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Course Notes

The ACCA DipIFR examination consists of four compulsory questions, each worth 25 marks, with a pass mark of 50%. The course covers various accounting topics, including the preparation of financial statements, ethical considerations, and specific IFRS requirements. Key components of financial statements include the statement of financial position, statement of profit or loss, and qualitative characteristics of financial information such as relevance and faithful representation.

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0% found this document useful (0 votes)

22 views163 pages

Course Notes

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Rudolf Witzig

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ACCA DipIFR|Course Notes The

TheExP Group

Start – About the DipIFR examination

The examination is a 3 hour and 15 minute paper that contains four compulsory 25 mark questions. The
overall pass mark for the paper is 50%.
Candidates may spend the three hours and 15 minutes reading, planning and comp completing the paper. The
ACCA recommends that questions should be read carefully and that answers should be planned but
there are no restrictions as to when candidates may start writing in their answer booklets.
Most questions will contain both computational and discursive elements. ExP recommends that all
workings are shown clearly.
According to ACCA:
Question 1 will involve the preparation of one or more of the consolidated financial statements that are
examinable within the syllabus. This question will ofte
oftenn include issues that will need to be addressed
prior to performing the consolidation procedures. Generally, these issues will relate to the financial
statements of the parent prior to their consolidation
consolidation.
Question 2 will often be related to a scenario in which questions arise regarding the appropriate
accounting treatment and/or disclosure of a range of issues. In this
his question candidates may be asked
to comment on management’s chosen accounting treatment and determine a more appropriate one,
based on circumstances
umstances described in the question. There will also be up to 5 marks awarded for
discussing the ethical and professional issues surrounding the accounting treatment being examined.
Question 3 will usually focus more specifically on the requirements of one specific IFRS. This question
will typically contain a mixture of explanation of the principles underpinning the standard and practical
application of those principles.
Question 4 will usually consist of a scenario in which the candidate is given a series of queries from a
superior relating to the financial statements. The requirement will usually be to answer each query. The
queries will normally be independent of each other. It will be rare for the queries in question 4 to require
a numerical answer.

Start – Abbreviations used in these notes

Abbreviation Meaning
SOPL Statement of profit or loss
SOFP Statement of financial position

SOPLOCI Statement of profit or loss and other comprehensive income

OCI Other comprehensive income

P Parent
S Subsidiary
CFS Statement of cash flows
NCI Non
Non-controlling interest

© 2019 The ExP Group. To be used only as part of ExP’sDipIFR course. Reproduction by any means for any other purpose is prohi
prohibited.
bited. These materials are for
educational purposes only and so are necessarily simplified and summarised. Always obtain expert ad
advice
vice on any specific issue. Refer to our full terms and conditions of
use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
Page 4
ACCA DipIFR|Course Notes The
TheExP Group

Contents
1. The International Accounting Standards Board (the Board) and the regulatory framework .................................. 8
2. Fundamental ethical and professional principles ................................................................
...................................................................14
3. Revenue ................................................................
................................................................................................
..................................................................16
4. Tangible non-current assets ................................
................................................................................................
...................................................................21
5. Impairment of assets ................................
................................................................................................................................
..............................................34
6. Leases ................................................................
................................................................................................
.....................................................................39
7. Intangible assets and goodwill ................................
................................................................................................
...............................................................45
8. Inventories and agriculture ................................
................................................................................................
....................................................................50
9. Financial Instruments ................................
................................................................................................................................
.............................................54
10. Provisions, contingent assets and liabilities ................................................................................................
.........................................65
11. Employee benefits ................................
................................................................................................................................
................................................70
12. Tax in financial statements ................................
................................................................................................
...................................................................74
13. The effects of changes in foreign currency exchange rates ................................................................
.................................................82
14. Share-based payment ................................
................................................................................................................................
...........................................86
15. Exploration and evaluation expenditures
expenditures................................................................................................
.............................................92
16. Fair value ................................................................
................................................................................................
..............................................................94
17. Presentation of the statement of financial position and statement of profit or loss and other comprehensive
income and the statement
ment of changes in equity ................................................................
........................................................................97
18. Earnings per share ................................
................................................................................................................................
..............................................104
19. Events after the reporting period ................................
................................................................................................
.......................................................110
20. Accounting policies, changes in account
accounting estimates and errors .....................................................................
................................ 112
21. Related party transactions and operating segments ................................................................
.........................................................114
22. Reporting
orting requirements of small and medium
medium-sized entities (SMEs) ................................................................
................................ 120
23. Preparation of group consolidated external reports: the statement of financial position ................................122
24. Preparation of group consolidated statement of profit or loss and other comprehensive income ..................133
25. Business combinations – associates and joint arrangements ................................................................
............................................135
26. Complete disposal of shares in subsidiaries ................................................................................................
.......................................141
27. Employability and technology skills ................................................................................................
....................................................145
Solutions to practice questions ................................
................................................................................................
................................................................146
Chapter 1: The International Accounting Standards Board (IASB) and the regulatory framework .....................146
Chapter 2: Fundamental
ndamental ethical and professional principles ................................................................
...............................................146
Chapter 3: Revenue ................................
................................................................................................................................
..............................................146
Practice question 1 ................................
................................................................................................................................
...........................................146

Practice question 2 ................................

................................................................................................................................
...........................................146
Practice question 3 ................................
................................................................................................................................
...........................................147
Chapter 4: Tangible non-current
current assets ................................................................................................
...............................................147
Practice question 1 ................................
................................................................................................................................
...........................................147
Practice question 2 ................................
................................................................................................................................
...........................................148
Practice question 3 ................................
................................................................................................................................
...........................................148
Practice question 4 ................................
................................................................................................................................
...........................................149
Chapter 5: Impairment ................................
................................................................................................................................
.........................................149
Chapter 6: Leases................................
................................................................................................................................
..................................................149
Practice question 1 ................................
................................................................................................................................
...........................................149
Practice question 2 ................................
................................................................................................................................
...........................................150
Chapter 7: Intangible assets and goodwill................................................................................................
............................................151
Practice question 1 ................................
................................................................................................................................
...........................................151
Practice question 2 ................................
................................................................................................................................
...........................................151
Chapter 8: Inventories and agriculture
agriculture................................................................................................
.................................................151
Practice question 1 ................................
................................................................................................................................
...........................................151
Practice question 2 ................................
................................................................................................................................
...........................................152
Practice question 3 ................................
................................................................................................................................
...........................................152
Chapter 9: Financial instruments................................
................................................................................................
..........................................................153
Practice question 1 ................................
................................................................................................................................
...........................................153
Chapter 10: Provisions, contingent assets and liabilities ................................................................
.....................................................154
Practice question 1 ................................
................................................................................................................................
...........................................154
Practice question 2 ................................
................................................................................................................................
...........................................154
Chapter 11: Employee benefits ................................
................................................................................................
............................................................154
Chapter 12: Taxation ................................
................................................................................................................................
............................................155
Practice question 1 ................................
................................................................................................................................
...........................................155
Chapter 13: The effects of changes in foreign currency exchange rates .............................................................
................................ 156
Chapter 14: Share- based payments ................................................................................................
....................................................156
Practice question 1 ................................
................................................................................................................................
...........................................156
Practice question 2 ................................
................................................................................................................................
...........................................156
Chapter 15: Exploration and evaluation expenditures................................................................
.........................................................157
Practice question 1 ................................
................................................................................................................................
...........................................157
Chapter 16: Fair value................................
................................................................................................................................
...........................................157
Chapter 17: Presentation of the statement of financial position and statement of profit or los loss and other
comprehensive income and the statement of changes in equity ................................................................
........................................157

Practice question 1 ................................

1. The International
Accounting Standards
Board (the Board) and the
regulatory framework

What do you need to know to pass DipI

DipIFR?
Make sure that you are able to:
 Discuss the need for International Financial Reporting Standards and possible barriers to their
development.
 Explain the structure and constitution of the Board and the standard setting process.
Understand and interpret the Board’s Conceptual ual Framework for Financial Reporting ®
 Critically discuss and apply the definitions of the elements of financial statements and the
reporting of items in the financial statements.
 Account for the first-time
time adoption of IFRS Standards.

The Big Picture

IFRS Standards provide a series of accounting rules that should enhance understandability and
consistency of financial statements. However, these rules cannot possibly cover every type of accounting
transaction that could ever happen.
To give
ive guidance on what to do with situations that are not covered by a standard, the Conceptual
Framework exists. This has been rewritten over recent years and the newest version was published in
2018.
The Conceptual Framework document does not have the stat
status of an IFRS Standard and if there is any
conflict between the Conceptual Framework and a specific provision in an IFRS Standard, the IFRS
Standard prevails.
The Conceptual Framework also provides an underlying logic for the development of new IFRS
Standards.. This means that each IFRS Standard should define an asset or a gain in the same way, for
example. This is a marked difference from the historical tendency for accounting standards to be
developed in a piecemeal way, sometimes called a “patchwork quilt
quilt”.
The Conceptual Framework document starts by discussing the characteristics financial information needs
to have and defining some of these key concepts. All references in this chapter are to the Conceptual
Framework.

The financial statements

Before considering
idering the characteristics and content of the financial statements it is worth noting what
they include:
 Statement of financial position (SOFP): this shows the wealth of the business at a point in time
and records the assets, liabilities and equity of the company.
 Statement of profit or loss and other comprehensive income (S (SOPLOCI):
PLOCI): this shows the net of
income and expenses for the reporting period known as a profit or loss.
 Statement of changes in equity (SOCIE): this summarises the movement in the compan company’s equity
between the last reporting period end and this.
 Statement of cash flows:: this is not covered in the DipIFR syllabus but shows where cash has
been generated and where it has been spent.
 Disclosure notes: explain in further detail the transactions reflected in the SOFP and SPLOCI.

Qualitative characteristics of financial information

The Conceptual Framework identifies two categories of characteristics that financial information should
have: fundamental (qualities that must be present) and enhancing (qualities that it would be good to
have). Both characteristics make the information useful to those interested in the company’s financial
information. Interested parties are called ‘stakeholders’ and include shareholders, lenders, customers,
suppliers, employees, government bodies as well as the general public.
Fundamental characteristics
Financial information is only useful if it is:
 Relevant: To be useful, information must be relevant to the decision
decision-making
making needs of users.
For this, managers must consider
ider the materiality. An item is material if its omission or misstatement
would influence the economic decisions of users.
 Faithful representation: to represent a transaction faithfully, the preparer of the financial
statements needs to reflect its substan
substance
ce rather than its legal form. There are several examples
of this in the IFRS Standards: for example, redeemable preference shares being presented as a
liability in the statement of financial position, rather than its legal form of a share (chapter 9).
In addition, the transaction should be:
i) Complete;
ii) Neutral (meaning
meaning free from bias); and
iii) Free from error.
Another important aspect of faithful representation is prudence.. This means not overstating assets
and income and not understating liabilities and expense
expenses.
s. A good example of when accountants are
prudent is when inventory is valued at the lower of cost and net realisable value (chapter 8).
Enhancing characteristics
The four enhancing characteristics are:
 Comparability: Users must be able to compare the fina financial
ncial statements of an entity through
time in order to identify trends in its financial position and performance.

Users must also be able to compare the financial statements of different entities to evaluate their
relative financial position, performance and changes in financial position.
Hence, the measurement and display of the financial effect of like transactions and other events must be
carried out in a consistent way throughout an entity and over time for that entity and in a consistent
way for different entities.
 Timeliness: information that is out-of-date
date is less useful than more recent information.
 Verifiability: two independent and knowledgeable users should be able to agree that how a
transaction has been recorded provides faithful representation
representation.
 Understandability: An essential quality of the information provided in financial statements is
that it is readily understandable by users. For this purpose, users are assumed to have a
reasonable knowledge of business and economic activities and accounti
accounting and a willingness to
study the information with reasonable diligence.
However, information about complex matters that should be included in the financial statements
because of its relevance to the economic decision
decision-making
making needs of users should not be excluded
ex merely
on the grounds that it may be too difficult for certain users to understand.
It is important too, to make sure that the cost of producing the financial information does not outweigh
the benefits for the users.

Elements of financial statement

statements
The information presented in the financial statements consists of five elements and they are listed
below.It is worth spending some time remembering and understanding these as their application
reflected in many of the IFRS Standards
Standards.
Asset A present eco
economic resource controlled by an entity as a result of a past
event. An economic resource is a right to the potential to produce economic
benefits (para 4.3 and 4.4)
Liability A present obligation of the entity to
o transfer an economic resource of a past
event.
nt. (para 4.26)
Equity The residual interest in the assets of the entity
entity.
Note: Assets – liabilities = equity = capital + reserves
This mathematical identity is useful when preparing group financial statements
later in the course
course.
Income Increases in ass
assets or decreases in liabilities that result in increases to equity,
other than those relating to contributions from equity shareholders.
share
Expenses Decreases in assets or inc
increases in liabilities that result in decreases in equity,
other than those relating to distributions to equity shareholders.
shareholders

Recognition criteria
For an item to be recognised in the financial statements, it must meet the definition of one of the
elements and provide the users with useful information. One of the key issues is that of m
measurement
and where it is difficult to measure a transaction it is not recognised.
An item is derecognised when it no longer meets the definition of one of the elements.

Measurement
A transaction is only recognised when its value can be quantified in mon
monetary
etary terms.
terms There are broadly
two measurement bases: historical cost and current value (which includes fair value, value
value-in- use and
current cost.
Historical cost accounting is easy to apply and to audit.
In times of low inflation, this means that histor
historical
ical cost accounting works well. However, in periods of
higher inflation, or for transactions with a long life ((e.g. plant with a 40-year life) it has some significant
limitations, including:
 Matching today’s revenues with yesterday’s costs, thus overstat
overstating
ing profit;
profit
 Giving out of date asset valuations
valuations;
 Not recording gains where companies are able to hold net trade payables (assuming the
payables don’t bear interest)
interest);
 Comparatives are misleading, since not expressed in a stable monetary unit
unit;
 Long-term apparent
rent growth can be overstated, due to the compounding effect of inflation.
Current value is applied for certain transactions and we will see this throughout the course.

Capital maintenance concepts

Capital maintenance means preserving the initial value of an investor’s investment. This is done using
either the financial capital maintenance concept, or the operating capital maintenance concept.
Historical cost accounting is the simplest form; being financial capital maintenance with no adjustment
for inflation.
Financial capital maintenance means preserving the general purchasing power of an investor’s initial
investment. Adjustments will be made using the general rate of inflation.
Operating capital maintenance means preserving the ability of the business tto continue trading at its
current level.
Inflation adjustments are specific to the industry in which it operates. Current cost accounting (also
known as “replacement cost accounting”) uses this method of capital maintenance.

IFRS Standards and the standard

ndard setting process
IFRS Standards are governed internationally by the International Accounting Standards Board. The
accounting principles underpinning the preparation of financial statements are made by the Board and
issued in the form of IFRS Standards
Standards.. The standards have been adopted by many countries worldwide

but there are some countries who are taking a while to consider using them. This may be for a number
of reasons.
The advantages of having a globally accepted set of accounting standards include (called
harmonisation):
 Easier access to international finance
 For multi-national
national entities the preparation of group and single entity financial statements is more
straight-forward
forward as they are all prepared using the same standards
 The audit process should be e easier and therefore less costly for the entity
 Investors are able to compare the financial statements of entities worldwide to make more
informed decisions.
Disadvantages of harmonisation include:
 Difficult to enforce
 Different
ifferent legal systems may prev
prevent the application of certain accounting standards and practices
 Different countries use financial statements for different purposes and therefore identifying the
needs of all users may be difficult
 Some countries are unwilling to accept anything other than their own national accounting
standards
 The standards are costly to develop and the funding needs to be obtained.

The standard setting process

Monitoring Board

IFRS Foundation

International Accounting
IFRS Advisory Council Standards Board
(the Board)

IFRS Interpretations
Committee (IFRIC)

The IASB issues and promotes the use of IFRS Standards around the world. The procedure
pr for issuing
an IFRS Standard is:
1. The need for the IFRS Standard is agreed following discussions with businesses and the profession.
The Board is given a budget by the IFRS Foundation.
2. The Board may decide to establish an Advisory C Council to provide advice, including prioritising the
work and giving their views on the content of the project.
3. The Board may develop and issue a discussion paper upon which interested parties are invited to
comment.
4. After the comments have been received and reviewed, the IASB develops and published an Exposure
Draft (ED) of the intended standard and invites comments from the public.
5. Once the comments have been received and reviewed (and there may be several versions of the
ED), the Board issues the final IFRS Standard.
It is worth noting that the publication of the IFRS Standard, ED and IFRIC Interpretation must be voted
on and have the approval of at least eight of the 15 IASB members.
The IFRIC issues rapid guidance (called Interpretations) on accounting matters where the IFRS Standard
has been interpreted differently by a large number of different preparers of financial information. The
IFRIC may also issue interpretations where a new identified financial reporting issue has been identified
and where an IFRS Standard has yet to be developed.

2. Fundamental ethical and

professional principles
principl

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Appraise and discuss the ethical and professional issues in complying with accounting standards.
Start- the big picture
Many stakeholderss rely on the financial statements to make decisions and it is important that the
information can be relied upon.
The ACCA, as a professional body, has developed a code of ethics and conduct which all members must
adhere to. Often, when preparing the finan
financial
cial statements there may be pressure from others or a
conflict of interest that may tempt us to show a transaction in a certain way. It is important to
understand what these pressures are and how to avoid them.
The code of ethics and conduct
The fundamental
al principles of the code are:
 Integrity – accountants should be straightforward and honest in all professional business
relationships. This means that when preparing financial statements transactions need to be
recorded correctly and demonstrate the true activity behind the transaction. For example, not
recording debt on the statement of financial position, knowing that the company is applying for a
bank loan and the bank is reviewing the financial statements, would show the accountant to lack
integrity.
 Objectivity – accountants should not allow bias, conflict of interest or the undue influence of
others to override professional and business judgements. For example, the accountant may earn
a bonus based on the size of the profit for the year and may be tem
tempted
pted to overstate it in some
way. Doing so would indicate that the accountant is showing bias.
 Professional competence and due care – accountants should keep up to date with their
professional knowledge and skill at a level required to ensure that the clie
client or employer receives
competent professional services
services. This knowledge is based on current developments in practice,
legislation and techniques and the accountant should act diligently and in accordance with

applicable technical and professional standards

standards.. For example, if a transaction is recorded
incorrectly which did not agree with the treatment suggested in the IRFS Standards then the
accountant would not be seen to be professionally competent and showing due care.
 Confidentiality -anan accountant should respect the confidentiality of information acquired from
their professional and business relationships and should not disclose it to third parties without
the authority to do so. Sometimes the accountant has a legal duty to disclosedisclose, and some
judgement may need to be applied here.
 Professional behaviour – the accountant needs to behave in a way that does not discredit the
profession. For example, if the accountant commits a crime this would not reflect well on the
ACCA and would be deemed unprofessional beh behaviour.

Consequences of breaches of the code

The consequences for the individual if they breach the code include:
 Fines and penalties
 Loss of professional reputation and employment
 Prison sentence
 Being expelled from the ACCA
 Being prevented in the future from acting as a director or being an officer of a public company

Actions to be taken to prevent breaches of the code

It is important to consider all situations where an accountant may have an incentive to breach the code
and to understand the actions that at need to be taken to make sure that the breaches do not occur.
Companies will have procedures in place to make sure that the interview process identifies suitably
professional employees and a training programme that constantly reminds staff about certain issues.
The following is not an exhaustive list of scenarios but here are ssome
ome examples of when potential
breaches may occur and how to deal with them
them:
 Profit related bonus: when accounts have been prepared by an individual who will receive a
bonus based on the result, it would be wise to get the figure checked by an independent person.
 The company has a new transaction to account for this year: the transaction may be the result of
an IFRS Standard that has not been used by the company before. The account
accountant should make
sure that they have read around the subject in technical articles and perhaps attend a CPD
(continued professional development) course that covers the issues to be addressed.
 Confidentiality: when an accountant is new to a firm, they should be reminded of how to deal
with sensitive and confidential information so training would be important. Equally it would be
wise for the company to allow limited access to information that is confidential and to log the
details of those that have reviewed the information.

3. Revenue

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Explain and apply the principles of revenue recognition (the 5-step
step process).
 Describe and apply the acceptable methods for measuring progr progress
ess towards complete
satisfaction of performance obligations.
 Explain and apply the criteria for the recognition of contract costs.
 Specifically be
e able to account for the following types of transactions:
(i) Principal versus agent;
(ii) Repurchase agreements;
nts;
(iii)Bill and hold arrangements
(iv)Consignment agreements
 Account for different types of consideration (including variable consideration) and where a
significant financing component exists in the contract.
 Prepare financial statement extracts for con
contracts
tracts with multiple performance obligations, some of
which are satisfied overtime and some at a point in time.

Start – The Big Picture

For most entities, Revenue is the largest figure on the statement of profit or loss and other
comprehensive income. Its misrepresentation has been the subject of many corporate scandals in recent
years. IFRS 15 Revenue recognition ensures that revenue is recognised by applying a 5 5-step process.
5-step process
1. Identify the contract with the customer. The contract does not need eed to be in writing but
there must be two willing parties and a transaction with commercial substance. One important
point to note is that a contract only exists if it is probable that the customer is going to pay the
seller.

2. Identify the separate perfo

performance
rmance obligations that the seller has agreed to carry out.
e.g. a trader sells a computer with a three
three-year
year service contract. The performance obligations are:
 To sell the computer
 To provide a service over a three -year period
3. Determine the transaction pr
price.
See variable consideration and financing below for examples of how this may not be as straight
straight-
forward as it first appears.
4. Allocate the transaction price to the performance obligations.
5. Recognise revenue as the performance obligations are met.
See the examples below to see how steps 4 and 5 are applied.

Practice question 1: Extract of question 4 from December 2015 (5 marks)

IFRS 15 Revenue from Contracts with Customers was issued in 2014 and replaces the previous
international financial reporting standard
ndard relating to revenue.
Required:
(i) Identify the five steps which need to be followed by entities when recognising revenue from
contracts with a customer.
(ii) Explain how IFRS 15 is expected to improve the financial reporting of revenue

Measuring progress towards completion

When a performance obligation is met at a point in time (e.g. a sale made to a customer in a shop) the
revenue is recognised when the control
ntrol of the goods is transferred to the customer.
Where performance obligations are met over time (e.g. a service provided) it is necessary to determine
how much of the performance has been completed during the accounting period. There are two
methods used
d to determine this stage of completion:
 Input method (e.g. costs to date as a percentage of the total costs estimated to be incurred)
 Output method (e.g. surveys of work completed to date as a percentage of the total contract
price)

Practice question 2: extract of question 4 from December 2015 (10 marks)

On 1 September 20X5, Kappa sold a machine to a customer. Kappa also agreed to service the machine
for a two-year
year period from 1 September 20X5 for no additional charge. The total amount payable by the
customer
omer for this arrangement was agreed to be:
 $800,000, if the customer paid by 31 December 20X5.
 $810,000, if the customer paid by 31 January 20X6.
 $820,000, if the customer paid by 28 February 20X6.
The directors of Kappa consider that it is highly probabl
probablee the customer will pay for the products in
January 20X6. The stand- alone selling price of the machine was $700,000 and Kappa would normally

expect to receive $140,000 in consideration for providing two years’ servicing of the machine. The
alternative amounts
unts receivable are to be treated as variable consideration.
Required: Explain and show how this transaction would be reported in the financial statements of Kappa
for the year ended 30 September 20X5
Suggested solution is on page: 146

Contract costs
A sales
ales contract would obligate the entity to provide sales to a customer. The following costs would be
capitalised and amortised to the SOPL
OPL over the length of the contract:
 Obtaining the contract
 Fulfilling the contract

Revenue recognition for specific tra

transactions
Principal vs agent (e.g. insurance broker, travel agent)
When an entity is providing goods or services itself to the customer it is acting as the principal. The test
is whether the entity controls the good or service before it is transferred to tthe
he customer. The entity
recognises the revenue generated from the sale.
When the entity is using a third party to provide the goods or services that third party is acting as an
agent. The agent only recognises as revenue the fee it is entitled to.

Example
An insurance broker acts on behalf of an insurance company selling a policy to a customer for $1,000.
The broker keeps 10% as commission and pays the remaining $900 to the company.
company
The broker is the agent and he revenue to be recognised is $100
$100.($1,000 - $900) only with no cost of
sales.
The insurance company is the principal and will recognise revenue of $900.
Bill and hold
A company bills a customer for products sold but does not ship them until a later date. For a transfer of
ownership and revenue recognition
nition to occur
occur, certain conditions must be met.
Repurchase
A company may sell an asset like a building to a finance provider with the promise to buy it back at a
later pre-determined
determined date. If the likelihood of the repurchase is high
high, then this is not a sale
sa of the
building but a loan arrangement between the company and the finance provider. The accounting
treatment will be for the company to keep the asset in the books and to account for the cash advanced
as a liability.

Consignment
Consignments are where a manufacturer transfers an asset to a retailer to promote sales for that item.
The key question is whether at the point of transfer a sale has taken place or not. This depends on
whether the risks and rewards of ownership have transferred to the retailerr or whether they have
remained with the manufacturer.
If the retailer has the risks and rewards of ownership, then the manufacturer records the sale but if not
then no sale has taken place and the inventory remains that of the manufacturer.
Sale and return
Often, especially with the rise of sales through the internet, a customer buys goods from a trader and
has the option to return them within a set number of days. When this occurs, the transaction price
contains a variable element. The only amount that ca cann be recognised as revenue is that which is not
going to be refunded.
The accounting entry is:
Dr Trade receivable with the value of the goods delivered
Cr Revenue with the amount that is not likely to be returned
Cr Refund liability with the amount that is likely to be returned.

Practice question 3: extract of question 4 from December 2015 (5 marks)

On 20 September 20X5, 5, Kappa sold 100 identical items to a customer for $2,000 each. The items cost
Kappa $1,600 each to manufacture. The terms of sale are th that
at the customer has the right to return the
goods for a full refund within three months. After the three
three-month
month period has expired the customer can
no longer return the goods and payment becomes immediately due. Kappa has entered into transactions
of this type
ype with this customer previously and can reliably estimate that 4% of the products are likely to
be returned within the three-month
month period
period. Required: Explain and show how this transaction would be
reported in the financial statements of Kappa for the year ended 30 September 20X5
20
Suggested solution is on page: 147

4. Tangible non-current
non
assets

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Define the initial cost of a non
non-current asset (including a self-constructed
constructed asset)
asse and apply this to
various examples of expenditure, distinguishing between capital and revenue items.
 Identify pre-conditions
conditions for the capitalisation of borrowing costs.
 Describe, and be able to identify, subsequent expenditures that should be capitalised
capitalised, including
appropriate borrowing costs.
 Compute the impact on the financial statements when property, plant and equipment is
measured under revaluation model and a revaluation to fair value is mademade.
 Account for gains and losses on the disposal of re re-valued assets.
 Calculate depreciation on:
– revalued assets, and
– assets that have two or more major items or significant components.
 Apply the provisions of accounting standards relating to government grants and government
assistance in relation to property, plant and equipment.
 Describe the criteria that need to be present before non
non-current
current assets are classified as held for
sale, either individually or in a disposal group.
 Apply the requirements of IFRS Standards for non-current assets and disposal groups thatth are
held for sale.
 Discuss the way in which the treatment of investment properties differs from other properties.
 Apply the requirements of IFRS Standards to investment properties.

Start – The Big Picture

Non-current
current assets are assets that give benefits over more than one period. Before studying this
chapter, ensure that you are happy with the Conceptual Framework definition of an asset and the
recognition criteria, as they will make all of these rules easier to remember.
Pay particular attention to the definition of an asset including:

 Controlof that asset

 The potential to produce economic benefit for the reporting entity If no potential economic
benefit can be reasonably expected
expected, no asset exists and the monetary value is expensed to the
SOPL.
There arere a number of IFRS Standards that provide guidance on accounting for tangible assets,
including:
 IAS 16: Property, plant and equipment
 IAS 23: Borrowing Costs
 IAS 40: Investment Property
 IAS 20: Accounting for Government Grants and Disclosure of Governmen
Government Assistance
 IFRS 5: Non-current
current Assets Held for Sale and Discontinued Operations
Each of these is covered below.

IAS 16: Property, Plant and Equipment (PPE)

PPEcomprise tangible non-current
current assets held by a business for use in the production or supply of goods
or services, for rental to others, or for administrative purposes
purposes. This includes land, buildings, machinery,
vehicles and equipment although it excludes:
 investment property (IAS 40)
 inventory - items acquired for resale (IAS 2)
 asset held for sale or as part of a disposal group (IFRS 5)
Initial recognition/ classification
PPE is recognised when an entity has control over the asset, not necessarily legal ownership. The
important point to remember is that the entity is likely to gain future economic b
benefits from using the
asset and its cost can be measured reliably. It is common for sub-components
components of a single non-current
non
asset to be unbundled into separate non
non-current
current assets where each has a materially different useful life.

Practice question 1: extract of question 3 from June 2017 (amended) (5 marks)

Non-current
current assets are often a highly significant component of the total assets of an entity. Therefore, a
number of different International Financial Reporting Standards have been published which regul regulate
their definition, recognition, measurement and disclosure. IAS 1 Presentation of Financial Statements
distinguishes between current and nonnon-current
current assets. IAS 16 Property, Plant and Equipment specifically
regulates the recognition, measurement and dis disclosure of tangible assets.
Required: Explain how:
(i) IAS 1 distinguishes between current and non
non-current assets
(ii) IAS 16 defines property, plant and equipment
Suggested solution is on page: 147

Initial valuation
PPE is measured initially at its costt and this includes a
all costs directly involved in bringing it into working
condition. These are called capital costs. Any costs not capitalised are expensed in the SOPL and are
referred to as revenue expenditure.

Include in initial valuation Exclude from initial valuation

(Dr Non-current asset) (Dr Expenses)

 Purchase price net of trade discounts  Administration costs

 Transaction costs of purchase, e.g.  Training costs for staff
legal fees  Fuel costs
 Borrowing costs incurred, if this is the  Initial inefficiencies and losses during
policy under IAS 23 Borrowing Costs “run in”
 Inwards delivery costs  General overheads
 Import duties, irrecoverable purchase  Costs giving benefit for one year or
taxes less only e.g. insurance and
 Materials and labour costs for self
self- warranties
build PPE
 Dismantling costs - net present value  Any costs due to abnormal losses in
of unavoidable future purchase, delivery
very or production as
decommissioning costs (these are they will not enhance earning
provided for under IAS 37 Provisions, capacity
Contingent Assets and Contingent
Liabilities)
 Installation and assembly costs,  Any costs that will maintain current
including site preparation costs earning capacity of the asset rather
than improve its intrinsic
characteristics (e.g. maintenance
maint
costs)
Example

Company A started to build a new Head Office on 1 January 20X4 and incurred the following costs:

$ million
Purchase price of land 50
Stamp duty and legal fees 2
Site preparation and building access roads 14
Materials and labour 22
Design fees 1
General sundry expenses 5
Total 94
Due to adverse weather conditions, the site was closed for a week and $0.5 million of labour costs relate
to this period. Materials were damaged too, costing $1.5 million and the figures above include this
amount.
What is the cost of the building that will be capitalised as a tangible non
non-current
current asset?

