable standards immediately before
classification as held for sale would mean that IAS 40 would be applied to determine the carrying
amount of the investment property on 30 June 2022.

However, investment properties fall outside the scope of the measurement requirements of
the standard in terms of IFRS 5.5 and should therefore be carried as a current asset at fair value
only (without deducting costs to sell) once classified as held for sale (see 5.5.1 and 5.5.2).
Consequently this newly determined carrying amount of R510 000 (fair value) should not be
compared to the fair value less costs to sell of the item involved [being R495 000 (R510 000 –
R15 000)], as the exception to measurement requirements applies. The investment property must
now be carried as a current asset at its new fair value of R510 000.

LECTURER’S COMMENT

Guidelines on applying IFRS 5 to an individual asset carried at fair value

• The carrying amount of the asset to be disposed of is measured at date of

initial classification as held for sale in accordance with the applicable
standard, for instance by applying the fair value model in IAS 40 – the
standard applicable – to the type of item (investment property) disposed
of.
• Since the fair value model is used, no depreciation is written off on the
investment property. However, if the cost model was used, the carrying
amount at initial classification as held for sale would be determined writing
off depreciation to the point of initial classification. Thereafter the carrying
amount is remeasured to the lower of this new carrying amount and fair
value less costs to sell. No further depreciation is written off after
remeasurement.
• No comparison of the newly measured carrying amount of the asset with
the fair value less costs to sell is made, as the item under discussion is
excluded from the measurement requirements of IFRS 5.
• The classification and presentation requirements of IFRS 5 will still apply
and the investment property will be carried as a current asset once
classified as held for sale.

5.6.3 Application of IFRS 5 to a disposal group at initial classification as

held for sale
A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group in
a single transaction, and liabilities directly associated with those assets that will be transferred in the
transaction.

Sometimes an entity disposes of a group of assets possibly with some directly associated liabilities,
together in a single transaction (IFRS 5.4). Immediately before the initial classification of the disposal
group as held for sale, the carrying amounts of the assets (or all the assets and liabilities in the
group) shall be measured in accordance with the applicable IFRSs (IFRS 5.18).

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EXAMPLE 6
Measurement of a disposal group

Candy Ltd (year-end 31 December 2020) decides on 30 September 2020 to dispose of a disposal
group within the next year. All the requirements for classification as held for sale have been met and
consequently the disposal group can be classified as held for sale. The carrying amounts of the
items included in the disposal group are the following (take note of the dates involved):

• Land (at 1 January 2020):

Carrying amount R150 000
• Factory building (at 1 January 2020):
Carrying amount R520 000 (depreciate: reducing balance at 6.667% per annum)
• Plant (at 1 January 2020):
Carrying amount R200 000 (depreciate: reducing balance at 13.3333% per annum)
• Inventories:
Carrying amount R50 000 (at 30 September 2020 with a net realisable value (NRV) of R45 000)
• Payables associated with the plant, inventories and factory building:
R25 000 (at 30 September 2020)
• Share investment:
Fair value R110 000 (30 September 2020)
The fair value of the disposal group at 30 September 2020, date of initial classification as held for
sale, amounted to R980 000 (amount assumed), and costs associated with selling the disposal group
amounted to
• commission on sale of all items in disposal group = R50 000
• CGT on disposal of factory = R20 000

SOLUTION 6
In this case, although the share investments fall outside the scope of IFRS 5 regarding measurement
requirements, the disposal group as a whole will be subject to the measurement requirements since
other non-current assets within the scope of IFRS 5 form part of the group. The whole disposal group
will thus be measured at the lower of carrying amount and fair value less costs to sell.

Step 1:

Determine the carrying amount of all the individual assets in the disposal
group at 30 September 2020
R
Land at cost 150 000
Factory building [520 000 – (520 000 x 6.667% x 9/12)] (IAS 16 applicable) 494 000
Plant [200 000 – (200 000 x 13.3333% x 9/12)] (IAS 16 applicable) 180 000
Inventories – use NRV since lower than cost (IAS 2 applicable) 45 000
Payables – cost (IFRS 9 applicable) (25 000)
Share investments – fair value (IFRS 9 applicable) 110 000

Total carrying amount 954 000

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Step 2:

Determine the fair value less costs to sell of the disposal group at
30 September 2020
R
Fair value less costs to sell (980 000 – 50 000) 930 000

Note: CGT is excluded specifically per the definition of costs to sell (see 5.2).

Step 3:

Determine the lower of carrying amount and fair value less costs to sell
at 30 September 2020
R
Fair value less costs to sell (980 000 – 50 000) 930 000
Carrying amount 954 000

Measure the disposal group held for sale at the fair value less costs to sell,
as this is the lower of the two figures calculated. 930 000

Step 4:

Calculate the impairment loss at 30 September 2020

R
Carrying amount less fair value less costs to sell (954 000 – 930 000) 24 000

LECTURER’S COMMENT

Guidelines on approaching this question

• All the assets and liabilities in the disposal group initially classified as held
for sale will first be measured to their carrying amounts by applying the
IFRSs applicable to them. Note the applicable standard in brackets.
• The fair value less costs to sell of the whole disposal group is then
determined. Note the calculation of fair value less costs to sell per
definition.
• The disposal group will then be measured to the lower of its carrying
amount and fair value less costs to sell. This is done by allocating the
impairment loss of R24 000 to non-current assets within the scope of the
measurement requirements of IFRS 5 (a detailed discussion and
examples of the matter appears below).

Note: If none of the assets in a disposal group falls within the scope of measurement requirements
of IFRS 5, then the measurement requirement of IFRS 5 will not be applicable to the disposal group
and the assets in the group will merely be carried at their values determined by applying their
applicable standards.

EXAMPLE 7
Eish-Deish Ltd decides on 30 June 2020 to dispose of all its share investments in one transaction at
some point during the next year. All the requirements for classification as held for sale of this disposal
group have been met. Consequently the disposal group can be classified as held for sale. Eish-
Deish Ltd has a 31 December year-end and accounts for their share investments according to
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IFRS 9. The share investments are designated as financial assets at fair value through profit or loss.

The carrying amounts of the items included in the disposal group are the following:

• Speculative share investments at fair value at 1 January 2020: R85 000; 30 June 2020: R90 000
• Long-term share investments at fair value at 1 January 2020: R95 000; 30 June 2020: R105 000

The fair value of the disposal group at 30 June 2020 amounted to R195 000, and costs associated
with selling amounted to

• commission on sale of both investments = R23 000 (assumed)

• CGT on disposal of investments = R10 000 (assumed)

SOLUTION 7
Share investments fall outside the scope of IFRS 5 regarding measurement requirements, and thus
the disposal group as a whole will be excluded from the scope of IFRS 5 in respect of measurement
requirements. Consequently, the investments will be shown at fair value without deducting costs to
sell and not the lower of carrying amount and fair value less costs to sell.

Step 1:

Determine the carrying amount of the individual assets in the disposal

group at 30 June 2020
R
Speculative share investments – fair value (IFRS 9) 90 000
Other share investments – fair value (IFRS 9) 105 000

Total carrying amount 195 000

LECTURER’S COMMENT

Guidelines on approaching this question

• The assets in the disposal group reclassified as held for sale will first be
measured to their carrying amounts at the point of classification as held
for sale by applying the IFRSs applicable to them. In this case the fair
value adjustment to the investments will be R15 000 in total (R195 000 –
R180 000) and this amount is taken to profit or loss.
• The fair value less costs to sell of the whole disposal group is not
determined as all assets in the disposal group fall outside the scope of the
measurement requirements of IFRS 5.

5.6.4 Other matters in respect of measurement

Non-current assets are sometimes acquired with a view to dispose of them in the short term.

If a newly acquired non-current asset (or disposal group) meets the criteria to be classified as held
for sale, applying the measurement requirements of IFRS 5 (refer to IFRS 5.15) will result in the
asset (or disposal group) being measured on initial recognition at the lower of its carrying amount
had it not been classified as held for sale (e.g. its cost) and its fair value less costs to sell. If the asset
(or disposal group) is acquired as part of a business combination, it shall be measured at acquisition
at fair value less costs to sell (IFRS 5.16).

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EXAMPLE 8
Titan Ltd buys a non-current asset (PPE item) with a cost price of R105 000 and a fair value of
R110 000 cash. Costs to resell the asset amount to R10 000. The asset was acquired with a view to
dispose of it within the next 6 months. All other criteria necessary for classification as a non-current
asset held for sale have been met.

SOLUTION 8
Following the general principles discussed above, this asset will be measured at the lower of its cost
and fair value less costs to sell at initial recognition. This means that the asset will be recognised at
initial recognition at R100 000 (R110 000 – R10 000). Presumably this will lead to the asset being
recorded at R100 000, the bank being credited with R105 000 and an impairment loss of R5 000
being recognised immediately.

5.6.5 Subsequent remeasurement of an individual asset or disposal

group
Assets or disposal groups classified as held for sale will have to be remeasured to their fair value
less costs to sell if a year-end occurs between the date of initial classification as held for sale and
the final date of disposal.

Assets that fall outside the scope for measurement requirements for IFRS 5
Individual non-current assets that fall outside the scope of the measurement requirements of
IFRS 5 will subsequently be measured by merely applying the applicable standards.

On subsequent remeasurement of a disposal group, the carrying amounts of any assets and
liabilities that are not within the scope of the measurement requirements of this IFRS, but are
included in a disposal group classified as held for sale (including current assets such as inventories),
shall be remeasured in accordance with applicable standards before the fair value less costs to sell
of the disposal group is remeasured (IFRS 5.19).

