the international accounting standards board (iasb

One-page summary of each IFRS (For financial reporting), 2017. Compiled by Usidamen Israel (08022747678)

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TABLE OF CONTENT

IASB Conceptual Framework……………………………………………………………………………………………………2

IASB proposed revision to the Conceptual Framework…………………………………………………………….3

Differences between the existing and proposed Conceptual Framework…………………………………4

IAS 1: Presentation of financial statements………………………………………………………………………………5

IAS 2: Inventories……………………………………………………………………………………………………………………..6

IAS 7: Statement of cash flows………………………………………………………………………………………………….7

IAS 8: Accounting policies, changes in accounting estimates and errors……………………………………8

IAS 10: Events after the reporting period………………………………………………………………………………….9

IAS 12: Income taxes…………………………………………………………………………………………………………………10

IAS 16: Property, plant and equipment……………………………………………………………………………………..11

IAS 17: Leases……………………………………………………………………………………………………………………………12

IFRS 16: Leases………………………………………………………………………………………………………………………….13

Differences between IAS 17 and IFRS 16…………………………………………………………………………………..14

IAS 18: Revenue………………………………………………………………………………………………………………………..15

IFRS 15………………………………………………………………………………………………………………………………………16

Differences between IAS 18 (existing revenue recognition IFRSs and IFRS 15)…………………………..17

IAS 20: Accounting for government grants and disclosure of government assistance……………....18

IAS 23: Borrowing costs…………………………………………………………………………………………………………….19

IAS 24: Related parties……………………………………………………………………………………………………………...20

IAS 27: Separate financial statements……………………………………………………………………………………….21

IAS 28: Investment in associates and joint venture……………………………………………………………………22

IAS 32: Financial instruments: Presentation………………………………………………………………………………23

IAS 33: Earnings per share…………………………………………………………………………………………………………24

IAS 36: Impairment of assets…………………………………………………………………………………………………….25

IAS 37: Provisions, contingent liabilities and contingent assets…………………………………………………26

IAS 38: Intangible assets…………………………………………………………………………………………………………..27

IAS 39: Financial instruments: Recognition and measurement…………………………………………………28

IFRS 9: Financial instruments…………………………………………………………………………………………………..29

Differences between IAS 39 and IFRS 9……………………………………………………………………………………30

IAS 40: Investment property……………………………………………………………………………………………………31

IFRS 3: Business combinations…………………………………………………………………………………………………32

IFRS 5: Non-current assets held for sale and discontinued operations…………………………………….33

IFRS 7: Financial instruments: Disclosures……………………………………………………………………………….34

IFRS 8: Operating segments…………………………………………………………………………………………………….35

IFRS 10: Consolidated financial statements…………………………………………………………………………….36


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THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) CONCEPTUAL FRAMEWORK

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

PURPOSE AND STATUS

a.) To assist the IASB in the development of future IFRSs and in its review of existing IFRSs;

b.) To assist national standard-setting bodies in developing national standards;

c.) To assist auditors in forming an opinion on whether financial statements (FSs) comply with IFRSs;

d.) To assist preparers of FSs in applying IFRSs & in dealing with topics yet to be covered by any IFRS;

e.) To provide those who are interested in the work of the IASB with information about its approach to the formulation of

IFRSs.

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

The objective of GPFR is to provide financial information about the reporting entity that is useful to existing and potential

investors, lenders and other creditors in making decisions about providing resources to the entity.

Content of GPFR

GPFR contains the entity’s economic resources (assets), claims against the entity (liability) & changes in resources & claims

(changes in financial position). In brief, this content represents the entity’s financial position & financial performance.

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

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

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

Fundamental qualitative characteristics

I. Relevance: relevant financial information is capable of making a difference in the decisions made by users.

Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value

or both. Materiality is an entity specific aspect of relevance, no need to state it as a separate concept.

II. Faithful representation: for a financial information to have this trait it must be complete, neutral and free from

error. Substance over form is subsumed in faithful representation, no need to state it as a separate concept.

Enhancing qualitative characteristics

a. Comparability: allows users make proper comparison by ensuring the information is consistent with each other.

Consistency is required to achieve comparability, but is not the same as comparability.

b. Verifiability: an information verified by independent & knowledgeable observers have higher quality. A financial

information would be of high quality if independent and knowledgeable observers would draw same/almost

same conclusion on it.

c. Understandability: FI must be presented in an understandable manner. In order to achieve understandability,

financial information should not exclude complex phenomena because an expert may be hired by the user for

that purpose.

d. Timeliness: the financial information should be issued at the time when it is of utmost importance to users.

Cost constraints on financial reporting

All parties (from preparers to users) involved in financial reporting incur considerable costs. These costs are taken into

account in developing IFRSs as the IASB brings preparers of FS, auditors, etc. into the standard setting process.

CHAPTER 4: THE REMAINING TEXT: THE IASC FRAMEWORK FOR PREPARATION & PRESENTATION OF FS.

Underlying assumption: FSs shall be prepared on the going concern basis

Elements of FSs are assets, liabilities, equity, income and expenses.

Recognition: an element shall be recognised in the FSs if it meets the definition of an element and:

I. It is probable that economic benefits would flow in or out of the entity

II. It is capable of being reliably measured.

Measurement base may be at: historical cost, current value, realisable (or settlement value) & present value

Concept of capital and capital maintenance: this is broken down into physical and financial capital maintenance.

The physical capital maintenance (CM) uses operating capacity as an entity’s capital and a change in operating

capacity represents either profit or loss while the financial regards net asset as the capital and a change in net assets

represents either profit or loss.


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IASB PROPOSED REVISION TO THE CONCEPTUAL FRAMEWORK

In May 2015, the IASB released an exposure draft that proposes revisions to its conceptual framework for financial reporting.

The proposed Framework has eight (8) chapters as follows:

CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

This includes new guidance on stewardship and primary users of FSs. It states that information about how management has

discharged its stewardship responsibilities are useful to the users. It also emphasizes that the terms users and primary users

refer to existing and potential investors, lenders and other creditors who must rely on GPFR for much of the financial

information they need.

CHAPTER 2: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION This chapter adds a discussion on measurement uncertainty, emphasizes that neutrality is supported by the exercise of

prudence. Prudence is the exercise of caution when making judgment under conditions of uncertainty & that faithful

representation involves applying the substance of a transaction over its legal form.

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

This chapter indicates that FSs are prepared from the perspective of the entity as a whole and not the user. This chapter

talks about going concern assumptions. It also states that a reporting entity is an entity that chooses, or required to

prepare general purpose FSs. The following can be used to determine the boundary of a RE:

Direct control only, in which case the parent reports only on its own assets & liabilities (unconsolidated FS).

Both direct and indirect in which case the reporting entity reports both its own assets and liabilities and those of its

subsidiaries (Consolidated financial statements).

CHAPTER 4: ELEMENTS OF FINANCIAL STATEMENTS

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

CHAPTER 5: RECOGNITION AND DERECOGNITION

This defines recognition as the process of capturing, for inclusion in the SFP or the statement(s) of financial performance,

an item that meets definition of an element. It also stipulates recognition criteria (see next page).

This chapter also explains derecognition as the removal of all or part of a previously recognised asset or liability from an

entity’s SFP. Derecognition is not appropriate when an entity has retained control of an economic resource. It also indicates

that an entity’s exposure to positive or negative variations in the economic benefits produced by an economic resource may

indicate retention of control.

CHAPTER 6: MEASURMENT

This defines measurement as the process of quantifying, in monetary terms, information about an entity’s assets, liabilities,

equity, income and expenses. It describes 2 measurement bases: historical costs and current value.

CHAPTER 7: PRESENTATION AND DISCLOSURE

This chapter discusses what information is included in FSs and how that information should be presented and disclosed. The

chapter also includes guidance on reporting financial performance, including the use of OCI.

CHAPTER 8: THE CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

This consist of minor changes from the existing Framework. In line with the existing Framework, there are two concepts of

capital maintenance: physical and financial capital maintenance which is same with the proposed conceptual framework.

NB: The above framework is yet to be published as at the time of this write-up.


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DIFFERENCES BETWEEN THE EXISTING CONCEPTUAL FRAMEWORK (CF) AND THE PROPOSED CF

Areas of differences Existing IASB CF Proposed IASB CF

The concept of a

reporting entity

The guidance on reporting entity is yet to

be added in chapter 2

Chapter 3 defines what a reporting entity is and

what can be used to determine the boundary.

Definition of an asset An asset is a resource controlled by the

entity as a result of past events and from

which future economic benefits are

expected to flow to the entity.

An asset is a present economic resource

controlled by the entity as a result of past

events. An economic resource is a right that

has the potential to produce economic

benefits.

Definition of a

liability

A liability is a present obligation of the

entity arising from past events, the

settlement of which is expected to result

in an outflow from the entity of resources

embodying economic benefits.

A liability is a present obligation of the entity

to transfer an economic resource as a result of

past event.

Recognition criteria An element shall be recognised in the FSs

if it meets the definition of an element

and:

a) It is probable that economic benefits

would flow in or out of the entity;

b) It is capable of being reliably

measured.

An entity would recognise an asset or a liability

if such recognition provides financial

statements users with:

a) Relevant information about the asset or

the liability and about any income,

expenses or changes in equity.

b) A faithful representation of the asset or the

liability and of any income, expenses or

changes in equity.

c) Information that results in benefits

exceeding the cost of providing that

information.

Derecognition There is very little guidance about

derecognition of assets or liability from

the SFP

Defines derecognition and stipulates indicators

that an entity may not derecognise an item.

Measurement Identifies four (4) measurement bases:

a) Historical costs

b) Current value

c) Realisable (settlement) value

d) Present value

Identifies to (2) measurement bases:

a) Historical costs &

b) Current value

Other

comprehensive

income

Limited guidance on comprehensive

income (CI)and other comprehensive

income (OCI)

Extensive guidance on CI and OCI.

SIMILARITIES

Areas of similarities Brief explanation

Objective of general purpose

financial reporting

GPFR is still aimed at providing useful information to the users of financial

statements.

Qualitative characteristics of

useful financial information

Both classifies this as fundamental and enhancing although additional

guidance was included in the proposed CF but no change to the classification.

Definitions of income, expenses

and equity

The definitions of income, expenses and equity remained same.

Concept of capital and capital

maintenance

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


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IAS 1: PRESENTATION OF FINANCIAL STATEMENTS (FSs)

This IFRS prescribes the structure, content of financial statements in order to achieve comparability. It breaks down the

structure content into general content and specific content.