Solution
The cost to be capitalised includes all the costs with the exception of those that are expensed in the
SOPL. These include the abnormal coscoststs of wasted labour and materials ($0.5 million + $1.5 million) and
the general sundry expenses ($5 million).
The cost is $87 million i.e. $(50+2+14+(22
$(50+2+14+(22-0.5-1.5) +1) million.

Subsequent expenditure
Expenditure on PPE made after the initial purchase may be added to its carrying amount if it:
 enhances
nhances the economic benefits. This may include a modification to the PPE that enhances it its
useful life or increases its productivity. Relates
elates to an overhaul or a major inspection that may be
required. A good example off this is for aircraft that, according to aviation law, have to be
inspected and have a major overhaul of engines after a specified number of flying hours.
 is a component of a complex asset that is being replaced. A good example would be production
equipment of a bakery which will comprise different pieces of equipment with different useful
lives.. The lining of the ovens may need to be replaced every two years whereas the other items
every five years. The replacement of the lining will be capitalised when iitt is replaced.

Subsequent treatment:: depreciation

Depreciation applies to all assets except land. It is the ‘systematic allocation of the depreciable amount
of an asset over its useful life’ (IAS 16, para 6). The ‘depreciable amount is the cost of an asse
asset, or other
amount substituted for cost, less its residual value’ (IAS 16, para 6).
Depreciation is charged from the date the asset is available for use and this may be earlier than when it
is actually brought into use.
The entity’s directors choose the de
depreciation
preciation method for each asset with a finite useful lifeand this is
treated as expenditure through the SOPL. The pattern of depreciation should match the income stream
generated.
The accounting adjustment for depreciation is:
Dr Depreciation (expense in the SOPL)
Cr Accumulated depreciation (deduction from the cost of the non
non-current
current asset in SOFP)
The directors must review the asset’s useful life annually.. Depreciation is not aimed at showing market
value of assets in the SOFP, but only at matching cos
costs
ts and benefits as closely as possible.
Depreciation may be calculated using the following methods:
1. Straight-line [(cost – estimated residual value) ÷ estimated useful life]
Example
An asset costs $100,000 on the first day of the accounting period and has an estimated scrap value of
$20,000. The directors estimate the useful life to be 5 years. What is the annual depreciation charge and
the journal needed to account for it
it?

Solution
The depreciation expense is $100,000 - $20,000/5 years = $16,000 a year.
Dr Depreciation Expense $16,000
Cr Accumulated depreciation $16,000
Note that if the asset was bought mid -year the depreciation may be pro-rated.

Example
What is the depreciation charge for the accounting period if the asset is bought 9 months before the
accounting period end?
Solution
The depreciation expense is $16,000 (as above) x 9/12 = $12,000.
Note that if the asset is bought mid
mid-year
year and the question tells you that the directors charge a full year’s
depreciation in the year of acquisition and nothin
nothingg in the year of disposal, then in the example above
$16,000 would be charged in the first year.

2. Reducing balance ((cost less accumulated depreciation to datex %)

%).

Example
An assets costs $100,000 on the first day of an accounting period and is to be depreciated at 20% a
year using the reducing balance method.
What is the depreciation expense for the first two years of the asset’s useful life?
Solution
Year 1 depreciation is $100,000 x 20% = $20,000.
Year 2 depreciation is [$100,000 - $20,000] x 20% = $16,000.

Any change in depreciation method (e.g. from straight line to reducing balance depreciation), change in
the estimated useful life or estimated residual value is treated as a change in an accounting estimate
rather than a change in accounting polpolicy and must be accounted for prospectively. This means the
previous years’ financial statements are not amended but that those of future years will be to reflect the
new depreciation expense.
When an asset contains two components the depreciation shall be determined for each component over
its useful life. For example, if an industrial baker buys a bread oven, the lining of the oven may be
replaced every two years whereas the remaining production equipment may have a useful life of 10
years. Depreciation will
ill be charged on the oven over two years and on the remaining equipment over
10.

Revaluation
The default accounting policy is historical cost. The entity may choose to revalue its non-current
non assets
if the following conditions are met:
 Must revalue alll property, plant and equipment in the same class (e.g. all buildings or all
vehicles);

 Must revalue with sufficient regularity.

If an asset is revalued upwards the accounting entry is:

Dr Cost (to take the carrying value to the revised value)
Dr Accumulated
ated depreciation (to remove the depreciation to date)
Cr Revaluation surplus (the difference between the original carrying value and the revalued amount)
Although this is a change in accounting policy the previous year’s accounts are not restated. But it
should be noted that:
 Valuation details need to be disclosed

 Depreciation will now be charged on the revised carrying value

 The entity may choose to make an annual transfer from revaluation surplus to retained
earnings of the difference between deprecati
deprecation
on on revalued amount and depreciation on
historical costs. Exam questions will state clearly if the entity has chosen this policy.

 Eventual gain on disposal likely to be lower, as carrying value on derecognition will be higher
higher.
At this time the balance o
onn the revaluation surplus is credited to retained earnings.

Example
Company Y revalued
valued its land and buildings at the start of the accounting period to $100 million, of which
$25 million relates to the land. The cost of the land and building 10 years before
befor revaluation was $12
million and $27 million respectively. The total expected useful life of 50 years remains unchanged.
Company Y’s policy is to make an annual transfer of realised amounts to retained earnings.
What is the amount to be recorded in the ffinancial statements for:
 Depreciation expense
 Carrying amount of land and buildings
 Revaluation surplus?
Solution
This working is a good place to start:
Land Building Total
$ million $ million $ million
Cost 12 30 42
Accumulated depreciation (10/50 X $30 million) - (6) (6)
Carrying amount at the start of the year 12 24 36

Revaluation gain (balancing figure) 8 56 64

Revalued amount at the start of the year 20 80 100
Depreciation (1/40 x $80 million) - (2) (2)
Carrying amount at the end of the year 20 78 98

The SOFP will show the carrying amount of the land and buildings as a non
non-current
current asset: $98 million.
The SOPL will show the depreciation expense of $2 million.
As the entity has a policy of making an annual transfer of realised amounts to retai
retained earnings the
extra depreciation charged as a result of the revaluation will be calculated. This is calculated as old
depreciation less new depreciation:
$ million
New annual depreciation 2
Old annual depreciation ($30 million/50 years) (0.6)
Annual transfer 1.4

The journal entry to record this transfer is

is:
Dr Revaluation surplus $1.4 million
Cr Retained earnings $1.4 million
The revaluation surplus is recorded in the equity section of the SOFP and the balance for this year is
$62.6 million ($64 million - $1.4 million).

Disclosures
The financial statements shall disclose, for each class of property, plant and equipment a reconciliation
for the start of year figure to end of year figure, including:
 Cost/ valuation of each class of assets

 Accumulated depreciation

 Carrying value.
This will explain all movements between opening and closing carrying value of each major class of
assets.

IAS 23: Borrowing costs

Finance costs must be added to the initial value of the asset on the acquisition or construction
constru of an
asset that takes a significant period of time to get ready for use or sale (a ‘qualifying asset’).These costs
include interest charged on the money borrowed.
The interest is only capitalised during the construction phase and may include either interest on specific
loans or a fair weighted average of general company finance costs.
Capitalisation begins when all of the following have been met:

 Expenditure is being incurred on the asset (e.g. land has been acquired upon which to build a
new office)
 Interest is being incurred
 Activities necessary to get the asset ready for use are in progress (e.g. planning permission has
been obtained)
Any costs incurred during periods of extended stoppage are expensed in the SOPL (e.g. breaks for
bad weather, labour disruptions).
One the asset is ready for use,, even if not brought into use on that datedate,, the interest is no longer
capitalised and is expensed in the SOPL
SOPL. Depreciation of the asset begins on this day.

Example
Company B bought a piece of land on 1 DeceDecember
mber 20X3 for $15 million on which to build a new head
office. The planning application was delayed and so the construction did not start until 1 January 20X4.
The construction cost $10 million and the office equipment $5 million. The construction was comp
completed
on 31 October 20X4 and brought into use on 1 January 20X5.
Company B borrowed $30 million on 1 December 20X3 to finance the project. The loan carries interest
of 10% a year. The loan will be repaid on 31 May 20X5.
What is the amount to be capitalised as PPE for the year ended 31 December 20X4?
Solution
The amount to be capitalised as the cost if the land and building includes the cost of the assets and the
interest from 1 January 20X4 to 31 October 20X4:
$ million
Land 15
Building 10
Equipment 5
Interest capitalised ($30 million x 10% x 10/12) 2.5
32.5

Profit or loss on disposal of any non

non-current asset
This is calculated the point that the asset is de
de-recognised by the entity.

Proceeds (cash
cash or other asset received
received) X
Less: Carrying value derecognised
ecognised (what leaves the SOFP) (X)
Profit or loss on disposal (sometimes
sometimes called over or under depreciation
depreciation) X

The profit or loss on disposal is recorded in the SOPL.

IAS 40: Investment Property

An investment property is land or buildings controlled by the he entity, where the principal purpose of
holding it is to generate a return from rental yield or appreciation in value over time.
It can include part of a building as well as an entire building.

It may include assets held under a lease

lease.
Self-constructed assets may qualify as investment property, if the intention is to hold onto that building
for longer-term
term investment return. If the intention is to sell the asset upon completion, it is long
long-term
inventory.
Investment property cannot include any properties that are occupied by the reporting entity itself,
whether for production, supply of services or administrative purposes. Be careful when looking at group
accounts. If a parent entity rents a building to a subsidiary
subsidiary, it will be accounted for as investment
property in the parent’s financial statements but will be PPE for the group as it is used by the group.
Recognition and initial value
The recognition criteria are those of the Framework and the initial valuation is much the same as for
other PPE.
The initial
ial valuation is cost, including transaction costs necessarily incurred. Costs must exclude any
start-up costs, initial operating losses
losses, capitalised borrowing costs or abnormal losses during
construction.
Subsequent carrying value
Investment properties may be revalued using the fair value model. Notice the differences between the
revaluation model for PPE and the fair value model.

Subsequent valuation of
investment property
Accounting policy choice

Fair value model

Cost model
Do not depreciate
Cost less accumulated
Annual revaluation
depreciation
Gain or loss reported in SOPL

Where an entity chooses the fair value model as its accounting policy, this must be applied to all
investment properties.

Practice question 2: extract of question 4 from December 2016 (7 marks)

You are the financial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with International Financial Reporting Standards (IFRS). Y You have recently
produced the final draft of the financial statements for the year ended 30 September 20X6 and these are
due to be published shortly. The managing director, who is not an accountant, reviewed these financial
statements and prepared a list off queries arising out of the review.

Query: The notes to the financial statements say that plant and equipment is held under the ‘cost
model’. However, property which is owner occupied is revalued annually to fair value. Changes in fair
value are sometimess reported in profit or loss but usually in ‘other comprehensive income’. Also, the
amount of depreciation charged on plant and equipment as a percentage of its carrying amount is much
higher than for owner occupied property. Another note says that propert
propertyy we own but rent out to others
is not depreciated at all but is revalued annually to fair value. Changes in value of these properties are
always reported in profit or loss. I thought we had to be consistent in our treatment of items in the
accounts. Pleasee explain how all these treatments comply with relevant reporting standards.
Provide answers to the query raised by the managing director.
Suggested solution is on page: 148

IAS 20: Accounting for Government Grants and Disclosure of

Government Assistance
Government grants are a form of finance that differs from normal loans in that they are not paid back
unless the conditions of issue are broken. Grants and assistance are different.
Government assistance to an entity is w where a government department provides
es assistance to an entity
in the form of advice. This is disclosed in the financial statements.

Recognition of government grants

Grants are recognised when it is reasonably certain that the benefits they embody will be received by
the reporting entity. Until they are reasonably certain, they are contingent assets and simply disclosed if
probable.
Grants may be capital (to acquire an asset) or income (to pay for an expense such as salaries). Both
types are recognised in SOPL on a systematic basis to reflect
ct the benefit obtained.

Government grants

Capital grant - release

grant to profit alongside Income grant
depreciation on acquired
asset

Show asset at gross cost Show asset at net cost Show gross expense and Show net expense in
and grant received as after deducting expected grant as separate item of profit after deducting
deferred income grant receipt income effect of grant

Note that grants received will always pass through SOPL.. It is not permissible to treat government
grants received as directly through equity.

Example
Company J buys a new factory for $70,000 and receives a government grant of $1
$10,000. The building
has an estimated useful life of 10 years.
Show how this acquisition and grant receipt accounted for in the financial statements of Company J if:
(i) the grant is deducted from the cost of the factory (method 1)
(ii) the grant is recorded
d as deferred income (method 2)
Solution
Method 1:
The costt of the asset is recorded as $70,000 less the grant received (Dr Cash $10,000 Cr Asset
$10,000). The carrying amount is then $60,000 before depreciation. The depreciation charge for the first
year is $6,000 ($60,000/10 years) and the journal entry to record this is:
Dr Depreciation expense in the SOPL $6,000
Cr Accumulated depreciation in the SOFP $6,000
Method 2:
The cost of the asset is $70,000 and this is depreciated over its useful life. The annual depreciation
charge is $7,000 ($70,000/10years). The grant is recorded as deferred income: Dr Cash $10,000 Cr
Deferred income $10,000. This deferred income is them amortised to the SOPL over 10 years so in the
first year the $1,000 ($10,000/10 years) iis recorded as:
Dr Deferred income $1,000
Cr SOPL $1,000.
The balance on the deferred income account $9,000 ($10,000 - $1,000) is recorded as:
Current liability $1,000
Non-current liability $8,000

Changes to recognition of grants

If it appears likely that a grant will become repayable (e.g. such as by the entity changing plans so that
the business no longer qualifies for the grant), then repayment of the grant will be accounted for in the
year when it becomes apparent that it will be repaid.
The recognition
n of this liability to repay the grant will normally be recognised in SOPL.
Conversely, if an entity becomes entitled to receipt of a grant after completing a period of qualifying
expenditure, it will normally be recognised in profit in full once the repor
reporting
ting entity qualifies for its
receipt.
In other words, changes to estimates of the right to receive a grant will normally be presented as a
change in accounting estimate rather than a correction of an accounting error.

Practice question 3: extract of ques

question
tion 4 from December 2019 (5 marks)
Epsilon, a company with a year end of 30 September 20X7, is listed on a securities exchange. A director
of Epsilon has a question relating to the application of International Financial Reporting Standards
(IFRS® Standards)
s) in its financial statements for the year ended 30 September 20X7.
Inconsistencies
I have recently been appointed to the board of another company which is growing very quickly and will
probably seek a securities exchange listing in the next few years. AAss part of my familiarisation process,
I’ve been reviewing their financial statements which they state comply with IFRS Standards. I have been
comparing them with the financial statements of Epsilon. There appear to be some inconsistencies
between the two setsets of financial statements: Both Epsilon and this other company have received
government grants to assist in the purchase of a non
non-current
current asset. We have deducted the grant from
the cost of the non-current
current asset. They have recognised the grant received as deferred income.
Please explain the apparent inconsistenc
inconsistency to me.
Suggested solution is on page: 148

IFRS 5: Non-current
current assets held for sale and discontinued operations
Non-current
current assets are classified as ‘held for sale’ if their carrying value will be recovered mainly through
a sale transaction rather than through their continuing use in the business. This will apply to disposal
groups too (a group of net assets that the entity is planning to sell in a single transaction).
Classification
An asset or disposal group is classified as held for sale when all of the following conditions are met:
 Available for sale immediately in its present condition
 Sale is highly probable
 Directors are committed to the sale (i.e. the sales price is reasonable)
 Active programme
ramme to locate a buyer is in place (i.e. an agent has been instructed to sell)
 Sale will be completed within 12 months from classification
 Unlikely that the plan will be withdrawn
Accounting treatment
Once classified as held for sale:
 Stop depreciating the
e asset/disposal group
 Determine whether the asset/disposal group has been impaired by comparing the carrying value
with the fair value less costs to sell (it will have no value in use at this point)
 Any impairment is expensed through the SOPL
 Present the asset/disposal as current on the SOFP. Assets and liabilities for the disposal group
are presented separately.

Example
Company X bought a machine on 1 October 20X1 for $12,000 and it was expected to have a useful life
of 10 years. On 31 March20X3the
20X3the direct
directors
ors of Company X decide to sell the machine and advertise it for
sale through local agents. The agent states that the machine will sell quickly and that the market value
is $7,500 before deducting its fees and dismantling costs of $500.
The machine remains unsold at the year end of 30 September 20X3.
How is this machine recorded in the financial statements of Company X at 30 September 20X3?
Solution
The carrying amount on the date the machine is classified as held for sale is: Costless depreciation to 30
June 20X3 i.e. $12,000 - $(12,000/10 years x 1.5 years) = $10,200.
The fair value less costs to sell is $7,500 - $500 = $7,000.
The machine is shown as a current asset at the lower of carrying amount and fair value less costs to
sell: $7,000.
The difference of $3,200 ($10,200 - $7,000) is recorded as an expense in the SOPL. It is called
impairment. The machine is no longer depreciated.

Disposal group
A disposal group is a group of assets (and possibly liabilities)) that the entity intends to dispose of. This
may represent the net assets of a division for example. The assets are recorded in the SOFP in the same
way as those described in the example above. The liabilities are shown as current liabilities.

Practice question 4: extract of question 4 from December 2015 (10 marks)

You are the financial controller of Omega, a listed company which prepares consolidated financial
statements in accordance with International Financial Reporting Standards (IFRS). Your managing
director, who is not an accountant, has recen
recently
tly attended a seminar and has raised two questions for
you concerning issues discussed at the seminar
Query: A delegate was discussing the fact that the entity of which she is a director is relocating its head
office staff to a more suitable site and inte
intends
nds to sell its existing head office building. Apparently,
Apparently the
existing building was advertised for sale on 1 July 2020X5 5 and the entity anticipates selling it by 31
December 20X5. 5. The year end of the entity is 30 September 20 20X5.
5. The delegate stated that in certain
circumstances buildings which are intended to be sold are treated differently from other buildings in the
financial statements.
Please outline under what circumstances buildings which are being sold are treated differently and also
what that different treatment is.
Suggested solution is on page: 149

5. Impairment of assets

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Identify circumstances which indicate that the impairment of an asset may have occurred.
 Describe what is meant by a cash
cash-generating unit.
 Define and calculate the recoverable amount of an asset and any associated impairment losses.
 State the basis on which impairment losses should be allocated, and allocate a given impairment
loss to the assets of a cash --generating unit.
 Account for the reversal of an impairment loss that was recognised in a previous period.

Start – The Big Picture

An asset cannot be shown in the SOFP at a valuation greater than the economic benefits it’s expected to
generate, since this would
uld violate the Conceptual Framework definition of an asset.
When the value falls this is called impairment and is covered by IAS 36. Impairment occurs when the
recoverable value of an asset exceeds its carrying value. Directors are responsible for determi
determining
whether an asset has been impaired and will do so when assets
ssets that are being depreciated or amortised
show some indication of impairment
impairment. Assets that are not being depreciated or amortised are checked for
impairment annually.
Impairment definition
An asset is impaired if its carrying amount is greater than its recoverable amount.
Recoverable amount
IAS 36 Impairment assumes that a business will always take the most rational course of action and sell
any asset where the net sales proceeds is greater tha
thann the benefit from attempting to recover the value
of the asset by its own use. The recoverable amount is defined as:

Recoverable value
HIGHER of

Value in use (VIU)

Fair value less costs to sell
NPV of expected net cash flows
(FVCS)
from the asset

VIU is also called ‘economic value’ and it means what the asset is worth to the entity iif it is kept.
If either the FVCS or VIU exceeds the current carrying value of the asset, there will be no impairment
loss recognised in the current period. Any impairment loss is recognised immediately in full in the SOPL
(like depreciation) unless the asset was previously revalued.

Example
The carrying
ying value of an asset is $34,000. The value in use is $28,000 and the fair value less costs to
sell is $25,000.
The asset should be recognised at $28,000. The recoverable amount is the higher of the value in use
and the fair value less costs to sell: $28
$28,000.
,000. The carrying value exceeds this so the asset is impaired by
$6,000.
The accounting entry would be:
Dr SOPL $6,000
Cr Asset $6,000

If the asset had been revalued previously then the revaluation surplus would be reduced by $6,000.
The accounting entry would be:
Dr Revaluation surplus $6,000
Cr Asset $6,000

If the credit balance on the revaluation surplus was, say, $4,000 then this would be removed, and the
remaining $2,000 impairment would be expensed through SOPL.
The accounting entry would be:
Dr SOPL $2,000
Dr Revaluation surplus $4,000
Cr Asset $6,000

Indicators of impairment
There are a number of factors which might indicate an impairment, though this list is not exhaustive:

External  Unexpected fall in market value of the asset.

indicators of  Significant adverse changes in the business environment
impairment using PESTEL factors (political, economic, sociological,
technological, environmental or legal) making the asset at
least partially redundant
redundant.
 Interest rate rises in the periods which are expected to
remain in place for a long time, reducing the asset’s NPV and
hence its VIU
VIU.

Internal  Obsolescence of the asset.

indicators of  Physical damage to the asset.
impairment  Significant changes to the reporting entity’s business plan in
the period or near future making the asset at least partially
redundant.
 Poor performance of the asset itself.

Cash generating unit

In practice, many assets do not generate any cash flows in their own right, as they only exist as a
component in an income generating enterprise.
It is therefore practically impossible to value individual assets, so instead groups of assets are valued
together.
A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent
dependent of the cash inflows from other assets or groups of assets. In practical terms, it’s the
smallest group of assets which together could be a going concern.
Example
An entity operates a chain of fast--food
food restaurants. Each restaurant runs a kitchen
kitche and prepares and
sells food. Each restaurant would be classed as a cash
cash-generating unit.

Reporting impairment losses: cash generating unit

A cash generating unit may be impaired if, for example, it makes losses or suffers physical damage like a
fire. The
e whole unit is checked for impairment and then the impairment is deducted from the assets in
the following order:
 Any assets physically damaged or otherwise specifically impaired, then

 Goodwill attributable to the CGU, to a minimum value of zero, ie do n

not recognise internally
generated negative goodwill, then

 Other assets pro rata to value but never impair an asset below its individual recoverable value
(which will logically be sales price less costs to sell if an asset is part of a CGU, as it is unlike
unlikely to

have an individual value in use), as the rational thing would be to sell an asset if it appears to
have a higher value to somebody else than it does to the current owner.
For each asset impaired the accounting entry is:
Dr SOPL
Cr Asset

Example
Company
any F has a fire in one of its restaurant kitchens on 1 April 20X7. The following carrying amounts
of net assets are recorded in the financial statements of this restaurant immediately before the fire:
$’000
Goodwill 24
Furniture and fittings 15
Kitchen equipment 26
Building 60
Net current assets 12
Total 137

The recoverable value of the restaurant is estimated to be $77 $77,000.. The kitchen equipment has been
destroyed completely. The net current assets include inventory and some corporate receivables and the
carrying amount is considered to be a fair reflection of the net realisable value.
Show the impact of the impairment resulting from the fire.
Solution
The impairment is calculated as the difference between the carrying amount ($137,000) and the
recoverable amount ($77,000) and is $60,000. The net current assets are not impaired.
This is deducted from the assets in the following order:
1. Kitchen equipment. The value is reduced from $26,000 to $nil and this leaves $34,000 impairment
($60,000 - $26,000)
00) to be deducted from other assets.
2. Goodwill. The value is reduced from $24,000 to $nil and this leaves $10,000 impairment ($34,000 -
$24,000) to be deducted from other assets.
3. Building and furniture and fittings. The remaining impairment loss is p
pro-rated
rated between the assets in
proportion to their carrying amounts: $60,000: $15,000.
Building impairment is$60,000/$(60,000+15,000) x $10,000 = $8,000. Its revised carrying value is
$52,000.
Furniture and fittings impairment is $15,000/$(60,000+15,000) x $10,000 = $2,000. Its revised carrying
value is $13,000.
Notice that the new carrying value of the restaurant is $77,000.
$’000
Goodwill Nil
Furniture and fittings 13
Kitchen equipment Nil

Building 52
Net current assets 12
Total 77

Reversal of impairments
This is possible if the circumstances creating the impairment no longer exist. Directors check annually to
see if the conditions giving rise to impairment have been reversed.
The reversal would be reported immediately in the SOPL unless it was re recorded
corded in the revaluation
surplus. The reversal will never take the value of the asset above the amount that it would have been
recorded at if the original impairment had not taken place. Remember to change the depreciation charge
once the impairment has been een reversed.
Goodwill impairment is never reversed.

Example
Company K bought a machine on 1 October 20X4 for $50,000. The estimated useful life is 10 years at
this time. Company K does not revalue its non
non-current assets.
On 30 September 20X6 the machine was impaired as its recoverable amount is now $22,000.
On 30 September 20X8, the circumstances which gave rise to the impairment no longer exist and the
recoverable amount is $45,000.
Show how the impairment and subsequent reversal are recorded in Compan
Companyy K’s financial statements.
Solution
The original impairment on 30 September 20X6
The carrying amount at that time is $50,000 – (2/10 x $50,000) = $40,000.
The recoverable amount is $22,000 so the machine has been impaired by £18,000. This is recorded as
Drr SOPL $18,000 and Cr Machine $18,000. The new annual depreciation charge is $22,000/8 years =
$2,750.
Reversal of impairment on 30 September 20X8
The carrying amount at this time is: $22,000 – (2/8 x $22,000) = $16,500.
The carrying value of there had bee
beenn no impairment on 30 September 20X6 is: $50,000 – (4/10 x
$50,000) = $30,000.
The reversal cannot take the carrying amount above $30,000 because there is no revaluation policy. So,
the amount reversed is: $30,000 - $16,500 = $13,500.
The accounting entry is:
Dr Machine $13,500
Cr SOPL $13,500

6. Leases

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Account for right of use assets and lease liabilities in the records of the lessee
lessee.
 Explain the exemption from the recogn
recognition
ition criteria for leases in the records of the lessee.
 Account for sale and leaseback transactions in the financial statements of lessees.
 Explain the distinction between operating leases and finance leases from a lessor perspective.
 Account for operating leases and finance leases in the financial statements of lessors.

Start – The Big Picture

A lease is a contract between two parties that gives the right to use the asset for a fixed period of time
in exchange for payment. It is important to note that a llease
ease is a contract to use an asset not one in
exchange for services. The accounting treatment is covered by IFRS 16 Leases.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Lessor is the person or entity who
o owns the right of use asset and receives the consideration.
Lessee is the entity who has the right to use the asset and pays the lessor the consideration.
Right of use asset is the lessee’s right to use the asset in the lease over the term of the lease.
Short life and low value asset is an asset used in a lease but one of low value or used for a period of
less than 12 months.

Lessee accounting
There are two types of leases that need to be considered:
 Right-of-use
use asset with a liability
 Short-life and low
w value assets

Accounting for right of use assets with a liability

Committing to a lease of a right of use asset meets the Conceptual Framework definition of a liability,
since:
 It creates an obligating event

 The obligation results in an outflow of resour

resources

 The outflows can be measured accurately.

The time value of money is material, so must be discounted to present value at an appropriate discount
rate. An appropriate discount rate is the “rate implicit in the lease” w
which is the IRR of the lessor’s cash
cas
flows.
In the exam, you will be given the discount factor as a % that may also be described as the incremental
cost of borrowing.
The lease term is important to determine. It comprises:
 The non-cancellable period
 Period covered by an option to extend tthehe lease if it is certain that it will be extended
 If the lease is to be terminated early, then periods covered by the option to terminate.
Initial recognition
Determine the lease liability first to include:
 Fixed lease payments
 Options to purchase the asset
et if these are reasonably expected to be paid
 Variable payments based on, say, an index
 Termination payments expected to be paid
 Any amounts
mounts due under residual value guarantees
The accounting entry is
Dr Right-of-use asset
Cr Lease liability
The right-of-use
use asset is then debited with further sums to cover:
 Any lease payments made at the start or before the lease term
 Initial direct costs
 Estimated costs of removing or dismantling the asset at the end of the lease term

Subsequent recognition
Liability: add
d interest annually and deduct the lease payment
payment.. The lease is split between the current and
non-current liabilities on the SOFP.

If the lease payment is made in arrears the calculation is:

B/f Interest Lease payment c/f
X X (X) X

If the lease payment is made in advance the calculation is:

B/f Lease payment Interest c/f

X (X) X X

Right of use asset

The non-current
current asset is depreciated over the shorter of the lease term and its useful life.

Practice question 1: extract of question 2 from December 2017 (8 marks)

Kappa prepares financial statements to 30 September each year. On 1 October 20 20X6, Kappa began to
lease a property on a 10-year
year lease. The annual lease payments were $500,000, payable in arrears – the
first payment being made on 30 September 20X7. 7. Kappa incurred initial direct costs of $60,000 in
arranging this lease. The annual rate of interest implicit in the lease is 10%. When the annual discount
rate is 10%, the present value of $1 payable at the end of years 1 1–10
10 is 6·145 dollars.
Required:
d: Explain and show how these transactions would be reported in the financial statements of
Kappa for the year ended 30 September 20
20X7 under IFRS 16 – Leases.
Suggested solution is on page: 149

Short-life and low value assets

Leases for assets that are classified
lassified as short
short-life
life or low value do not need to be recorded as assets on
the SOFP with a corresponding liability. Instead
Instead, the entity may choose to expense the lease payments
on a straight-line
line basis in the SOPL.
IFRS 16 Leases does not give a monetary amount to decide which leases may fall under this category,
although it does give some examples of low value assets:
 Tablets
 Small personal computers
 Telephones
 Small items of furniture.
A car is never considered to be a low value item.

Example
On 1 January 20X2 Company D buys personal computers for staff under a twotwo-year lease agreement.
The agreement states that an initial payment of $2,000 is made followed by two annual payments of
$4,000 each on 31 December 20X2 and 31 December 20X3.

Show the amounts to be recorded in the financial statements of Company D for the years ended 31
December 20X2 and 20X3.
Solution
The amount to be charged to the SOPL for each year is:

Total amount payable over the lease term/ number of years of the lease
= $(2,000 + 4,000 + 4,000)/2 = $5,000.
The journal entries for each year are:
31 December 20X2
Dr SOPL $5,000
Dr Prepayment $1,000
Cr Cash $6,000
31 December 20X3
Dr SOPL $5,000
Cr Cash $4,000
Cr Prepayment $1,000
Notice that the asset itself remains in the books of the le
lessor.

Sale and leaseback transactions for lessees

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Seller-lessee (entity) is the entity that is selling the asset and leasing it back from the lessor
Buyer-lessor (finance provider) is the entity who owns the asset and is leasing back to the lessee
A sale and leaseback transaction is a form of financing where one entity sells an asset to a finance
provider and then continues to use it and pays a lease payment fforor that use. First look to see if a
performance obligation has been satisfied to treat this as a sale.
 Transfer is not a sale: seller
seller-lessee
lessee continues to recognise the asset and recognises a liability
equal to the transfer proceeds
 Transfer is a sale: seller-lessee
lessee derecognises the asset and replaces with a right
right- of -use asset
and corresponding liability. The right
right-of-use
use asset is recognised as a non-current
non asset valued at
the previous carrying amount that relates to the value of the rights retained. A pr profit or loss on
disposal will be recorded in the SOPL.