Assets that fall within the scope for measurement requirements for IFRS 5

On subsequent remeasurement of an individual asset or disposal group, the carrying amounts of

non-current assets that fall within the scope of the measurement requirements of IFRS 5.5 will be
the fair value less costs to sell less any impairment losses that were determined at initial
classification. If the fair value less costs to sell at subsequent remeasurement is different from the
fair value less costs to sell at initial classification, the asset should be remeasured to the "new" fair
value less costs to sell, resulting in a further impairment loss or a reversal of a previous impairment
loss. (Refer to 5.7.)

5.7 RECOGNITION OF IMPAIRMENT LOSSES AND REVERSALS

5.7.1 Impairment loss for an individual non-current asset
At initial classification and measurement as well as subsequent remeasurement

An entity shall recognise an impairment loss for any initial or subsequent write-down of the non-
current asset to fair value less costs to sell (IFRS 5.20).

The impairment loss calculated will be treated in terms of IFRS 5. Therefore, regardless of whether
the assets are carried at the cost model or the revaluation model, the impairment loss will be treated
the same. The carrying amount of the asset affected will be credited and the impairment loss
will be debited in P/L in the statement of profit or loss and other comprehensive income (not
revaluation surplus).
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5.7.2 Impairment loss for a disposal group

At initial classification and measurement as well as subsequent remeasurement leading to
an impairment loss

The impairment loss recognised for a disposal group shall reduce the carrying amount of the non-
current assets that fall within the scope of the measurement requirements of IFRS 5 (see 5.5.2 for
exclusions) in the order of allocation set out in IAS 36.104(a), (b) and .122 Impairment of assets
(IFRS 5.23).

The impairment loss shall be allocated to reduce the carrying amounts of the assets (group of assets)
in the following order: first against goodwill and the remainder against other assets in proportion to
their carrying amounts (IAS 36.104 (a), (b) and .122). Current assets forming part of the disposal
group will not be reduced by the impairment loss.

EXAMPLE 9
The information in example 6 in 5.6.3 will be used here to illustrate the accounting treatment of an
impairment loss.

SOLUTION 9
The impairment loss calculated in example 6 amounted to R24 000 and the whole amount will appear
in the statement of comprehensive income (P/L). Since the total non-current assets subject to
impairment amounted to R824 000 (= 150 000 + 494 000 + 180 000), the allocation of the impairment
loss to the individual assets will be as follows:

Carrying amounts Impairment loss Carrying

on classification allocated amount after
impairment
loss
R R R
Land 150 000 (4 369) (1) 145 631
Factory building 494 000 (14 388) (2) 479 612
Plant 180 000 (5 243) (3) 174 757
Inventories 45 000 NIL (4) 45 000
Payables (25 000) NIL (5) (25 000)
Share investment 110 000 NIL (6) 110 000

Total carrying amount 954 000 (24 000) 930 000

It is vital that you understand the arguments set out in the calculations and explanations
below:

(1) 24 000 x 150 000/824 000

(2) 24 000 x 494 000/824 000
(3) 24 000 x 180 000/824 000
(4) Asset already subjected to a net realisable value test in terms of IAS 2 – the equivalent of
impairment tests for current assets – and IFRS 5.23 specifically refers to only non-current
assets for allocation of impairment loss.
(5) Not an asset and not subject to impairment.
(6) Since IFRS 5.23 specifically states that only non-current assets that fall within the scope of the
measurement requirements of IFRS 5.5 should be reduced by the impairment loss for the
disposal group and investments fall outside the scope of measurement requirements of
IFRS5.5, no portion of the impairment loss is allocated to the share investments. This would
also have been the case if the share investments were, say, an investment property carried

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under the fair value model. The reasoning is presumably that the fair value of the asset (not
less costs to sell) will reflect any drop in fair value in any case.

5.7.3 Reversal of an impairment loss/gain on remeasurement of an

individual asset
An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of an
asset, but not in excess of the cumulative impairment loss that has been recognised either in
accordance with IFRS 5 or previously under IAS 36 Impairment of assets (IFRS 5.21).

5.7.4 Recognition of gains and losses at date of sale of a non-current

asset
A gain or loss not previously recognised at either initial classification or subsequent remeasurement
shall be recognised at the date of derecognition.

Requirements of non-current assets falling within the scope of IFRS 5 relating to derecognition are
set out in IAS 16.67 to 72 Property, plant and equipment and IAS 38.112 to 117 Intangible assets.
The derecognition requirements are as follows:

• The gain or loss arising from derecognition of an item of PPE/intangible asset must be included
in profit or loss (the statement of profit or loss and other comprehensive income) when the item
is derecognised. Gains shall not be classified as revenue (IAS 16.68).
• In determining the date of disposal of an item, an entity applies the criteria in IFRS 15 Revenue
from contracts with customers for recognising revenue from the sale of goods – all the criteria
must be met (IAS 16.69).
• The gain or loss arising from the derecognition of a PPE item of property, plant and equipment
shall be determined as the difference between the net disposal proceeds, if any, and the carrying
amount of the item (IAS 16.71).
• The consideration receivable on disposal of an item of PPE is recognised initially at its fair value.
If payment for the item is deferred, the consideration received is recognised initially at the cash
price equivalent. The difference between the nominal amount of the consideration and the cash
price equivalent is recognised as interest revenue under IFRS 15 Revenue from contracts with
customers reflecting the effective yield on the receivable (IAS 16.72).

EXAMPLE 10
Purple Heather Ltd has classified an item as held for sale on 30 June 2020 after all the criteria for
classification have been met and an impairment loss of R50 000 was recognised in profit or loss.
This resulted in a carrying amount of R850 000. At 31 December 2020 (year-end) the fair value less
costs to sell of the PPE item was once again lower than its carrying amount at that date and
consequently the item was subsequently remeasured at fair value less costs to sell of R810 000,
recognising an impairment loss of R40 000 in profit or loss. The asset is finally disposed of at
R830 000 at 30 April 2021 after all the criteria for derecognition have been met.

The effect of the above scenario on the statement of profit or loss and other comprehensive income
in 2020 and 2021 is the following:

2020

A first impairment loss of R50 000 was recognised at initial classification as held for sale on
30 June 2020. A second impairment loss of R40 000 (850 000 – 810 000) was recognised at
remeasurement on 31 December 2020.

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2021

A final gain of R20 000 (830 000 – 810 000) is recognised at derecognition on final disposal.

5.8 NON-CURRENT ASSETS TO BE ABANDONED

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing use.

This difference in treatment arises since the carrying amount of the abandoned asset (or disposal
group) will be recovered principally through continuing use, whereas that of an asset (or disposal
group) held for sale will be recovered through sale. Consequently, an entity shall not classify as held
for sale a non-current asset (or disposal group) that is to be abandoned.

Non-current assets (or disposal groups) to be abandoned include non-current assets (or disposal
groups) that are to be used to the end of their economic life, as well as non-current assets (or
disposal groups) that are to be closed down rather than sold (IFRS 5.13).

An entity shall not account for a non-current asset that has been temporarily taken out of use as if it
had been abandoned (IFRS 5.14).

5.9 CHANGES TO A PLAN OF SALE

5.9.1 General
If an entity has previously classified an asset (or disposal group) as held for sale, but the criteria for
classification as held for sale are no longer met, the entity shall cease to classify the asset (or
disposal group) as held for sale (IFRS 5.26).

The entity shall measure a non-current asset that ceases to be classified as held for sale (or ceases
to be included in a disposal group classified as held for sale) at the lower of

• its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted
for any depreciation, amortisation or revaluations that would have been recognised had the asset
(or disposal group) not been classified as held for sale
• its recoverable amount at the date of the subsequent decision not to sell (IFRS 5.27)

5.9.2 Individual assets no longer classified as held for sale

The entity shall include any required adjustment to the carrying amount of a non-current asset that
ceases to be classified as held for sale in income from continuing operations in the period in which
the criteria for classification are no longer met.

The adjustment must be included in the same caption in the statement of comprehensive income
used to present a gain or loss, if any, that is recognised on measuring an item that has been classified
as held for sale but that is not a discontinued operation. However, if the asset under consideration
is either a PPE item or intangible asset that has been carried under the revaluation model per IAS
16 or IAS 38, the adjustment shall be treated as a revaluation increase or decrease (IFRS 5.28).

EXAMPLE 11
Monty Ltd classified a patent as held for sale on 30 June 2020 (its year-end) as it had met all the
criteria for classification as held for sale on that date. The patent had a carrying amount and fair
value less costs to sell of R960 000 at year-end, an original cost of R1 600 000 and amortisation on
the item is written off at 20% per annum on the straight-line basis with no residual value anticipated
at any time in the future.
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Due to a change in patent rights promulgated on 1 April 2021, Monty Ltd decided to no longer dispose
of the patent and consequently the asset had to be reclassified. The recoverable amount of the asset
under consideration amounted to R700 000 on 1 April 2021 and its useful life on that date was 2,25
years.

REQUIRED

Calculate the carrying amount at which the patent should be reinstated on

1 April 2021 due to the decision to no longer sell the asset, the adjustment to the
carrying amount, as well as the applicable amortisation for 2021. Also state under
which caption in the statement of profit or loss and other comprehensive income
the adjustment to the carrying amount should be reflected.

SOLUTION 11
The asset no longer classified as held for sale should be reinstated at the lower of what its carrying
amount would have been had it never been classified as held for sale and its recoverable amount.

