ACCA P2 Course Notes

P2 Course notes 
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Syllabus A: THE PROFESSIONAL AND ETHICAL DUTY OF THE ACCOUNTANT 3
Syllabus A1. Professional behaviour and compliance with accounting standards 3
Syllabus A2. Ethical requirements of corporate reporting 7
Syllabus A3: Social Responsibility 8
Syllabus B: THE FINANCIAL REPORTING FRAMEWORK 16
Syllabus B1. The applications, strengths and weaknesses of an accounting framework 16
Syllabus B2. Critical evaluation of principles and practices 31
Syllabus C: REPORTING THE FINANCIAL PERFORMANCE OF ENTITIES 40
Syllabus C1. Performance reporting 40
Syllabus C2. Non-current Assets 51
Syllabus C3. Financial Instruments 112
Syllabus C4. Leases 159
Syllabus C5. Segmental Reporting 182
Syllabus C6. Employee Benefits 190
Syllabus C7. Income tax 200
Syllabus C8. Provisions 212
Syllabus C9. Related parties 222
Syllabus C10. Share based payment 225
Syllabus C11. Reporting requirements of small and medium- sized entities (SMEs) 249
Syllabus D: FINANCIAL STATEMENTS OF GROUPS OF ENTITIES 259
Syllabus D1: Group accounting including statements of cash flows 259
Syllabus D2: Continuing and discontinued interests 309
Syllabus D3: Changes in group structures 319
Syllabus D4: Foreign transactions and entities 321
Syllabus E: SPECIALISED ENTITIES AND SPECIALISED TRANSACTIONS 329
Syllabus E1: Financial reporting in specialised, not-for-profit and public sector entities 329
Syllabus E2: Entity reconstructions 331
Syllabus F: IMPLICATIONS OF CHANGES IN ACCOUNTING REGULATION 338
Syllabus F1. The effect of changes in accounting standards on accounting systems 338
Syllabus F2. Proposed changes to accounting standards 338
Syllabus G: THE APPRAISAL OF FINANCIAL PERFORMANCE 340
Syllabus G2. Analysis and interpretation of financial information and measurement of performance 340
Syllabus H: CURRENT DEVELOPMENTS 354
Syllabus H1. Environmental and social reporting 354
Syllabus H2. Convergence between national and international reporting standards 358
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Syllabus A: THE PROFESSIONAL AND
ETHICAL DUTY OF THE ACCOUNTANT
Syllabus A1. Professional behaviour and compliance

with accounting standards
Syllabus A1a) Appraise and discuss the ethical and professional issues in advising on
corporate reporting.
Giving Advice
When giving advice be aware of:
1) Your own professional competence and that company directors must keep up to
date with IFRS developments
The issues that may threaten this are:

• Insufficient time
• Incomplete, restricted or inadequate information
• Insufficient experience, training or education
• Inadequate resources
2) Your own objectivity
The issues that may threaten this are:

• Financial interests (profit-related bonuses /share options)
• Inducements to encourage unethical behaviour
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In fact ACCA’s Code of Ethics and Conduct identifies that accountants must not be
associated with reports, returns, communications where they believe that the
information:
• Contains a materially misleading statement

• Contains statements or information furnished recklessly
• Has been prepared with bias, or
• Omits or obscures information required to be included where such omission or obscurity
would be misleading
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Syllabus A1b) Assess the relevance and importance of ethical and professional issues in
complying with accounting standards.
Ethical and professional issues
Accounting professionals are expected to be:

1. highly competent
2. reliable
3. objective
4. high degree of professional integrity.
A professional’s good reputation is one of their most important assets.
Accountancy as a profession has accepted its overriding need to act in the best interest
of the public.
This can create an ethical/professional dilemma.
As accountants also have professional duties to their employer and clients.
Where these duties are in contrast to the public interest, then the ethical conduct of the
accountant should be in favour of the public interest.
This can create problems particularly on an audit, whereby you provide a service for the
client, yet may have to make public information which is detrimental to the company but in
the public interest.
There is a very fine line between acceptable accounting practice and management’s
deliberate misrepresentation in the financial statements.
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The financial statements must meet the following criteria:
• Technical compliance:
Generally accepted accounting principles (GAAP) used.
• Economic substance: 
The economic substance of the event that has occurred must be represented
(over and above GAAP)
• Full disclosure and transparency: 

Sufficient disclosures made
Management often seeks loopholes in financial reporting standards that allow them to
adjust the financial statements as far as is practicable to achieve their desired aim.
These adjustments amount to unethical practices when they fall outside the bounds of
acceptable accounting practice.
In most cases conformance to acceptable accounting practices is a matter of personal

integrity.
Reasons for such behaviour often include
1. market expectations
2. personal realisation of a bonus
3. maintenance of position within a market sector
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Syllabus A2. Ethical requirements of corporate reporting
Syllabus A2a) Appraise the potential ethical implications of professional and managerial
decisions in the preparation of corporate reports.
Syllabus A2b) Assess the consequences of not upholding ethical principles in the
preparation of corporate reports.
Ethical requirements of corporate reporting
Misrepresenting figures in the financial statements may not be illegal but is

unethical.
Accountants have a responsibility to not mislead the public.
Accountancy is a profession which, like all professions, has:

1. Specialised body of knowledge
2. Commitment to social good
3. Can regulate itself
4. Has high social status
The professions promise to act in the best public interest.

In return the public allows the profession to self-regulate, enjoy high social status and have
an exclusive right to perform certain functions (e.g. Auditors)
Accountants need to act professionally and in the current conditions have even more of a
duty to present fair, accurate and faithfully represented information.
It can be argued that accountants should have the presentation of truth, in a fair and
accurate manner, as a goal. 
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Syllabus A3: Social Responsibility
Syllabus A3a) Discuss the increased demand for transparency in corporate reports, and
the emergence of non-financial reporting standards.
Transparency & Non-Financial Standards
This has become more important recently as stakeholders are interested in:
1. Management of business
2. Future prospects
3. Environmental concerns
4. Social responsibility of company
How is this reported…?

• Operating and Financial Review (OFR)
Looks at results and talks about future prospects
• Corporate Governance Report

Looks at how the company is directed and controlled
• Environmental and social report

Looks at the environment and social concerns and the sustainability of these
• Management Commentary
Looks at the trends behind the figures and what is likely to affect future performance
and position
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IFRS Practice Statement Management Commentary
• On 8 December 2010 the IASB issued the IFRS Practice Statement Management
Commentary.
 
The Practice Statement provides a broad, non-binding framework for the
presentation of management commentary that relates to financial statements
prepared in accordance with IFRS.
 
The Practice Statement is not an IFRS. Consequently, entities are not required to
comply with the Practice Statement, unless specifically required by their jurisdiction.
• Management commentary is a narrative report that provides a context within which

to interpret the financial position, financial performance and cash flows of an
entity.
 
It also provides management with an opportunity to explain its objectives and its
strategies for achieving those objectives.
 
Management commentary encompasses reporting that jurisdictions may describe
as management’s discussion and analysis (MD&A), operating and financial review
(OFR), or management’s report.
• Management commentary fulfils an important role by providing users of financial

statements with a historical and prospective commentary on the entity’s financial
position, financial performance and cash flows.  
• The Practice Statement permits entities to adapt the information provided to

particular circumstances of their business, including the legal and economic
circumstances of individual jurisdictions.  
This flexible approach will generate more meaningful disclosure about the most
important resources, risks and relationships that can affect an entity’s value, and
how they are managed.
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• The purpose of an OFR is to assist users, principally investors, in making a forward-
looking assessment of the performance of the business by setting out
management’s analysis and discussion of the principal factors underlying the
entity’s performance and financial position.
Typically, an OFR would comprise some or all of the following:
1. Description of the business and its objectives;

2. Management’s strategy for achieving the objectives;
3. Review of operations;
4. Commentary on the strengths and resources of the business;
5. Commentary about such issues as human capital, research and development
activities, development of new products and services;
6. Financial review with discussion of treasury management, cash inflows and
outflows and current liquidity levels.
The publication of such a statement would have the following advantages:
1. It could be helpful in promoting the entity as progressive and as eager to

communicate as fully as possible with investors;
2. It could be a genuinely helpful medium of communicating the entity’s plans and
management’s outlook on the future;
However, there could be some drawbacks:

1. If an OFR is to be genuinely helpful to investors, it will require a considerable input
of senior management time.
This could be costly, and it may be that the benefits of publishing an OFR would not
outweigh the costs;
2. There is a risk in publishing this type of statement that investors will read it in
preference to the financial statements, and that they may therefore fail to read
important information.
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Non-financial reporting
This is concerned with business ethics and accountability to stakeholders
Companies should look after ALL shareholders and be transparent in its dealings with
them when compiling corporate reports.
CSR requires directors to look at the aims and purposes of the company and not assume
profit to be the only motive for shareholders.
Arrangements should be put in place to ensure that the business is conducted in a

responsible manner.
This includes environmental and social targets, monitoring of these and continuous
improvement.
There is pressure now for companies to show more awareness and concern, not only for
the environment but for the rights and interests of the people they do business with.
Governments have made it clear that directors must consider the short-term and long-term
consequences of their actions, and take into account their relationships with employees
and the impact of the business on the community and the environment.
CSR requires the directors to address strategic issues about the aims, purposes, and
operational methods of the organisation, and some redefinition of the business model that
assumes that profit motive and shareholder interests define the core purpose of the
company.
The reporting of the company's effects on society at large
It expands the traditional role that company´s only provide for the shareholders.
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Why prepare a social report?
1. Build their reputation on it (e.g. body shop)

2. Society expects it (Shell)
3. Long term it will increase profits
4. Fear that governments may force it otherwise
How companies interact responsibly with society
• Provide fair pay to employees

• Safe working environment
• Improvements to physical infrastructure in which it operates
Is it against the maximising shareholder wealth principle?
Organisations are rarely controlled by shareholders as most are passive investors.
This means large companies can manipulate markets - so social responsibility is a way of
recognising this, and doing something to prevent it happening from within.
Also, of course, business get help from outside and so owe something back. They benefit
from health, roads, education etc. of the workforce and suppliers and customers.
This social contract means that the companies then take on their own social responsibility
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Human Capital Reporting
Sees employees as an asset not an expense and competitive advantage is gained by

employees.
The training, recruitment, retention and development of employees is all part of what would
therefore be reported
• Implications
People are a resource like any other and so needs to be effectively and
efficiently managed
Safeguarding of the asset as normal
Impairment could mean a simple drop in motivation
• HCM reports should:

1. Show size of workforce
2. Retention rates
3. Skills needed for success
4. Training
5. Remuneration levels
6. Succession planning
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Syllabus A3b) Discuss the progress towards a framework for integrated reporting.
Purpose and content of an integrated report
To explain to providers of financial capital how an organisation creates value

over time.
The ‘building blocks’ of an integrated report are:
• Guiding principles 
These underpin the integrated report 
They guide the content of the report and how it is presented
• Content elements 
These are the key categories of information  
They are a series of questions rather than a prescriptive list
Guiding Principles
• Are you showing an insight into the future strategy..?
• Are you showing a holistic picture of the organisation's ability to create value over
time? 
Look at the combination, inter-relatedness and dependencies between the factors
that affect this.
• Are you showing the quality of your stakeholder relationships?
• Are you disclosing information about matters that materially affect your ability to
create value over the short, medium and long term?
• Are you being concise?  

Not being burdened by less relevant information.
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• Are you showing Reliability, completeness, consistency and comparability when
showing your own ability to create value?
Content Elements
• Organisational overview and external environment 
What does the organisation do and what are the circumstances under which it
operates?
• Governance 
How does an organisation’s governance structure support its ability to create
value in the short, medium and long term?
• Business model  
What is the organisation’s business model?
• Risks and opportunities  

What are the specific risk and opportunities that affect the organisation’s ability to
create value over the short, medium and long term? And how is the organisation
dealing with them?
• Strategy and resource allocation 

Where does the organisation want to go and how does it intend to get there?
• Performance 
To what extent has the organisation achieved its strategic objectives for the period
and what are its outcomes in terms of effects on the capitals?
• Outlook 
What challenges and uncertainties is the organisation likely to encounter in
pursuing its strategy, and what are the potential implications for its business
model and future performance? 
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Syllabus B: THE FINANCIAL REPORTING
FRAMEWORK
Syllabus B1. The applications, strengths and

weaknesses of an accounting framework
Syllabus B1a) Evaluate the valuation models adopted by standard setters.
Fair Value
Fair value considers the characteristics of the asset
For example
• The condition and location of an asset
• Any restrictions on the sale or use of an asset
This means that when revaluing its property, plant and equipment, an entity should
consider:
the highest and best use of the assets
Fair value assumes the sales takes place in:
• The Principal market  

the market with greatest volume and level of activity for the asset or liability
• The most advantageous market 
The market that maximises the amount that would be received paid for the asset
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Valuation Techniques
• Market approach 
Prices from similar market transactions  
e.g. quoted prices of listed equity, debt securities or futures, or market interest rates
• Income approach 
This converts future cash flows to a single discounted amount; e.g. discounted cash flow
models and option pricing models
• Cost approach 
This reflects the amount required currently to replace the service capacity of an asset,
i.e. the current replacement cost
When measuring fair value, an entity is required to maximise the use of relevant
observable inputs and minimise the use of unobservable inputs
Level 1 Level 2 Level 3
Definition Quoted prices in active Observable inputs Unobservable inputs

markets for identical
assets or liabilities
Example Share prices on a stock Current market rents for similar Projected cash flows
exchange properties and market interest rates used to value a none
for the FV of an investment public business
property
How does all this work in practice?

E.g. An entity owns 10,000 ordinary shares in M & S
Since there is an active market for these shares through the London stock exchange, the
entity must use a market approach (level 1 input).
However, the measurement of the fair value of an unlisted debt security may require the
use of an income approach, e.g. a discounted cash flow model using market interest rate
for similar debt securities (level 2 input) and market credit spreads adjusted for entity-
specific credit risk (level 2 or 3 inputs).
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Syllabus B1b) Discuss the use of an accounting framework in underpinning the
production of accounting standards.
Syllabus B1c) Assess the success of such a framework in introducing rigorous and
consistent accounting standards.
Framework - Basics and Arguments
The IASB framework is not a standard nor does it override any standards
Definition
It sets out the concepts which underlie the accounts. It means that basic principles do not
have to re-debated for every new standard.
It is.. 
‘a constitution, a coherent system of interrelated objectives and fundamentals which
can lead to consistent standards and which prescribe the nature, function and limits
of financial accounting and financial statements’
What’s its purpose?
The IASB’s Framework for the Preparation and Presentation of Financial Statements
describes the basic concepts by which financial statements are prepared:
• Serves as a guide in developing accounting standards.

• Serves as a guide to resolving accounting issues that are not addressed directly in a
standard.  
(In fact IAS 8 requires management to consider the definitions, recognition criteria, and
measurement concepts for assets, liabilities, income, and expenses in the Framework.)
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What does it ‘look’ like?
It includes the following:
1. The objective of financial statements

2. Underlying assumptions
3. Qualitative characteristics of good information
4. Elements of FS
5. Recognition of Elements
6. Measurement of Elements
7. Concepts of Capital
More on these in other sections
Arguments for a conceptual framework
• It may seem a very theoretical document but it has highly practical aims.
• Without a framework then standards would be developed without consistency and also
the same basic principles would be continually examined. Perhaps even sometimes with
differing conclusions.
• The IASB therefore becomes the architect of financial reporting with a framework as
solid foundations upon which everything else relies.
• Also without such a framework then a rules based system tends to come in instead. The
rules get added to as situations arise and finally become cumbersome and unadaptable.
• It also prevents political lobbyists from changing pressurising changes in standards as

the principles have already been agreed upon.
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So a conceptual framework basically provides a framework for:
1. what should be brought into the accounts

2. when it should be brought into the accounts and
3. at how much it should be measured
Arguments against a conceptual framework
• Financial Statements are prepared for many different users - can one set of principles be
agreed by all?
• Perhaps different users need different information and hence different measurement
bases and principles
• Even with framework principles - standards go through a huge analysis process, for
example the revenue recognition exposure draft has now been re-exposed!
GAAP & the framework

In some ways the framework tries to codify the current GAAP into new standards - or
at least current thinking
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Conceptual Framework Chapters (1-3)
Chapter 1: The Objective of Financial Reporting
The objective is to provide financial information that is useful to present and potential
equity investors, lenders and other creditors in making decisions.
The degree to which that financial information is useful will depend on its qualitative
characteristics.
A few observations about the objective:
• Wide Scope 
Its scope is wider than financial statements. It is the objective of financial reporting in
general.
• Users 
Financial reporting is aimed primarily at capital providers. That does not mean that
others will not find financial reports useful. It is just that, in deciding on the principles for
recognition, measurement, presentation, and disclosure, the information needs of capital
providers are paramount.
• Decision usefulness & stewardship 

Decision usefulness to capital providers is the overriding purpose of financial reporting,
as well as assessing the stewardship of resources already committed to the entity. 
The ability of management to discharge their stewardship responsibilities effectively has
an effect on the entity’s ability to generate net cash inflows in the future, implying that
potential investors are also assessing management performance as they make their
investment decision.
• Capital providers - main users  

The Framework identifies equity investors, lenders and other creditors as ‘capital
providers’.
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Governments, their agencies, regulatory bodies, and members of the public are identified
as groups that may find the information in general purpose financial reports useful.
However, these groups have not been identified as primary users.
Limitations of FS
The Boards note that users of financial reports should be aware of the limitations of the
information included in such reports – specifically, estimates and the use of judgement.
Additionally, financial reports are but one source of information needed by those who make
investment decisions. Information about general economic conditions, political events and
industry outlooks should also be considered.
Financial reporting should also include management’s explanations, since management

knows more about the entity than external users.
Chapter 2: The Reporting entity
The chapter on the Reporting Entity will be inserted once the IASB has completed its re-
deliberations following the Exposure Draft ED/2010/2 issued in March 2010.
Chapter 3: Qualitative Characteristics of Useful Financial Information
Main Principle
Financial information is useful when it is relevant and represents faithfully what it purports
to represent. The usefulness of financial information is enhanced if it is comparable,
verifiable, timely and understandable.
Fundamental characteristics:
1. Relevance 
Relevant information makes a difference in the decisions made by users. 
Therefore it must have a predictive value, confirmatory value, or both. The predictive
value and confirmatory value of financial information are interrelated.  
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Materiality is an entity-specific aspect of relevance. It is based on the nature and/or
size of the item relative to the financial report.
2. Faithful representation 
General purpose financial reports represent economic phenomena in words and
numbers.  
To be useful, financial information must not only be relevant, it must also represent
faithfully the phenomena it purports to represent. 
This maximises the underlying characteristics of completeness, neutrality and freedom
from error.
Enhancing characteristics:
1. Comparability (including consistency)
2. Timeliness
3. Reliable information
4. Verifiability 
Helps to assure users that information represents faithfully the economic phenomena
that it purports to represent. 
It implies that knowledgeable observers could reach a general consensus (although
not necessarily absolute agreement) that the information does represent faithfully the
economic phenomena.
5. Understandability 
Enables users with a reasonable knowledge to comprehend the information.
Understandability is enhanced when the information is:

• Classified
• Characterised
• Presented clearly and concisely
However, relevant information should not be excluded solely because it may be too
complex.
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Two constraints that limit the information provided in useful financial reports:
1. Materiality 
Information is material if its omission or misstatement could influence the decisions
that users make on the basis of an entity’s financial information.  
Materiality is not a matter to be considered by standard-setters but by preparers and
their auditors.
2. Cost-benefit 
The benefits of providing financial reporting information should justify the costs of
providing that information.
Potential Problems
Decision usefulness seen as more important than the giving information about how well
the company is being looked after (Stewardship).
Although it may be said that stewardship is taken into account when talking about decision
usefulness - perhaps there should be a more specific mention of it.
Faithful representation has replaced reliability.
This is even more vague and could lead to problems regarding treatment of some items
where substance over form exists
Should it encompass not for profits also?
Why the split between fundamental and enhancing characteristics?
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Faithful Representation
Accounts must represent faithfully the phenomena it purports to represent
Faithful representations means
1. Substance over form 

Faithful representation means capturing the real substance of the matter.
2. Represents the economic phenomena 

Faithful means an agreement between the accounting treatment and the economic
phenomena they represent. 
The accounts are verifiable and neutral.
3. Completeness, Neutrality & Verifiability
Examples
Sell and buy back = Loan

An entity may sell some inventory to a finance house and later buy it back at a price based
on the original selling price plus a pre-determined percentage. Such a transaction is really
a secured loan plus interest. To show it as a sale would not be a faithful representation of
the transaction.
Convertible Loans
Another example is that an entity may issue convertible loan notes.
Management may argue that, as they expect the loan note to be converted into equity, the
loan should be treated as equity.
They would try to argue this as their gearing ratio would then improve. However, it is
recorded as a loan as primarily this is what it is.
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As noted previously, simply following rules in accounting standards can provide for
treatment which is essentially form over substance.
Whereas, users of accounts want the substance over form.
The concept behind faithful representation should enable creators of financial statements
to faithfully represent everything through measures and descriptions above and beyond
that in the accounting standard if necessary.
Limitations to Faithful Representation
1. Inherent uncertainties
2. Estimates
3. Assumptions
Conceptual Framework Chapter 4
Recognition and measurement
Recognition
Please remember this!!!

For an item to be recognised in the accounts it must pass three tests:
1. Meet the definition of an asset/liability or income/expense or equity

2. Be probable
3. Be reliably measurable
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Definitions
1. Asset 
An asset is a resource controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise.
2. Liability 
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
3. Equity 
Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
4. Income 
Income is increases in assets (or decreases of liabilities) that result in increases in
equity, other than contributions from equity participants.
5. Expense 
Expenses are decreases in assets or (incurrences of liabilities) that result in decreases
in equity, other than distributions to equity participants.
How this is applied in specific cases?
• Factoring of receivables 
 
Where debts are factored, the firm sells its debts to the factor. This may be a true sale or
just a means of getting cash in and so in effect a loan. 
It all depends on whether the debtors sold are still an asset to the company. 
The definition of an asset refers to economic benefits so whoever receives those
benefits should hold the debtors as an asset. 
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Example 
RCA (that fine academy) sells some of its debtors to a factor. The terms of the
arrangement are as follows:
 
Factor charges 5% Interest on all outstanding debts every month
 
Any bad debts are transferred back to RCA for a refund.
Solution 
The best way to view this is by looking at who takes the risks. The risk of a
debtor is that they pay slowly and/or go bad.
 
The 5% interest charge means that if the debtor is a slow payer, RCA pays 5%
so takes the risk. Equally if the debt goes bad RCA takes the risk. So they
remain RCA debtors. The money from the so called sale is treated as a loan. As
the debtors pay the factor that is the loan being paid off.
• Consignment Stock 
 
This is where inventories are held by one party but are owned by another (for example a
manufacturer and car dealer arrangement)  
Often used in a ‘sale or return’ basis. 
Issue  
The issue is - to whom does the stock belong? Not the legal form but the
substance. Again look at who is taking most of the risks and it is they who
should have the stock on their SFP.
Risks 
Who takes the risk of obsolescence? 
Who takes the risk of the sell on price falling? 
Who takes the risk of the stock taking a long time to sell?
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Example
Here’s an agreement between a car manufacturer (m) and a car dealer (d)
The price of vehicles is fixed at the date of transfer. (Price fall risk taken by d)
D has no right to return unsold cars (obsolescence risk taken by d)
D pays m 2% a month on all unsold cars. (slow moving stock risk taken by d)
Therefore the cars should be on D’s statement of financial position.
IAS 1 Presentation of Financial Statements
The statement of profit or loss (P&L)
is defined as the total of income less expenses, excluding the components of other
comprehensive income
Other comprehensive income (OCI)
comprising of items of income and expense (including reclassification adjustments) that

are not recognised in profit or loss
IFRS currently requires
• the statement of P&L and OCI to be presented as either one statement, being a
combined statement of P&L and OCI
• or two statements, being the statement of P&L and the statement of comprehensive
income.
An entity has to show separately in OCI
• Those items which would be reclassified (recycled) to P&L and
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• Those items which would never be reclassified (recycled) to P&L.  
The related tax effects have to be allocated to these sections.
Reclassification adjustments
are amounts recycled to P&L in the current period which were recognised in OCI in the
current or previous periods.
An example of items recognised in OCI which may be reclassified to P&L are

foreign currency gains on the disposal of a foreign operation and realised gains
or losses on cash flow hedges
Those 20 items which may not be reclassified are changes in a revaluation surplus under
IAS 16 Property, Plant and Equipment, and actuarial gains and losses on a defined benefit
plan under IAS 19 Employee Benefits. 
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Syllabus B2. Critical evaluation of principles and
practices
Syllabus B2a) Identify the relationship between accounting theory and practice.
Syllabus B2b) Critically evaluate accounting principles and practices used in corporate
reporting
Usefulness of financial Reports
Usefulness of financial Reports
Different options problem
The availability of different accounting treatment options causes difficulty for analysts and
investors in their efforts to understand and benchmark an entity’s financial statements.
This is why there is increased emphasis on accounting policy disclosures and information
on significant accounting estimates and judgements.
Poor Disclosures
• Worryingly the Financial Reporting Review Panel (FRRP) in a report issued in late 2006
commented that such disclosures were an area of weakness in the financial statements
of many UK listed entities.  
Many had simply retained previous GAAP policy disclosures even though actual
accounting treatment had correctly changed to IFRS.
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• There was also scant regard paid by many such entities to disclosures in relation to
significant accounting estimates and judgements.
An Alternative?
There has always been strong support of principles-based standards rather than the
“cookery-book” approach of a rules-based regime.
Already, there is evidence of strong US influence on IASB standard-setting which brings us

in that direction, with the most recent example being the removal of the option to expense
borrowing costs on qualifying assets.
If the balance is to be retained in IFRS standards, companies need to aim for the “gold
standard” of transparency and consistency.
Key Discussion Areas
Key Discussion Areas of a Conceptual Framework
Objectives
Are financial statements produced for shareholders or a wide range of users?

Currently the focus is on the capital markets and maximising shareholder wealth.
Is decision usefulness or stewardship the key criteria or stewardship?
It would seem currently that decision usefulness is taking the driving seat, but there is
plenty of argument that the main objective of a set of accounts is not to make decisions but
to keep tabs on those making decisions!
Qualitative Characteristics
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• Relevance or reliability?  
For example fair values or historical costs?  
FV are more relevant while HC is more reliable.
• Neutrality or prudence?
Definitions of the elements of financial statements
Should ‘control’ be included in the definition of an asset or become part of the recognition
criteria?
1. For example, does the holder of a call option ‘control’ the underlying asset?
2. Goodwill is capitalised yet is not controlled.
3. Is a convertible loan equity or debt? How can it be both?
Recognition and De-recognition
There are issues over the timing of recognition. When a value is put on an item or when
cost incurred?
Measurement
More detailed discussion of the use of measurement concepts, such as historical cost, fair
value, current cost, etc. are required and also more guidance on measurement techniques.
Measurement concepts should address initial measurement and subsequent
measurement in the form of revaluations, impairment and depreciation which in turn gives
rise to issues about classification of gains or losses in income or in equity.
Reporting entity
Which entities should be included in consolidated financial statements:

Complex business arrangements raise issues over what entities should be consolidated
and the basis upon which entities are consolidated.
For example, should the basis of consolidation be ‘control’ and what does ‘control’ mean?
Presentation and disclosure
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Discussions as to the boundaries of presentation and disclosure are required.
Increased information disclosure helps investment decisions.
This means good companies get the required investment.
It creates confidence and so helps liquidity in the capital markets. Risk is better understood
and so the cost of capital more accurate.
However, there are problems of understandability and information overload. Also there are
costs including:
1. Getting and giving the information

2. Possible litigation
3. The cost of competitive disadvantage
Approaches to Corporate Governance
Corporate governance
is the system by which organisations are directed and controlled.
There are 2 possible systems for trying to get companies to have good corporate
governance:
These are:
1. Rules based
2. Principle based
Rules-based system
In the rules-based system, companies adhere to the rules or pay penalties.
• ADVANTAGES
1. Clarity
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2. Standardisation
3. Penalties are a deterrent against bad CG
4. Easier compliance with the rules, as they are unambiguous, and can be evidenced
• DISADVANTAGES
1. Can create just a "box-ticking" approach
2. Not suitable to all possible situations.
3. Creates unnecessary administration burden on some companies
4. One size does not necessarily fit all.
5. Expensive
Principles-based System (Comply or explain)
In the principles system, companies adhere to the spirit of the “rule”, or explain why it
hasn’t.
This does not mean the company has a choice not to adhere.
It just means it can TEMPORARILY explain why it has not.
The punishment for this non-adherence will be judged by investors.
• ADVANTAGES
1. Not so rigid, allows for different circumstances.
2. Allows companies to go beyond the minimum required.
3. Less of an admin burden.
4. Can develop own specific CG and Internal controls (For example physical controls
over cash will be vital to some businesses and less relevant or not applicable to
others.
• DISADVANTAGES
1. The principles are so broad that they are of very little use as a guide to best
corporate government practice
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2. Not easier compliance as with the rules, as they are ambiguous, and can not be
evidenced
Principles v Rules More Detail
• Principles 
 
The principle of ‘comply or explain’ means that companies have to take seriously the
general principles of relevant corporate governance codes. 
Compliance is required under stock market listing rules but non-compliance is allowed
based on the premise of full disclosure of all areas of non-compliance.  
It is believed that the market mechanism is then capable of valuing the extent of non-
compliance and signalling to the company when an unacceptable level of compliance is
reached. 
On points of detail companies could be in non-compliant as long as they made clear in

their annual report the ways in which they were non-compliant and, usually, the reasons
why. 
This meant that the market was then able to ‘punish’ non-compliance if investors were
dissatisfied with the explanation (ie the share price might fall). 
In most cases nowadays, comply or explain disclosures in the UK describe minor or

temporary non-compliance. 
Some companies, especially larger ones, make ‘full compliance’ a prominent

announcement to shareholders in the annual report, presumably in the belief that this will
underpin investor confidence in management, and protect market value. 
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Remember though that companies are required to comply under listing rules but the fact
that it is not legally required should not lead us to conclude that they have a free choice. 
The stock market takes a very dim view of most material breaches, especially in larger
companies. 
Typically, smaller companies are allowed (by the market, not by the listing rules) more
latitude than larger companies. 
This is an important difference between rules-based and principles-based approaches. 
Smaller companies have more leeway than would be the case in a rules-based jurisdiction,
and this can be very important in the development of a small business where compliance
costs can be disproportionately high. 
• Rules 
 
Rules-based control is when behaviour is underpinned and prescribed by statute of the
country’s legislature.  
Compliance is therefore enforceable in law such that companies can face legal action if
they fail to comply. 
US-listed companies are required to comply in detail with Sarbox provisions. 
Sarbox compliance can also prove very expensive.
 