Practice question 2: extract of question 2 from June 2019 (12 marks)

Gamma prepares its financial statements to 31 March each year. The note below contains information
relevant to these financial statements.
ements.
On 1 April 20X6, Gamma sold a property to entity A for its fair value of $1,500,000. The terms and
conditions of the sale satisfy the sale and leaseback requirements of IFRS® 15 – Revenue from

Contracts with Customers. The carrying amount of the prproperty

operty in the financial statements of Gamma at
1 April 20X6 was $1,000,000. The estimated future useful life of the property on 1 April 20X6 was 20
years. On 1 April 20X6, Gamma entered into an agreement with entity A under which Gamma leased the
property back. The lease term was for five years, with annual rentals of $100,000 payable in arrears.
The annual rate of interest implicit in the lease was 10% and the present value of the minimum lease
payments on 1 April 20X6 was $379,100.
Suggested solution is on page: 150

Lessor accounting
The lessor must classify leases as finance leases or operating leases.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Finance lease is a lease where the risks and rewards of the asset have been transferred to the lessee.
Risks and rewards may include the right to purchase at the end of the lease, the lease term is for most
of the asset’s useful life, the asset is specialised, the lessee is responsible for repairs and servicin
servicing.
Operating lease is a lease that does not meet the definition of a finance lease.
Accounting for finance leases
The lessor does not control the asset and so instead of having a tangible non-current
current asset the financial
statements record a receivable.. The value of the receivable is calculated as the present value of:
 Fixed payments
 Variable payments that depend on an index or rate, valued at the index or rate at the start of
the lease
 Residual value guarantees
 In guaranteed residual values
 Purchase options that are expected to be exercised
 Termination penalties, if these are expected to be paid to the lessor
Subsequently the carrying value of the lease receivable is increased by finance income earned (and
credited to the SOPL) and reduced for lease rentals rreceived (which are debited ot cash).
cash)

Example
Company E leases equipment to Company Z. The lease is for five years at an annual cost of $$5000
payable annually in arrears. The present value of the lease payments is $18,955 and the rate implicit in
the lease is 10%.
Show how this lease is accounted for in Company E’s financial statements.
Solution
Company E recognises the net investment in the lease as a receivable. This is initially the present value
of the lease payments of $18,955.
Each year the receivable is increased for the finance income of 10% and reduced by the payment
received from Company Z.

The receivable at each year end will be:

Year Opening receivable Finance income Cash received Closing receivable
$ $ $ $
1 18,955 1,896 (5,000) 15,851
2 15,851
,851 1,585 (5,000) 12,436
3 12,436 1,244 (5,000) 8,680
4 8,680 868 (5,000) 4,548
5 4,548 452 (5,000) 0

Accounting for operating leases

The lessor continues to recognise the asset as a non
non-current
current asset. Income from the lease is recognised
in the SOPL on a straight- line basis.
Example
Company T hires out equipment on operating leases. On 1 April 20X3 it entered into a five
five- year lease
on equipment with Company V. Company V has agreed to pay an initial payment of $10,000 followed by
four annual amounts of $50,000 on 31 March 20X4
20X4-20X7.
20X7. The equipment will be returned to Company T
at the end of the lease.
Company T paid $900,000 for the equipment when it was new and it has a 20 year useful life.
Show how
ow this lease is accounted for in Company Ts financial statements.
Solution
The equipment is recorded as a non
non-current
current asset in the statement of financial position at its cost less
the accumulated depreciation. The depreciation charge each year is expensed to the SOPL. The amount
is $900,000/20 years = $45,000.
Rental income is recognise in the SOPL on a straight
straight-line
line basis. This will be calculated as total income
expected to be received/ number of years of the lease: $10,000 + (4 x $50,000)/5 years = $42,000 a
year.
The journal entry for year one is:
Dr Cash $60,000
Cr Rental income $42,000
Cr deferred income (liability in the SOFP) $18,000

7. Intangible assets and

goodwill

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Discuss the nature and possible accounting treatments of both internally generated
gen and
purchased goodwill.
 Distinguish between goodwill and other intangible assets.
 Define the criteria for the initial recognition and measurement of intangible assets.
 Explain the principle of impairment tests in relation to purchased goodwill.
 Identify
tify the circumstances in which a gain on a bargain purchase (negative goodwill) arises, and
its subsequent accounting treatment.
 Describe and apply the requirements of IFRS Standards to internally generated assets other than
goodwill (e.g. research and dedevelopment).

Start – The Big Picture

Intangible assets are defined as assets that can be separately identified, are non
non-monetary and without
physical substance. Examples include:
 Goodwill (the excess paid on the acquisition of a trade above its underlying net assets)
 Patents and copyrights
 Licences and permits
 Franchises
 Publishing titles
 Computer software
 Purchased brand names
There are broadly three categories of intangible non
non-current
current asset covered by IAS 38 Intangibles, each
of which has its own accounting
ting rules
rules.

Summary of accounting treatments of three types of asset:

Research & Goodwill Other intangible

development non-current
current assets
Initial recognition
Research costs always Internally generated If expected to give an
written off as incurred. goodwill (positive or inflow of economic
negative) never benefit and separately
Development costs
recognised. Purchased identifiable from goodwill.
capitalised if reasonably
goodwill recognised as an Key test is whether the
certain
ain of future benefits
asset. Negative goodwill entity has control over
using RAT PIE mnemonic
is called a bargain the purported asset.
(see below).
purchase and is
recognised in full as a
credit (income) in the
statement of profit or
loss.

Initial valuation
Costs incurred, including See goodwill calculation. Costs incurred, including
transaction
ansaction costs. Based on fair value of transaction costs.
consideration paid less
fair value of net assets
acquired.
Transaction costs written
off immediately to profit
or loss.

Amortisation period
For development Do not amortise. Over period of expected
expected
xpected useful life, Instead, test annually for benefit to residual value.
va
which must be revised impairment. Goodwill has Usually on a straight-
straight line
annually. Costs to match a finite but indefinite life. basis.
period of expected
benefit.

Upward revaluation
No, unless reversing a Never. Yes, but only if revalued
possible? previously recognised amount is reliable, by
impairment loss (see obtaining the valuation
from an “active market”
(see below).

Impairment loss
For development Test for impairment Recognise impairment
recognition recognise
ecognise impairment annually. losses using normal rules
losses using normal rules of IAS 36, ie if an event
of IAS 36, i.e. if an event suggests impairment.
impair
suggests impairment.

Reversal of
Possible, if can Never. Possible, if can
impairment losses demonstrate the demonstrate the
estimates of the estimates of the
impairment loss are now impairment loss are now
not likely to happen. not likely to happen.

Allowed alternative
None. Can elect to present as None.
presentations gross or proportionate
goodwill.

Initial recognition/ classification

An intangible asset is an identifiable non
non-monetary
monetary asset without physical substance. This can include
the right to use a tangible asset. PPremiums
remiums paid to acquire services of a person (e.g. transfer price of a
sports player) are intangible assets although other employees are not intangible assets.
assets
Goodwill is an example of an intangible asset. Identifiable means that the asset can be seen as separate
from the business as a whole, in contrast to goodwill.
An intangible is recognised once it meets the definition of an asset, which means that it’s controlled by
the entity and it’s reasonably expected to generate a positive inflow of bene
benefit.
fit.
Intellectual
ntellectual property (knowledge generally known) is not controlled by an entity and is not an intangible.
Intellectual property rights are controlled by the entity (e.g. patent) and so may be recognised. This
includes development costs, brands, lilicenses, patents, etc.
Research costs are written off as incurred as they either are not controlled by the entity or are not
sufficiently certain to generate future benefits.
Tests for deciding if expenditure is research (write off) or development (treat as a an asset) are
specifically set out in the standard
standard. Expenditure is development cost if it meets all of the following:
(mnemonic RAT PIE):
 Resources are adequate to complete the project
 Ability to complete
 Technically feasible
 Probable economic benefit (i
(i.e. expected to be profitable)
 Intend to complete the project
 Expenditure on the project can be separately recorded.

Initial valuation
Measured at cost including any expenditure that is directly attributable. Similar rules to IAS 16, Property,
Plant and Equipment.
If negative goodwill (a bargain purchase) arises on a business combination, first check all the figures
in the calculation to make sure that it exists and then recogn
recognise
ise immediately as income.
Note the different treatment of transaction costs in the determination of goodwill’s initial value (i.e. write
them off) and other intangibles (i.e. include them in the initial value).

Amortisation
Intangible assets are written off over their useful lives. This is called amortisation and ffor intangible
assets with a definite (i.e. known) life, such as patents this is calculated on a straight-line basis
assuming no residual value.
For intangible assets with an indefinite (i.e. unknown) life, such as goodwill, do not amortise, but test
annually for impairment. Note that indefinite is not the same as infinite which assumes that assets
last forever -allll intangible assets have a finite (ie limited) useful life.

Impairments
Recognise any impairment losses as expenses in the statement of profit or loss,
loss unless they are to
reverse any previous upwards revaluation shown in equity. See notes on IAS 36 impairments.

Revaluation
The default measurement policy is that of historical cost. If an entity chooses to revalue a non
non-current
asset, there are similar consequences as for IAS 16 Property, Plant and Equipment.
Intangible assets can be revalued upwards only by reference to a market value in an active market.
Paragraph 8 of IAS 38 defines an active market as:
 The items traded in the market are homogeneous
 Willing buyers
ers and sellers can normally be found at any time; and
 Prices are available to the public.
It is common for intangible assets to be unique or at least very distinctive (i.e. not homogenous) or for
the market in them to be shallow.
Active markets in intangibles
gibles are therefore rare so it is unlikely that intangibles will be revalued upwards.
Goodwill relating to a business is unique, so can never be revalued upwards.

Enhancements
Any further
urther costs must be added to the asset’s value if the cost enhances the earnings-generating
potential of the asset above its original specification, e.g. upgrade of some software so that it is now
able to generate revenues that previously would not previously have been accessed by the entity. Other
cost (e.g. repair of hardware)
re) must be expensed immediately.

Practice question 1: extract of question 4 from December 2016 (5 marks)

You are the financial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with IFRS Standards. You have ve recently produced the final draft of the
financial statements for the year ended 30 September 20 20X66 and these are due to be published shortly.
The managing director, who is not an accountant, reviewed these financial statements and prepared a
list of queries
ries arising out of the review
review. One of these queries is:
As you know, in the year to September 20 20X66 we spent considerable sums of money designing a new
product. We spent the six months from October 20 20X5 to March 20X6 6 researching into the feasibility of
the product. We charged these research costs to profit or loss. From April 20 20X6,
6, we were confident that
the product would be commercially successful and we fully committed ourselves to financing its future
development. We spent most of the rest of the year de developing
veloping the product, which we will begin to sell
in the next few months. These development costs have been recognised as intangible assets in our
statement of financial position. How can this be right when all these research and development costs are
design
gn costs? Please justify this with reference to relevant reporting standards.
Provide answers to the managing director’s queries.
Suggested solution is on page: 151

Practice question 2: extract of question 4 from June 2018 (8 marks)

You are the financial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with IFRS Standards.. The chief executive officer (CEO) of Omega has
reviewed the draft consolidated financial statements of the Omega group and of a number of the key
subsidiary companies for the year ended 31 March 20 20X8.
8. None of the subsidiaries are listed entities but
all prepare their financial statements in accordance with IFRS. The CEO has sent you an email with the
following query.
When I read the disclosure
osure note relating to intangible non
non-current
current assets in the consolidated financial
statements, I notice that this figure includes brand names associated with subsidiaries which we’ve
acquired in recent years. However, the brand names which are associated d directly
irectly with products sold by
Omega (the parent entity) are not included within the non
non-current
current assets figure. This is an inconsistency
that I don’t understand. Please explain how this practice can be in line with IFRS Standards
requirements. Also, would I be right in thinking that, as with property, plant and equipment, we can use
the fair value model to measure intangible assets
assets?
Provide answers to the CEO’s queries.
Suggested solution is on page:: 151

8. Inventories and
agriculture

What do you need to know to pas

pass DipIFR?
Make sure that you are able to:
 Measure and value inventories.
 Recognise the scope of IFRS S Standards for agriculture.
 Discuss the recognition and measurement criteria including the treatment of gains and losses,
and the inability to measure fair value reliably.
 Identify and explain the treatment of government grants, and the presentation and disclosure of
information relating to agriculture.
 Report on the transformation of biological assets and agricultural produce at the point of harvest
and account
unt for agriculture related government grants.

Start – The Big Picture

Inventory
Inventory items are assets that are held with the intention of selling within the ordinary course of
business. They are usually held for a period of less than one year and so are recognised as current
assets in the statement of financial position.

Valuation
According to IFRS 2 Inventories, goods held for resale are valued at the lower of each item of inventory
is valued at the lower of cost and net realisable value.
Cost is defined ass purchase price (net of trade discounts) and any other costs incurred in bringing the
inventory to its current location and condition. These include:
 Installation
 Testing
 Import duties
 Irrecoverable sales tax
 Conversion costs (direct material, dire
direct labour, direct overheads)

Costs specifically excluded are:

 Abnormal wastage
 Storage and warehousing
 Admin and selling
Acceptable methods of determining the cost of inventory include:
 Weighted average cost
 Periodic average cost
 First-in-first-out (FIFO)
Last-in-first-out
out (LIFO) is not permitted.
Net realisable value (NRV) is defined as the estimated selling price of the inventory having deducted
any costs necessary to make the sale.
Example
S Co has three product lines: A, B and C. the following informat
information
ion is available for each one:
Product A B C
Cost $3 $10 $15
Selling price $4 $12 $14
Costs to make the sale $1.50 $1.00 $2.00
Lower of cost and NRV $2.50 $10 $12

Agriculture
IAS 41 Agriculture explains how to account for biological assets (living pl plants
ants and animals) from their
birth or planting up to their death or harvest. Any agricultural produce (meat, fruit, vegetables, crops)
created at this point is treated as inventory. Other agricultural assets such as equipment, land and farm
buildings are accounted
ccounted for under IAS 16 Property, Plant and Equipment.
Definitions
Biological assets: living plants and animals (cattle, vegetable plants, crops)
Agricultural produce: milk, meat, fruit, vegetables
Bearer plants: grapevines, olive trees
Measurement
Biological
ogical assets are not always bought as they can be grown from seed or be born on the farm. For
consistency they are measured as follows:
 Initially: fair value less estimated costs to sell
 At each subsequent period end: fair value less costs to sell
Any movement
ement in the value is recorded as a gain or loss in the statement of profit or loss.
The assets are presented separately as non
non-current
current assets on the statement of financial position.
Only if a fair value cannot be determined is the biological asset measure
measuredd at cost less accumulated
depreciation.

Agricultural produce is valued at fair value less estimated costs to sell at the point of harvest with any
gains or losses being recognised under operating activities. It is then an item of inventory and is
accountedd for under IAS 2 Inventories.
Bearer plants
As these have a long life and do not undergo a transformation, they are regarded as property, plant and
equipment and accounted for using IAS 16 Property, Plant and Equipment.
Government grants
The treatment of government grants is not the same as for other entities. If the grant relates to the
purchase or upkeep of biological assets valued at fair value less estimated costs to sell then determine
whether it has been given unconditionally or conditionally.
Unconditional: Treated as income in the statement of profit or loss when it is receivable
Conditional: Treated as income in the statement of profit or loss once the conditions attaching to the
grant are met. Until that point it is deferred income and recorded in the statement of financial position
as a liability.

Practice question 1:: extract of question 4 from June 2016 (5 marks)

You are the financial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with IFRS Standards.. The managing director, who is not an accountant, has
recently attended a business seminar at which financial reporting issues were discussed. Following the
seminar, she reviewed the financial statements of Omega for the year ended 31 March 2020X6. Based on
this review she has asked you about the following query.
‘An issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological
assets’ was mentioned. I don’t really understand what these are or how they’re recogni recognised and
measured in the financial statements.
Please explain this to the managing director.
Suggested solution is on page: 151

Practice question 2: extract of question 4 from June 201

2019 (8 marks)
You are the financial controller of Epsilon, a listed entit
entity.
y. The financial statements of Epsilon for the year
ended 31 March 20X7 are currently being prepared. Your managing director has sent you a question
regarding the financial statements.
‘I’ve
I’ve recently been reviewing the financial statements of one of our ssubsidiaries.
ubsidiaries. This subsidiary
specialises in both dairy farming and beef farming. There are amounts included in both non
non-current and
current assets:
 The non-current
current assets include farm machinery which has been purchased. I understand why
this machinery has been included as we have spent money on it. However, the non non-current
assets figure also includes a figure for the dairy and beef herds. These existing herds were not
purchased but are made up of animals the farming subsidiary has bred.
 The inventories include
ude amounts for milk and beef. The milk comes from the dairy herd and the
beef comes from the animals we have slaughtered.

Is there an international financial reporting standard which deals with these issues and how does it
require the subsidiary to value and account for the herds and the inventories?
Please advise the managing director.
Suggested
ggested solution is on page: 151

Practice question 3:: extract of question 3 from September 2020 (13 marks)
Delta is a farming entity specialising in milk production. C
Cows
ows are milked on a daily basis. Milk is kept in
cold storage immediately after milking and sold to retail distributors on a weekly basis.
On 1 April 20X4, Delta had a herd of 500 cows which were all three years old.
During the year, some of the cows becam
becamee sick and on 30 September 20X4 20 cows died. On 1 October
20X4, Delta purchased 20 replacement cows at the market for $210 each. These 20 cows were all a year
old when they were purchased.
On 31 March 20X5, Delta had 1,000 litres of milk in cold storage w which
hich had not been sold to retail
distributors. The market price of milk at 31 March 20X5 was $2 per litre. When selling the milk to
distributors, Delta incurs selling costs of 10 cents per litre. These amounts did not change during March
20X5 and are not expected
xpected to change during April 20X5.
Information relating to fair value and costs to sell is given below:

Date Fair value of a dairy cow which is: Costs to sell a cow at
market
$ $ $ $ $
1 year old 1.5 years old 3 years 4 years old
old
1 April 20X4 200 220 270 250 10
1 October 210 230 280 260 10
20X4
31 March 20X5 215 235 290 265 11

Required:
Using the information provided, explain, with appropriate computations, how Delta should report these
transactions in the financial statements for the year ended 31 March 20X5.
Suggested solution is on page: 15
152

9. Financial Instruments

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Explain the definition of a financial instrument.
 Determine the appropriate classification of a fina financial
ncial instrument, including those instruments
that are subject to ‘split classification’ – e.g. convertible loans.
 Discuss and account for the initial and subsequent measurement (including impairment in the
case of financial assets) of financial assets and financial liabilities in accordance with applicable
IFRS Standards
tandards and the finance costs associated with them.
 Discuss the conditions that are required for a financial asset or liability to be de
de-recognised.
 Explain the conditions that are required for he hedge
dge accounting to be used.
 Prepare financial information for hedge accounting purposes, including the impact of treating
hedging arrangements as fair value hedges or cash flow hedges hedges.
 Describe the financial instrument disclosures required in the notes to tthehe financial statements.

Start – The Big Picture

Financial instruments appear in most corporate financial statements in one form or another. It is
important to understand what a financial instrument is, how it is valued and where it is presented in the
financial
nancial statements. The two accounting standards that you should know how to apply are:
 IAS 32 Financial Instruments: presentation; and
 IFRS 9 Financial instruments

Definition
In accordance with IAS 32, a financial instrument is ‘any contract that give
givess rise to a financial asset of
one entity and a financial liability or equity instrument of another entity’ (IAS 32, para 11). For the
purposes of DipIFR, the following definitions from IAS 32 are appropriate:
Financial assets include:
 Cash
 An equity instrument
ument of another entity (i.e. investment in ordinary shares)
 Derivative instrument that is in the money (e.g. options)
 A contractual right to receive cash or another financial asset from another entity (e.g. trade
receivable)
Note that this definition does not include a prepayment.
Financial liabilities include:
 Contractual obligation to deliver cash or another financial asset to another entity (e.g. trade
payable, loans, redeemable preference shares)
 Derivative instruments that are out of the money.
Note that
hat statutory liabilities like those for taxation are excluded from this definition.
An equity instrument is one that provides the residual interest in assets once all the liabilities have been
settled. An example would be an ordinary share in an entity.
Allll financial instruments are recognised once the entity becomes a party to the contract and not when
control is obtained.

Classification of financial instruments and accounting treatment

Financial assets
It is important to determine whether the asset is o
one
ne of debt (e.g. investment in another entity through
a loan acquired), or equity (e.g. acquisition of equity shares in another entity). The classification is
determined and designated at acquisition of the asset
DEBT
There are three classifications:
Amortised cost FVOCI FVPL
Description A method that accrues Fair value through Fair value through
service charges over the other comprehensive profit or loss
instrument’s life income
Use Only when both the Only when the Default
following tests are following tests are
passed (see later) passed:
 Contractual cash  Contractual
flows cash flows
 Business model  Business
model
(different to

the amortised
cost model)

Initial Fair value (with Fair value (with Fair value (with
measurement transaction costs added transaction costs transaction costs to
to the fair value of the added to the fair the SPL)
asset) value of the asset)
Subsequent Adding the effective Fair value with gains Fair value with gains
measurement interest accrued for the and losses recorded in and losses recorded
period and deducting any other comprehensive in the SPL
interest received. income. Gains and
losses are reclassified
to SPL when the
investment is sold.

EQUITY
There are two classifications:
FVPL FVOCI
Description Fair value through profi
profit or loss Fair value through other comprehensive
income
Use Default Only when:
 The equity instrument is not held
for trading; and
 FVOCI is designated at inception
and this is irrevocable

Initial Fair value (with transaction costs Fair value (with transaction costs added
measurement to the SOPLOCI) to the fair value of the asset)
Subsequent Fair value with gains and losses Fair value with gains and losses recorded
measurement recorded in the SPL in other comprehensive income. Gains
and losses are not reclassified
classified to SPL in
future periods.

Financial liabilities
Amortised cost FVPL
Description A method that accrues service Fair value through profit or loss
charges over the instrument’s life
Use Most liabilities Default
Initial Fair value (with transaction costs Fair value (with transaction costs
measurement deducted from the liability) expensed to the SOPLOCI)
Subsequent Adding the effective interest Fair value with gains and losses recorded
measurement accrued for the period and in the SPL
deducting any interest paid.

Convertible bonds
A convertible bond is a bond that upon its maturity date may be repaid in cash, or converted into
shares, at the option of the holder (buyer) of the bond.
Convertible bonds are examples of “hybrid” or “split” instru
instruments.
Convertible bonds will always sell for a higher price than non
non-convertible
convertible bonds, as the existence of the
option to convert into shares will always have a positive value. Alternatively, for bonds sold at the same
price, a convertible bond will be a able
ble to pay a lower cash interest (“coupon”) than a non-convertible
non
bond.
A convertible bond contains a series of obligations, only some of which mee
meett the definition of liabilities
and they are therefore spilt into a debt and an equity component.

Specific accounting treatment

Fair value accounting
“Fair value” essentially means market value. This is given in the exam and the regulations from FRS 13
Fair value should be applied.

Example
Company A invests in 20,000 shares in a listed entity in December 20X4 at a cost of $5.00 a share.
Transaction costs are $0.50 a share. At the year end of 31 March 20X5 the shares have a market value
of $6.10 a share.
Show how this change in value is accounted for.
Solution
The initial value of the shares is $100,000 and the transaction costs are $10,000.
The accounting entry is:
Dr Equity share investment $100,000
Dr SOPLOCI $10,000
Cr Cash $110,000
At the year end the shares have increased in value by $22,000 [($6.10
[($6.10- $5.00) x 20,000].
The accounting entry is:
Dr Equity share
e investment $22,000
Cr SOPLOCI $22,000.

Example
Show the accounting entries for Company A’s share purchase if the investment is not going to be sold in
the short term and Company A elects to hold them at FVOCI.

Solution
The initial investment will include
de the transaction costs and the accounting entry becomes:
Dr Equity share investment $110,000
Cr Cash $110,000
At the year end the increase in value is now only $12,000 ($122,000 - $110,000). The accounting entry
is:
Dr Equity share investment $12,000
Cr SOPLOCI $12,000

Amortised cost
The two tests mentioned above need to be passed in order to apply amortised cost to financial assets
(although most financial liabilities will use this measurement):
The business model test establishes whether the entity hol holds the financial asset to collect the
contractual cash flows or whether the objective is to sell the financial asset prior to maturity to realise
changes in fair value. If it is the former, it implies that there will be no or few sales of such financial
assets from a portfolio prior to their matu
maturity date. If this is the case, the test is passed. Where this is
not the case, it would suggest that the assets are not being held with the objective to collect contractual
cash flows, but perhaps may be disposed o off to respond to changes in fair value. In this situation, the
test is failed and the financial asset cannot be measured at amortised cost. For FVOCI entities pass this
test if the assets are sold before maturity because the holder has found a more lucrative
lucrativ investment.
The contractual cash flow characteristics test determines whether the contractual terms of the
financial asset give rise to cash flows on specified dates that are solely of principal and interest
based upon the principal amount outstanding. IIff this is not the case, the test is failed and the financial
asset cannot be measured at amortised cost.
For example, convertible bonds contain rights in addition to the repayment of interest and principal(the
right to convert the bond to equity) and there
therefore would fail the test and must be accounted for as fair
value through profit or loss.
In summary,, for a debt instrument to be measured at amortised cost, it will therefore require that:
 the asset is held within a business model whose objective is to holhold the assets to collect the
contractual cashflows, and
 the contractual terms of the financial asset give rise, on specified dates, to cash flows that are
solely payments of principal and interest on the principal outstanding.
Measurement under amortised cost:
st:
Financial asset
Opening asset Investment income Cash receipt Closing asset
(op. asset x effective (nominal value x
% given in exam) coupon %)
X X1 (X)2 X3

Notes
1. Income in SPL (Dr Asset Cr SPL)
2. Cash receipt (Dr Cash Cr Asset)
3. Closing balance to be recorded
ecorded in SFP

Financial liability

Opening liability Finance cost Cash payment Closing liability

(op. liability x (nominal value x
effective % given in coupon %)
exam)
X X1 (X)2 X3

Notes
1. Finance cost in SPL (Dr SPL Cr liability)
2. Cash payment (Dr Liability
ility Cr Cash)
3. Closing balance to be recorded in SFP

Example
Company B issued a bond on 1 January 20X4 with a nominal value of $100,000 with a discount of 10%.
The costs of issue were $2,000 and the bond will be redeemed in 3 years’ time for a premium of $578.
The coupon rate is 5% and the effective rate is 10%.
Show the accounting treatment of the bond.
Solution
The initial proceeds of the bond: ($100,000 x 90%) - $2,000 = $88,000. The accounting entry is:
Dr Cash $88,000
Cr Non-current liability $88,000.
The subsequent treatment is:
Year ended B/f Finance cost Paid C/f
$ $ $ $
31 December 20X4 88,000 8,800 (5,000) 91,800
31 December 20X5 91,800 9,180 (5,000) 95,980
31 December 20X6 95,980 9,598 (100,578) Nil

Practice question 1:: extract of question 3 from December 2016 (12 marks)
Kappa prepares financial statements to 30 September each year. During the year ended 30 September
20X6
6 Kappa entered into the following transactions:
(i) On 1 October 20X5,
5, Kappa made an interest free loan to an employee of $800,000. The loan is due
for repayment on 30 September 20XX7
7 and Kappa is confident that the employee will repay the loan.
Kappa would normally require an annual rate of return of 10% on business loans (5 marks)

(ii) On 1 October 20X5,5, Kappa made a three

three-year
year loan of $10 million to entity X. The rate of interest
payable on the loan was 8% per annum, payable in arrears. On 30 September 20 20X8, Kappa will receive
a fixed number of shares in entity X in full settlement of the loan. Entity X paid the interest du
due of
$800,000 on 30 September 20X6 6 and entity X has no liquidity problems. Following payment of this
interest, the fair value of this loan asset at 30 September 2020X66 was estimated to be $10·5 million. (4
marks)
(iii) On 1 October 20X5,
5, Kappa purchased an e
equity
quity investment in entity Y for $12 million. The
investment did not give Kappa control or significant influence over entity Y but the investment is seen as
a long-term
term one. On 30 September 2020X6,
6, the fair value of Kappa’s investment in entity Y was estimated
estimat
to be $13 million. (3 marks)
Required
Explain and show how the above transactions would be reported in the financial statements of Kappa for
the year ended 30 September 20X66.
Suggested solution is on page:: 153

Convertible bonds
When the bonds are issued d the capital is split into debt and equity. The debt portion is calculated by
taking the cash flows (interest and redemption value) and discounting them using a market interest rate.
This will be higher than the coupon rate. The difference between this an and
d the capital received is the
equity portion. Debt is measured using amortised cost until redemption and the equity is recorded in the
SFP at the same value until the holder decides whether to redeem the bond or convert into shares.
Example
Company T issuess a $500,000 5% four four-year
year convertible loan on 1 January 20X4. The market rate of
interest for a similar loan without conversion rights is 8%. The conversion terms are one equity share
($1 nominal value) for every $2 of debt. Conversion or redemption at par will occur on 31 December
20X7.
How is this accounted for?
Solution
First, the $500,000 received is split into the debt and equity element.
The debt element is calculated as the present value of the cash payable to the investor using the market
rate of debt as the discount factor.
The interest paid to the investor is $500,000 x 5% each year i.e. $25,000. The redemption value is
deemed to be par value.
($25,000 x 3.312) + ($500,000 x 0.735) = $450,300
The remaining balance is considered to be equity: $500,0
$500,000 - $450,300 = $49,700.
Initially the entry is recorded as:
Dr Cash $500,000
Cr Equity $49,700
Cr Non-current liability $450,300.
© 2019 The ExP Group. To be used only as part of ExP’sDipIFR course. Reproduction by any means for any other purpose is prohi
prohibited.
bited. These materials are for
educational purposes only and so are necessarily simplified and summarised. Always obtain expert ad
advice
vice on any specific issue. Refer to our full terms and conditions of
use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
Page 60
ACCA DipIFR|Course Notes The
TheExP Group

The equity is recorded in the equity section of the SOFP and the value is unchanged every year until the
redemption date.
The liability is measured at amortised cost:
Year ended B/f Finance cost Paid C/f
$ $ $ $
31 December 20X4 450,300 36,204 (25,000) 461,324
31 December 20X5 461,324 36,906 (25,000) 473,230
31 December 20X6 473,230 37,858 (25,000) 485,815
31 December 20X7 485,815 39,815* (525,000) Nil
*rounding

Derecognition
Derecognition of a financial instrument occurs whenthe instrument is settled or the contractual
arrangements have expired. For receivables covered by a debt factoring arrangement, the asset
continues to be recognised until the risks and rewards of the receivable have passed to another party.
This is on receipt of cash if the arrangement is without recourse and when the cash is collected by the
factor if the arrangement is with recourse.
Financial liabilities
lities will be derecognised only when they are paid or when the other party to the contract
terminates the contract.
Impairments
Financial liabilities are not impaired.
All financial assets held at fair value are automatically revalued for impairments (e.g. equity instruments
held as investments).
For debt instruments held at FVOCI or amortised cost then impairments are ‘loss allowances’. The entity
must check if the credit risk (the risk of not being paid) has increased significantly since the asset was
issued.
sued. If it has not then the loss allowances are equal to the 12
12-month
month expected credit losses. If they
are significant then lifetime credit losses are recognised. Credit losses are the cash shortfalls between
the amount expected to be received from the inv investment
estment and the present value of what is expected
now, using the original discount rate.