Step 1:
Calculate what the carrying amount would have been on 1 April 2021 if the intangible asset
had never been classified as held for sale

R
Carrying amount on 30 June 2020 960 000
Amortisation from 1 July 2020 to 31 March 2021 (1 600 000 x 20% x 9/12) (240 000)
Carrying amount at 1 April 2021 720 000
Recoverable amount at 1 April 2021 700 000

The lower of the two is the recoverable amount of R700 000 and therefore the asset should be
remeasured to this amount at 1 April 2021.

Step 2:
Calculate the adjustment to the existing carrying amount on reclassification

R
Held for sale item carried at 960 000
Carrying amount on 1 April 2021 once no longer held for sale 700 000

Adjustment to carrying amount – write-off 260 000

Amortisation during 2021

The new carrying amount at 1 April 2021 from the previous calculation is R700 000 and the remaining
useful life would be 2,25 years on that date. Since the patent has no residual value, the amortisation
for 2021 will be R77 778 (R700 000/2,25 x 3/12).

The adjustment of R260 000 should be disclosed as a deduction from other income or as part of
other expenses.

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5.9.3 Individual item part of disposal group, no longer classified as held

for sale
If an entity removes an individual asset or liability from a disposal group classified as held for sale,
the remaining assets and liabilities of the disposal group still to be sold shall continue to be measured
as a group only if the group still meets the criteria in 5.3.1.
Otherwise, the remaining non-current assets of the group that individually still meet the criteria to be
classified as held for sale shall be measured individually at the lower of their carrying amounts and
fair values less costs to sell at that date. Any non-current assets that no longer meet the criteria shall
cease to be classified as held for sale (IFRS 5.29).

EXAMPLE 12
Widget Ltd (year-end 31 December 2019) classified the following group of assets as a disposal group
held for sale on 2 January 2020, having met all the criteria for classification as held for sale required
by IFRS 5. The effect of the classification as held for sale and measurement at initial classification
is set out in the table below:

Carrying
amounts on Impairment Carrying amount
classification loss allocated after impairment
loss
R R R
Land 100 000 5 759 94 241
Factory building 475 000 27 356 447 644
Widget plant1 189 000 10 885 178 115
Inventories 45 000 Nil 45 000
Payables (35 000) Nil (35 000)
Share investments 110 000 Nil 110 000
Total carrying amount 884 000 44 000 840 000

1 Depreciation provided for at 15% per annum straight-line based on a cost of R240 000 (no
residual value). The recoverable amount of the widget plant based on value in use is R180 000
at 31 May 2020, and the remaining useful life of the widget plant on 31 May 2020 is 5 years and
3 months. The residual value of the asset has not changed and is still Rnil.

On 31 May 2020 the directors reconsidered and decided to no longer dispose of the widget plant as
they unexpectedly secured a large contract for the production of widgets for the next five years –
consequently the widget plant was removed from the disposal group. The inventories retained their
net realisable value determined on 2 January 2020 and all payables have been repaid since initial
classification as held for sale. The fair value of the share investments has not changed. The group
still meets the criteria for classification as a disposal group after the removal of the widget plant.

REQUIRED

Determine the carrying amount of the widget plant after the decision to no longer
sell it has been made, the adjustment to the statement of profit or loss and other
comprehensive income due to the reclassification, the depreciation charge for
2020, as well as the carrying amount of the disposal group after the removal of
the widget plant.

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SOLUTION 12

Step 1:
Calculate the carrying amount of the widget plant on removal from the disposal group on
31 May 2020
R
Carrying amount as it would have been if the disposal group was never
classified as held for sale [R189 000 – (240 000 x 15% x 5/12)] 174 000
Recoverable amount (given) 180 000

The lower of the two alternatives should be taken, thus the carrying amount of R174 000.

Step 2:
Calculate the adjustment in the statement of profit or loss and other comprehensive income
of 2020 due to reclassification

R
Carrying amount determined on 2 January 2020 178 115
Carrying amount determined on 31 May 2020 174 000
Adjustment to statement of profit or loss and other comprehensive income – loss
recognised 4 115

LECTURER’S COMMENT
Note that the adjustment in respect of reclassification of the widget plant would
have been different if the recoverable amount was, say, R160 000 (i.e. lower than
the carrying amount at 31 May of R174 000).

Depreciation charge for 2020 on the widget plant:

R
Carrying amount on 31 May 2020 174 000
Depreciation charge (174 000/5,25 x 7/12) 19 333

Carrying amount of disposal group after removal of the widget plant on 31 May 2020:

R
Carrying amount including the widget plant 840 000
Carrying amount excluding the widget plant (840 000 – 178 115 + 35 000
(payables)) 696 885

5.10 PRESENTATION AND DISCLOSURE OF A NON-CURRENT ASSET

OR DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE

5.10.1 Presentation
An entity shall present a non-current asset classified as held for sale and the assets of the disposal
group classified as held for sale separately from other assets in the statement of financial position.
The liabilities of a disposal group classified as held for sale shall be presented separately from other
liabilities in the statement of financial position. Those assets and liabilities shall not be offset and
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presented as a single amount. The major classes of assets and liabilities classified as held for sale
shall be separately disclosed either on the face of the statement of financial position or in the notes.
An entity shall present separately any cumulative income or expense recognised in other
comprehensive income relating to a non-current asset (or disposal group) classified as held for sale
(IFRS 5.38).

If the disposal group is a newly acquired subsidiary that meets the criteria to be classified as held for
sale on acquisition, disclosure of the major classes of assets and liabilities is not required (IFRS
5.39).

• An entity shall not reclassify or re-present amounts presented for non-current assets or for the
assets and liabilities of disposal groups classified as held for sale in the statement of financial
position for prior periods to reflect the classification in the statement of financial position for the
latest period presented (IFRS 5.40).

5.10.2 Additional disclosures – IFRS 5.41

An entity shall disclose the following information in the notes in the period in which a non-current
asset (or disposal group) has been either classified as held for sale or sold:

• a description of the non-current asset (or disposal group)

• a description of the facts and circumstances of the sale, or leading to the expected disposal, and
the expected manner and timing of that disposal
• the gain or loss recognised and, if not separately presented on the face of the statement of
comprehensive income, the caption in the statement of comprehensive income that includes that
gain or loss
• if applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8 Operating segments

Refer to the integrated example at the end of the learning unit for a model disclosure of non-current
assets or disposal group held for sale.

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PART II: DISCONTINUED OPERATIONS

5.11 INTRODUCTION
5.11.1 Objective
The objective of this standard is to specify the accounting for assets held for sale and the
presentation and disclosure of discontinued operations (IFRS 5.01).

5.11.2 Definition
As per the definitions under 5.2 above, a discontinued operation is a component of an entity that
either has been disposed of or is classified as held for sale and
• represents a major line of business or geographical area of operations,
• is a part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations, or
• is a subsidiary acquired exclusively with a view to resale (IFRS 5.32)

5.11.3 Classification as discontinued operation

The IFRS classifies an operation as discontinued at the date that the operation meets the criteria to
be classified as held for sale or when the entity has disposed of the operation.

5.12 PRESENTATION AND DISCLOSURE

An entity shall present and disclose information that enables users of the financial
statements to evaluate the financial effects of discontinued operations and disposals of non-
current assets (or disposal groups) (IFRS 5.30).

An entity shall disclose a single amount on the face of the statement of profit or loss and other
comprehensive income comprising the total of

• the post-tax profit or loss of discontinued operations

• the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operations

An entity shall also disclose an analysis1 of the above single amount into

• the revenue, expenses and pre-tax profit or loss of discontinued operations

• the related income tax expense as required by paragraph 81(h) of IAS 12
• the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal
of the assets or disposal group(s) constituting the discontinued operation
1. The analysis may be presented in the notes or on the face of the statement of profit or loss
and other comprehensive income. For the purpose of this module, we will present it on the
face of the statement of profit or loss and other comprehensive income (IFRS 5.33).

If an entity presents the components of profit or loss in a separate statement of profit or loss
and other comprehensive income as described in IAS 1.81, a section identified as relating to
discontinued operations is presented in that separate statement.

An entity shall re-present the disclosures in IFRS 5.33 (above) for prior periods presented in the
financial statements so that the disclosures relate to all operations that have been discontinued by

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the end of the reporting period for the latest period presented (IFRS 5.34).

Adjustments in the current period to amounts previously presented in discontinued operations that
are directly related to the disposal of a discontinued operation in a prior period shall be classified
separately in discontinued operations. The nature and amount of such adjustments shall be
disclosed. Examples of circumstances in which these adjustments may arise include the following
(IFRS 5.35):

• the resolution of uncertainties that arise from the terms of the disposal transaction, such as the
resolution of purchase price adjustments and indemnification issues with the purchaser
• the resolution of uncertainties that arise from and are directly related to the operations of the
component before its disposal, such as environmental and product warranty obligations retained
by the seller
• the settlement of employee benefit plan obligations, provided that the settlement is directly
related to the disposal transaction

If an entity ceases to classify a component of an entity as held for sale, the results of operations of
the component previously presented in discontinued operations in accordance with IFRS 5.33–35
shall be reclassified and included in income from continuing operations for all periods presented.
The amounts for prior periods shall be described as having been re-presented (IFRS 5.36).

5.13 GAINS OR LOSSES RELATING TO CONTINUING OPERATIONS

Any gain or loss on remeasurement of a non-current asset (or disposal group) classified as held for
sale that does not meet the definition of a discontinued operation, shall be included in profit or loss
from continuing operations (IFRS 5.37).