GENERAL FEATURES OF FINANCIAL STATEMENTS 1. Fair presentation and compliance with IFRS: this requires that a financial statement in line with IFRS shall show a

true and fair view (TFV). TFV can be achieved by complying with all applicable IFRSs. 2. Going concern (GC): prepare FSs on going concern basis or break-up basis if GC assumption is not appropriate.

3. Accrual basis: prepare FSs on accrual basis except for cash flow information.

4. Materiality & aggregation: aggregation is prohibited for material items, if material, disclose separately.

5. Consistency of presentation: presentation method shall be consistent from year to the other.

6. Frequency of reporting: FSs shall be presented covering a 12-month period (i.e. a year).

7. Offsetting: do not offset income and expenses, assets and liabilities except if required by another IFRS.

SPECIFIC FEATURES OF FINANCIAL STATEMENTS

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

Identification of financial statements

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

a) Name of the reporting entity

b) Period covered

c) Whether it is an individual FS or a consolidated FS

d) Level of rounding

e) Presentation currency

Content of a complete set of financial statements

a) a statement of financial position (SFP) as at the end of the period;

b) a statement of profit or loss and other comprehensive income (SPLOCI) for the period;

c) a statement of changes in equity for the period;

d) a statement of cash flows for the period;

e) notes, comprising significant accounting policies and other explanatory information;

f) comparative information in respect of the preceding period

g) a third statement of financial position (SFP) as at the beginning of the preceding period when an entity applies an

accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when

it reclassifies items in its financial statements.

The SFP distinguishes assets and liabilities into current and non-current with the aid of the definition of current assets

and liabilities as stipulated in IAS 1. IAS 1 also provides a minimum disclosure to be presented on the face if the SFP or

notes.

SPLOCI: IAS 1 stipulates information to be presented in the SPLOCI. SPLOCI can be presented either by combining

profit or loss and OCI under one statement or presenting profit or loss under a separate statement from OCI. IAS

1 also stipulates that profit or loss may be presented either by nature or by function. A presentation by nature shows

the “raw” source of the expense while by function shows the role played by the expense to the entity as distribution,

administrative expenses etc.

Statement of changes equity: for each component of equity this shows a reconciliation between the balance and the

balance at the end of the reporting period. It also shows the effect of retrospective adjustment on equity (usually

retained earnings).

Statement of cash flows: see IAS 7

Notes to the financial statements: this provides the basis on which the FSs were prepared, selected and applied

accounting policies, any information not provided elsewhere in the FSs and any additional information required for

understanding the FSs.

OFF THE RECORD!! Chapter 1 of the conceptual framework on objective of general purpose financial

reporting represents the major source from which the content of financial

statements were extracted.


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IAS 2: INVENTORIES

Inventories are held for sale in the ordinary course of business, in the process of production for such sales or materials to

be consumed in the production process or in rendering of services. The major issue dealt with in this IFRS is the measurement

of inventories.

MEASUREMENT OF INVENTORIES

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

COST

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the

inventories to their present location and condition.

Cost of purchase: purchase price, import duties, non-refundable taxes, transport/handling costs less trade discounts

and rebates.

Conversion costs: costs directly related to unit of production plus fixed and variable production overheads.

Other cost: costs incurred in the process of bringing the inventory to its present location and condition e.g. non-

production overheads/costs of designing products for specific customers in the cost of inventories.

Costs excluded from the cost of inventories

a) abnormal amounts of wasted materials, labour or other production costs;

b) storage costs, unless those costs are necessary in the production process before a further production stage;

c) selling costs.

Techniques for measurement of costs

This includes standard cost method which takes into consideration normal activity level and the retail method which

is used in the retail industry for large quantity of inventory. Standard cost is reviewed on a regular basis.

Cost formulas

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for

specific projects shall be assigned by using specific identification of their individual costs.

The cost of other inventories shall be assigned using First-in-first-out (FIFO) or weighted average cost (WAVCO) formular.

LIFO is not permitted by the revised IAS 2! A uniform formular should be used for inventory that are similar in nature and

use while a different formular may be justified dissimilar inventories.

NET REALISABLE VALUE

This is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated

costs necessary to make the sale. To avoid carrying inventories at a value greater than the value that would be recovered

from selling the inventory, an entity may need to write down its inventories to NRV.

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

RECOGNITION OF EXPENSE

a) Inventories shall be recognised as expense when the related revenue is earned.

b) The amount of any write-down of inventories to NRV shall be recognised as an expense

c) Reversal of any write-down arising from increase in NRV shall be recognised as a reduction in cost of sales.

d) Inventories that serve as a component of other assets (e.g. property, plant and equipment) are recognised as an

expense over the assets useful life.

COST OF A SERVICE PROVIDER (This guidance has been deleted from IAS 2 and moved to IFRS 15 par 95-98)

[Effective prior to 1 January 2018.] To the extent that service providers have inventories, they measure them at the costs of

their production. These costs consist primarily of the labour and other directly engaged in providing the service, including

supervisory personnel, and attributable overheads. Labour and other costs relating to sales and general administrative

personnel are not included but are recognised as expenses in the period in which they are incurred. The cost of inventories

of a service provider does not include profit margins or non-attributable overheads that are often factored into prices

charged by service providers.


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IAS 7: STATEMENT OF CASH FLOWS

This IFRS talks about the principle behind the preparation and presentation of statement of cash flows (SCF). SCF shows the

historic changes in cash and cash equivalents.

THE CONCEPT OF CASH AND CASH EQUIVALENTS

Cash means cash in hand and at bank. This does not include cash which the entity has restricted access to.

Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and

are subject to insignificant risk of changes in value. Such an investment must be held to meet short-term (or working

capital) commitment and maturity date should normally be within 3-months from its acquisition date.

The idea is to identify items that form the entity’s cash management policies and practices.

PRESENTATION OF STATEMENT OF CASH FLOWS

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

Operating activities: this relates to the principal revenue producing activities of the entity. This is a key indicator of

the extent to which the entity’s operations have generated sufficient cash to repay loans, pay dividends and make

new investments without recourse to external sources of finance. Use either the direct method of presentation or

the indirect method.

Investing activities: this relates to acquisition and disposal of long-term assets. These represent the extent to which

expenditures have been made for resources intended to generate future income and cash flows. Only expenditures

that result in a recognised asset in the statement of financial position are eligible for classification as investing

activities.

Financing activities: these relates to changes in the size and composition of borrowings and contributed equity. It is

useful in predicting claims on future cash flows by providers of capital to the entity

INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid shall be disclosed separately. Interest paid, dividends and interest

received may be classified as either operating, investing or financing cash flows while dividend paid may be classified as

either operating or financing cash flows.

TAXES ON INCOME

Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating

activities unless they can be specifically identified with financing and investing activities.

NON-CASH TRANSACTIONS (NCT)

NCT shall be excluded from the SCF. Examples of NCT includes: acquisition of an entity by issue of shares, acquisition of an

asset by means of finance lease, & conversion of debt to equity.

BENEFITS OF CASH FLOW INFORMATION

a) It helps users evaluate the changes in an entity’s net assets and financial structure.

b) It helps users in assessing the entity’s ability to adapt to changes circumstances and opportunities.

c) It is useful in assessing the entity’s ability to generate cash and cash equivalents

d) Helps in developing models to assess/compare the present value of future cash flows of different entities

e) By eliminating accrual accounting, it aids in comparability of the operating performance of different entities.

COMPONENTS OF CASH AND CASH EQUIVALENTS

The components of cash and cash equivalents should be disclosed and a reconciliation should be presented showing the

amounts in the SFP and the equivalent amounts reported in the statement of cash flows.

Considering the wide range of cash management practices all over the world, it is required for an entity to disclose the

accounting policy it applies in determining item(s) included as part of its cash and cash equivalent.

OTHER DISCLOSURES

Restriction on the use of or access to any part of cash equivalents.

The amount of undrawn borrowing facilities which are available

Cash flows which increased operating capacity compared to cash flows which merely maintained operating capacity


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

The objective of this IFRS is to achieve relevance, faithful representation & comparability. This represents a means of

achieving the fundamental qualitative characteristics explained in the Conceptual Framework.

ACCOUNTING POLICIES (APs)

Specific principles, rules, bases, conventions and practices applied by an entity in preparing & presenting FSs.

Selection & application of accounting policies

a) Specific IFRSs shall be the APs for specific transactions/events e.g IAS 16 is the AP for accounting for PPE

b) In the absence of a specific IFRSs, the entity should apply judgement to APs applied are relevant, reliable and take

the following into account (in the following order):

i. Use requirements in IFRSs dealing with similar & related issues.

ii. In the absence of a similar IFRS, consider the principles in the Conceptual Framework (CF).

iii. Use the recent pronouncements of another standard setting body using the same CF.

iv. Other accounting literature and accepted industry practices as long as they don’t conflict with (b) & (c).

Consistency and changes in accounting polices

An entity shall be consistent with the application of APs, but may change its APs due to the following reasons:

a) If change is required by an IFRS

b) If the change would result in FSs that are more reliable and relevant.

A change required by an IFRS in (a) above is treated by applying the specific transitional provision (STP) in that IFRS, In the

absence of STP, apply retrospectively while (b) is applied retrospectively i.e. as if the new AP has always been applied.

CHANGES IN ACCOUNTING ESTIMATES (AE)

An AE is an approximation of monetary amount used in the absence of a precise means of measurement. Examples of AEs

include: allowance for doubtful debts, inventory obsolescence, useful life, warranty obligations, estimated litigation losses &

provisions. AEs are based on the most reliable information at hand.

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

and in future periods, if applicable.

ERRORS

This arise from misuse or failure to use reliable information. FSs are not in line with IFRSs if they contain material errors

therefore potential material errors relating to the current period should be corrected in the current period while prior period

errors should be corrected retrospectively i.e. going back to the past FSs and correcting as if the error(s) never occurred.

Examples of errors include: fraud, mathematical mistake & oversight or misinterpretation of facts, mistakes in applying APs.

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

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For

a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a

retrospective restatement to correct an error if:

a) the effects of the retrospective application or retrospective restatement are not determinable

b) the RA or RR requires assumptions about what management’s intent would have been in that period;

c) the RA and RR requires significant estimates of amounts


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IAS 10: EVENTS AFTER THE REPORTING PERIOD

The objective of this Standard is to identify when an entity should adjust its financial statements (FSs) for events after the

reporting period and certain other disclosures. The Standard also requires that an entity should nit prepare its FSs on going

concern basis if going concern assumption is not appropriate.