Hedge accounting
The Big Picture

Hedge accounting is a way of showing how risky transactions are managed using hedging instruments.
These include derivatives such as forwards, futures, swaps and options. You do not need to be aware of
the details of how these operate, just how they are accounted for.

Definitions
Hedged item: The asset or liability that is subject to a variability in value (i.e. is risky). Examples
include:
 Foreign currency receivable

 Foreign currency payable

 Variable interest rate loan resulting in higher than expected cash outflows
 Forecast future major purchase in a foreign currency becoming unaffordable due to changes in
the exchange rate.
Hedging instrument:: a designated derivative or non non-derivative
derivative financial instrument, whose changes in
fair value will offset the variations in the hedged item.

Types of hedge accounting

Though three types of hedge accounting methods exist, only two are examined fo
for DipIFR:
1. Fair value hedge. The hedging instrument is taken out to protect against value changes of an item
recognised in the financial statements e.g. a forward contract to fix the amount payable to an overseas
supplier in three months’ time.
2. Cash flow hedge. This might be to protect against adverse movements in an item not in the
financial statements yet e.g. a customer places an order for cutlery made of silver to be delivered in
three months. The risk is that the price of silver changes between nnow
ow and then, so the sales price
quoted does not cover the cost. The hedging instrument would be taken out now but there is no sale to
record until the goods are delivered to the customer in the future.

Accounting for hedges

Conditions for hedge accounting to be used
Hedge accounting can only be applied if the following conditions are met:
1. At inception the hedged item and the hedging instrument are formally designated and
documented as such
2. The relationship is effective (there must be an economic relationsh
relationship
ip between the two, credit risk
does not dominate the value changes and the hedging ratio is the same as the quantity of the
item hedged and the quantity of the instrument used)
3. The hedging instruments and hedged items must be eligible

Accounting
Fair value hedge
Both the hedged item and hedging instrument will be recorded in the SOFP at fair value and subsequent
gains and losses will be recorded in the SPL and offset. The accounting rules reflect what the
instrument is trying to achieve. It is the match
matching principle.

Cash flow hedge

The hedging instrument will be a contract, so will be in the SOFP, but the hedged item will be an
intention, so is not in the financial statements
statements.. Since the hedging instrument exists only because of the
expected existence of the hedged item, the gain or loss on the hedging instrument is “hidden” in

equity(through
(through other comprehensive income) until the hedged transaction takes place when it is
recycled through the SPL to match the movement in the hedged item
item.

Example: Fair value hedge

On 1 January 20X3 Company Y purchased equity shares for their fair value of $1 million. They were
designated to be classified as FVOCI upon recognition.
At 31 October 20X3 the equity shares were worth $1 million but Company Y was worried that th the value
would fall. It therefore entered into a futures contract to sell the equity shares for $1 million in 3
months’ time. The future is designated as the hedging instrument and all the conditions in IFRS 9 are
met.
By the year end 31 December 20X3, the fair value of the equity shares has fallen to $750,000 and the
fair value of the futures contract has risen by $230,000.
Show the accounting treatment of the fair value hedge.
Solution
The hedged item is an investment classified as FVOCI. Therefore the incincrease
rease in the fair value of the
future and the fall in the fair value of the hedged item are both taken to OCI.
Dr Future $230,000
Cr OCI $230,000
Dr OCI $250,000
Cr Equity shares $250,000

Example: cash flow hedge

Company G signs a derivative contract to p protect
rotect its future cash inflows relating to a recognized financial
asset. At inception, when the fair value of the hedging instrument is $Nil the relationship is documented
as a cash flow hedge.
By the reporting date, the loss in respect of the future cash flows amounted to $7,500 in terms of fair
value. The conditions for hedge accounting in IFRS 9 have been met.
Show the accounting treatment of the cash flow hedge if the fair value of the hedging instrument at the
reporting date is:
(i) $$5,000
(ii) $10,000
Solution
(i) The movement in the hedging instrument is less than the movement in the hedged item. Therefore,
the instrument is remeasured to fair value and the gain is recognized in other comprehensive income.
Dr Derivative $5,000
Cr OCI $5,000

(ii) The movement on the hedging instrument is more than the movement on the hedged item. The
excess movement of $2,500 ($10,000 - $7,500) is recognized in the statement of profit or loss.
Dr Derivative $10,000
Cr statement of profit or loss $2,500
Cr OCI $7,500

Disclosures
IFRS 7 Financial instruments: disclosures sets out the disclosure requirements of financial instruments.
These include:
1. Information about how significant the instruments are for the entity’s financial performance and
position.
2. Information about the nature and extent of risks arising from holding the instruments.
These disclosures are both qualitative and quanti
quantitative.

10. Provisions,
contingent assets and
liabilities

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Explain why an accounting standa
standard on provisions is necessary – give examples of previous
abuses in this area.
 Define provisions, legal and constructive obligations, past events and the transfer of economic
benefits.
 State when provisions may and may not be made, and how they should be a accounted for.
 Explain how provisions should be measured.
 Define contingent assets and liabilities – give examples and describe their accounting treatment.
 Identify and account for:
– Onerous contracts
– Environmental and similar provisions.

Start – The Big Picture

Provisions are a form of liability, simply one of uncertain timing or amount. There needs to be an
obligation (something that is legally or constructively impossible to avoid
avoid).
). Note that an
a intention is
never an obligation, so an intention to in
incur
cur an expense can never generate a provision.
Historically, provisions were rather abused with companies using “big bath” provisions to smooth profits.
This allowed companies to set aside profits in good years by creating a provision that would be release
released
when profits were poorer. This is creative accounting and is no longer possible under IAS 37.
Also, some acquiring companies made provisions for intended reorganisation costs in the books of
subsidiary companies as a fair value adjustment. This was then occasionally reversed in following years
through group profit. This does not reflect the results of an entity fairly. IAS 37 has clear definitions of
what a provision is and when to recognize one.

Key definitions (these are ExP’s definitions, which are ssimplified

implified for exam preparation purposes)

Provision is a present obligation (i.e. a liability) where the timing or amount is uncertain.
Contingent liability is a possible obligation whose existence will be confirmed by a future outcome.
Contingent asset is a possible asset whose existence will be confirmed by a future event outside the
control of the entity
Legal obligation is where the obligation is determined by legislation or a contract.
Constructive obligation is where an entity creates an expectation tthat
hat it will fulfill its responsibilities
as a result of past behavior.

Summary diagram
Provisions and contingent liabilities for individual entities

Probable: Greater than 50% estimated probability

Possible: Greater than 5% and up to 50% estimated pro

probability

Remote: 5% of lower probability

Reliable: Any estimate which is more reliable than making no estimate

Provide: Provide expected value and discount at an appropriate rate.

Provisions
A provision is recognised when all of the following are met:
 An entity has a present legal or constructive obligation that has occurred as a result of a past
event; and
 It is probable that there will be an outflow of economic benefits; and
 The obligation can be measured using a reliable estimate.
The accounting entry is:
Dr Asset or expense
Cr Provision
Provisions are measured initially as follows:
 For a series of events (e.g. multiple goods sold under guarantee), use the expected value of the
outflow and discount if the time value of money is material.
 For a one-off event
ent (e.g. a single litigation), use the single most probable outcome and discount
if the time value of money is material.
At each accounting period end they are remeasured to reflect the best estimate of the expenditure
required to settle the obligation.

Contingent liabilities
Contingent liabilities are disclosed unless the possibility of the future payment is remote and not
recognised as liabilities in the SOFP.
Examples include:
 Loans guaranteed for another entity
 Court cases where any negative outcome iiss not yet determined by the judge

Contingent assets
Contingent assets are only disclosed if the possibility of the inflow of benefit in the future is probable.
Otherwise they are ignored.
Examples include:
 Insurance claims
 Court cases where any positive outcome has not yet been determined by the judge

Specific examples:
Onerous contracts
This is a contract where the costs of meeting the contract outweigh any benefit obtained. An example
would be where an entity continues to pay lease rentals on propert
propertyy that has been vacated.
Onerous contracts are provided for in full at the lower of the cost of fulfilling the contract and the cost of
terminating and paying resulting penalties.
Environmental provisions
A provision for environmental costs may be legal or constructive. It may be for rectification costs or
causing damage that needs to be cleaned up. Always consider the time value of money as the ultimate
expenditure may be incurred in many years’ time (see below).
Discounting and unwinding of provisions
IAS 37 requires that where there is a material difference in time between creation of an obligating event
and its settlement, this must be reflected in the financial statements by discounting the provision back to
its nett present value on recognition.
This discounted
iscounted value is then compound
compounded back up (also known as “unwinding
inding”) using the same
discount rate used to initially discount it.
The discount rate used must be a pre
pre-tax rate to reflect the risks associated with the obligating event
itself.

Practice question 1:: extract of question 4from June 2019 (5 marks)

You are the financial controller of Epsilon, a listed entity. The financial statements of Epsilon for the year
ended 31 March 20X7 are currently being prepared. Your managing director has sent you a question
regarding the financial statements:
You will be aware that the board of directors met on 10 March 20X7 to discuss over
over-capacity in parts of
the group. The decision was reluctantly taken to implement a programme of redundancies. The
programme was to be implemented in two phases:
 Phase 1 involves 300 redundancies on 30 June 20X7. This phase of the programme was planned
out in detail at the meeting on 10 March 20X7. The redundancy costs were calculated in some
detail at the meeting and this first phase was made public to all affected parties on 25 March
20X7. – Phase 2 involves 200 redundancies on 30 September 20X7. This phase of the
programme was also planned out in detail at the meeting on 10 March. The redundancy costs
were estimated at the meeting an
andd this second phase was announced on 25 April 20X7.
The financial statements for the year ended 31 March 20X7 include a provision for the first phase of the
redundancies but not the second phase. Both phases were agreed and the costs calculated at the sam same
meeting. Surely both costs should be accounted for consistently?
Suggested solution is on page: 154

Practice question 2:: extract of question 2 from June 2016 (6 marks)

Delta is an entity which prepares financial statements to 31 March each year. Each year the financial
statements are authorised for issue on 20 May. The following events are relevant to the year ended 31
March 20X6:
On 1 August 20X5, 5, Delta supplied some products it had manufactured to customer C. The products were
faulty and on 1 October 20X5 5 C commenced legal action against Delta claiming damages in respect of
losses due to the supply of the faulty products. Upon investigating the matter, Delta discovered that the
products were faulty due to defective raw materials supplied to Delta by ssupplier
upplier S. Therefore on 1
December 20X5, 5, Delta commenced legal action against S claiming damages in respect of the supply of
defective materials. Since that date Delta has consistently estimated that it is probable that both of the
legal actions, the action
n of C against Delta and the action of Delta against S, will succeed.
On 1 October 20X5, 5, Delta estimated that the damages Delta would have to pay to C would be $5
million. This estimate was updated to $5·2 million as at 31 March 20
20X6
6 and $5·25 million as at
a 15 May
20X6.6. This case was eventually settled on 1 June 220X6,
6, when Delta was required to pay damages of
$5·3 million to C.
On 1 December 20X5, 5, Delta estimated that they would receive damages of $3·5 million from S. This
estimate was updated to $3·6 million
on as at 31 March 20
20X6
6 and $3·7 million as at 15 May 20X6.
20 This case
was eventually settled on 1 June 20
20X6,
6, when S was required to pay damages of $3·75 million to Delta.
Explain and show (where possible by quantifying amounts) how this event would be reported
repor in the
financial statements of Delta for the year ended 31 March 2
20X6.
Suggested solution is on page: 154

Disclosures
Since provisions have historically been used as a place to hide things, the disclosure requirements of IAS
37 enforce considerable transparency
ansparency both about the uncertainties behind the provision, the existence of
the provision and all movements on the provisions during the year.
For each class of provision, an entity shall disclose
 The
he carrying amount at the beginning and end of the peri
period;

 Additional
dditional provisions made in the period, including increases to existing provisions
provisions;
 Amounts
mounts used (i.e. incurred and charged against the provision) during the period
period;
 Unused
nused amounts reversed during the period; and
 The
he increase during the period in ththe
e discounted amount arising from the passage of time and
the effect of any change in the discount rate.
Comparative information is not required.

11. Employee benefits

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Describe the nature of short term and long term employee benefits, termination benefits and
defined contribution, and defined benefits schemes.
 Explain the recognition and measurement of short term and long term employee benefits,
termination benefits and defined contribution and defined benefit schemes in the financial
statements of contributing employers
employers.
 Account for short term and long term employee benefits, termination benefits and defined
contribution and defined benefit schemes in the financial statements of contributing
contr employers.

Start – The Big Picture

Employers may provide an occupational pension scheme for their employees. The company will make
financial contributions to the scheme which is often managed by a pension fund manager who works for
a third-party provider.
ovider. Some employees prefer their employer make contributions to a private scheme.
The accounting treatment of these contributions and the effects they have on the financial statements
depends on the type of scheme they are.
There are two types of pension
on plan: defined contribution and defined benefit.
Pension costs are fairly frequently examined. Although they seem difficult at first, they are surprisingly
easy to deal with after working a few examples. To master the subject, you need to have:
 A good working understanding of double entry bookkeeping
 To understand the transaction itself (ie how a promise is made and assets set aside to cover the
cost of honouring that promise)
 A methodical step-by-step
step approach to dealing with the numbers in a logical, chronological,
sequence.

Defined contribution plan

The accounting treatment of these is straightforward
straightforward. The
he employer makes contributions to the scheme
on behalf of the employee. The pension fund manager invests this cash in income in various investment
investments
and generates a fund from which the employee can draw a pension when they retire. The pension
received will depend on how well the fund investments perform. The risk of having an insufficient
pension rests with the employees. The employer is not committe
committedd to invest any further cash once they
have made the contributions.
When the employer makes a contribution the accounting entry is:
Dr SOPL
Cr Cash

Defined benefit plan

These are considerably more complicated for the accountant and are risky for the employer.
emplo
Here, the employer promises to make pension contributions sufficient to guarantee a fixed pension for
the employee when they retire. This creates an obligation for the employer and so we will need to
recognize a liability).
The fund held by the manager ger comprises fund assets and liabilities. The assets are valued at fair value
and comprise the cash and investments the fund holds in order to pay pensions in the future. The
liabilities represent the present value of the amounts owed to employees as penspensions.
At the end of the accounting period the financial statements will show:
SOFP: Net pension liability (Pension liability > pension assets) or, less often, net pension
assets (Pension assets > pension liability)
SOPLOCI: Expenses for service component: the cost of pensions determined by the actuary
for the fund that represent the amount earned by the employee for current or past
services (current service cost and past service cost)
cost).
Net interest component: the cost that represents the unwinding of the pension
liability as the employee is one year closer to retiring net of the income or return
that the investments in the fund assets are assumed to have earned. Both figures
are determined by the actuary and are calculated by taking a % of the opening
liability
bility and asset value. If cost >income then an expense is recorded in the SOPL;
income > cost is net income in SOPL.
Remeasurement component: often called actuarial gains and losses. At the period
end the actuary will value the assets and liability. This will often not agree with the
value determined by applying the bookkeeping entries to the transactions above.
The differences between the values are gains and losses and are recorded in the
statement of other comprehensive income.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Current service cost The value of the pension earned by the employee for this year’s service as
determined by the actuary.
Past service cost The value of the pension earned by the employee for previous years’
service as determined by the actuary. These are much less common than
current service cost and might happen if the employee decides to enhance
the pension benefits by allowing, for example, pensions for spouses of
employees.
Net interest component Relates to change in measurement in both the plan obligation and the plan
assets arising from passage of time.
Contributions Cash sums paid to the fund by the employer.
Benefits Payments
yments made to the employee on retirement. These are paid by the
fund manager from the fund assets.

Example
Company J’s defined benefit pension plan for the year ended 31 December 20X1
X1 is as follows:

Pension Pension Profit and

assets liability loss effect

Balance at 1 January 20X1 10,000 DR 9,500 CR -

Current service costs - 500 CR 500 DR
Past service costs - 200 CR 200DR
Interest charge - 450 CR 450 DR
Contributions paid into the plan 180 DR - -
(Dr Plan assets, Cr company cash)
Benefits 210 CR 210 DR -
Interest return on assets 600 DR - 600 CR
Expected figure c/f 10,570 DR 10,440 CR
Actual figure c/f 8,650 DR 10,200 CR

=>Remeasurement
Remeasurement component (gain) 240 DR See below
=>Remeasurement
Remeasurement component (loss) 1,920 CR See below
Net remeasurement loss in year 1,680 CR See below

Recognition of actuarial gains and losses

Remeasurement gains and losses arise each year and are the result of the actuary estimating returns
and service charges that do not meet expectations
expectations. Often, they are self-correcting
correcting over time (e.g.
( a
short-term stock market crash is likely to recover by it comes time to pay out the pensions promised).
Remeasurement gains and losses arising during the accounting period are recognised in OCI for the year
and will not be recycled to P/L in future periods. A gain is an addition to OCI and a loss is deducted.

12. Tax in financial

statements

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Account for current tax liabilities and assets in accordance IFRS Standards.
Standard
 Describe the general principles of government sales ttaxes
axes (e.g. VAT or GST).
 Outline the principles of accounting for deferred tax.
 Explain the effect of taxable and deductible temporary differences on accounting and taxable
profits.
 Identify and account for the requirements relating to deferred tax assets a and liabilities in
accordance with IFRS Standards
Standards.
 Calculate and record deferred tax amounts in the financial statements.

Start – The Big Picture

Current tax: The amount demanded by the tax authority in respect of corporate taxable gains/
losses that are subject
ubject to tax in the current period. This is generally an estimate at
the year-end
end and is accounted for as an accrued expense.
Deferred tax: Future tax due on gains and losses recognised in the current period but not
assessed for tax by the tax authority u until
ntil some future period. Deferred tax is
generally a net liability but can very occasionally be a net asset. It is an accounting
adjustment and does not represent an obligation to the tax authorities like current
tax.
Sales tax: An indirect tax collected on behalf of national tax authorities. Sales tax is charged
on sales of certain goods and services and refunded on purchases.
Guidelines for accounting for tax are in IAS 12.

Accounting Treatment
Current tax
At the end of the year, the reporting compan
companyy will make an estimate of what tax will be demanded by
the tax authority in respect of profits for that year.
This will be an estimate, as there is often some negotiation over the tax treatment of some items that is
completed after the year end.
Currentt tax is therefore the estimate of what tax will be demanded based on gains and losses
recognised within the tax computation for the current year.
The accrued expense is accounted for as:
Dr SPL
Cr Tax liability
If in the subsequent year the amount paid is more or less than this accrued expenses the over/under
amount is deducted/added to the following year’s SPL expense for tax.

Example
Company M has an estimated income tax liability for the year ended 31 October 20X3 of $200,000. In
the previous year the income tax liability had been estimated as $150,000.
Provide is the tax expense to be shown in the SOPL for the year ended 31 October 20X3 if the amount
paid to settle last year’s liability was:
(i) $185,000
(ii)$120,000.

Solution
(i) Tax expense in the SOPL:

$
Year- end estimate 200,000
Under-provision ($185,000 - $150,000) 35,000
Income tax expense 235,000

(ii) Tax expense in the SOPL:

$
Year- end estimate 200,000
Over-provision ($120,000 - $150,000) (30,000)
Income tax expense 170,000

Deferred tax
Deferred tax arises because the accounting rule for a transaction may not be the same as the rule used
to calculate tax and the timing of payment of tax, on that transaction.
Wherever a transaction has different rules for financial reporting and for tax computation, there is
probably a deferred tax implication.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)

Tax base Carrying

arrying value of the asset as it would be in the statement of financial
positio
position drawn up by the tax authority e.g.tax
tax written down value of a non-
non
current asset having had tax depreciation deducted

Temporary difference Difference

ifference between the accounting carrying value of an asset/ liability and
its tax base. Both tax base and carrying value start with purchase price and
both will become zero when the asset is scrapped. Differences may be
taxable (that gives rise to a future tax liability) or deductible (that gives rise
to a tax asset)

Permanent difference This is not a phrase used in IIAS AS 12, but it’s helpful in forming an
understanding. This is where the tax base and the carrying value of an
asset or liability are always different, as a matter of principle.
E.g. government grant income received may never be taxable, though it’s
income in the profit for the year.

Goodwill gives a permanent difference since impairment losses on goodwill

are never a tax-deductible expense. The tax base of an investment in a
subsidiary is historical cost of purchase, so goodwill never appears at all in
the tax computation. The fact that it never appears makes it a permanent
difference.

Deferred tax is never recognised on permanent differences.

Exam Approach for Deferred Tax

Calculation of deferred tax liability and SPLOCI effect

Go through the accou

accounting
nting policies of the entity and identify each one
1 where the carrying value is not the same as the tax base due to a
temporary difference.
Identify which of these differences are permanent differences, e.g.:
2  goodwill
 Government grants receivable

State in your exam answer that this is a permanent difference, so has no

future tax effects.
For each difference (other than permanent difference) calculate the
3 temporary difference at the period end (CV less tax base).

Multiply the temporary difference b

byy the tax rate expected to be in force
4 when the item becomes taxable (when it “reverses”).
Note: Cr temporary differences produce Dr deferred tax assets
Dr temporary differences produce Cr deferred tax liabilities
This gives the closing balance on the de
deferred
ferred tax asset/liability account
Look at all the deferred tax assets for evidence of impairment. They may
5 only be recognised if there is an opportunity for the entity to receive a tax
benefit in the future.
Offset deferred tax liabilities against def
deferred
erred tax assets with the same tax
authority.
Calculate the movement on the deferred tax liability. This will be the total
6 charge to the statement of comprehensive income for deferred tax. An
increase in the provision is an expense and a decrease is in
income.
Split the movement on deferred tax liability in the year into the element
7 reported in other comprehensive income and the rest that will be reported
as part of the profit and loss charge for taxation in the period.
This is done by matching the move
movement
ment on deferred tax (e.g. caused by a
property upward revaluation) with where the gain or loss causing that
movement in deferred tax was reported.

Work out the movement in Show the movement in deferred

7A deferred tax due to items 7B tax that isn’t shown as gains taken
reported in equity, e.g.: to equity (step 7A) and show this
as the deferred tax movement in
 Property revaluation
profit.
gains
 Movements in
FVOCI financial
assets

Take the proportion of

deferred tax movement on
equity gains to equity.

Example

Give the tax base, the carrying amount and the temporary difference for each of the following
transactions:

1. Interest is taxed when received and the amount receivable in the SOFP is $5,000

Solution

Carrying amount Tax base Temporary difference

$ $ $
5,000 0 5000

2. PPE that cost $125,000 and has a carrying amount of $75,000 and tax depreciation to date of
$90,000.

Solution

Carrying amount Tax base Temporary difference

$ $ $
75,000 35,000 40,000

3.Trade receivables of $50,000 have been adde

added to the taxable profit.

Solution

Carrying amount Tax base Temporary difference

$ $ $
5,000 5,000 0

4. Current liabilities include accrued expenses of $10,000. The expenses are tax deductible when paid.

Solution

Carrying amount Tax base Temporary difference

$ $ $
(10,000) 0 (10,000)

Transactions where deferred tax assets and liabilities may arise

1. Revaluations of PPE (Increase in value will create a deferred tax liability)
2. Provisions for unrealised profits in consolidated financial statements (will create a deferred tax
asset in consolidated financial statements only)
3. Equity settled share option schemes (will create a deferred tax asset)
4. Unrelieved tax trading losses carried forward (will create a deferred tax asset if the entity is likely
to return to profit in the foreseeable future)

5. Fair value adjustments in consolidated financial statements (an increase will create a deferred tax
asset in consolidated financial statements only)
The two most commonly tested transaction types are revaluations and fa
fair
ir value adjustments.

Example
Company L owns PPE that cost $150,000 when it was bought. To date the depreciation charged against
the PPE is $30,000 and the tax depreciation is $50,000. At the year end, after the depreciation is
charged, the PPE is revalued to $170,000.
170,000. The tax rate is 20%.
Explain the deferred tax implications of the revaluation.
Solution
The carrying amount is $170,000 and the tax base is $100,000 ($150,000 - $100,000). At 20% tax this
gives rise to a deferred tax liability of $14,000 (20
(20% x $70,000).
Without the revaluation the deferred tax liability would have been ($120,000 - $100,000) at 20% =
$4,000.
The revaluation gain is $50,000
50,000 ($170,000 - $120,000), The deferred tax on this is 20% x $50,000 =
$10,000. This is accounted for as:
Dr OCI (which is deducted from the revaluation surplus) $10,000
Dr SOPL$4,000
Cr Deferred tax liability $14,000

Example
On 1 November 20X1 Company N acquired 100% of the ordinary shares of Company S for $500,000. On
this date the carrying amount of Company S’s net assets are $200,000 and their fair value is $220,000.
The tax rate is 20%.
Explain the deferred tax implications of the fair value adjustment.
Solution

The fair value adjustment is$20,000

$20,000 ($220,000 - $200,000). The deferred tax on this is 20% x $20,000
$2
= $4,000.

The goodwill is calculated as:

$
Consideration 500,000
NCI (N/A)
Fair value of net assets $(220,000 –
–$4,000) (116,000)
Goodwill 384,000

Practice question 1: Question 3

3from June 2016 (20marks)
(a) A deferred tax liability is the am
amount
ount of income tax payable in respect of taxable temporary
differences. A deferred tax asset is the amount of income tax recoverable in future periods in respect of
deductible temporary differences. A temporary difference is the difference between the carrcarrying amount
of an asset or liability in the statement of financial position and its tax base.
Required:
(i) Define the tax base of an asset as outlined in IAS 12 – Income Taxes. Use your definition to
compute the tax base of the following assets:
 A machine wass purchased during the current accounting period for $250,000. Depreciation
of $50,000 was charged in arriving at the accounting profit for the current period. A
deduction of $100,000 was given against taxable profits by the local tax authorities against
the
he taxable profits of the current period. The remaining cost will be deductible in future
periods, either as depreciation or as a deduction on disposal.
 A current asset of $60,000 relates to interest receivable. The related interest revenue will be
taxed onn a cash basis when it is received. (4 marks)

(ii) Define the tax base of a liability as outlined in IAS 12. Use your definition to compute the tax
base of the following liabilities:
 $120,000 is included in trade payables. This amount relates to purchases whic which qualified for
a tax deduction when the purchase was made.
 $40,000 is included in accrued liabilities. A tax deduction relating to this liability will be given
when the liability is settled. (4 marks)

(b) Epsilon prepares financial statements to 31 Mar

March
ch each year. The rate of income tax applicable to
Epsilon is 20%. The following information relates to transactions, assets and liabilities of Epsilon during
the year ended 31 March 20X6:
(i) Epsilon has an investment property which it carries under the fair value model. The property
originally cost $30 million. The property had an estimated fair value of $35 million on 31 March
20X55 and $38 million on 31 March 20 20X6.
6. In the tax jurisdiction in which Epsilon operates, gains
on the fair value of investment prope
properties
rties are not subject to income tax until the properties are
disposed of.
(ii) Epsilon has a 40% shareholding in Lambda. Epsilon purchased this shareholding for $45 million.
The shareholding gives Epsilon significant influence over Lambda but not control and th therefore
Epsilon accounts for its interest in Lambda using the equity method. The equity method carrying
value of Epsilon’s investment in Lambda was $70 million on 31 March 20 20X5 and $75 million on 31
March 20X6. 6. In the tax jurisdiction in which Epsilon oper
operates,
ates, profits recognised under the equity
method are taxed if and when they are distributed as a dividend or the relevant investment is
disposed of.
(iii) Epsilon measures its head office property using the revaluation model. The property is revalued
every year on 31 March. On 31 March 20 20X5,
5, the carrying value of the property (after revaluation)
was $40 million and its tax base was $22 million. During the year ended 31 March 20 20X6, Epsilon
charged depreciation in its statement of profit or loss of $2 million and cclaimed
laimed a tax deduction
for tax depreciation of $1·25 million. On 31 March 20 20X6,
6, the property was revalued to $45

million. In the tax jurisdiction in which Epsilon operates, revaluation of property, plant and
equipment does not affect taxable income at the time of revaluation.
Required
Assuming that there are no other temporary differences other than those indicated above, compute:
 The deferred tax liability of Epsilon at 31 March 20
20X6.
 The charge or credit to both profit or loss and other comprehensive incincome
ome relating to deferred
tax for the year ended 31 March 20 20X6.
6. You should include brief explanations to support your
computations. (12 marks)
Total 20 marks
Suggested solution is on page: 155

Sales tax
Sales tax has many names: in Europe it is called Vat and in other countries it is known as GST. The
accounting principles are the same no matter. In any exam the rate of sales tax applicable will be given.
Sales tax is charged on sales by registered traders and this is paid over to the local tax authority on a
periodic basis (usually every three months). Tax suffered on purchases is repaid to registered traders by
tax authorities.

Definitions
Output tax: tax charged on net of sales tax revenue
Input tax: tax suffered on net of sales tax purchases
In the SPL expenses and income of a registered trader are recorded net of sales tax. In the SOFP
receivables and payables are shown gross of sales tax.

13. The effects of

changes in foreign
currency exchange
rates
What do you need to know to pass DipIFR?
Make sure that you are able to:
 Distinguish between n reporting and functional currencies.
 Determine an entity’s functional currency.
 Discuss the recording of transactions and translation of monetary/non
monetary/non-monetary
monetary items at the
reporting date for individual entities in accordance with IFRS Standards.

Start – The Big Picture

An entity cannot record transactions using a mixture of currencies when producing financial statements.
statements
Each entity must prepare its financial statements in a single currency so any transactions that are made
in another currency need to be translated before being recognised in the financial statements.
There are two sets of rules to know
know,, depending upon where in the flow of transactions an event is
occurring.

Foreign currency Functional Presentation

currency currency
Translation Presentation
rules rules

Functional currency
Generally, the currency that the entity’s general ledger and tria
trial balance is produced in. It is
determined by facts. It is the currency of the primary economic environment in which the
company operates. i.e.
e. effectively the currency that the company “thinks in”.
Factors to consider:

 Which currency influences the sales price for goods and services, labour, materials and other
costs?
 Where are the competitive forces coming from that determine the sales prices
prices?
If these are not conclusive then look at where the entity gets its funding from, the currency in which it
pays tax and receives income from sales and whether it operates autonomously from its parent
company.
The functional currency may not be the curren
currency
cy of the country in which the company operates,
especially if the company is more like a branch of a foreign parent and depends upon the foreign parent
for day-to-day support.
All other currencies other than the functional currency are a
an overseas currency.
y. All exchange rates will
be given in the exam.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Monetary items include receivables, payables, loans and cash
Non-monetary items include PPE and inventory

Key workings / methods

Translation rules for functional currency

Record all transactions in the functional currency using the spot rate at the
1 date of the transaction. This is called the ‘historic rate’.

Settled transactions: retranslate the monetary item at the spot rate on the
2 date of settlement.