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5.14 MODEL FOR DISCLOSURE

XXX LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 20.0
Notes R
CONTINUING OPERATIONS
Revenue XXXX
Cost of sales (XXX)
Gross profit XXXX
Other expenses (XXX)
Finance costs (XX)
Profit before tax XXX
Income tax expense (XX)
Profit for the year from continuing operations XXX

DISCONTINUED OPERATIONS

Revenue XXX
Expenses (XXX)
Loss before tax (XXX)
Income tax benefit XX
Loss after tax (XXX)
Loss after tax on measurement of non-current asset held for (XX)
sale/disposal group
Loss on measurement of non-current asset held for sale to fair value less
costs to sell (XX)
Income tax benefit X
Loss for the year from discontinued operations (XX)

PROFIT FOR THE YEAR XXXXXX

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5.15 COMPREHENSIVE EXAMPLES

EXAMPLE 13
Aqua Ltd manufactures and sells water sports equipment and has branches in Cape Town,
Gqeberha and East London. The East London branch, whose results were previously reported in
the Eastern Cape geographical segment, incurred losses over the past two years. On 31 March 2020
the board of directors approved a detailed formal disposal plan for the discontinuance of the branch
and on the same date made a public announcement. The approved formal plan regarding the
piecemeal sale of the assets was at a stage of completion on 30 September 2020 where there was
no realistic possibility of withdrawal. Binding sale agreements regarding property and plant were
concluded. The plan for the discontinuance of the East London branch was expected to be
completed on 28 February 2021. Aqua Ltd's year-end is 31 December. All the remaining assets and
liabilities were taken over by the continuing operation.

The following information is presented to you on 31 December 2020 (before taking into account any
adjustments due to the discontinuance):

Balances in the statement of financial position

Cape Town
East and Gqeberha
London
R R
Property, plant and equipment 200 000 1 000 000
Current assets 40 000 200 000
Long-term liabilities 90 000 300 000
Current liabilities 60 000 150 000

Actual results – continuing operations

Cape Town and

Cape Town Gqeberha Gqeberha
01/01/2020 to 01/01/2020 to 01/01/2019 to
31/12/2020 31/12/2020 31/12/2019
R R R
Revenue 800 000 770 000 1 250 000
Cost of sales 350 000 355 000 500 000
Other expenses 325 000 297 000 515 000

Actual results – discontinued operations

East East East East

London London London London
01/01/2020 to 01/04/2020 to 01/10/2020 to 01/01/2019 to
31/03/2020 30/09/2020 31/12/2020 31/12/2019
R R R R
Revenue 75 000 100 000 60 000 250 000
Cost of sales 60 000 70 000 45 000 200 000
Other expenses 20 000 30 000 20 000 60 000

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Discontinuance cost of discontinued operations

01/01/2021 to 31/03/2020 to
28/02/2021 31/12/2020
Estimated Actual
R R
Direct costs of discontinuance 3 000 4 500
Severance pay payable to employees 20 000 –
Fines (discontinuance of contracts) 3 000 –
Revenue 30 000 –
Cost of sales 25 000 –
Other expenses 10 000 –

Other information

2020 2019
R R
Finance cost (continuing operations) 15 000 15 000
Tax (continuing and discontinued operations) 65 240 63 000
Current tax 65 240 63 000
Dividends paid 50 000 40 000

Tax was calculated before taking into account the finance cost paid and the direct costs to
discontinue the East London branch as well as the estimated gross discontinuance loss in 2021.

Additional information

1. The direct cost of discontinuance is tax deductible. Assume that the severance pay and fines
are not deductible for tax purposes.
2. On 30 September 2020 information regarding the piecemeal sale of property and plant to two
independent parties relating to the discontinued operation was as follows:

Tax base Carrying Contract Contract settlement

amount price date
R R R R
Property 120 000 120 000 105 000 28 February 2021
Plant 80 000 80 000 80 000 28 February 2021
200 000 200 000 185 000

3. On 30 September 2020 the plant was withdrawn from operations.

4. Assume an income tax rate of 28%. 80% of all capital gains are taxable.
5. There is no difference between the carrying amount and the tax base of the property.
6. There are no non-taxable income, non-deductible expenses or temporary differences other than
those evident from the question.

REQUIRED
(a) Prepare the statement of profit or loss and other comprehensive income of
Aqua Ltd for the year ended 31 December 2020.
(b) Prepare the income tax expense note, as well as the note on non-current
assets held for sale for the year ended 31 December 2020. Accounting
policy notes are not required.

Your answer must comply with International Financial Reporting Standards.

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SOLUTION 13

AQUA LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 2020
Notes 2020 2019
R R
CONTINUING OPERATIONS
Revenue (1) 1 570 000 1 250 000
Cost of sales (2) (705 000) (500 000)
Gross profit 865 000 750 000
Other expenses (3) (622 000) (515 000)
Finance costs (15 000) (15 000)
Profit before tax 228 000 220 000
Income tax expense (6) 2 (63 840) (61 600)
Profit for the year from continuing operations 164 160 158 400

DISCONTINUED OPERATIONS

Revenue (4) 235 000 250 000

Expenses (5) (275 500) (260 000)
Loss before tax (40 500) (10 000)
Income tax benefit (7) 2 4 900 2 800
Loss after tax (35 600) (7 200)
Loss after tax on measurement (10 800) –
Loss on measurement of non-current asset held for sale
to fair value less costs to sell (9) (15 000) –
Income tax benefit (9) 4 200 –
Loss for the year from discontinuing operations (46 400) (7 200)

PROFIT FOR THE YEAR 117 760 151 200

AQUA LTD

NOTES FOR THE YEAR ENDED 31 DECEMBER 2020

1. Accounting policy

1.1 Non-current assets held for sale

Non-current assets or disposal groups are classified as non-current assets held for sale when the
carrying amount of the asset or the disposal group will be recovered through a sale transaction rather
than through use of the asset or the disposal group.

Immediately before the classification of the asset or disposal group as held for sale, the carrying
amount of the assets or the carrying amount of the assets and liabilities in the disposal group are
measured in accordance with the applicable IFRSs. Subsequently the asset or the disposal group
measured at the lower of its carrying amount and the fair value less costs to sell of the asset or the
disposal group. Any adjustment is recorded in profit or loss.

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2. Income tax expense

2020 2019
R R
Major components of tax expense
Current tax 59 780 58 800
Continuing operations (calc 6) 63 840 61 600
Discontinued operations (calc 7) (4 060) (2 800)
Deferred tax (5 040) –
Continuing operations – –
Discontinued operations (840 (calc 8) + 4 200 (calc 9)) (5 040) –
Tax expense 54 740 58 800

3. Non-current assets held for sale

A decision to dispose of property and plant, due to the fact that the branch incurred losses for the
past two years, was taken in March 2020 after approval of a detailed formal disposal plan for the
discontinuance of the East London branch. The plan regarding the piecemeal sale of the assets was
at a stage of completion on 30 September 2020 where there was no realistic possibility of withdrawal.
The assets were expected to be sold for cash and the disposal was expected to be completed by
28 February 2021.

The non-current assets held for sale comprise the following:

2020
R
Assets
Property (calc 9) 105 000
Plant 80 000
185 000

An impairment loss of R15 000 (pre-tax) was recognised on initial classification of the property as
held for sale and this amount was included under loss after tax on measurement on the face of the
statement of profit or loss and other comprehensive income.

The assets are part of the Eastern Cape geographical segment.

LECTURER’S COMMENT

The information regarding the disposal of the property and plant of the East
London branch is disclosed in the note "Non-current assets held for sale"
because the assets were sold independently (piecemeal) to two different
parties and no liabilities directly associated with these assets were
transferred. Therefore it does not qualify to be classified as a disposal group.

CALCULATIONS
1. 800 000 + 770 000 = 1 570 000
2. 350 000 + 355 000 = 705 000
3. 325 000 + 297 000 = 622 000
4. 75 000 + 100 000 + 60 000 = 235 000
5. (60 000 + 70 000 + 45 000)1 + (20 000 + 30 000 + 20 000)2 + (3 000 + 20 000 +
3 000)3 + 4 5004 = 275 500

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1 Cost of sales
2 Other expenses
3 Provision for costs related to discontinuance
4 Actual cost of discontinuance

6. Tax on continuing operations

2020 2019
R R
Profit before tax 228 000 220 000
Temporary differences – –
Non-taxable/non-deductible differences – –

Taxable income 228 000 220 000

Tax @ 28% 63 840 61 600

7. Tax on discontinued operations

2020 2019
R R
Profit/(loss) before tax (40 500) (10 000)
Exempt differences 23 000 –
− Severance pay to employees 20 000
− Fines 3 000
Temporary differences
Provision for direct cost of discontinuance 3 000 –
Taxable income/(loss) (14 500) (10 000)
Current tax @ 28% (4 060) (2 800)

8. Deferred tax on discontinued operations

2020 2019
R R
Deferred tax balance beginning of year – –
Deferred tax balance end of year (asset) 8401 –

Deferred tax movement (Cr to P/L) 840 –

Deferred tax balance

Carrying Temporary Deferred tax

amount Tax base difference asset/(liability)
R R R R
Provision for direct cost of
discontinuance 3 000 – 3 000 840

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9. Carrying amount of property and plant to be sold

2020
R
Property – impairment loss
− Original carrying amount 120 000
− Contract price ("new" carrying amount) (105 000)
Impairment loss 15 000
Deferred tax thereon 4 200

LECTURER’S COMMENT
Provisions are made for the following future expenses:
• severance pay
• fines on discontinuance of contracts
• estimated direct future cost of discontinuance

The provisions were made because

• there is a present obligation at year-end as a result of a past event (the
approval and announcement of a formal disposal plan for the discontinued
operation)
• it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation
• a reliable estimate of these amounts of obligations can be made (IAS
37.14)

There is no tax on the severance pay and fines, but deferred tax must be
provided for on the provision for direct future discontinuance costs. The reason
is that SARS will not allow the provision as a deduction in the current year, but
will allow it when the expense is actually paid.