EVENTS AFTER THE REPORTING PERIOD

These are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when

the financial statements are authorised for issue. Two types of events can be identified:

Adjusting events (AE): are those that provide evidence of conditions that existed at the end of the reporting period.

An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events.

Non-adjusting events (NAE): those that are indicative of conditions that arose after the reporting period. An entity

shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting

period. If a NAE is material disclose: the nature and an estimate of its financial effect.

Date when the financial statements are authorised for issue

If the entity issues it FSs to shareholders or a supervisory board (made up solely of non-executives) for approval, the FSs are

authorised on the date of issue, not the date when they approve the FSs

DIVIDENDS

If an entity declares dividends to holders of equity instruments (as defined in IAS 32) after the reporting period, the entity

shall not recognise those dividends as a liability at the end of the reporting period.

GOING CONCERN

An entity shall not prepare its FSs on a going concern basis if management determines after the reporting period either that

it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

OTHER DISCLOSURES

Date of authorization for issue

An entity shall disclose the date when the FSs were authorised for issue and who gave that authorisation. If the

entity’s owners or others have the power to amend the FSs after issue, the entity shall disclose that fact.

Updating disclosure about conditions at the end of the reporting period

If an entity receives information after the reporting period about conditions that existed at the end of the reporting

period, it shall update disclosures that relate to those conditions, in the light of the new information.

EXAMPLES OF ADJUSTING EVENTS EXAMPLES OF NON-ADJUSTING EVENTS

Settlement of a court case at the end of the reporting period

that confirms the entity has a present obligation

Announcing a plan to discontinue an operation

The receipt of information after the reporting period indicating

that an asset was impaired at the end of the reporting period.

Destruction of a major plant by fire after the reporting

period

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

year end

Determination after the reporting period of cost of asset

purchased

Abnormally large changes after the reporting period in

asset prices or foreign exchange rates;

The determination after the reporting period of the amount of

profit-sharing or bonus payments if the entity had an

obligation at the end of the reporting period

Changes in tax rates or tax laws enacted or announced

after the reporting period that have a significant effect

on current and deferred tax assets and liabilities.

Receipt of information after the reporting period that the

amount of a previously recognised impairment loss needs

adjustment.

Commencing major litigation arising solely out of

events that occurred after the reporting period.


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IAS 12: INCOME TAXES

Tax expense (tax income) is the aggregate amount used in the determination of P or L for the period in respect of current

& deferred taxes. The principal issue dealt with by IAS 12 is the treatment of current & deferred taxes.

CURRENT TAX

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

1. An entity is required to make appropriate provisions for current tax at the end of every reporting period.

2. An entity is also required to identify whether or not there is an over/under provision of current tax relating to prior

year(s). An over provision shall be recognised as a tax income while an under provision shall be recognised as

additional tax expense. Both shall be included in the P or L of the period they were identified.

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

DEFERRED TAX

This represents the future tax effect of the entity’s current financial position. Deferred tax involves comparing the carrying

amount (CA) of assets and liabilities with their tax bases (TB). Tax base is the amount attributed to assets and liabilities for

tax purposes.

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

Step 1: Determine the carrying amount of assets and liabilities

Step 2: Determine their TBs: the TB of an asset represents future allowable tax deduction, while the TB of a liability

represents future non-allowable tax deduction (i.e. CA less future amount deductible for tax purpose).

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

CA>TB=Deductible TD, if CA <TB= taxable TD.

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

a) Tax rates that are expected to apply to the period in which the asset is realised or the liability is settled based on

the enacted or substantively enacted tax rate as at reporting date.

b) The rate that reflects the expected manner of recovery of assets or settlement of liabilities.

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

For deferred tax asset: Dr: Deferred tax asset and Cr: Income tax expense. For deferred tax liability: Dr: Income tax

expense and Cr: Deferred tax liability.

If the deferred tax is attributable to other comprehensive income (OCI): for deferred tax asset: Dr: deferred tax

asset & Cr: OCI. For deferred tax liability: Dr: OCI & Cr: deferred tax liability.

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

a) has a legally enforceable right to set off the recognised amounts; &

b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Discounting of deferred tax

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

OFF THE RECORD!! In allocating deferred tax, if the aggregate deferred tax results into a deferred tax

asset, the entity should recognise the asset to the extent it is probable that taxable

profit will be available against which the deductible temporary difference can be

utilized. (IAS 12:24).


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IAS 16: PROPERTY, PLANT AND EQUIPMENT

The key issues dealt with in this IFRS are recognition and measurement of property, plant and equipment (PPE).

RECOGNITION

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

a) it is probable that future economic benefits associated with the item will flow to the entity; and

b) the cost of the item can be measured reliably.

MEASUREMENT AT RECOGNITION

An item of PPE that qualifies for recognition as an asset shall be measured at its cost.

Elements of cost

a) its purchase price, including import duties & non-refundable purchase taxes, less trade discounts & rebates.

b) any costs directly attributable to bringing the asset to the required location and condition.

c) initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit

terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of

credit unless such interest is capitalised in accordance with IAS 23.

Directly attributable costs include: installation & assembly costs, borrowing costs, professional fees, direct

employee benefit costs, site preparation cost, initial delivery & handling costs, initial testing cost etc.

Directly attributable costs exclude: admin. & general overhead, cost of opening a new facility, cost of conducting

a business in a new location or with new customers, cost of introducing a new product etc.

MEASUREMENT AFTER RECOGNITION

PPE is subsequently measured using either:

Cost model:

PPE is measured cost less accumulated depreciation less any accumulated impairment loss.

Revaluation model:

PPE is measured at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent

accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount

does not differ materially from that which would be determined using fair value at the end of the reporting period.

Depreciation:

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

Depreciable amount = Cost less residual value

The residual value and the useful life of an asset shall be reviewed at least at each financial year-end

Each part of PPE with a cost that is significant in relation to the total cost shall be depreciated separately.

The depreciation shall be recognised in P or L unless it is included in the carrying amount of another asset.

The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected

to be consumed by the entity.

Depreciation method shall be reviewed at least at each year end.

DERECOGNITION

The carrying amount of an item of property, plant and equipment shall be derecognised:

a) on disposal; or

b) when no future economic benefits are expected from its use or disposal.

Gain or loss on disposal shall be recognised in profit or loss account.


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IAS 17: LEASES

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

CLASSIFICATION OF LEASES

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

LEASES IN THE FINANCIAL STATEMENTS OF LESSEES

Finance leases (FL): initial recognition

At the commencement of the lease, recognise assets & liabilities in SFP at fair value of the leased asset or, if lower,

the present value of the minimum lease payments (MLP), each determined at inception of the lease.

The discount rate to be used in calculating the present value of the MLP is the interest rate implicit in the lease, if

not practicable, the lessee’s incremental borrowing rate shall be used.

Any initial direct costs of the lessee are added to the amount recognised as an asset.

Subsequent measurement:

MLPs shall be apportioned between the finance charge and the reduction of the outstanding liability.

Allocate finance charge to each period in the lease term so as to produce a constant periodic rate of interest on the

remaining balance of the liability.

Contingent rents shall be charged as expenses in the periods in which they are incurred.

Depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned

(and apply IAS 16 & IAS 38). Depreciation is based on the shorter of the lease term and useful life.

Operating leases

Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term

unless another systematic basis is more representative of the time pattern of the user’s benefit

LEASES IN THE FINANCIAL STATEMENTS OF LESSORS

Finance lease (FL):

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

Subsequent measurement:

Recognise finance income on a pattern reflecting a constant periodic rate of return on the lessor’s NIIL.

Manufacturer or dealer lessors shall recognise selling profit or loss in the period, by applying the accounting policy

for outright sales. Market interest rates shall be used determining selling profit/loss. Costs incurred in connection

with negotiating & arranging a lease are recognised as expense when selling profit is recognised.

Operating leases

Recognise lease income on a straight-line basis over the lease term, unless another systematic basis that is more

representative of the time pattern within which the asset is consumed.

Initial direct costs incurred by lessors relating to an operating lease shall be added to the carrying amount of the

leased asset & recognised as an expense over the lease term on the same basis as the lease income.

The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy

for similar assets, & depreciation shall be calculated in accordance with IAS 16 & IAS 38.

SALE AND LEASEBACK TRANSACTIONS (SALT)

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

Operating lease

If sale price is equal to fair value, any profit or loss shall be recognised immediately.

If the sale price is below fair value, any profit or loss shall be recognised immediately except that, if the loss is

compensated for by future lease payments at below market price, it shall be deferred and amortised in proportion

to the lease payments over the period for which the asset is expected to be used.

If the sale price is above fair value, the excess over fair value shall be deferred and amortised.

If the fair value at the time of a SALT is less than the carrying amount of the asset, a loss equal to the amount of the

difference between the carrying amount and fair value shall be recognised immediately


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IFRS 16: LEASES (Effective for annual periods reporting periods beginning on or after 1 January

2019)

IFRS 16 ensures that lessees & lessors faithfully represents the effect of lease transactions.

IDENTIFYING A LEASE

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange

for consideration. The entity is required to identify only the component(s) that contain a lease and apply IFRS 16 on those component(s).

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

LEASES IN THE FINANCIAL STATEMENTS OF LESSEES-LEASE ACCOUNTING MODEL (LAM) Recognition: at the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.

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

Subsequent measurement: after the commencement date, a lessee shall measure the ROU asset by applying a cost model. Other

measurement models that should be considered are as follows:

Fair value model, if the ROU meets the definition of an investment property and the entity uses the FV model.

May use revaluation model if ROU asset relates to a class of PPE measured using revaluation model (IAS 16).

Lease liability (LL)

Initial measurement: At the commencement date, a lessee shall measure the lease liability (LL) at the present value of the lease payments

that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if not determinable, the

lessee’s incremental borrowing rate shall be used

Subsequent measurement: After the commencement date, a lessee shall measure the lease liability by:

a) increasing the carrying amount to reflect interest on the lease liability;

b) reducing the carrying amount to reflect the lease payments made; and

c) remeasuring the carrying amount to reflect any reassessment or lease modifications

PRESENTATION

SFP: present ROU assets & LL separately, if not, disclose the particular line item they have been included.

Profit or loss: present interest expense (as part of finance costs) and depreciation of ROU asset separately.

SCF: variable lease payments not included in LL & payment for short term /low value lease are taken to operating activities,

principal paid to financing activities, interest paid is treated like other interest paid.