Exchange difference arising Exchange difference arising on

3A on settlement for foreign 3B settlement for foreign
n currency
currency loans is reported in trade payabless and receivables is
SOPL as finance income/ reported in SOPL as other
finance cost. operating income/ other
operating expenses.

Unsettled transactions:
4 retranslate
ranslate monetary assets
and liabilities at the rate at
the date if the SOFP i.e.
‘closing rate’.
Don’t retranslate non-
monetary items unless they

have been revalued.

Exchange difference arising at Exchange difference arising at

5A year-end for foreign currency 5B the year -end
end for foreign
foreig
loans is reported in SOPL as currency trade payables and
finance income/ finance cost. receivables
bles is reported in SOPL
as other operating income/ other
operating expenses.

Example
Company Z’s functional currency is $ and prepares its financial statements to 31 December each year.
On 2 November 20X6 Company Z buys goods from an overseas supplier fo
forr 300,000 dinars.
Rates of exchange are:
2 November 20X6: $1 = 3 dinars
30 November 20X6: $1 = 2.5 dinars
31 December 20X6: $1 = 4 dinars.
Show the accounting treatment for the above transactions if:
(i) a payment of 300,000 dinars is made on 30 November 2
20X6
(ii) the amount owed remains unsettled at 31 December 20X6
Solution
(i) on 2 November 20X6 the value is translated into Company Z’s functional currency: 300,000 dinars/3
= $100,000.
Dr Purchases $100,000
Cr Payables $100,000
On 30 November 20X6 the amo
amount
unt paid is 300,000 dinars/2.5 = $120,000.
Dr Payables $100,000
Dr SOPL $20,000
Cr Cash $120,000
(ii) The initial entry is the same as for (i). On 31 December 20X6 the amount owed is retranslated to
300,000 dinars/4 = $75,000
Dr Payables $25,000
Cr SOPL $25,000
Note: the inventory would be recorded initially as $100,000 and would not be retranslated at the year
end if it remains unsold.

Presentation currency
This is normally examined in the context of group accounting, but it could be examined as a singl
single
company only.
An entity may choose any currency it likes for the presentation of its financial statements
statements.
E.g. a company with a dual listing in the USA and in the European Union is likely to cho
choose the US dollar
as its presentation currency and also th
the euro as its presentation currency.

14. Share-based
based
payment

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Understand the term ‘share--based payment’.
 Discuss the key issue that measurement of the transaction should be based on ffair value.
 Explain the difference between cash settled share based payment transactions and equity settled
share based payment transactions and transactions with cash alternatives.
 Identify the principles applied to measuring both cash and equity settled sshare-based payment
transactions and transactions with cash alternatives
alternatives.
 Compute the amounts that need to be recorded in the financial statements when an entity
carries out a transaction where the payment is share based.

Start – The Big Picture

Prior to IFRS 2 Share based payments, listed companies often paid senior staff in shares that were
issued below market value. These shares were then sold at a profit by the holders, with two effects:
 The holder made a profit on sale, which in substance was part of their total remuneration, and
 The other shareholders lost wealth (ie suffered an expense) as the share price fell by new shares
being issued below market price.
Prior to IFRS 2, this was simply recorded as:
Dr Cash (with actual cash received by the entity
entity, below market value)
Cr Share capital/ share premium account.
IFRS 2 remedies this by making an estimate of the loss to other shareholders by granting cheap shares
and spreading that cost over the period the company gains benefit from the share scheme.
IFRS
RS 2 is an unpopular accounting standard with many preparers of accounts, who say that it generates
artificial expenses, brings in highly subjective valuations as expenses and repeats the same information
as IAS 33 diluted earnings per share.
The accounting treatment of share- based payments follows a pattern. It is best to follow this suggested
approach to questions.

Key knowledge - suggested approach to questions

Decide whether the scheme is entirely payment in shares, is a payment in cash

1 that is linked
ked to the share price or some mix of the two. This decides how the
share based payment is valued, as the rules are different for pure equity schemes
and schemes in cash.
Equity settled: The holder is paid only in shares. He/ she has no right to a cash
alternative.

For an equity settled transaction, For a cash- based payment (often

1A estimate the total benefit of the 1B called a Share Appreciation Right or
share plan to the holders by SAR),, estimate the total liability that
multiplying the total number of the plan generates. As this is a
cheap shares to be issued by the liability,
ty, it must be revalued at the
option of the share at its grant end of each period to its latest fair
date. This option value will be value.
given
ven in the exam. It is then
frozen at the value per share at
the grant date – it is never
updated.

Work out the vesting period. That is the period that staff must stay in the
2 company’s employment to be able to exercise their options over cheap shares.
This is the period overr which the cost/ benefit of the share option plan will be
spread.

Work out the cost of the share

share- based payment each period, as:
3 Latest estimate of total cost of the plan X (Expected total cost)
Divided by years between grant and vesting date X (Total
otal cost to date)
Less: Costs cumulatively already recognised (X)
Current period expense X

Equity settled
Example
On 1 January 20X1, an entity granted 5,000 options on shares to each of its 200 senior managers. Each
option is conditional upon each member of staff staying in the entity’s employment until 31 December
20X3. On 31 December 20X3, 3, participating staff can continue to hold the share options and may choose
to exercise them on 31 December 20 20X4 or 31 December 20X5. 5. Each option allows the holder
hold to buy the
entity’s shares at a price of $1 each.

You are given this data and are required to calculate the expense for each of the years in question.
Date Fair value of Number of Share price
option ($) participants ($)
expected to
stay until 31
Dec 20X3
(called a
service
condition)

01 Jan 20X1 3.30 180 4.00

31 Dec 20X1 3.40 175 4.20
31 Dec 20X2 3.45 180 4.25
31 Dec 20X3 2.95 165 3.80
31 Dec 20X4 3.10 165 3.95
31 Dec 20X5 3.30 165 4.30

Step 1: This is a pure equity settled transact

transaction.
ion. Its value per share option is therefore frozen at the
grant date.

Total expected cost to the entity’s

’s other shareholders: 5,000 x 180 x 3.30 = $2.97 million.

Step 2: The vesting period is three years. Although people may stay longer than that, the ccompany
cannot presume that they will voluntarily stay longer than the minimum required.

Step 3: The cumulative cost in each year is now worked out.

Date Cumulative Expense Expense

expense ($) previously recognised
recognised in year
($) ($)
31 Dec 20X1 (5,000
5,000 x $3.30 x 175 x 1/3) 962,500 0 962,500
31 Dec 20X2
2 (5,000 x $3.30 x 180 x 2/3) 1,980,000 962,500 1,017,500
31 Dec 20X3
3 (5,000 x $3.30 x 165 x 3/3) 2,722,500 1,017,500 742,500
31 Dec 20X4
4 (5,000 x $3.30 x 165 x 3/3) 2,722,500 2,722,500 0
31 Dec 20X5
5 (5,000 x $3.30 x 165 x 3/3) 2,722,500 2,722,500 0

The expense each year is recognised as:

Dr Expense

Cr Other components of equity.

quity.

Practice question 1:: extract of question 2 from June 2016 (9 marks)

Delta is an entity which prepares financial statem
statements
ents to 31 March each year. Each year the financial
statements are authorised for issue on 20 May. The following event is relevant to the year ended 31
March 20X6:

On 1 April 20X4,
4, Delta granted 2,000 employees 1,000 share options each. The options are due to vest
on 31 March 20X7 7 provided the relevant employees remain in employment over the three
three-year period
ending on 31 March 20X7.
On 1 April 20X4,
4, the directors of Delta estimated that 1,800 employees would qualify for the options on
31 March 20X7. This estimate
stimate was amended to 1,850 employees on 31 March 20 20X5, and further
amended to 1,840 employees on 31 March 20 20X6. On 1 April 20X4,
4, the fair value of an option was $1·20.
The fair value increased to $1·30 by 31 March 20 20X55 but, due to challenging trading conditions,
con the fair
value declined after 31 March 20X5. 5. On 30 September 20 20X5,
5, when the fair value of an option was 90
cents, the directors repriced the options and this caused the fair value to increase to $1·05. Trading
conditions improved in the second halhalf of the year and by 31 March 20X6 6 the fair value of an option was
$1·25. Any additional costs that have occurred as a result of the repricing of the options on 30
September 20X5 5 should be spread over the remaining vesting period from 30 September 20 20X5 to 31
March 20X7.
Explain and show (where possible by quantifying amounts) how th this event
vent would be reported in the
financial statements of Delta for the year ended 31 March 20
20X6.
Suggested solution is on page: 156

Cash settled (SAR)

Example
On 1 January 20X1, an entity granted 15,000 SARs to 150 of its staff. These rights gave a bonus in
cash based on the price of the entity’s shares. The SARs offered a cash payment equal to the entity’s
share price at the exercise date, less the share price at the grant ddate.
ate. Participants have to stay at the
entity until 31 December 20X3 3 in order for the rights to vest, though they may exercise on either 31
December 20X3, 31 December 20X4 4 or 31 December 20 20X5.

Date Number of Number of Fair value of

options participants SAR ($)
exercised in expected to
the period stay until 31
(000’s) Dec 20X3

01 Jan 20X1 0 140 1.20

31 Dec 20X1 0 140 1.45
31 Dec 20X2 0 142 1.50
31 Dec 20X3 1,100 144 1.52
31 Dec 20X4 800 144 1.60
31 Dec 20X5 260 144 1.48

Step 1: This is a cash settled

led transaction, which therefore gives rise to a liability. As a liability, the
expected value must be revalued each year.
Step 2: The vesting period is three years. Although people may stay longer than that, the company
cannot presume that they will voluntarily
untarily stay longer than the minimum required.

Step 3: The cumulative cost in each year is now worked out, including updates of cost in the last two
years after the first vesting period but before the latest possible exercise date.

Date Liability Expense

recognised recognized in
SOPL
($’000)
($’000)
01 Jan 20X1 (15,000 x 140 x 1.20 x 0/3
0/3) 0 0
31 Dec 20X1
1 (15,000 x 140 x1.45 x 1/3
1/3) 1,015,000 1,015,000
31 Dec 20X2
2 (15,000 x 142 x 1.50 x 2/3
2/3) 2,130,000 1,115,000
31 Dec 20X3
3 (15,000 x 144 x 1.52 x 3/3
3/3) 3,283,200 1,153,200

The expense each year is recognized as:

Dr Expense

Cr Liability

Practice question 2:: extract of question 2 from December 2016 (5marks)

marks)
Delta is an entity which prepares financial statements to 30 September each year. The financial
statements
ments for the year ended 30 September 20 20X66 are shortly to be authorised for issue. The following
event is relevant to these financial statements: On 1 October 20X4, 4, Delta granted 250 share
appreciation rights to 100 senior executives. The rights vest on 30 September 20X7 20 provided the
executives remain with Delta for the three
three-year period from 1 October 20X4 4 to 30 September 20X7.
20 The
rights can be exercised from 30 November 20 20X7 to 31 December 20X7. 7. On 1 October 20X4,
20 it was
expected that 10 executives would leave over the three
three-year
year period from 1 October 20X4
20 to 30
September 20X7. 7. This estimate was confirmed on 30 September 20 20X5 5 but two executives left
unexpectedly during the year ended 30 September 20 20X66 and Delta now expects that 12 executives will
leave over the three-year
year period ending on 30 September 20 20X7.
7. Delta further estimated that all
executives who were eligible to exercise the rights would do so. On 1 October 20 20X4, the fair value of a
share appreciation right was $3·20. The fair value increased to $ $3·50
3·50 by 30 September 20X5
20 and to
$3·60 by 30 September 20X6.
Required: Explain and show how the event would be reported in the financial statements of Delta for the
year ended 30 September 20X6.
Suggested solution is on page: 156

Deferred tax and share- based payment

Tax authorities may allow a future tax deduction for the expense created by share
share- based payment, or
they may allow nothing.
If there is an allowable deduction from taxable profits for share
share- based payment, then the future tax
recovery (ie deferred
ferred tax asset) should be recognised systematically alongside the expense.

In exams to date, the examiner has always said to assume that the future tax deduction will be based
on the “intrinsic value” of the share-- based payment. IFRS 2 defines intrinsicc value as the difference
between the spot price of a share and the exercise price.
To return to the example the equity settled share
share- based payment above:

Date Fair value of Number of Share price Intrinsic value

option ($) participants ($) ($)
expected to
stay until 31
Dec 20X3

01 Jan 20X1 3.30 180 4.00 3.00

31 Dec 20X1 3.40 175 4.20 3.20
31 Dec 20X2 3.45 180 4.25 3.25
31 Dec 20X3 2.95 3.80 2.80
165
31 Dec 20X4 3.10 165 3.95 2.95
31 Dec 20X5 3.30 165 4.30 3.30

The maximum tax recoveries are ther

therefore:

Date Number of Intrinsic value Expected Deferred tax

options per option future tax asset in SOFP
expected to saving $ (1) @ 30% (2)
vest (000s)

01 Jan 20X1 900 3.00 0 0

31 Dec 20X1 875 3.20 933,333 280,000
31 Dec 20X2 900 3.25 1,950,000 585,00
585,000
31 Dec 20X3 825 2.80 2,310,000 693,000

(1) This is calculated as number of options expected to vest x intrinsic value per option x 1/3, 2/3,
3/3 for each year.

(2) This is calculated as the expected future tax saving multiplied by the expected future tax rat
rate.

15. Exploration and

evaluation expenditures

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Outline the need for an accounting standard in this area and clarify its scope.
 Give examples of elements of cost that might be included in the initial mea
measurement of
exploration and evaluation assets.
 Describe how exploration and evaluation assets should be classified and reclassified.
 Explain when and how exploration and evaluation assets should be tested for impairment.

Start – The Big Picture

IFRS 6 sets out the accounting policies to be followed for the exploration for and evaluation of mineral
resources. It was written initially because before there was no help at all for the preparers of the
accounts for these entities and there were a number of opposi
opposing
ng views on how the expenditures
incurred should be accounted for. The value of transactions in such entities can be substantial.

Examples of cost of exploration and evaluation assets

An entity should only include expenditure that is associated with findi
finding
ng mineral resources. The following
may be included:
 Buying rights to explore
 Geographical surveys
 Exploratory drilling
 Sampling
 Trenching
 Finding out the technical feasibility and commercial viability of extracting the resources

Accounting treatment
Expenses
Any costs that do not relate to exploring for mineral resources
Assets
 Measured at cost and capitalised
capitalised.
 Classified as tangible (property, plant and equipment) or intangible (e.g. drilling rights) according
to the nature of the asset.
 Development expenditure on mineral resources are recognized as intangible assets under IAS 38.
 Ceases to be classified under IFRS 6 when the technical feasibility and commercial viability of
extracting a mineral resource can be demonstrated.
Impairment
 Assessed when there
here is evidence of impairment
o The entity no longer has the rights to explore for minerals
o No plans to spend substantial sums on exploration
o No mineral resources have been found that would bring commercial success to the
business
o The equipment’s value has fallen

Practice question 1:: extract of question 4 from December 2020 (7 marks)

You are the financial controller of Omega, a listed entity involved in the exploration for and evaluation of
mineral resources. One of Omega’s directors has raised some queries following his review of the
consolidated financial statements for the year ended 30 September 20X5 20X5.
When I looked at our financial statements, a saw a note which gave a breakdown of our exploration and
evaluation assets. I compared it with that of a compe
competitor
titor and I have the following three questions:
First, both notes showed the breakdown of the exploration and evaluation assets figure into various
categories but they are not presenting the same categories despite both companies operating in similar
ways. How can this be right when both companies use IFRS Standards to prepare their financial
statements?
Second, why does neither company include the costs of developing mineral resources as part of the
exploration and evaluation assets figure? As a key part o
off both of our businesses, should these costs not
be recognized as part of this figure?
Finally, the financial statements state that we measure our exploration and evaluation assets using the
cost model while the competitor’s state they use the revaluation model. Is this an acceptable
inconsistency when both companies are preparing financial statements in accordance with IFRS
Standards?

16. Fair value

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Explain the principle under which fair value is measured according to IFRS Standards.
 Identify an appropriate fair value measurement for an asset or liability in a given set of
circumstances.

Start – The Big Picture

The term ‘fair value’ is used a good deal in international financial reporting standards. It was decided
that the term needed to be defined clearly. IFRS 13 Fair value measurement is the result and provides a
single source of guidance for fair value.
In DipIFR the term will be used for revaluing non-current
current assets and determining goodwill in business
combinations. It should be noted that it does not apply to share
share- based payments and leases.

Definition
Fair value is defined as the price that would be received to sell an asset or paid tto transfer a liability in
an orderly transaction between market participants (knowledgeable third parties) at the measurement
date.
ate. This is often taken as the price at which the asset could be sold.
It is important to consider the condition and location of the asset or liability as well as any restrictions
there may be on its use.
There are a number of approaches to determining the fair value of an asset or liability:
 Market – based on sales prices
 Cost – based on replacement cost
 Income – based on financiall forecasts

Fair value determination

Price
Where possible, fair value should be determined from observable data in a market where transactions
occur frequently (i.e. an active market).
Valuation techniques are classified as three level
level.

Level Observable? Description Example

1 Yes Quoted prices in for similar assets in Quoted shares

active markets

2 Yes Quoted prices for similar assets in active Property

markets or for identical or similar assets
in non- active markets or use of quoted
interest rates for valuat
valuation purposes

3 No Using entity’s assumptions about market Unquoted shares

exit value

Priority is given to level 1 inputs and the lowest priority os given to level 3.
Markets
The price received when an asset is sold or paid when a liability is ttransferred
ransferred may differ depending on
the market where the transaction occurs:
Principal market
IFRS 13 says that fair value should be measured by reference to the principal market i.e the market
with the greatest activity as long as the entity can access thi
this market.
The fair value is determined after deducting any transportation costs but not transaction costs (legal or
broker fees)
Most advantageous market
If there is no principal market, then the entity uses prices in the most advantageous market i.e. the
market that maximises the net amount from selling an asset or minimizes the amount paid to transfer a
liability. For this both transaction and transportation costs are deducted
deducted,, although the transaction costs
are not factored into the fair value itself.
Example
Product X is sold in Country A and Country B, both active markets for different selling prices. Company E
sells product X in both countries and wants to know the fair value of the asset.
Country A Country B
$ $
Price 48 56
Transaction costs (5) (4)
Transportation costs (2) (6)
Net price received 41 46

What is the fair value if:

(i) Company E sells more of product X in Country A?
(ii) Company E sells product X in equal proportions in Country A and Country B?

Solution
(i) If Country A is the principal market, then the fair value would be measured using the price that would
be received there less the transport costs. The fair value is then $46 ($48 - $2). Transaction costs are
ignored.
(ii) If neither market is the principal market, then the mo
most
st advantageous market needs to be identified.
This is the one that maximises the net amount received from the sale.
This compares Country A: $41 and Country B: $46. Therefore, Country B is the most advantageous
market, and the fair value is $50 ($56 - $6) as the transaction costs are not included in the fair value
itself.

Non-financial assets
These include property, plant and equipment and intangible assets.
The fair value needs to be based on the highest and best use i.e. the use that a market participant
participan
would adopt to maximise its value. This would be determined by how the asset is currently being used
unless there is evidence that this is not the case. However, only consider uses that are physically
possible, legally permissible, and financially feasib
feasible.

Example
Company P owns land which is currently being used for agricultural purposes for which its market value
is $5 million. Land nearby and owned by other companies is being developed for house
house- building,
although Company P does not have planning pepermission
rmission to be able to do this, it is considered likely that
permission would be granted if requested. The market value then would be $7 million.
What is the fair value of the land?
Solution
The land is a non-financial
financial asset and so the fair value should be determined by its highest and best use.
This will be the current use unless there is evidence to the contrary.
The current use is $5 million.
There is evidence that the land could be developed for building houses, and this does not seem to be
restricted because
ecause the other land has permission to do this. The value for this is higher at $7 million and
therefore this is the highest and best use.

17. Presentation off the statement

of financial position and statement
of profit or loss and other
comprehensive income and the
statement of changes in equity

What do you need to know to pass DipIFR?

Make sure that you are able to:

 State the objectives of IFRS Standards governing the presentation of financial statements.
 Describe the structure and content of statements of financial position and statements of profit or
loss and other comprehensive income including continuing operations.
 Discuss the importance
tance of identifying and reporting the results of discontinued operations
operations.
 Define and account for non-current
current assets held for sale and discontinued operations.
 Discuss ‘fair presentation’ and the accounting concepts/principles.

Start – The Big Picture

IAS 1 Presentation of Financial Statements explains the content and presentation of a complete set of
accounts that should be published for a corporate entity. Having a standard presentation that applies to
all entities allows stakeholders to compare the inf
information contained in them.

This is likely to be examined as part of a question where the requirement may ask for a discussion about
how a transaction may be reported for shareholders.

Components of financial statements

A full set of IFRS financial statements
nts comprises the following primary statements (i
(i.e. statements that
must be shown with equal prominence as each other):

 Statement of financial position

position;
 Statement of comprehensive income (comprising profit and loss statement and statement of
other comprehensive
ensive income)
income);
 Statement of changes in equity
equity;
 Statement of cash flows;
 Comparative data for the previous year for each of the above.

In addition, secondary statements are required being notes that explain the accounting policies and
other significant explanations
planations or useful “drill down” information.

Core concepts and principles

IAS 1 includes a number of core concepts, with some overlap with the Framework document.
 Fair presentation – fair, neutral and complete description of transactions.
 Going concern – entity assumed to continue trading into the foreseeable future.
 Accruals (matching) basis of accounting – match costs with associated revenues and items to the
time- period incurred.
 Consistency of presentation – present similar transactions the same wayy within the current year
and year by year.
 Materiality and aggregation – no need to present information about immaterial transactions, but
aggregate transactions with similar characteristics instead.
 Offsetting - offset as little as possible. An example would
ould be when an entity has a cash in the
bank and an overdraft. These are shown separately on the statement of financial position unless
the bank specifically offsets them in their accounts.
 Frequency of reporting – normally annually but can be shorter if necessary and certain
disclosures made.
 Comparative information – comparative information must be provided and presented in such a
way as to make comparison easy ((e.g. use the same accounting policies in both years. This is
further developed in IAS 8).

True and fair override

Paragraph 23 of IAS 1 gives details of what to do in the “extremely rare” circumstance when compliance
with IFRS will fail to give a true and fair view.
This requires full disclosure of the particulars, reason and effect of the failu
failure
re to follow all extant IFRS.

Presentation of financial statements

These pro-formas
formas demonstrate how the financial information is presented for a group of entities.

The statement of profit or loss and other comprehensive income

Statement of profit or loss and
nd other comprehensive income for the year ended 31
December 20X7
20X7 20X6
$000 $000
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other operating income X X
Distribution costs (X) (X)
Administration expenses (X) (X)
Profit from operations X X

Finance costs (X) (X)

Investment income X X
Share of associate’s profit X X
Profit before tax X X
Income tax expense (X) (X)
Profit or loss for the period X X
Other comprehensive income: X X
Total comprehensive income X X
Profit attributable to:
Group X X
Non-controlling interest X X
X X
Total comprehensive income attributable to:
Group X X
Non-controlling interest X X
X X

Statement of changes in equity

Statement of changes in equity for the year ended 31 December 20X7

Equity Other Retained Group Non- Total

capital reserves earnings Total controlling
interest
$000 $000 $000 $000 $000 $000
Balance at 1 Jan 20X7 X X X X X X
Prior year adjustments X X X
Restated balance X X X
Dividends (X) (X) (X) X
Issue of equity capital X X
Total comprehensive X X X X X
income
Transfers to retained (X) X
earnings
Balance at 31 X X X X X X
December 20X7

Statement of financial position

Statement of financial position as at 31 December 20X7

20X7 20X6
$000 $000 $000 $000
Non- current assets
Property, plant and equipment X X
Goodwill X X
Other intangibles X X
Investments in associates X X
Investments in equity instruments X X
X X
Current assets
Inventories X X
Trade receivables X X
Cash and cash equivalents X X
X X
Total assets X X
Equity and liabilities
Equity attributable to the owners of the parent X X

Share capital X X
Other reserves X X
Retained earnings X X
Non-controlling interest X X
Total equity X X
Non-current liabilities X X
Current liabilities X X
Total equity and liabilities X X

IFRS 5 Non-current
current assets held for sale and discontinued operations
Stakeholders are interested in future as well as present financial statements when th
they are making
decisions. IFRS 5 provides useful information as it explains what should be disclosed when a non
non-current
asset is not going to be held for the foreseeable future and the results from those parts of the business
that are being sold or closed down.

Non-current
current assets held for sale
Non-current
current assets held for sale are those where the carrying value will be recovered mainly through
sale rather than from being used in the business.
Criteria
 available
vailable for sale in its current condition
 sale must be probable (management are committed to the sale, there is an active programme to
locate a buyer and it is being sold for a sensible price)
 being marketed actively
 likely to be sold with 12 months
Presentation and measurement
 on the face of the statement of financial position as the last current asset
 valued at the lower of carrying value and fair value less costs to sell
 Any reductions in value are impairments and reported as expenses in the SPL
 Depreciation ceases once the asset is classified as held for sa
sale

Example
Company V bought a machine on 1 January 20X5 for $50,000. On this date the machine had an
expected useful life of 10 years, and the estimated residual value is $0. On 30 June 20X
20X7, the directors
of Company V decide to sell the machine and adver
advertise
tise it for sale. On 1 September 20X7,
20X Company W
has expressed an interest in buying the machine and has made an offer of $ $35,000.
5,000. It will cost $500 to
dismantle the machine and make it available to a purchaser.
By the year end of 30 September 20X
20X7, the machine has not been sold.
Explain the amount the machine will be recognized at and where it will be presented in the financial
statements of Company V at the year end of 30 September 20X
20X7.

Solution

At 30 June 20X8, when the machine is identified as held fo

forr sale, the carrying amount is:

Cost on 1 January 20X5 50,000

Depreciation to 30 September 20X5 (($50,000/10 x 9/12) (3,750)

Depreciation to 30 September 20X6 ($50,000/10) (5,000)

Depreciation to 30 June 20X7 ($50,000/10 x 9/12) (3,750)

Carrying amount at 30 June 20X7 $37,500

Fair value less costs to sell $35,000 - $500 $34,500

The machine will be recorded as a current asset at $34,500. The impairment of $3,000 ($37,500 -
$34,500) is recorded as an expense in the SOPL.

Discontinued operation
This
his is a component of an entity (a subsidiary in a group or a department/division of a single entity) that
has been disposed of in the period or is classified as held for sale and:
 Represents a separate line of business or is a geographical area;
 Is part of a single co-ordinated
ordinated plan to dispose of a separate major line of business or
geographical area; or
 Is a subsidiary that has been acquired with the view to sell.

Presentation
The assets and liabilities will be reported as a disposal group and shown as a
assets
ssets and liabilities held for
sale.
In the SPL a single amount will be presented below profit from continuing operations that will include all
the operating activities of the discontinued part and any gains or losses on disposal and impairments.
The detailed
led breakdown of this will be disclosed in the notes to the accounts. Comparatives are also
shown.

Practice question 1:: extract of question 4from December 2015 (10 marks)
You are the financial controller of Omega, a listed company which prepares consolida
consolidated financial
statements in accordance with International Financial Reporting Standards. Your managing director, who
is not an accountant, has recently attended a seminar and has raised a question for you concerning
issues discussed at the seminar. A deleg
delegate
ate was discussing the fact that the entity of which she is a
director is relocating its head office staff to a more suitable site and intends to sell its existing head
office building. Apparently, the existing building was advertised for sale on 1 July 2020X5 and the entity

anticipates selling it by 31 December 20

20X5. 5. The year end of the entity is 30 September 20X5.
20 The
delegate stated that in certain circumstances buildings which are intended to be sold are treated
differently from other buildings in the fin
financial
ancial statements. Please outline under what circumstances
buildings which are being sold are treated differently and also what that different treatment is.
Suggested solution is on page: 157

18. Earnings per share

What do you need to know to pass DipIFR

DipIFR?
Make sure that you are able to:
 Recognise the importance of comparability in relation to the calculation of earnings per share
(EPS) and its importance as a stock market indicator.
 Explain why the trend of EPS may be a more accurate indicator of performa
performance than a
company’s profit trend.
 Define earnings for EPS purposes
purposes.
 Calculate the EPS in the following circumstances:
o where the number of issued ordinary shares is constant throughout the year.
o where there has been an issue of ordinary shares at fair valu value
e during the year.
o where there has been a bonus issue of ordinary shares/stock split during the year. year
o where there has been a rights issues of ordinary shares during the year.
o where there has been more than one change in the number of issued ordinary shares
during the year.
 Explain the relevance to existing shareholders of the diluted EPS, and describe the circumstances
that will give rise to a future dilution of the EPS.
 Compute the diluted EPS in the following circumstances:
o where convertible debt or prefe preference shares are in issue
o where share options and warrants exist.
 Identify anti-dilutive
dilutive circumstances.

Start – The Big Picture

Earnings per share (EPS) is a measure of an entity’s performance and is widely used by shareholders to
compare with that of other
er entities that they may have invested in.
Itt must be presented on the face of SPL of a listed entity and as such is the subject of IAS 33. Having an
accounting standard explaining how it must be presented and calculated ensures consistency for
stakeholders.

Over time the trend is a good indicator of how the entity has performed. As a basic calculation it
represents the amount of profit available to equity shareholders. It may be compared to dividends that
have been paid to each shareholder to determine h how
ow much profit the entity is reinvesting in the
business each accounting period.

Basic calculation

Profit or loss for the period attributable to equity shareholders (1)

Weighted average number of equity shares in issue during the period (2)

(1) The profit figure is taken after tax, interest, all preference share dividends
(2) The weighted average number of shares reflects any changes in the share capital during the
period.

Changes in share capital

These include:
 Bonus issue/stock split
 Full market issue
 Rights issue

Bonus issue/stock split

Shares are given to existing shareholders in proportion to the number they currently hold. There is no
injection of cash into the business, so the entity’s earnings will not change.
The shares issued are treated as if they have been in issue for the full year and the previous year.
year To
adjust the previous year’s comparative figure a bonus fraction is applied to last year’s number of shares
in the EPS calculation. It is calculated as:
New number of shares in issue
Previous number
mber of shares in issue

Example
On 1 September 20X7 Company T has 10 million $1 ordinary shares in issue. On 1 April 20X8, Company
T makes a bonus issue of one share for every five held. For the years ended 31 August 20X8 and 20X7
the profit for the year is $1,000,000 and $800,000 respectively.
What is the EPS for the years ended 31 August 20X7 and 20X8?
Solution
The number of shares to be used in the EPS calculation for both years is 12 million (10 million plus 2
million). The EPS for the year ended 31 A
August
ugust 20X7 was originally $800,000/10 million = 8 cents.
Now the EPS for year ended 31 August 20X7 is $800,000/12 million = 6.7 cents. Alternatively, this could
be calculated as 8 cents x 10 million/12 million = 6.7 cents.

EPS for year ended 31 August 20X8 is $1,000,000/12 million = 8.3 cents.