The same detailed provisions are required of SME's as of large companies, and these
provisions apply to each company listed in New York.
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Changes in accounting policies and accounting
estimates
Comparatives are changed for accounting POLICY changes only
Changes in accounting estimates have no effect on the comparative
Changes in accounting policy means we must change the comparative too to ensure we
keep the accounts comparable for trend analysis
Accounting Policy
Definition
“the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting the financial statements”
An entity should follow accounting standards when deciding its accounting policies
If there is no guidance in the standards, management should use the most relevant and
reliable policy
Changes to Accounting Policy
These are only made if:

It is required by a Standard or Interpretation; or
It would give more relevant and reliable information
1. Adjust the comparative amounts for the affected item 

(as if the policy had always been applied)
2. Adjust Opening retained earnings 
(Show this in statement of changes in Equity too)
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Accounting Estimates
Definition
“an adjustment of the carrying amount of an asset or liability, or related expense, resulting
from reassessing the expected future benefits and obligations associated with that asset or
liability”
Examples
Allowances for doubtful debts;
Inventory obsolescence;
A change in the estimate of the useful economic life of property, plant and equipment
Changes in Accounting Estimate

1. Simply change the current year
2. No change to comparatives
Prior Period Errors
These are accounted for in the same way as changes in accounting policy
Accounting treatment
1. Adjust the comparative amounts for the affected item
2. Adjust Opening retained earnings 
(Show this in statement of changes in Equity too)
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Syllabus C: REPORTING THE FINANCIAL
PERFORMANCE OF ENTITIES
Syllabus C1. Performance reporting
Syllabus C1b) Discuss and apply the criteria that must be met before an entity can apply the revenue
recognition model to that contract.
Revenue Recognition - IFRS 15 - introduction
When & how much to Recognise Revenue?
Here you need to go through the 5 step process…
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation
Before we do that though, let’s get some key definitions out of the way..
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Key definitions
• Contract
An agreement between two or more parties that creates enforceable rights and
obligations.
• Income
Increases in economic benefits during the accounting period in the form of

increasing assets or decreasing liabilities
• Performance obligation
A promise in a contract to transfer to the customer either:
- a good or service that is distinct; or
- a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.
• Revenue
Income arising in the course of an entity’s ordinary activities.
• Transaction price
The amount of consideration to which an entity expects to be entitled in exchange for

transferring promised goods or services to a customer. 
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Syllabus C1c) Discuss and apply the five-step model which relates to revenue earned from a
contract with a customer
Revenue Recognition - IFRS 15 - 5 steps
Ok let’s now get into a bit more detail…
Step 1: Identify the contract(s) with a customer
• The contract must be approved by all involved
• Everyone’s rights can be identified
• It must have commercial substance
• The consideration will probably be paid
Step 2: Identify the separate performance obligations in the contract
This will be goods or services promised to the customer
These goods / services need to be distinct and create a separately identifiable

obligation
• Distinct means:
The customer can benefit from the goods/service on its own AND
The promise to give the goods/services is separately identifiable (from other promises)
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• Separately identifiable means:
No significant integrating of the goods/service with others promised in the contract
The goods/service doesn’t significantly modify another good or service promised in the
contract.
The goods/service is not highly related/dependent on other goods or services promised

in the contract.
Step 3: Determine the transaction price
How much the entity expects, considering past customary business practices
• Variable Consideration 
If the price may vary (eg. possible refunds, rebates, discounts, bonuses, contingent
consideration etc) - then estimate the amount expected
• However variable consideration is only included if it’s highly probable there won’t
need to be a significant revenue reversal in the future (when the uncertainty has been
subsequently resolved)
• However, for royalties from licensing intellectual property - recognise only when the
usage occurs
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Step 4: Allocate the transaction price to the separate performance obligations
If there’s multiple performance obligations, split the transaction price by using

their standalone selling prices. (Estimate if not readily available)
• How to estimate a selling Price
- Adjusted market assessment approach  

- Expected cost plus a margin approach  
- Residual approach (only permissible in limited circumstances).
• If paid in advance, discount down if it’s significant (>12m)
Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation
Revenue is recognised as control is passed, over time or at a point in time.
• What is Control 
It’s the ability to direct the use of and get almost all of the benefits from the asset.
This includes the ability to prevent others from directing the use of and obtaining the
benefits from the asset.
• Benefits could be:
- Direct or indirect cash flows that may be obtained directly or indirectly
- Using the asset to enhance the value of other assets;
- Pledging the asset to secure a loan
- Holding the asset.
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• So remember we recognise revenue as asset control is passed (obligations satisfied)
to the customer 
 
This could be over time or at a specific point in time.
Examples (of factors to consider) of a specific point in time:
1. The entity now has a present right to receive payment for the asset;
2. The customer has legal title to the asset;
3. The entity has transferred physical possession of the asset;
4. The customer has the significant risks and rewards related to the ownership of the
asset; and
5. The customer has accepted the asset.
Contract costs - that the entity can get back from the customer
These must be recognised as an asset (unless the subsequent amortisation would be

less 12m), but must be directly related to the contract (e.g. ‘success fees’ paid to
agents).
Examples would be direct labour, materials, and the allocation of overheads - this
asset is then amortised 
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Syllabus C1a) Prepare reports relating to corporate performance for external stakeholders
Revenues - Presentation in financial statements
Show in the SFP as a contract liability, asset, or a receivable, depending on

when paid and performed
i.e.. Paid upfront but not yet performed would be a contract liability
Performed but not paid would be a contract receivable or asset
1. A contract asset if the payment is conditional (on something other than time)
2. A receivable if the payment is unconditional
Contract assets and receivables shall be accounted for in accordance with IFRS 9.
Disclosures
All qualitative and quantitative information about:
• its contracts with customers;
• the significant judgments in applying the guidance to those contracts; and
• any assets recognised from the costs to fulfil a contract with a customer.
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Exam Standard Illustrations
Illustration 1 - Agent or not?
An entity negotiates with major airlines to purchase tickets at reduced rates
It agrees to buy a specific number of tickets and must pay even if unable to resell them.
The entity then sets the price for these ticket for its own customers and receives cash
immediately on purchase
The entity also assists the customers in resolving complaints with the service provided
by airlines. However, each airline is responsible for fulfilling obligations associated with
the ticket, including remedies to a customer for dissatisfaction with the service.
How would this be dealt with under IFRS 15?
This is clear here when the ticket is purchased
Step 2: Identify the performance obligations in the contract
This is tricky - is it to arrange for another party provide a flight ticket - or is it - to provide
the flight ticket themselves?
Well - look at the risks involved. If the flight is cancelled the airline pays to reimburse,
If the ticket doesn't get sold - the entity loses out
Look at the rewards - the entity can set its own price and thus rewards
On balance therefore the entity takes most of the risks and rewards here and thus
controls the ticket - thus they have the obligation to provide the right to fly ticket
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This is set by the entity
Step 4: Allocate the transaction price to the performance obligations in the

contract
The price here is the GROSS amount of the ticket price (they sell it for)
obligation
Recognise the revenue once the flight has occurred
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Illustration 2 - Loyalty discounts
An entity has a customer loyalty programme that rewards a customer with one
customer loyalty point for every $10 of purchases.
Each point is redeemable for a $1 discount on any future purchases
Customers purchase products for $100,000 and earn 10,000 points
The entity expects 9,500 points to be redeemed, so they have a stand-alone selling
price $9,500
This is when goods are purchased
Step 2: Identify the performance obligations in the contract
The promise to provide points to the customer is a performance obligation along with,
of course, the obligation to provide the goods initially purchased
$100,000
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Step 4: Allocate the transaction price to the performance obligations in the
contract
The entity allocates the $100,000 to the product and the points on a relative stand-
alone selling price basis as follows:
So the standalone selling price total is 100,000 + 9,500 = 109,500
Now we split this according to their own standalone prices pro-rata
Product $91,324 [100,000 x (100,000 / 109,500]  

Points $8,676 [100,000 x 9,500 /109,500]
obligation
Of course the products get recognised immediately on purchase but now lets look at
the points..
Let’s say at the end of the first reporting period, 4,500 points (out of the 9,500) have
been redeemed
The entity recognises revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and
recognises a contract liability of $4,566 (8,676 – 4,110) for the unredeemed points
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Syllabus C2. Non-current Assets
Syllabus C2a) Apply and discuss the timing of the recognition of non-current assets and the
determination of their carrying amounts including impairments and revaluations.
Initial Recognition of PPE
When should we bring PPE into the accounts?
When the following 3 tests are passed:
1. When we control the asset
2. When it’s probable that we will get future economic benefits
3. When the asset’s cost can be measured reliably
What gets included in ‘Cost’
1. Directly attributable costs to get it to work and where it needs to be
eg. site preparation, delivery and handling, installation, related professional fees for
architects and engineers
2. Estimated cost of dismantling and removing the asset and restoring the site.
This is: 
Dr PPE 
Cr Liability
All at present value
This will need discounting and the discount unwound: 

Dr interest (with unwinding of discount)  
Cr liability
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3. Borrowing costs
If it is an asset that takes a while to construct.
Interest at a market rate must be recognised or imputed.
Let's look at the Future obligated costs in detail..
Future obligated costs
Dr PPE 
Cr Liability
at present value
• The present value is calculated by discounting down at the rate given in the exam
eg. 100 in 2 years time at 10% = 100/1.10/1.10 = 82.6
• So the double entry would be:
Dr PPE 82.6 
Cr Liability 82.6
However the LIABILITY needs unwinding..
• Unwinding of discount
Dr Interest 
Cr Liability
Use the original discount rate (so here 10%)
10% x 82.6 = 8.26
Dr Interest 8.26 
Cr Liability 8.26
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IAS 16 Depreciation
The depreciable amount (cost less prior depreciation, impairment, and

residual value) should be allocated on a systematic basis over the asset’s
useful life
Residual Value & UEL
• Should be reviewed at least at each financial year-end
• if expectations differ from previous estimates, any change is accounted

for prospectively as a change in estimate.
Which Method of Depreciation should be used?
It should reflect the pattern in which the asset’s economic benefits are consumed
by the enterprise
How often should depreciation methods be reviewed?
• At least annually
• If the pattern of consumption changes, the depreciation method should be changed

prospectively as a change in estimate.
Depreciation should be charged to the income statement
Depreciation begins when the asset is available for use and continues until the asset
is de-recognised
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Significant parts are depreciated separately
• If the cost model is used each part of an item of PPE with a significant cost (in
relation to the total cost) must be depreciated separately
• Parts which are regularly replaced - depreciate separately.
The replacement cost is then added to the asset cost when recognition criteria are met.
The carrying amount of the replaced parts is de-recognised
Major Inspections for faults (e.g. Aircraft)
The inspection cost is added to the asset cost when recognition criteria are met
If necessary, the estimated cost of a future similar inspection may be used as an

indication of what the cost of the existing inspection component was when the item was
acquired or constructed
An asset with a component included with a different UEL:
This could be something like Land and buildings - basically you should take the land
value away from the total cost and then depreciate the remainder over the UEL of the
building.
• Illustration
Buy House for 100,000.  

The land has a value of 40,000.  
UEL of building is 10 years
• Solution:
The value of the building itself is: 100,000 - 40,000 = 60,000
Depreciation would be: 

Land 40,000 - zero depreciation 
Building 60,000 / 10 years = 6,000
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Borrowing Costs
Let’s say you need to get a loan to construct the asset of your dreams - well
the interest on the loan then is a directly attributable cost.
So instead of taking interest to the I/S as an expense you add it to the cost of the
asset. (in other words - you capitalise it)
There are 2 scenarios here to worry about:
1. You use current borrowings to pay for the asset
2. You get a specific loan for the asset
1) Use current borrowings
This is looking at the scenario where we use funds we have already borrowed from
different sources.
So, if the funds are borrowed generally – we need to calculate the weighted average
cost of all the loans we have generally.
(I know you're thinking - how the cowing'eck do I work out the weighted average of
borrowings... aaarrgghh!).
Well relax my little monkey armpit - here's how you do it:
Step 1: Calculate the total amount of borrowings
Step 2: Calculate the interest payable on these in total
Step 3: Weighted average of borrowing costs = Divide the interest by the borrowing -
et voila!
Step 4: We then take this weighted average of borrowing costs and multiply it by any
expenditure on the asset.
The amount capitalised should not exceed total borrowing costs incurred in the period.
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Illustration
5% Overdraft 1,000 
8% Loan 3,000 
10% Loan 2,000
We buy an asset with a cost of 5,000 and it takes one year to build - how much interest
goes to the cost of the asset?
Solution
Calculate the WA cost of the borrowings:
Step 1: Total Borrowing = (1,000+3,000+2,000) = 6,000
Step 2: Interest payable = (50+240+200) = 490
Step 3: 490/6,000 = 8.17%
Step 4: So the total interest to be added to the asset is 8.17% x 5,000 = 408
2) Get a specific loan
Ok well you would think this is easy - just the interest paid, surely?! But it’s not quite
that easy…
It is the actual borrowing costs less investment income on any temporary

investment of the funds
So what does this mean exactly?
Well imagine you need 10,000 to build something over 3 years. You borrow 10,000 at
the start but don’t need it all straight away.
So the bit you don’t need you leave in the bank to gain interest
So, the amount you could capitalise would be the interest paid on the 10,000 less the
interest received on the amount not used and left in the bank (or reinvested elsewhere)
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Steps:
1. Calculate the interest paid on the specific loan
2. Calculate any interest received on loans proceeds not used
3. Add the net of these 2 to 'cost of the asset’
Illustration
Buy asset for 2,000 - takes 2 years to build.
Get a 2,000 10% loan.
We reinvest any money not used in an 8% deposit account.  

In year 1 we spend 1,200.
How much interest is added to the cost of the asset?
1. Interest Paid = 2,000 x 10% = 200
2. Interest received = ((2,000-1,200) x 8%) = 64
3. Dr PPE Cost (200-64) = 136 

Cr Interest Accrual
Basic Idea
Borrowing costs that are directly attributable to the acquisition, construction or

production of a qualifying asset form part of the cost of that asset.
Other borrowing costs are recognised as an expense.
So what is a “Qualifying asset?”
It is one which needs a substantial amount of time to get ready for use or sale.
This means it can’t be anything that is available for use when you buy it.
It has to take quite a while to build (PPE, Investment Properties, Inventories and
Intangibles).
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You don’t have to add the interest to the cost of the following assets:
1. Assets measured at fair value,
2. Inventories that are manufactured or produced in large quantities on a repetitive

basis even if they take a substantial period of time to get ready for use or sale.
When should we start adding the interest to the cost of the asset?
Capitalisation starts when all three of the following conditions are met:
1. Expenditure begins for the asset
2. Borrowing costs begin on the loan
3. Activities begin on building the asset e.g. Plans drawn up, getting planning etc.
So just having an asset for development without anything happening is not enough
to qualify for capitalisation
Are borrowing costs just interest?
It’s actually any costs that an entity incurs in connection with the borrowing of funds.
So it includes:
Interest expense calculated using the effective interest method.
Finance charges in respect of finance leases
What about if the activities stop temporarily?
Well you should stop capitalising when activities stop for an extended period
During this time borrowing costs go to the profit or loss.
Be careful though - If the temporary delay is a necessary part of the construction

process then you can still capitalise, e.g. Bank holidays etc.
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When will capitalisation stop?
Well, when virtually all the activities work is complete. This means up to the point when
just the finalising touches are left.
NB
• Stop capitalising when AVAILABLE for use. This tends to be when the construction is
finished
• If the asset is completed in parts then the interest capitalisation is stopped on the
completion of each part
• If the part can only be sold when all the other parts have been completed, then stop
capitalising when the last part is completed
PPE - After Initial recognition
After the initial recognition there are 2 choices:
Cost model
• Cost less accumulated depreciation and impairment
• Depreciation should begin when ready for use not wait until actually used
Revaluation model
Fair value at the date of revaluation less depreciation
• If we follow the revaluation model - how often should we revalue?
Revaluations should be carried out regularly
For volatile items this will be annually, for others between 3-5 years or less if deemed
necessary.
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• Ok and which assets get revalued?
If an item is revalued, its entire class of assets should be revalued
• And to what value?
Market value normally is fair value.
Specialised properties will be revalued to their depreciated replacement cost.
Accounting treatment of a Revaluation
An increase in the revalued amount (above depreciated historic cost)
Any increase above depreciated historic cost is credited to equity under the heading
"revaluation surplus" (and shown in the OCI)
DR Asset 
CR equity - “revaluation surplus”
An increase in the revalued amount (up to depreciated historic cost)
is taken to the income statement.
DR Assets 
CR I/S
A decrease down to Historic cost
Any decrease down to depreciated historic cost is taken to the revaluation reserve (and
OCI) as a debit.
DR equity - “revaluation surplus” 

CR Assets
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A decrease below historic cost
Any decrease below depreciated historic cost is debited to the income statement
DR Income statement 
CR Assets
Disposal of a Revalued Asset
The revaluation surplus in equity - IS NOT transferred to the income statement - it just
drops into RE.
It will, therefore, only show up in the statement of changes in equity.
Let´s make no mistake about this - the revaluation adjustments can be very
tricky.
when you revalue upwards:
1. the asset will increase .... therefore
2. the depreciation will increase ... and hence
3. the expenses will increase ...
4. This means smaller profits and smaller retained earnings just because of the
revaluation!
Shareholders will not be impressed by this as retained earnings are where they are
legally allowed to get their dividends from.
Because of this, a transfer is made out of the revaluation reserve and into retained
earnings every year with the extra depreciation caused by the previous revaluation.
This, though, then causes more problems if the asset is subsequently impaired etc. -
but worry not - the COW has the answer!
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This is what you do in a tricky looking revaluation question:
1. Calculate the Depreciated Historic Cost
This is basically what the asset would have been worth had nothing (revaluations/
impairments) occurred in the past.
We do this because anything above this figure is a genuine revaluation and so goes to
the RR.
Similarly anything below this is a genuine impairment and goes to the income
statement.
2. Calculate the NBV just before the Revaluation or Impairment in question
3. Now calculate the difference between step 2 and the new NBV (the amount to
be revalued or impaired to).
This will be the debit or credit to the asset.
The other side of the entry will depend on the depreciated historic cost calculated in
step 1.
I know all that sounds tricky - so let’s look at an illustration:
Illustration
An asset is bought for 1,000 (10yr UEL). 

2 years later it is revalued to 1,000.  
One year after that it is impaired to 400.
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What is the double entry for this impairment?
DHC would be 1,000 less 3 years of depreciation = 700
2. Calculate the NBV just before the Impairment
NBV at date of impairment = 1000 NBV one year earlier.  

So 1,000 less depreciation of (1,000 / 8) = 125 = 875
3. Now calculate the difference between step 2 and the amount to be impaired to
Impair to 400.
So from 875 to 400 - credit Asset 475
4. Accounting treatment
Dr RR with any amount above the DHC of 700. So 875-700 = 175 

Dr I/S with any amount below DHC of 700. So 700-400 = 300
Dr I/S 300 
Dr RR 175 
Cr PPE 475
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Illustration
1/1/20x2 an asset has a carrying amount of 140 and a remaining UEL of 7 years. No
residual value. The asset is revalued to 60 on 1/1/20x3.
On 1/120x5 the asset is revalued to 110
DHC would be 140 - depreciation (140 / 7 years x 3 years) = 80
2. Calculate the NBV just before the Revaluation
The asset is revalued to 60 on 1/1/20x3.
So 60 less depreciation of (60 / 6 x 2) = 40
3. Now calculate the difference between step 2 and the amount to be revalued to
On 1/120x5 the asset is revalued to 110
So from 40 to 110 - DR Asset 70
Cr RR with any amount above the DHC of 80. So 110-80 = 30 

Cr I/S with any amount below DHC of 80. So 80-40 = 40
Dr PPE 70 
Cr I/S 40 
Cr RR 30
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Review Page
1. PPE costs $1,000, has installation costs of $100, dismantling fee with a present value of
$50 and some losses expected at first while operators get used to the system of $50. At
what Value should the PPE be in the accounts initially?
2. The PPE above has a 10 yr. UEL but is not used for the first year. How much is
depreciation and from when?
3. A piece of PPE has a dismantling fee in 2 years of $1,000 and the discount rate is 10%.
What entries would be put in the accounts for this in year 1?
4. What is the best method for depreciation? Reducing balance or straight line?
5. An item of PPE is bought for 1,000 and has a 10 yr. UEL. What is the NBV in 3 years
time?
6. The PPE above is then revalued 1,050. How is this increase accounted for?
7. What would the depreciation charge be for the following year?
8. At the end of that year what is the NBV?
9. What is the Depreciated Historic Cost?
10. It is now revalued down to 400. How is this fall accounted for?
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Exam Standard Question
A piece of property, plant and equipment (PPE) cost $12 million on 1 May 2008. It is being
depreciated over 10 years on the straight-line basis with zero residual value.
On 30 April 2009, it was revalued to $13 million and on 30 April 2010, the PPE was
revalued to $8 million.
The whole of the revaluation loss had been posted to the statement of comprehensive
income and depreciation has been charged for the year.
Make any adjustments necessary for the year ended 30 April 2010
Answer
At 30 April 2009, a revaluation gain of ($13m – $12m – depreciation $1·2m) $2·2 million
would be recorded in equity for the PPE. At 30 April 2010, the carrying value of the PPE
would be $13m – depreciation of $1·44m i.e. $11·56m.
Thus there will be a revaluation loss of $11·56m – $8m i.e. $3·56m. Of this amount $1·96m
will be charged against revaluation surplus in reserves and $1·6 million will be charged to
profit or loss.
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Componentisation
Various components of an asset to be identified and depreciated separately if

they have differing patterns of benefits.
If a significant component is expected to wear out quicker than the overall asset, it is
depreciated over a shorter period.
Then any restoring or replacing is capitalised.
This approach means different depreciation periods for different components.
Examples are land, roof, walls, boilers and lifts.
So the depreciation reflects the effect of a future restoration or replacement.
A challenging process due to..
• Difficulties valuing components
because it is unusual for the various component parts to be valued, so..
1. Involve company personnel in the analysis
2. Applying component accounting to all assets
3. How far the asset should be broken down into components
4. Any measure used to determine components is subjective
5. Asset registers may need to be rewritten
6. Breaking down assets needs ‘materiality', setting a de minimis limit
• When a component is replaced or restored
The old component is de-recognised to avoid double-counting and the new component
recognised.
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• Where it is not possible to determine the carrying amount of the replaced part
of an item of PPE
Best estimates are required.
A possibility is:
Use the replacement cost of the component, adjusted for any subsequent
depreciation and impairment
• A revaluation
Apportion over the significant components.
• When a component is replaced
1. The carrying value of the component replaced should be charged to the income
statement
2. The cost of the new component recognised in the statement of financial position
Transition to IFRS
Use the ‘fair value as deemed cost’ for the asset:
The fair value is then allocated to the different significant parts of the asset
Componentisation adds to subjectivity.
The additional depreciation charge can be significant.
Accountants and other professionals must use their professional judgment when
establishing significance levels, assessing the useful lives of components and
apportioning asset values over recognised components.
Discussions with external auditors will be key one during this process
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IAS 36 Impairments
A company cannot show anything in its accounts higher than what they’re
actually worth
“What they’re actually worth” is called the “Recoverable Amount”
So no asset can be in the accounts at MORE than the recoverable amount.
Less is fine, just not more.
So, assets need to be checked that their NBV is not greater than the RA.
If it is then it must be impaired down to the RA
So how do you calculate a Recoverable Amount?
There are 2 things an entity can do with an asset
1. Sell it or
2. Use it
It will obviously choose the one which is most beneficial
So, you'll choose the higher of the following
• FV-CTS
(Fair value less costs to sell)
• VIU
(Value in use)
So the higher of the FV - CTS and VIU is called the Recoverable amount
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Illustration
In the accounts an item of PPE is carried at 100.  

It’s FV-CTS is 90 and its VIU is 80.
• This means the recoverable amount is 90 (higher of FV-CTS and VIU)
• And that the PPE (100) is being carried at higher than the RA, which is not allowed,
and so an impairment of 10 down to the RA is required in the accounts (100 - 90)
Recognition of an Impairment Loss
An impairment loss should be recognised whenever RA is below carrying amount.
The impairment loss is an expense in the income statement
Adjust depreciation for future periods.
Here's some boring definitions for you:
• Fair value 
The amount obtainable from the sale of an asset in a bargained transaction between
knowledgeable, willing parties.
• Value in use 
The discounted present value of estimated future cash flows expected to arise from:
- the continuing use of an asset, and from
- its disposal at the end of its useful life
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Recoverable Amount in more detail
Fair Value Less Costs to Sell
• If there is a binding sale agreement, use the price under that agreement less costs of
disposal
• If there is an active market for that type of asset, use market price less costs of
disposal.
Market price means current bid price if available, otherwise the price in the most recent
transaction
• If there is no active market, use the best estimate of the asset's selling price less
costs of disposal (direct added costs only (not existing costs or overhead))
Let's look at VIU in more detail..
The future cash flows:
• Must be based on reasonable and supportable assumptions
(the most recent budgets and forecasts)
• Budgets and forecasts should not go beyond five years
• The cashflows should relate to the asset in its current condition
– future restructuring to which the entity is not committed and expenditures to improve
the asset's performance should not be anticipated
• The cashflows should not include cash from financing activities, or income tax
• The discount rate used should be the pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the asset
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Identifying an Asset That May Be Impaired
At each balance sheet date, review all assets to look for any indication that an asset
may be impaired.
If there is an indication that an asset may be impaired, then you must calculate the
asset’s recoverable amount... to see if it is below carrying value
if it is - then you must impair it
Illustration
Asset has carrying value of 100
It has a FV-CTS of 90
It has a VIU of 95
It's recoverable amount is therefore the higher of the 2 = 95 and this is below the
carrying value in the books (100) and so needs impairment of 5.
What are the indicators of impairment?
1. Losses / worse economic performance
2. Market value declines
3. Obsolescence or physical damage
4. Changes in technology, markets, economy, or laws
5. Increases in market interest rates
6. Loss of key employees
7. Restructuring / re-organisation
Just to confuse you a little bit more, we do not JUST check for impairment when there
has been an indicator (listed above).
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We also check the following ANNUALLY regardless of whether there has been an
impairment indicator or not:
1. an intangible asset with an indefinite useful life
2. an intangible asset not yet available for use
3. goodwill acquired in a business combination
Reversal of an Impairment Loss
First of all you need to think about WHY the impairment has been reversed..
1. Discount Rate Changes
Here, no reversal is allowed. So if the discount rate lowers and thus improves the VIU,
this is not considered to be a reversal of an impairment.
2. Other
The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognised
Reversal of an impairment loss is consistent with the original treatment of the

impairment in terms of whether recognised as income in the income statement or OCI.
Reversal of an impairment loss for goodwill is prohibited.
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Cash Generating Units
Sometimes individual assets do not generate cash inflows so the calculation

of VIU is impossible
In such a case then the asset will belong to a larger group that does generate cash.
This is called a cash generating unit (CGU) and it is the carrying value of this which is
then tested for impairment
Recoverable amount should then be determined for the asset's cash-generating unit
(CGU)
CGU - A restaurant
For example, the tables in a restaurant do not generate cash.
They do belong to a larger CGU though (the restaurant itself).
It is the restaurant that is then tested for impairment
The carrying amount of the CGU is made up of the carrying amounts of all the assets
directly attributed to it.
Added to this will be assets that are not directly attributed such as head office and a
portion of goodwill.
Illustration
A subsidiary was acquired, which included 3 cash generating units and the goodwill for
the whole subsidiary was 40m
 
Each CGU would be allocated part of the 40 according to the carrying amount of the
assets in each CGU as follows:
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CGU 1 2 3
NBV 200 200 400
Goodwill 10 10 20
A CGU to which goodwill has been allocated (like the 3 above) shall then be tested for
impairment at least annually by comparing the carrying amount of the unit, including the
goodwill, with the recoverable amount of the CGU
If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity
must recognise an impairment loss (down to the unit’s RA)
Order of Impairment
But the problem is what do you impair first - the assets or the goodwill in the unit?
The impairment loss is allocated in the following order:
1. Reduce any goodwill allocated to the CGU
2. Reduce the assets of the unit pro rata
Note: The carrying amount of an asset should not be reduced below its own
recoverable amount
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Illustration
The following carrying amounts were recorded in the books of a restaurant immediately
prior to the impairment:
Goodwill 100
Property, plant and equipment 100
Furniture and fixtures 100
The fair value less costs to sell of these assets is $260m whereas the value in use is
$270m
 
Required: Show the impact of the impairment
Solution
Recoverable amount is 270 - so the CV of the CGU needs to be reduced from 300 to
270 = 30
This 30 reduces goodwill down to 70
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Review Page
1. When do you check for impairment?
2. What is recoverable amount?
3. If RA is higher than the carrying amount what do you do?
4. If RA is lower than the carrying amount what do you do?
5. What if the asset that is being checked for impairment is not a cash generating unit what
must you do?
6. What are steps for calculating the correct impairment to goodwill when the proportionate
method is used?
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Exam Standard Question
A subsidiary company had purchased computerised equipment for $4 million on 31
October 2006 to improve the manufacturing process.
Whilst re-organising the group, Ghorse had discovered that the manufacturer of the
computerised equipment was now selling the same system for $2·5 million. The projected
cash flows from the equipment are:
Year ended 31 October

2008 $1·3
2009 $2·2
2010 $2·3
The residual value of the equipment is assumed to be zero.
The company uses a discount rate of 10%. The directors think that the fair value less costs
to sell of the equipment is $2 million. The directors of Ghorse propose to write down the
non-current asset to the new selling price of $2·5 million.
The company’s policy is to depreciate its computer equipment by 25% per annum on the
straight line basis. (5 marks)
Solution
At each balance sheet date, Ghorse should review all assets to look for any indication that
an asset may be impaired, i.e. where the asset’s carrying amount ($3 million) is in excess
of the greater of its net selling price and its value in use.
IAS36 has a list of external and internal indicators of impairment. If there is an indication
that an asset may be impaired, then the asset’s recoverable amount must be calculated
(IAS36 paragraph 9).
The recoverable amount is the higher of an asset’s fair value less costs to sell (sometimes
called net selling price) and its value in use which is the discounted present value of
estimated future cash flows expected to arise from:
(i) the continuing use of an asset, and from

(ii) its disposal at the end of its useful life
If the manufacturer has reduced the selling price, it does not mean necessarily that the
asset is impaired. One indicator of impairment is where the asset’s market value has
declined significantly more than expected in the period as a result of the
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passage of time or normal usage. The value-in-use of the equipment will be $4·7 million.
Cash Discounted at 10%
$m
2008 1·2
2009 1·8
2010 1·7
––––
Value in use – 4·7
––––
The fair value less costs to sell of the asset is estimated at $2 million. Therefore, the
recoverable amount is $4·7 million which is higher than the carrying value of $3 million
and, therefore, the equipment is not impaired 
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Syllabus C2b) Apply and discuss the treatment of non-current assets held for sale.
Assets Held for Sale
How do we deal with items in our accounts which we are no longer going to
use, instead we are going to sell them
So, think about this for a moment.. Why does this matter to users?
Well, the accounts show the business performance and position, and you expect to see
assets in there that they actually are looking to continue using.
Therefore their values do not have to be shown at their market value necessarily (as
your intention is not to sell them)
Here, though, everything changes… we are going to sell them.
So maybe market value is a better value to use, but they haven’t been sold yet, so
showing them at MV might still not be appropriate as this value has not yet been
achieved
So these are the issues that IFRS 5 tried, in part, to deal with and came up with the
following solution..
Accounting Treatment
1. Step 1 - Calculate the Carrying Amount...
Bring everything up to date when we decide to sell
This means:
- charge the depreciation as we would normally up to that date or 