RECOGNITION EXEMPTION

Lessee can elect not apply the above model to: short term lease (<12 months) or for lease of low value items ($5,000 or

less).

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

SALE AND LEASEBACK TRANSACTION

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

Lessee (Seller) Lessor (Buyer)

If SALT is

a sale

Derecognise underlying asset (UA) & use lessee accounting

model (LAM) on the leaseback.

Measure the ROU asset at the retained portion of the previous

carrying amount.

Recognise a gain/loss related to the rights transferred to the

lessor.

Recognise the UA & apply the LAM to the

leaseback.

if SALT is

not a sale

Continue to recognise the underlying asset

Recognise a financial liability under IFRS 9 for any amount

received from the buyer-lessor.

Do not derecognise the underlying

asset.

Recognise a financial asset for the

amount paid to the seller-lessee.

SUB-LEASES

Intermediate lessor classifies as finance or an operating lease with reference to the ROU from the head-lease

Intermediate lessor treats the head lease and sub-lease as two different contracts.

Treat sub-lease as operating lease if the head lease is a short-term lease.


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SOME DIFFERENCES BETWEEN IAS 17 AND IFRS 16

IAS 17 IFRS 16

There is very little emphasis on control over the

use of the leased asset, more emphasis is placed

on control over the economic benefits from the

use of the asset.

There is more emphasis on control both over the use of the identified

asset and the economic benefits generated from the use of the asset.

As a result, IFRS 16 refers to the leased asset as a right of use (ROU)

asset.

Classification into finance or operating leases is

considered in financial statements of both the

lessor and lessee.

Classification into finance or operating leases is considered only in

the FSs of the lessor. By default, leases are treated as finance lease in

the FSs of the lessee subject to the recognition exemption.

Under finance lease in the FSs of a lessee, the

leased asset is initially measured at the lower of

the present value of minimum lease payment and

fair value

Under finance lease in the FSs of a lessee, the “ROU asset” is initially

measured at cost.

The cost is as determined by IFRS 16 and not in line with IAS 16 and

38. Cost includes following:

The amount of initial measurement of the lease liability

Any lease payments made at or before the commencement date

less any lease incentives received

Any initial direct costs incurred by the lessee

An estimate of costs to be incurred by the lessor for dismantling

and removing the underlying asset where there is an obligation.

A lessee is not required to remeasure lease

liability to reflect changes in the lease payments,

lease term and other key judgements.

The lessee is required to reassess the lease liability to reflect changes

in lease payments, lease term and other key judgements

The lessee is required to make lesser disclosures

under finance and operating leases

Extensive disclosures are required for finance and operating leases.

The Standard also requires the need to assess whether additional

information is necessary to meet the overall objective.

IAS 17 requires assessment of whether or not an

operating lease has become onerous

Instead, IFRS 16 requires testing the ROU asset for impairment.

Under a sale and leaseback transaction (SALT),

the seller-lessee may treat the lease back as

either an operating or finance lease

Under a SALT, the seller-lessee shall treat the lease back as a finance

lease subject to the recognition exemption i.e. if it is short-term or

the underlying asset is of low value.

There is very little guidance about on lease

modifications

Extensive guidance on lease modifications.

SIMILARITIES BETWEEN IFRS 16 AND IAS 17

The lease accounting model for lessors in both IFRSs are similar.

Under both IFRSs, lessees cannot choose to measure lease liabilities subsequently at fair value.

Under both IFRSs, the discount rate used to by a lessee to discount a lease liability is the interest rate implicit to the

lease or if not determinable, the lessee’s incremental borrowing rate.

PRACTICAL EFFECTS OF APPLYING IFRS 16

IFRS 16 would significantly improve the quality of financial reporting for companies with material off balance sheet

leases and transparency is improved as a lot of off balance sheet finance would be brought into the FSs.

Companies with material off-balance sheet lease are expected to incur some costs on initially implementing IFRS 16

and on an on-going basis.

Considering the recognition exemption for short-term leases and leases of low value items, this may lead to cost

reliefs in applying IFRS 16.

Deterioration of some debt ratios due to increased gearing, total assets would increase etc.


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IAS 18 REVENUE

Revenue is the gross inflow of economic benefits during the period from the entity’s ordinary activities when those inflows

result in increases in equity, other than increases relating to contributions from equity participants.

The primary issue in accounting for revenue is determining timing of revenue. Generally, revenue is recognised when (The

general revenue recognition criteria):

a) it is probable that future economic benefits will flow to the entity and

b) these benefits can be measured reliably.

MEASUREMENT OF REVENUE

Revenue shall be recognised at the fair value of the consideration received or receivable.

The trade discounts and rebates allowed by the entity are taken into consideration in revenue measurement.

When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is

determined by discounting all future receipts using an imputed rate of interest.

Revenue is not recognised when similar goods or services are swapped or exchanged.

If goods exchanged are similar, revenue is measured at the fair value of goods received, if impracticable, it is

measured at the fair value of the goods or services given up.

IDENTIFICATION OF TRANSACTIONS

The recognition criteria are applied on separately to each transaction

It may also be necessary to apply the RC on separately identifiable components of a single transaction.

Conversely two or more transactions may be combined and the RC applied on the combined transaction.

RECOGNITION OF REVENUE

Sale of goods

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

a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor

effective control over the goods sold;

c) the amount of revenue can be measured reliably;

d) it is probable that the economic benefits associated with the transaction will flow to the entity; and

e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Rendering of services

When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with

the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting

period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

a) the amount of revenue can be measured reliably;

b) it is probable that the economic benefits associated with the transaction will flow to the entity;

c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; &

d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be

recognised only to the extent of the expenses recognised that are recoverable.

Interests, royalties and dividends

Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised when

the general RC above is met on the following bases:

a) interest shall be recognised using the effective interest method as set out in IFRS 9;

b) royalties shall be recognised on an accrual basis in line with the substance of the relevant agreement; &

c) dividends shall be recognised when the shareholder’s right to receive payment is established.


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IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS (Effective from 1 January 2018)

The core principle of IFRS 15 is that an entity shall recognise revenue to depict the transfer of promised goods or services

to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those

goods or services.

IFRS 15 applies a 5-step model for revenue recognition, as described below.

RECOGNITION

Step 1: identify the contract with customers: a contract exists if all the following criteria are met:

Collection of consideration is probable

Rights of goods or services and payment terms can be identified

It has commercial substance

It is approved and the parties are committed to the obligation

Step 2: identify the performance obligation (PO): a PO is the unit of account for revenue recognition. An entity assesses

the goods or services (GOS) promised in a contract with a customer and identifies as a PO either:

A good or service (or a bundle or goods or services) that is distinct; or

A series of distinct GOS that are substantially the same & that have same pattern of transfer to the customer.

This would include an assessment of implied promises and administrative tasks.

MEASUREMENT

Step 3: determine transaction price (TP): the TP is the amount of consideration to which an entity expects to be entitled

in exchange for transferring the GOS to a customer, excluding amounts collected on behalf of 3rd parties.

Variable consideration, significant finance component, non-cash consideration, consideration payable to a customer should

all be taken into consideration in determining TP.

Customer credit risk is considered in step 1 and not in step 3, but if there is a significant finance component provided to the

customer the entity shall consider credit risk in determining the appropriate discount rate.

Step 4: Allocate the TP to PO in the contract: the TP is allocated to each PO or distinct GOS to depict the amount of

consideration to which the entity expects to be entitled in exchange for transferring the promised GOS.

An entity generally allocates the TP to each PO in proportion to its stand-alone selling price. However, when specified criteria

are met, a discount or variable consideration is allocated to one or more, nut not all, POs,

Step 5: recognise revenue when or as the entity satisfies a performance obligation (PO): an entity recognizes revenue

when or as it satisfies a PO by transferring a GOS to a customer, either at a point in time (when) or over time (as). A GOS is

transferred when or as the customer obtains control.

If the PO is not satisfied over time, recognise revenue at the point in time at which control of the GOS is transferred. If the

PO is satisfied over time an entity is expected to identify an appropriate method to recognise revenue over time. IFRS 15

talks about the output and input methods

CONTRACT COSTS

This includes costs of obtaining the contract, costs of fulfilling the contract, amortisation and impairment of assets arising

from costs to obtain or fulfill the contract

CONTRACT MODIFICATION

A contract modification occurs when the parties to a contract approve a change in scope, price or both. The accounting is

dependent on whether the distinct GOS is added to the arrangement.

APPLICATION OF THE 5-STEP MODEL

IFRS 15 applied the model to gift cards, warranties, non-refundable upfront fees, repurchase agreements, consignment

agreements, bill and hold arrangements, licenses, principal vs. agent etc.


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DIFFERENCES BETWEEN IAS 18 (AND OTHER REVENUE RECOGNITION IFRSs) AND IFRS 15

Areas of differences IAS 18/IAS 11 IFRS 15

Dividend income Dividend is recognised when an

entity’s right to collection has been

established

Absence of a guidance on the accounting for

dividend income. Instead, guidance that is

consistent with IAS 18 has been incorporated into

the financial instruments standards.

Separating components of a

contract

Limited guidance on identifying

separate components that applies to

all revenue generating transactions.

Extensive guidance on identifying separate

components that applies to all revenue

generating transactions.

Estimation uncertainty Under IAS 18, an entity recognizes

revenue only if it can estimate the

amount reliably.

IFRS 15 uses these criteria as ceiling for the

recognition of revenue. It limits rather than

preclude revenue recognition.

Advance receipt from

customers

IAS 18 is silent on the treatment of

revenue when customers make

payments on advance.

IFRS 15 require that an interest expense should be

recognised on any payments received from

customers. The interest is used to increase

revenue with a corresponding increase to

revenue.

Trade discounts granted to

customers

IAS 18 does not include specific

guidance on the allocation of trade

discounts to each components of

the transaction

IFRS 15 includes specific guidance on allocating

discounts.

Allocating variable

considerations

IAS 18 does not include specific

guidance on allocating variable

consideration

IFRS 15 provides a flexible guidance on the

allocation of variable considerations to

performance obligations.

Allocation of revenue to

components

IAS 18 is silent on the allocation

revenue to components

IFRS 15 contains extensive guidance on allocating

revenue to components.

Transfer of goods or services IAS 18 focuses on the transfer of risk

and reward in the recognition of

revenue on sale of goods or services

IFRS 15 applies a control-based approach

(whereby control can be transferred over time or

at a point in time) regardless of the industry.