Full market issue

As new capital is introduced it brings cash into the business and this has an effect on earnings for the
period. It would be expected to rise from the point that the cash is received. The earnings ffor the year is
therefore a weighted average figure and so the number of share is also shown as a weighted average.
The number of shares is calculated as:
(No months before the issue/12 x old number of shares) + (No months after the issue/12 x new number
of shares).
There is no change to the comparative EPS of the previous year.
Example
Company D’s profit for the year ended 31 October 20X6 are $2,500,000. On 1 November 20X5, the
issued ordinary share capital of Company D was 4,500,000 shares of $1 each. Comp
Company D issued
1,000,000 shares at full market value on 30 April 20X6.
What is the EPS for the year ended 31 October 20X6?
Solution
The earnings for the year are $2,500,000 and this needs to be divided by the weighted average number
of ordinary shares in the year.
From 1 November 20X5 to 30 April 20X6 the number of shares is 4,500,000 and from 1 May 20X6 to 31
October 20X6 the number is 5,500,000.
Weighted average is (4,500,000 x 6/12) + (5,500,000 x 6/12) = 5,000,000.
EPS is $2,500,000/5,000,000 = 50 cents.

Rights issue
This is a hybrid of a bonus issue and a full market issue as the shares are sold to existing shareholders
at a price below the current market price but in proportion to their existing holding.
The number of shares is calculated as the weight
weighted
ed average as before but applying a bonus fraction to
the number before the issue and the previous year’s comparative. This fraction is calculated as:

Actual cum-rights price (1)

Theoretical ex-rights price (2)

(1) This is the price the shares were trading at immediately before the rights issue
(2) This is the theoretical price the shares will be trading at immediately after the rights issue:
(existing issue x cum-rights
rights price) + (amount raised from rights issue)

Number of shares in issue after the rights issue

Example
Company K prepares its financial statements to 31 December each year. On 1 January 20X1 the issued
share capital consisted of 3 million ordinary shares. On 30 June 20
20X1,
X1, Company K made a 1 for 3 rights
issue at $1.50 a share. Shares were trading at $2.00 each on that day.
The profit for the year ended 31 December 20X1 is $375,000 and for the previous year it was $300,000.
What is the EPS for the year ended 31 December 20X1 and the previous year?
Solution
TERP: [(3 million x $2) + (1 million x $1.5
$1.50)] ÷ 4 million = $1.875.
Bonus fraction: $2/$1.875 [actual cum
cum-rights price/TERP]
Weighted average number of shares: (3 million x 6/12 x($2/$1.875)) + (4 million x 6/12) = 3.6 million.
EPS for 31 December 20X1 = $375,000/3.6 million = 10.4 cents
EPS for 31
1 December 20X0 was $300,000/$3 million = 10 cents and it is revised to:
10 cents x $1.875/$2 = 9.4 cents

When there is more than one change in share structure, for example a bonus issue followed by a full
market issue, deal with the changes in chronologi
chronological order.

Example
On 1 July 20X3 Company N had 400,000 shares in issue. On 1 October 20X1 a further 100,000 shares
were issued at full market price followed by a 1 for 5 bonus issue on 1 January 20X2. The profit for the
tear is $125,000.
What is the EPS for the year ended 30 June 20X4?
Solution
Weighted average number of shares:
Date Number of Bonus Proportion Total
shares fraction of year

1 July – 30 September 20X3 400,000 6/5 3/12 120,000

1 October – 31 December 20X3 500,000 6/5 3/12 150,000

1 January – 30 June 20X4 600,000 N/A 6/12 300,000

570,000

EPS = $125,000/570,000
125,000/570,000 = 21.9 cents

Diluted EPS
An entity will sometimes have instruments in issue that will give the holder free or substantially
discounted equity shares in the entity. Existing sshareholders
hareholders need to be aware that when these are
redeemed their EPS may reduce. We call this the diluting effect. Diluted EPS must be disclosed on the ÷
Instruments that effect diluted EPS
 Convertible loan notes
 Convertible preference shares
 Options and warrants
The diluted EPS is calculated as the basic calculation adjusted assuming the new shares have been
issued.

Convertible bonds and preference shares

When these are converted into equity shares two things happen:
1. The profit available to equity sharehol
shareholders
ders will increase because the interest and dividends are no
longer deducted. This increases the profit available to equity shareholders.
2. The number of shares increases by the number being issued as a result of the conversion. This
increases the number of shares in issue.
When the increase in profit is greater than the increase in shares the calculation results in a higher EPS
than the basic. This is called anti-dilutive
dilutive and would not be disclosed (as it gives false hope of higher
returns for investors and it would not be prudent to disclose).

Example
Company M has a basic EPS of 10 cents for the year ended 31 March 20X5, calculated as earnings of
$1,000,000 divided by the weighted average number of ordinary shares of 10 million.
On 1 April 20X4, Company M issued $500,000 of convertible bonds that has a coupon rate of 3% and an
effective rate of 7%. The convertible bonds may be converted into 90 ordinary shares for every $100 of
bond in three years’ time. The tax rate is 20%.
What is the diluted EPS?
Solution
The extra profit earned without the convertible bond is $(500,000 x 7% x (100% - 20%) = $28,000.
The extra shares in issue if the bond is converted: $500,000/$100 x 90 = 450,000.
Diluted EPS is:
$(1,000,000 + 28,000) ÷ (10,000,000 + 450,000) = 9.8 cents

Options and warrants

When investors take up the options the only effect on the basic EPS is that the number of shares
increases. However, some cash may be paid for the options, so it is important to adjust the diluted EPS
only for the ‘free’ shares that
at may be issued.

This is calculated by taking the amount of cash to be received when the options vest and divide by the
current market price. This gives the equivalent number of shares that will be acquired at full market
price. The difference between this
his and the number of options is the number of free shares. This is
added to the number currently in issue to dilute the EPS. The profit is not adjusted.
Example
Company M has a basic EPS of 10 cents for the year ended 31 March 20X5, calculated as earnings of
$1,000,000 divided by the weighted average number of ordinary shares of 10 million.
On 1 April 20X4, Company M has outstanding options to purchase 900,000
,000 ordinary shares at a price of
$1.50. The average share price during the year is $2.00.
What is the diluted EPS?
Solution
The extra profit earned with the options is $0.
The equivalent extra shares that will be issued for full value is: (900,000 x $1.50) ÷ $2.00 = 675,000.
Therefore 225,000 (900,000 – 675,000) are given away for free.
Diluted EPS is:
$(1,000,000 + 0) ÷ (10,000,000 + 225,000) = 9.8 cents

19. Events after the

reporting period

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Distinguish between and account for adjusting and non
non-adjusting
adjusting events after the reporting
period.

Start – The Big Picture

After the accounting period end an entity may become aware of further information that would enhance
the understanding of the financial information. These events are called ‘events after the reporting
period’ and are the subject of IAS 1
10.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Event after the reporting period: event that may be either favourable or unfavourableand
unfavourable occurs
between the end of the accounting period and the date the accounts are approved by the directors (not
the date of the AGM)
Adjusting event: an event that provides additional evidence of conditions that existed at the reporting
date.
Non-adjusting event: an event that is material, but which concerns conditions tha
that did not exist at the
accounting period end

Accounting treatment
Adjusting event: the necessary amendments are made to the figures in the financial statements
statements.
Non-adjusting event: disclosed only unless the event is so significant that the entity is no longer
l a
going concern in which case the event is treated like an adjusting one.

Examples of adjusting events

 Confirmation that a customer will not be able to pay the amount owed at the year end.
 Discovery of fraud or significant errors.
 Settlement of a court
ourt case that was ongoing at the accounting period end.
 Sale of inventory for a price below the valuation in the draft financial statements

Examples of non-adjusting
adjusting events
 Major business acquisition or disposal
 Announcement of a plan to discontinue an o operation
 Major purchases or disposals of assets
 Destruction of assets by fire, flood, earthquake
 Announcement to restructure
 Proposal or declaration of equity dividends
 Significant changes in foreign exchange rates or market rates of property

Practice question 1:: extract of question 2 from June 2017(5marks)

Delta is an entity which prepares financial statements to 31 March each year. Each year, the financial
statements are authorised for issue on 25 May. The following event occurred which is relevant to the
year ended 31 March 20X7:
On 31 March 20X7,7, Delta was owed $10m by entity Z. The amount was due for payment by 30 April
20X7.
7. Entity Z has been a customer for many years and has an excellent payment record. At 31 March
20X7,
7, there was no reason to suppo
supposese that entity Z would fail to pay the $10m owed to Delta by 30 April
20X7. By 20 April 20X7,
7, entity Z’s going concern status was in considerable doubt.
Required: Explain and state (where possible by quantifying amounts) how th
this
is event will be reported in
the financial statements of Delta for the year ended 31 March 20X7.
Suggested solution is on page:: 158

20. Accounting policies,

changes in accounting
estimates and errors

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Identify items requiring separate disclosure, including their
heir accounting treatment and required
disclosures.
 Recognise the circumstances where a change in accounting policy is justified.
 Define prior period errors.
 Account for the correction of errors and changes in accounting policies.

Start – The Big Picture

It is important to understand the difference between policies, estimates and errors and to know how to
account for each.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes)
Accounting policies are the principl
principles
es and rules applied by an entity to determine how transactions
are accounted for in the financial statements.
Accounting estimates are how transactions are measured.
Accounting errors are significant mistakes made in the financial statements.

Accounting policies and treatment of changes

Where an accounting standard determines the policy for a particular transaction then that policy must be
adopted by an entity. For example, IAS 23 on capitalized borrowing costs. However, sometimes there is
a choice on how to account for certain transactions e.g. whether to revalue PPE and investment
properties. Policies also include where certain costs are presented e.g. depreciation being a cost of sale
rather than an operating expense.

The choice of accounting policies are disclosed in the financial statements to help users understand the
figures.
Accounting policies should be applied consistently. If the directors feel that a policy is no longer
appropriate, or a new accounting standard is published then a change in po policy
licy may be required. This is
accounted for retrospectively.

Accounting estimates and treatment of changes

Accounting estimates include the depreciation method, determination of an asset’s useful life,
determination of the residual value of an asset, dete
determination
rmination of allowances for irrecoverable debts etc.
At each accounting period end the directors should determine whether the estimates continue to be
appropriate. Changes in accounting estimates result from new information or new developments and,
accordingly, are not corrections of errors.
Changes in accounting estimates are accounted for prospectively in subsequent accounting periods. No
adjustment is made to the previously published financial statements of the previous period.

Accounting errors (prior period errors)

These are significant errors and omissions in the entity’s financial statements for prior period(s) arising
from a failure to use reliable information that:
 was available when financial statements for those periods were authorised for issue and
 could reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements.
Accounting errors are corrected by amending the previously issued financial statements of the previous
year, meaning
eaning that there is not normally a profit effect in the current year when the error is discovered.
This will be recorded in SOCIE as a correction to the balance brought forward on retained earnings.

Practice question 1: extract of question 4 from June 2016 (7 marks)

You are the financial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with International Financial Reporting Standards
Standards. The managing director, who
is not an accountant, has recently attended a business seminar at which financial reporting issues were
discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31
March 20X6.6. Based on this review she has a query relating to those statements..
‘During a break-out
out session I heard someone talking about accounting policies and accounting
estimates. He said that when there’s a change of these items sometimes the change is made
retrospectively and sometimes it’s made prospectively. Please explain the difference be
between an
accounting policy and an accounting estimate and give me an example of each. Please also explain the
difference between retrospective and prospective adjustments and how this applies to accounting
policies and accounting estimates.’
Suggested solution
ution is on page: 158

21. Related party

transactions and
operating segments

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Define and apply the definition of related parties in accordance IFRS Standards.
Standard
 Describe the potential to mislead users when related par
party relationships and transactions are not
disclosed appropriately.
 Explain the disclosure requirements for related party transactions.
 Discuss the usefulness and problems associated with the provision of segment information.
 Define an operating segment.
 Identify
entify reportable segments (including applying the aggregation criteria and quantitative
thresholds).

Start – The Big Picture

The notes to the financial statements provide a good source of useful information for users. Two topics
in particular are related party disclosures, which are the subject of IAS 24 and operating segments,
covered by IFRS 8.

Related party disclosures

It is important for stakeholders to understand the parties the entity is engaging and doing business with.
These disclosures explain that.
There are two aspects of the standard that you need to be aware of:
 Identification of related parties; and
 Disclosure

Identification of related parties (always look at the substance of the

relationship)
A person is related to an entity if:
 They control
rol or jointly control the entity (e.g. Mrs X has a 75% holding in Entity A)
 They
hey have significant influence over the entity (e.g. Mrs X has a 30% holding in Entity B)
 They
ey are key management personnel of the entity or its parent
 They are a close family member
mber of a person mentioned above (e.g. of Mrs X)
 They have control, joint control or significant influence over two entities the two entities are
related (e.g. Entities A and B above)
An entity is related to another entity if:
 They are member of the same g group (e.g. parent and subsidiary)
 One is an associate or joint venture of the other
 Both are joint ventures of a third party
 One is an associate and the other a joint venture of a third party
 One is a pension plan for the employees of the other
Not necessarily related parties:
 Two entities who have a director who is on both Boards
 Two entities that jointly control a joint venture
 Loan and other finance providers
 A large customer or supplier simply because the transactions are significant

Example
Company A owns 70% of Company B and 80% of Company C.
Company C owns 30% of Company D.
Identify the related party relationships.
Solution
Company A:Company B and Company C are in the same group so are related parties of Company A.
Company D is an associate of Compan
Company C, C is in Company A’s group, so Company D is a related party
of Company A.
Company B:Company A and Company C are in the same group so are related parties of Company B.
Company D is an associate of Company C, Company C is in the same group as Company B, so Company
D is a related party of Company B.
Company C:Company A and Company B are in the same group as Company A so are related parties of
Company C. Company D is an associate of Company C, so Company C and Company D are related
parties.
Company D: Company D is an associate of Company C, so Company C and Company D are related
parties. As mentioned above, because Company C is in the same group as Company A and Company B,
Company D is a related party of Company A and Company B.

Example
Mr X owns 80% of Company
pany A and 25% of Company B. Mr X exerts significant influence over Company
B.
Mrs X owns 30% of Company M and 30% of Company N. Mrs X exerts significant influence over both
companies.
Identify the related party relationships.
Solution
Mr X is a related party
rty to both Company A and Company B because he controls one and has significant
influence of the other.
Mrs X is a related party to both Company A and Company B because she has significant influence over
both.

Example
Mr X owns 100% of Company D and is a member of the key management personnel of Company E,
which owns 100% of Company F.
Identify the related party relationships.
Solution
Mr X has control over Company D and is a related party of Company D.
Mr X is a member of the key management personnel of C
Company
ompany E and so is a related party of Company
E.
Company D and Company E are related parties through Mr X.
Company E controls Company F and so these are related parties. As Mr X is a member of the keyt
management personnel of Company E, Mr X and Company F are related parties. Therefore,
Therefore Company D
and Company F are also related parties.

Example
Mr L owns 100% of Company G and Mrs L owns 35% of Company Y (which gives her significant
influence).
Identify the related party relationships.
Solution
Mr and Mrs L are close family. Mr L controls Company G and so Mr and Mrs L are related parties of
Company G.
Mrs L has significant influence over Company Y and so Mr and Mrs L are related parties of Company Y.
Company G and Company Y are related parties through the rel
relationships
ationships with Mr and Mrs L.

Disclosure
The following need to be disclosed whether there have been any transactions between them or not
not:
 Name of the entity’s parent and ultimate controlling party
 Remuneration of key management personnel
Then if there have
ve been transactions between the two parties:
 Nature of the relationship (notice that the name is not mentioned)
 Amount
 Amount outstanding
 Irrecoverable receivables written off
 Allowance for impaired receivables

Operating segments
The disclosures for operating
ating segments are designed to provide operating information for an entity that
may have a wide range of activities. Without these disclosures the information is hidden within the
SPLOCI, which just provides totals. The disclosures are compulsory for listed
d entities.
It is recommended that you look at the annual report of a listed entity (e.g. Tesco plc) and find this
disclosure. It is usually given in note 2 or 3 in the notes to the accounts.

Key definitions (these are ExP’s definitions, which are simpli

simplified
fied for exam preparation purposes)

Operating segment is a part of an entity (division, department or subsidiary) that:

 Generates revenues and incurs expenses (so the head office of a large entity and pension
plans are not segments); and
 Whose operating results
sults are reviewed by the Chief Operating Decision Maker (CODM); and
 Has its own discrete financial information.
The segments may be geographical or based on product lines. It depends how the management
accounting information is presented for the CODM to mmake
ake his decisions on the strategy of the entity.
Segments may be aggregated if they have similar characteristics (products, services, production
processes, types of customer, methods of distribution).

Usefulness and problems

Usefulness: to compare, say, the
he retail division of one entity with the retail division of another
Problems: each entity’s reportable segments may be defined in a different way because of the reliance
on management information.

Reportable segments
Some segments of an entity may be ssmall.
mall. IFRS 8 states that an entity need only report segments
separately if they meet ANY of the following thresholds:
 External and internal revenue together is ≥10% of the entity’s total revenue: or
 The profit or loss is ≥10% of the greater of the total profits or total losses made by segments; or
 Assets (NOT net assets) are ≥10% of the entity’s total assets.
In addition, ≥75%of the entity’s external revenue must be included in reportable segments. If by
applying the rules above that is not achieved, then additional reportable segments must be identified
until this is met. Any segments not meeting the thresholds above are aggregated in a ‘other segments’
category.

Example
The directors of Company J, which is listed, have identified the following segments based on
geographical location:

Segment Total Revenue External Internal Profit/(loss) Assets

revenue revenue
$million $million $million $million $million
A 130 70 60 49 1,700
B 39 17 22 (13) 170
C 75 75 - 24 500
D 165 98 67 60 1,900
E 45 20 25 (8) 290
F 50 28 22 6 440
504 308 196 118 5,000

Which segments need to be recorded according to IFRS 8?

Solution

Segment 10% revenue 10% results 10% assets Report?

A Y Y Y Y
B N N N N
C Y Y Y Y
D Y Y Y Y
E N N N N
F N N N N

 Profit making segment total: $139 million. 10% = $13.9 million. Loss making segment total: $21
million. 10% = $2.1 million. So, all seg
segments
ments making a profit or loss greater than $13.9 million
are reportable.
 10% of total revenue: $504 million x 10% = $50.4 million
 10% of assets: $5,000 million x 10% = $500 million

75% test:
The external revenue of the reportable segments above for A, C and D is $(70 + 75 + 98) million =
$243 million. As a % of the total external revenue this is $243 million/$308 million = 79%
79%, so no extra
segments need to be reported.

Practice question 1:: extract of question 4 from December 2016 (8 marks)

You are the financial
nancial controller of Omega, a listed entity which prepares consolidated financial
statements in accordance with International Financial Reporting Standards
Standards. You have recently produced
the final draft of the financial statements for the year ended 30 Septe
September 20X6 6 and these are due to
be published shortly. The managing director, who is not an accountant, reviewed these financial
statements and had two queries arising out of the review
review.

Query 1
One of the notes to the financial statements gives details of purchases made by Omega from entity X
during the period. I own 100% of the shares in entity X but I do not understand why it is necessary for
any disclosure whatsoever to be made in the Omega financial statements. The transaction is carried out
on normal commercial
ommercial terms and is totally insignificant to Omega, representing less than 1% of Omega’s
purchases.

Query 2
“On
On reviewing our financial statements, I found a note giving information about the different segments
of our business and also the disclosure o off the earnings per share of our entity. Neither the segment note
nor the earnings per share disclosure appears in the financial statements of entity X (above). Even
though entity X is unlisted, both entities report under full International Financial Report
Reporting Standards so
I do not understand how this difference can occur.
Please explain this to me.
Suggested solution is on page: 159

22. Reporting requirements

of small and medium-sized
medium
entities (SMEs)

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Outline the principal considerations
derations in developing a set of financial reporting standards for SMEs.
 Discuss solutions to the problem of differential financial reporting.
 Discuss reasons why the IFRS for SMEs Standard does not address certain topics.

Start – The Big Picture

The financial
ncial burden for small and medium
medium-sized entities (SME) having to produce full sets of accounts
when the stakeholders do not require them is enormous. The standard for SMEs has been issued for
entities whose debt and equity instruments are not traded public publicly.
ly. Stakeholders for these entities do
not require the level of detail that is included in full financial statements so the content for SMEs is
reduced.

Definition of SME
SMEs have the following characteristics:
 Small number of owners (e.g. family run comcompany).
 Revenues, expenditure, assets and liabilities are relatively low value.
 Small number of employees.
 Operating activities are straight
straight-forward
forward and not the subject of the more complicated financial
reporting standards.

Considerations for developing st

standards for SMEs
There are a number of issues to be considered:
 Identifying a SME is often difficult.

 When a SME no longer qualifies there is a significant cost to convert the financial statements to
full IFRS.

 How often is the standard updated? Usually

Usually, every three years but full standards are more
frequently. This reduces the cost for SMEs compared to larger entities.

The SMEs standard

The standard is a single document. To reduce the cost of producing financial reporting information for
SMEs the following
ng reporting standards do not apply:
 Earnings per share (IAS 33)
 Interim reporting (IAS 34)
 Segmental reporting (IFRS 8)
 Non- current assets held for sale (IFRS 5)
In addition, there are some IFRSs that allow a choice in accounting policy for larger entiti
entities and these
are not available to SMEs:
 When recognizing goodwill, the fair value method is used not the proportionate.
 Revaluation method of valuing intangible assets is not permitted. SMEs use cost less
accumulated amortization only.
 Investment propertiess are valued using the fair value method (unless market values are not
available). This means that they are revalued annually and not depreciated.
Other standards are simplified. Some examples:
 Depreciation and amortization methods are not reviewed annuall annuallyy by the directors, instead just
when an indication of change is needed.
 Research and development expenditure is always expensed to the SPL.
 If the useful life of an intangible cannot be determined then it is assumed to be 10 years.
 Goodwill is amortised overver its useful life but if this cannot be determined it should not exceed 10
years.
 Borrowing costs incurred on qualifying assets are always expensed not capitalized.
 Joint ventures can be held at cost in group accounts or using the equity method.

Advantages
ges and disadvantages of the SMEs standard
Advantages
 Time and cost savings from the simplified disclosures.
 The SMEs standard is easy to follow.
 As there is only one standard to follow
follow,, all the information is in one place so preparers of
financial statements
nts will find it more quickly.

Disadvantages
 It is difficult to compare one company with another if one uses full IFRS Standards and another
does not.
 Some small companies still find this standard too complex, especially for deferred tax and leases.
© 2019 The ExP Group. To be used only as part of ExP’sDipIFR course. Reproduction by any means for any other purpose is prohi
prohibited.
bited. These materials are for
educational purposes only and so are necessarily simplified and summarised. Always obtain expert ad
advice
vice on any specific issue. Refer to our full terms and conditions of
use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
Page 121
ACCA DipIFR|Course Notes The
TheExP Group

23. Preparation of group

consolidated external
reports: the statement of
financial position
n

What do you need to know to pass DipIFR?

Make sure that you are able to:
 explain the concept of a group and the purpose of preparing consolidated financial statements.
 Explain and apply the definition of a subsidiary.
 Prepare a consolidatedd statement of financial position for a simple group (one or more
subsidiaries) dealing with pre and post
post-acquisition profits, non-controlling
controlling interest and goodwill.
 Explain the need for using coterminous year
year-ends
ends and uniform accounting policies when
preparing
aring consolidated financial statements and describe how it is achieved in practice.
 Explain why intra-group
group transactions should be eliminated on consolidation.
 Report the effects of intra-group
group trading and other transactions including:
o Unsettled intra-group
up balances at the year
year-end
o Unrealised profits in inventory and non non-current assets
o Intra-group
group loans and interest and other intra
intra-group charges,, and
o Intra-group
group dividends
 Explain why it is necessary for both the consideration paid for a subsidiary and the subsidiary’s
identifiable assets and liabilities to be accounted for at their fair values when preparing
consolidated financial statements.
 Compute the fair value of the consideration given including the following elements:
o Cash
o Share exchanges
o Deferred consideration
nsideration
o Contingent consideration
 Prepare consolidated financial statements dealing with fair value adjustments (including their
effect on consolidated goodwill) in respect of:
o Depreciating and non
non-depreciating non-current assets

o Inventory
o Deferred tax
o Liabilities
o Assets and liabilities (including contingencies), not included in the subsidiary’s own
statement of financial position

Start – The Big Picture

The exam will contain a 25-markmark question on groups. This could ask for the preparation of a
consolidated
ated SOFP or SPLOCI possibly with a SOCIE. It is important that the basic concepts of group
accounting are fully understood.

Principles based approach

Companies often trade through a group of companies. This might be due to acquisition of other pre pre-
existing entity (the most common situation in the exam) or by setting up separate legal entities to ring
ring-
fence business risks.
Legally, each entity exists separately and must produce separate (“individual” or “entity”) financial
statements.
Investors in the investing
sting entity (the parent)
parent),, however, will be interested to see all the assets, liabilities
and profits that their entitycontrols.. This is achieved by the process of consolidation, which presents the
financial statements of all entities under the parent comp
company’s
any’s control as if it were one single entity.

Investors

Parent

Group
Subsidiary

The parent company will record its investments in its subsidiaries as a financial asset, initially at cost.
IFRS 9 Financial Instruments determines their recognition and measurem
measurement.
ent. In the group financial
statements this investment is replaced with the assets and liabilities controlled by the group.
The process of consolidation is one of replacement of data in the parent’s financial statements with
information that is more useful to investors.

Key definitions (these are ExP’s definitions, which are simplified for exam preparation purposes
and are based on IFRS 10 Consolidated Financial Statements
Statements)
Parent(P) is the entity that controls one or more other entities (called subsidiaries)
aries)
Subsidiary(S) is the entity controlled by another entity
Control is taken as power over the investee
investee,, which may be taken as having >50% of the equity share
capital (as investor there is no entitlement to a fixed dividend) and/or the ability to direc
direct the board. In
the exam it is usually determined through the ownership of equity shares. IFRS 10 goes on to describe
the control as “exposure to rights, variable returns from its involvement with the investee and the ability
to use its power over the investee
stee to affect the amount of the investor’s returns.”(IFRS 10, para 7)
Consolidated financial statements present the net assets, equity, income and expenses of the
parent and subsidiary as is they were a single entity.
Goodwill is the excess consideration paid to acquire the subsidiary over the fair value of its net assets
at the date of acquisition
Non-controlling
controlling interests (NCI) is the proportion of the subsidiaries net assets that belong to
investors other than the parent. If the entity is wholly owned tthen
hen there are no non-controlling
non interests.

Consolidated statement of financial position

Notes 20X7 20X6

$000 $000 $000 $000
Non- current assets
Property, plant and equipment 1 X X
Goodwill 2 X X
Other intangibles X X
Investments in associates Chapter X X
25
Investments in equity instruments 3 X X
X X
Current assets
Inventories 4 X X
Trade receivables 4 X X
Cash and cash equivalents 4 X X
X X
Total assets X X

Equity and liabilities

Equity attributable to the owners of the parent X X

Share capital 5 X X
Other reserves 6 X X
Retained earnings 6 X X

Non-controlling interest 7 X X
Total equity X X
Non-current liabilities 4 X X
Current liabilities 4 X X
Total equity and liabilities X X

Notes on how the figures are derived:

1. Property, plant and equipment = P + 100%S +/ +/- Fair value adjustments
2. Goodwill = consideration +NCI – fair value of net assets (see later) - impairment
3. Investments in equity instrum
instruments = P + 100%S
4. Current assets, non-current
current liabilities and current liabilities = P + 100%S +/+/-inter-company
adjustments
5. Share capital = P only
6. Other reserves and retained earnings = P + Group% S’s post acquisition reserves +/ +/-
adjustments
7. Non-controlling
g interest =NCI at acquisition + NCI% S’s post acquisition reserves – impairment
of goodwill

The adjustments and goodwill calculations are now described in more detail.

Goodwill

Basic calculation is:

$
Consideration X
NCI at acquisition X
Fair value of net assets X
Goodwill at acquisition X
Impairment X
Goodwill at accounting period end X

Consideration
Always shown at fair value at the date the subsidiary is acquired in accordance with IFRS 3 Business
Combinations. It may comprise:
 Cash

 Share for
or share exchanges, where the parent issues some of its shares at fair value to the
previous owners of the subsidiary in exchange for their shares. These are valued at fair value on
the day the subsidiary is bought.
 Deferred consideration, where the parent promises to pay the previous shareholders a sum of
money on a future date. This is recorded as consideration here and the corresponding credit
entry is a liability for the parent. Finance costs arise as the liability is unwound each year it is
nearer to being
eing settled. This is recorded in the retained earnings.
 Contingent consideration, where the parent may pay the previous shareholders some cash in the
future depending on future events
 Note that professional fees incurred on the acquisition are expenses to the CPLOCI.

Example
On 1 January 20X4 Company A acquired 75% of the 20 million ordinary shares of Company B by
offering:
 Share-for- share exchange of two shares in Company A for every three shares in Company B;
and
 Cash payment of $1 a share payable in tthree years’ time; and
 Cash now of $0.50 a share.
Company A’s shares have a fair value of $3.00 at the date of acquisition and the cost of capital is 10%
(so the value of $1 in three years’ time is $0.75).
Required:
(i)What is the consideration to be record
recorded
ed in the goodwill calculation on the acquisition of Company B?
(ii) How is the deferred consideration recorded at 31 December 20X4?
Solution

(i)

Cost of investment $million

Share-for-share exchange (20 million x 2/3 x $3.00) 40
Deferred cash (20 million x $0.75 x $1) 15
Cash ($0.50 x 20 million) 10
Total 65

(ii) by the end of the first year the deferred cash will still be outstanding but is one year closer to being
paid. The liability will be unwound by adding $1.5 million ($15 million x 10%) to the liability and the
finance cost in the consolidated statement of profit or loss.

NCI at acquisition
Valued using the proportionate (partial) or Fair (full) method
method.. The parent chooses for each
acquisition.

Proportionate:: the NCI is valued as NCI % of the fa

fair
ir value of the net assets of the subsidiary on the
date of acquisition
Fair: the NCI is valued at fair value at the date of acquisition (given to you in the exam)
The corresponding credit entry is the NCI recorded in the equity section of the CSFP.
Example
Company C acquired 70% of the ordinary share capital of Company D on 1 July 20X7 for $500,000. At
this date the fair value of the net assets of Company D are $650,000 and the fair value of the NCI is
$220,000.
What is the goodwill arising on acquisition if the following methods of valuation are used:
(i) proportionate
(ii) fair value?
Solution

(i) Proportionate

$’000
Cost of investment 500
NCI (30% x $650,000) 195
Less: fair value of net assets (650)
Goodwill at acquisition 45

(ii) Fair value

$’000
Cost of investment 500
NCI 220
Less: fair value of net assets (650)
Goodwill at acquisition 70

Fair value of net assets

Take the carrying value of the subsidiary’s net assets at acquisition date (=share capital+ reserves) and
make fair value adjustments
tments to bring the values to the value to the group on the date of acquisition (the
historic cost to the group).
The fair values of assets and liabilities will be given in the question and the adjustment is the difference
between the carrying value of thee asset and the fair value.
Increases in the fair value of assets decrease goodwill and increase the carrying value of the assets in
the CSFP. Increases in the fair value of liabilities increase goodwill and increase the carrying value of the
liabilities in the CSFP.