- revalue it at that date (if following the revaluation policy)
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2. Step 2 - Calculate FV - CTS
Now we can get on with putting the new value on the asset to be sold..
Measure it at Fair Value less costs to sell (FV-cts).
This is because, if you think about it, this is the what the company will receive.
HOWEVER, the company hasn’t actually made this sale yet and so to revalue it now to
this amount would be showing a profit that has not yet happened
3. Step 3 - Value the Assets held for sale
IFRS 5 says the new value should actually be…
...The lower of carrying amount (step 1) and FV-CTS (step 2)
4. Step 4 - Check for an Impairment
Revaluing to this amount might mean an impairment (revaluation downwards) is

needed.
This must be recognised in profit or loss, even for assets previously carried at revalued
amounts.
Also, any assets under the revaluation policy will have been revalued to FV under step
1.
Then in step 2, it will be revalued downwards to FV-cts.
Therefore, revalued assets will need to deduct costs to sell from their fair value and this
will result in an immediate charge to profit or loss.
Subsequent increase in Fair Value?
• This basically happens at the year-end if the asset still has not been sold
A gain is recognised in the p&l up to the amount of all previous impairment losses.
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Non-depreciation
Non-current assets or disposal groups that are classified as held for sale shall not be
depreciated.
When is an asset recognised as held for sale?
• Management is committed to a plan to sell
• The asset is available for immediate sale
• An active programme to locate a buyer is initiated
• The sale is highly probable, within 12 months of classification as held for sale
• The asset is being actively marketed for sale at a sales price reasonable in relation

to its fair value
Abandoned Assets
The assets need to be disposed of through sale. Therefore, operations that are
expected to be wound down or abandoned would not meet the definition. Therefore
assets to be abandoned would still be depreciated.
Balance sheet presentation
Presented separately on the face of the balance sheet in current assets
• Subsidiaries Held for Disposal
IFRS 5 applies to accounting for an investment in a subsidiary held only with a view to
its subsequent disposal in the near future.
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• Subsidiaries already consolidated now held for sale
The parent must continue to consolidate such a subsidiary until it is actually disposed
of. It is not excluded from consolidation and is reported as an asset held for sale under
IFRS 5.
So subsidiaries held for sale are accounted for initially and subsequently at FV-CTS of
all the net assets not just the amount to be disposed of.
Held for sale disposal group
This is where we sell more than a single asset, in fact it may be a whole
company
A 'disposal group' is a group of assets, possibly with some associated liabilities, which
an entity intends to dispose of in a single transaction.
Any impairment losses reduce the carrying amount of the disposal group in the order of
allocation required by IAS 36
A disposal group with reversal of impairment losses
Normally the rule here is that an impairment under IFRS 5 can only be reversed up to
as much as a previous impairment.
A disposal group may take up the advantage of some assets within the group using up
the unused Impairment losses on other assets.
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Illustration
Disposal Asset 1 Asset 2 Asset 3

group assets
Previous (100) (20) (30)
impairment
NBV 80 90 100
Here the total nbv is 270.
If by the year end the FV-CTS is now:
Asset 1: 150,  
Asset 2: 100 
Asset 3: 150
Asset 1 it can be revalued to 150, increase of 70 as previous impairment was 100
Asset 2 can be revalued to 100, an increase of 10 as previous impairment was 20
Asset 3 could normally not be revalued to 150, an increase of 50 but only to 130 as it’s
previous impairment was only 30
However, it can also use any unused impairments of the other assets in it's disposal
group such as 10 from asset 2 and a further 10 from asset 1, and so can be revalued
up to 150.
What if the asset or disposal group is not sold within 12 months?
1. Normally, returns to PPE at the amount it would have been at had it not gone to
held for sale.
2. Check for impairment.
3. Or, keep in HFS if delay is caused by circumstances outside the control of the entity
e.g.
Buyer unexpectedly imposes transfer conditions which extend beyond a year
Or the market demand has collapsed. 
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Review Page
1. When a company decides to sell one of its assets what must it do to that asset first?
2. At what value is a HFS asset held initially in the SFP?
3. Where is this value shown on the SFP?
4. What happens if this asset is still not sold at the year end and has decreased in value?
5. What happens if this asset is still not sold at the year end and has Increased in value?
6. What is the rule for reversal of impairment losses for HFS assets?
7. What is special about disposal groups when looking at reversal of impairment losses 
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Exam Question Page
Ghorse identified two manufacturing units, Cee and Gee, which it had decided to dispose
of in a single transaction. These units comprised non-current assets only.
One of the units, Cee, had been impaired prior to the financial year end on 30 September
2007 and it had been written down to its recoverable amount of $35 million.
The criteria in IFRS5, ‘Non-current Assets Held for Sale and Discontinued Operations’, for
classification as held for sale, had been met for Cee and Gee at 30 September 2007. The
following information related to the assets of the cash generating units at 30 September
2007:
Depreciated
FV-CTS IFRS 5 Value
Historic Cost
Cee 50 35 35
Gee 70 90 70
The fair value less costs to sell had risen at the year end to $40 million for Cee and $95
million for Gee.
The increase in the fair value less costs to sell had not been taken into account by Ghorse.
Solution
The two manufacturing units are deemed to be a disposal group under IFRS5 ‘Non-current
Assets Held for Sale and Discontinued Operations’ as the assets are to be disposed of in a
single transaction.
Any impairment loss will reduce the carrying amount of the non-current assets in the
disposal group in the order of allocation required by IAS36 ‘Impairment of Assets’
Immediately before the initial classification of the asset as held for sale, the carrying
amount of the asset will be measured in accordance with applicable IFRSs.
On classification as held for sale, disposal groups are measured at the lower of carrying
amount and fair value less costs to sell. Impairment must be considered both at the time of
classification as held for sale and subsequently.
On classification as held for sale, any impairment loss will be based on the
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difference between the adjusted carrying amounts of the disposal group and fair value less
costs to sell.
Any impairment loss that arises by using the measurement principles in IFRS5 must be
recognised in profit or loss (IFRS5 paragraph 20).
Thus Ghorse should not increase the value of the disposal group above $105 million at 30
September 2007 as this is the carrying amount of the assets measured in accordance with
applicable IFRS immediately before being classified as held for
sale (IAS36 and IAS16).
After classification as held for sale, the disposal group will remain at this value as this is
the lower of the carrying value and fair value less costs to sell, and there is no impairment
recorded as the recoverable amount of the disposal group is in excess of the carrying
value.
At a subsequent reporting date the disposal group should be measured at fair value less
costs to sell. However, IFRS5 (paragraphs 21–22) allows any subsequent increase in fair
value less costs to sell to be recognised in profit or loss to the extent that it is not in excess
of any impairment loss recognised in accordance with IFRS5 or previously with IAS36.
Thus any increase in the fair value less costs to sell can be recognised as follows at 31
October 2007:
$m
Fair value less costs to sell – Cee 40
Fair value less costs to sell – Gee 95
This gives a total of 135, compared to the carrying value (105) - meaning a potential
increase of 30
However an increase can only be as much as a previous impairment, which only occurred
in Cee (50 – 35) 15
Therefore, the carrying value of the disposal group can increase by $15 million and profit
or loss can be increased by the same amount, where the fair value rises. Thus the value of
the disposal group will be $120 million.  
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Syllabus C2c) Apply and discuss the accounting treatment of investment properties including
classification, recognition and measurement issues.
Investment property
A building (or land) owned but not used - just an investment
The building is not used it just makes cash by:
1. its FV going up (capital appreciation) or
2. from rental income
It might not even belong to the entity it could even be just on an operating lease.
This is still an IP (if the FV model is used)
This allows leased land (which is normally an operating lease) to be classified as

investment property.
Land held for indeterminate future use is an investment property where the entity has
not decided that it will use the land as owner occupied or for short-term sale
Accounting treatment for the Rental Income
1. Add it to the income statement
2. Easy! (Even for a gonk like you!) :p
Accounting treatment for the FV increase
The difference in FV each year goes to the I/S
Double easy - double gonky
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No depreciation is needed because it's not used :)
Give me examples of what can be Investment Properties cowy.
ok you asked for it:
1. Land held for long-term capital appreciation rather than short-term sale
2. Land held for a currently undetermined future use
This basically means they haven't yet decided what to do with the land
3. A building owned but leased to a third party under an operating lease
4. A building which is vacant but is held to be leased out under an operating lease
5. Property being constructed or developed for future use as an investment property
Ok smarty pants - what ISN'T an Investment property?
• Property intended for sale in the ordinary course of business
(It's stock!)
• Owner-occupied property
• Property leased to another entity under a finance lease
• Property being constructed for third parties
Parts of property
These can be investment properties if the different sections can be sold or leased
separately.
Mais oui, monsier/madame
For example, company owns a building and uses 4 floors and rents out 1. The
latter can be an IP while the rest is treated as normal PPE
Can it still be an IAS 40 Investment property if we are involved in the building still
by giving services to it?
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Si Claro hombre/mujer - It´’s still an IAS 40 Investment property if the supply is small
and insignificant.
If it’s a significant part of the deal with the tenant then the property becomes an
IAS 16 property.
What if my subsidiary uses it but I don’t?
Right ok - now your questions are getting on my nerves… but still - it’s an IAS 40
Investment property in your own individual accounts - because you personally are not
using it.
However, in the group accounts it´s an IAS 16 property because someone in the group
is using it.
..now enough of the questions already.. get back to facebook ..
When can we bring an Investment Property into the accounts?
As with everything else, an investment property should be recognised when:
1. It is probable that the future economic benefits will flow; and
2. The cost of the investment property can be measured reliably.
Cool - and at how much do we show it at initially?
Initially measured at cost.
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This includes:
1. Purchase price
2. Directly attributable costs, for example transaction costs (professional fees,

property transfer taxes)
This does not include:
1. Start-up costs
2. Operating losses incurred before the investment property achieves the planned
level of occupancy
3. Abnormal amounts of wasted labour, material or other resources incurred in

constructing or developing the property
NB
If the property is held under a lease then you must show it initially at the lower of:
• Fair value and
• The present value of the minimum lease payments
Ok so how do we value it after the initial cost?
You choose between two models:
1. The IAS 16 cost model
2. The fair value model
The policy chosen should be applied consistently to all of the entity’s investment
property.
If the property is held under an operating lease the fair value model must be adopted.
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Cost model
Basically as per IAS 16. The property is measured at cost less depreciation and
impairment losses (the fair value should still be disclosed though).
Fair value model
All investment properties should be measured at fair value at the end of each reporting
period.
Changes in fair value added to / subtracted from the asset and the other side
recognised in the income statement.
No depreciation is therefore ever recognised.
Change in use
This bit deals with when we decide say to use it as a normal property instead of renting
it out or vice-versa etc.
Examples
1. We occupy and start to use the investment property
All owner-occupied property falls under IAS 16 - cost less depreciation and
impairment losses.
If the FV model was being used then the FV at change of use date is the deemed
cost for future accounting.
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2. Start developing an investment property with the intention of selling it when
finished
The property is to be sold in the normal course of business and should therefore
be reclassified as inventory and accounted for under IAS 2 Inventories.
3. Start developing an investment property with the intention of letting it out

when finished
The property should continue to be held as an investment property under IAS 40.
4. We were using the building but now we are going to let it out when finished
Transfer to investment properties and account under IAS 40. 

When we transfer it though (if FV model) we revalue it.
Any revaluation here goes to the Revaluation reserve and OCI as normal (not the
income statement as under IAS 40).
5. A property that was originally held as inventory has now been let to a third
party.
Transfer from inventory to investment properties.
Here when the transfer is made, we revalue (if FV model) to FV and any
difference goes to the income statement.
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Review Page
1. How much interest can be capitalised on an asset which takes 3 weeks to build?
2. How much interest can be added to the cost of an asset when using a specific loan
3. How much interest can be added to the cost of an asset when using general funds?
4. What is an Investment Property?
5. How is an IP using the FV model accounted for?
6. Can 1 floor of a building be an IP?
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Exam Question Page
Grange acquired a plot of land on 1 December 2008 in an area where the land is expected
to rise significantly in value if plans for regeneration go ahead in the area.
The land is currently held at cost of $6 million in property, plant and equipment until
Grange decides what should be done with the land.
The market value of the land at 30 November 2009 was $8 million but as at 15 December
2009, this had reduced to $7 million as there was some uncertainty surrounding the
viability of the regeneration plan.
Solution
The land should be classified as an investment property. Although Grange has not decided
what to do with the land, it is being held for capital appreciation.
IAS 40 ‘Investment Property’ states that land held for indeterminate future use is an
investment property where the entity has not decided that it will use the land as owner
occupied or for short-term sale.
The fall in value of the investment property after the year-end will not affect its year-end
valuation as the uncertainty relating to the regeneration occurred after
the year-end.
Dr Investment property $6 million

Cr PPE $6 million
Dr Investment property $2 million

Cr Profi t or loss $2 million
No depreciation will be charged
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Syllabus C2d) Apply and discuss the accounting treatment of intangible assets including the criteria
for recognition and measurement subsequent to acquisition and classification.
What is an intangible asset
What is an Intangible asset?
Well, according to IAS 38, it’s an identifiable non-monetary asset without physical

substance, such as a licence, patent or trademark.
The three critical attributes of an intangible asset are:
1. Identifiability
2. Control (power to obtain benefits from the asset)
3. Future economic benefits
Whooah there partner, what´s identifiable mean??
Well it just means the asset is one of 2 things:
1. It is SEPARABLE, meaning it can be sold or rented to another party on its own

(rather than as part of a business) or
2. It arises from contractual or other legal rights.
It is the lack of identifiability which prevents internally generated goodwill being

recognised. It is not separable and does not arise from contractual or other legal rights.
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Examples
• Employees can never be recognised as an asset; they are not under the control of
the employer, are not separable and do not arise from legal rights
• A taxi licence can be an intangible asset as they are controlled, can be sold/
exchanged/transferred and arise from a legal right 
(The intangible doesn’t have to be separable AND arise from a legal right, just one or
the other is enough).
When can you recognise an IA and for how much?
Well it's the old reliably measurable and probable again!
In posher terms...
1. When it is probable that future economic benefits attributable to the asset will flow
to the entity
2. The cost of the asset can be measured reliably
So at how much should we show the asset at initially?
Well thick pants - it’s obviously brought in at cost!! Aaarh but what is cost I hear you
whisper in my big floppy cow-like ears.. well it’s
Purchase price plus directly attributable costs
Remember that directly attributable means costs which otherwise would not have
been paid, so often staff costs are excluded.
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Let’s now look at some specific issues that come up often in the exam:
• IA acquired as part of a business combination
Well this time, the intangible asset (other than goodwill ) should initially be recognised
at its fair value.
If the FV cannot be ascertained then it is not reliably measurable and so cannot be

shown in the accounts.
In this case by not showing it, this means that goodwill becomes higher.
• Research and Development Costs
Research costs are always expensed in the income statement
Development costs are capitalised only after technical and commercial feasibility of the
asset for sale or use have been established.
This means that the enterprise must intend and be able to complete the intangible
asset and either use it or sell it and be able to demonstrate how the asset will generate
future economic benefits.
If entity cannot distinguish between research and development - treat as research and
expense
• Research and Development Acquired in a Business Combination
Recognised as an asset at cost, even if a component is research.
Subsequent expenditure on that project is accounted for as any other research and
development cost
• Internally Generated Brands, Mastheads, Titles, Lists
Should not be recognised as assets - expense them as there is no reliable measure
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• Computer Software
If purchased: capitalise as an IA 
Operating system for hardware: include in hardware cost
If internally developed: charge to expense until technological feasibility, probable

future benefits, intent and ability to use or sell the software, resources to complete the
software, and ability to measure cost.
Always expense the following:
1. Internally generated goodwil
2. Start-up, pre-opening, and pre-operating costs
3. Training cost
4. Advertising and promotional cost, including mail order catalogues
5. Relocation costs
Intangible Assets - Future Measurement
So we can use either historic cost or revaluation.
Historic Cost (and amortise)
Generally intangible assets should be amortised over their useful economic life.
1. If has a useful economic life
Amortise over UEL
Residual values should be assumed to be nil, except in the rare circumstances

when an active market exists or there is a commitment by a third party to
purchase the asset at the end of its useful life.
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2. If has an indefinite UEL
Check for impairment every year
There should also be an annual review to see if the indefinite life assessment is
still appropriate.
Revaluation (and amortise)
This model can only be adopted if an active market exists for that type of asset.
Revaluing Intangibles is hard, because there is no physical substance, and so a

reliable measure is tricky.
1. There MUST be an active market
2. The item MUST be unique
So what’s an ‘active market’?
• Firstly I should mention that these are rare, but may exist for certain licences and
production quotas
• These, though, are markets where the products are unique, always trading and prices
available to public
Examples where they might exist:
1. Milk quotas
2. Stock exchange seats
3. Taxi medallions
These two tests make it very difficult for any intangibles to be revalued so the historic
cost choice is by far the most common.
If the revaluation model is adopted, revaluation surpluses and deficits are accounted for
in the same way as those for PPE 
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Research and development
Research is expensed, Development is often an asset.
Research
Research is investigation to get new knowledge and understanding
All goes to I/S
Development
Under IAS 38, an intangible asset must demonstrate all of the following criteria:
(use pirate as a memory jogger)
1. Probable future economic benefits
2. Intention to complete and use or sell the asset
3. Resources (technical, financial and other resources) are adequate and available 
to complete and use the asset
4. Ability to use or sell the asset
5. Technical feasibility of completing the intangible asset (so that it will be available 
for use or sale)
6. Expenditure can be measured reliably
Once capitalised they should be amortised.
Amortisation begins when commercial production has commenced.
Once capitalised they should be amortised
The cost of the development expenditure should be amortised over the useful life.
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Therefore, the cost of the development expenditure is matched against the revenue it
produces.
Amortisation must only begin when the asset is available for use (hence matching the
income and expenditure to the period in which it relates).
It is an expense in the income statement:
Dr Amortisation expense (I/S) 

Cr Accumulated amortisation (SFP)
It must be reviewed at the year-end to check it still is an asset and not an expense.
If the criteria are no longer met, then the previously capitalised costs must be written off
to the statement of profit or loss immediately.
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Review Page
1. What does identifiable mean?
2. What happens if an IA is bought as part of a subsidiary, but its value cannot be

measured reliably?
3. When acquiring a sub which has some research costs - how are these treated in the
group accounts initially?
4. What options are available for the accounting treatment of Intangibles?
5. Which option is rare and why?
6. Should all intangibles be amortised?
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Exam Question Page
H is acquiring S.
S has several marketing-related intangible assets that are used primarily in marketing or
promotion of its products.
These include trade names, internet domain names and non-competition agreements.
These are not currently recognised in S’s financial statements
How should these be treated?
Solution
Intangible assets should be recognised on acquisition under IFRS3 (Revised).
These include trade names, domain names, and non-competition agreements. Thus these
assets will be recognised and goodwill effectively reduced.
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Government Grants
Government grants are a form of government assistance.
When can you recognise a government grant?
When there is reasonable assurance that:
• The entity will comply with any conditions attached to the grant and
• the grant will be received
However, IAS 20 does not apply to the following situations:
1. Tax breaks from the government
2. Government acting as part-owner of the entity
3. Free technical or marketing advice
Accounting treatment of government grants
Dr Cash
The debit is always cash so we only have to know where we put the credit..
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There are 2 approaches - depending on what the grant is given for:
• Capital Grant approach:
(Given for Assets - For NCA such as machines and buildings)
Recognise the grant outside profit or loss initially:
Dr Cash
Cr Cost of asset 
or 
Cr Deferred Income
• Income Grant approach:
(Given for expenses - For I/S items such as wages etc)
 
Recognise the grant in profit or loss
Dr Cash  
Cr Other income (or expense)
Capital Grant approach - accounting for as "Cr Cost of asset"
• Dr Cash Cr Cost of asset
This will have the effect of reducing depreciation on the income statement and the
asset on the SFP
• An Example
Asset $100 with 10yrs estimated useful life 

Received grant of $50
Accounting for a grant received: 

DR Cash $50 
CR Asset $50
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At the Y/E 
Depreciation charge: 
DR Depreciation expense (I/S) (100-50)/10yrs = $5 
CR Accumulate depreciation $5
Capital Grant approach - accounting for as "Cr Deferred Income"
• Dr Cash  
Cr Deferred Income
This will have the effect of keeping full depreciation on the income statement and the
full asset and liability on the SFP
Then... 
Dr Deferred Income  
Cr Income statement (over life of asset)
This will have the effect of reducing the liability and the expense on the income
statement
• An Example
Asset $100 with 10yrs estimated useful life 

Received grant of $50
Accounting for a grant received: 

DR Cash $50 
CR Deferred income $50
At the Y/E 
Depreciation charge: 
DR Depreciation expense (I/S) 100/10yrs = $10 
CR Accumulate depreciation $10
Release of deferred income: 

DR Deferred income 50/10yrs =$5 
CR I/S $5
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Conditions
These may help the company decide the periods over which the grant will be earned.
It may be that the grant needs to be split up and taken to the income statement on
different bases.
Compensation
The grant may be for compensation on expenses already spent.
Or it might be just for financial support with no actual related future costs.
Whatever the situation, the grant should be recognised in profit or loss when it
becomes receivable.
NB 
If a condition might not be met then a contingent liability should be disclosed in the
notes. Similarly if it has already not been met then a provision is required.
Non-monetary government grants
Think here, for example, of the government giving you some land (ie not cash).
To put a value on it - we use the Fair Value. Alternatively, both may be valued at a

nominal amount.
Repayment of government grants
This means when we are not allowed the grant anymore and so have to repay it back.
This would be a change in accounting estimate (IAS 8) and so you do not change past
periods just the current one.
• Accounting treatment (capital grant repayment):

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- Dr Any deferred Income Balance or Dr Cost of asset
- Dr Income statement with any balance
and CR cash with the amount repaid
The extra depreciation to date that would have been recognised had the grant not
been netted off against cost should be recognised immediately as an expense.
• Accounting treatment - Income Grant Repayment
Dr Income statement 
Cr Cash
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Review Page
1. Where do you put income from a revenue grant?
2. What are the choices for a capital grant?
3. What if the grant is for land?
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Exam Question Page
Norman has obtained a significant amount of grant income for the development of hotels
in Europe.
The grants have been received from government bodies and relate to the size of the hotel
which has been built by the grant assistance.
The intention of the grant income was to create jobs in areas where there was significant
unemployment.
The grants received of $70 million will have to be repaid if the cost of building the hotels is
less than $500 million. (4 marks)
Solution
The accruals concept is used by the standard to match the grant received with the related
costs.
The relationship between the grant and the related expenditure is the key to establishing
the accounting treatment. Grants should not be recognised until there is reasonable
assurance that the company can comply with the conditions relating to their receipt and
the grant will be received.
Provision should be made if it appears that the grant may have to be repaid.
There may be difficulties of matching costs and revenues when the terms of the grant do
not specify precisely the expense towards which the grant contributes. In this case the
grant appears to relate to both the building of hotels and the creation of
employment.
However, if the grant was related to revenue expenditure, then the terms would have been
related to payroll or a fixed amount per job created. Hence it would appear that the grant is
capital based and should be matched against the depreciation of the hotels by using a
deferred income approach or deducting the grant from the carrying value of the asset
(IAS20).
Additionally the grant is only to be repaid if the cost of the hotel is less than $500 million
which itself would seem to indicate that the grant is capital based.
If the company feels that the cost will not reach $500 million, a provision should
be made for the estimated liability if the grant has been recognised.
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Syllabus C3. Financial Instruments
Syllabus C3a) Apply and discuss the recognition and de- recognition of financial assets and financial
liabilities.
Financial Instruments - Introduction
Ok, ok, relax at the back - this is not as bad as it seems… trust me
Definition
• First of all it must be a contract
• Then it must create a financial asset in one entity and a financial liability or
equity instrument in another.
Examples: 
An obvious example is a trade receivable. There is a contract, one company has the
debt as a financial asset and the other as a liability
Other examples: 
Cash, investments, trade payables and loans….
And the trickier stuff…..
It also applies to derivatives financial such as call and put options, forwards, futures,
and swaps.
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And the just plain weird….
It also applies to some contracts that do not meet the definition of a financial
instrument, but have characteristics similar to derivative financial instruments.
Such as precious metals at a future date when the following applies:
1. The contract is subject to possible settlement in cash NET rather than by delivering

the precious metal
2. The purchase of the precious metal was not normal for the entity
The trick in the exam is to look for contracts which state “will NOT be delivered” or
“can be settled net” - these are almost always financial instruments
The following are NOT financial instruments:
• Anything without a contract 

e.g. Prepayments
• Anything not involving the transfer of a financial asset 

e.g. Deferred income and Warranties
Recognition
The important thing to understand here is that you bring a FI into the accounts when
you enter into the contract NOT when the contract is settled.
Therefore derivatives are recognised initially even if nothing is paid for it initially.
• Substance over form
Form (legally) means a preference share is a share and so part of equity.

HOWEVER, a substance over form model is applied to debt/equity classification.
Any item with an obligation, such as redeemable preference shares, will be
shown as liabilities. 
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De-recognition
This basically means when to get rid of it / take it out of the accounts
• So you should do this when:
The contractual rights you used to have have expired/gone
For Example
You sell an asset and its benefits now go to someone else (no conditions attached)
• You DONT de-recognise when..
You sell an asset but agree to buy it back later (this means you still have an interest
in the risk and rewards later)
The difference between equity and liabilities
IAS 32 Financial Instruments: Presentation
establishes principles for presenting financial instruments as liabilities or equity.
• IAS 32 does not classify a financial instrument as equity or financial liability on the
basis of its legal form but the substance of the transaction.
The key feature of a financial liability
1. is that the issuer is obliged to deliver either cash or another financial asset to the
holder.
2. An obligation may arise from a requirement to repay principal or interest or

dividends.
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The key feature of an Equity
has a residual interest in the entity’s assets after deducting all of its liabilities.
• An equity instrument includes no obligation to deliver cash or another financial asset

to another entity.
• A contract which will be settled by the entity receiving or delivering a fixed number of
its own equity instruments in exchange for a fixed amount of cash or another financial
asset is an equity instrument.
• However, if there is any variability in the amount of cash or own equity instruments
which will be delivered or received, then such a contract is a financial asset or liability
as applicable.
An accounting treatment of the contingent payments on acquisition of the NCI in

a subsidiary
• IAS 32 states that a contingent obligation to pay cash which is outside the control of
both parties to a contract meets the definition of a financial liability which shall be
initially measured at fair value.
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Syllabus C3b) Apply and discuss the classification of financial assets and financial liabilities and their
measurement.
Financial liabilities - Categories
There's only 2 categories, FVTPL and Amortised cost.. Yay!
Right-y-o, we’ve looked at recognising (bring into the accounts for those of you who are
a sandwich short of a picnic*) - now we want to look at HOW MUCH to bring the
liabilities in at.
*A quaint old English saying - meaning you're an idiot :p
Basically there are 2 categories of Financial Liability…
1. Fair Value Through Profit and Loss (FVTPL)
This includes financial liabilities incurred for trading purposes and also
derivatives.
2. Amortised Cost
If financial liabilities are not measured at FVTPL, they are measured at amortised
cost.
The good news is that whatever the category the financial liability falls into - we always
recognise it at Fair Value INITIALLY.
It is how we treat them afterwards where the category matters (and remember here we
are just dealing with the initial measurement).
Accounting Treatment of Financial Liabilities (Overview)

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Initially At Year-End Any gain/loss
FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost
So - the question is - how do you measure the FV of a loan??
All you do is those 2 steps:
STEP 1: Take all your actual future cash payments
STEP 2: Discount them down at the market rate
 
If the market rate is the same as the rate you actually pay (effective rate) then this is
no problem and you don’t really have to follow those 2 steps as you will just come back
to the capital amount…let me explain
10% 1,000 Payable Loan 3 years 

Capital 1,000 x 0.751 = 751
Interest 100 x 2.486 = 249
Total 1,000
 
So the conclusion is - WHERE THE EFFECTIVE RATE YOU PAY (10%) IS THE SAME
AS THE MARKET RATE (10%) THEN THE FV IS THE PRINCIPAL - so no need to do
the 2 steps.
Always presume the market rate is the same as the effective rate you’re paying unless
told otherwise by El Examinero.
Possible Naughty Bits
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Premium on redemption
This is just another way of paying interest. Except you pay it at the end (on redemption)
e.g. 4% 1,000 payable loan - with a 10% premium on redemption.
This means that the EFFECTIVE interest rate (the rate we actually pay) is more than
4% - because we haven’t yet taken into account the extra 100 (10% x 1,000) payable at
the end.
So the examiner will tell you what the effective rate actually is - let’s say 8%.
The crucial point here is that you presume the effective rate (e.g. 8%) is the same as
the market rate (8%) so the initial FV is still 1,000.
Discount on Issue
Exactly the same as above - it is just another way of paying interest - except this time
you pay it at the start
e.g. 4% 1,000 payable loan with a 5% discount on issue.
So again the interest rate is not 4%, because it ignores the extra interest you pay at the
beginning of 50 (5% x 1,000). So the effective rate (the rate you actually pay) is let’s
say 7% (will be given in the exam).
The crucial point here is that the discount is paid immediately. So, although you
presume that the effective rate (7%) is the same as the market rate (7% say), the
INITIAL FV of the loan was 1,000 but is immediately reduced by the 50 discount - so is
actually 950
NB You still pay interest of 4% x 1,000 not 4% x 950 
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Financial Liabilities - Amortised Cost
So, we’ve just looked at initial measurement (at FV), now let’s look at how we
measure it from then onwards.
This is where the categories of financial liabilities are important - so let’s remind
ourselves what they are:
Initially At Year-End Any gain/loss

FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost
So you only have 2 rules to remember - cool…
1. FVTPL
- simple just keep the item at its FV (remember this is those 2 steps) and put the
difference to the income statement
2. Amortised Cost
- Amortised Cost is the measurement once the initial measurement at FV is done
Amortised Cost
This is simply spreading ALL interest over the length of the loan by charging
the effective interest rate to the income statement each year.
If there’s nothing strange (premiums etc) then this is simple.
For example: 10% 1,000 Payable Loan
Opening Interest to I/S Interest actually Paid Closing Loan on SFP

1,000 1,000 x 10% = 100 (100) 1,000
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Now let’s make it trickier 
 
10% 1,000 Loan with a 10% premium on redemption . Effective rate is 12%
Opening Interest to I/S Interest actually Paid Closing Loan on SFP

1,000 1,000 x 12% = 120 (100) 1,020
 
So in year 1 the income statement would show an interest charge of 120 and the loan
would be under liabilities on the SFP at 1,020.
This SFP figure will keep on increasing until the end of the loan where it will equal the
Loan + premium on redemption.
And trickier still… 

 
10% 1,000 loan with a 10% discount on issue. Effective rate is 12%
Opening Interest to I/S Interest Closing Loan on SFP

actually
Paid
1,000 - (10% x 1,000) = 900 900 x 12%= 108 (100) 908
IFRS 9 requires FVTPL gains and losses on financial liabilities to be split into:
1. The gain/loss attributable to changes in the credit risk of the liability (to be placed in
OCI)
2. The remaining amount of change in the fair value of the liability which shall be
presented in profit or loss.
The new guidance allows the recognition of the full amount of change in the FVTPL
only if the recognition of changes in the liability's credit risk in OCI would create or
enlarge an accounting mismatch in P&L.
Amounts presented in OCI shall not be subsequently transferred to P&L, the entity may
only transfer the cumulative gain or loss within equity.
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Financial Liabilities - convertible loans
When we recognise a financial instruments we look at substance rather than

form
Anything with an obligation is a liability (debt).
However we now have a problem when we consider convertible payable loans.
The ‘convertible’ bit means that the company may not have to pay the bank back with
cash, but perhaps shares.
So is this an obligation to pay cash (debt) or an equity instrument?
In fact it is both! It is therefore called a Compound Instrument
Convertible Payable Loans
These contain both a liability and an equity component so each has to be shown
separately.
• This is best shown by example:
2% Convertible Payable Loan €1,000
• This basically means the company has offered the bank the option to convert the loan
at the end into shares instead of simply taking €1,000
• The important thing to notice is that that the bank has the option to do this.
• Should the share price not prove favourable then it will simply take the €1,000 as
normal.
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Features of a convertible payable loan
1. Better Interest rate
The bank likes to have the option. Therefore, in return, it will offer the company a
favourable interest rate compared to normal loans
2. Higher Fair Value of loan
This lower interest rate has effectively increased the fair value of the loan to the
company (we all like to pay less interest ;-))
We need to show all payable loans at their fair value at the beginning.
3. Lower loan figure in SFP
Important: If the fair value of a liability has increased the amount payable (liability)
shown in the accounts will be lower.
After all, fair value increases are good news and we all prefer lower liabilities!
How to Calculate the Fair Value of a Loan
So how is this new fair value, that we need at the start of the loan, calculated?
Well it is basically the present value of its future cashflows…
• Step 1: Take what is actually paid (The actual cashflows):
Capital €1,000 
Interest (2%) €20 pa.
Now let’s suppose this is a 4 year loan and that normal (non-convertible) loans carry
an interest rate of 5%.
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• Step 2: Discount the payments in step 1 at the market rate for normal loans
(Get the cashflows PV)
Take what the company pays and discount them using the figures above as follows:
Capital €1,000 discounted @ 5% (4 years SINGLE discount figure) = 1,000 x 0.823

= 823
Interest €20 discounted @ 5% (4 years CUMULATIVE)= 20 x 3.465 = 69
Total = 892 
 
This €892 represents the fair value of the loan and this is the figure we use in the
balance sheet initially.
The remaining €108 (1,000-892) goes to equity.
Dr Cash 1,000 
Cr Loan 892 
Cr Equity 108
• Next we need to perform amortised cost on the loan (the equity is left untouched
throughout the rest of the loan period).
The interest figure in the amortised cost table will be the normal non-convertible rate
and the paid will the amounts actually paid.
The closing figure is the SFP figure each year
Opening Interest Payment Closing

892 892 x 5% = 45 (1,000 x 2% = 20) 892 + 45 - 20 = 917
917 917 x 5% = 46 (1,000 x 2% = 20) 917 + 46 - 20 = 943
943 48 (1,000 x 2% = 20) 971
971 49 (1,000 x 2% = 20) 1,000
Now at the end of the loan, the bank decide whether they should take the shares
or receive 1,000 cash…
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1. Option 1: Take Shares (lets say 400 ($1) shares with a MV of $3)
Dr Loan 1,000 
Dr Equity 108 
Cr Share Capital 400 
Cr Share premium 708 (balancing figure)
2. Option 2: Take the Cash
Dr Loan 1,000 
Cr Cash 1,000
Dr Equity 108 
Cr Income Statement 108
Conclusion
1. When you see a convertible loan all you need to do is take the capital and interest
PAYABLE.
2. Then discount these figures down at the rate used for other non convertible loans.
3. The resulting figure is the fair value of the convertible loan and the remainder sits in
equity.
4. You then perform amortised cost on the opening figure of the loan. Nothing
happens to the figure in equity
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Convertible Payable Loan with transaction costs - eek!
Ok well remember our 2 step process for dealing with a normal convertible loan?
Step 1) Write down the capital and interest to be PAID
Step 2) Discount these down at the interest rate for a normal non-convertible loan
Then the total will be the FV of the loan and the remainder just goes to equity.
Remember we do this at the start of the loan ONLY.
Right then let’s now deal with transaction or issue costs.
These are paid at the start.
Normally you simply just reduce the Loan amount with the full transaction costs.
However, here we will have a loan and equity - so we split the transaction costs pro-
rata
I know, I know - you want an example…. boy, you’re slow - lucky you’re gorgeous
e.g. 4% 1,000 3 yr Convertible Loan.  