SIMILARITIES BETWEEN CURRENT REVENUE RECOGNITION IFRSs (IASs 11 & 18) AND IFRS 15

Areas of similarities Similarities

Contracts at their early stages Both IAS 11 and IFRS 15 requires that revenue recognised is restricted to costs incurred

which are expected to be recoverable and no profit is recognised.

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

Amounts collected on behalf

of a 3rd party

Under IFRS 15 and IAS 18, amounts collected on behalf of a 3rd party cannot be

recognised as a revenue. However, the guidance for determining a principal and agent

is different in both Standards.

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

allocation of consideration.


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IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT

ASSISTANCE

The core principle in accounting for government grant is to match the grant income with the cost of fulfilling the condition

tied to the grant. This method of accounting for government grant is called the income approach.

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

international.

ACCOUNTING FOR GOVERNMENT GRANTS: THE FOUR STEP MODEL

Government grants are assistance by government in the form of transfers of resources to an entity in return for past or

future compliance with certain conditions relating to the operating activities of the entity.

1) Identify the condition tied to the grant

Government grants usually have conditions tied to them. These conditions are the criteria the entity must satisfy

before the entity can gain access to the grant.

2) Determine the cost of fulfilling the condition

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

i. Grant related to asset (GRA): are government grants whose primary condition is that an entity qualifying

for them should purchase, construct or otherwise acquire “long-term” assets. GRA are accounted for using:

Deferred income approach: recognise grant as deferred income & spread over the useful life of

asset.

Reduction from cost: deduct the grant in calculating the carrying amount of the asset. The grant is

recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.

ii. Grant related to income (GRI): are government grants other than those related to assets. GRI are

presented as part of profit or loss, either separately or under a general heading such as ‘Other income’;

alternatively, they are deducted in reporting the related expense.

3) Determine when to recognise the grant and its value

Government grants shall not be recognised until there is reasonable assurance that:

i. the entity will comply with the conditions attaching to them; and

ii. the grants will be received.

The grant may be either monetary or non-monetary.

i. Monetary grant: government transfers cash to the entity. Value of the grant is equal to the cash transferred.

ii. Non-monetary grant: this is in form of a transfer of a non-monetary asset (NMA), such as land or other

resources, for the use of the entity. Account for both grant and asset at the fair value of the NMA.

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

REPAYMENT OF GOVERNMENT GRANT

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

DISCLOSURE OF GOVERNMENT ASSISTANCE

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of

entities qualifying under certain criteria. Excluded from the definition of government grants are certain forms of government

assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be

distinguished from the normal trading transactions of the entity. These government assistances should be disclosed.


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IAS 23: BORROWING COSTS

The core principle of this IFRS is to capitalise only directly attributable borrowing costs (DABC) as part of the cost of a

qualifying asset (QA). The Standard plays around the concept of QA and borrowing costs.

QUALIFYING ASSETS (QAs)

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

a) Intangible assets

b) Investment property

c) Manufacturing plants

d) Power generating facilitates

e) inventories

The following are not QAs:

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

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

c) Financial assets

BORROWING COSTS (BCs)

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

finance charges under finance lease (IAS 17).

Borrowing costs eligible for capitalisation

Specific borrowing: the entity borrows funds specifically for the purpose of obtaining a particular QA, the amount

of BCs eligible for capitalisation is the actual borrowing costs incurred on that borrowing less any investment income

(on the temporary investment of those borrowings).

General borrowings: here, the funds are taken from a pool of funds. This pool of funds is usually meant for general

use and are not specific to the qualifying asset. Borrowing costs are calculated by using weighted average cost of

capital (WACC) relating to the pool of funds.

Period of capitalisation

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

Commencement of capitalisation: an entity shall begin capitalising BCs when the entity first meets all of the

following conditions:

a) it incurs expenditures for the asset;

b) it incurs borrowing costs; and

c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Suspension of capitalisation: an entity shall suspend capitalisation of borrowing costs during extended periods in

which it suspends active development of a qualifying asset. However, an entity does not normally suspend

capitalising borrowing costs:

a) During a period when it carries out substantial technical and administrative work

b) a temporary delay is a necessary to get an asset ready for its intended use or sale.

c) If the asset is undergoing maturity during the period of suspension

Cessation of capitalisation: an entity shall cease capitalising borrowing costs when substantially all the activities

necessary to prepare the qualifying asset for its intended use or sale are complete.

EXCESS OF CARRYING AMOUNT OF THE QA OVER RECOVERABLE AMOUNT

When the carrying amount or the expected ultimate cost of the QA exceeds its recoverable amount or net realisable value,

the carrying amount is written down or written off in accordance with the requirements of IAS 36.


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IAS 24: RELATED PARTY DISCLOSURES

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

party, regardless of whether a price is charged.

The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention

to the possibility that its financial position & profit or loss may have been affected by the existence of related parties & by

transactions & outstanding balances, including commitments, with such parties.

KEY DISCLOSURES

1. Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been

transactions between them. An entity shall disclose the name of its parent and, if different, the ultimate controlling

party. If neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements

available for public use, the name of the next most senior parent that does so shall also be disclosed.

2. An entity shall disclose key management personnel compensation in total and for each of the following categories:

short-term employee benefits; post-employment benefits; other long-term benefits; termination benefits; and

share-based payment.

3. If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose:

a) the amount of the transactions;

b) the amount of outstanding balances, including commitments,

c) provisions for doubtful debts related to the amount of outstanding balances; and

d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.

e) incurred by the entity for the provision of key management personnel services that are provided by a

separate management entity shall be disclosed.

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

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

b) purchases or sales of property and other assets;

c) rendering or receiving of services;

d) leases;

e) transfers of research and development;

f) transfers under licence agreements

GOVERNMENT ENTITIES

A reporting entity is exempt from key disclosure (3) above in relation to related party transactions and outstanding balances,

including commitments, with:

a) a government that has control or joint control of, or significant influence over, the reporting entity; and

b) another entity that is a related party because the same government has control or joint control of, or significant

influence over, both the reporting entity and the other entity.

FACTORS AFFECTING THE LEVEL OF DETAILS FOR DISCLOSURES OF RPTs

Factors relevant in establishing the level of significance of a RPT such as whether it is:

a) Significance of the transaction in terms of size;

b) carried out on non-market terms;

c) outside normal day-to-day business operations, such as the purchase and sale of businesses;

d) disclosed to regulatory or supervisory authorities;

e) reported to senior management;

f) subject to shareholder approval.


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IAS 27: SEPARATE FINANCIAL STATEMENTS

Separate financial statements are those presented by an entity in which the entity could elect, subject to the requirements

in this Standard, to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance

with IFRS 9 Financial Instruments, or using the equity method as described in IAS 28 Investments in Associates and Joint

Ventures.

The objective of this Standard is to prescribe the accounting and disclosure requirements for investments in subsidiaries,

joint ventures and associates when an entity prepares separate financial statements.

PREPARATION OF SEPARATE FINANCIAL STATEMENTS

General preparation requirements

a) Separate financial statements shall be prepared in accordance with all applicable IFRSs.

b) When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures

and associates either:

i. at cost;

ii. in accordance with IFRS 9; or

iii. using the equity method as described in IAS 28.

c) The entity shall apply the same accounting for each category of investments. Investments accounted for at cost or

using the equity method shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations when they are classified as held for sale or for distribution (or included in a disposal group

that is classified as held for sale or for distribution). The measurement of investments accounted for in accordance

with IFRS 9 is not changed in such circumstances.

d) Dividends from a subsidiary, a joint venture or an associate are recognised in the separate financial statements of

an entity when the entity’s right to receive the dividend is established. The dividend is recognised in profit or loss

unless the entity elects to use the equity method, in which case the dividend is recognised as a reduction from the

carrying amount of the investment.

e) entity shall apply all applicable IFRSs when providing disclosures in its separate financial statements.

Specific requirements

Investment in associate or joint ventures

If an entity elects, in accordance with IAS 28, to measure its investments in associates or joint ventures at fair value through

profit or loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial

statements.

Investment in subsidiary

If a parent is required, in accordance with paragraph 31 of IFRS 10, to measure its investment in a subsidiary at fair value

through profit or loss in accordance with IFRS 9, it shall also account for its investment in a subsidiary in the same way in its

separate financial statements.


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IAS 28: INVESTMENT IN ASSOCIATES AND JOINT VENTURES (JVs)

The objective of this Standard is to prescribe the accounting for investments in associates and to set out the requirements

for the application of the equity method when accounting for investments in associates and JVs.

An associate is an entity over which the investor has significant influence while a joint venture is a joint arrangement whereby

the parties that have joint control of the arrangement have rights to the net assets of the arrangement (See IFRS 11, Joint

arrangements for more information).

SIGNIFICANT INFLUENCE

When an entity has 20% or more voting power over the investee this gives rise to significant influence. The existence of

significant influence by an entity is usually evidenced in one or more of the following ways:

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

b) participation in policy-making processes, including participation in decisions about dividends or other distributions;

c) material transactions between the entity and its investee;

d) interchange of managerial personnel; or

e) provision of essential technical information.

An entity loses significant influence over an investee when it loses the power to participate in the financial and operating

policy decisions of that investee.

EQUITY METHOD

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter

for the post-acquisition change in the investor’s share of the investee’s net assets.

Exemptions from applying the equity method

Investment in associate and joint ventures shall be accounted for using the equity method except:

a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners,

including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not

applying the equity method.

b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or

an over-the-counter market, including local and regional markets).

c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other

regulatory organisation, for the purpose of issuing any class of instruments in a public market.

d) The ultimate or any intermediate parent of the entity produces financial statements available for public use that

comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in

accordance with IFRS 10.

Discontinuing the use of the equity method (EM)

The entity shall discontinue the use of EM if its investment ceases to be an associate or JV as follows:

a) If the investment becomes a subsidiary

b) If the retained interest becomes a financial asset

If an investment in JV becomes and investment in associates and vice-versa, the entity continues to apply the equity method

and does not remeasure the retained interest.

When an entity discontinues the equity method any previously recognised OCI shall be recognised on the same basis as

would have been if the investor had directly disposed of the related assets/liabilities.


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IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION

The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for

offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective

of the issuer.

MEANING OF FINANCIAL INSTRUMENTS

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity

instrument of another entity.

FINANCIAL ASSETS FINANCIAL LIABILITIES

Cash Bank overdraft

An equity instrument of another entity Issued debt instrument

A contractual right: to collect cash or another FA or

to exchange FA under potentially favourable

conditions

A contractual obligation: to deliver cash or another FA to another

entity or to exchange FAs or FLs under conditions that are

potentially unfavourable.