An impairment loss is a temporary difference. Deferred tax is calculated on it

at 28%.

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EXAMPLE 14
Aqua Ltd manufactures and sells water sports equipment and has branches in Cape Town,
Gqeberha and East London. The East London branch, whose results were previously reported in
the Eastern Cape geographical segment, incurred losses over the past two years. On 31 March 2020
the board of directors approved a detailed formal disposal plan for the discontinuance of the branch
and on the same date made a public announcement. The approved formal plan regarding the once-
off sale of assets and liabilities was at a stage of completion on 30 September 2020 where there
was no realistic possibility of withdrawal. A binding sale agreement regarding the assets and
liabilities was concluded. The plan for the discontinuance of the East London branch was expected
to be completed on 28 February 2021. Aqua Ltd's year-end is 31 December.

The following information is presented to you on 31 December 2020 (before taking into account any
adjustments due to the discontinuance):

Balances in the statement of financial position

Cape Town
East and Gqeberha
London
R R
Property, plant and equipment 200 000 1 000 000
Current assets 40 000 200 000
Long-term liabilities 90 000 300 000
Current liabilities 60 000 150 000

Actual results – continuing operations

Cape Town
and Gqeberha
Cape Town Gqeberha 01/01/2019 to
01/01/2020 to 01/01/2020 to 31/12/2019
31/12/2020 31/12/2020
R R R
Revenue 800 000 770 000 1 250 000
Cost of sales 350 000 355 000 500 000
Other expenses 325 000 297 000 515 000

Actual results – discontinued operations

East East East East

London London London London
01/01/2020 to 01/04/2020 to 01/10/2020 to 01/01/2019 to
31/03/2020 30/09/2020 31/12/2020 31/12/2019
R R R R
Revenue 75 000 100 000 60 000 250 000
Cost of sales 60 000 70 000 45 000 200 000
Other expenses 20 000 30 000 20 000 60 000

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Discontinuance cost of discontinued operations

01/01/2021 to 31/03/2020 to
28/02/2021 31/12/2020
Estimated Actual
R R
Direct costs of discontinuance 3 000 4 500
Severance pay payable to employees 20 000 –
Fines (discontinuance of contracts) 3 000 –
Revenue 30 000 –
Cost of sales 25 000 –
Other expenses 10 000 –

Other information 2020 2019

R R
Finance cost (continuing operations) 15 000 15 000
Tax (continuing and discontinued operations) 65 240 63 000

Current tax 65 240 63 000

Dividends paid 50 000 40 000

Tax was calculated before taking into account the finance cost paid and the direct costs to
discontinue the East London branch as well as the estimated gross discontinuance loss in 2021.

Additional information

1. The direct cost of discontinuance is tax deductible. Assume that the severance pay and fines
are not deductible for tax purposes.
2. The assets and liabilities of the East London branch meet all the criteria to be classified as a
disposal group. On 30 September 2020 the fair value less costs to sell of the disposal group
was R49 000.
3. On 30 September 2020 the plant was withdrawn from operations.
4. Assume an income tax rate of 28%. 80% of all capital gains are taxable.
5. There is no difference between the carrying amount and the tax base of the property.
6. There are no non-taxable income, non-deductible expenses or temporary differences other than
those evident from the question.

REQUIRED
(a) Prepare the statement of profit or loss and other comprehensive income of
Aqua Ltd for the year ended 31 December 2020.
(b) Prepare the income tax expense note as well as the note on the disposal
group for the year ended 31 December 2020.

Your answer must comply with International Financial Reporting Standards.

Accounting policy notes are not required.

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SOLUTION 14

AQUA LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 2020
Notes 2020 2019
R R R
CONTINUING OPERATIONS
Revenue (1) 1 570 000 1 250 000
Cost of sales (2) (705 000) (500 000)
Gross profit 865 000 750 000
Other expenses (3) (622 000) (515 000)
Finance costs (15 000) (15 000)
Profit before tax 228 000 220 000
Income tax expense (6) 2 (63 840) (61 600)
Profit for the year from continuing operations 164 160 158 400

DISCONTINUED OPERATIONS
Revenue (4) 235 000 250 000
Expenses (5) (275 500) (260 000)
Loss before tax (40 500) (10 000)
Income tax benefit (7) 2 4 900 2 800
Loss after tax (35 600) (7 200)
Loss after tax on measurement (10 800) –
Loss on measurement of non-current asset held for
sale to fair value less costs to sell (9) (15 000) –
Income tax benefit (9) 4 200 –

Loss for the year from discontinuing operations (46 400) (7 200)

PROFIT FOR THE YEAR 117 760 151 200

2. Income tax expense

2020 2019
R R
Major components of tax expense
Current tax 59 780 58 800
Continuing operations (calc 6) 63 840 61 600
Discontinued operations (calc 7) (4 060) (2 800)
Deferred tax (5 040) –
Continuing operations – –
Discontinued operations (840 (calc 8) + 4 200 (calc 9)) (5 040) –
Tax expense 54 740 58 800

3. Disposal group
A decision to dispose of assets, due to the fact that the branch incurred losses for the past two years,
was taken in March 2020 after approval of a detailed formal disposal plan for the discontinuance of
the East London branch. The plan regarding the once-off sale of assets and liabilities was at a stage
of completion on 30 September 2020 where there was no realistic possibility of withdrawal. The
disposal group was expected to be sold for cash and the disposal was expected to be completed by
28 February 2021.

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The disposal group under discussion comprises the following:

R
Assets
Property, plant and equipment (200 000 – 15 000) 185 000
Current assets 40 000
225 000

Liabilities
Long-term liabilities (given) 90 000
Current liabilities 60 000
Provision for discontinuance costs (20 000 + 3 000 + 3 000) 26 000
176 000

An impairment loss of R15 000 (pre-tax) was recognised on initial classification of the disposal group
as held for sale. This amount was included under loss after tax on measurement on the face of the
statement of profit or loss and other comprehensive income. The disposal group is presented as part
of the Eastern Cape geographical segment.

LECTURER’S COMMENT

The information regarding the disposal of the assets and liabilities of the East
London branch is disclosed in the note "disposal group" because the whole
group of assets and liabilities associated with those assets is disposed
of in a single transaction. Therefore it qualifies to be classified as a disposal
group.

CALCULATIONS
1. 800 000 + 770 000 = 1 570 000
2. 350 000 + 355 000 = 705 000
3. 325 000 + 297 000 = 622 000
4. 75 000 + 100 000 + 60 000 = 235 000
5. (60 000 + 70 000 + 45 000)1 + (20 000 + 30 000 + 20 000)2 + (3 000 + 20 000 + 3 000)3 +
4 5004 = 275 500
1 Cost of sales
2 Other expenses
3 Provision for costs related to discontinuance
4 Actual cost of discontinuance

6. Tax on continuing operations

2020 2019
R R
Profit before tax 228 000 220 000
Temporary differences – –
Non-taxable/non-deductible differences – –

Taxable income 228 000 220 000

Tax @ 28% 63 840 61 600

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7. Tax on discontinued operations

2020 2019
R R
Profit/(loss) before tax (40 500) (10 000)
Exempt differences 23 000 –
− Severance pay to employees 20 000 –
− Fines 3 000 –
Temporary differences –
− Provision for direct cost of discontinuance 3 000 –
Taxable income/(loss) (14 500) (10 000)
Current tax @ 28% (4 060) (2 800)

8. Deferred tax on discontinued operations

2020 2019
R R
Deferred tax balance beginning of year – –
Deferred tax balance end of year (asset) 840 –

Deferred tax movement (Cr to P/L) 840 –

Deferred tax balance

Carrying Temporary Deferred tax

amount Tax base difference asset/(liability)
R R R R
Provision for direct cost of
discontinuance 3 000 – 3 000 840

9. Carrying amount of disposal group

2020
R
Carrying amount of disposal group on classification
Property, plant and equipment 200 000
Current assets 40 000
Long-term liabilities (90 000)
Current liabilities (60 000)
Provision for discontinuance costs (20 000 + 3 000 + 3 000) (26 000)
64 000

Fair value less costs to sell 49 000

Impairment loss (64 000 – 49 000) 15 000

Allocated as follows:
− Property, plant and equipment 15 000

Deferred tax thereon (cr to P/L) (4 200)

5.16 E-TUTOR ACTIVITY

X-Treme Sports Ltd is a company that specialises in the manufacturing and distribution of race cars
and motorbikes. They also use their own race cars and motorbikes to compete in various races and
events, including Formula 1. The company is based in Kyalami, Johannesburg and has a 30 June
financial year-end.