Assets that may have fair value adjustments:

 Property plant and equipment (these adjustments may be subsequently depreciated, and this
decreases the value of the asset at the year end and reduces retained earnings)
 Current assets and liabilities
 Contingent liabilities. These would be disclosed in the subsidiary’s financial statements but are
included as actual liabilities for the group. Any changes in value before the year end are recorded
in the group retained earnings
 Deferred tax is created
ted as it would for revalued assets

Impairment of goodwill
Goodwill is impaired when the Directors feel that the subsidiary is not worth what it was to the group. In
an exam the amount of impairment will be given to you as a monetary amount or a % of the carrying
value of the goodwill. Remember that once impaired it is not reversed.
The accounting entries depend on the method of goodwill chosen:
Proportionate: deduct the full amount from the goodwill and expense to the group retained earnings
Fair: deduct the full amount from the goodwill and expense the group % to group retained earnings and
deduct the NCI% from the carrying value of NCI.
Example
On 1 October 20X5 Company E paid $2.5 million to acquire 90% of the equity shares of Company F. On
that day the
e net assets of Company F’s had a carrying amount of$1.of$1.4 million and this was the same as
the book value with the exception of the plant and equipment. The plant and equipment has a
remaining useful life of 5 years and its fair value exceeded the carrying amount by $800,000.
Company E uses the fair value method to value NCI and at acquisition the fair value of Company F’s NCI
is $170,000.
By the 30 September 20X6, Company F had not performed as well as expected and the goodwill is
impaired by 20%.
What is the
he carrying value of goodwill at 30 September 20X6?
Solution
At the year end the goodwill is calculated as the amount at acquisition less impairment:
$’000
Consideration 2,500
Fair value of NCI 170
Less: Fair value of net assets ($1.4 million + $0.8 mi
million) (2,200)
Goodwill 470
Impairment 20% 94
Carrying amount on 30 September 20X6 376

The impairment is divided between the group and the NCI:

Dr Group retained earnings (90%) $84,600

Dr NCI (10%) $9,400

Cr Goodwill $94,000

Intercompany adjustments
Need to be eliminated because the group is a single entity and should record transactions between itself
and third parties. Make sure that the corresponding assets in one group entity matc
match the liability in the
other by making necessary adjustments.
Trading current accounts: when one group entity sells goods or services to the other on credit
outstanding receivable and payable balances are cancelled. Always make sure the amounts owed and
owing
ing between the group companies agree before cancelling. Adjustments may be needed for cash or
goods in transit.
Loans: usually the parent lending to the subsidiary. The non
non-current
current liability is cancelled with the non-
non
current asset (which may be in non--current investments)
Dividends: subsidiary paying to the parent. If there are outstanding sums due then cancel the
receivable and payable. These are not examined often as they are often non-adjusting
adjusting events after the
reporting period end.
Unrealised profit adjustments
These arise when P and S sell assets to one another at a profit and the assets remain in the buyer’s
books at the year-end still valued with the inter
inter-company profit.
Inventory (Provisions for unrealised profits – PUPs)
Inventory must be valued att the lower of cost and net realisable value to the group so if one entity has
sold to the other at a profit and the inventory remains unsold the profit needs to be eliminated. This
may be calculated as a margin (% of selling price) or mark
mark-up (% of cost).
Adjustment needed:
Reduce inventory in current assets (Credit)
Reduce inventory in cost of sales therefore reducing the profit of the selling entity. (Debit)

Example
Company G acquired 75% of the ordinary shares of Company H many years ago. During the year
y ended
31 December 20X5, Company H sold goods to Company G for $125,000 with a mark
mark-up of 25%. 70% of
the goods remain unsold at the year end.
What is the provision for unrealised profit that is recorded in the consolidated financial statements for
the year ended 31 December 20X5?
Solution
The adjustment required is:
$125,000 x 100/125 x 70% = $70,000.
The seller is the subsidiary, so the journal entry is:

Dr Retained earnings of the subsidiary $70,000

Cr Group inventory in the SOFP $70,000.

Note:
 If the
e seller had been the parent, the debit entry would be to the parent’s retained earnings
 If the 25% mark-up up had been a margin the amount of the provision would be: $125,000 x
25/100 x70% = $21,875.

Non-current assets
If non-current
current assets are transferred at a profit from one entity to the other, then there is an unrealised
gain and the buying entity is charging too much depreciation. The asset must be recorded at the value
had it not been sold. The adjustment is the difference between the current carrying value and the
carrying value had the asset not been sold.
Adjustment needed:
Reduce the value of the non-current
current asset (Credit)
Reduce the profit of the selling entity (Debit)

Example
Company J transferred a machine to its 100% owned subsidiary, Company K K, on the first day of the
accounting period when the machine’s carrying amount was $100,000 and the remaining useful life is
estimated to be 5 years. Company K paid $150,000. The estimated residual value is $0.
What is the provision for unrealised profit tthat
hat is recorded in the consolidated financial statements at the
end of the year?
Solution
The selling company is the parent and so the adjustment will be made to the Company J’s retained
earnings and also the consolidated non
non-current assets.
The carrying amount
mount with the transfer is: $150,000 x 4/5 = $120,000.
The carrying amount without the transfer would have been: $100,000 x 4/5 = $80,000.
The adjustment is $40,000. (Dr retained earnings of the parent, Cr NCA)

Practice question 1: Question Runner Co from ACCA Financial Reporting from March/July
2019 (20 marks)
On 1 April
pril 20X4, Runner Co acquired 80% of Jogger Co's equity shares when the retained earnings of
Jogger Co were $19.5m. The consideration consist
consisteded of cash of $42.5m paid on 1 April
A 20X4 and a
further cash payment
ment of $21m, deferred until 1 A
April
pril 20X5. No accounting entries have been made in
respect of the deferred cash payment. Runner Co has a cost of capital of 8%. The appropriate discount
rate is 0.926.

The draft, summarised statements of financi

financial
al position of the two companies at 31 March 20X5 are
shown below:

Runner Co Jogger Co
$’000 $’000
ASSETS
Non-current assets
Property plant and equipment 455,800 44,700
Investments 55,000 -
510,800 44,700

Current assets
Inventory 22,000 16,000
Trade receivables 35,300 9,000
Bank 2,800 1,500
60,100 26,500
570,900 71,200

Equity and liabilities

Equity
Equity shares of $1 each 202,500 25,000
Retained Earnings 286,600 28,6000
489,100 53,600

Current liabilities
Trade Payables 81,800 17,600
Total equity and liabilities 570,900 71,200

(i) Runner Co’s policy is to value the non

non-controlling
controlling interest at fair value at the date of acquisition.
The fair value of the non-controlling
controlling interest in Jogger Co on 1 April 20X4 was e estimated at
$13m.
The fair value of Jogger Co’s other assets, liabilities and contingent liabilities at 1 April 20X4 were
equal to their carrying amounts with the exception of a specialised piece of plant which had a fair
value of $10m in excess of its car
carrying
rying amount. This plant had ten year remaining useful life on 1
April 20X4.
(ii) In December 20X4 Jogger Co sold goods ro Runner Co for $6.4m, earning gross margin of 15%
on the sale. Runner co still held $4.8m of these goods in its inventories at 31 March 20
20X5.
Jogger Co still had the full invoice value of $6.4m in its trade receivables at 31 March 20X5,
however, Runner Co’s payables only showed $3.4m as it made a payment of $3m on 31 March
20X5.
Required
(a) Prepare the consolidated statement of financial positi
position
on for Runner Co as at 31 March 20X5.
(b) Runner Co acquired 30% of Walker Co’s equity shares on 1 April 20X5 for $13m, Walker Co had
been performing poorly over the last few years and Runner Co hoped its influence over Walker Co

would help to turn the companyy around. In the year ended 31 March 20X6 Walker Co made a loss of
$30m. Runner Co had no contractual obligation to make good the losses relating to Walker Co.
Explain how Walker Co should be accounted for in the consolidated Statement of financial positio
position of
Runner co for the year ended 31 March 20X6. Your answer should also include a calculation of the
carrying amount of the investment in the associate at the date.

Other provisions of IFRS 10

Coterminous year ends
If the subsidiary has a different accounting period end than the parent, in practice they become
coterminous to that of the parent. If they do not, then adjustments need to be made to the subsidiaries
figures to align them with the parent.
Uniform accounting policies
If the subsidiary does not apply the same accounting policies of the parentparent, then their financial
statements need to be redrafted before consolidation to make sure they do.
Exemption from preparation of group financial statements
The directors of a group of companies may wish to exclude one or more subsidiaries from consolidation
due to their poor performance or poor financial position. This is not allowed and exemption is only
allowed in the following circumstances:
 The parent is itself a 100% o owned subsidiary or a partially- owned subsidiary and the owners
know and do not object to the parent’s accounts not being consolidated; and
 the parent’s debt or equity instruments are not traded in a public market; and
 the parent has not filed its financia
financiall statements with the securities commission or other
regulatory body in order to issue any class of instruments in the public market: and
 the ultimate parent company produces consolidated financial statements that complay with IFRS
Standards and are available
ble for public use.

24. Preparation of group

consolidated statement of
profit or loss and other
comprehensive income

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Prepare a consolidated statement of profit or loss, statement of profit or loss and other
comprehensive income and statement of changes in equity for a simple group (one or more
subsidiaries), including an example where the acquisition or disposal occurs during the year and
there is a non-controlling
controlling interest.

Start – The Big Picture

The statement of comprehensive income shows gains and los
losses
ses under a company’s control during a
period. Consequently, a group statement of comprehensive income shows all income and expenditure
around the group since the date of acquisition.
The full amount controlled is consolidated, with these totals then anal
analysed
ysed out between owners of the
parent company and non-controlling
controlling interests.

Consolidated Statement of profit or loss and other comprehensive income

Notes 20X7 20X6
$000 $000
Revenue 1 X X
Cost of sales 2 (X) (X)
Gross profit X X
Other operating income 3 X X
Distribution costs 3 (X) (X)
Administration expenses 3 (X) (X)
Profit from operations X X
Finance costs 4 (X) (X)
Investment income 5 X X

Share of associate’s profit See X X

chapter
25
Profit before tax X X
Income tax expense 3 (X) (X)
Profit or loss for the period X X
Other comprehensive income: 3 X X
Total comprehensive income X X
Profit attributable to:
Group 7 X X
Non-controlling interest 6 X X
X X
Total comprehensive income (TCI) attributable to:
Group 7 X X
Non-controlling interest 6 X X
X X

Notes to explain where the figures come from. Note that if the subsidiary is acquired part way through
the year then all of its figures are pro
pro-rated to show the post- acquisition (unless the question says
otherwise)
1. Revenue = P + 100% S – intercompany sales
2. Cost of sales = P +100%S + all PUP adjustments+ fair value depreciation – intercompany sales
3. Expenses and other income and OCI = P + 100%S + impairment of goodwill
4. Finance costs = P+100%S – intercompany interest
5. Investment
nvestment income = P+100%S – intercompany interest – intercompany dividends
6. Non-controlling
controlling interest (for both profit and TCI) = NCI% S profit – share of impairment of
goodwill (FV method only) – PUP (S is seller) – FV depreciation
7. Group = balancing figure

A practice example of a consolidated statement of profit or loss and other comprehensive

income is practice question 2 in chapter 25.

25. Business
combinations – associates
and joint arrangements

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Define associates and joint
int arrangements.
 Distinguish between joint operations and joint venture
ventures.
 Prepare consolidated financial statements to include a single subsidiary and an associate or a
joint arrangement.

Start – The Big Picture

There are different levels of investment tthat
hat one company may have in another and the accounting
treatment is different depending what the level of influence is
is:
Type of investment Level of influence Accounting treatment in group
financial statements

Investment (FVOCI) Little or none Historical cost

c or fair value in
accordance with IFRS 9.

Subsidiary Control (dominant

dominant influence)
influence), normally Line-by-line
line consolidation of all
by holding >50% of the equity shares. items under parent’s control, plus
These are ordinary shares that carry a goodwilll and non
non-controlling
vote. interests.

Associate Significant influence, normally by holding “Equity accounting”, which is a

between 20% and 50% of the voting simplified
fied form of consolidation.
shares.. Where one entity jointly controls
another by holding 50% this is called a
joint venture.

Significant influence
This fairly self-explanatory
explanatory concept means that the parent cannot consolidate each item of the investee’s
assets, liabilities, income and gains, since the parent does not have control of them.
However, there
here is a close relationship between the parent and the associate of significant influence.
Significant influence exists when there is a holding of between 20% and 50% (where a number of other
investors hold the remaining shares). However, oth
other factors mayy be taken into account, such as:
 Representation on the investee’s board of directors
 Evidence that the investee company is used to accepting the investor as having significant
influence
 Whether the investee is part of the supply chain of the investor
 Sharing key personnel
 Sharing key information.

Accounting treatment in the group financial statements

Associates are accounted for using ‘equity accounting’.
In the consolidated SOFP:
 Assets and liabilities of the associate are not added to those of the parent and subsidiary.
 A single line in non-current
current assets representing the group’s investment in the associate:
o Cost of investment by parent X
o Add group % of post
post-acquisition profits X
o Less impairment of associate (X)
o Carrying amount X
 In the consolidated SOPL the revenue and costs of the associate are not added to those of the
parent and subsidiary but instead there is a single line immediately above PBT for Group % of
associate’s profit for the year less impairment and les
lesss PUP adjustments. The profit is pro-rated
pro
for mid- year acquisitions.
 PUP adjustments are calculated in the same way as they are for subsidiaries except that the
group % is taken. The debit entry for the adjustment is made in the consolidated SOPL and the
credit entry is deducted from inventories (if the parent has been sold the inventory) and
deducted from the investment in the associate (if the parent sold the inventory).

Practice question 1: Question Dargent Co from ACCA Financial Reporting March/June 2017
(20marks)
On January 20X6, Dargent Co acquired 75% of Latree Co’s equity shares by means of a share exchange
of two shares in Dargent Co for every three Latree Co shares acquired. On that date, further
consideration was also issued to the shareholders Latree Co in the form of a $100 8% loan note for
every 100 shares acquired in Latree Co.

None of the purchase consideration, nor the outstanding interest on the loan notes at 31 March 20X6,
has yet been recorded by Dargent Co. At the date of acquisition, the share price of Dargent Co and
Latree Co is $3·20 and $1·80respectively.
The summarised statements of financial position of the two companies as at 31 March 20X6 are:

Dargent Co Latree Co
$’000 $’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 75,200 31,500
Investment in Amery Co at 1 April 20X5 (note (iv)) 4,500 -
79,700 31,500
Current assets
Inventory (note (iii)) 19,400 18,800
Trade receivables (note (iii)) 14,700 12,500
Bank 1,200 600
35,300 31,900
Total assets 115,000 63,400

Equity and liabilities

Equity
Equity shares of $1 each 50,000 20,000
Retained earnings – at 1 April 20X5 20,000 19,000
– for year ended 31 March 20X6 16,000 8,000
86,000 47,000
Non-current liabilities
8% loan notes 5,000 nil
Current liabilities (note (iii)) 24,000 16,400
29,000 16,400
Total equity and liabilities 115,000 63,400

The following information is relevant:

(i) At the date of acquisition, the fai
fairr values of Latree Co’s assets were equal to their carrying amounts.
However, Latree Co operates a mine which requires to be decommissioned in five years’ time. No
provision has been made for these decommissioning costs by Latree Co. The present value (dis (discounted
at 8%) of the decommissioning is estimated at $4m and will be paid five years from the date of
acquisition (the end of the mine’s life).
(ii) Dargent Co’s policy is to value the non
non-controlling
controlling interest at fair value at the date of acquisition.
Latree Co’s share price at that date can be deemed to be representative of the fair value of the shares
held by the non-controlling interest.
(iii) The inventory of Latree Co includes goods bought from Dargent Co for $2·1m. Dargent Co applies a
consistent mark-upup on cost of 40% when arriving at its selling prices.
On 28 March 20X6, Dargent Co despatched goods to Latree Co with a selling price of $700,000. These
were not received by Latree Co until after the year end and so have not been included in the above
inventory at 31 March 20X6.

At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3m, this differed to
the equivalent payable in Latree Co’s records due to the goods in transit.
The intra-group
group reconciliation should be achieved b
byy assuming that Latree Co had received the goods in
transit before the year end.
(iv) The investment in Amery Co represents 30% of its voting share capital and Dargent Co uses equity
accounting to account for this investment. Amery Co’s profit for the year ended 31 March 20X6 was $6m
and Amery Copaid total dividends during the year ended 31 March 20X6 of $2m. Dargent Co has
recorded its share of the dividend received from Amery Co in investment income (and cash).
(v) All profits and losses accrued evenly th
throughout the year.
(vi) There were no impairment losses within the group for the year ended 31 March 20X6.
Required:
Prepare the consolidated statement of financial position for Dargent Co as at 31 March
20X6. (20 marks )
Suggested solution is
s on page: 162

Practice question 2:: Question Plank Co from ACCA Financial Reporting March/July 2020 (20
marks)
Plank Co has owned 35% of Arch Co since 1 June 20X7 and it acquired 85% of Strip Co on 1 april 20X8.
The statements of profit or loss and other comprehensive income for the year ended 31 December 20X8
are:

Plank Co Strip Co Arch Co

$’000 $’000 $’000
Revenue 705,000 218,000 256,000
Cost of sales (320,000) (81,000) (83,500)
Gross profit 385,000 137,000 172,500
Distribution costs (58,000) (16,000) (18,500)
Administrative expenses (92,000) (28,000) (29,000)
Investment income 46,000 2,000 -
Finance costs (12,000) (14,000) (11,000)
Profit before tax 269,000 81,00 114,000
Income tax expense (51,500) (15,000) (21,430)
Profit for the year 217,500 66,000 92,570
Other comprehensive income
Gain on revaluation of land 2,800 3,000 -
Total comprehensive income for the year 220,300 69,000 92,570

The following information is relevant.

(i) A fair value exercise conducted on 1 Aprilpril 20X8 concluded that the carrying amounts of Strip Co’s
net assets were equal to their fair values with the exception of an item of machinery which had a
fair value of $8m in excess of its carrying amount. At 1 April 20X8, the machinery had a
remaining life of three years. Depreciation is charged to cost of sales.
(ii) Since acquisition, Plank Co has sold goods to Strip Co totaling $39m. Strip Co had one quarter of
these goods in inventory at 31 December 20X8. During the year, Plank Co also sold goods to
Arch Co for $26m, all of which Arch Co h held
eld in inventory at 31 December 20X8. All of these
goods had a mark-up up on cost at 30%.
(iii) The investment income of Plank Co for the year ended 31 December 20X8 includes dividends
from Strip Co and Arch Co (see note (iv)). It also includes $5m interest receiv
receivable on a loan
made to Strip Co on 1 April 20X8 of $35m.
(iv) Strip Co paid a dividend to shareholders of $18m on 31 December 20X8. Arch Co paid a dividend
on 31 December 20X8 of $35m.
(v) In Plank Co’s consolidated statement of financial position at 31 December 2 20X7, the carrying
amount of Plank Co’s investment in Arch Co was $145,000. This was calculated using equity
accounting.
(vi) All other comprehensive income occurred after 1 April 20X8. Unless otherwise indicated, all other
items in the above statements of profi
profitt or loss and other comprehensive income are deemed to
accrue evenly over the year.

Requirements
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of Plank Co for
the year ended 31 December 20X8.
(b) Calculate the carrying amount
ount of the investment in Arch Co in the consolidated statement of financial
position of Plank Co as at 31 December 20X8.

26. Complete disposal of

shares in subsidiaries

What do you need to know to pass DipIFR?

Make sure that you are able to:
 Calculate the gain or loss on the complete disposal of shares in a subsidiary in the financial
statements of the parent and the subsidiary.
 Explain and illustrate the effect of the complete disposal of a parent’s investment in a subsidiary
in the parent’s individual financial statements and/or those of the group.

Start – The Big Picture

When dealingg with the disposal of a subsidiary entity there is a difference between the accounting
treatment in the parent’s own financial statements and that of the group.

Parent’s financial statements

The investment in the subsidiary entity will be reflected as a n
non-current
current asset and will be recognized at
fair value. When the subsidiary is sold the parent compares the sale proceeds to the carrying value and
the resulting profit or loss is recorded immediately in the SOPL.
Proceeds (what is coming into the SOFP in tthe transaction) X
Less: Carrying value derecognised (what leaves the SOFP) (X)
Profit or loss on disposal (the increase or decrease in net assets) X
Capital gains tax is calculated on this value and is the liability of the parent.

Consolidated financial st
statements
The carrying value of a subsidiary in a group SOFP comprises:
 100% of the individual
ndividual assets and liabilities of the subsidiary at the SOFP date
 Unimpaired goodwill
oodwill from the purchase by the parent
 Non-controlling
controlling interests at the SOFP date.

Therefore,
ore, the gain or loss on derecognition of a subsidiary in the consolidated financial statements is:
Proceeds (what is coming into the SOFP in the transaction) X
Less:
Individual assets and liabilities of the subsidiary at the SOFP date (X)
Goodwill remaining
ng from the purchase by the parent (X)
Non-controlling
controlling interests at the SOFP date X
Group gain or (loss) on disposal X/(X)

Example
Company J acquired 75% of the equity shares in Company Z for $40,000 three years ago. Company J
measures NCI at fair value
e at the date of acquisition. The fair value of Company Z’s NCI at the date of
acquisition was $8,000 and the fair value of its net assets was $22,000. The goodwill has not been
impaired.
Company J disposes of its entire holding in Company Z for $65,000. T
The
he fair value of Company Z’s net
assets at the date of disposal are $48,000.
Required
Calculate the profit or loss on disposal that would be recorded in:
(i) Company J’s statement of profit or loss.
(ii) J Group’s consolidated statement of profit or loss.

Solution
(i) Gain in Company J’s statement of profit or loss

Sale proceeds 65,000

Cost (45,000)

Profit on disposal 20,000

(ii) Gain in J Group’s consolidated statement of profit or loss.

$ $

Sale proceeds 65,000

Less: Carrying value of Company

Z at disposal

Net assets 48,000

Goodwill (W1) 31,000

NCI (W2) (14,500)

(64,500)

Profit on disposal 500

(W1) Goodwill

FV of consideration 45,000

FV if NCI at acquisition 8,000

FV of net asset at acquisition (22,000)

31,000

(W2) NCI at disposal date

NCI at acquisition 8,000

NCI% of post- acquisition reserves

(25% x $(48,000 – 22,000) 6,500

14,500

Subsidiary is sold it will no longer be consolidated and this gain or loss will be recorded in the
consolidated statement of profit
rofit or loss.
The subsidiary is consolidated in the group statement of profit or loss up to the point of disposal and will
not be reflected in the group statement of financial position at the year end. The subsidiary’s profit for
the year is pro-rated if the disposal occurs part way through the group’s financial year.

Example
Company J acquired 75% of the equity shares in Company Z for $40,000 three years ago. Company J
measures NCI at fair value at the date of acquisition. The fair value of Company Z’s N
NCI at the date of
acquisition was $8,000 and the fair value of its net assets was $22,000. The goodwill of $31,000 has not
been impaired.
On 31 March 20X4, Company J disposes of its entire holding in Company Z for $65,000. The fair value of
Company Z’s net assets at the date of disposal are $48,000. The gain on disposal for the group has been
calculated as $500.
The statements of profit or loss for the year ended 31 October 20X4 for Company Jand Company Zare:

Company Company Z
J

$’000 $’000

Revenue 750 328

Operating costs (420) (296)

Operating profit 330 32

Investment income 9 -

Profit before tax 339 32

Income tax expense (68) (6)

Profit for the period 271 26

Company Z paid a dividend of $10,000 on 1 January 20X4.

Prepare J Group’s consolidated statement of profit or loss for the year ended 31 October 20X4.

Solution
J Group consolidated statement of profit or loss for the year ended 31 October 20X4
$’000
Revenue $(750,000
(750,000 + (328,000 x 6/12)) 914
Operating costs $(420,000 + (296,000 x 6/12)) (568)
Operating profit 346
Investment income $(9,000 – (75% x 10,000)) 1.5
Profit on disposal 0.5
Profit before tax 348
Income tax expense $(68,000 + (6,000 x 6/12)) (71)
Profit for the period 277
Attributable to:
Equity holders of Company J (balan
(balance) 273.75
Non-controlling interest (25% x $26,000 x 6/12)) 3.25
277

27. Employability
ployability and
technology skills

Employability and technology skills

 Use computer technology to efficiently access and manipulate relevant information.
 Work on relevant response options, using a available
vailable functions and technology, as would be
required in the workplace.
 Navigate windows and computer screen to create and amend responses to exam requirements,
using the appropriate tools.
 Present data and information effectively, using the appropriate tools.
This skill is going to be demonstrated in the exam by using the software available to answer your
examination questions.
The DipIFR exam is a computer based assessment (CBE). This is to simulate the workplace and allow
you to use the technology and tools that you would in the office. You will use an electronic copy of the
exam paper and submit your answers on a specially designed spreadsheet and word processing
document.
The CBE Guidance document explains the workspace and response options used in DipIFR
Di and gives
some guidance on how to use the exam functionality to navigate through the exam and answer
questions. Please take some time to read through it.

Solutions to practice questions

Chapter 1: The International Accounting Standards Board
(IASB) and the regulatory framework
There are no practice questions in this chapter

Chapter 2: Fundamental ethical and professional principles

There are no practice questions in this chapter

Chapter 3: Revenue

Practice question 1
(i) The five steps to be
e followed are to:
1. Identify the contract(s) with the customer.
2. Identify the performance obligations the contract(s) create.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognise the revenue associated with each performance obligation as the performance obligation is
satisfied.
(ii) The IASB issued IFRS 15 Revenue because the existing criteria for revenue recognition outlined in
the previous standards are subjective. Therefore
Therefore, it was difficult to verify the accuracy of the reported
figures for revenue and associated costs.
One of the fundamental qualitative characteristics of useful financial information which is referred to in
the Conceptual Framework is faithful representation. Information needs to be verifiable to ensure it
meets this fundamental characteristic. IFRS 15 Revenue provides a more robust framework upon which
to base the revenue recognition decision, thus increasing the verifiability of the revenue figure and
hence its usefulness.

Practice question 2
Kappa has TWO performance obligations
obligations: to provide the machine and provide the servicing.
The
he total transaction price consists of a fixed element of $800,000 and a variable element of $10,000 or
$20,000.

The variable element

ement should be included in the transaction price based on the probability of its
occurrence. Therefore, a variable element of $10,000 should be included and the total transaction price
will be $810,000.
The transaction price should be allocated to the pe
performance
rformance obligations based on their stand-
stand alone fair
values. In this case, these are $700,000:$140,000 or 5:1.
Therefore $675,000 ($810,000 x 5/6) should be allocated to the obligation to supply the machine and
$135,000 ($810,000 x 1/6) to the obligation to provide two years’ servicing of the machine.
The
he obligation to supply the machine is satisfied fully in the year ended 30 September 20
20X5 and so
revenue of $675,000 in respect of this supply should be recognised.
Only 1/24 of the obligation to provide tthe
he servicing is satisfied in the year ended 30 September 20X5
20
and so revenue of $5,625 ($135,000 x 1/24) in respect of this supply should be recognised.
On 30 September 20X5, 5, Kappa will recognise a receivable of $810,000 based on the expected
transaction price.
rice. This will be reported as a current asset.
On 30 September 20X5,5, Kappa will recognise deferred income of $129,375 ($810,000 – ½ $675,000 –
$5,625). $67,500 ($129,375 x 12/23) of this amount will be shown as a current liability. The balance of
$61,875 ($129,375 – $67,500) will be non
non-current.

Practice question 3
When the customer has a right to return products, the transaction price contains a variable element.
Since this can be reliably measured, it is taken account of in measuring the revenue and the total
revenue will be $192,000 (96 x $2,000).
$200,000 (100 x $2,000) will be recognised as a trade receivable
receivable.
$8,000 ($200,000 – $192,000) will be recognised as a refund liability. This will be shown as a current
liability.
The total cost of the goods sold
old is $160,000) (100 x $1,600). Of this amount, only $153,600 (96 x
$1,600) will be shown as a cost of sale. The other $6,400 ($160,000 – $153,600) will be shown as a
right of return asset under current assets.

Chapter 4: Tangible non

non-current assets

Practice question 1
(i) IAS 1 distinguishes between current and non
non-current
current assets by identifying the meaning of the term
‘current asset’.
An asset is classified as current when the entity:
 Expects to realise the asset, or intends to sell or consume it, in its normal operating cycle.
 Holds the asset primarily for the purpose of trading.
 Expects to realise the asset within 12 months after the reporting period.

 Has cash or a cash equivalent which is not subject to an exchange restriction.

An entity classifies
ies all other assets as non
non-current.
(ii) IAS 16 defines property, plant and equipment as tangible items which are held for use in the
production or supply of goods and services, for rental to others, or for administrative purposes and are
expected to be used for more than one period.
NB: The examiner does not expect to see e
exact wordings for the marks

Practice question 2
The accounting treatment of the majority of tangible non
non-current
current assets is governed by IAS 16 –
Property, Plant and Equipment (PPE).
IAS 16 states that the accounting treatment of PPE is determined on a class by class basis. For this
purpose, property and plant would be regarded as separate classes.
IAS 16 requires that PPE is measured using either the cost model or the revaluation mod
model. This model is
applied on a class by class basis and must be applied consistently within a class.
IAS 16 states that when the revaluation model applies, surpluses are recorded in other comprehensive
income, unless they are cancelling out a deficit which has previously been reported in profit or loss, in
which case it is reported in profit or loss. 1 Where the revaluation results in a deficit, then such deficits
are reported in profit or loss, unless they are cancelling out a surplus which has previously been
reported in other comprehensive income, in which case they are reported in other comprehensive
income.
According to IAS 16, all assets having a finite useful life should be depreciated over that life. Where
property is concerned, the only depreciable element of the property is the buildings element, since land
normally has an indefinite life. The estimated useful life of a building tends to be much longer than for
plant. These two reasons together explain why the depreciation charge of a property as a percentage of
its carrying amount tends to be much lower than for plant.
Properties
roperties which are held for investment purposes are not accounted for under IAS 16, but under IAS 40
– Investment Property.
Under the principles of IAS 40, investment properties can be accounted for under a cost or a fair value
model. We apply the fair value model and thus our investment properties are revalued annually to fair
value, with any changes being reported in profit or loss.

Practice question 3
Inconsistencies
It is possible
ble for two sets of financial statement to comply with IFRS standards and yet be inconsistent
with each other. Some individual IFRS standards allow a choice of accounting treatment and some IFRS
standards are only compulsory for listed entities like Epsilo
Epsilon.

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – requires
government grants to be recognised in profit or loss on a systematic basis over the period in which the
entity recognises as expenses the related cost.
However, IAS 20 allows entities to choose from two alternative models for presenting the government
grants. These are the approach, which Epsilon uses, which deducts the grant in arriving at the non
non-
current asset’s carrying amount and will result in a reduced depr
depreciation
eciation charge through profit or loss.
The other company uses the allowed alternative of setting up the grant as deferred income and
releasing the grant systematically to profit or loss.
The net effect on profit or loss will be the same, whichever approac
approachh is used. Consistency of choice is
required within entities. Therefore, the other company could continue to use the deferred income
approach to present its government grants even after obtaining a listing.