A contract that will or may be settled in the entity’s

own equity instrument.

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

instrument.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its

liabilities.

PRESENTATION

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial

liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and

the definitions of a financial liability, a financial asset and an equity instrument.

Compound financial instruments

These are financial instruments that contain both a liability and an equity component. Both components shall be separated

from each other using the definition of equity in the Framework. Separation is done as follows:

N

Total proceeds X

Fair value of the liability component (X)

Equity component X

The split above shall not be revised!! The liability component shall be determined by discounting the principal and the

interest using the market interest rate of a similar liability with no conversion rights (or option).

Interests, dividends, gains and losses

Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be

recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by

the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity.

Treasury shares

If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted from equity. No

gain or loss shall be recognised in profit or loss account.

OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position

when, and only when, an entity:

a) currently has a legally enforceable right to set off the recognised amounts; and

b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.


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IAS 33: EARNINGS PER SHARE (EPS)

The objective of this Standard is to prescribe principles for the determination and presentation of earnings per share to

improve comparability. The focus of this Standard is on the number of shares used for EPS calculation.

The Standard mainly talks about the measurement of basic and diluted EPS and is applicable to entities whose ordinary

shares or potential ordinary share (POS) are publicly traded or in process of being traded.

EPS is attributable to only ordinary shareholders.

BASIC EPS

Earnings

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

a) Non-controlling interest’s share of profit

b) Dividends on preference shares (even if the preference shares are classified as equity under IAS 32).

c) Differences arising in settlement of preference shares

Shares

Time weighted average number of shares issued from the date the consideration becomes receivable

Additional shares where no consideration receivable (e.g. bonus issue): weighted from beginning of the year

DILUTED EPS

This is based on the fact that some instruments may reduce EPS in the future (dilutive instruments). Examples include: share-

based payment, written put options, contingently issuable share, potential ordinary shares.

Earnings

Earnings as calculated under basic EPS is adjusted for:

a) any dividends or other items related to dilutive potential ordinary shares (DPOS)

b) any interest recognised in the period related to dilutive potential ordinary shares; and

c) other changes in income/expense that would result from the conversion of the DPOS.

Shares

Start with the basic EPS

Adjust for the number of shares that will be issued on conversion

Adjust presuming conversion at the beginning of the year/date of issue of potential ordinary shares

Diluted EPS are presented for only instruments that would lead into reduction of EPS while those that are anti-

dilutive (increase EPS) are excluded.

RETROSEPCTIVE ADJUSTMENTS

Adjust basic & diluted EPS of prior year FSs for effect of bonus issue, share split, decrease due to reverse split.

If (i) occurs after the reporting period but before FSs are authorised for issue, adjust the basic & diluted EPS of

current and prior year FSs.

Basic and diluted EPS of all periods presented shall be adjusted for the effects of errors and adjustments resulting

from changes in accounting policies accounted for retrospectively.

PRESENTATION

Present in the statement of P or L & OCI basic & diluted EPS attributable to the parent and to the ordinary

shareholders.

Present basic & diluted EPS with equal prominence for all periods presented.

Where an entity also presents discontinued operations. Basic and diluted EPS are required to be presented for

continuing and discontinued operations

An entity shall present basic & diluted EPS even if the amounts are negative (i.e. loss per share).


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IAS 36: IMPAIRMENT OF ASSETS

The objective of IAS 36 is to ensure that an entity is not carrying its asset higher than its recoverable amount (RA).

Impairment loss (IL) arises when an asset’s CA is higher than it RA. IAS 36 also states when to reverse IL.

STEPS FOR RECOGNISING IMPAIRMENT LOSS (IL)

1. Identify an asset that is impaired: an entity shall assess at the end of each reporting period if there is any indicator

of impairment. If any such indicator exists, the entity shall estimate the RA of the asset, however, irrespective of

whether there is an indicator an entity shall test the following for impairment annually:

Intangible asset (IA) with an indefinite useful life or an IA not yet available for use.

Goodwill acquired in a business combination

Indicators of impairment:

External sources: (a) unexpected significant changes in the value of an asset (b) the CA of an entity’s net asset is higher

than it market capitalisation. (c) increase in market interest rate which will likely affect value in use.

Internal sources: (a) physical damage or obsolescence of an asset (b) evidence that the economic performance of an

asset is or will be worse than expected.

2. Determine RA of an asset: RA is the higher of fair value less cost of disposal (FVLCD) and value in use (VIU). RA shall

be calculated for an individual asset, if impracticable, that individual asset shall be traced to a cash-generating unit

(CGU), then RA shall be calculated for the CGU. IAS 36 mentions corporate asset as one of such “individual asset” that

should be traced to their CGU.

FVLCD: fair value is market-based, while costs to disposal are direct incremental costs to bring an asset into a

condition intended for its sale e.g. legal costs, stamp duty, costs of removing the asset.

VIU: this is the present value of future cash flows to be generated from using an asset. Determining VIU requires

a discount rate and future cash flows. The discount rate shall be based on time value of money & risk specific

to the asset while future cash flows shall be based on reasonable and supportable assumptions.

3. Recognise impairment loss: If, and only if, the RA of an asset is less than its carrying amount (CA), the CA of the

asset shall be reduced to its RA. That reduction is an impairment loss. An impairment loss shall be recognised

immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for

example, in accordance with the revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated

as a revaluation decrease in accordance with that other Standard.

Allocating impairment loss to a CGU

If the impairment loss is attributable to a CGU, the impairment loss shall be allocated to reduce the carrying amount of the

assets of the unit in the following order:

first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit

then, to the other assets pro rata on the basis of the carrying amount of each asset in the CGU.

REVERSAL OF IMPAIRMENT LOSS

An entity shall assess at the end of every reporting period if there is an indicator that any previously recognised

impairment loss no longer exist or has been decreased. The following are indicators that IL may have reversed:

External sources: (a) significant increase in the value of the asset (b) decrease in market interest.

Internal sources: evidence that the economic performance of an asset would be better than expected.

Impairment loss on goodwill can never be reversed!!!!

OFF THE RECORD!!

When the amount estimated for an impairment loss is greater than the carrying

amount of the asset to which it relates, an entity shall recognise a liability if, and only

if, that is required by another Standard (IAS 36 paragraph 62).


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IAS 37: PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS

The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to

provisions, contingent liabilities and contingent assets and that the related disclosures are sufficient.

RECOGNITION

Provisions

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

a) an entity has a present obligation (PO) (legal or constructive) as a result of a past event (PE);

b) it is probable that an outflow of economic benefits will be required to settle the obligation; and

c) a reliable estimate can be made of the amount of the obligation.

Contingent liabilities (CLs)

a) a possible obligation that arises from past events & whose existence will be confirmed only by the occurrence/non-

occurrence of one/more uncertain future events not wholly within the entity’s control; or

b) a present obligation that arises from past events but is not recognised because:

it is not probable that an outflow of economic benefits will be required to settle the obligation; or

the amount of the obligation cannot be measured with sufficient reliability.

CL shall not be recognised. CLs are disclosed in the notes to the financial statements except the likelihood of outflow

of economic benefit is remote. They are assessed continually to determine whether an outflow of economic benefits has

become probable. If it becomes probable, a provision should be recognised.

Contingent assets

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the

occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A

contingent asset is not recognised instead it is disclosed if the inflow of economic benefits is probable, however, if the inflow

become virtually certain an asset should be recognised.

MEASUREMENT

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

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

Present value: Where the effect of the time value of money is material, the amount of a provision shall be the present

value of the expenditures expected to be required to settle the obligation.

Future events: future events that may affect the amount required to settle an obligation shall be reflected in the amount

of a provision where there is sufficient objective evidence that they will occur.

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

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

Changes in provision: assess provision at the end of each reporting period to revise its best estimate or even

derecognise the provision if it is no longer probable that economic benefits would flow out.

APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES

Reimbursements: recognise reimbursement as a separate asset in the SFP only if virtually certain, but may be used to

offset the provision expense in P or L. Reimbursement shall not exceed the related provision.

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

Onerous contract: this is a contract in which its unavoidable cost exceeds its benefit. If an entity has a onerous contract,

the PO under the contract shall be recognised and measured as a provision.

Restructuring: this is when an entity materially changes its scope or manner in which it is conducted. Recognition:

recognise restructuring provision if and only if:

(i) There is a detailed formal plan for restructuring

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

Measurement: a restructuring provision shall include only directly attributable restructuring costs. Such costs shall exclude:

Retraining/relocation cost, marketing cost, investment on new distribution system.


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IAS 38: INTANGIBLE ASSETS (IAs)

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

DEFINITION OF AN INTANGIBLE ASSET (IAs)

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

Identifiability

The definition of an intangible asset requires an IA to be identifiable to distinguish it from goodwill i.e.

is separable, i.e. is capable of being separated or divided from the entity and transferred separately; or

arises from contractual/legal rights, regardless of whether those rights are separable from the entity.

Control

An item can be recognised as an intangible asset if the entity has the power to obtain the future economic benefits flowing

from the underlying resource and to restrict the access of others to those benefits.

Future economic benefits

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

RECOGNITION CRITERIA

a) the definition of an intangible asset (above);

b) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; &

c) the cost of the asset can be measured reliably.

MEASUREMENT

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

a) Separate acquisition: the cost of IA acquired separately is same with cost elements (i) & (ii) in IAS 16.

b) Internally generated IAs: Split project phase into research and development phases:

Research phase: any costs incurred at this phase shall be expensed. Development phase: capitalise any cost incurred at

this phase if the entity has all of the following in place: (i) Technical feasibility of completion. (ii) intention to complete (iii)

adequate technical, financial and other resources to complete (iv) ability to use/sell the IA (v) probable future economic

benefits (vi) if expenditure can be reliably measured.

a) Acquisition as part of a business combination: cost is equal to fair value at the acquisition date (see IFRS 3).

b) Acquisition by way of government grant: cost is equal to fair value (FV)/nominal amount (see IAS 20).

c) Exchanges of asset: measure acquired assets at FV, if not possible, measure at the CA of asset given up.

d) Internally generated goodwill: can never be recognised as it is not identifiable & can’t be measured reliably.

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

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

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

Revaluation model: similar to IAS 16, except that fair value must be based on an active market. If no active market, use the

cost model. It is uncommon for an active market to exist for an IA, although this may happen.