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Motorbike division

During the 2020 financial year, a famous extreme sports biker, Johnny X, was involved in a serious
accident while performing at an event. He claims that his accident was caused by the malfunction of
his motorbike, which was manufactured by X-Treme Sports Ltd. The negative publicity after the
accident resulted in a significant decline in sales of motorbikes manufactured by X-Treme Sports Ltd.
The directors of X-Treme Sports Ltd subsequently decided to sell the motorbike manufacturing
division and on 31 March 2020 a detailed formal plan of disposal for the division was finalised. All
the other requirements for classification of the disposal group as held for sale were also met on this
date. The disposal group consists of only assets and the fair value less costs to sell of the disposal
group on date of classification as held for sale was estimated to be R126 000. At year-end, on
30 June 2020, the fair value less costs to sell of the disposal group was estimated to be R110 000.
Management expects that a binding sales agreement for all the assets of the disposal group will be
concluded by 1 November 2020, and the assets will be sold for cash.
Details of the motorbike division’s assets are as follows:

Carrying amount Recoverable

31 March 2020 amount
R 31 March 2020
R
Inventories 55 000 Not applicable
Machinery 86 000 90 000

The related income and expenditure of the motorbike division are as follows:

1 July 2019 to 1 April 2020 to

31 March 2020 30 June 2020
R R
Revenue 56 000 6 600
Cost of sales 16 800 14 000
Other expenses (including depreciation) 28 000 7 500

Inventories consist of motorbikes, motorbike spares and parts. Inventories are measured at the lower
of cost price or net realisable value using the first-in, first-out method. The net realisable value of the
inventory on 30 June 2020 amounted to R39 000. No inventory was purchased or manufactured
during the 2020 financial year.

SARS will allow a write-down to net realisable value of the inventory as a tax deduction.

Taxation

The South African normal tax rate is 28%. Assume that there is no difference between the carrying
amount and the tax base of the motorbike division’s assets.

Assumptions

Assume that all amounts are material.

Ignore the implications of VAT.

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REQUIRED

Prepare the statement of profit or loss and other comprehensive income of X-Treme Sports Ltd
only relating to the discontinued operation, for the year ended 30 June 2020. Ignore the
statement of profit or loss and other comprehensive income for the continued operations of X-
Treme Sports Ltd.

Disclose the disposal group note in the annual financial statements of X-Treme Sports Ltd for the
year ended 30 June 2020.

Note:
• Your answer must comply with the requirements of International Financial Reporting
Standards.
• Show all calculations.
• Round off all amounts to the nearest rand.
• Accounting policy notes are not required.
• Ignore comparative information.

ASSESSMENT CRITERIA

After having studied this learning unit, you should be able to

1. identify the purpose and scope of IFRS 5

2. apply the definitions
3. apply the criteria to identify a non-current asset or disposal group held for
sale in terms of IFRS 5
4. apply the first measurement rule of IFRS 5 to individual non-current assets
and disposal groups to determine the carrying amounts of individual non-
current assets or disposal groups immediately after being classified as held
for sale
5. apply the measurement requirements of IFRS 5 to individual non-current
assets and disposal groups to determine the fair value less costs to sell
individual non-current assets or disposal groups classified as held for sale
6. calculate the impairment loss arising on initial classification as held for sale
for an individual non-current asset or disposal group and allocate the
impairment loss according to the rules contained in IFRS 5
7. remeasure an individual asset or disposal group subsequently and account
for the additional impairment loss or reversal of impairment loss according
to the rules contained in IFRS 5
8. present and disclose non-current assets and disposal groups held for sale
as well as associated statement of profit or loss and other comprehensive
income items according to IFRS 5
9. disclose discontinued operations on the face of the statement of profit or
loss and other comprehensive income and in the notes to the financial
statements according to IFRS 5

If you battle to do any of the above, you need to revisit the content.

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FAC3702
LEARNING UNIT 6
THE EFFECTS OF CHANGES
IN FOREIGN EXCHANGE
RATES [IAS 21]

Distinctive Financial
Reporting

Distinctive Financial
Reporting

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LEARNING UNIT 6 – THE EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES
LEARNING OUTCOMES
Once you have studied and completed this learning unit, you should be able to do the following:

1. Define the objective and scope of IAS 21, and apply the definitions.

2. Determine the transaction date of a foreign currency transaction and record it at the spot
exchange rate on transaction date.

3. Remeasure monetary items to fair value at reporting date and settlement date using the
appropriate exchange rates.

4. Recognise foreign exchange differences in profit or loss or in other comprehensive income.

5. Disclose foreign exchange differences in the financial statements.

OVERVIEW
A GENERAL

6.1 Introduction
6.2 Work excluded
6.3 Objectives
6.4 Definitions – IAS 21.8
6.5 Elaboration on the definitions

B UNCOVERED FOREIGN CURRENCY TRANSACTIONS

6.6 Reporting uncovered foreign currency transactions in the functional currency

6.6.1 Initial recognition
6.6.2 Subsequent reporting periods
6.6.3 Recognition of exchange differences
6.6.4 Impairment of non-monetary assets

6.7 Disclosure of uncovered foreign currency transactions

C TAX IMPLICATIONS

D E-TUTOR ACTIVITY

STUDY
PRESCRIBED:
Gripping Gaap
The relevant chapter
RECOMMENDED:
IFRS - The Annotated IFRS
IAS 21 The effects of changes in foreign exchange rates

The standard can be accessed online at https://www.ifrs.org/

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A GENERAL
6.1 INTRODUCTION
An entity may have transactions in foreign currencies and/or foreign operations.

When an entity undertakes transactions denominated in foreign currencies, for example buying or
selling goods overseas denominated in foreign currencies, then the results of these transactions are
translated into the presentation currency (rand) for incorporation into the financial statements of the
entity.

The entity can be conducting business through foreign operations, for example establishing a foreign
branch to handle the marketing and selling of its products overseas. The results of the foreign
operations (branch) will be accounted for in the functional currency (rand) (IAS 21.1).

6.2 WORK EXCLUDED

IAS 21 distinguishes between the accounting treatment for foreign transactions and foreign
operations. Foreign operations (IAS 21.11–15 and .44–49) fall outside the scope of this module.

6.3 OBJECTIVES
The principal issues in accounting for foreign currency transactions are

- which exchange rate to use

- how to report the effects of changes in exchange rates in the financial statements
(IAS 21.1–2)

6.4 DEFINITIONS – IAS 21.8

Closing rate
The spot exchange rate at the end of the reporting period.

Exchange difference
The difference resulting from translating a given number of units of one currency into another
currency at different exchange rates.

Exchange rate
The ratio of exchange for two currencies.

Fair value
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.

Foreign currency
A currency other than the functional currency of the entity.

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

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, e.g. bank accounts, fixed deposits, trade receivables, loans and trade
payables.

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Non-monetary items
The essential feature is the absence of a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency, e.g. inventories and property, plant and equipment.

Presentation currency
The currency in which the financial statements are presented.

Spot exchange rate

The exchange rate for immediate delivery.

6.5 ELABORATION ON THE DEFINITIONS

Functional currency

The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash.

In determining the functional currency of an entity, they need to consider the following factors:

• the currency that mainly influences selling prices of goods and services and the currency of
the country whose competitive forces and regulations mainly determine the selling price of its
goods and services

EXAMPLE
Selling prices of goods and services are denominated and settled in this currency.

and

• the currency that mainly influences labour, material and other costs of providing goods or
services

EXAMPLE
The costs are denominated and settled in this currency.

The following additional supporting evidence may also provide evidence of an entity's functional
currency:

• the currency in which funds from financing activities are generated

• the currency in which receipts from operating activities are usually retained

If the functional currency is not obvious because the above indicators are mixed, management must
use its judgement to determine the functional currency that most faithfully represents the economic
effects of the underlying transactions, events and conditions.

The primary indicators need to be given priority before considering the additional supporting
evidence to determine an entity's functional currency (IAS 21.12).

Once the functional currency of an entity is determined, it is not changed unless there is a change
in the underlying transactions, events and conditions that are relevant to the functional currency and
reflected by it (IAS 21.13).

If the entity's functional currency is that of a hyper inflationary economy, the entity's financial
statements are restated in accordance with IAS 29 Hyper inflationary economies (IAS 21.14).

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Monetary items

The essential feature of a monetary item is a right to receive (or obligation to deliver) a fixed or
determinable number of units of currency.

Examples
• pensions and other employee benefits to be paid in cash
• provisions that are to be settled in cash
• cash dividends that are recognised as a liability

Similarly, a contract to receive (or deliver) a variable number of the entity's own equity instruments
or a variable amount of assets in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency is a monetary item.

Non-monetary item

The essential feature of a non-monetary item is the absence of a right to receive (or an obligation to
deliver) a fixed and determinable number of units of currency, for example
• amounts prepaid for goods and services (e.g. prepaid rent)
• goodwill
• intangible assets
• inventory
• PPE
• provisions that are to be settled by the delivery of a non-monetary asset

B UNCOVERED FOREIGN CURRENCY TRANSACTIONS

6.6 REPORTING UNCOVERED FOREIGN CURRENCY TRANSACTIONS

IN THE FUNCTIONAL CURRENCY
6.6.1 Initial recognition
A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign
currency, including transactions arising when an entity
• buys or sells goods, assets and services whose price is denominated in a foreign currency
• borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency
• acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency
(IAS 21.20)
A foreign currency transaction shall initially be recorded in the functional currency by applying the
exchange rate (spot rate) between the functional currency and the foreign currency at the date of
the transaction to the foreign currency amount (IAS 21.21). Thus, the spot rate on the transaction
date is used for translation purposes.
The date of the transaction is the date on which the transaction first qualifies for recognition in
accordance with IASs (IAS 21.22).
An entity shall recognise a financial asset or a financial liability on its statement of financial position
when the entity becomes a party to the contractual provisions of the instrument, for example
unconditional receivables and payables are recognised as assets or liabilities when the entity
becomes a party to the contract and, as a consequence, has a legal right to receive or a legal
obligation to pay cash (IFRS 9.3.1.14).