Practice question 4
The accounting treatment of buildings to be sold is governed by IFRS 5 – Non-Current
Current Assets Held for
Sale and Discontinued Operations.
A building would be classified as held for sale if its carrying amount will be recovered principally through
a sale transaction, rather than through continuing use.
For this to be the case, the asset must be available for immediate sale in its present condition. Also
management must be committed to a plan to sell the asset and an active programme to locate a buyer
must have been initiated. Further, the asset must be actively marketed for sale at a reasonable price. In
addition, the sale should be expected to be completed within one year of the date of classification as
held for sale (although there are certain circumstances in which the one
one-year
year period can be extended).
Finally, it should be unlikely that significant changes to the plan will be made or that the plan will be
withdrawn.
Immediately prior to being classified as held for sale, assets should be stated (or re
re-stated) at their
current carrying amount under relevant International Financial Reporting Standards. Assets then
classified as held for sale should be measured at the lower of their current carrying amount and their fair
value less costs to sell. Any write down of the assets due to this p
process
rocess would be regarded as an
impairment loss and treated in accordance with IAS 36 – Impairment of Assets.
Assets classified as held for sale should be presented separately from other assets in the statement of
financial position

Chapter 5: Impairment
There
here are no practice questions in this chapter

Chapter 6: Leases

Practice question 1
The initial right of use asset and lease liability would be $3,072,500 (500,000 x 6·145).

The initial direct costs of the lessee would be added to the right of use asset to give an initial carrying
amount of $3,132,500 ($3,072,500 + $60,000).
Depreciation would be charged over a ten
ten-year
year period, so the charge for the year ended 30 September
20X7
7 would be $313,250 ($3,132,500 x 1/10).
The closing carrying amount of PPE in non-current
current assets would be $2,819,250 ($3,132,500 x 9/10).
Kappa would recognise a finance cost in profit or loss of $307,250 ($3,072,500 x 10%).
The closing lease liability would be $2,879,750 ($3,072,500 + $307,250 – $500,000).
Next year’s finance cost
ost will be $287,975 ($2,879,750 x 10%), so the current liability at 30 September
20X7 will be $212,025 ($500,000 – $287,975).
The balance of the liability of $2,667,725 ($2,879,750 – $212,025) will be non-current.
current.

Practice question 2
Because the sale of the building by Gamma satisfies the requirements in IFRS® 15 – Revenue from
Contracts with Customers – Gamma will de
de-recognise
recognise the building on 1 April 20X6.
Gamma will recognise a ‘right of use asset’ on 1 April 20X6. The right of use asset will be measur
measured as a
percentage of the previous carrying amount of $1 million which relates to the right of use retained by
Gamma. This percentage is 25·27% ($379,100/$1·5 million). This means that the carrying amount of
the right of use asset will be $252,700 ($1 mill
million x 25·27%).
The gain on sale of property to be recognised in Gamma’s statement of profit or loss is restricted to the
rights transferred to entity A. The total gain is $500,000 ($1·5m – $1m). The percentage of this gain to
be recognised is 74·73% (100% – 25·27%). This means that the gain which will be recognised will be
$373,650 ($500,000 x 74·73%).
The right of use asset will be depreciated over the lease term, which is five years. Therefore
Therefore,
depreciation of $50,540 ($252,700 x 1/5) will be charged in the statement of profit or loss.
The statement of financial position at 31 March 20X7 will show a right of use asset of $202,160
($252,700 – $50,540) under non-current
current assets.
Gamma will show a finance cost of $37,910 ($379,100 x 10%) in the statement of p
profit or loss for the
year ended 31 March 20X7.
The closing lease liability will be $317,010 ($379,100 + $37,910 – $100,000).
The amount of the overall liability which is current will be $68,299 ($100,000 – {$317,010 x 10%}). The
balance of the liability of $248,711 ($317,010 – $68,299) will be non-current.
Tutorial note: The amount of the gain on sale which is recognised by Gamma could alternatively be
computed as follows:
The total gain x (The fair value of the asset – the lease liability)/ The fair value
lue of the asset
In this case this would give: $500,000 x (($1,500,000 – $379,100)/$1,500,000) = $373,633 (difference
to above $373,650 due solely to rounding)
rounding).

Chapter 7: Intangible assets and goodwill

Practice question 1
Accounting for product design costs is governed by IAS 38 – Intangible Assets.
Under
nder IAS 38, the treatment of expenditure on intangible items depends on how it arose.
Generally internal expenditure on intangible items cannot be recognised as assets.
The exception to the above rule is that once it can be demonstrated that a development project is likely
to be technically feasible, commercially viable, overall profitable and can be adequately resourced, then
future expenditure on the project can be recognised as an intangible asset. ThiThiss explains the differing
treatment of expenditure up to 31 March 20 20X6 and expenditure after that date.

Practice question 2
Under the provisions of IAS 38 – Intangible Assets – the ability to recognise an intangible asset depends
on how the potential asset arose. From the perspective of the Omega group, brand names generated by
Omega are internally generated. The recognition criteria for such potential assets are very stringent and
only costs associated with the development phase of an identifiable research and development project
would satisfy them.
This explains why the Omega brand names are not recognised. In contrast, intangible items which relate
to an acquired subsidiary which exist at the date of acquisition are acquired as part of a business
combination
on and for such assets the recognition criteria are different.
Provided the fair value of such an intangible can be reliably measured at the date of acquisition, it is
recognised in the consolidated statement of financial position based on its fair value at the date of
acquisition.
The use of the fair value model for intangible non
non-current
current assets is restricted to those assets which are
traded in an active market. This is relatively uncommon in the case of intangibles. It is most unlikely that
brand names would be traded in such a market, so the fair value model is unlikely to be available here.

Chapter 8: Inventories and agriculture

Practice question 1
A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal.
The majority of non-biological
biological assets of an entity have an initial acquisition cost which can be computed
with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born
calf) this is often not the case.
For the vast majority of biological assets their initial measurement should be at its fair value less costs to
sell. Gains or losses arising from such initial measurement should be recognised in profit or loss.
Ass the biological asset transforms and its fair value less costs to ssell
ell changes, the carrying amount of the
asset should be updated with changes being recognised in profit or loss.

Practice question 2
There is an international financial reporting standard which is particularly applicable to entities such as
farming companies.
ies. The standard is IAS 41 – Agriculture.
IAS 41 would regard a dairy or beef herd as an example of a biological asset. A biological asset is a
living plant or animal.
Given the impracticability of measuring the cost of biological assets, IAS 41 requires that they should be
measured at each reporting date at their fair value less costs to sell, provided that fair value can be
measured reliably. Gains and losses are reported in profit or loss.
Dairy
airy and beef cows are regularly bought and sold and therefore there should be no problem in
determining their fair value which will be equivalent to market value. This would allow the calculation of
the carrying amount of the dairy and beef herd in the non
non-current
current assets of the subsidiary.
IAS 41 would regard milk and nd beef as agricultural produce. Agricultural produce is ‘harvested’ from the
biological asset. In the case of the dairy herd, the ‘harvesting’ is the milking of the cows and in the case
of the beef herd, the ‘harvesting’ is the slaughtering of the beef co
cows.
IAS 41 requires that agricultural produce be initially measured based on fair value at the point of
harvesting. This then forms the ‘cost’ for the purposes of subsequently applying IAS 2 – Inventories

Practice question 3
Under the principles of IAS 41 – Agriculture, the herd of cows will be regarded as a biological asset.
Biological assets are measured at their fair value less costs to sell.
The carrying amount of the herd at 1 April 20X4 will be $130,000 (500 x {$270 – $10}).
When the 20 cows die, $5200
5200 (20 x $260) will be credited to the herd asset and shown as an expense in
the statement of profit or loss.
When the 20 cows are purchased for $4,200 (20 x $210), the herd asset will be debited with $4,000 (20
x {$210 – $10}).
The difference of $200 ($4,200 – $4,000) between the amount paid and the amount recognised as an
asset will be shown as an expense in the statement of profit or loss.
The intermediate carrying amount of the herd before the year
year-end
end revaluation will be $128,800
($130,000 – $5,200 + $4,000).
The carrying amount of the herd at 31 March 20X5 after revaluation will be $126,400 (480 x {$265 –
$11} + 20 x {$235 – $11}).
The change in the carrying amount of the herd due to the year
year-end
end revaluation of $2,400 ($128,800 –
$126,400) will be shown as an expense in the statement of profit or loss.
Therefore the total charge to profit or loss in respect of the herd for the year ended 31 March 20X5 will
be $7,800 ($5,200 + $200 + $2,400).
The herd will be shown as a non-current
current asset in the sstatement
tatement of financial position and disclosed
separately.

The milk held by Delta at the year end will be regarded as harvested produce.
Under the principles of IAS 41, harvested produce is recognised in inventory at an initial carrying amount
of fair value
e less costs to sell at the point of harvesting.
In this case, the initially recognised amount will be $1,900 (1,000 x {$2 – $0·10}). This will be the ‘cost’
of the inventory which will henceforth be accounted for under IAS 2 – Inventories.
The inventory of milk will be shown as a current asset in the statement of financial position of Delta. The
market price of milk is not expected to decline in the near future so there is no need for a write
write-down to
net realisable value.

Chapter 9: Financial instruments

Practice question 1
(i) The loan is a financial asset which would initially be recognised at its fair value on 1 October 20
20X5.
Given the fact that Kappa normally requires a return of 10% per annum on business loans of this type,
the loan asset should be initially recognised at $661,157 ($800,000/(1·10)2
An amount of $138,843 ($800,000 – $661,157) would be charged to profit or loss at 1 October 20X5.
20
Because of the business model and the contractual cash flows, this loan asset will subsequently be
measured at amortised cost.
Therefore $66,116 ($661,157 x 10%) will be recognised as finance income in the year ended 30
September 20X6. 6. The closing loan asset $727,273 will be ($661,157 + $66,116). This will be shown as a
current asset since repayment is due on 30 September 20X7.
(ii) Since the loan is at normal commercial rates, the loan would initially be recognised at $10 million –
the amount advanced.
The interest received and receivable of $800,000 would be credited to profit or loss as finance income.
In this case, the contractual cash flows are not solely payments of principal and interest on the principal
amount outstanding. Therefore, the asset would be measured at fair value through profit or loss.
A fair value gain of $500,000 ($10·5 million – $10 million
llion would be recognised in profit or loss. The loan
asset of $10·5 million would be shown as a non
non-current asset.
(iii) The equity investment would be initially recognised at its cost of purchase – $12 million. The
contractual cash flows relating to an
n equity investment are not solely payments of principal and interest
on the principal amount outstanding. Therefore
Therefore, the asset would normally be measured at fair value
through profit or loss. This would result in a gain on remeasurement to fair value of $$1 million ($13
million – $12 million) being recognised in profit or loss.
Since the equity investment is being held for the long term, rather than as part of a trading portfolio, it
is possible to make an irrevocable election on 1 October 20
20X5 to classify the asset as fair value through
other comprehensive income. In such circumstances, the remeasurement gain of $1 million would be
recognised in other comprehensive income rather than profit or loss.

Chapter 10: Provisions

Provisions, contingent assets and liabilities

Practice question 1
Treatment of redundancy programmes
programmes:
Provisions are subject to the requirements of IAS 37 – Provisions, Contingent Assets and Contingent
Liabilities. IAS 37 states that in order for a provision to be recognised, an obligation needs to exist at the
reporting date which can be measured reliably. The costs of both phases of the redundancy programme
have been either estimated or calculated, so for both phases the potential obligation can be measured
reliably.
The reason for the different treatments
eatments of the two phases is due to whether or not an obligation exists
at the reporting date. An obligation can be legal or constructive; in this case the redundancy programme
was determined internally by the company
company, so the obligation is not a legal one.. In the case of phase of
the programme, a constructive obligation does exist at the reporting date because the details have been
announced to those affected by it, giving them a valid expectation that it will be carried through.
Therefore IAS 37 requires a provision for the costs to be included in the financial statements. As no such
obligation exists for phase 2 at the reporting date, since the announcement had not been made at that
time, neither a provision or disclosure of a contingent liability is req
required.

Practice question 2
The potential liability to pay damages to C needs to be recognised as a provision because the event
giving rise to the potential liability (the supply of faulty products) arose prior to 31 March 20
20X6, there is
a probable transfer
er of economic benefits and a reliable estimate can be made of the amount of the
probable transfer.
The amount recognised should be the best estimate of the amount required to settle the obligation at
the reporting date. In this case, this estimate is the one made on 15 May – just before the financial
statements are authorised for issue. Therefore a provision of $5·25 million should be recognised as a
current liability. There should also be a charge of $5·25 million to profit or loss. The potential amount
receivable from S is a contingent asset as it arose from an event prior to the year-end
year but at the date
the financial statements are authorised for issue, the ultimate outcome is uncertain. Contingent assets
are not recognised as assets in the statement of financial position. Their existence and estimated
financial effect is disclosed where the future receipt of economic benefits is probable. This is the
situation here.

Chapter 11: Employee benefits

There are no practice questions in this chapter

Chapter 12: Taxation

Practice question 1
The tax base of an asset is the amount which will be deductible for tax purposes against any taxable
economic benefits which will flow to the entity when it recovers the carrying amount of the asset. If
those economic benefits
efits will not be taxable, the tax base of the asset is equal to its carrying amount.
Where an asset is purchased for $250,000 and has already received a tax deduction of $100,000, then
the future tax deduction which is available will be $150,000 ($250,00
($250,000 – $100,000). The tax base of the
asset is $150,000. The interest receivable will generate a taxable economic benefit of $60,000 when it
is received in the following period. There is no related tax deduction against this taxable benefit so the
tax base of this asset is nil.
(ii) The tax base of a liability is its carrying amount, less any amount which will be deductible for tax
purposes in respect of that liability in future periods. In the case of revenue which is received in
advance, the tax base of the e resulting liability is its carrying amount, less any amount of the revenue
which will not be taxable in future periods. For a trade payable which relates to a purchase which has
already been fully deducted for tax purposes, there will be no further dedu deduction
ction when the payable is
settled. Therefore, in this case the tax base of the liability is $120,000. For an accrual of $40,000 which
relates to an expense which will qualify for a tax deduction only when the liability is settled, the tax base
is nil ($40,000 – $40,000).

(b) Deferred tax liability at 31 March 20X6

Component Explanation/working Amount
$’000
Investment property Carrying value is $38 million. Tax base is $30 million.
Taxable temporary difference is $8 million. 1,600
Investment in Lambda Carrying value is $75 million. Tax base is $45 million.
Taxable temporary difference is $30 million.
Head office property Carrying value is $45 million. Tax base is $20·75 million
($22 million – $1·25 million). 4,850
12,450

Deferred tax charge/(credit)

credit) to profit or loss for the year ended 31 March 20X6

Component Explanation/working Amount

$’000
Investment property Opening deferred tax liability is $1 million (20% x {$35
million – $30 million}). Fair value changes are recognised
in profit or los
loss.
s. Tax charge is the difference between the
closing and opening liability. 600
Investment in Lambda Opening deferred tax liability is $5 million (20% x {$70
million – $45 million}). Share of profits under the equity
method is recognised in profit or loss
loss.. Tax charge is the
difference between the closing and opening liability 1,000
Head office property See working below (150)
1,450

Deferred tax charge/(credit) to other comprehensive income for the year ended 31 March
20X6
Component Explanation/wor
Explanation/working Amount
$’000
Head office property See working below 1,400

Chapter 13: The effects of changes in foreign currency

exchange rates
There are no practice questions in this chapter.

Chapter 14: Share- based payments

Practice question 1
IFRS 2 – Share based Payments – requires that equity settled share
share- based payments should be
measured based on their fair value at the grant date, based on the number of options expected to vest
based on estimates at the reporting date.
The cost should be spreadead over the vesting period – three years in this case. This means that the charge
to profit or loss in the year ended 31 March 20
20X55 will be $740,000 (1,850 x 1,000 x $1·20 x 1/3).
The credit entry will be to equity, probably to an option reserve. Based o on
n the original arrangements,
the cumulative balance in equity on 31 March 20 20X66 will be $1,472,000 (1,840 x 1,000 x $1·20 x 2/3).
The impact of the repricing on 30 September 20 20X55 is to charge the incremental increase in fair value
over the remaining vesting g period on the same basis as the original charge. Therefore
Therefore, the additional
credit to equity in respect of the repricing will be $92,000 (1,840 x 1,000 x {$1·05 – $0·90} x 6/18).
This means the closing balance in equity will be $1,564,000 ($1,472,000 + $9 $92,000).
2,000). The charge to
profit or loss in the year ended 31 March 2020X6 will be $824,000 ($1,564,000 – $740,000). This will be
shown as an employment expense under operating costs.

Practice question 2
In accordance with IFRS 2 – Share Based Payments – this cash settled share- based payment
arrangement should be measured using the fair value of an option on the reporting date, with a debit to
profit or loss and a corresponding credit to liabilities.
The liability should be built up over the vesting period base
basedd on the estimated number of rights
ultimately estimated to vest.

The liability at 30 September 20X5 5 would have been $26,250 [1/3 (250 x 90 x $3·50)]. The liability at 30
September 20X6 6 would have increased to $52,800 [2/3 (250 x 88 x $3·60]. This will be shown as a non-
current liability. The increase in the liability over the year of $26,550 ($52,800 – $26,250) will be shown
as an expense in profit or loss for the year ended 30 September 20 20X6.

Chapter 15: Exploration and evaluation expenditures

Practice question 1
Exploration and evaluation assets IFRS 6 – Exploration for and Evaluation of Mineral Resources –
specifies financial reporting in this area. IFRS 6 does not specifically prescribe what expenditures should
be included as exploration and evaluat
evaluation
ion assets. Relevant entities are allowed to determine an
accounting policy which specifies which expenditures should be included as exploration and evaluation
assets and must apply it consistently.
IFRS 6 states that, in making this determination, entiti
entities
es should consider the degree to which the
expenditure can be associated with finding the specific mineral resources it is seeking. Therefore it is
quite possible that two entities in fairly similar sectors might make a different assessment of their
accounting
ting policies given very specific criteria which might apply to one entity or another. IFRS 6 does,
however, specifically prohibit the inclusion of the costs of developing mineral resource in the exploration
and evaluation assets figure. Such expenditures should be accounted for in accordance with IAS 38 –
Intangible Assets. IFRS 6 allows exploration and evaluation assets to be measured under either the cost
model or the revaluation model.

Chapter 16: Fair value

There are no practice questions in this cha
chapter.

Chapter 17: Presentation of the statement of financial position

and statement of profit or loss and other comprehensive
income and the statement of changes in equity

Practice question 1
The accounting treatment of buildings to be sold is governed b
by IFRS 5 – Non-Current
Current Assets Held for
Sale and Discontinued Operations.
A building would be classified as held for sale if its carrying amount will be recovered principally through
a sale transaction, rather than through continuing use. For this to be the case, the asset must be
available for immediate sale in its present condition. Also
Also, management must be committed to a plan to
sell the asset and an active programme to locate a buyer must have been initiated. Further, the asset
must be actively marketed for sale at a reasonable price. In addition, the sale should be expected to be

completed within one year of the date of classification as held for sale (although there are certain
circumstances in which the one-year
year period can be extended). Finally, it should
uld be unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
Immediately prior to being classified as held for sale, assets should be stated (or re
re-stated) at their
current carrying amount under relevant Internation
International
al Financial Reporting Standards. Assets then
classified as held for sale should be measured at the lower of their current carrying amount and their fair
value less costs to sell. Any write down of the assets due to this process would be regarded asan
impairment
irment loss and treated in accordance with IAS 36 – Impairment of Assets. Assets classified as held
for sale should be presented separately from other assets in the statement of financial position
position.

Chapter 18:: Earnings per share

There are no practice questions
tions in this chapter.

Chapter 19: Events after the reporting period

Practice question 1
Doubts regarding the going concern status of a customer would normally be regarded as prima facie
evidence that any trade receivable had suffered impairment. In such circumstances an impairment
allowance equal to the expected losses would normally be appropriate.
However, IFRS 9 Financial Instruments requires the impairment assessment to be made at the reporting
date.
At the reporting date, the going concern status o
off Z was not in doubt, so in this case no allowance is
necessary.
However, the information about the decline in the going concern status of Z after the reporting date is a
non-adjusting
adjusting event after the reporting date. Therefore whilst no impairment allowa
allowance is necessary, it
will be necessary to disclose details of the 20 April event at Z’s business premises and its impact on the
collectability of Delta’s trade receivable.

Chapter 20: Accounting policies, changes in accounting

estimates and errors

Practice question 1
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – defines an accounting policy
as ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements’.

An example of an accounting policy would be the decision to apply the cost model or the fair value
model when measuring investment properties.
When an entity changes an accounting policy, the change is applied retrospectively. This means that the
comparative
arative figures are based on the new policy (rather than last year’s actual figures). The opening
balance of retained earnings is restated in the statement of changes in equity.
Accounting estimates are made in order to implement accounting policies. An eexample
xample of an accounting
estimate would be (consistent with the above given example) the fair value of an investment property at
the reporting date (where the fair value model was being applied).
Changes in accounting estimates are made prospectively. This means applying the new estimates in
future financial statement preparation, without amending any previously published amounts.

Chapter 21: Related party transactions and operating

segments

Practice question 1
Query 1
The reason disclosure of this transa
transaction
ction is necessary is because entity X is a related party of Omega.
Related parties are generally characterised by the presence of control or influence between the two
parties.
IAS 24 – Related Party Disclosures – identifies related parties as, inter alia,, key management personnel
and companies controlled by key management personnel. On this basis, entity X is a related party of
Omega. Where related party relationships exist, IAS 24 requires the disclosure of the existence of the
relationship where the related
ated party controls the reporting entity. This is not the case here, so in the
absence of transactions disclosure would not be required. Where transactions occur with related parties,
IAS 24 requires that details of the transactions are disclosed in a note to the financial statements. This is
required even if the transactions are carried out on a normal arm’s length basis. Transactions with
related parties are material by their nature, so the fact that the transaction may be numerically
insignificant to Omega
ga does not affect the need for disclosure.
Query 2
Where two companies report under the same reporting framework, you would generally expect the
same reporting requirements to apply to both companies. However, there are certain requirements of
IFRS which apply to listed companies only
only. The requirement to provide segmental information and to
disclose earnings per share are both examples of requirements which only listed companies are forced to
comply with. If an unlisted entity voluntarily chooses to provi
provide
de segmental information, or to disclose its
earnings per share, then it must comply with the provisions of the relevant IFRS in both cases.

Chapter 22: Reporting requirements of small and medium -

sized entities (SMEs)
There are no practice questions in this chapter.

Chapter 23: Preparation of group consolidated external

reports: the statement of financial position

Practice question 1
(a) Runner Co consolidated statement of financial position as at 31 March 20X5

$’000 $’000
Assets
Non-current assets 509,500
Property plant and equipment (455,800 + 44,700+ 12,500
9,000 (w1))
Investment 20,446
Goodwill (w2) 542,446

Current assets
Inventory (22,000 + 16,000 – 720 (w4)) 37,280
Trade receivables (35,300 + 9,000 – 3,000 – 3,400) 37,900
Bank (2,800 + 1,500 + 3,000) 7,300 82,480
Total assets 624,926

Equity and liabilities

Equity attributable to the owners of the parent
Equity shares of $1 each 202,500
Retained earnings (w5) 290,950
493,450
Non-controlling interest (w3) 14,476
Total equity 507,926

Current liabilities (81,800 + 17,600 – 3,400) 96,000

Deferred consideration (19,446 + 1,554)
21,000 117,000
Total equity and liabilities 624,926

Workings

(1) Net assets of Jogger Co

Year-end Acquisition Post-
$’000 $’000 acquisition
$’000
Share capitaL 25,000 25,000 0
Retained earnings 28,600 19,500 9,100
Fair value adjustment 9,000 10,000 (1,000)
Unrealised profit (720) 0 (720)
61,880 54,500 7,380

(2) Goodwill in Jogger Co

$’000 $’000
Cost of investment: Cash 42,500
Deferred consideration (21,000 x 19,446 61,946
0·926)
Non-controlling interest 13,000
74,946
Less: Net assets acquired (w1) (54,500)
Goodwill 20,446

(3) Non-controlling interest

$’000
NCI at acquisition 13,000
NCI share of post-acquisition
acquisition reserves (7,380 x 20%) 1,476

(4) Intercompany transaction

$’000
Inventory held at year end 4,800
Unrealised profit (4,800 x 15%) 720

(5) Retained earnings

$’000
Runner Co 286,600
Runner Co’s share of Jogger Co’s post
post-acquisition RE (7,380 (w1) x 80%) 5,904
Unwinding discount on deferred consideration (21,000 – 19,446 (w1)) (1,554)
290,950

(b) Runner Co has significant influence over Walker Co, o, therefore Walker Co should be treated as an
associate in the consolidated financial statements, using equity method.
(c) In the consolidated statement of financial position, the interest in the associate should be presented
as ‘investment in associate’ as a single line under non
non-currentt assets. The associate should initially
be recognised at cost and subsequently adjusted each period for the parent’s share of the post
post-
acquisition change in net assets (retained earnings). This figure should be reviewed for impairment
at each year end which
ch given the fall in value of the investment due to the loss would be most likely.

Calculation:

$’000
Cost of investment 13,000
Share of post-acquisition
acquisition change in net assets ((30,000 x 30%) = 9,000) (9,000)
4,000

Chapter 24: Preparation of grou

group
p consolidated statement of
profit or loss and other comprehensive income
There are no practice questions in this chapter.

Chapter 25: Business combinations – associates and joint

arrangements

Practice question 1
Dargent Co – Consolidated statement of fi
financial
nancial position as at 31 March 20X6

$’000 $’000
Assets
Non-current assets:
Property, plant and equipment (75,200 + 31,500 + 4,000 110,500
re mine – 200 depreciation)
Goodwill (w (i)) 11,000
Investment in associate (4,500 + 1,200 (w (iii
(iii))) 5,700
Current assets 127,200
Inventory (19,400 + 18,800 + 700 GIT – 800 URP (w (ii))) 38,100
Trade receivables (14,700 + 12,500 – 3,000 intra group) 24,200
Trade receivables (14,700 + 12,500 – 3,000 intra group) 24,200
Bank (1,200 + 600) 1,800 64,100
Total assets 191,300

Equity and liabilities

Equity attributable to owners of the parent

Equity shares of $1 each (50,000 + 10,000 ((w (i)) 60,000

Other equity reserves (share premium) (w (i)) 22,000
Retained earnings (w (iii)) 37,390 59,390
119,390
Non-controlling interest (w (iv)) 9,430
Total equity 128,820
Non-current liabilities
8% loan notes (5,000 + 15,000 consideration) 20,000
Accrued loan interest (w (iii)) 300
Environmental provision (4,000 + 80 interest (w (iii))) 4,080 24,380
Current liabilities (24,000 + 16,400 – (3,000 – 700 GIT) 38,100
intra group (w (ii)))
Total equity and liabilities 191,300

Workings (figures in brackets are in $’000)

(i) Goodwill in Latree Co

$’000 $’000
Controlling interest
Share exchange (20,000 x 75% x 2/3 = 10,000 x $3·20) 32,000
8% loan notes (20,000 x 75% x $1000/1,000) 15,000
Non-controlling
controlling interest (20,000 x 25% x $1·80) 9,000
56,000
Equity shares 20,000
Retained earnings at 1 April 2015 19,000
Earnings 1 April 2015 to acquisition (8,000 x 9/12) 6,000
Fair value adjustments – asset re mine 4,000
– provision re mine (4,000) (45,000)
Goodwill arising on acquisition 11,000

The
he share exchange of $32 million would be recorded as share capital of $10 million (10,000 x $1) and
share premium of $22 million (10,000 x ($3·20 – $1·00)).
Applying the group policy to the environmental provision would mean adding $4 million to the carr carrying
amount of the mine and the same amount recorded as a provision at the date of acquisition. This has no
overall effect on goodwill, but it does affect the consolidated statement of financial position and post
post-
acquisition profit.

(ii) The inventory of Latree Co includes unrealised profit (URP) of $600,000 (2,100 x 40/140). Similarly,
the goods-in-transit
transit sale of $700,000 million includes URP of $200,000 (700 x 40/140).

(iii) Consolidated retained earnings:

$’000
Dargent Co’s retained earnings 36,000
Latree Co’s post-acquisition
acquisition profit (1,720 x 75% see below) 1,290
Unrecorded share of Amery’s retained profit ((6,000 – 2,000) x 30%) 1,200
Outstanding loan interest at 31 March 2016 (15,000 x 8% x 3/12) (300)
URP in inventory (w (ii)) (800)
37,390

(iv) Non-controlling interest

$’000
Fair value on acquisition (w (i)) 9,000
Post-acquisition
acquisition profit (1,720 x 25% (w (iv))) 430
9,430

Practice question 2

(a)

Consolidated statement of profit or loss and other comprehensive income for the year
ended 31 December 20X8

$000
Revenue 705,000 + (9/12 x 218,000) - 829,500
39,000
Cost of sales Working 1 (346,000)
Gross profit 483,500
Distribution costs 58,000 + (9/12 x 16,000) (70,000)
Administrative expenses 92,000 + (9/12 x 28,000) (113,000)
Investment income: Share of 30,300
profit of associate
Other income 46,000 + (9/12 x 2,000) - 14,950
5,000 - 12,250 - 15,300
Finance costs 12,000 + (9/12 x 14,000) - (17,500)
5,000
Profit before tax 328,250
Income tax expense 51,500 + (9/12 x 15,000) (62,750)
Profit for the year 265,500

Other comprehensive income:

Gain on revaluation of land 2,800 + 3,000 5,800

Total comprehensive income
for the year 271,300
Profit attributable to Parent 258,375
Profit attributable to NCI 7,125
265,500
Total comprehensive income 263,725
attributable to Parent
Total comprehensive income
attributable to NCI 7,575
271,300

Workings

W1) Cost of Sales

Plank Co 320,000

Strip Co 81,000 x 9/12 60,750

Intercompany purchases (39,000)

Additional depreciation on $8 million / 3 years x 9/12 2,000
plant
Unrealised profit adjustment Plank to Strip $39million x 1/4 x 30/130 2,250
346,000

W2) Income from associate

Share of profit after tax $92.57m x 35% 32,400

Unrealised profit Plank to Arch $26m x 35% x 30/130 2,100
30,300

W3) Share of profit/total comprehensive income to parent and NCI

Strip post acquisition profit 9/12 x 66,000 49,500

Less: Additional depreciation on machinery (2,000)
47,500
x 15% 7,125
Profit as above 7,125
Other comprehensive income 3000 x 15% 450
7,575

(b)

Investment in Associate $000

Carrying amount of investment at 31 145,000

December 20X7
Share of post-acquisition profits $92.57 million x 35% (W2) 32,400
Dividends paid $35 million x 35% (SOPL) (12,250)
Unrealised profit adjustment $26 million x 30/130 x 35% (W2) (2,100)
Carrying amount at 31 December 163,050
20X8

Chapter 26: Complete disposal of shares in subsidiaries

There are no practice questions in this chapter.

Chapter 27: Employability and technology skills

There are no practice questions in this chapter.

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