IAs with indefinite useful life: these IAs have no foreseeable limit to future expected economic benefits. They are not

amortised but are tested for impairment annually in accordance with IAS 36. The entity shall carry out annual assessment to

determine if the IA should be transferred from indefinite to finite useful.

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

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

RECOGNITION OF AN EXPENSE

The following shall be recognised as an expense: expenditure on start-up activities, training, advertising & promotional

activities, relocating or reorganising.

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

DERECOGNITION (same with IAS 16)


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IAS 39: FINANCIAL INSTRUMENTS: RECOGNITION & MEASURMENT (To be replaced by IFRS 9)

RECOGNITION & DERECOGNITION

Recognition: An entity shall recognise a financial asset (FA) or a financial liability (FL) in its statement of financial position

when, & only when, the entity becomes a party to the contractual provisions of the instrument.

Derecognition: an entity should derecognise a FA when: (i) the contractual right to the cash flows from the FA expire or (ii)

it transfers all the risk and reward of the FA ownership to another party.

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

MEASUREMENT

Initial measurement:

FA & FL are initially measured at the fair value (FV) of the consideration given or received. For only FA & FL not at fair value

through profit or loss (FVTPL) transaction costs are included as part of fair value. FV is usually equal to transaction price (TP)

any difference between FV and TP is taken to P or L.

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

Subsequent measurement

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

FA at FVTPL: are held for speculative/trading purposes, measured at FV & changes in FV taken to P or L.

Held to maturity (HTM): are acquired with the intention of holding till maturity. They’ve fixed or determinable

payments & fixed maturity date. They are measured at amortised cost using the effective interest rate (EIR) method.

Loans and receivables: same with HTM but no fixed maturity date and are not traded in an active market.

Available for sale: are designated as such and do not meet the characteristics of the first three. They are measured

at fair value & changes in fair value is taken to other comprehensive income (OCI).

Financial liabilities: after initial measurement, these are generally measured at amortised cost. However, to avoid

accounting mismatch they may be measured at FVTPL.

Impairment and uncollectability of financial assets:

An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or

group of financial assets is impaired. Objective evidence includes:

a) significant financial difficulty of the issuer or obligor;

b) a breach of contract, such as a default or delinquency in interest or principal payments;

c) the lender grants concession to the borrower as a result of the borrower’s financial difficulty;

d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

e) the disappearance of an active market for that financial asset because of financial difficulties

Once there is an objective evidence, test for impairment.

For FAs measured at amortised cost: compare the FAs carrying amount and the present value of the estimated

future cash flows discounted at the original effective interest rate.

For FAs measured at cost: compare the FAs carrying amount and the present value of the estimated future cash

flows discounted at the current market rate of return for a similar financial instrument.

For available for sale FAs: reclassify the cumulative loss from equity (OCI) to P or L as a reclassification adjustment.

The amount of the cumulative loss that is reclassified from equity to profit or loss shall be the difference between

the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment

loss on that financial asset previously recognised in profit or loss.

HEDGING (See the version meant for Corporate reporting students only)


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IFRS 9: FINANCIAL INSTRUMENTS (Effective for annual periods beginning on or after 1 January

2018)

RECOGNITION AND DERECOGNITION

IFRS 9 incorporates without substantive amendments the requirements of IAS 39 for the recognition and derecognition

of financial assets and financial liabilities

However, as it relates to derecognition, IFRS 9 includes the new guidance on write-offs of financial assets. IFRS 9 states

that an entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable

expectations of recovering a financial asset in its entirety or a portion thereof. Simply, a write-off is a derecognition

event.

MEASUREMENT

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


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

dependent on the following tests:

Sole payment of principal and interest (SPPI) criterion: this refers to financial assets that give rise on specified dates

to cash flows that sole payment of principal and interest based outstanding.

Business model: this relates to how an entity manages it FAs in order to generate cash flows. The entity’s business

model may be to sell, hold, or to sell and hold the FAs.

Classification and measurement

Financial assets measured at amortised cost: these are FAs held within a business model whose objective is to collect

contractual cash flows (hold) and the contractual terms of the FAs give rise to cash flows that are sole payment of

principal and interest (SPPI criterion).

Financial assets measured at fair value through OCI: these FAs meets the SPPI criterion and is held in a business

model whose objective is achieved by both collecting contractual cash flows and selling FAs.

Financial assets measured at fair value through profit or loss (FVTPL): all FAs other than the above are classified as

FVTPL. This category is also applied to avoid accounting mismatch.

Financial liabilities (FLs): the measurement principle in IAS 39 was substantially retained, however, under IFRS 9, as it relates

to FLs at FVTPL, the amount of change in the fair value that is attributable to changes in credit risk of the liability is presented

in OCI and the remaining amount of change in the fair value is presented profit or loss.

IMPAIRMENT OF FINANCIAL ASSETS

While IAS 39 applies the incurred loss approach, IFRS 9 applied the expected loss approach for assessing impairment loss.

Under IFRS 9 impairment is measured as either:

a) 12-month expected credit losses (ECL)or

b) Lifetime expected credit losses (ECL)

The 12-month ECL represent the cash shortfalls that will result if a default occurs in the 12-months after the

reporting date (or for a shorter date if the expected life of a financial instrument (FI) is less than 12-months).

This includes only expected losses that would cover the next 120months, it excludes losses beyond 12-months.

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


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DIFFERENCES BETWEEN IAS 39 AND IFRS 9

Areas of differences IAS 39 IFRS 9

Derecognition Absence of a guidance as regards

write-off of a financial asset

IFRS 9 contains a guidance which stipulates that a

write-off of the gross carrying amount of a financial

assets represents a derecognition event.

Subsequent

classification of

financial assets

Subsequent classification and

measurement of financial assets into

FVTPL, HTM, loans and receivables and

available for sale

Subsequent distinction is based on the business model

and the SPPI criterion.

Subsequent

measurement of

financial liabilities

For financial liabilities measured at

FVTPL, all changes in fair value are

taken to profit or loss.

As it relates financial liabilities measured at FVTPL, the

amount of change in the fair value that is attributable

to changes in credit risk of the liability is presented in

OCI and the remaining amount of change in the fair

value is presented profit or loss.

Impairment loss IAS 39 applies an incurred loss

approach where impairment loss is

recognised only when a loss event

occurs

IFRS 9 applies an expected loss approach which

recognizes impairment loss based on an assessment

of the 12-month expected credit losses and lifetime

expected credit losses.

Presentation and

disclosures

Lesser disclosures when compared

with IFRS 9

IFRS 9 introduces extensive disclosure requirements

compared to IAS 39.

SIMILARITIES BETWEEN IAS 39 AND IFRS 9

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

to the contractual arrangement.

Initial

measurement

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

Derecognition Both IFRSs have very similar requirements on derecognition of financial assets and financial liabilities.

Measurement

bases

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

Hedge

accounting

Both IFRSs have similar guidance for hedging, however, the IASB is still working on macro-hedging

accounting principles, hence, there might be a change in that area.


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IAS 40: INVESTMENT PROPERTY (IP)

IP is land or a building, or both held to earn rentals or for capital appreciation or both. The objective of IAS 40 is to prescribe

the accounting treatment for investment property & their disclosures.

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

IP is held to earn rentals or for capital appreciation or both while owner occupied is held for the production or supply

of goods or services (or the use of property for administrative purposes).

An IP generates cash flows largely independently of the other assets held by an entity, while owner-occupied generates

cash flows that are attributable not only to the property, but also to other assets used in the production or supply

process. IAS 16 applies to owner occupied.

A property held by a lessee under an operating lease may be classified & accounted for as IP if, & only if, the property

would otherwise meet the definition of an IP & the lessee uses the fair value model.

EXAMPLES OF INVESTMENT PROPERTY EXAMPLES OF ITEMS THAT ARE NOT INVESTMENT

PROPERTY

Land held for long-term capital appreciation rather than

for short-term sale in the ordinary course of business.

Property intended for sale in the ordinary course of business

or in the process of construction or development for such

sale (IAS 2)

Property that is being constructed or developed for future

use as investment property.

Property being constructed or developed on behalf of third

parties

A building that is vacant but is held to be leased out under

one or more operating leases.

Property that is leased to another entity under a finance

lease.

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

A building held under a finance lease

RECOGNITION (Same with IAS 16)

MEASUREMENT

Initial measurement

An IP shall be measured initially at its cost. The following are also important in measuring costs:

Transaction costs shall be included in the initial measurement.

The initial cost of a property interest held under a lease and classified as an investment property shall be the lower

of the fair value of the property and the present value of the minimum lease payments.

The cost of a purchased IP comprises its purchase price and any directly attributable expenditure.

If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this

amount and the total payments is recognised as interest expense over the period of credit.

If the acquired asset was obtained through exchanges of asset (see exchange of asset under IAS 38).


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

Fair value model: After initial recognition, an entity that chooses the fair value model shall measure all of its investment

property at fair value. When a property interest held by a lessee under an operating lease is classified as an investment

property the fair value model must be applied. A gain or loss arising from a change in the fair value of investment property

shall be recognised in profit or loss for the period in which it arises.

TRANSFERS

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

DERECOGNITION

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

on disposal or

when the investment property is permanently withdrawn from use and

no future economic benefits are expected from its disposal.


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IFRS 3: BUSINESS COMBINATIONS (BCs)

The objective of this IFRS is to prescribe the accounting for BCs using the acquisition method.

IDENTIFYING A BUSINESS COMBINATION

A business is an integrated set of activities and assets capable of being conducted and managed to provide returns. If the

assets acquired are not a business, it shall be accounted as an asset acquisition and not as a BC!!

STEPS IN APPLYING ACQUISITION METHOD

1. Identifying the acquirer: the acquirer is the combining entity that obtains control (see IFRS 10 for control).

2. Determine the acquisition date: this is the date on which the acquirer obtains control of the acquiree.

3. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling

interest (NCI) in the acquiree: recognise assets and liabilities if all the following criteria are met:

a. The items must meet the definition of an asset or liability per the Framework

b. The item must be part of what is exchanged

c. The item must be identifiable i.e. it must exist at acquisition date.

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

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

Exceptions to the measurement principle: the following shall be measured by applying the related IFRSs: share-based

payment transactions (IFRS 2), assets held for sale (IFRS 5) and not necessarily at fair value.

Exceptions to the recognition and measurement principle: the following shall be recognised and measured in

accordance with their related IFRSs: income taxes (IAS 12), employee benefits (IAS 19).

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

the proportionate method.