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EXAMPLE 1
SA Ltd placed an order for machinery from a USA company on 15 March 2020. The transaction was
invoiced on 31 March 2020. The machinery was shipped free on board (FOB) on 20 March 2020.
The machinery was delivered to SA Ltd on 30 June 2020.

15/3/2020 20/3/2020 31/3/2020 30/6/2020

Order Shipped (FOB) Invoiced Delivered

The machinery should be recorded at the spot rate ruling on 20 March 2020 (the transaction date),
since that is the date on which risks and rewards are transferred to the buyer. The exchange rates
ruling on 15 March 2020, 31 March 2020 and 30 June 2020 are not relevant.

In the above example, the cost of the machinery and the corresponding financial liability (creditor)
must be accounted for separately.

The machinery is a non-monetary asset and its cost will be fixed at the spot rate on the transaction
date (20 March 2020).

The amount of the payment to the creditor (a monetary financial liability) depends on the exchange
rate ruling on the date of payment. The amount of the creditor is therefore not fixed as is the case
with the machinery. The movement in foreign currency exchange rates subsequent to the transaction
date does not affect the cost of the machinery but will affect the creditor until it is paid.

6.6.2 Subsequent reporting periods

At the end of each reporting period

• Foreign currency monetary items (creditor) shall be translated using the closing rate (the rate
at the end of the reporting period). The amount of the monetary items will therefore change at
the end of the reporting period when it is converted at the closing rate
(IAS 21 .23(a)).
• Non-monetary items (inventory, PPE) that are measured in terms of historical cost in a
foreign currency shall be translated using the exchange rate at the date of the transaction. For
example, a plant that was bought two years ago would have been recorded at the spot rate at
that date and will not subsequently be changed to the spot rate at the end of the reporting period
(IAS 21.23(b)).
• Non-monetary items that are measured at fair value in a foreign currency shall be translated
using the exchange rates at the date when the fair values were determined, i.e. the date it was
revalued (IAS 21.23(c))

When a gain or a loss on a non-monetary item is recognised in other comprehensive income,

any exchange component of that gain or loss shall be recognised in other comprehensive income.

Conversely, when a gain or a loss on a non-monetary item is recognised in profit or loss, any
exchange component of that gain or loss shall be recognised in profit or loss (IAS 21.30).

Other standards require some gains and losses to be recognised in other comprehensive income,
for example IAS 16 Property, plant and equipment. Gains and losses arising on the revaluation of
PPE require to be recognised in other comprehensive income. When such an item is measured in a
foreign currency, paragraph 23(c) of the standard requires the revalued amount to be translated
using the rate at the date the value is determined, resulting in an exchange difference that is also
recognised in other comprehensive income (IAS 21.31).

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6.6.3 Recognition of exchange differences

Exchange differences arising upon the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition during the
period, or in previous financial statements, shall be recognised in profit or loss in the period in which
they arise (IAS 21.28).

An exchange difference arises when there is a change in the exchange rate between the initial
recognition date of the transaction and the date of settlement of any monetary item arising from a
foreign currency transaction (IAS 21.29).

Exchange differences are dealt with as follows:

• If the transaction is settled within the same accounting period as that in which it occurred, all the
exchange differences are recognised in that period.
• If the transaction is settled in a subsequent accounting period, the exchange difference
recognised in each period up to the date of settlement is determined by the change in exchange
rates during each period (IAS 21.29).

EXAMPLE 2
If inventory was bought on 1 January 2020, the year-end of the company is 31 January 2020 and
the creditor is eventually paid on 28 February 2020, then there are two intervening periods:

• The first intervening period is from 1 January 2020 to 31 January 2020 and a foreign exchange
difference will be recognised as a gain or loss on 31 January 2020.
• The second intervening period is from 31 January 2020 to 28 February 2020 and it will also
give rise to an exchange difference that will be recognised as a gain or loss on
28 February 2020.

6.6.4 Impairment of non-monetary assets

At each reporting date, an entity shall assess whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset
(IAS 36.9).

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount (IAS 36.6).

The carrying amount of an item is determined in conjunction with other relevant standards. PPE may
be measured in terms of fair value or historical cost in accordance with IAS 16.

Whether the carrying amount is determined on the basis of historical cost or on the basis of fair
value, if the amount is determined in a foreign currency, it is then translated into the functional
currency in accordance with this standard (IAS 21.24).

When the asset is a non-monetary item and it is measured in a foreign currency, the carrying amount
is determined by comparing

• the cost or carrying amount, as appropriate, translated at the exchange rate at the date when
that amount was determined (i.e. the rate at the date of the transaction for an item measured in
terms of historical cost)

and
• the net realisable value (e.g. inventories) or recoverable amount, as appropriate, translated at
the exchange rate at the date when that value was determined (e.g. closing rate at the end of
the reporting period)
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The effect of this comparison may be that an impairment loss is recognised in the functional currency,
but would not be recognised in the foreign currency, or vice versa (IAS 21.25).

6.7 DISCLOSURE OF UNCOVERED FOREIGN CURRENCY

TRANSACTIONS

Disclosure in terms of IAS 21

• An entity shall disclose the following:

− The amount of exchange differences recognised in profit or loss. This excludes those arising
on financial instruments measured at fair value through profit or loss in accordance with IFRS
9.
− The net exchange differences recognised in other comprehensive income and accumulated
in a separate component in equity, and a reconciliation of the amount of these exchange
differences at the beginning and end of the period (IAS 21.52).

• When the presentation currency and the functional currency are different

− state the fact

− disclose the functional currency
− give the reason for using a different presentation currency (IAS 21.53)

• When there is a change in the functional currency of the entity

− state the fact

− give the reason for the change in functional currency (IAS 21.54)

EXAMPLE 3
ALL TRANSACTIONS OCCUR IN THE SAME FINANCIAL YEAR

(a) Payment occurs on delivery date (the transaction is paid immediately)

On 30 June 2020, a South African company sold goods for $100,000 to an American import
company. Payment was made on the same day. The year-end of the South African company is
31 December.

Applicable exchange rates were as follows:

30 June 2020 $1 = R6,80

31 December 2020 $1 = R6,70

REQUIRED
Provide all the relevant journal entries in the records of the South African
company for the year ended 31 December 2020.

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SOLUTION 3(a)
Journal entries Dr Cr
R R
30 June 2020
Bank (SFP) 680 000
Sales (P/L) 680 000
Recording of cash sales ($100,000 x R6,80)

(b) Payment made after delivery date

On 30 June 2020, a South African company sold goods to an American import company for
$100,000. Payment was made on 30 September 2020. The year-end of the South African company
is 31 December.

Applicable exchange rates were as follows:

30 June 2020 ........................................................................................................... $1 = R6,80

30 September 2020 .................................................................................................. $1 = R6,75
31 December 2020 ................................................................................................... $1 = R6,70

REQUIRED
Provide all the relevant journal entries in the records of the South African
company for the year ended 31 December 2020.

SOLUTION 3(b)
Journal entries Dr Cr
R R
30 June 2020
Trade receivables (SFP) 680 000
Sales (P/L) 680 000
Recording of credit sales ($100,000 x R6,80)

30 September 2020
Bank (SFP) 675 000
Trade receivables (SFP) 675 000
Recording of payment received from debtor ($100,000 x R6,75)

Foreign exchange loss (P/L) 5 000

Trade receivables (SFP) 5 000
Accounting for foreign exchange difference
[$100,000 x (R6,80 - R6,75)]

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EXAMPLE 4
TRANSACTIONS OCCUR IN DIFFERENT FINANCIAL YEARS

On 1 June 2020, a South African company purchased inventory from an American export company
for $100,000. The inventory was shipped free on board (FOB) on 30 June 2020. Payment was made
on 30 April 2021. The year-end of the South African company is 31 December. 30% of the
merchandise was still on hand at year-end, and was sold during January 2021.

Applicable exchange rates were as follows:

30 June 2020 ........................................................................................................... $1 = R6,80

31 December 2020 ................................................................................................... $1 = R6,70
30 April 2021 ............................................................................................................ $1 = R6,75
31 December 2021 ................................................................................................... $1 = R6,85

REQUIRED
Provide all the relevant journal entries in the records of the South African
company for the years ended 31 December 2020 and 31 December 2021.

SOLUTION 4
Calculation

$1 = R 6,80 6,70 6,75 6,85

30/6/2020 31/12/2020 30/4/2021 31/12/2021

Transaction Y/E Payment Y/E

Journal entries Dr Cr
R R
30 June 2020
Inventory (SFP) 680 000
Trade payables (SFP) 680 000
Recording of credit purchase ($100,000 x R6,80)

31 December 2020
Cost of sales (P/L) 476 000
Inventory (SFP) 476 000
Inventory sold during the period (R680 000 x 70%)

Trade payables (SFP) 10 000

Foreign exchange profit (P/L) 10 000
Accounting for exchange difference

Recorded at ($100,000 x R6,80) R680 000

Translated at year-end ($100,000 x R6,70) R670 000
Foreign exchange profit R10 000

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Dr Cr
R R
31 January 2021
Cost of sales (P/L) 204 000
Inventory (SFP) 204 000
Inventory sold during January 2021 (R680 000 x 30%)

30 April 2021
Trade payables (SFP) 675 000
Bank (SFP) 675 000
Payment of debt ($100,000 x R6,75)

Foreign exchange loss (P/L) 5 000

Trade payables (SFP) 5 000
Accounting for exchange difference

Year-end balance ($100,000 x R6,70) R670 000

Payment ($100,000 x R6,75) R675 000
Foreign exchange loss R5 000

EXAMPLE 5
COMPREHENSIVE EXAMPLE

A South African company, ABC Ltd, received an order of $100,000 from an American import
company, to ship goods free on board (FOB) to America on 30 June 2020. Payment of $50,000 was
made on 30 September 2020 and the balance was paid on 31 January 2021.