Transaction costs of £100 also to be paid.  
Non convertible loan rate 10%
Step 1 and 2
Capital 1,000 x 0.751 = 751 

Interest 40 x 2.486 = 99 (ish) 
Total = 850
So FV of loan = 850, Equity = 150 (1,000-850)
Now the transaction costs (100) need to be deducted from these amounts pro-rata
So Loan = (850-85) = 765 

Equity (150-15) = 135 
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Financial Assets - Initial Measurement
There are 3 categories to remember:
Category Initial Year-end Difference goes

Measurement Measurement where?
FVTPL FV FV Profit and Loss
FVTOCI FV FV OCI
Amortised Cost FV Amortised Cost -
Financial assets that are Equity Instruments
e.g. Shares in another company
These are easy - Just 2 categories
• FVTPL = Fair Value through Profit & Loss
These are Equity instruments (shares) Held for trading
Normally, equity investments (shares in another company) are measured at FV in the

SFP, with value changes recognised in P&L
Except for those equity investments for which the entity has elected to report value
changes in OCI.
• FVTOCI = Fair Value through Other Comprehensive Income
These are Equity instruments (shares) Held for longer term
• NB. The choice of these 2 is made at the beginning and cannot be changed
afterwards
There is NO reclassification on de-recognition
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Financial Assets (FA) that are Receivable Loans
There are basically 3 types:
1. Fair Value Through Profit & Loss (FVTPL)
A receivable loan where capital and interest aren’t the only cashflows (see CF test
below)
2. FVTOCI
Receivable loans where the cashflows are capital and interest only BUT the business
model is also to sell these loans (see Business model test below)
3. Amortised Cost
A FA that meets the following 2 conditions can be measured at amortised cost:
1. Business model test:
Do we normally keep our receivable loans until the end rather than sell them on?
2. Cashflows test
Are the ONLY cashflows coming in capital and interest?
So what sort of things go into the FVTPL category?
If one of the tests above are not passed then they are deemed to fall into the
FVTPL category
This will include anything held for trading and derivatives.
INITIAL measurement
Good news! Initially both are measured at FV.
Easy peasy to remember.
The FV is calculated, as usual, as all cash inflows discounted down at the market
rate.
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FVTPL can be:
1. Equity items held for trading purposes
2. Equity items not held for trading (but OCI option not chosen)
3. A receivable loan where capital and interest aren’t the only cashflows
Derivative assets are always treated as held for trading
Initial recognition of trade receivables
1. Trade receivables without a significant financing component
Use the transaction price from IFRS 15
2. Trade receivables with a significant financing component
IFRS 9 does not exempt a trade receivable with a significant financing component from
being measured at fair value on initial recognition.
Therefore, differences may arise between the initial amount of revenue recognised in
accordance with IFRS 15 – and the fair value needed here in IFRS 9
Any difference is presented as an expense.
FVTOCI - Receivable loans held for cash and selling
Interest revenue, credit impairment and foreign exchange gain or loss recognised in
P&L (in the same manner as for amortised cost assets)
Other gains and losses recognised in OCI
On de-recognition, the cumulative gain or loss previously recognised in OCI is

reclassified from equity to profit or loss 
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Syllabus C3c) Apply and discuss the treatment of gains and losses arising on financial assets and
financial liabilities.
Syllabus C3d) Apply and discuss the treatment of the expected loss impairment model.
Financial assets - Accounting Treatment
So we have these 3 categories..
Category Initial Year-end Difference goes

Measurement Measurement where?
FVTPL FV FV Profit and Loss
FVTOCI FV FV OCI
Amortised Cost FV Amortised Cost -
Initially both are measured at FV.
Now let's look at what happens at the year-end..
FVTPL accounting treatment
1. Revalue to FV
2. Difference to I/S
FVTOCI accounting treatment
1. Revalue to FV
2. Difference to OCI
Amortised cost accounting treatment
1. Re-calculate using the amortised cost table
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An Example:
8% 100 receivable loan (effective rate 10% due to a premium on redemption)
Amortised Cost Table
Opening Balance Interest (effective (Cash Received) Closing balance

rate)
100 10 (8) 102
The interest (10) is always the effective rate and this is the figure that goes to the
income statement.
The receipt (8) is always the cash received and this is not shown in the income
statement - it just decreases the carrying amount
Any expected credit losses and forex gains/losses all go to I/S
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Financial Assets - Convertible loan
Compound instruments (Convertible loans)
Be careful here as these are treated differently according to whether they are
receivable loans (assets) or payable loans (liabilities)
This is because, if you remember, the amortised cost category for financial assets has
2 tests, whereas the amortised cost category for liabilities does not have any
The 2 tests for placing a financial asset into the amortised cost category are:
1. Business model test - do we intend to keep (not sell) the loan
... presumably we do hold until the end and not sell it - so yes that test is passed
2. Cashflow test - Are the cash receipts capital and interest only?
No - There is the potential issue of shares that we may ask for instead of the capital
back.
For a receivable convertible loan - it fails the cashflow test - as one receipt may be
shares and not just capital and interest
Therefore a receivable convertible loan cannot be amortised cost and so is a FVTPL

item
Type Category
Receivable Convertible Loan FVTPL
Initial Year End

FVTPL FV FV
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An Example:
2% Convertible Loan €1,000, a 4 year loan
You are also told the non-convertible interest rates are as follows:
Start: 5% 
End of year 1: 6% 
End of year 2: 7% 
End of year 3: 8%
• As in the payable we need to calculate FV initially.
We did this and it came to 892.
• Then we perform amortised cost BUT also adjust to FV each year end as this a
FVTPL item.
Here’s a reminder of what we had before (but with a new FV adj column added....
Opening Interest Payment FV adj Closing

892 45 -20 917
917 46 -20 943
943 48 -20 971
971 49 -20 1,000
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So we need to change the closing figures (and hence opening next year) to the
new FV at each year end.
Calculating the FV of a loan is the same as before..
• Step 1: Take all the CASH payments (capital and interest)
• Step 2: Discount them down at the MARKET rate
• FV at end of year 1 
Capital discounted = 1,000 / 1.06^3 (3 years away only now) = 840 
Interest = 20pa for 3 years @ 6% = 20 x 2.673 = 53 
Total = 893
Capital discounted = 1,000 / 1.07^2 (2 years away only now) = 873 
Interest = 20pa for 2 years @ 7% = 20 x 1.808 = 36 
Total = 909
Capital discounted = 1,000 / 1.08 (1 year away only now) = 926 
Interest = 20pa for 1 year @ 8% = 20 x 0.926 = 19 
Total = 945
So the table now becomes...
Opening Interest Payment FV adj Closing

892 45 -20 -24 917
893 46 -20 -10 943
909 48 -20 +8 971
945 49 -20 +26 1,000
Remember interest goes to the income statement as does the FV adjustment also
The closing figure is the SFP receivable loan amount 
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Syllabus C3e) Account for derivative financial instruments, and simple embedded derivatives.
Financial Instruments - Transactions costs
Transaction Costs
There will usually be brokers’ fees etc to pay and how you deal with these depends on
the category of the financial instrument...
For FVTPL - these go to the income statement.
For everything else they get added/deducted to the opening balance.
So if it is an asset - it will increase the opening balance
If it is a liability - it will decrease the opening balance
 
Nb. If a company issues its own shares, the transaction costs are debited to share
premium
Illustration 1
A debt security that is held for trading is purchased for 10,000. Transaction costs are
500.
The initial value is 10,000 and the transaction costs of 500 are expensed.
Illustration 2
A receivable bond is purchased for £10,000 and transaction costs are £500.
The initial carrying amount is £10,500.
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Illustration 3
A payable bond is issued for £10,000 and transaction costs are £500.
The initial carrying amount is £9,500.
Note: With the amortised cost categories, the transaction costs are effectively being
spread over the length of the loan by using an effective interest rate which INCLUDES
these transaction costs
Illustration: Transaction costs
An entity acquires a financial asset for its offer price of £100 (bid price £98)
IFRS 9 treats the bid-offer spread as a transaction cost:
1. If the asset is FVTPL
The transaction cost of £2 is recognised as an expense in profit or loss and the

financial asset initially recognised at the bid price of £98.
2. If the asset is classified as amortised cost
The transaction cost should be added to the fair value and the financial asset
initially recognised at the offer price (the price actually paid) of £100.
Treasury shares
It is becoming increasingly popular for companies to buy back shares as another way of
giving a dividend. Such shares are then called treasury shares
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1. Deduct from equity
2. No gain or loss shown, even on subsequent sale
3. Consideration paid or received goes to equity
Illustration
Company buys back 10,000 (£1) shares for £2 per share. They were originally issued
for £1.20
Dr RE 20,000 Cr Cash 20,000
The original share capital and share premium stays the same, just as it would
have done if they had been bought by a different third party
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De-recognition of Financial Instruments
De-recognition of Financial Assets
De-recognition of a financial asset occurs where:
1. The contractual rights to the cash flows of the financial asset have expired (debtor
pays), or
2. The financial asset has been transferred (e.g., sold) including the risks and
rewards.
Illustration 1
A company sells an investment in shares, but retains the right to repurchase the shares
at any time at a price equal to their current fair value.
The company should de-recognise the asset
Illustration 2
A company sells an investment in shares and enters into an agreement whereby the
buyer will return any increases in value to the company and the company will pay the
buyer interest plus compensation for any decrease in the value of the investment.
The company should not de-recognise the investment as it has retained

substantially all the risks and rewards
Financial Liability De-recognition
The risks and rewards transfer does not apply for financial liabilities. Rather, the focus
is on whether the financial liability has been extinguished.
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Impairment of Financial Instruments
Expected Credit Loss model
This applies to:
I. Amortised cost items

II. FVTOCI items
How it works
Significant increase in credit risk occurred? Show lifetime expected losses
No significant increase in credit risk? Show 12-month expected losses only
How do you calculate the Expected Credit Loss?

Use a probability-weighted outcome, the time value of money and the best available
forward-looking information.
Notice the use of forward-looking info - this means judgement is needed - so it will be
difficult to compare companies
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Stage 1 - Assets with no significant increase in credit risk
For these assets:
1) 12-month expected credit losses (‘ECL’) are recognised and

2) Interest revenue is calculated on the gross carrying amount of the asset (that is,
without deduction for credit allowance)
12-month ECL are based on the asset’s entire credit loss but weighted by the probability
that the loss will occur within 12 months of the Y/E
Stage 2 - Assets with a significant increase in credit risk (but no evidence of

impairment)
For these assets:
1) Lifetime ECL are recognised

2) Interest revenue is still calculated on the gross carrying amount of the asset.
Lifetime ECL come from all possible default events over its expected life
Expected credit losses are the weighted average credit losses with the probability of
default (‘PD’) as the weight.
Stage 3 - Assets with evidence of impairment
For these assets:
1) Lifetime ECL are recognised and

2) Interest revenue is calculated on the net carrying amount (that is, net of credit
allowance
In subsequent reporting periods, if the credit quality improves so there’s no longer a

significant increase in credit risk since initial recognition, then the entity reverts to
recognising a 12-month ECL allowance
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Where does the impairment go?
The changes in the loss allowance balance are recognised in profit or loss as an
impairment gain or loss
So what do all these new rules on impairment mean?

Impairments are now recorded BEFORE any actual impairment (except for FVTPL items)
due to the 12-month ECL allowance for all assets
The ECL model is more forward looking when calculating ECLs
Entities with shorter term and higher quality financial instruments are likely to be less
significantly affected.
Higher volatility in the ECL amounts charged to profit or loss, increasing as economic
conditions are forecast to deteriorate, meaning more judgement required
For companies, the ECL model will most likely not cause a major increase in allowances
for short-term trade receivables because of their short term nature.
The provision matrix should help measure the loss allowance for short-term trade
receivables.
Collective Basis
If the asset is small it’s just not practical to see if there’s been a significant increase in
credit risk
So, you can assess ECLs on a collective basis, to approximate the result of using
comprehensive credit risk information that incorporates forward-looking information at an
individual instrument level
Simplified Approach
This means no tracking changes in credit risk!
Instead just recognise a loss allowance based on lifetime ECLs at each reporting date,
right from origination.
The simplified approach is for trade receivables, contract assets with no significant
financing component, or for contracts with a maturity of one year or less
12-month expected credit losses

These are a portion of the lifetime ECLs that are possible within 12 months
The portion is weighted by the probability of a default occurring
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It is not the predicted (probable) defaults in the next 12 months. For instance, the
probability of default might be only 25%, in which case, this should be used to calculate
12-month ECLs, even though it is not probable that the asset will default.
Also, the 12-month expected losses are not the cash shortfalls that are predicted over only
the next 12 months. For a defaulting asset, the lifetime ECLs will normally be significantly
greater than just the cash flows that were contractually due in the next 12 months.
Lifetime expected credit losses

These are from all possible default events over the expected life
Estimate them based on the present value of all cash shortfalls
So, basically, it’s the difference between:

• The contractual cash flows And
• The cash flows now expected to receive
As PV is used, even late (but the same) cashflows create an ECL
For a financial guarantee contract, the ECLs would be the PV of what it expects to pay as
guarantor less any amounts from the holder
ILLUSTRATION 1:
A company has a 5yr 6% receivable loan of $1,000,000
They expect credit losses of $10,000 pa.
The present value (discounted at 6%) of these lifetime expected credit losses is $42,124.
The present value of the 12-month expected credit losses is $9,434
Solution - how to deal with this financial asset

On day 1
Dr Loan receivable $1,000,000

Cr Cash $1,000,000
End of yr 1 - no significant increase in credit risk - show 12m ECL

Dr I/S Impairment loss $9,434
Cr Loss allowance in financial position $9,434
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End of yr 1 - significant increase in credit risk - show re-estimate of lifetime ECL
Let’s say the present value of the lifetime expected credit losses is $34,651.
Dr I/S Impairment loss $25,217 (34,651 – 9,434)

ILLUSTRATION 2:
A company has a receivable loan of $1,000,000.
They estimates that the loan has a 1% probability of a default occurring in the next 12
months.
It further estimates that 25% of the gross carrying amount will be lost if the loan defaults.
How much should the 12m ECL be?
Solution:
= 1% x 25% x $1,000,000 = $2,500
ILLUSTRATION 3:
An entity has a 10 yr 6% loan receivable of $1,000,000.
On initial recognition the probability of default is 1%. Expected lifetime losses $250,000
End of year 1 - probability of default increases to 1.5%
End of year 2 - probability of default increases to 30% (but still no evidence of impairment)
- expected lifetime losses now $100,000
End of year 3 - probability of default increases further - expected lifetime losses now
150,000 (but still no evidence of impairment)
End of year 4 - probability of default increases further - expected lifetime losses now
200,000 (but still no evidence of impairment)
The loan eventually defaults at the end of Year 5 and the actual loss amounts to $250,000.
At the beginning of Year 6, the loan is sold to a third party for $740,000
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Solution
Initial recognition
Dr Loan receivable – amortised cost asset $1,000,000
Cr Cash $1,000,000
Dr I/S Impairment loss (1% x 250,000) $2,500

At the end of Year 1

Dr Impairment loss in profit or loss (3,750 – 2,500) $1,250
The new 12m ECL would be 1.5% x 250,000 = $3,750.
Interest income 6% x 1,000,000 = $60,000.
At the end of Year 2

Dr I/S Impairment loss (100,000 - 3,750) $96,250
Interest income 6% x 1,000,000 = $60,000
Notice that interest is still calculated on gross amount
At the end of year 3



From Year 6 onward, interest income would be calculated at 6% on the net carrying
amount of the loan $750,000.
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Start of year 6
Dr Cash $740,000
Dr Loss allowance in financial position – de-recognised $250,000
Dr Loss on disposal in profit or loss $10,000
Cr Gross loan receivable – de-recognised $1,000,000
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Embedded derivatives
Embedded derivatives Hedging is all about matching. It is optional
Sometimes a seemingly normal contract has terms which make the cashflows act like a
derivative
So we call this an embedded derivative
Such a contract then has 2 elements; a host contract and an embedded derivative
The accounting treatment depends on whether the host contains a financial asset or
not
1. Host contains a financial asset
Here the contract is deal with as normal as a whole.
It is either an amortised cost or a FVTPL (probably a FVTPL because of the cashflow

terms)
2. Host does not contain a financial asset
Here we need to take the derivative element out, and treat it as FVTPL and the rest of
the contract as normal...but only if...
1. It has different (unusual) economic characteristics to that of the host contract
2. A separate instrument with the same characteristics would be treated as a derivative;

and
3. The contract is not measured at FVTPL anyway
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Illustration
A company borrows some money and agrees to pay back interest that is linked to the
price of gold
• Now there is clearly a derivative here (based on the price of gold) alongside a loan
• So we need to know now if the host contains a financial asset? Well no it doesn’t
because its a financial liability
• Therefore we need to take out the embedded derivative (as the economic
characteristics of gold are not the same as interest) and treat it as FVTPL
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Syllabus C3f) Outline the principles of hedge accounting and account for fair value hedges and cash
flow hedges including hedge effectiveness.
Hedge accounting
Objective
To manage risk companies often enter into derivative contracts
eg. Company buys wheat - so it is worried about the price of wheat rising rising (risk).
To manage this risk it buys a wheat derivative that gains in value as the price of wheat
goes up.
Therefore any price increase (hedged item) will be offset by the derivative gains (hedging
item)
So, the basic idea of hedge accounting is to represent the effect of an entity’s risk
management activities
IFRS 9 changes
IFRS 9 has made hedge accounting more principles based to allow for effective risk
management to be better shown in the accounts
It has also allowed more things to be hedged, including non-financial items
It has allowed more things to be hedging items also - options and forwards
There also used to be a concept of hedge effectiveness which needed to be tested

annually to see if hedge accounting could continue - this has now been stopped. Now if its
a hedge at the start it remains so and if it ends up a bad hedge well the FS will show this
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Accounting Concept
The idea behind hedge accounting is that gains and losses on the hedging instrument and
the hedged item are recognised in the same period in the income statement
It is a choice - it doesn’t have to be applied
Types of Hedge
There are 3 types of hedge:
Fair Value
Here we are worried about an item losing fair value (not cash).
For example you have to pay a fixed rate loan of 6%. If the variable rate drops to 4% your
loan has lost value. If the variable rate rises to 8%, then you have gained in fair vale
Notice you still pay 6% in both scenarios - so the risk isn’t cashflow - it is fair value
Cashflow
Here we are worried about losing cash on the item at some stage in the future
For example, you agree to buy an item in a foreign currency at a later date. If the rate
moves against you, you will lose cash
Net investment in a foreign operation

This applies to an entity that hedges the foreign currency risk arising from its net
investments in foreign operations 
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Hedged items
The hedged item is the item you’re worried about - the one which has risk (which needs
managing)
A hedged item can be:
• A recognised asset or liability (financial or not)

• An unrecognised commitment
• A highly probable forecast transaction
• A net investment in a foreign operation
They must all be separately identifiable, reliably measurable and the forecast transaction
must be highly probable.
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When can we use hedge accounting?
The hedge must meet all of the following criteria: (replacing the old 80-125% criteria)
1. An economic relationship exists between the hedged item and the hedging
instrument – meaning as one goes up in FV the other will go down
For example, a UK company selling to US customers - enters into a $100 to £ futures

contract which ends when the UK company is expected to receive $100
Here - the future $ receipt will be the hedged item and the futures contract the hedging
item
In the above example it is an obvious economic relationship as it’s the same amount and
same timing
However, sometimes the amounts and timings won’t be the same so you may use
judgement as to whether this is actually a proper hedge or not - here numbers could be
used
2. Credit risk doesn’t dominate the fair value changes
So, after having established an economic relationship (above) - IFRS 9 just wants to make
sure that any credit risk to the hedged or hedging item wont affect it so much as to destroy
the relationship
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Fair Value Hedges
Gains and losses of both the Hedged and Hedging item are recognised in the current
period in the income statement
Cash Flow Hedge

Here the hedged item has not yet made its gain or loss (it will be made in the future e.g.
Forex)
So, in order to match against the hedged item when it eventually makes its gain or loss,
the “effective” changes in fair value of the hedging instrument are deferred in reserves
(any ineffective changes go straight to the income statement)
These deferred gains/losses are then taken from reserves/OCI and to the income
statement when the hedged item eventually makes its gain or loss
Hedges of a net investment in a foreign entity

Same as cash-flow, changes in fair value of the hedging instrument are deferred in
reserves/OCI
Normally individual company forex gains/losses are taken to the income statement and
foreign subsidiary retranslation gains/losses taken to the OCI/Reserves.
So, lets say a UK holding company has a UK subsid and a Maltese subsid. The Malta sub
also has loaned the UK sub some cash in Euros.
Normally the UK sub would retranslate this loan and put the difference to the income
statement.
Also the Maltese sub is retranslated and the difference taken to OCI.
Here, it is allowed for the UK sub to hold the translation losses also is reserves (like a
cashflow hedge) as long as the loan is not larger than the net investment in the Maltese
sub
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Special cases of hedging items which reduce P&L Volatility
Options - time value element when intrinsic value of option is the designated hedging item
If the hedging item is an option - then the time value changes in that option will be taken to
the OCI (and equity)
When the hedged item is realised, these then get reclassified to P&L
Forward points - when the spot element of a forward contract is the designated hedging
item
If the hedging item is a forward contract then the forward points FV changes MAY be taken
to OCI, and again gets reclassified when the hedged item hits the I/S
Currency basis risk
The spread from this can be eliminated from the hedge - and instead either be valued as
FVTPL or FVTOCI(with reclassification) 
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Illustration - Fair Value Hedge
A company purchases a $2 million bond that has a fixed interest rate of 6% per year .
The instrument is classed as a FVTPL financial asset. The fair value of the instrument is
$2 million (This is the HEDGED item)
The company enters into an interest rate swap (fair value zero) to offset the risk of a
decline in fair value.
If the derivative hedging instrument is effective, any decline in the fair value of the bond
should be offset by opposite increases in the fair value of the derivative instrument.
The company designates and documents the swap as a hedging instrument. (This is the
HEDGING instrument)
Market interest rates increase to 7% and the fair value of the bond decreases to
$1,920,000.
This change in fair value of the instrument is recognised in profit or loss, as follows:
Dr Income statement 80,000
Cr Bond 80,000
The fair value of the swap has also increased by $80,000. Since the swap is a derivative, it
is measured at fair value with changes in fair value recognised in profit or loss.
The changes in fair value of the hedged item and the hedging instrument exactly offset,
the hedge is 100% effective and, the net effect on profit or loss is zero.
Fair Value Hedge illustration 2

A company purchases $1000 of gold. They then enter into a gold derivative. It is a perfect
hedge
By the year end the gold is worth $1,100. And when they come to actually use the stock it
is valued at $1,150. At this point the hedge is no longer needed and so the derivative
contract is closed
Required:
Show the journals required
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Dr Inventory 1000
Cr Bank 1,000
Year end journal

Dr Inventory 100
Cr I/S 100
Dr I/S 100 
Cr Derivative 100
Closing journal
Dr Inventory 50
Cr I/S 50
Dr I/S 50 
Cr Derivative 50
Dr COS 1,150 
Cr Inventory 1,150
Dr Derivative 150 
Cr Bank 150
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Illustration -Cash Flow Hedge
A company expects to purchase a piece of machinery for €10 million in a years time ( 31
July 2010 ). (This is the HEDGED item)
In order to offset the risk of increases in the euro rate, the company enters into a forward
contract to purchase €10 million in 1 year for a fixed amount (£6,500,000). The forward
contract is designated as a cash flow hedge and has an initial fair value of zero. (This is
the HEDGING item)
At the year end, ( 31 October 2009 ) the euro has appreciated and the value of €10 million
is £6,660,000. The machine will still cost €10 million so the company concludes that the
hedge is 100% effective. Thus the entire change in the fair value of the hedging instrument
is recognised directly in reserves.
Dr Forward contract £160,000

Cr Reserves £160,000
The effect of the cash flow hedge is to lock in the price of €10 million for the machine. The
gain in equity at the time of the purchase of the machine will either be released from equity
as the machine is depreciated or be deducted from the initial carrying amount of the
machine.
A hedge of net investment in a foreign operation is accounted similarly to a cash flow

hedge and generally, a hedge is viewed as being highly effective if actual results are within
a range of 80% and 125%.
Cashflow hedge illustration 2

A company plans to buy a product shortly after its year end, its expected cost is $1,000
(but the actual price will depend on market conditions after the year end)
So the company enters into a derivative based on the price of the product.
By the year end, the market value of the product is $1,200
So the derivative is closed out and the company receives $200
Required:
Show the journals required
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Year end
Dr Derivative 200 
Cr Hedge reserve 200
Closure journals
Dr Inventory 1,200 
Cr Bank 1,200
Dr Bank 200
Cr Derivative 200
Dr Hedge reserve 200 

Cr Inventory 200
“Ineffective” Hedges
If a hedge is 70% effective - then 70% is recorded using these rules
Miscellaneous Issues for IFRS 9
Reclassification
Reclassification of financial assets is required if the objective of the business model in
which they are held changes after initial recognition, and the change is significant.
Such changes are expected to be very infrequent. No other reclassifications are permitted.
' No reclassification of financial liabilities is permitted
Offsetting
For example an asset of 100 and a liability of 80 being shown as a net 20. This is generally
not allowed as it distorts the users understanding.
IAS 32 allows it if the cash is intended to be paid and received at the same time (rare) and
has a legal right to set off the amounts
Net Positions
For example 100 foreign forecast sales and 80 expenses can be netted off and hedged as
20 - with the following restrictions
Cashflow hedging - only net positions when its a forex risk

Fair value hedging - all risks 
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IFRS 7 Disclosures
Some risks are not apparent just by looking at the SPF.
For example, a foreign currency receivable loan is subject to:
1) Interest rate risks

2) Forex risks
3) Non - payment risks
Also, many loans have interest linked to derivative elements such as price of gold etc -
thus bringing in a further element of risk
IFRS 7 says the disclosures should allow users to “evaluate the significance of financial
instruments”
There are 2 parts to IFRS 7…disclosures on..
1. The significance of financial instruments

2. The nature and extent of risks from the financial instruments
Significance of Financial Instruments
I. Show the carrying amounts of: (and net gains/losses on):

FVTPL assets and Liabilities
Amortised Cost assets and liabilities
II. Collateral
Show the amount of financial assets that has been pledged against liabilities
III. Allowance for Credit Losses

Eg Bad debts account - these should be reconciled each period
IV. Defaults
Any breaches in loans payable to be disclosed
V. Total interest (effective rate) for amortised cost items
VI. Total impairments to financial assets
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Nature and Extent of Risks
Qualitative and quantitative disclosures to help understand:
Credit Risk (risk you won’t get paid)

• Best estimate of maximum exposure
• Disclosure of impairments and where payments are overdue on financial assets
Liquidity Risk (no cash to meet obligations)

• A maturity analysis for financial liabilities
• Description of how this risk is managed
Market risk (risk of value changes)

• Sensitivity analysis to interest rates, exchange rates and market prices, showing effect
on income statement
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Syllabus C4. Leases
Syllabus C4a) Apply and discuss the accounting for leases by lessees including the measurement of
the right of use asset and liability
Leases - Definition
IFRS 16 gets rid of the Operating lease (which showed no liability on the
SFP).
So, every lease now shows a liability!
Therefore the definition of what is a lease is super important (as it affects the amount of
debt shown on the SFP)
Here is that definition:
A contract that gives the right to use an asset for a period of time in exchange for
consideration
So let's dig deeper
There's 3 tests to see if the contract is a lease..
1. The asset must be identifiable 

This can be explicitly - it's in the contract 
Or implicitly - the contract only makes sense by using this asset 
(There is no identifiable asset if the supplier can substitute the asset (and would
benefit from doing so))
2. The customer must be able to get substantially all the benefits while it uses it
3. The customer must be able to direct how and for what the asset is used
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Example
A contract gives you exclusive use of a specific car
You can decide when to use it and for what
The car supplier cannot substitute / change the car
So does the contract contain a lease?
Does it pass the 3 tests?
1. Is there an Identifiable asset? 

Yes the car is explicitly referred to and the supplier cannot substitute the car
2. Does the customer have substantially all benefits during the period? 
Yes
3. Does the customer direct the use? 

Yes he/she can use it for whatever and whenever they choose
So, yes this contract contains a lease because it's...
consideration
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Example
A contract gives you exclusive use of a specific airplane
You can decide when it flies and what you fly (passengers, cargo etc)
The airplane supplier though operates it using its own staff
The airplane supplier can substitute the airplane for another but it must meet specific
conditions and would, in practice, cost a lot to do so
So does the contract contain a lease?
Does it pass the 3 tests?
1. Is there an Identifiable asset? 

Yes the airplane is explicitly referred to and the substitution right is not substantive
as they would incur significant costs
2. Does the customer have substantially all benefits during the period? 
Yes it has exclusive use
3. Does the customer direct the use? 

Yes the customer decides where and when the airplane will fly
So, yes this contract contains a lease because it's...
consideration 
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Basic Rule
Lessees recognise a right to use asset and associated liability on its SFP for
most leases
How to Value the Liability
Present value of the lease payments, where the lease payments are:
1 Fixed Payments
2 Variable Payments (if they depend on an index / rate)
3 Residual Value Guarantees
4 Probable purchase Options
5 Termination Penalties
How to Value the Right of Use asset?
Includes the following:
1 The Lease Liability (PV of payments)
2 Any lease payments made before the lease started
3 Any Restoration costs (Dr Asset Cr Provision)
4 All initial direct costs
After the initial Measurement - Asset
• Cost - depreciation (normally straight line) less any impairments
• Any subsequent re-measurements of the liability
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After the initial Measurement - Liability
• Effective interest rate method (amortised cost)
• Any re-measurements (e.g. residual value guarantee changes)
Example
3 year lease term
Annual lease payments in arrears 5,000
Rate implicit in lease: 12.04%
PV of lease payments: 12,000
Answer
The lease liability is initially the PV of future lease payments - given here to be 12,000
Double entry: Dr Asset 12,000 Cr Lease Liability 12,000
The Asset is then depreciated by 4,000pa (12,000 / 3)
The lease liability uses amortised cost:
Opening Interest (I/S) 12.04% (Payment) Closing
12,000 1,445 (5,000) 8,445

8,445 1,017 (5,000) 4,463
4,463 537 (5,000) 0
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Example - Variable lease payments (included in Lease Liability)
(Remember only include those linked to a rate or index)
So the lease contract says you have to pay more lease payments of 5% of the sales in
the shop you're leasing - should you include this potential variable lease payment in
your lease liability?
Answer
No - because it is not based on a rate or index
(They are just put to the Income statement when they occur)
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Variable Lease payments example
10 year Lease contract:
500 payable at the start of every year
Increased payments every 2 years to reflect the change in the consumer price index
The consumer price index was 125 at the start of year 1
(so these are variable payments based upon an index / rate)
ANSWER (IGNORING DISCOUNTING)
Start of year 1:
Dr Asset 500 Cr Cash 500
Dr Asset 4500 Cr Lease Liability 4500 (9 x 500)
End of year 2:
Asset will be 5,000 - 1,000 (straight line depreciation) = 4,000
Lease liability will be 8 x 500 = 4,000
End of year 3:
Lease payments are now different - 500 x 135/125 = 540
So the lease liability will be 7 x 540 = 3,780
Asset will be 4,000 - 500 (depreciation) + 280 (re-measurement of Liability) = 3,780
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(Please note that this example ignored discounting - which would normally happen as
the liability is measured as the PV of future payments)
Variable payments that are really fixed payments
These are included into the liability as they're pretty much fixed and not variable
e.g. Payments made if the asset actually operates
(well it will operate of course and so this is effectively a fixed payment and not a
variable one)
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The Lease Term
This is important because..
The lease liability = PV of payments in the lease term!
How is the Lease Term calculated?
• Period which can't be cancelled
• + any option to extend period (if reasonably certain to take up)
• + period covered by option to terminate (if reasonably certain not to take up)
So what does "Reasonably Certain" mean?
1 Market conditions mean its favourable to do it
2 Significant leasehold improvements made
3 High costs to terminate the lease
4 The asset is very important to the lessee (or specialised/customised to

the lessee)
Problem
How do we 'weight' these factors that tell us whether the lessee is reasonably certain to
extend the term or not?
Eg A flagship store in a prime and much sought-after location.
Significant judgement would be needed to determine whether the prime geographical

location of the store or other factors (for example termination penalties, lease hold
improvements, etc.) indicate that it is reasonably certain whether or not the lessee will
renew the store lease.
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When is the lease term re-assessed?
It's very rare but
1 When the lessee exercises (or not) an option in a different way than
previously was reasonably certain;
2 When something happens that contractually obliges the lessee to

exercise an option not previously included in the determination of the
lease term or
3 When something significant happens that affects whether it is reasonably

certain to exercise an option. This trigger is only relevant for the lessee
(and not the lessor).
Example
A 10 year lease with an option to extend for 5 years.
Initially, the lessee is not reasonably certain that it will exercise the extension option. So
the lease term is set for 10 years.
After 5 years, they decides to sublease the building for 10 years
Answer
Entering into a sublease is a significant event and it affects the entity’s assessment of
whether it is reasonably certain to exercise the extension option.
So, the lessee must change the lease term of the head lease 
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Syllabus C4e)
Discuss the recognition exemptions under the current leasing standard
Exemptions to Leases treatment
So now we know that all lease contracts mean we have to show
1 A right to use Asset
2 A Liability
So remember we said there was no longer a concept of operating leases - all lease
contracts mean we need to show a right to use asset and its associated liability
Well.. there are some exemptions..
Exemption 1 - Short Term Leases
These are less than 12 months contracts (unless there's an option to extend that you'll
probably take or an option to purchase)
1 Treat them like operating leases  

Just expense to the Income Statement (on a straight line / systematic basis)
2 Each class of asset must have the same treatment
3 This exemption ONLY applies to Lessees
Exemption 2: Low Value Assets
e.g. IT equipment, office furniture with a value of less than $5,000
1 Treat them like operating leases  

Just expense to the Income Statement (on a straight line basis)
2 Choice is made on a lease by lease basis
3 This exemption ONLY applies to Lessees 
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Syllabus C4c)
Apply and discuss the circumstances where there may be re-measurement of the lease liability
Measurement Exemptions
Exemption 1: Investment Property
(if it uses the FV model in IAS 40)
• Measure the property each year at Fair Value
Exemption 2 - PPE
(if revaluation model is used)
• Use revalued amount for asset
Exemption 3: Portfolio Approach
(Portfolio of leases with SIMILAR characteristics)
• Use same treatment for all leases in the portfolio 
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Syllabus C4d)
Apply and discuss the reasons behind the separation of the components of a lease contract into
lease and no lease elements
Components of a Lease
Sometimes a contract is for more than 1 thing
So the supplier (lessor) has more than 1 obligation
These obligations might be lease components or a combination of lease and non-lease

components.
For example, a contract for a car lease might be combined with maintenance (non
lease component)
IFRS 16 says lease and non-lease components should be accounted for separately...
What is a separate component?
1 something the lessee can benefit from alone and
2 not dependent on other assets in the contract
What do you do with separate lease components?
Deal with them separately
1. The non-lease components should be assessed under IFRS 15 for separate

performance obligations.
2. The lease components are treated as financial liabilities as normal under IFRS 16
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So if you treat 2 components in a contract differently..
How do you separate them in terms of allocating an amount of the lease payment to
them?
• Use their stand-alone prices (or an estimate if not available)
Practical expedient
Lessees are allowed not to separate lease and non-lease components and, instead,
account for them as a single lease component.
This accounting policy choice has to be made by class of underlying asset.
Because not separating a non-lease component would increase the lessee’s lease
liability, the IASB expects that a lessee will use this exemption only if the non-lease
component is not significant. 
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Syllabus C4b)
Apply and discuss the accounting for leases by lessors
Lessor Accounting - Finance Lease
Is it a Finance Lease or an Operating Lease?
If the majority of the risks and rewards are transferred to the lessee then it's a finance
lease
Other Indicators of a Finance Lease
1 Ownership transferred at the end
2 Option to buy at the end at less than Fair Value
3 Lease term is for majority of the asset's UEL
4 PV of future lease payments is close to the actual Fair Value of the asset
5 The asset is specialised and customised for the lessee
Finance Lease accounting
Dr Lease Receivable Cr Asset
What makes up the Lease Receivable?
1 PV of lease payments  
(Fixed receipts, Variable receipts (based on index / rate), Residual Value guaranteed to
receive, Exercise price to be received of any likely purchase option from the lessee,
Any penalties likely to be received from the lessee for early termination)
2 Un-guaranteed Residual Value
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Lessor - Finance Lease accounting
Opening Lease Effective Interest Amounts Received Closing Lease

Receivable Received Receivable
Dr Lease Receivable Dr Lease Receivable Dr Cash Balancing

Cr PPE Cr Interest Receivable Cr Lease Receivable figure
Lessor accounting if Operating Lease
Remember this is when the lessor keeps the risks and rewards of the asset
Accounting rules
• Keep the Asset on the SFP as normal
• Show lease receipts on the income statement (straight line basis)
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Syllabus C4b)
Apply and discuss the accounting for leases by lessors
Lessor Accounting - Operating Lease
Ok - let´s have a think about this
Remember that when we say operating lease - we mean the risks and rewards are
NOT taken by the lessee. So have we sold the asset or not?
Revenue recognition tells us that when the risks and rewards for goods are passed on
then we have made a sale and can recognise the revenue.
So, no the lessor has NOT in substance sold the asset. Therefore the lessor keeps the
asset on its SFP.
Income from an operating lease (not including services such as insurance and
maintenance), should be shown straight-line in the income statement over the length
of the lease (unless the item is used up on a different basis - if so use that basis).
SFP Income statement
Keep the Asset there Operating Lease rentals received
Negotiating costs etc
Any initial direct costs incurred by lessors should be added to the carrying amount of
asset on the SFP and expensed over the lease term (NOT the assets life).
Operating Lease Incentives
The lessor should reduce the rental income over the lease term, on a straight-line basis
with the total of these.
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Syllabus C4f)
Account for and discuss sale and leaseback transactions.
Sale and Leaseback
Let’s have a little ponder over this before we dive into the details…
So - the seller makes a sale (easy) BUT remember also leases it back - so the seller
becomes the lessee always, and the buyer becomes the lessor always
Seller = Lessee (after) 

Buyer = Lessor (after)
However, If we sell an item and lease it back - have we actually sold it? Have we got rid
of the risk and rewards?
So the first question is..
Have we sold it according to IFRS 15? (revenue from contracts with customers)
Option 1: Yes - we have sold it under IFRS 15
This means the control has passed to the buyer (lessor now)
But remember we (the seller / lessee) have a lease - and so need to show a right to use
asset and a lease liability
Step 1: Take the asset (PPE) out
Dr Cash
Cr Asset
Cr Initial Gain on sale
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Step 2: Bring the right to use asset in
Dr Right to use asset
Cr Finance Lease / Liability
Dr/Cr Gain on sale (balancing figure)
• How much do we show the Right to Use asset at? 