1. Recognise and measure goodwill (or gain on a bargain purchase): this is arrived at thus: Fair value of consideration

transferred plus NCI less fair value of net asset at acquisition. If this equation results into a positive figure, it is goodwill,

if negative, it is referred to as a gain on a bargain purchase. Goodwill is recognised as an intangible asset in the SFP

while gain on a bargain purchase as an income in the P or L.

Measurement period

On the acquisition date, some figures used in calculating goodwill may be based on estimates. IFRS 3 establishes a

measurement period during which these initial estimates may be retrospectively adjusted if actual information is obtained.

The measurement period shall not exceed one year from the acquisition date.

If the actual information relates to facts and circumstances that existed as of the acquisition date then the acquirer would

retrospectively adjust the initial estimates and recalculate goodwill, if it doesn’t relate to the acquisition date, then it would

be prospectively adjusted.

After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an

error in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

SUBSEQUENT MEASUREMENT AND ACCOUNTING

In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity

instruments issued in a business combination in accordance with other applicable IFRSs for those items, depending on their

nature. However, reacquired rights, contingent liabilities, indemnification assets and contingent considerations shall all be

accounted for subsequently by applying IFRS 3.

Additional guidance for applying the acquisition method to particular types of business combinations

IFRS 3 provides guidance for business combinations achieved in stages and on business combination achieved without the

transfer of consideration.


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IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (DOs) A non-current asset HFS (or disposal group-DG) is one in which its carrying amount would be recovered principally through

sale. This IFRS specifies the accounting for assets HFS, presentation & disclosure of DOs.

NON-CURRENT ASSETS HELD FOR SALE (NCA HFS)

Classification of NCA HFS or distribution to owners

An entity shall classify a non-current asset (or disposal group) as HFS if its carrying amount will be recovered principally

through a sale transaction rather than through continuing use. The following criteria must be met:

a. the asset (or disposal group) must be available for immediate sale in its present condition subject to terms that are

usual and customary for sales of such assets.

b. Its sale must be highly probable. For the sale to be highly probable:

i. Management must be committed to the plan to sell the asset

ii. The asset must be actively marketed at a reasonable price in relation to its fair value

iii. Sale must be completed within one year of the classification date

iv. Existence of an active programme to locate a buyer

v. It is unlikely that there will be significant changes to the plan or that management would withdraw.

NCA acquired exclusively for resale: shall be classified as HFS if the 1-year criteria is met and it is highly probable that

the other criteria would be met within a short period of time (usually 3-months).

Non-current assets that are to be abandoned: shall not be classified as but if a DG to be abandoned meets the DO

criteria (see below) it shall be presented as a discontinued operation (DO).

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

Initial

First measure in accordance with applicable IFRSs immediately before initial classification as HFS.

After initial classification, measure at the lower carrying amount (CA) and fair value less cost to sell

Subsequent

Non-current assets HFS shall not be depreciated.

Any further increase in fair value less cost to sell (FVLCS) shall be taken to profit or loss.

Recognition of impairment losses and reversals

Impairment must be considered at initial classification (by using IAS 36) & after classification (using IFRS 5).

Increase in FVLCS shall not exceed cumulative impairment loss previously recognised under IAS 36 & IFRS5.

Changes to a plan of sale

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

i. The amount that should have been its current CA if the asset was not classified as HFS.

ii. its recoverable amount at the date of the subsequent decision not to sell or distribute

DISCONTINUED OPERATIONS (DOs)

A DO is a component of an entity that either has been disposed of, or is classified as HFS, and

a. represents a separate major line of business or geographical area of operations (GAOP),

b. is part of a single co-ordinated plan to dispose of a separate major line of business or GAOP or

c. is a subsidiary acquired exclusively with a view to resale.

DISCLOSURE OF NON-CURRENT ASSETS HFS AND DISCONTINUED OPERATIONS

NCA HFS:

NCA HFS & any related liabilities are disclosed separately from other assets in the SFP.

Description of the nature of the NCA (or DG) HFS & facts and circumstances surrounding the sale.

A gain/loss resulting from initial/subsequent classification as HFS if not separately presented in P or L.

Comparatives are not restated and the reportable segment relating to the NCA HFS is disclosed.

Discontinued operations:

Results of DOs are presented as a single amount in the P or L, the single amount is further broken down in the notes

to the FSs. Cash flow effect is disclosed in the notes or the statement of cash flows

Comparatives are restated


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IFRS 7: FINANCIAL INSTRUMENTS: DISLCOSURES

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

a. the significance of financial instruments for the entity’s financial position and performance; and

b. the nature and extent of risks arising from financial instruments and how the entity manages those risks.

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

CLASSESS OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE

Where applicable, an entity shall group financial instruments into classes that are appropriate to the nature of the

information disclosed and that take into account the characteristics of those financial instruments.

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

SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND FINANCIAL PERFORMANCE

Statement of financial position

a) The carrying amount of each category of financial assets and financial liabilities

b) Disclosures relating to reclassification of financial assets.

c) The effect of offsetting financial assets and financial liabilities.

d) Disclosures relating to financial assets held as collateral for liabilities or contingent liabilities

e) Reconciliation of allowance account for credit losses

f) Disclosures relating to defaults and breaches relating to financial assets and financial liabilities

Statement of profit or loss and comprehensive income

a) Net gains/losses on each category of financial assets and financial liabilities

b) Total interest income and interest expense (calculated using the effective interest rate method) recognised on

financial assets and financial liabilities not at fair value through profit or loss.

c) Amount of any impairment loss for each class of financial assets

d) Accrued interest income on impaired financial assets.

Other disclosures:

a) Accounting policies used in preparing the FSs

b) Certain hedge accounting disclosures for each type of hedge described in IFRS 9.

c) Fair value of each class of financial asset and financial liabilities

NATURE AND EXTENT OF RISK ARISING FROM FINANCIAL INSTRUMENTS.

Qualitative disclosures

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

a) the exposures to risk and how they arise;

b) its objectives, policies and processes for managing the risk and the methods used to measure the risk; and

c) any changes in (a) or (b) from the previous period.

Quantitative disclosures

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

a) summary quantitative data about its exposure to that risk at the end of the reporting period.

b) concentrations of risk if not apparent from the disclosures made in accordance with (a) and (b).

Types of risk

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

discharge an obligation.

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

3. Market risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes

market prices. Market risk comprises of currency risk, interest rate risk and other price risk.

i. Currency risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of

changes in foreign exchange rates

ii. Interest rate risk: same with currency risk except that fluctuation is due to changes in market interest rates.

iii. Other price risk: same with currency risk except that fluctuation is due to changes in market prices.


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IFRS 8: OPERATING SEGMENT

CORE PRINCIPLE

An entity shall disclose information to enable users of its FSs to evaluate the nature and financial effects of the business

activities in which it engages and the economic environments in which it operates.

OPERATING SEGMENT (OS)

An operating segment is a component of an entity:

(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and

expenses relating to transactions with other components of the same entity),

(b) whose operating results are regularly reviewed by the entity’s CODM to make decisions about resources to be allocated

to the segment and assess its performance, and

(c) for which discrete financial information is available.

However, start-up operations that has not earned revenues may be referred to as an operating segment as may a

component that sells to other components within the same group.

CODM is a function & not a person with responsibility for assessing performance & allocating resources.

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

REPORTABLE SEGMENT (RS)

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

quantitative thresholds:

a) Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or

more of the combined revenue, internal and external, of all operating segments.

b) The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the

combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all

operating segments that reported a loss.

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

Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately

disclosed, if management believes that information about the segment would be useful to users of the financial statements.

Aggregation criteria: Two or more operating segments may be aggregated into a single operating segment if aggregation

is consistent with the core principle of this IFRS, the segments have similar economic characteristics, and the segments are

similar in each of the following respects:

a) the nature of the products and services;

b) the nature of the production processes;

c) the type or class of customer for their products and services;

d) the methods used to distribute their products or provide their services; and

e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

Other OSs that do not meet the quantitative threshold may be aggregated with other OSs that have similar economic

characteristics and share majority of the aggregation criteria.

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

MEASUREMENT

Measurement of RS is based on the information used internally by the CODM & not necessarily based on the IFRS, hence,

IFRS 8 requires RS amounts to be reconciled to the relevant (IFRS) amount for the entity as a whole, but only in total and

not on a segment by segment basis.


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IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS

The objective of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements

when an entity controls one or more other entities.

CONTROL

In accordance with IFRS 10, control is the sole basis for the preparation of consolidated financial statements i.e. the

investor must control the investee. If control is not established an entity cannot be consolidated!!

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

a. power over the investee;

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

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

INVESTMENT ENTITIES (IE)

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

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

services;

b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation,

investment income, or both; and

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

An IE shall not consolidate its subsidiaries or apply IFRS 3 when it obtains control of another entity. Instead, an IE shall

measure an investment in a subsidiary at fair value through profit or loss using IFRS 9.

If an IE has a subsidiary that is not in itself an IE and whose main activities and purpose is related to the investment

activities of the IE, it shall consolidate that subsidiary.

ACCOUNTING REQUIREMENTS

Accounting policies: a parent shall prepare consolidated financial statements using uniform accounting policies for like

transactions and other events in similar circumstances.

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

when the investor loses control of the investee.

Non-controlling interests (NCI): a parent shall present non-controlling interests in the consolidated statement of financial

position within equity, separately from the equity of the owners of the parent.

Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are

equity transactions (i.e. transactions with owners in their capacity as owners).

Continuous assessment: an investor shall reassess whether it controls an investee if facts and circumstances indicate that

there are changes to one or more of the three elements of control listed

Consolidation procedures: combine like items of assets, liabilities, expenses, income and equity of both the parent &

subsidiary. Offset the consideration transferred with the subsidiary’s equity at acquisition in calculating goodwill. Eliminate

intra-group transactions.

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

Loss of control: if a parent loses control of a subsidiary the parent: derecognises the net assets, goodwill, NCI, recognise

the fair value of retained interest. The gains or losses on disposal shall be recognised in profit or loss.

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

Please share this material with your friends. Thank you for reading!!!!!!!!!!


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Please share this material with your friends. Thank you for reading!!!!!!!!!!

Usidamen Israel Usidamen Israel is an experienced auditor, teacher, author and mentor. He teaches financial/corporate reporting at Students Pye, Yaba, Lagos and Widerange Professionals, Arepo, Ogun State. He currently works in the audit line of service of one of the big 4 firms.

For technical assistance with issues relating to financial reporting, auditing and other related areas you can

reach me on:

08022747678

D866C8E9

[email protected]

mailto:[email protected]

the international accounting standards board (iasb

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