The company ordered raw materials from the United Kingdom for an amount of £20,000. Payment
for the raw material was made on 31 May 2020. The raw material was shipped FOB on 1 April 2020.
The year-end of the company is 31 December. 20% of the raw material bought from the UK company
was still on hand at year-end and was used during January 2021.

Applicable exchange rates were as follows:

$1 = R £1 = R
01 April 2020 ........................................................................... 5,00 9,00
30 April 2020 ........................................................................... 5,10 9,10
31 May 2020 ............................................................................ 5,15 9,15
30 June 2020 ........................................................................... 5,20 9,20
30 September 2020 ................................................................. 5,35 9,35
31 December 2020 .................................................................. 5,40 9,40
31 January 2021 ...................................................................... 5,30 9,30
31 December 2021 .................................................................. 5,45 9,45

REQUIRED
(a) Provide all the relevant journal entries, in the records of ABC Ltd for the year
ended 31 December 2020 and 31 December 2021.
(b) Provide the disclosure of the above transactions in the annual financial
statements of ABC Ltd for the year ended 31 December 2020. Your answer
should comply with the requirements of International Financial Reporting
Standards.

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SOLUTION 5
Calculations

1. Bought inventory
£1 = R 9,00 9,15 9,40

01/04/2020 31/05/2020 31/12/2020

FOB Payment Y/E

2. Sales
$1 = R 5,20 5,35 5,40 5,30

30/06/2020 30/09/2020 31/12/2020 31/01/2021

FOB Payment 1 Y/E Payment 2
$100,000 $50,000 $50,000

(a) Journal entries

Dr Cr
R R
1 April 2020
Inventory (SFP) 180 000
Trade payables (SFP) 180 000
Recording of credit purchase (£20,000 x R9,00)

31 May 2020
Trade payables (SFP) 183 000
Bank (SFP) 183 000
Recording of payment to foreign creditor (£20,000 x R9,15)

Foreign exchange loss (P/L) 3 000

Trade payables (SFP) 3 000
Accounting for exchange difference

Recorded at (£20,000 x R9,00) R180 000

Payment (£20,000 x R9,15) R183 000
Foreign exchange loss R3 000

30 June 2020
Trade receivables (SFP) 520 000
Sales (P/L) 520 000
Recording of sale of goods on credit ($100,000 x R5,20)

30 September 2020
Bank (SFP) 267 500
Trade receivables (SFP) 267 500
Recording of payment received from debtor ($50,000 x R5,35)

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(a) Journal entries

Dr Cr
R R

Trade receivables (SFP) 7 500

Foreign exchange profit (P/L) 7 500
Accounting for exchange difference

Recorded at ($50,000 x R5,20) R260 000

Payment ($50,000 x R5,35) R267 500
Foreign exchange profit R7 500

31 December 2020
Cost of sales (P/L) 144 000
Inventory (SFP) 144 000
80% of inventory sold (R180 000 x 80%)

Trade receivables (SFP) 10 000

Foreign exchange profit (P/L) 10 000
Accounting for exchange difference

Recorded at ($50,000 x R5,20) R260 000

Balance at year-end ($50,000 x R5,40) R270 000
Foreign exchange profit R10 000

31 January 2021
Cost of sales (P/L) 36 000
Inventory (SFP) 36 000
Inventory sold during January 2021 (R180 000 x 20%)

Bank (SFP) 265 000

Trade receivables (SFP) 265 000
Payment received from debtor ($50,000 x R5,30)

Foreign exchange loss (P/L) 5 000

Trade receivables (SFP) 5 000
Accounting for exchange difference

Balance at year-end ($5,000 x R5,40) R270 000

Payment ($50,000 x R5,30) R265 000
Foreign exchange loss R5 000

(b) Disclosure

ABC LTD

EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT

31 DECEMBER 2020
ASSETS R
Current Assets
Trade and other receivables (520 000 – 267 500 + 7 500 + 10 000) or
($50,000 x R5,40) 270 000
Inventory (180 000 – 144 000) 36 000

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ABC LTD

EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020
R
Revenue (520 000 + xxx) xxx
Cost of sales (180 000 – 36 000) (144 000)
Gross profit xxx
Other expenses xxx
Profit before tax xxx

ABC LTD

NOTES FOR THE YEAR ENDED 31 DECEMBER 2020

2. Profit before tax

Included in profit before tax are the following items:

R
Income:
Foreign exchange differences (7 500 + 10 000 – 3 000) 14 500

3. Foreign currency exposure

Current assets Foreign Exchange rate R
asset $1 = R
Trade receivables (sale of goods) $50,000 5,40 270 000

C TAX IMPLICATIONS
• The tax treatment of gains and losses on foreign exchange transactions in terms of section 24l
of the Income Tax Act will correspond to the accounting treatment thereof for the majority of
transactions, with certain exceptions.
• Note from the very start that section 24I only addresses the foreign exchange differences on the
exchange items (i.e. monetary items) and NOT THE UNDERLYING ASSET.
• The underlying asset is treated in terms of section 25D (1) (translated into the local [functional]
currency using the spot rate on the date of the transaction). Therefore the cost of the asset
(PPE, inventory) will be measured for both tax purposes and for accounting purposes at the spot
rate on transaction date (FOB date).
• Note that every foreign currency transaction has two legs, namely the underlying asset (non-
monetary item) and the foreign currency liability (exchange [monetary] item).

Dr Underlying asset (non-monetary item)

Cr Creditor (monetary item)

The following table illustrates the interaction between sections 24I (foreign exchange), 25D
(determination of taxable income in foreign currency) and the Eighth Schedule (CGT) if an item was
imported and financed with a loan (creditor) raised in a foreign currency.

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Underlying asset purchased in foreign currency

Inventory Fixed asset

Section 25D applies Section 25D applies (recorded at spot rate)

(recorded at spot rate) and paragraph 431 of the Eighth Schedule will
be applicable to the asset

Foreign currency liability (exchange item)

Section 24l is applicable

Yes No2

Apply general rule in section 24l to Apply Part XIII of the Eighth Schedule
exchange item to calculate the to the foreign currency liability3
exchange differences

1. Paragraph 43 of the Eighth Schedule of the Income Tax Act sets out the rules for determining
the capital gains and losses when assets are acquired or disposed of in foreign currency.
2. Section 24I will not be applicable if, for example, the taxpayer is an individual who does not
hold the exchange item as part of his trading stock or a trust not carrying on a trade (section
24I(2)) or if section 24I(11) is applicable.
3. Part XIII of the Eighth Schedule of the Act deals with the capital gains and losses of a resident
in respect of the acquisition and disposal of a foreign currency asset, or the settlement or part
settlement of a foreign currency liability (paragraph 85 of the Eighth Schedule).

D E-TUTOR ACTIVITY
TB Clinic Ltd is a manufacturer and distributor of tuberculosis (TB) medicine in South Africa and is
listed on the JSE. The company has a 31 March year-end.
Distribution right

On 1 March 2020, TB Clinic Ltd acquired the exclusive distribution rights of a new TB medicine at a
total cost of $150,000. The new TB medicine claims that the body will not build up any resistance to
the medicine.

The cost of the distribution right is payable as follows:

• $10,000 immediately on acquisition date, in respect of legal costs and registration fees
• the outstanding balance of $140,000 on 28 February 2021
The licence was available for use, as intended by management, on acquisition date. On acquisition
date it was determined that the licence had an estimated useful life of 5 years and a residual value
of Rnil was allocated to the licence.
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The following foreign exchange rates are applicable:

Date Spot rate
$1 = R
1 March 2020 13,02
31 March 2020 13,41
28 February 2021 11,66

On 1 January 2021, a news article was published that claimed patients suffered severe side effects
from the new TB medicine. The published article caused a decline in the use of the new TB medicine.
On 31 March 2021, management of TB Clinic Ltd determined the fair value less costs to sell of the
distribution right, with reference to current market evidence, to be R1 290 000 and the value in use
calculated based on the total net cash inflows expected from the use of the licence was determined
to be R1 350 500. An applicable pre-tax discount rate of 9.5% per annum was applied. The
remaining useful life and the residual value of the licence remained unchanged throughout the
period.

Assumptions

All amounts are material.

Ignore the implications of VAT.

REQUIRED:
Prepare all the general journal entries (including cash transactions but excluding amortisation)
relevant to the dates indicated below, in the accounting records of TB Clinic Ltd, to correctly
account for the acquisition of the licence and the foreign creditor.
• 1 March 2020
• 31 March 2020
• 28 February 2021

Note

• Your answer must comply with the requirements of International Financial Reporting
Standards.
• Show the date of each journal entry.
• Journal narrations are not required.
• No abbreviations for general ledger account names may be used.
• Accounting policy notes are not required.
• Ignore comparative information.
• Show all calculations.
• Round all amounts to the nearest rand.

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ASSESSMENT CRITERIA
After having studied this learning unit, you should be able to

1. define the objective and scope of IAS 21, and apply the definitions
2. determine the transaction date of a foreign currency transaction and
record it at the spot exchange rate on transaction date
3. remeasure monetary terms to fair value at reporting date and settlement
date using appropriate foreign exchange rates
4. recognise foreign exchange differences in profit or loss or in other
comprehensive income
5. disclose foreign exchange differences in the financial statements

If you battle to do any of the above, you need to revisit the content.

©
UNISA 2025
FAC3702_2025_TL_103_3_B

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