The proportion (how much right of use we keep) of our old carrying amount  
The PV of lease payments / FV of the asset x Carrying amount before sale
• How much do we show the finance liability at? 

The PV of lease payments
Example
A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000 and
FV 1,800
The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears.
The interest rate implicit in the lease is 4.5%, which results in a present value of the
annual payments of 1,459
The transfer of the asset to the buyer-lessor has been assessed as meeting the
definition of a sale under IFRS 15.
Answer
Notice first that the seller received 200 more than its FV - this is treated as a financing
transaction:
Dr Cash 200
Cr Financial Liability 200
Now onto the sale and leaseback..
Step1: Recognise the right-of-use asset - at the proportion (how much right of use
we keep) of our old carrying amount
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Old carrying amount = 1,000
How much right we keep = 1,259 / 1,800 (The 1,259 is the 1,459 we actually pay - 200
which was for the financing)
So, 1,259 / 1,800 x 1,000 = 699
Step 2: Calculate Finance Liability - PV of the lease payments
Given - 1,259
So the full double entry is:
Dr Cash 2,000
Cr Asset 1,000
Cr Finance Liability 200
Cr Gain On Sale 800
Dr Right to use asset 699
Cr Finance lease / liability 1,259
Dr Gain on sale 560 (balance)
Option 2: It's not a sale under IFRS 15
So the buyer-lessor does not get control of the asset
Therefore the seller-lessee leaves the asset in their accounts and accounts for the cash
received as a financial liability.
The buyer-lessor simply accounts for the cash paid as a financial asset (receivable).
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Further Guidance on Lease accounting
Some further guidance on measuring Right to use Assets
1 Discount rate 
The lessee uses the discount rate the interest rate implicit in the lease - if this rate
cannot be readily determined, the lessee should use its incremental borrowing rate (for
similar amount, term & security)
2 Restoration costs 
This should be included in the initial measurement of the right-of-use asset and as a
provision. This corresponds to the accounting for restoration costs in IAS 16 Property,
Plant and Equipment.
 
If the expected restoration costs change - then the right-of-use asset and provision is
changed
3 Initial direct costs 

These are incremental costs that would not have been incurred if a lease had not been
obtained. e.g. commissions or some payments made to existing tenants to obtain the
lease.
 
All initial direct costs are included in the initial measurement of the right-of-use asset.
4 Subsequent measurement 
The lease liability is measured in subsequent periods using the effective interest rate
method.
The right-of-use asset is depreciated on a straight-line basis or another systematic

basis that is more representative of the pattern in which the entity expects to consume
the right-of-use asset.
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The lessee must also apply the impairment requirements in IAS 36,‘Impairment of
assets’, to the right-of-use asset.
 
Using straight-line depreciation (for the asset) and the effective interest rate (for the
lease liability) will mean higher charges at the start of the lease and less at the end
(‘frontloading’)
 
But this might not properly reflect the economic characteristics of a lease contract
(especially for 'operating leases'.
 
It also means the carrying amount of the right-of-use asset and the lease liability won't
be equal in subsequent periods. The right-of-use asset will, in general, be lower than
the carrying amount of the lease liability.
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When should the lease liability be reassessed?
(only if the change in cash flows is based on contractual clauses that have been part of
the contract since inception) otherwise it's a modification not a reassessment
Component of the lease liability Reassessment
Lease Term When? – If there is a change in the lease

term.
How? – Reflect the revised payments using a

revised discount rate(the interest rate implicit
in the lease for the remainder of lease term)
Exercise price of a purchase option When? – A significant event (within the control
of the lessee) affects whether the lessee is
reasonably certain to exercise an option.
How? – Reflect the revised payments using a

revised discount rate(the interest rate implicit
in the lease for the remainder of lease term)
Residual value guarantee When? – If there is a change in the amount
expected to be paid.
How? – Include the revised residual payment

using the unchanged discount rate.
Variable lease payment (dependent When? – If a change in the index/rate results
on an index or a rate) in a change in cash flows.
How? – Reflect the revised payments based

on the index/rate at the date when the new
cash flows take effect for the remainder of the
term using the unchanged discount rate
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Syllabus C5. Segmental Reporting
Syllabus C5a) Determine the nature and extent of reportable segments.
Syllabus C5b) Specify and discuss the nature of segment information to be disclosed.
Segmental Reporting (IFRS 8) - Introduction
Objective of IFRS 8
The objective of IFRS 8 is to present information by line of business and by

geographical area.
It applies to plcs and any entity voluntarily providing segment information should
comply with the requirements of the Standard.
So why is it a good thing to have information by line of business and geographical

area?
Well, imagine you are an Apple shareholder.
You will naturally be interested in how well the company is doing.
That information would only make real sense though if it was broken down by business
area.
For example, if most of the profits were from i-Pods, then this would be worrying as this
market is in decline.
You would want to know how they are doing in the desktop computer market, how they
are doing in the smartphone and tablet market as well as any new areas they may be
diversifying into.
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Key Definitions
Business segment (e.g. i-Phone segment):
A component of an entity that
(a) provides a single product or service and
(b) is subject to risks and returns that are different from those of other business
segments.
Geographical segment (e.g. European market): 
A component of an entity that
(a) provides products and services and
(b) is subject to risks and returns that are different from those of components
operating in other economic environments.
May be based either on where the entity’s assets are located or on where its customers
are located.
Operating Segment  
Engages in business (even if all internal), whose results are regularly reviewed by the
chief operating decision maker and for which separate financial information is available.
• Earns revenue and incurs expenses from a business activity
• Is regularly reviewed by the chief decision maker when handing out resources
• Has separate financial info available
Therefore the head office is not an operating segment as it is not a business activity.
The idea behind the regular review part is that the entity reports on those segments that
are actually used by management to monitor the business
Aggregating Segments
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Operating Segments can be aggregated together only if
they have similar economic characteristics such as:
1. Similar product / service
2. Similar production process
3. Similar sort of customer
4. Similar distribution methods
5. Similar regulations
Quantitative Thresholds
Any segment which meets these thresholds must be reported on:
1. Total revenue is 10% or more of total Revenue

2. Profit is 10% or more of all profitable segments
3. Assets are 10% or more of the total assets of all operating segments
Reportable Segments
If the total EXTERNAL revenue of the operating segments reported on (meeting the
quantitative thresholds) is less than 75% of total revenue of the company then additional
operating segments results (those not meeting the quantitative thresholds) are reported
upon (until the 75% is met)
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Illustration
A B C D E Total
External 220 300 75 55 60 710

Revenue
Internal 60 15 5 10 90
Revenue
Profit 60 50 20 -11 14 133
Assets 5000 4000 300 300 400 10,000
Which of the segments A-E should be reported upon?
A B C D E
280 / 800 = 315 / 800 = 75 / 800 = 60 / 800 = 70 / 800 =

Revenue
35% 39% 9% 7.5% 9%
Test
PASS PASS FAIL FAIL FAIL
60 / 144* = 50 / 144 = 20 / 144 = 14 / 144 =

Profit Test 42% 35% 14% 9%
PASS PASS PASS FAIL
5,000 / 4,000 / 300 / 300 / 400 /

10,000 = 10,000 = 10,000 = 10,000 = 10,000
Assets Test
50% 40% 3% 3% = 4%
PASS PASS FAIL FAIL FAIL
*Profitable segments only

A, B and C all pass one of the tests and so would be reported on
External Revenue Test

A + B + C = 595 / 710 = 84% PASS (No more segments needed)
Disclosures for each segment

Profit
Total Assets and Liabilities
External Revenues
Internal Revenues
Interest income and expense
Depreciation
Profit from Associates and JVs
Tax
Other material non-cash items
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Measurement
This shall be the same as the one used when reporting to the chief decision maker.
So it is the internal measure rather than an IFRS one
A reconciliation is then provided between this measure and the entity’s actual figures for:
1) Profit (e.g. Allocation of centrally incurred costs)
2) Assets & Liabilities
Also any asymmetrical allocations.

For example, one segment may be charged depreciation for an asset not allocated to it
IFRS 8 requires the information presented to be the same basis as it is reported internally,
even if the segment information does not comply with IFRS or the accounting policies used
in the consolidated financial statements.
Examples of such situations include segment information reported on a cash basis (as
opposed to an accruals basis), and reporting on a local GAAP basis for segments that are
comprised of foreign subsidiaries.
Although the basis of measurement is flexible, IFRS 8 requires entities to provide an

explanation of:
(i) the basis of accounting for transactions between reportable segments;
(ii) the nature of any differences between the segments’ reported amounts and the
consolidated totals.
For example, those resulting from differences in accounting policies and policies for the
allocation of centrally incurred costs that are necessary for an understanding of the
reported segment information.
In addition, IFRS 8 requires reconciliations between the segments’ reported amounts and
the consolidated financial statements.
Entity Wide Disclosures
A. External revenue for each product/service

B. Totals for revenue made at home and abroad
C. NCA totals for those held at home and abroad
D. If 1 customer accounts for 10%+ of revenue this total must be disclosed alongside
which segment it is reported in 
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IFRS 8 Determining Reporting segments
Identifying Business and Geographical Segments
• An entity must look to its organisational structure and internal reporting system to
identify reportable segments.
In fact, the segmentation used for internal reports for the board should be the same
for external reports
• Only if internal segments are not along either product/service or geographical lines is
further disaggregation appropriate.
Primary and Secondary Segments
• For most entities one basis of segmentation is primary and the other is secondary
(with considerably less disclosure required for secondary segments)
• To decide which is primary, the entity should see whether business or geographical
factors most affect the risk and returns.
This should be helped by looking at entity’s internal organisational and management

structure and its system of internal financial reporting to senior management.
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Illustration
Product External Internal Profit Assets Liabilities

Revenue Revenue
The Nose picker 2,000 30 (100) 3,000 2,000
The Earwax extractor 3,000 20 600 8,000 3,000
Other Products 5,000 50 1,050 20,000 14,000
Which segments should be reported upon?
Let’s look at the 3 reportable segment tests: 

10% of combined revenue = 1,010 
10% of profits = 165 
10% of losses = 10 
10% of assets = 3,100 
So,
1. The Nose picker only passes the revenue test, it fails the profits test as a loss of
100 is less than 165 (165 is higher than 10), it fails the assets test. It is still a
reportable segment though as only 1 test needs to be passed
2. The Earwax extractor passes all 3 tests
3. Other Products These are not separate segments and can only be added together if
the nature of the products are similar, as are their customer type and distribution
method. So ordinarily these would not be disclosed. However we need to check
whether the 2 reported segments meet the 75% external revenue test:
4. Currently only 5,000 out of 10,000 (50%). Therefore additional operating segments
(other products) may be added until the 75% threshold is reached
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IFRS 8 Pros and Cons
IFRS 8 follows what we call the “managerial approach” as opposed to the old “risks and
rewards” approach to determining what segments are.
• This has the following advantages: 

Cost effective as data can be reported in the same way as it is in the managerial
accounts (though it does need reconciling)
• The segment data reflects the operational strategy of the business
However there are problems also:
• It gives a lot of subjective responsibility to the directors as to what they disclose
• Also the internal nature of how it is reported may actually make it less useful to some
users and lead to problems of comparability
• There is also no defined measure of profit/loss in IFRS 8
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Syllabus C6. Employee Benefits
Syllabus C6a) Apply and discuss the accounting treatment of short term and long term employee
benefits and defined contribution and defined benefit plans.
Syllabus C6b) Account for gains and losses on settlements and curtailments.
Syllabus C6c) Account for the “Asset Ceiling” test and the reporting of actuarial gains and losses
Pensions Introduction
Objective of IAS 19
Companies give their employees benefits - the most obvious being wages but there
are, of course, other things they may offer such as pensions.
IAS 19 says that the benefit should be shown when earned rather than when paid.
Employee benefits include paid holiday, sick leave and free or subsidised goods given
to employees.
Short-term Employee Benefits
As we mentioned above, any benefits payable within a year after the work is done,
(such as wages, paid vacation and sick leave, bonuses etc.) should be recognised
when the work is done not when paid for.
Profit-sharing and Bonus Payments
Recognise when there is an obligation to make such payments and a reliable estimate
of the expected cost can be made.
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Illustration
Grazydays PLC give their employees 6 weeks of paid holiday each year, and because
they’re groovy employers, any holiday not taken can be carried forward to the next
year.
Accounting Treatment  
Any untaken holiday entitlement should be recognised as a liability in the current
year even though it wouldn’t be taken until the next year.
Types of Post-employment Benefit Plans
There are two types:
1. Defined Contribution plan
In this one the company just promises to pay fixed contributions into a pension fund for
the employee and has no further obligations.
The contribution payable is recognised in the income statement for that period.
If contributions are not payable until after a year they must be discounted.
2. Defined Benefit plan
This is a post-employment benefit that gives the company an obligation to pay a

defined pension to its employees who have left.
The SFP Figure
The present value of the obligation less FV of assets (in the pension fund).
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Defined Benefit Scheme - Terms
Defined Benefit Scheme - Terms
Defined benefit plan
As we said in the intro - this is “A post-employment benefit that creates a constructive

obligation to the enterprise’s employees”.
• The SFP shows the pension fund as it stands at the year end in terms of the present
value of the obligation less FV of assets.
Let’s dig a little deeper to make some sense out of this.
• The idea is that the company puts money into the fund, the fund spends that money
on assets.
The assets make an EXPECTED return. The company hopes this return will pay off the
employees future pensions when they leave the company.
• Of course, the fund will not always exactly match the pension liability. Therefore there
will either be a surplus or deficit on the SFP.
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Let’s look at some terms before we put it all together:
1. Actuarial gains/losses
These occur due to differences between previous estimates and what actually
occurred.
These are recognised in the OCI.
2. Past service cost
Cr Pension Liability
This is a change in the pension plan resulting in a higher pension obligation for
employee service in prior periods.
They should be recognised immediately if already vested or not.
3. Plan curtailments or settlements
Curtailments are reductions in benefits or the number of employees covered by the

pension.
Any gain/loss is recognised when the curtailment occurs.
4. Current service cost
Increase in pension liability due to benefits earned by employee service in the period.
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5. Interest cost
The unwinding on the discount of the pension liability.
Dr Interest 
6. Expected return on plan assets
This is the Interest, dividends and other revenue from the pension assets and is now to
be based on the return from AA-rated corporate bonds.
This means companies cannot set expected returns according to the assets actually
held by the plan
It could encourage them to invest in more secure vehicles than is currently the case,
seeing as the potential higher return will no longer be reflected in the accounts.
The reason behind this is to improve transparency and consistency.
Dr Pension Asset 
Cr Interest received
The Interest cost and EROA are netted off against each other. They use the same
discount rate.
So if a fund has more assets than liabilities (a surplus) - it will have net interest
received.
If a fund has more liabilities than assets (a deficit) - it will have net interest paid.
7. Contributions to Pension fund
This is simply the money that the company puts in to the fund - so the fund can buy
assets to generate an expected return.
Dr Pension Asset 
Cr Cash
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8. Benefits paid
These are the actual pensions paid out to former employees.
Paying the pensions means we reduce the liability, but we use the pension fund to do it,
so we reduce the pension asset also.
Dr Pension Liability 
Cr Pension Asset
Other Long-term Benefits (e.g. Profit shares, bonuses)
A simplified application of the model described above for other long-term employee
benefits:
All past service cost is recognised immediately.
Termination Benefits (e.g. Redundancy)
Amount payable only recognised when committed to either:
1. Terminating the employment of employees before the normal retirement date; or
2. Providing benefits in order to encourage voluntary redundancy.
“Demonstrably committed” means a detailed formal plan without realistic

possibility of withdrawal.
Discount down if payable in more than a year.
Equity Compensation Benefits
No recognition for stock options issued to employees as compensation.
Nor does it require disclosure of the fair values of stock options or other share-based
payment.
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IAS 19 ‘Asset Ceiling’
This stops gains being shown just because Past service costs (unvested) have been
deferred.
It may be that there are net assets but not all can be recovered through refunds /
contributing less in the future.
In such cases, deferral of past service cost may not result in a refund to the entity or a
reduction in future contributions to the pension fund, so a gain is prohibited in these
circumstances.
So, any asset recognised in the balance sheet should be the lower of:
• the net total calculated; and
• the net total of:
(i) past service costs not recognised as an expense; and
(ii) the present value of any economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan.
An asset may arise where a defined benefit plan has been overfunded or in certain
cases where actuarial gains are recognised.
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Defined Benefit - Illustration
This is best seen on the video - but here goes in the written word….
Illustration
Pension Fund asset b/f 400 

Pension Fund Liability b/f 600 
Current service cost 100 
Expected return on assets 10% 
Discount rate 10% 
Contributions paid (@ year-end) 80 
Benefits paid (@ year-end) 60
Actuarial c/f: Pension Fund Asset 500 

Pension Fund Liability 650
Solution
• Current Service cost
Dr I/S 100 
Cr Pension Liability 100
• Expected return on Assets
Dr Pension asset 40 (10% x 400) 

Cr Interest 40
• Unwinding of discount
Dr Interest 60 (10% x 600) 

Cr Pension Liability 60
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• Contributions Paid
Dr Pension asset 80 

Cr Cash 80
• Benefits paid
Dr Pension Liability 60 

Cr Pension Asset 60
Having done those double entry we can see that assets have increased by 60 (400 to
460) and liabilities have increased by 100 (600 to 700) giving a net increase in the SFP
pension liability of 40. 
We now compare the pension assets and liabilities figure (which is based upon
assumptions) to what has actually occurred.
This is given in the actuarial figures c/f.
So, the assets made an actuarial gain of 40 and the liabilities a gain of 50.
This total gain of 90 is recognised in the OCI as a gain.
The balance sheet is showing a liability of 240, less the re-measurement of 90, equals
150 Liability.
This matches what is actually in the pension fund (650- 500) = 150.
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Defined Contribution Scheme
Short-term Employee Benefits
Benefits payable within a year after work is done, such as wages, paid vacation and
sick leave, bonuses etc. should be recognised when work is done.
Profit-sharing and Bonus Payments
Recognise when there is an obligation to make such payments and a reliable estimate
of the expected cost can be made.
Defined contribution plan
• The enterprise pays fixed contributions into a fund and has no further obligations.
• The contribution payable is recognised in the income statement for that period.
• If contributions are not payable until after a year they must be discounted.
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Syllabus C7. Income tax
Syllabus C7a) Apply and discuss the recognition and measurement of deferred tax liabilities and
deferred tax assets.
Syllabus C7b) Determine the recognition of tax expense or income and its inclusion in the financial
statements.
Current tax
The amount of income taxes payable or receivable in a period
Any tax loss that can be carried back to recover current tax of a previous period is shown
as an asset
If the gain or loss went to the OCI, then the related tax goes there too
Deferred Tax
This is caused by differences between IFRS rules and Tax rules (also known
as tax base)
Let´s say we have credit sales of 100 (but not paid until next year).
There are no costs.
The tax man taxes us on the cash basis (i.e. next year).
The Income statement would look like this:
Income Statement
Sales 100
Tax (30%) 0
Profit 100
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This is how it should look.
The tax is brought in this year even though it´s not payable until next year, it´s just a
temporary timing difference.
Income Statement SFP

Sales 100
Tax (30%) 0 Deferred tax payable 30
Profit 100
Illustration
Tax Base
Let’s presume in one country’s tax law, royalties receivable are only taxed when they are
received
IFRS
IFRS, on the other hand, recognises them when they are receivable
Now let’s say in year 1, there are 1,000 royalties receivable but not received until year 2.
The Income statement would show:
Royalties Receivable 1000

Tax (0) (They are taxed when received in yr 2)
This does not give a faithful representation as we have shown the income but not the
related tax expense.
Therefore, IFRS actually states that matching should occur so the tax needs to be brought
into year 1.
Dr Tax (I/S)
Cr Deferred Tax (SFP provision)
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Deferred tax on a revaluation
Deferred tax is caused by a temporary difference between accounts rules and tax rules.
One of those is a revaluation:
Accounting rules bring it in now. 

Tax rules ignore the gain until it is sold.
So the accounting rules will be showing more assets and more gain so we need to
match with the temporarily missing tax.
Illustration
A company revalues its assets upwards making a 100 gain as follows:
OCI SFP
PPE 1,000 + 100
Revaluation Gain 100 Revaluation surplus 100
This is how it should look.
The tax is brought in this year even though it´s not payable until sold, it´s just a
temporary timing difference.
Notice the tax matches where the gain has gone to.
OCI SFP
PPE 1,000 + 100
Deferred tax payable (30%) (30)
Revaluation Gain 100 - 30 Revaluation surplus 100 - 30
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Deferred Tax Scenarios
 
So as we saw in the introductory section, deferred tax is all about matching.
If the accounts show the income, then they must also show any related tax.
This is normally not a problem as both the accounts and taxman often charge amounts
in the same period.
The problem occurs when they don’t.
We saw how the accounts may show income when the performance occurs, while the
taxman only taxes it (tax base) when the money is received.
In this case, as financial reporters we must make sure we match the income and
related expense.
So this was a case of the accounts showing ‘more income’ than the tax man in the
current year (he will tax it the following year when the money is received).
So we had to bring in ‘more tax’ ourselves by creating a deferred tax liability.
So, basically deferred tax is caused simply by timing differences between IFRS rules and
tax rules.
Therefore IFRS demands that matching should occur i.e.

Difference Tax adjustment Deferred Tax Double entry
between IFRS needed for
and Tax base matching to
occur
Dr Tax (I/S)
More Income in I/S More tax needed Liability Cr Def Tax Liability
(SFP)
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Hopefully you can see then that the opposite also applies:
Difference Tax effect Deferred Tax Double entry
Dr Def tax asset

More expense in I/S less tax needed Asset
Cr tax (I/S)
In fact, the following table all applies:
Difference Tax effect Difference

1 More Income More tax Liability
2 Less income Less tax Asset
3 More expense Less tax Asset
4 Less expense More tax Liability
 
Remember this “more income etc.” is from the point of view of IFRS. I.e. The accounts
are showing more income, as the taxman does not tax it until next year.
We will now look at each of these 4 cases in more detail.
Case 1

1 More Income More tax Liability
Issue
IFRS shows more income than the taxman has taken into account.
Example 
Royalties receivable above.
Double entry required: 

Dr Tax (I/S) 
Cr Deferred tax Liability (SFP)
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Case 2

2
Issue
IFRS shows less income than the taxman has taken into account.
Example 
Taxman taxes some income which IFRS states should be deferred such as upfront
receipts on a long term contract.

Dr Deferred Tax Asset (SFP) 
Cr Tax (I/S)
This will have the effect of eliminating the tax charge for now, so matching the fact that
IFRS is not showing the income yet either. 
Once the income is shown, then the tax will also be shown by:
Dr Tax (I/S) 
Cr Deferred tax asset (SFP)
Case 3

3 More Expense Less tax Asset
Issue
IFRS shows more expense than the taxman has taken into account.
Example 
 
IFRS depreciation is more than Tax depreciation (WDA or CA).
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Dr Deferred Tax Asset (SFP) 
Cr Tax (I/S)
Illustration
IFRS TAX
Asset Cost 1,000 1,000
Depreciation (400) (300)
NBV 600 700
Simply compare 700-600 =100
100 x tax rate = deferred tax asset
Case 4

4 Less Expense More tax Liability
Issue
IFRS shows less expense than the taxman has taken into account.
Example 
 
IFRS depreciation is less than Tax depreciation (WDA or CA).

Dr Tax I/S 
Cr Deferred Tax Liability
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Illustration
IFRS TAX
Asset Cost 1,000 1,000
Depreciation (300) (400)
NBV 700 600
Simply compare 700-600 =100
100 x tax rate = deferred tax liability
Then multiply this by the tax rate (e.g. 30%) = 100 x 30% = 30
NOTE
In actual fact, the standard refers to assets and liabilities rather than more income and
more expense etc.
Simply use the above tables and substitute the word asset for income and expense for
liability.
Difference Tax effect Tax effect

1 More Asset More tax Liability
2 Less Asset Less tax Asset
3 More Liability Less tax Asset
4 Less Liability More tax Liability
Possible Examination examples of Case 1& 4
Accelerated capital allowances (accelerated tax depreciation) - see above.
Interest revenue - some interest revenue may be included in profit or loss on an

accruals basis, but taxed when received.
Development costs - capitalised for accounting purposes in accordance with IAS 38

while being deducted from taxable profit in the period incurred.
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Revaluations to fair value  
In some countries the revaluation does not affect the tax base of the asset and hence a
temporary difference occurs which should be provided for in full based on the difference
between its carrying value and tax base.
NOTE: Double entry here is: 

Dr Revaluation Reserve with the tax (as this is where the “income” went) 
Cr Deferred tax liability
Fair value adjustments on consolidation  

IFRS 3/ IAS 28 require assets acquired on acquisition of a subsidiary or associate to be
brought in at their fair value rather than carrying amount.
The deferred tax effect is a consolidation adjustment - this is more assets (normally) so
a deferred tax liability. The other side would be though to increase goodwill. And vice-
versa.
Undistributed profits of subsidiaries, branches, associates and joint ventures  

No deferred tax liability if Parent controls the timing of the dividend.
Possible Examination examples of Case 2 & 3
Provisions - may not be deductible for tax purposes until the expenditure is incurred.  
 
Losses - current losses that can be carried forward to be offset against future taxable
profits result in a deferred tax asset.
Fair value adjustments  

liabilities recognised on business combinations result in a deferred tax asset where the
expenditure is not deductible for tax purposes until a later period.
A deferred tax asset also arises on downward revaluations where the fair value is less
than its tax base.  
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NOTE: Here, the deferred tax asset here is another asset of S at acquisition and so
reduces goodwill.
Unrealised profits on intra-group trading  

the tax base is based on the profits of the individual company who has made a realised
profit.
THERE IS NO DEFERRED TAX EFFECT ON INITIAL GOODWILL.
How much deferred tax?

1. Deferred tax is measured at the tax rates expected to apply to the period when the
asset is realised or liability settled, based on tax rates (and tax laws) that have been
enacted by the end of the reporting period.
2. No Discounting
3. Deferred tax assets are only recognised to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can be used
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Miscellaneous Deferred Tax Items
On acquiring a Subsidiary
Here you need to check the Net Assets at acquisition (from your equity table) and compare
it to the tax base of the NA (this will be given in the exam)
Again you just look to see if the accounts are showing more or less assets and create a
deferred tax liability / asset at acquisition also. This will affect goodwill.
Illustration
H acquires 100% S for 1,000. At that date the FV of S’s NA was 800 and the tax base 700.
Tax is 30%.
How much is goodwill?
Goodwill
FV of Consideration 1,000
NCI -
FV of NA acquired -800
New Deferred tax liability 30

(800-700) x 30%
Goodwill 230
Un-remitted Earnings of Group Companies
H always has the right to receive profits (and dividends from them) from S or A. However
not all profits are immediately paid out as dividends.
This creates deferred tax as H will receive the full amount one day and when it does it will
be taxed. Therefore, a deferred tax liability should be created to match against the profits
shown from S and A
However, for Subsidiaries only, H might control its dividend policy and have no intention of
paying dividends out and no intention of selling S either in the foreseeable future.
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Therefore when this is the case NO deferred tax liability is created (this can not be the
case for Associates as H does not control A)
Unrealised Profit Adjustments
Here, the group makes an adjustment and decreases profits, in the group accounts only.
However, tax is charged on the individual companies and not the group. So, the group
accounts will be showing less profits and so the tax needs adjusting by creating a deferred
tax asset
The issue though is what tax rate to use - that of the selling company or that of the buyer
who holds the stock?
IAS 12 says you should use the tax rate of the buyer
Setting Off
A deferred tax asset can normally be set off against a deferred tax liability (to the same tax
jurisdiction) as the liability gives strong evidence that profits are being made and so the
asset will come to fruition
Deferred Tax Liability 1,000
Deferred Tax Asset -800
200
If, however, the deferred tax asset is more than the liability then the deferred tax asset can
only be recognised if is probable that it will be recovered in the near future
Deferred Tax Liability 1,000
Deferred Tax Asset -1,100
NO SET OFF
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Syllabus C8. Provisions
Syllabus C8a) Apply and discuss the recognition, de- recognition and measurement of provisions,
contingent liabilities and contingent assets including environmental provisions and restructuring
provisions.
Syllabus C8b) Apply and discuss the accounting for events after the reporting dates.
Syllabus C8c) Determine and report going concern issues arising after the reporting date.
Provisions
A provision is a liability of uncertain timing or amount
Double entry
Dr Expense
Cr Provision (Liability SFP)
If it is part of a cost of an asset (e.g. Decommissioning costs)
Dr Asset
Cr Provision (Liability SFP)
Recognise when
1. There is an obligation (constructive or legal)

2. There is a probable outflow
3. It is reliably measurable
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At how much?
The best estimate of the expenditure
Large Population of Items..

use expected values.
Single Item...
the individual most likely outcome may be the best estimate.
Discounting of provisions
Provisions should be discounted
Eg. A future liability of 1,000 in 2 years time (discount rate 10%)
1,000 x 1/1.10 x 1/1.10 = 826
Dr Expense 826
Cr Provision 826
Then the discount unwound
Year 1
826 x 10% = 83
Dr Interest 83
Cr Provision 83
Year 2
(826+83) x 10% = 91
Dr Interest 91
Cr Provision 91
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Measurement of a Provision
• The amount recognised as a provision should be the best estimate of the

expenditure required to settle the present obligation at the end of the reporting period.
• Provisions for one-off events
E.g. restructuring, environmental clean-up, settlement of a lawsuit
Measured at the most likely amount
• Large populations of events
E.g. warranties, customer refunds
Measured at a probability-weighted expected value
Illustration
A company sells goods with a warranty for the cost of repairs required in the first 2
months after purchase.
Past experience suggests:
88% of the goods sold will have no defects
7% will have minor defects
5% will have major defects
If minor defects were detected in all products sold, the cost of repairs will be $24,000;
If major defects were detected in all products sold, the cost would be $200,000.
What amount of provision should be made?
(88% x 0) + (7% x 24,000) + (5% x 200,000) = $11,680
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Contingent Liabilities
These are simply a disclosure in the accounts

They occur when a potential liability is not probable but only possible
(Also occurs when not reliably measurable)
Contingent Assets
Here, it is not a potential liability, but a potential asset.
The principle of PRUDENCE is important here, it must be harder to show a potential

asset in your accounts than it is a potential liability.
This is achieved by changing the probability test.
For a potential (contingent) asset - it needs to be virtually certain (rather than just
probable).
Probability test for Contingent Liabilities
Remote chance of paying out - Do nothing
Possible chance of paying out - Disclosure
Probable chance of paying out - Create a provision
Probability test for Contingent Assets
Remote chance of receiving - Do nothing
Possible chance of receiving - Do nothing
Probable chance of receiving - Disclosure
Virtually certain of receiving - create an asset in the accounts
Notice how an asset needs a little more evidence all the time 
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Some typical examples
Specific types of provision

Future operating losses
Provisions are not recognised for future operating losses (no obligation)
Onerous contracts
Recognised and measured as a provision (as there is a contract and so a legal obligation)
Restructuring
Create a provision when:
1. There is a detailed formal plan for the restructuring; and

2. There is a valid expectation in those affected that it will carry out the restructuring by
starting to implement that plan or announcing its main features to those affected by it
(this creates a constructive obligation)
Provide only for costs that are:

(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity
Possible Exam Scenarios
Warranties
Yes there is a legal obligation so provide. The amount is based on the class as a whole
rather than individual claims. Use expected values
Major Repairs
These are not provided for. Instead they are treated as replacement non current assets.
See that chapter
Self Insurance
This is trying to provide for potential future fires etc. Clearly no provision as no obligation to
pay until fire actually occurs
Environmental Contamination Clearance

Yes provide if legally required to do so or other parties would expect the company to do so
as it is its known policy
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Decommissioning Costs
All costs are provided for. The debit would be to the asset itself rather than the income
statement
Restructuring
Provide if there is a detailed formal plan and all parties affected expect it to happen. Only
include costs necessary caused by it and nothing to do with the normal ongoing activities
of the company (e.g. don’t provide for training, marketing etc)
Reimbursements
This is when some or all of the costs will be paid for by a different party.
This asset can only be recognised if the reimbursement is virtually certain, and the
expense can still be shown separately in the income statement
Circumstance Provide?
Warranties/guarantees Accrue a provision (past event was the
sale of defective goods)
Customer refunds Accrue if the established policy is to give
refunds
Land contamination Accrue a provision if the company's

policy is to clean up even if there is no
legal requirement to do so
Firm offers staff training No provision (there is no obligation to
provide the training)
Restructuring by sale of an operation/ Accrue a provision only after a binding
line of business sale agreement
Restructuring by closure of business Accrue a provision only after a detailed
locations or reorganisation formal plan is adopted and announced
publicly. A Board decision is not enough
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Current developments IAS 37 Exposure Draft (June
2005)
The term 'contingent liability' would be eliminated because (under the Framework)
liabilities arise only from unconditional (non-contingent) obligations.
So, provisions and contingent liabilities become:

• an unconditional obligation (which establishes the existence of a liability)
• a conditional obligation (which affects the amount required to settle it).
This effectively fives a fair value to contingent liabilities and so is aligned with the IFRS 3
treatment
Provisions would be measured at their expected outflow
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IAS 10 Events After The Reporting Period
Events can be adjusting or non-adjusting.
We are looking at transactions that happen in this period, and whether we should go back
and adjust our accounts for the year end or not adjust and just put into next year’s
accounts
If the event gives us more information about the condition at the year-end then we
adjust.
If not then we don’t.
When is the "After the Reporting date" period?
It is anytime between period end and the date the accounts are authorised for issue.
After the SFP date = Between period end and date authorised for issue
Ok and why is it important?
Well it may well be that many of the figures in the accounts are estimates at the period
end.
However, what if we get more information about these estimates etc afterwards, but
before the accounts are authorised and published.. should we change the accounts or
not?
The most important thing to remember is that the accounts are prepared to the SFP
date. Not afterwards.
So we are trying to show what the situation at the SFP date was. However, it may be
that more information ABOUT the conditions at the SFP date have come about
afterwards and so we should adjust the accounts.
Sometimes we do not adjust though…
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Adjusting Events
Here we adjust the accounts if:
The event provides evidence of conditions that existed at the period end
Examples are..
1. Debtor goes bad 5 days after SFP date
(This is evidence that debtor was bad at SFP date also)
2. Stock is sold at a loss 2 weeks after SFP date
IAS2 ‘Inventories’ states that estimates of net realisable value should take into account
fluctuations in price occurring after the end of the period to the extent that it confirms
conditions at the year end
(This is evidence that the stock was worth less at the SFP date also)
3. Property gets impaired 3 weeks after SFP date
(This implies that the property was impaired at the SFP date also)
4. The result of a court case confirming the company did have a present
obligation at the year end
5. The settling of a purchase price for an asset that was bought before the year
end but the price was not finalised
6. The discovery of fraud or error in the year 
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Non-Adjusting Events - these are disclosed only
These are events (after the SFP date) that occurred which do not give evidence of
conditions at the year end, rather they are indicative of conditions AFTER the SFP date
1. Stock is sold at a loss because they were damaged post year-end
(This is evidence that they were fine at the year-end - so no adjustment)
2. Property impaired due to a fall in market values generally post year end
(This is evidence that the property value was fine at the year end - so no adjustment
required).
3. The acquisition or disposal of a subsidiary post year end
4. A formal plan issued post year end to discontinue a major operation
5. The destruction of an asset by fire or similar post year end
6. Dividends declared after the year end
Non-adjusting event which affects Going Concern
Adjust the accounts to a break up basis regardless if the event was a non-adjusting
event.
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Syllabus C9. Related parties
Syllabus C9a) Determine the parties considered to be related to an entity.
Syllabus C9b) Identify the implications of related party relationships and the need for disclosure.
IAS 24 Related Parties
A party is said to be related to an entity if any of the following three situations

occur:
The 3 situations are:
1. Controls / is controlled by entity
2. is under common control with entity
3. has significant influence over the entity
Types of related party
These therefore include:
1. Subsidiaries
2. Associate
3. Joint venture
4. Key management
5. Close family member of above (like my beautiful daughter pictured in her new
school uniform aaahhh)
6. A post-employment benefit plan for the benefit of employees
Not necessarily related parties
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Two entities with a director in common
Two joint venturers
Providers of finance
A big customer, supplier etc
Stakeholders need to know that all transactions are at arm´s length and if not then be
fully aware.
Similarly they need to be aware of the volume of business with a related party, which
though may be at arm´s length, should the related party connection break then the
volume of business disappear also.
Disclosures
• General
The name of the entity’s parent and, if different, the ultimate controlling party
The nature of the related party relationship
Information about the transactions and outstanding balances necessary for an

understanding of the relationship on the financial statements
• As a minimum, this includes:
Amount of outstanding balances 

Bad and doubtful debt information
• Key management personnel compensation should be broken down by:
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• short-term employee benefits
• post-employment benefits
• other long-term benefits
• termination benefits
• share-based payment
Group and Individual accounts
1. Individual accounts
Disclose related party transactions / outstanding balances of parent, venturer or

investor.
2. Group accounts
The intra-group transactions and balances would have been eliminated.
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Syllabus C10. Share based payment
Syllabus C10a) Apply and discuss the recognition and measurement criteria for share-based
payment transactions.
Syllabus C10b) Account for modifications, cancellations and settlements of share based payment
transaction.
Share Based Payments - Introduction
What is a SBP transaction?

Well first of all it needs to be for receiving good or services1 and in return the company
gives:
1) Its own shares

2) Cash based upon the price of its own shares
Contracts to buy or sell non-financial items that may be settled net in shares or rights to
shares are outside the scope of IFRS 2 and are addressed by IAS 32
There are 3 types of Share based payment:
1. Equity-settled share-based payment
This is where the company pays shares in return for goods and/or services received.
Dr Expense 
Cr Equity
2. Cash-settled share-based payment
1 Goods and services not identified are still under IFRS 2 e.g.. Payments to Trade Unions etc
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This is where cash is paid in return for goods and services received, HOWEVER..the
actual cash amount though is based on the share price.
These are also called SARs (Share Appreciation Rights).
Dr Expense 
Cr Liability
3. Transactions with a choice of settlement
A choice of cash or shares paid in return for goods and services received.
Vesting period
 
Often share based payments are not immediate but payable in say 3 years. The
expense is spread over these 3 years and this is called the vesting period.
How much to recognise?
So we have decided that share based payments (either shares or cash based on share
price) should go into the accounts .
(Dr expense Cr Equity or Liability)
We now have to look at the value to put on these:
• Option 1: Direct method
Use the FV of the goods or services received
• Option 2: Indirect method
Use the FV of the shares issued by the company
Equity settled - Use FV of shares @ grant date 

Cash settled - Update FV of shares each year
IFRS 2 suggests you choose option 1 - the FV of the goods/services.
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However, if the FV of these cannot be reliably measured then you should go for
option 2 - FV of shares issued.
Strangely enough, option 2 is the most common. This is because share based
payments are often associated with paying employees.
You cannot put a value on the work done by employees - except for the value of
what you pay them i.e. Option 2.
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SBP - Equity Settled
This is where payments are made with an equity instrument such as a share
or a share option.
Measurement
The FV of the product / service acquired (if possible)
FV of equity instrument issued
FV of Equity Instrument
This is basically MARKET VALUE, taking into account the terms and market related
conditions of the offer.
If there is no MV available, then the “Intrinsic Value” option is available. This is basically
the share price less the exercise price.
However, if this is chosen then the accounting treatment below is slightly different. It will
need to be remeasured to the new intrinsic value each year - this will be very rare.
Dr Expense (or asset) 

Cr Equity
The problem is we only do the above double entry once the item has ‘vested’ (i.e.
satisfied all conditions to be met to make the share payable)
For example, if shares are issued for the purchase of a building, and the building is
available to use immediately, then it has vested immediately and you would Dr PPE Cr
Equity with the FV of the asset acquired.
If, however, share options are issued, but only once employees have stayed in the job
for say 3 years, then this means they do not fully vest for 3 years. What you do here, is
recognise the expense as it vests - over what we call the ‘vesting period’. So, in this
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example, you would calculate the full cost of the options at grant date and in the first
year Dr Expense Cr Equity with 1/3 of that total.
Precise Measurement
You take the best available estimate at the time of the number of equity instruments
expected to vest at the end.
The value used for the share options throughout the vesting period remains at the
GRANT DATE value (with the exception of “intrinsic value” method above).
Illustrations
Equity Settled
An entity grants 100 share options on its $1 shares to each of its 500 employees on 1
January Year 1.
Each grant is conditional upon the employee working for the entity over the next three
years.
The fair value of each share option as at 1 January Year 1 is $10. 
On the basis of a weighted average probability, the entity estimates on 1 January that
100 employees will leave during the three-year period and therefore forfeit their rights
to share options.
The following actually occurs: 

– 20 employees leave during Year 1 and the estimate of total employee departures
over the three-year period is revised to 70 employees 
– 10 employees leave during Year 3
Solution
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Step 1: Decide if this is a cash or equity settled SBP - share options are equity settled
(so Dr Expense Cr Equity).
Step 2: Decide whether to value directly or indirectly - these are for employees so
indirectly.
Step 3: Calculate how many employees (and their share options each) are expected to
be issued at the end of the vesting period.
Year 1: 430 Employees expected to be left at end (500-70) x 100 (share options each)
x $10 (FV @ GRANT date) x 1/3 (time through vesting period) = 143,300
Year 2: 440 x 100 x $10 x 2/3 - 143,300 = 150,000
Year 3: 445 x 100 x $10 x 3/3 - 293,300 = 151,700
So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Equity 143,300 

Year 2: Dr Expense 150,000 Cr Equity 150,000 
Year 3: Dr Expense 151,700 Cr Equity 151,700
Notice that if you add these up it comes to 445,000. This is exactly our final liability (445
x 100 x $10 x 3/3) - it’s just we’ve spread it over the 3 years vesting period.
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SBP - Cash Settled
These are when a company promises to pay for goods or services for cash, however
the cash price is linked to the share price
They are often called “Share Appreciation Rights (SARs)”
The double entry is:
Dr Expense 
Cr Cash or Liability
If the payment is for a service stretching over a number of years (vesting period) then
the expense is recognised over the number of years and the liability is calculated by
taking into account the change in the share price
Illustration 1
1 Jan Year 1 - 100 share appreciation rights (SARs) given to each of the company’s
1000 employees. FV of these at grant date was £5. The employees had to be in service
for 3 years to take the SAR
End of year 1 - 100 employees had left and 140 more expected to leave by the end of
year 3. FV of SAR now £6
End of year 2 - 40 employees left in the year and another 50 expected to leave in year
3. FV of SAR now £8
End of year 3 - 60 employees left and the FV of SAR is now £7
Solution
Year 1 - 760 (1,000 - 100 -140) x 100 x £6 x 1/3 = 152,000 (Dr Expense Cr Liability)
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Year 2 - 810 (1,000 - 100 - 40 - 50) x 100 x £8 x 2/3 = 432,000 - 152,000 = 280,000 (Dr
Expense Cr Liability)
Year 3 - 800 (1,000 - 100 - 40 - 60) x 100 x £7 x 3/3 = 560,000 - 432,000 = 128,000 (Dr
Expense Cr Liability)
Finally the 560,000 is paid
Dr Liability 560,000
Cr Cash 560,000
illustration 2
An entity grants 100 share options on its $1 shares to each of its 500 employees on 1
January Year 1.
Each grant is conditional upon the employee working for the entity over the next three
years.
The fair value of each share option as at 1 January Year 1 is $10. 
On the basis of a weighted average probability, the entity estimates on 1 January that
100 employees will leave during the three-year period and therefore forfeit their rights
to share options.
The following actually occurs: 

– 10 employees leave during Year 3
Information of share price at the end of each year: 

Year 1 10 
Year 2 12 
Year 3 14
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Solution  
 
As this is cash settled then the double entry becomes Dr Expense Cr Liability and we
do not keep the value of the option @ grant date but change it as we pass through the
vesting period.
Y1: 430 x 100 x 10 x 1/3 = 143,300 

Y2: 440 x 100 x 12 x 2/3 - 143,300 = 208,700 
Y3: 445 x 100 x 14 x 3/3 - 623,000 x 3/3 - 352,000 = 271,000
So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Liability 143,300 

Year 2: Dr Expense 208,700 Cr Liability 208,700 
Year 3: Dr Expense 271,000 Cr Liability 271,000
Notice that if you add these up it comes to 623,000.
This is exactly our final liability (445 x 100 x $14 x 3/3) - it’s just we’ve spread it over the
3 years vesting period.
SBP with a Choice of Settlement
Share-based payment with a choice of settlement
Entity has the choice
Is there a present obligation to settle in cash?
Yes
Treat as cash-settled
No
Treat as equity-settled 
Counter-party has the choice
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The transaction is a compound financial instrument which needs splitting into debt and
equity
Debt Portion
This must be calculated first..the FV of the cash option at grant date
Then it is treated just like a normal cash-settled SBP
Equity Portion
This is the FV of the option less the debt portion calculated above at grant date
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Illustration
An entity grants an employee a right to receive either 8,000 shares or cash to the value,
on that date, of 7,000 shares. She has to remain in employment for 3 years.
The market price of the entity's shares is $21 at grant date, $27 at the end of year 1, $33
at the end of year 2 and $42 at the end of the vesting period, at which time the employee
elects to receive the shares.
The entity estimates the fair value of the share route to be $19.
Show the accounting treatment.
Solution
The fair value of the cash route at grant date is: 7,000 × $21 = $147,000 
The fair value of the share route is: 8,000 × $19 = $152,000 - 147,000 = $5,000
We then treat them as cash and equity settled SBPs as appropriate:
Year Cash Equity I/S
7,000 x $27 x 1/3 5,000 x 1/3

1
63,000 1,667 64,667
7,000 x $33 x 2/3 5,000 x 1/3
2
154,000 1,667 92,667
7,000 x $42 x 3/3 5,000 x 1/3
3
294,000 1,667 141,667
Entity has the choice of issuing shares or cash
Option 1 - Obligated to pay cash

The entity is prohibited from issuing shares or where it has a stated policy, or past practice,
of issuing cash rather than shares.
Treat as a cash-settled SBP
Option 2 - Not obligated to pay cash

Treat as if it was purely an equity-settled transaction.
If on settlement, cash was actually paid, the cash should be treated as if it was a
repurchase of the equity instrument by a deduction against equity. 
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Vesting Period
This is normally a set amount of time but sometimes it may be dependent upon a condition
to be satisfied..
Vesting Conditions
These are conditions that have to be met before the holder gets the right to the shares or
share options
There are 2 types of Vesting Condition:
Non-market based2
Those not relating to the market value of the entity’s shares
Market based3
Those linked to the market price of the entity’s shares in some way
Non-Market Vesting Conditions
Here only the number of shares or share options expected to vest will be accounted for.
At each period end (including interim periods), the number expected to vest should be
revised as necessary.
2 Employee completing minimum service; Achieving sales target; EPS target; On flotation;
3 Increase in SP; Increase in shareholder return; Target SP
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Illustration
An entity granted 10,000 share options to one director. The director had to work there for 3
years, and indeed he did
Also to get the options, the director had to reduce costs by 10% over the vesting period. At
the end of the first year, costs had reduced by 12%. By the end of the 2nd year, costs had
only reduced in total by 7%. By the end of yr. 3 though the costs had been reduced by 11%
The FV of the option at grant date was $21

How should the transaction be recognised?
Solution
The cost reduction target is a non-market performance condition which is taken into
account in estimating whether the options will vest. The expense recognised in profit or
loss in each of the three years is:
Yearly Charge Cumulative
(10,000 × £21)/3 years =

Year 1 70,000
70,000
Year 2 (performance
target not expected to be -70,000 0
met)
(10,000 x $21)
Year 3
210,000 210,000
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Market Vesting Conditions
These conditions are taken into account when calculating the fair value of the equity
instruments at the grant date.
They are not taken into account when estimating the number of shares or share options
likely to vest at each period end.
If the shares or share options do not vest, any amount recognised in the financial
statements will remain.
Make an estimate of the vesting period at the acquisition date
If vesting period is shorter than original estimate

Expense all the remainder in the year the vesting condition is complied with
If vesting period is longer than the original estimate

Expense still using the original estimate of vesting period
Market and non-market based vesting conditions together
Where both market and non-market vesting conditions exist, then as long as the non
market conditions are met the company must expense (irrespective of whether market
conditions are satisfied)
So, where market and non-market conditions co-exist, it makes no difference whether the
market conditions are achieved.
The possibility that the target share price may not be achieved has already been taken into
account when estimating the fair value of the options at grant date.
Therefore, the amounts recognised as an expense in each year will be the same
regardless of what share price has been achieved.
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Illustration
A company granted 10,000 share options to a director. He must work there for 3 years. He
did this.
Also the share price should increase by at 25% over the three-year period.
During the 1st year the share price rose by 30% and by 26% compound over the first two
years and 24% per annum compound over the whole period
At the date of grant the fair value of each share option was estimated at £184
How should the transaction be recognised?
Solution
The director satisfied the service requirement but the share price growth condition was not
met.
The share price growth is a market condition and is taken into account in estimating the
fair value of the options at grant date.
Therefore, no adjustment should be made if there are changes from that estimated in
relation to the market condition. There is no write-back of expenses previously charged,
even though the shares do not vest.
The expense recognised in profit or loss in each of the three years is one third of 10,000 x
£18 = £60,000.
4 Remember this would already include the probability of meeting the 25% increase over the 3 years
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IFRS 2 Share based payments deferred tax
Deferred tax implications
Issue
An entity recognises an expense for share options but the taxman offers the tax
deduction on the later exercise date.
This is therefore an example of accounts showing more expenses (than the taxman
has allowed so far) and so a deferred tax asset occurs.
The taxman may calculate his expense on the intrinsic value basis. This may offer a
greater deduction (at the end) than our expense. This extra deferred tax asset is set off
against equity (and OCI) not the income statement.
Illustration
An entity granted 1,000 share options to an employee vesting 3 years later. The fair
value of at the grant date was $3. 
Tax law allows a tax deduction of the intrinsic value of$1.20 at the end of year 1 and
$3.40 at the end of year 2. 
Assume a tax rate of 30%.
Solution
Year 1
Accounts  
1,000 x 1/3 x 3 = 1,000
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Tax  
Has allowed 0 
However, at the end he will allow 1,000 x 1/3 x 1.2 = 400
 
Therefore the deferred tax asset is capped at 400. So, the double entry is: 
Dr Deferred Tax Asset (400x30%) 120 
Cr Tax (I/S) 120
Year 2  
 
Accounts  
1,000 x 2/3 x 3 - 1,000 = 1,000
Tax  
1,000 x 2/3 x 3.4 - 400 = 1.867
Therefore we have expensed 2,000 (1,000 + 1,000) 

The tax man will allow at the end 2,267 (400 + 1,867) 
So, the deferred tax asset should now be 2267 x 30% = 680
Of this only 2,000 x 30% = 600 should have gone to the income statement (to match
with the 2,000 expense). 
The remaining 80 should have gone to equity.
 
Year 2 
Income statement  
Expense 1,000 
Tax (600 - 120) -480
Equity  
Share Options 2,000 
Tax asset 80
Double entry  
Dr Deferred tax asset (680-120) 560 
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Cr Income statement 480 
Cr Equity 80
IFRS 2 Modifications and Cancellations
The entity might: 

Reprice (modify) share options, or
Cancel or settle the options.
Equity instruments may be modified before they vest.  
For example, a fall in the actual share price may mean that the original option exercise
price is no longer attractive.
Therefore the exercise price is reduced (the option is ‘re-priced’) to make it valuable again.
 
Such modifications will often affect the fair value of the instrument and therefore the
amount recognised in profit or loss.  
1. Continue to recognise the original fair value of the instrument in the normal way
(even where the modification has reduced the fair value)
2. Recognise any increase in fair value at the modification date (or any increase in the
number of instruments granted as a result of modification) spread over the period
between the modification date and vesting date.
3. If modification occurs after the vesting date, then the additional fair value must be
recognised immediately unless there is, for example, an additional service period, in
which case the difference is spread over this period.
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Illustration
At the beginning of year 1, an entity grants 100 share options to each of its 500
employees over a vesting period of 3 years at a fair value of $15.
Year 1  
40 leave, further 70 expected to leave; share options repriced (as mv of shares has
fallen) as the FV had fallen to $5. After the repricing they are now worth $8.
Year 2  
35 leave, further 30 expected to leave
Year 3  
28 leave
 
Solution  
The repricing has increased FV by (8-5) = 3
This amount is recognised over the remaining two years of the vesting period, along
with remuneration expense based on the original option value of $15.
Year 1  
Income statement & Equity 
(500-110) x 100 x 1/3 x $15 = 195,000
Year 2  
[(500 – 105) × 100 × (($15 × 2/3) + ($3 × ½))] 454,250 - 195,000 
 
Dr Expenses $259,250 Cr Equity $259,250 
 
Year 3  
[(500 – 103) × 100 × ($15 + $3 ) 714,600 - 454,250
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Dr Expenses $260,350 
Cr Equity $260,350
Illustration
An entity granted 1,000 share options at an exercise price of £50 to each of its 30 key
management personnel.
They had to stay with the entity for 4 years
At grant date, the fair value of the share options was estimated at £20 and the entity
estimated that the options would vest with 20 managers.
This estimate didn’t change in year 1
The share price fell early in the 2nd year. So half way through that year they modified the
scheme by reducing the exercise price to £15. (The fair value of an option was £2
immediately before the price reduction and £11 immediately after.)
It retained its estimate that options would vest with 20 managers.
How should the modification be recognised?
Solution
The total cost to the entity of the original option scheme was: 1,000 shares × 20 managers
× £20 = £400,000 
This was being recognised at the rate of £100,000 each year.
The cost of the modification is: 

1,000 x 20 managers × (£11 – £2) = £180,000
This additional cost should be recognised over 30 months, being the remaining period up
to vesting, so £6,000 a month.
The total cost to the entity in the second year and from then on is: £100,000 + (£6,000 × 6)
= £136,000.
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Cancellations and settlements  
An entity may settle or cancel an equity instrument during the vesting period.
Basically treat this as the vesting period being shortened.
Charge any remaining fair value of the instrument that has not been recognised
immediately in profit or loss (the cancellation or settlement accelerates the charge and
does not avoid it).
Any amount paid to the employees by the entity on settlement should be treated as a
buyback of shares and should be recognised as a deduction from equity.
If the amount of any such payment is in excess of the fair value of the equity instrument
granted, the excess should be recognised immediately in profit or loss.
A cash settlement made to an employee on cancellation
Dr Equity 
Dr Income statement (excess over amount in equity) 
Cr Cash
An equity settlement made to an employee on cancellation
This is basically a replacement of the option and so is treated as a modification (see

earlier) at this value:
Fair value of replacement instruments* X 

Less: Net fair value of cancelled instruments (X)
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Illustration
2,000 share options granted at an exercise price of $18 to each of its 25 key management
personnel. The management must stay for 3 years. The fair value of the options was
estimated at $33 and the entity estimated that the options would vest with 23 managers.
This estimate stayed the same in year 1
 
In year 2 the entity decided to abolish the existing scheme half way through the year when
the fair value of the options was $60 and the market price of the entity's shares was $70.
Compensation was paid to the 24 managers in employment at that date, at the rate of $63
per option.  
 
How should the entity recognise the cancellation?
Solution  
The original cost to the entity for the share option scheme was: 2,000 shares × 23
managers × $33 = $1,518,000  
This was being recognised at the rate of $506,000 in each of the three years.  
At half way through year 2 when the scheme was abolished, the entity should recognise a
cost based on the amount of options it had vested on that date. The total cost is:  
2,000 × 24 managers × £33 = $1,584,000 
After deducting the amount recognised in year 1, the year 2 charge to profit or loss is
$1,078,000.
The compensation paid is: 2,000 × 24 × $63 = $3,024,000 
Of this, the amount attributable to the fair value of the options cancelled is:  
2,000 × 24 × $60 (the fair value of the option, not of the underlying share) = $2,880,000 
This is deducted from equity as a share buyback.
The remaining $144,000 ($3,024,000 less $2,880,000) is charged to profit or loss.
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Cancellation and resistance
 
Where an entity has been through a capital restructuring or there has been a significant
downturn in the equity market through external factors, an alternative to repricing the share
options is to cancel them and issue new options based on revised terms.
The end result is essentially the same as an entity modifying the original options and
therefore should be recognised in the same way.
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IFRS 2 Scope
Share-based payments can be more than just employee share options, and the trick in
the exam is to know which scenarios you apply IFRS 2 to, and which you don’t…
It Applies to All Entities  

There is no exemption for private or smaller entities.
In fact, subsidiaries using their parent’s or fellow subsidiary’s equity as consideration for
goods or services are within the scope of the Standard.
Goods and Services Only  

IFRS 2 is used when shares are issued (or rights to shares given) in return for goods
and services ONLY.
What does fall under IFRS 2
• Share appreciation rights

• Employee share purchase plans
• Employee share ownership plans
• Share option plans and
• Plans where share issues (or rights to shares) depend on certain conditions
What doesn’t fall under IFRS 2
• When shares are issued to buy a subsidiary (rather than for employing the subs
directors primarily). 
So, in a question, care should be taken to distinguish share-based payments related
to the acquisition from those related to employee services.
• When the item is being paid for with shares is a commodity-based derivative (such as
those dealing with the price of gold, oil etc.). These are IFRS 9 financial instruments
instead. 
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Syllabus C11. Reporting requirements of small and
medium- sized entities (SMEs)
Syllabus C11a) Discuss the accounting treatments not allowable under the IFRS for SMEs including
the revaluation model for certain assets.
Syllabus C11b) Discuss and apply the simplifications introduced by the IFRS for SMEs including
accounting for goodwill and intangible assets, financial instruments, defined benefit schemes,
exchange differences and associates and joint ventures.
IFRS for SME - Introduction

The principal aim when developing accounting standards for small-to medium-sized
enterprises (SMEs) is to provide a framework that generates relevant, reliable and useful
information, which should provide a high-quality and understandable set of accounting
standards suitable for SMEs.
The only real users of accounts for SMEs are:
1) Shareholders
2) Management
3) Possibly government

IFRS for SMEs is a self-contained standard, incorporating accounting principles based on
existing IFRS, which have been simplified to suit SMEs.
If a topic is not covered in the standard there is no mandatory default to full IFRS.
Topics not really required for SMEs are excluded and so the standard does not address
the following topics:
• Earnings per share

• Interim financial reporting
• Segment reporting
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• Insurance (because entities that issue insurance contracts are not eligible to use the
standard)
• Assets held for sale.
Good news! The standards are relatively short and get the preparers to think. IFRS for
SMEs therefore contains concepts and pervasive principles, any further disclosures may
be needed to give a true and fair view. It will be updated once every 2 or 3 years only.

What is an SME?
There is no universally agreed definition of an SME. As there are differences between
firms, sectors, or countries at different levels of development.
Most definitions based on size use measures such as number of employees, balance
sheet total, or annual turnover. However, none of these measures apply well across
national borders.
Ultimately, the decision regarding who uses IFRS for SMEs stays with national regulatory
authorities and standard-setters. These bodies will often specify more detailed eligibility
criteria. If an entity opts to use IFRS for SMEs, it must follow the standard in its entirety – it
cannot cherry pick between the requirements of IFRS for SMEs and the full set.

Different users entirely
IFRS users are the capital markets. So, quoted companies and not SMEs.
The vast majority of the world's companies are small and privately owned, and it could be
argued that full International Financial Reporting Standards are not relevant to their needs
or to their users.
It is often thought that small business managers perceive the cost of compliance with
accounting standards to be greater than their benefit.
Because of this, the IFRS for SMEs makes numerous simplifications to the recognition,
measurement and disclosure requirements in full IFRS.
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Examples of these simplifications are:
Goodwill and other indefinite-life intangibles are amortised over their useful lives, but if
useful life cannot be reliably estimated, then 10 years.
A simplified calculation is allowed if measurement of defined benefit pension plan

obligations (under the projected unit credit method) involve undue cost or effort.
The cost model is permitted for investments in associates and joint ventures. 
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Differing approaches
Some argue having 2 sets of rules may mean 2 true and fair views
Local GAAP for SME?

An alternative could have been for GAAP for SMEs to have been developed on a national
basis, with IFRS focusing on accounting for listed company activities.
Then though, SMEs may not have been consistent and may have lacked comparability
across national boundaries.
Also, if an SME wished to later list its shares on a capital market, the transition to IFRS
could be harder.

List SME exemptions in the full IFRS?

Under another approach, the exemptions given to smaller entities would have been
prescribed in the mainstream accounting standard.
For example, an appendix could have been included within the standard, detailing those
exemptions given to smaller enterprises.
Separate SME standard for each IFRS?

Yet another approach would have been to introduce a separate standard comprising all the
issues addressed in IFRS that were relevant to SMEs.

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As it stands now
User friendly
The standard has been organised by topic with the intention of being user-friendlier for
preparers and users of SME financial statements
The standard also contains simplified language and explanations of the standards.
Easier transition to full IFRS

It is based on recognised concepts and pervasive principles and it allows easier transition
to full IFRS if the SME later becomes a public listed entity.
In deciding on the modifications to make to IFRS, the needs of the users have been taken
into account, as well as the costs and other burdens imposed upon SMEs by the IFRS.

Cost Benefit
Relaxation of some of the measurement and recognition criteria in IFRS had to be made in
order to achieve the reduction in these costs and burdens.
Stewardship not so important

Small companies pursue different strategies, and their goals are more likely to be survival
and stability rather than growth and profit maximisation.
The stewardship function is often absent in small companies, with the accounts playing an
agency role between the owner-manager and the bank.
Access to capital
Where financial statements are prepared using the standard, the basis of presentation
note and the auditor's report will refer to compliance with IFRS for SMEs.
This reference may improve SME's access to capital.
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In the absence of specific guidance on a particular subject, an SME may, but is not
required to, consider the requirements and guidance in full IFRS dealing with similar
issues.
The IASB has produced full implementation guidance for SMEs.
IFRS for SMEs is a response to international demand from developed and emerging
economies for a rigorous and common set of accounting standards for smaller and
medium-sized enterprises that is much easier to use than the full set of IFRS.
It should provide improved comparability for users of accounts while enhancing the overall
confidence in the accounts of SMEs, and reduce the significant costs involved in
maintaining standards on a national basis.
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Main Changes
Financial statements
Full IFRS: A statement of changes in equity is required, presenting a reconciliation of
equity items between the beginning and end of the period.
IFRS for SMEs: Same requirement. However, if the only changes to the equity during the
period are a result of profit or loss, payment of dividends, correction of prior-period errors
or changes in accounting policy, a combined statement of income and retained earnings
can be presented instead of both a statement of comprehensive income and a statement
of changes in equity.
Business combinations
Full IFRS: Transaction costs are excluded under IFRS 3 (revised). Contingent
consideration is recognised regardless of the probability of payment.
IFRS for SMEs: Transaction costs are included in the cost of investment.
Contingent considerations are included as part of the cost of investment if it is probable

that the amount will be paid and its fair value can be measured reliably.
Expense recognition
Full IFRS: Research costs are expensed as incurred; development costs are capitalised
and amortised, but only when specific criteria are met. Borrowing costs are capitalised if
certain criteria are met.
IFRS for SMEs: All research and development costs and all borrowing costs are
recognised as an expense.
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Non-current assets and goodwill
Full IFRS: For tangible and intangible assets, there is an accounting policy choice
between the cost model and the revaluation model.
Goodwill and other intangibles with indefinite lives are reviewed for impairment and not
amortised.
IFRS for SMEs: The cost model is the only permitted model. All intangible assets,
including goodwill, are assumed to have finite lives and are amortised.
Intangible Assets
Full IFRS: Under IAS 38, ‘Intangible assets’, the useful life of an intangible asset is either
finite or indefinite. The latter are not amortised and an annual impairment test is required.
IFRS for SMEs: There is no distinction between assets with finite or infinite lives. The
amortisation approach therefore applies to all intangible assets. These intangibles are
tested for impairment only when there is an indication.
Investment Property
Full IFRS: IAS 40, ‘Investment property’, offers a choice of fair value and the cost method.
IFRS for SMEs: Investment property is carried at fair value if this fair value can be
measured without undue cost or effort.
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Held for Sale
Full IFRS: IFRS 5, ‘Non-current assets held for sale and discontinued operations’, requires
non-current assets to be classified as held for sale where the carrying amount is recovered
principally through a sale transaction rather than though continuing use.
IFRS for SMEs: Assets held for sale are not covered, the decision to sell an asset is
considered an impairment indicator.
Employee benefits – defined benefit plans

Full IFRS: The use of an accrued benefit valuation method (the projected unit credit
method) is required for calculating defined benefit obligations.
IFRS for SMEs: The circumstance-driven approach is applicable, which means that the
use of an accrued benefit valuation method (the projected unit credit method) is required if
the information that is needed to make such a calculation is already available, or if it can
be obtained without undue cost or effort.
If not, simplifications are permitted in which future salary progression, future service or
possible mortality during an employee’s period of service are not considered.
Income taxes
Full IFRS: A deferred tax asset is only recognised to the extent that it is probable that
there will be sufficient future taxable profit to enable recovery of the deferred tax asset.
IFRS for SMEs: A valuation allowance is recognised so that the net carrying amount of the
deferred tax asset equals the highest amount that is more likely than not to be recovered.
The net carrying amount of deferred tax asset is likely to be the same between full IFRS
and IFRS for SMEs.
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Full IFRS: No deferred tax is recognised upon the initial recognition of an asset and
liability in a transaction that is not a business combination and affects neither accounting
profit nor taxable profit at the time of the transaction.
IFRS for SMEs: No such exemption.
Full IFRS: There is no specific guidance on uncertain tax positions. In practice,

management will record the liability measured as either a single best estimate or a
weighted average probability of the possible outcomes, if the likelihood is greater than
50%.
IFRS for SMEs: Management recognises the effect of the possible outcomes of a review
by the tax authorities. It should be measured using the probability-weighted average
amount of all the possible outcomes. There is no probable recognition threshold.
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Syllabus D: FINANCIAL STATEMENTS OF
GROUPS OF ENTITIES
Syllabus D1: Group accounting including statements of
cash flows
Group Accounting
Presentation
According to IAS 1 accounts must distinguish between:
1. Profit or Loss for the period

2. Other gains or losses not reported in profits above (Other Comprehensive Income)
3. Equity transactions (share issues and dividends)
Terminology
Consolidated financial statements:

The financial statements of a group presented as those of a single economic entity.
Parent
An entity that has one or more subsidiaries
Control
The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities
Two or more investors can control when they act together to direct the activities of the
subsidiary.
However, if one party cannot individually control then it is not a subsidiary. Instead it is
accounted for as a Joint Venture 
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Subsidiary
This is a company controlled by the parent
Identification of subsidiaries
Control is presumed when the parent has 50% + voting rights of the entity.
It could also come from the parent controlling one subsidiary, which in turn controls
another. The parent then controls both subsidiaries
Even when less than 50%, control may be evidenced by power..
• Getting the 50%+ by an arrangement with other investors

• Governing the financial and operating policies
• Appointing the majority of the board of directors
• Casting the majority of votes
Power
So a parent needs the power to affect the subsidiary and as we said before this is normally
given by owning more than 50% of the voting rights
It might also come from complex contractual arrangements
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Group Accounting Exemptions
Who needs to prepare consolidated accounts?
Basically a parent company, one with a subsidiary
However there are exceptions to this rule:
• The parent is itself a wholly owned subsidiary

• The parent is a partially (e.g. 80%) owned sub and the other 20% owners allow it to not
prepare consolidated accounts
• The parents shares are not publicly traded
• The parents own parent produces consolidated accounts
Sometimes a sub is purchased with a view to it being sold.

In this case it is an IFRS 5 discontinued operation
The group share of its profits are shown on the income statement and all of its assets and
liabilities shown separately on the SFP
Not Valid reasons for exemption
• A subsidiary whose business is of a different nature from the parent’s.

• A subsidiary that operates under severe long-term restrictions impairing the subsidiary’s
ability to transfer funds to the parent.
• A subsidiary that had previously been consolidated and that is now being held for sale.
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Business combinations - the basics
The purpose of consolidated accounts is to show the group as a single
economic entity.
So first of all - what is a business combination?
Well my little calf, it’s an event where the acquirer obtains control of another business.  
Let me explain, let’s say we are the Parent acquiring the subsidiary.
 
We must prepare our own accounts AND those of us and the sub put together (called
“consolidated accounts”) 
This is to show our shareholders what we CONTROL.
The accounts show all that is controlled by the parent, this means:
• All assets and liabilities of a subsidiary are included
• All income and expenses of the subsidiary are included
Non controlling Interest (NCI)
However the parent does not always own all of the above.
So the % that is not owned by the parent is called the “non-controlling interest”.
• A line is included in equity called non-controlling interests.

This accounts for their share of the assets and liabilities on the SFP.
• A line is also included on the income statement which accounts for the NCI’s share of the
income and expenses.
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Non-controlling Interests
If the parent owns 80% of the subsidiary then the NCI is 20%
IFRS 3 allows 2 ways of calculating this 20% NCI
• Proportionate method (20% of Sub’s Net Assets)

• Fair Value (of 20% of (Sub’s Net Assets + Goodwill))
Obviously these 2 methods will give different answers as one gives the NCI a share of
goodwill and the other doesn’t.
It is important to note that the parent can choose whichever method on a transaction by
transaction basis - so the same method does not have to be chosen every time for all
subsidiaries
The above 2 methods are used at ACQUISITION.

Therefore they affect the goodwill working which is also performed at acquisition
The NCI calculation after acquisition is the same for both methods, you simply add on the
NCI share of profits less any impairments and dividends each year
NCI proforma for the SFP
Proportionate Method
NCI on the SFP
Share of S’s NA at acquisiiton 100
Share of post acquisition

40
reserves (W1)
NCI 140
You will see a reference to (w1) - this will become clearer later
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Fair Value Method
FV of NCI at acquisition 120

40
reserves (W1)
Goodwill impaired (10)
NCI 150
Obviously here the figures used are meaningless, however I do want you to notice that the
impairment line is only used in the Fair Value method
This is because of the difference between the 2 methods which I would like to re-iterate
again..
Proportionate method at acquisition - shows just the NCI share of S’s Net Assets
Fair Value at acquisition - shows the NCI share of S’s Net Assets + goodwill
So, therefore NCI gets a share of goodwill ONLY when using the Fair value method at
acquisition.
So consequently only that method is affected by any goodwill impaired. The goodwill
impaired in the NCI working will, of course, just be the NCI share of goodwill impaired
NCI on the Income Statement
Simply take the NCI share of S’s profits in the income statement and OCI and show on a
line separately 
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Goodwill
When a company buys another - it is not often that it does so at the fair value of the net
assets only. 
 
This is because most businesses are more than just the sum total of their ‘net assets’ on
the SFP.
 
Customer base, reputation, workforce etc. are all part of the value of the company that is
not reflected in the accounts.
 
This is called “goodwill”
Goodwill only occurs on a business combination.
Individual companies cannot show their individual goodwill on their SFPs.

 
This is because they cannot get a reliable measure.
This is because nobody has purchased the company to value the goodwill appropriately.
Goodwill is basically comparing what you paid for the subsidiary plus the NCI share with
what the Fair Value of S’s Net assets are.
If there is a difference it means you and the NCI were willing to pay more than for just the
assets of the company. You were willing to pay for reputation etc , which is goodwill
This gets shown separately in the group accounts’ SFP
It replaces the line in the parent company individual accounts called “Investment in
Subsidiary”
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Goodwill workings:
Here’s the standard working you should use. I have shown you 2 of them but really there is
just one it’s just the calculation of the NCI line at acquisition that changes according to the
NCI method that was used (explained earlier)
Using NCI FV @ Acquisition method
Consideration Paid 400

FV of NCI at Acquisition 100
FV of S' Net Assets (W1) (340)
Impairment (60)
Goodwill 100
You will see a reference to (w1) - this will become clearer later
Using NCI- Share of S’s Net Assets @ Acquisition method

NCI share of S’s NA at acq 80
FV of S' Net Assets (W1) (340)
Impairment (60)
Goodwill 80
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Bargain Purchase
This is where the parent and NCI paid less at acquisition than the FV of S’s net assets.
This is obviously very rare and means a bargain was acquired
So rare in fact that the standard suggests you look closely again at your calculation of S’s
net assets value because it is strange that you got such a bargain and perhaps your
original calculations of their FV were wrong
However, if the calculations are all correct and you have indeed got a bargain then this is
NOT shown on the SFP rather it is shown as:
Income on the income statement in the year of acquisition
Techniques for SFP

Assets and liabilities
Include all parent’s and subsidiary’s (add them together)
Exclude any balances between them such as receivable and payable (these cancel out)
Fair values
Bring all of S's net assets in at their fair value to begin with (at acquisition)
Depreciate these values as normal as time passes, no need to keep them at fair value
Goodwill
Treated as an intangible asset in the group SFP. It is tested annually for impairment and
therefore not amortised
Where P pays less than the FV of S, then a bargain purchase has occurred. This is shown
immediately as a gain on the income statement
Unrealised profits
Reduce consolidated inventory
P sells to S - also reduce P’s retained earnings
S sells to P - also reduce S’s retained earnings and NCI by their share
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Group retained earnings
All of P plus share of S's post acquisition
Adjust for unrealised profits, impairment of goodwill and any other question adjustments
Non controlling interests
NCI at acquisition +
NCI share of S's post acquisition reserves
Less any impairment (if full goodwill)
Note: nci at acquisition can either be its FV or share of S's net assets at book value
(depending on the policy stated in the question)
Mid year acquisition

Reserves are the opening reserves for the period plus any profits less dividends in the
year up to the date of acquisition
Ok so we have talked so far about group accounts in general, to give you an idea of what
group accounts are all about and to introduce some important topics
Now let’s get a little more exam focussed. Let’s look at the workings that you will have to
produce in the exam
Of course, this is such a practical topic that only actual question practice (of full questions)
will really help here, but let’s at lease have a quick look at the workings needed..
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Standard workings
Working 1 S’s Equity Table
NOTE: S’s Equity = S’s Net Assets
Also note that we update this table only for adjustments that effect S’s EQUITY
Here we are trying to reproduce the equity of S both when H purchased it and now (after
any group adjustments). Of course, any differences between the at acquisition and at year
end columns must be due to things that have happened post acquisition
It is this post acquisition column, that H and NCI deserve to receive (in their respective
proportions)
It is the at acquisition column that is needed for the goodwill calculation (as goodwill is
calculated at acquisition). In this column we are just trying to work out what the FAIR value
of S’s net assets were at acquisition, so goodwill can be calculated accurately
The year end column is generally taken from the SFP given in the question, however, we
update this SFP for any group adjustments to S’s equity that may have happened
At Post
Year end
acquisition acquisition
Share capital 100 100 0
Retained 200 100 100
earnings
Fair value 80 100 (20)
Contingent (20) (10) (10)
liabilities
360 290 70
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Note
1. Adjust the year end and post acquisition columns for any adjustments to the
Reserves of S in the question notes
2. The table only applies to the Sub’s Equity
3. Remember to “depreciate” any Fair value adjustments
4. Remember to add the Year end Fair Value figures to the consolidated SFP
5. The acquisition column figures should all be given in the question. The total here is
used for the next working goodwill.
6. The post acquisition total are used for both the NCI and Retained Earnings working
7. Make any adjustments to H on the face of the question paper, not here 
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Working 2 Goodwill
So here the whole idea is pt ensure that goodwill represents ONLY the reputation /
customer base etc of S and not S’s actual physical net assets
Therefore it is vital that the amount paid by H (consideration) is compared to the FAIR
value of S’s net assets and that any surplus is therefore true goodwill (having given the
NCI their share of S’s Net assets also)
The Fair value of S’s net assets referred to above comes from working 1
Goodwill using NCI @ FV @ Acquisition method
Consideration 400
FV of NCI 100
FV of S' NA (W1) (340)
Impairment (60)
Goodwill 100
Goodwill using NCI @ Share of S’s Net Assets @ Acquisition method
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Working 3 NCI
We have seen this before, but this calculates how NCI is calculated on the SFP at the year
end.
It basically takes NCI when S was first acquired and then adds on their share of S’s post
acquisition profits (taken from the post acquisition column of working 1)
Remember that NCI at acquisition all depends on the method used (either share of S’s Net
assets or FV)
NCI using FV
Share of post acquisition 40

reserves (W1)
NCI 80
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Working 4 Retained Earnings
Actually you prepare this working for ANY reserve, but obviously the retained earnings one
is the most common
Here we are just calculating the reserves that belong to the group
So the group deserves…
I. All of H
II. H’s share of post acquisition S
III. H’s share of post acquisition A
Reserves
P 100
Share of S and A post 70

acquisition reserves (W1)
Retained Earnings 110
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Consolidated income statement - Techniques
As with the SFP all of H and S is added together because H controls S
The NCI is then given its share of S’s profits (after tax) at the end to leave H’s
shareholders with what they deserve
Income and expenses

Generally include all of P and S
Never include dividends received from S or A (as these are included in the profit that H have taken)
Intra group sales

Reduce the sales amount from both group sales and cost of sales
Add any UP to sellers cost of sales
Impairment of goodwill
Add current year impairment to consolidated expenses
Any NCI goodwill impairment to be reduced from NCI on the income statement
Non controlling interest

NCI share of profit after tax - nci goodwill impaired
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Mid year acquisitions
The key here is that the group only deserves POST acquisition of S in the year
So, time apportion S and deduct only POST acquisition intra group sales
Consolidated Changes in Equity
As its name suggests this just shows the changes in the shares and reserves of the group.
Notably though this is where dividends paid are shown (as a deduction from retained
earnings or as a deduction from NCI for dividends paid to NCI)
Retained
Share capital NCI
earnings
B/f 100 800 100
Total 400 100

comprehensive
income
Share issue 200
Dividend paid (80) (20)
300 1,180 180
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Associates
An associate is an entity over which the group has significant influence, but not control
Significant influence is normally between 20-50% but is usually evidenced in one or more
of the following ways:
• representation on the board of directors
• participation in the policy-making process
• material transactions between the investor and the investee
• interchange of managerial personnel; or
• provision of essential technical information.
An associate is not a group company and so is not consolidated. Instead it is accounted

for using the equity method. Inter-company balances are not cancelled.
Statement of Financial Position for an Associate

One line only "investment in Associate”
Investment in Associate
Cost 400
Share of A's post
200
acquisition reserves
Less impairment (100)
500
Consolidated income statement for an Associate

One line:
Share of Associates PAT (-impairment) 100
Include share of PAT less any impairment for that year in associate
Do not include dividend received from A
Unrealised profits
Only account for H's share
Adjust earnings of the seller so if..

A sells - reduce "share of A's PAT"
H sells - increase H's COS
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Control (IFRS 10)
We have seen this before, but it never hurts to just have a quick reminder again..
The investor considers all relevant facts to see if it controls an investee and so is a parent
Control comes when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the
investee.
So control needs ALL of:

• Rights that give it the ability to direct the relevant activities (the activities that significantly
affect the investee's returns)
• Exposure, or rights, to variable returns from its involvement with the investee
• Ability to use its power over the investee to affect the amount of the investor's returns.
• Power arises from rights. Such rights can be straightforward (e.g. through voting rights)
or be complex (e.g. embedded in contractual arrangements). An investor that holds only
protective rights cannot have power over an investee and so cannot control an investee
The returns must have the potential to vary as a result of the investee's performance and
can be positive, negative, or both
A parent must also have the ability to use its power over the investee to affect its returns
from its involvement with the investee
An investor with decision-making rights needs to see if it acts as principal or as an agent of

other parties. A number of factors are considered in making this assessment. For instance,
the remuneration of the decision-maker is considered in determining whether it is an agent

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The Goodwill Calculation in more detail
Contingent consideration
This is any consideration that DEPENDS on something else happening (e.g. S’s profits
reaching a target set)
Bring in at the Fair value
Only very rarely go back and change goodwill if the actual is different to the fair value at
acquisition. This is because it is probably due to a post acquisition event rather than some
unknown condition at the year end
Any changes afterwards to the liability is through the income statement
Fair values of net assets at acquisition

Obviously the key in the goodwill calculation is to ensure that S’s Net assets are brought in
initially at their fair values, but I thought it might be useful here to look at a couple of tricky
situations that may come up in the exam..
1. Operating leases: If terms are favourable to the market - recognise as an asset

2. Internally generated intangibles: These would now have a reliable measure and
would be brought in the consolidated accounts
3. Contingent liabilities: Normally these are just disclosures in the accounts. However,
they do have a fair value. Therefore they must be actually recognised in the
consolidated accounts until the amount is actually paid
So the rules are:
• Bring in at the FV
• Measure afterwards at this amount unless it then becomes probable. As usual, a
probable liability is then measured at the full liability
Note. If it remains just possible then keep it at the initial FV until it is either written off or
paid
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Joint Arrangements (IFRS 11)
What is a joint arrangement?

A joint arrangement is an arrangement of which two or more parties have joint control
A joint arrangement has the following characteristics:

1. the parties are bound by a contract, and
2. the contract gives two or more parties joint control
What is Joint Control?

The sharing of control where decisions about the relevant activities need unanimous
consent
The first step is to see if the parties control the arrangement per IFRS 10
After that, the entity needs to see if has joint control as per paragraph above
Unanimous consent means any party can prevent other parties from making unilateral
decisions (about the relevant activities)
Types of joint arrangements

Joint arrangements are either joint operations or joint ventures:
A joint operation
Here the parties have rights to the assets, and obligations for the liabilities, relating to the
arrangement. They are called joint operators
A joint venture
Here the parties have rights to the net assets of the arrangement. Those parties are called
joint venturers
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Classifying joint arrangements
This depends upon the rights and obligations of the parties to the arrangement. regardless
of the purpose, structure or form of the arrangement
A joint arrangement in which the assets and liabilities relating to the arrangement are held
in a separate vehicle can be either a joint venture or a joint operation
A joint arrangement that is not structured through a separate vehicle is a joint operation.
Financial statements of parties to a joint arrangement
Joint Operations
A joint operator recognises:

1. its assets, including its share of any assets held jointly;
2. its liabilities, including its share of any liabilities incurred jointly;
3. its revenue from the sale of its share of the output of the joint operation;
4. its share of the revenue from the sale of the output by the joint operation; and
5. its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its
involvement in a joint operation in accordance with the relevant IFRSs
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Illustration
An office building is being constructed by A and B, each entitled to half the profits.
A B
Amount Invoiced 300 500
Costs incurred 280 420
This shows that total sales are 800, total costs are 700 - so a profit of 100 needs splitting
50 each.
A is currently showing a profit of 20, and B of 80. Therefore A now needs to show a
receivable of 30 from B (and B a payable to A)
Revenue should be 400 each, so A needs an extra 100 and costs should be 350 each so
an 70 is required
Double entry for A

Dr Receivables 30
Cr Revenue 100
Dr COS 70
If an does not have joint control of a joint operation - it accounts for its interest in the
arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation
Joint Ventures
The group accounts for this using the equity method (see associates)
(A party that does not have joint control of a joint venture accounts for its interest in the
arrangement in accordance with IFRS 9)
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Illustration
A has a 25% JV at a cost of $1m. At acquisition the JV had net assets of $4m
A Group JV
PPE 60 20
Intangibles 30 8
Investment in JV 1
Inventories 50 16
Other 80 24
Current Liabilities -90 -36
Equity 131 32
Solution
Group
PPE 60
Intangibles 30
Investment in JV (1 + (25% x (32-4)) 8
Inventories 50
Other 80
Current Liabilities -90
Equity 131 + (25% x (32-4)) 138
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Other areas of IFRS 11
Unrealised profit on sales with JV - always just the share (e.g. 50%)
P to JV
Decrease P’s RE
Equity Accounting Increase P’s COS Decrease
Investment in JV
JV to P
Equity Accounting Decrease “Share of Decrease JV’s RE

JV PAT” Decrease P’s stock
No Elimination of Receivables and Payables to each other
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Complex Groups
Ok here we look at the idea of a sub-subsidiary. This is where a company is controlled by
our subsidiary, and so is, in effect, also controlled by us (the parent company)
Example:
H owns 70% S1, S1 also owns 60% S2
H controls S directly
H controls S2 indirectly
Therefore both should be consolidated as they are controlled
The consolidation approach is the same as for basic groups before, with the exception of
goodwill and NCI calculations
The above paragraph is important! Complex groups aren’t that complex! The only
difference really is in the goodwill and NCI calculations
Basics
Firstly let’s start with the basics of working out the group and NCI percentages in complex
group structures:
H owns 80% S1 owns 60% S2
How much does NCI own?

NCI in S1 = 20%
NCI in S2 = 52%
(This is because H effectively owns 80% x 60% = 48%)
Remember that the ONLY problem with complex groups occurs in the goodwill and the
NCI workings…. everything else is the same as with normal consolidations..
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NCI in Complex Groups
So, now let’s look at the NCI working in more detail, here is a quick reminder of what we
learned about how to calculate NCI using basic groups (on the SFP):
NCI using FV

reserves (W1)
NCI 80
With complex groups, we do this simple calculation for both subsidiaries and add the two
figures together for the group NCI - however we need to take into account a little bit of
double counting
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Removal of “Investment in S2” in S1 NCI working
Remember that in S1 there will be an asset called ‘Investment in S2’ - This needs
removing when calculating NCI in S1 (as we will calculate S2 in full anyway)
So the Proforma for NCI in complex groups is...

NCI using FV
Share of (post acquisition

40
reserves (W1) - Inv in S2)
NCI 80
NCI using FV

reserves (W1)
NCI 80
Notice the difference between the 2 above - the “problem” area is simply deducting the
Investment in S2 when calculating NCI in S1
Then simply add the total of these 2 together
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Illustration
H acquired 80% of S1 for 600 when FV of S1’s NA were 900. S1’s NA now are 1400
S1 acquired 60% S2 for 100, when FV of S2’s NA were 80. S2’s NA now are 140
NCI is calculated using the proportionate method
NCI S1 using Proportionate Method

NCI share at acquisition (20% x 900) 180
Share of post acquisition 20% x 80

reserves (W1) (1400-900-100)
Goodwill impaired (-)
NCI 260

NCI share at acquisition (52% x 80) 41.6
Share of post acquisition 52% x (140-80) 31.2

reserves (W1)
NCI 72.8
Total NCI (260+72.8) = 332.8
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Goodwill in complex groups
Here there are a couple of issues we need to deal with..
1) What is the actual date of acquisition

2) How is goodwill in S2 calculated?
Date of Acquisition
Get the acquisition date right! - It is when H takes control
Illustration
H acquires S1 in year 4 and S1 acquires S2 in year 5
S1 acquisition date = Year 4 (this is when H takes control of S1)

S2 acquisition date = Year 5 (this is when H takes control of S2)
Illustration 2
H acquires S1 in year 5 and S1 acquired S2 in year 4
S1 acquisition date = Year 5

S2 acquisition date = Year 5
Notice that basically the year of acquisition for S2 is basically the later year
Goodwill in S2
Goodwill in S1 is exactly the same as normal. We just need to make some small
alterations to goodwill in S2.
The key is to remember that everything in the calculation is from H’s point of view..
Use effective interest in S2 (For goodwill and Reserves)

For example, lets say 1H owns 80% of S1 and S1 owns 70% of S2
The effective interest in S2 would be = 56% (80% x 70%)
Notice how the effective interest is from H’s point of view.
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Goodwill in S2
Consideration H’s share x S1’s

-
Investment in S2
FV of NCI FV of NCI in S2 (from
-
H’s point of view)
FV of S' NA (W1) (-)
Impairment (-)
Goodwill -
Notice above how everything is from H’s viewpoint
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Illustration
H S1 S2
Investment in S1 10,000
Investment in S2 6,000
Other Net Assets 20,000 14,000 10,000
Share Capital 8,000 5,000 2,000

Retained Earnings 22,000 15,000 8,000
H acquired 80% S in yr 1 when S’s reserves were 3,000

S acquired 70% S2 in yr 2 when S2’s reserves were 1,000
Use proportionate goodwill method
Solution
Fair Value Tables
Post
S1 Year end At acquisition
acquisition
Share capital 5,000 5,000 0
Retained 15,000 3,000 12,000
earnings
Fair value adj - - (-)
20,000 8,000 12,000
Post
acquisition
Retained 8,000 1,000 7,000
earnings
10,000 3,000 7,000
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Goodwill
Goodwill in S1
Consideration 10,000
Proportionate NCI 20% x 8,000 1,600
FV of S' NA (W1) (8,000)
Impairment (-)
Goodwill 3,600
Goodwill in S2
Consideration 80% x 6,000 4,800

Proportionate NCI 44% x 3,000 1,320
FV of S' NA (W1) (3,000)
Impairment (-)
Goodwill 3,120
Total goodwill (3,120 + 3,600) = 6,720
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NCI

NCI share at acquisition
(20% x 8,000) 1,600

reserves (W1) 20% x (12,000
1,200
- 6,000)
Goodwill impaired
(-)
NCI 2,800

NCI share at acquisition
(44% x 3,000) 1,320

reserves (W1) 44% x (7,000) 3,080
Goodwill impaired
(-)
NCI 4,400
Total NCI (2,800 + 4,400) = 7,200
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Retained Earnings
Reserves
P
22,000
Share of S1 post acquisition

reserves (W1) (80% x 12,000) 9,600

reserves (W1) (56% x 7,000) 3,920
Goodwill impaired
(-)
Retained Earnings 35,520
H S1 S2 Group
Goodwill 6,720
Other Net Assets 20,000 14,000 10,000 44,000
50,720
Share Capital 8,000 5,000 2,000 8,000

Retained Earnings 22,000 15,000 8,000 35,520
NCI 7,200
50,720
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D - shaped Groups
This is simply when H not only has an indirect ownership over S2 (as referred to in the
previous section), but also a direct ownership
Example
H owns 80% in S1. H owns 10% in S2
S1 owns 60% in S2
H’s Effective interest in S2 = 10% (direct)

= 48% (indirect 80% x 60%)
= 58%
NCI therefore = 42%
Everything that you’ve learned before now applies as normal. It is just the same as
complex groups we saw earlier except include the direct cost of investment as well as the
indirect cost of investment in S2 when calculating its goodwill
Illustration
H S1 S2
Investment in S 120,000
Investment in S2 80,000 65,000
Other Net Assets 150,000 75,000 180,000
Share Capital 200,000 80,000 100,000
Retained Earnings 150,000 60,000 80,000
Yr 1 S1 acquired 35,000 shares in S2 when reserves were 40,000

Yr 2 H acquired 64,000 shares in S1 and 40,000 shares in S2 when reserves were 50,000
and 60,000 respectively
FV of NCI in S1 at acquisition = 27,000.

FV of NCI in S2 at acquisition = 56,000
No goodwill impaired
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Solution
Fair Value Tables
Post
acquisition
Retained 60,000 50,000 10,000
earnings
140,000 130,000 10,000
Post
acquisition
Share capital 100,000 100,000 0
Retained 80,000 60,000 20,000
earnings
180,000 160,000 20,000
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Goodwill in S1
FV of NCI 27,000
FV of S' NA (W1) (130,000)
Impairment (-)
Goodwill 17,000
Goodwill in S2
Consideration Indirect 80% x 65,000 52,000

Direct 80,000
FV of NCI 56,000
FV of S' NA (W1) (160,000)
Impairment (-)
Goodwill 28,000
Total NCI (17,000 + 28,000) = 45,000
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NCI
NCI S1 using FV Method
NCI share at acquisition 27,000
Share of post acquisition 20% x (10,000

(11,000)
reserves (W1) - 65,000)
NCI 16,000
NCI S2 using FV Method
NCI share at acquisition 56,000

32% x (20,000) 6,400
reserves (W1)
NCI 62,400
Total NCI = (16,000 + 62,400) = 78,400
Note
H owns direct in S2 (40,000/100,000) = 40%

H owns indirectly in S2 (80% x 35,000/100,000) = 28%
H owns in total 68% So NCI is 32%
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Retained Earnings
Reserves
H 150,000

(80% x 10,000) 8,000
reserves (W1)

(68% x 20,000) 13,600
reserves (W1)
H S1 S2 Group
Goodwill 45,000
Other Net Assets 150,000 75,000 180,000 405,000
Share Capital 200,000 80,000 100,000 200,000
NCI 78,400
Retained Earnings 150,000 60,000 80,000 171,600
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Cashflow Statements (IAS 7)
There are 2 methods of preparing a cashflow statement, a direct and an indirect method.
The most common by far in the exam is the indirect method
They are both very similar, in fact it is only the first part of it that is different
Anyway, regardless of method, the whole idea is to take the income statement and SFP
and turn these figures into cash.
This just means taking out accruals and other accounting adjustments to get back to the
underlying cash
Indirect Method
The approach to take is to deal with the operating activities part of the income statement
first (turn this into cash) and then the rest of the income statement (turn that into cash) and
finally the SFP (any figures here not already dealt with need turning into cash)
When I say “turning into cash” what I mean is simply look at the figure, take out accruals
and other adjustments and you are then left with the cash which you put into the cashflow
statement
The cashflow statement has 3 simple headings where we put these cash items:
1) Operating Activities
2) Investing Activities
3) Financing Activities
Which items go where we will look at as we go through the chapter
So, let’s prepare a step by step method then for doing a cashflow statement question
using the indirect method..
Step 1: Deal with the Operating Activities section of the I/S (Get cash indirectly)
Step 2: Deal with the rest of I/S (Get cash directly)
Step 3: Deal with any figures left in the SFP (Get cash directly)
Notice it is just step 1 which is different from the direct method
Let’s now look at these steps in a bit more detail..
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Step 1: Deal with the Operating Activities section of the I/S (Get cash
indirectly)
Ok well we always start off the cashflow statement with the profit before tax figure. This is
in the Operating Activities section of the cashflow statement
Cashflow Statement
Operating Activities
Profit Before Tax 100
Ok so far so good. Nice and easy :-)
However, look at what we’ve done… we have put a NON-CASH item straight into the
cashflow statement
We do this because we are using the INDIRECT method. What this means is that we start
with a NON-CASH item and then take out all the non-cash adjustments (accruals,
depreciation etc) to be left with CASH
So we end up with cash in the cashflow statement indirectly - rather than just putting the
actual cash in there directly
So, back to our method - what we now need to do is add back any non-cash items which
may be in the profit before tax figure of 100 above.
Potentially these could be…
Depreciation, Payables and Receivables, Inventory, profit/loss on sale of asset etc
Also, we want to take out any items which are not OPERATING items such as interest or
investment income
So the operating activities part of the cash flow could now look like this:
Cashflow Statement
Operating Activities
Profit Before Tax 100
Investment Property Income -180
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Cashflow Statement
Finance Costs 80
Depreciation 100
Profit on Sale 50
Increase in Inventory -30
Increase in Receivables -20
Increase in Payables 40
Ensure you get the signs the right way around! For example an increase in stock means
less cash so (x)
So that is pretty much step 1 dealt with, and the only part of the cashflow statement which
is indirect. From here on we put CASH directly into the cashflow statement
Step 2: Deal with the rest of I/S (Get cash directly)

We have now dealt with the first part of the income statement - Sales, COS, admin and
distribution
We now look at what’s left in the income statement and try to find the cash. In our
example, we have to deal with Investment Property income, finance costs and tax
We do this by using a different method to the one above as we are now looking to put the
cash in directly to the cashflow statement
General direct method Explanation
You owed somebody 100, then bought 20 more in the year - you should therefore owe
them 120
However you find out you only actually owe them 70
Therefore, you must have paid cash to them of 50
So 50 goes to your cashflow statement!
To show this differently:

Direct Method Proforma
Opening Payable (or Receivable) 100
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Direct Method Proforma
Income statement figure 20
Cash (balancing figure) -50
Closing Payable (or Receivable) 70
We use this format for the rest of the cashflow question - though it may need adjusting
slightly
So let’s use this method using the example of Finance Costs
Finance Costs - illustration
Income Statement (X2) 80
SFP X2 X1
Interest Payable 100 140
Finance Costs
Opening Payable 140
Closing Payable 100
Finance costs of 120 go to the operating activities section of the cashflow statement
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Taxation - illustration

SFP
X2 X1
Tax Payable 100 140
Deferred Tax 50 80
Taxation
Opening Payable 140+80
Closing Payable 100+50
Tax paid of 150 goes to the operating activities section of the cashflow statement
Investment Property Illustration

SFP
X2 X1
Investment Property 200 140
(There were no additions or disposals of IP in the year)
Investment Property
Opening Payable 140
Cash Received (balancing figure) -20
Closing Payable 200
Tax paid of 150 goes to the operating activities section of the cashflow statement
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We can now move onto the SFP and find the cash in those figures - remember much of it
we have already dealt with (e.g. receivables, inventory, payables, Inv Property, interest
and tax payable)
Step 3: Deal with any figures left in the SFP (Get cash
directly)
PPE
We deal with this slightly differently:
Step 1: Write down the PPE figures per the accounts

Step 2: Work out the cash element of each item (if any)
Illustration
SFP X2 X1
PPE 200 140
Notes: Depreciation in year = 50

Revaluation = 100
Disposal = Asset sold for 100 making 20 profit
The key here is to try and find the balancing figure which will be additions in the year
(Note: we are dealing with NBVs)
Step 1: Write down the PPE figures per the accounts

Opening 140
Depreciation (50)
Revaluation 100
Disposal (80) (nbv = 100-20)
Additions 90 This is a balancing figure
Closing 200
Step 2: Work out the cash element of each item (if any)
Cash
Opening 140 -
Depreciation (50) -
Revaluation 100 -
Disposal (80) 100
Additions 90 (90)
Closing 200 -
All PPE items go the investing activities section of the cashflow statement
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Now let’s carry on down the SFP:
Shares - illustration
SFP
X2 X1
Share Capital 200 140
Share Premium 150 80
Share Issue
Opening Amount 140 + 80
Cash Received (balancing figure) 130
Closing Amount 200+150
Share income goes to the financing activities section of the cashflow statement
Loans - illustration
SFP
X2 X1
10% Loan 100 140
Loan Proceeds
Opening Amount 140
Cash Paid (balancing figure) -40
Closing Amount 100
Loan repayments go to the financing activities section of the cashflow statement
And that’s about it folks you have now been through the income statement and SFP and
filled in the cashflow accordingly
The last job would be to add the cashflow figures down and calculate an increase/
decrease in cash for the year. Done!  
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Acquisition or Disposal of Subsidiary in Year
Ok my friends, now things get a little trickier if this happens, eek!
Illustration
H acquired 80% S for $ 8,000 and 200 shares FV $10 each
S at acquisition:
PPE 4,000
Inventory 1,000
Receivables 1,000
Cash 1,000
Payables 2,000
Issue number 1 - What is the cash effect?

Well that’s fairly straightforward there are only 2 cash figures if you look closely, one being
paid out and one coming in..
Cash out (8,000 - 1,000) 7,000

This figure goes to Investing activities as “Investment in Subsidiary”
Issue number 2 - What about the other figures?

All the other figures are NON-CASH
This means that let’s say you have calculated PPE to have a cash outlay of 10,000 (using
the method we looked at earlier), well now you know that 4,000 (from above) is NON
CASH so the actual PPE in investing activities is 6,000 not 10,000
So the figure in your cashflow you would change to 6,000
Similarly, if you had calculated an increase in inventories of 600, well now you know that
1,000 is NON CASH so there was actually a FALL in inventory of 400 to put into operating
activities
The same applies to receivables and payables etc.
Remember if it was a disposal then the effect is the other away
Issue Number 3 - Goodwill

In the above example goodwill could be calculated as:
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Goodwill
Consideration (8,000 + 2,000) 10,000

Proportionate NCI (20% x 5,000) 1,000
FV of S' NA (W1) (5,000)
Impairment (-)
Goodwill 6,000
Use this figure to check that the goodwill in the SFP has increased by 6,000.
If the increase is say only 5,000 then you now know that since acquisition goodwill must
have been impaired by 1,000.
This 1,000 is placed in the operating activities section of the cashflow statement, because
it is a non-cash item
Issue number 4 NCI

In the above example NCI would be 20% x 5,000 = 1,000
So, using the same technique as before (numbers made up):
NCI
Opening Amount 4,000
Income Statement 800
NCI on acquiring Subsidiary 1,000
Cash Paid (balancing figure) -700
Closing Amount 5,100
The 700 is the balancing figure and is shown in financing activities
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Associates and Joint Ventures
Simply do the following as usual:

SFP
X2 X1
Investment in Associate 200 140
Associate
Opening Investment in Associate 140
Share of A’s PAT 80
Cash Received (balancing figure) -20
Closing Amount 200
The 20 is the balancing figure and is shown in investing activities
Finance Leases
The payments are split between capital and interest
Capital payments go to financing

Interest to financing activities
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Syllabus D2: Continuing and discontinued interests
Step Acquisitions
This is where a subsidiary is purchased in stages (e.g. 10% then a further 60%)
Consolidation only occurs when control is eventually achieved
1. Remeasure all previous holdings (prior to when control is finally achieved) to FV

2. Any gain or loss to H’s income statement and hence retained earnings
Illustration
H acquires 20% of S 2 years ago for $200.
It now acquires a further 60% for $700 (At this date the FV of the original 20% is $210)
Solution
The consideration for goodwill purposes is the $700 just paid + the FAIR value of the
original holding $210 = $910
The increase in the original 20% of $10 is shown in the income statement and in H’s
Retained earnings
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Further acquisition after control is achieved
If there are further acquisitions after control - this is deemed to be a purchase from the
other owners (NCI) - so no profit is calculated.
All you do is decrease the NCI figure in the SFP. The difference between this decrease in
the NCI and the amount actually paid is shown in “Other Reserves” in Equity
This Equity Adjustment is calculated as follows:

Decrease the NCI with

Decrease in NCI -20
this amount
Take this to “Other

Difference -10
Reserves”
Simply
Dr NCI
Cr Cash
Dr or Cr Equity “Other Reserves” (with the difference)
How to calculate the NCI decrease

Step 1: Calculate NCI as normal
Step 2: Decrease this pro-rata
For example let’s say that H had an 80% subsidiary which it then made a further
acquisition to 95%
Let’s presume at the date of disposal the 20% NCI (step 1) was calculated as 100
The 15% acquisition means that NCI now goes from 20% down to 5%. Therefore the
decrease in NCI would be 100 / 20 X 15 = 75 
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Illustration
H S Group
Inv in S 20
Net Assets 200 100 300
Share Capital 100 20 100
Retained Earnings 120 80 180
NCI 20
H owns 80% S. It now acquires 10% for 20, making a 90% holding
Solution
H S Group
Inv in S 40
Other Reserves (10)
NCI 10
Equity Adjustment
Decrease the NCI with

Decrease in NCI -10
this amount

Difference 10
Reserves”
Calculation of NCI decrease

Step 1: NCI = 20 at date of disposal
Step 2: Decrease = 20 / 20 X 10 = 10
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Disposals
In this section we look at how we deal with situations where the holding company sells
either part of its investment in S, or maybe even all of it
The most important aspect is whether the holding keeps control or not
If it does keep control, then the disposal is only a disposal to the NCI
If it loses control, then a proper disposal has taken place and any gain or loss on disposal
is taken to the income statement
Type 1: Keeping Control (eg 80% to 60%)

This is seen as simply a transaction between owners. The disposal is effectively a sale to
the NCI. The NCI will therefore increase.
Any difference between the proceeds received and the increase in the NCI is simply taken
to an “other reserve” in equity
Income Statement Effect

As there is no loss of control, the subsidiary remains a subsidiary. The subsidiary is,
therefore, still consolidated in full
However, remember that the NCI % will grow. So the NCI % in the income statement is
time apportioned (eg 20% to date of disposal, 40% thereafter)
SFP Effect
Here we need to compare the proceeds from the disposal to the increase in the NCI.
The increase in the NCI is added to the NCI in the NCI working
And the difference between the proceeds received and this NCI increase is taken to equity
in an “other reserve” (see below)
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Consideration Received X
Increase the NCI with this

Increase in NCI (X)
amount

Difference X
Reserves”
Dr Cash (consideration received)

Cr NCI (Increase in NCI)
Dr/Cr Other Reserves (Balancing figure)
How to calculate the NCI increase

Step 1: Take the NA at year end from the Equity table working
Step 2: Add on goodwill
Step 3: Multiply the total of these 2 by the increase in NCI percentage
Illustration
For example let’s say that H had an 80% subsidiary which it then made a disposal down to
65%
Step 1
Let’s presume at the date of disposal the 20% NCI the Net assets in the equity table (year
end) is 400
Step 2
Goodwill was 100
Step 3
So the total of these 2 is 500. The 15% disposal means that NCI now goes from 20% up to
35%. Therefore the increase in NCI would be 500 x 15% = 75 
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Illustration
H S Group
Inv in S 20 Goodwill 10
NCI 20
H owns 80% S. It now sells 20% for 10, leaving a 60% holding
Solution
H S Group
Inv in S 16 Goodwill 10
Other Reserves (12)
NCI 42
Equity Adjustment
Consideration Received 10
Increase the NCI with this

Increase in NCI -22
amount

Difference -12
Reserves”
Calculation of NCI increase
Step 1: Take the NA at year end from the Equity table working (presume this total is the
same as the SFP = 100
Step 2: Add on goodwill of 10
Step 3: Multiply the total of these 2 by the increase in NCI percentage = 110 x 20% = 22
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Type 2: Lose Control (now just an Associate)
Consolidated until sale; Then treat as Associate
Show a profit on disposal (see below)
SFP Effect
Show the remaining % as an Investment in Associate
Gain on Disposal calculation

Consideration received x
FV of Associate remaining x
Goodwill (x)
NCI x
100% Net Assets (x)
X
The idea here is that the subsidiary has been disposed of therefore we need to deduct all
the goodwill and all the Net Assets of the sub (This will come from the year end column in
working 1)
We also need to get rid of all the NCI (this is positive in the calculation as the NCI was
effectively a liability)
Then we need to add on the FV of the remaining % (the associate), then the proceeds and
any difference is a proper gain or loss on disposal which is shown accordingly in the
income statement
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Type 2: Lose Control (now just a Trade Investment)

Consolidated until sale; Then Dividend Income only
Show a profit on disposal (see below)
SFP Effect
Show the remaining % as a financial asset (FVTPL or FVTOCI)
Gain on Disposal calculation

Consideration received x
FV of Associate remaining x
Goodwill (x)
NCI x
100% Net Assets (x)
X
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Subsidiary acquired with a view to disposal
A subsidiary that is acquired exclusively with a view to its subsequent disposal is
classified on the acquisition date of the subsidiary as a non-current disposal group 'held for
sale' (if it is expected that the subsidiary will be disposed of within one year and the other IFRS 5
criteria are met with within three months of the acquisition date)
Classification as a discontinued operation

A subsidiary classified as 'held for sale', is included in the definition of a discontinued
operation, with treatment as follows:
Income statement
Single Line “Discontinued operations” - PAT of the Sub + gain/loss on re-measurement to
held for sale
The income and expenses of the subsidiary are therefore not consolidated on a line-by-
line basis with the income and expenses of the holding company.
Statement of financial position

The assets and liabilities classified as 'held for sale' presented separately (the assets and
liabilities of the same disposal group may not be offset against each other).
The assets and liabilities of the subsidiary are therefore not consolidated on a line-by-line
basis with the assets and liabilities of the holding company.
Statement of Cashflows
No need to disclose the net cash flows attributable to the operating, investing and
financing activities of the discontinued operation (which is normally required) but is not
required for newly acquired subsidiaries which meet the criteria to be classified as 'held for
sale' on the acquisition date
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Important Examinable Narrative & Miscellaneous points
Transactions related to acquiring a subsidiary are to be written off to the Income
statement
Any future contingent consideration towards the cost of investment is included in cost of
investment at its FAIR VALUE regardless of whether it is probable or not
If the FAIR VALUE of the above changes after acquisition goodwill is NOT adjusted
unless it is simply providing more information about what the fair value would have been
at acquisition date
A company is a sub when it is controlled only. This means more than 50% of the voting
rights; or control of the financial and operating activities or power to appoint a majority of
the board
It may be that H owns 40% + 20% potential shares (eg share options). To see whether
this means H controls S all terms must be examined, disregarding management
intentions
Subsidiaries held for sale must be consolidated (see above)
JV’s and A’s are not consolidated if they are held for sale
Subsidiaries with very different activities to H must also be consolidated as IFRS 8
segmental reporting will deal with these problems
Subs with severe long term restrictions must still be consolidated until actual control is
lost
A’s with severe long term restrictions must still be equity accounted until actual
significant influence is lost
A company is an associate when there is no control but there is significant influence.
This means 20% or more of the voting rights (unless someone else holds more than
50% solely in which case they control it and we have no significant influence at all).
Participation in policy making is deemed to be significant influence
H does NOT need to consolidate if it is itself a 100% sub or if the shares aren’t traded
publicly and the ultimate parent prepares consolidated accounts
Subs may have a different reporting date to H but they must prepare further accounts to
make consolidation possible. Unless the difference in date is 3 months or less in which
case S’s accounts can be used and adjustments made for significant events
Consolidated accounts must be made with uniform accounting policies. So if S has
different policies to H, group level adjustments need to be made
NCI can be negative - they are simply owners of the group like the parent and so losses
are possible
An investment in an associate that is acquired and held exclusively with a view to its
disposal within 12 months should be accounted for as held for trading under IAS 39
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Syllabus D3: Changes in group structures
IAS 27
With reorganisations where a new parent is inserted above an existing parent, the ‘cost’ of
investment in the sub can now be its carrying amount rather than its FV
This relief is limited to where

(i) The new parent obtains control of the original parent (or entity) by issuing shares
(ii) The assets and liabilities of the new group and the original group are the same
immediately before and after the reorganisation; and
(iii) The owners of the original parent before the reorganisation have the same absolute
and relative interests after the reorganisation.
If any of the above is not met then the reorganisation must be accounted for as normal at
FV (rather than CV)
IAS 27 will require all dividends received to be shown in the income statement
However, if the dividend exceeds the total comprehensive income of the subsidiary in the
period the dividend is declared; or the carrying amount of the investment exceeds the
amount of net assets (including associated goodwill) recognised - then impairment should
be checked for
The distinction between pre- and post-acquisition profits is no longer required.
Recognising dividends received from subsidiaries as income will give rise to greater
income being recognised. Care will need to be taken as to what constitutes a dividend
(defined as a distribution of profits).
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De-mergers
As a company or group grows they sometimes diversify into other areas. This can cause
problems.
For example:
1. If each division has a different risk profile it could be commercially desirable to
reduce the overall risk profile.
2. If different shareholders/managers are involved in different areas of the business
they may wish to split the business (sometimes known as a partition) so that they
each own only the business area they are involved in.
Shareholders cannot just divide up a company or group and set up separate enterprises
without incurring significant tax liabilities unless the separation falls within the conditions
for either:
A statutory demerger, or
A company reconstruction using a members’ voluntary liquidation.
A statutory demerger
is the simpler of the two alternatives but the circumstances in which they can be used are
limited and the conditions which need to be met are more stringent.
It can only be used to split two or more trades. It cannot be used to split out a trade from,
say, a property investment business.
How it works
The mechanics of a statutory demerger are relatively straightforward, either:
I. the shares in a subsidiary are distributed out to the members or
II. the trade is transferred to a new company and shares in the new company are issued
to the members of the old company.
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Syllabus D4: Foreign transactions and entities
Foreign Exchange
You need to be able to deal with foreign exchange in 2 situations:
1. Translating Foreign Transactions in a single (individual) company

2. Translating Foreign subsidiaries
Translating Foreign Transactions in a single company

ALL EXCHANGE DIFFERENCES GO TO INCOME STATEMENT
Step 1: Translate the original credit transaction at spot rate

Step 2: If there is a creditor/debtor @ y/e - retranslate it (exch gain/loss to I/S)
Step 3: Pay off creditor - exchange gain/loss to I/S
Illustration
A Maltese Co. buys £100 goods on 1st June (£1:€1.2)
Y/E payable still outstanding (£1:€1.1)
5th January £100 paid (£1:€1.05)
Solution
Initial Transaction
Dr Purchases 120
Cr Payables 120
Year End
Dr Payables 10
Cr I/S Ex gain 10
On payment
Dr Payables 110
Cr I/S Ex gain 5
Cr Cash 105
Also items revalued to Fair Value will be retranslated at the date of revaluation and the
exchange gain/loss to Income statement 
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Translating Foreign Subsidiaries
ALL EXCHANGE DIFFERENCES TO RESERVES / OCI
Translate the Subsidiary into the Parent’s presentation currency
Exchange rates to be used:

Item Rate
Income Statement Average rate
SFP (Assets and Liabs) Closing rate
Net Assets Table Rate
At Acquisition Column Acquisition rate
Year End Column Closing rate
The post acquisition column (and hence reserves) effectively includes the exchange gains/
losses. This should be disclosed separately in the OCI and in Equity
This amount should go to what is called the translation reserve in equity. Although for the
exam it is fine to be left in retained earnings.
However, if it is asked for specifically then it can be calculated (and transferred out of
retained earnings) as follows:
Translation Reserve
Closing Net Assets (@ closing rate) x
Opening NA (@ opening rate) (x)
Profit (@ average rate) (x)
X
This can be re-written as..
Year End Column translated x

Acquisition Column translated (x)
Any post acquisition profits (@ average rate) (x)
X
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Translating Goodwill in the foreign subsidiary
Step 1: Calculate in the Foreign currency

Step 2: Retranslate at the acquisition rate
Step 3: Retranslate at the closing rate
Any exchange gain/loss goes to reserves / OCI (translation reserve)
Illustration
Step 1
Goodwill in FOREIGN currency
FV of NCI 27,000
FV of S' NA (W1) (130,000)
Impairment (-)
Goodwill 17,000
Step 2
Take this 17,000 and translate it at the acquisition rate at first
eg 17,000 x 0.5 = $8,500
Step 3
Now take the 17,000 and translate it at the year end rate
eg 17,000 x 0.6 = $10,200
The $10,200 is shown in the group SFP (as goodwill) and the gain of $1,700 is taken to
reserves and OCI 
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Full Illustration
Steps
1. Do S only adjustments (in foreign currency)

2. Translate S (using rates above)
3. Do adjustments and workings as normal - but calculate goodwill exchange gain or
loss and add to retained earnings
P S
$ Pintos
Investment in S 3,818
Assets 9,500 40,000
Shares 5,000 10,000
Retained Earnings 6,000 8,200
Liabilities 2,318 21,800
P S
Revenue 8,000 5,200
COS -2,500 -2,600
Tax -2,000 -400
PAT 3,500 2,200
P acquired 80% S @ start of year. At Acquisition S’s Land had a FV 4,000 pintos higher
than book value
Use the Proportionate NCI method
Exchange rates (Pinto:$)

Last year end 5.5
This year end 5
Average for year 5.2
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Solution
Step 1: S only adjustments - none
Net Asset Table (Acq @ acq rate; Year end @closing rate)
Post
acquisition
Retained 1,640 1,091 549
earnings
Fair value adj 800 727 73
4,440 3,636 804
Step 2: Translate S
All assets and liabilities at closing rate

Income statement at average rate
SFP Pintos $
Assets 40,000 8,000+800(FV)
Liabilities 21,800 4,360
Income statement
Revenue 5,200 1,000
COS -2,600 -500
Tax -400 -77
PAT 2,200 423
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Step 3: Workings and adjustments as normal
Goodwill in FOREIGN currency
Consideration (3,818 x 5.5) 21,000

Proportionate NCI (20% x 20,000) 4,000
FV of S' NA (W1) (3,636 x 5.5) (20,000)
Impairment (-)
Goodwill 5,000
Translated @ Acquisition rate = 5,000 / 5.5 = 909
Translated @ Year end = 5,000 / 5 = 1,000
Gain of 91 to retained earnings
NCI
NCI
NCI at acquisition 727
Share of post acquisition 20% x 804

161
reserves (W1) (W1)
NCI 888
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Retained Earnings
Reserves
P 6,000

(80% x 804) 643
reserves (W1)
Goodwill Retranslation gain 91
P S Group
$ $ $
Goodwill 1,000
Assets 9500 8,000+800 (FV) 18,300
Share Capital 5,000

NCI 888
Liabilities 2,318 4,360 6,678
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Foreign Currency - Examinable Narrative & Miscellaneous
points
Every entity has its own functional currency and measures its results in that currency
An entity can present in any currency it chooses
Functional currency is the one that influences sales price, the one used in the country
where most competitors are and where regulations are made and the one that
influences labour and material costs
There is often a loan between H and a foreign sub. If the loan is in a foreign currency
don’t forget that this will need retranslating in H’s own accounts with the difference going
to its income statement.
If the foreign sub is operating in a hyper-inflationary economy then their figures will need
to be adjusted before translation
When H sells a foreign Subsidiary, any exchange differences in equity are taken to the
income statement (re-cycling)
If functional currency changes then all items are translated at the exchange rate at the
date of change
There are deferred tax consequences of foreign exchange gains (see tax chapter)
Reverse Acquisitions
Reverse acquisition allows a private company to go public without regulatory requirements

of going public. It is often cheaper and quicker than using an IPO to become public. 
 
A shell PLC acquires a private company through a share for share exchange, effectively
giving control to the private company which then strategically places its management
within that business.
So the acquirer under IFRS 3 becomes the legal subsidiary but the former shareholders of
the subsidiary actually acquire control.
Reverse acquisition accounting reflects the substance of the transaction. So, fair value
accounting is applied to the assets of the legal parent, which is treated as the acquiree.  
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Syllabus E: SPECIALISED ENTITIES AND
SPECIALISED TRANSACTIONS
Syllabus E1: Financial reporting in specialised, not-for-
profit and public sector entities
Syllabus E1a) Apply knowledge from the syllabus to straightforward transactions and
events arising in specialised, not-for-profit, and public sector entities.
Not-for profit entities

The key points regarding a NFP are as follows:
• Accountability/stewardship
They don’t report to shareholders BUT they’re accountable for the funds received and how they’re
spent
This is particularly important as the money is often given for very precise requirements and so
management must show funds have been used for this
Think of how taxpayers are entitled to see how the government is spending their money.
• Users and user groups
The primary user group is those providing funds. So these could be taxpayers or private donors
Another primary user group are those receiving the goods and services provided by the not-for-
profit entity.
• Cash flow focus
How cash inflows are generated is vital to readers of accounts - whether NFP or not
The ability to deliver future goods and services efficiently, effectively and economically is key
• Budgeting
For NFPs budgets and variance analyses are more important. In some cases, funding is supplied
on the basis of a formal, published budget.
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Not-for-profit entities – specific issues
Using the ACCRUALS basis
This should give public sector accounts more relevance and also allow the accounts to be
compared to private companies
However many public bodies are avoiding the accruals basis as it is too costly to introduce, and
comparisons to private companies aren't always that helpful
Definition of a liability
Public sector bodies are often COMMITTED to providing public benefits - is this a LIABILITY?
They is no actual settlement or exchange. So maybe a specific commitment meets the definition of
a liability? Maybe but only without performance related targets (they might not reach them)
Theres also the problem of reliable measure. Often governments go way over budget!
Charities
Charities are regulated by accounting standards, charity law, relevant company law and best
practice. This will vary from country to country.
Larger charities run high-profile campaigns with celebrities etc, whilst their stakeholders worry the
money is being spent on everything but what they donated towards.  
Theres a problem with accruals here - imagine the charity has costs for a campaign for people to
leave money to them in their will
The income will come at an undetermined (and hopefully far-off) time - so how can the costs be
matched to this realistically?
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Syllabus E2: Entity reconstructions
Syllabus E2a) Identify when an entity may no longer be viewed as a going concern or
uncertainty exists surrounding the going concern status.
Going Concern problem identification

Where companies are facing difficult economic conditions and/or are in financial difficulty
this will necessitate particularly careful consideration by directors when making their
assessment.
Directors of small companies are not relieved from the obligation to assess going concern
when they prepare annual financial statements. The extent of the procedures necessary to
make an assessment for a small company will generally be less than would be appropriate
for larger more complex companies.
A going concern assessment involves consideration of the facts and circumstances of an

individual company. If a subsidiary of a parent company has no realistic alternative but to
cease trading, this does not necessarily mean that the parent company should produce its
financial statements on other than a going concern basis.
However, such circumstances are likely to trigger specific provisions of the IFRS, such as
a requirement to perform impairment reviews, and are likely to require additional
disclosures so that the financial statements give a true and fair view.
Directors need to evaluate which one of three potential conclusions is appropriate to the
specific circumstances of the company. The directors may conclude:
• there are no material uncertainties that may cast significant doubt about the company’s
ability to continue as a going concern; or
• there are material uncertainties related to events or conditions that may cast significant
doubt about the company’s ability to continue as a going concern but the going concern
basis remains appropriate; or
• the use of the going concern basis is not appropriate i.e. the company has no realistic
alternative but to cease trading or go into liquidation or the directors intend to cease
trading or place the company into liquidation.
Care should be taken by the directors to evaluate fully all of the facts and circumstances
and to make a balanced assessment of the disclosures that are necessary.
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For example, lenders may be reluctant to provide positive confirmation to the directors that
facilities will continue to be available. This reluctance may extend to companies with a
profitable business and relatively small borrowing requirements.
There may be a number of understandable reasons why a lender may be reluctant to

confirm that a facility will be available in the future including:
• as a matter of policy the lender does not provide such confirmations to its customers
during difficult economic conditions;
• the company and its lenders are engaged in negotiations about the terms of a facility
(e.g. the interest rate). However, there is no evidence that the lender is reluctant to lend
to the company; and
• the lender renewed a rolling facility immediately prior to the date of the issuance of the
financial statements and is reluctant to go through the administrative burden to confirm
the facility will be renewed again in a year’s time.
The absence of confirmations from lenders does not of itself necessarily cast significant
doubt upon the ability of the company to continue as a going concern nor require the
auditor necessarily to refer to going concern in its auditor’s report.
Market conditions impact companies differently. It should not be assumed that difficult
market conditions, affecting many companies, mean that a material uncertainty exists
about a specific company’s ability to continue as a going concern.
Equally, material uncertainties may exist about a company’s ability to continue as a going
concern in times of relatively benign economic circumstances. Whatever the economic
circumstances, it is important that a rigorous assessment is made and documented and
that financial statements contain balanced, proportionate and clear disclosures of going
concern uncertainties and liquidity risk as necessary to give a true and fair view.
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Syllabus E2b) Identify and outline the circumstances in which a reconstruction would
be an appropriate alternative to a company liquidation.
Syllabus E2c) Outline the appropriate accounting treatment required relating to

reconstructions.
Reconstructions
A scheme of reconstruction is an agreement between a company and its shareholders or
creditors
It may effect mergers and alter shareholder or creditor rights.
They are used to make changes in the structure of a business. They may be used for
rescheduling debt, for takeovers, and for returns of capital, among other purposes.
A company may enter into a scheme whether it is in liquidation or not.
It may be used instead of a liquidation or Company Voluntary Arrangement and is one of

the exit routes from a Company Administration or a receivership.  
 
Members’ voluntary liquidation - a special resolution of the company is required.
Creditors’ voluntary liquidation - the powers of the liquidator are only exercisable with
the sanction of the Court
An example might be when a company in liquidation is sold to another company and the
members agree to accept shares in the purchasing company instead of the cash
distribution to which they would normally be entitled.
Creditors remain creditors of the original company
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Company Reconstruction
What is it?
When a company’s capital structure changes due to circumstance
Types
Internal
Undertaken when companies have surplus capital or whose capital has been eroded by
trading losses
Companies may have to buy back their shares and so reduce capital. To do so the courts
and the legal structure (articles and memorandum) of the company must allow it
Suppose a company has share capital of 10,000 but accumulated losses of 9,000. The
business could now try and start a fresh by a reconstruction, whereby the shareholders
take the loss (eg Dr SC 9,000 Cr Acc Losses 9,000)
In reality, things are more complicated with creditors, preference shareholders and also the
situation might be worsened by the fact that there are some assets on the SFP such as
intangibles which may need writing off
So the rights of the various stakeholders need analysing; creditors need paying off, or
possibly transferring their claims into shares
Preference shareholders - the reduction in their value must not be as great as the ordinary
shareholders as the ordinary shareholders always take more risk
So in an internal reconstruction - no new company is formed, the ailing company does not
go into liquidation and involves detailed discussions with stakeholders
External
This is where a company reconstructs itself with a new identity. The shareholders of the
old company become shareholders of the new company which takes over the old
company’s assets and liabilities
The old company goes into liquidation
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Type 1: Creating A New Holding Company
This is where company A has its own shareholders, but then it creates a new company in
between (so A owns B and the shareholders are now in B)
Method
Generally a simple share for share exchange between A and B
Type 2: Moving a subsidiary

This is where A has, say, 2 subs B and C. Then C moves under B’s ownership and so
becomes a sub-subsidiary of A
Method
There will be no effect on group accounts as they’re all still subs of H. In A’s individual
accounts: It Will show a gain/loss on disposal of C
Illustration
A B C
Assets 1,200 1,200 1,200
Inv in B
400
(100%)
Inv in C
300
(100%)
Retained
1600 900 900
Earnings
Liabilities 200 200 200
A sells C to B for 310
A then loans the money to C
B then buys land with a carrying amount of 100 million from C for 150. The 150 is made up
of 10 of B’s own shares (non-voting) and it will take on a loan of theirs worth 40. The costs
of the restructuring is 30
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Solution for Company A

Dr Cash 310
Cr Inv in C 300
Cr RE 10

Dr Receivable 310
Cr Cash 310
The costs of the restructuring is 30

Dr RE 30
Cr Cash 30
Solution for Company B

Dr Inv in C 310
Cr Cash 310
B then buys land with a carrying amount of 100 million from C for 150. The 150 is made up
of 10 of B’s own shares and it will take on a loan of theirs worth 40
Dr Assets 150
Cr Loan 40
Cr Share Capital 10
Cr Share Premium 100
Solution for Company C

Dr Cash 310
Cr Loan 310
B then buys land with a carrying amount of 100 million from C for 150.
Dr Investment in B 110
Dr Loan 40
Cr Land 100
Cr RE (gain on sale) 50
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A B C
Assets 1,790 1040 1410
Inv in B
400 110
(100%)
Inv in C
0 310
(100%)
Share
100
Premium
Retained
1580 900 950
Earnings
Liabilities 510 240 470
Type 3: Making a sub-sub a sub!
This is where A owns B which owns C. Then B sells C to A, so A now ons B and C directly
Method
No change in the group accounts as all are still subsidiaries.
Company B will transfer C to A as a dividend (a dividend in specie). As long as it has

sufficient retained earnings to do so.
Or A can simply buy C for cash
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Syllabus F: IMPLICATIONS OF CHANGES
IN ACCOUNTING REGULATION
Syllabus F1. The effect of changes in accounting

standards on accounting systems
Syllabus F1a) Apply and discuss the accounting implications of the first time adoption of
a body of new accounting standards.
Syllabus F2. Proposed changes to accounting standards
Syllabus F2a) Identify issues and deficiencies which have led to a proposed change to
an accounting standard.
Here we look at 1st time adoption of IFRS
An entity’s first IFRS financial statements must:
• be transparent for users and comparable over all periods presented

• provide a suitable starting point for IFRS accounting
• be generated at a cost that does not exceed the benefits
An opening IFRS based SFP (using the same accounting policies as the future IFRS
based FS) is needed at the date of moving to IFRSs.
This is the suitable starting point.
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The opening IFRS based SFP shall…
1. recognise all assets and liabilities (where IFRSs say they should be recognised)
2. not recognise assets or liabilities (where IFRSs say they should not be recognised)
3. reclassify items (that IFRS say needs reclassification)
4. apply IFRSs in measuring all recognised assets and liabilities
Limited exemptions
Where the cost of complying is likely to exceed the benefits to users of financial
statements.
Retrospective Application
This is applying IFRS to previous periods - this is restricted if it means management
judgements (about past conditions) are needed when the actual outcome is now in fact
known.
Disclosures
Needed to explain how the transition from previous GAAP to IFRSs affected the entity’s
reported financial position, financial performance and cash flows 
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Syllabus G: THE APPRAISAL OF
FINANCIAL PERFORMANCE
Syllabus G2. Analysis and interpretation of financial

information and measurement of performance
How to answer a general interpretation question
Interpretation of accounts - step 1
The first piece of advice I have is this - Do not think of this as just a ‘ratios’ question.
To do this makes you start seeing the question in too abstract a way.
You need to see it for what it is, simply comparing one set of numbers to another, and
explaining their differences. The ratios simply help you do this. The scenario will often help
even more.
The good news is that with an interpretation question, the answer is actually given in the
question, it’s just your job to find it!
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So how do we go about doing this?
Well in a general question such as “Discuss the financial performance and position of the
company..”, I would take the following approach:
Step 1 Look at the bank and Cash figures
If increased - why?
1) Have sales increased?
2) Have profits increased?
Both of these are signs of good financial performance and positively explains the increase
in cash. Other explanations could be:
3)Selling PPE
4) Selling Branches or subsidiaries etc.
Both of these explain the increase in cash, but it would mean that the cash increase is due
to one off occurrences and not due to positive operating performance. The other problem
with selling PPE etc. is that future performance probably won’t be as strong.
Other possible explanations are:
5) Got a loan in
6) Issued shares
Again this means that the cash increase is not due to improved performance but rather a
simple influx of capital. The question then is why did they get this money? Is it to invest? (If
so NCA will have increased).
This would be an understandable and ‘good’ use of the cash. If the money was just to
keep the business going by financing the current assets and allowing us to still pay
dividends while making losses then this is not a ‘good’ sign as this can only occur for a
short time.
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Has cash decreased - if so why?
These will basically be the opposite of the above..
1) Poor Sales
2) Poor profits
These would explain the fall in cash and is a worrying sign. The cash will eventually run
out in this scenario.
3) Bought PPE
4) Bought Associates and Subs etc.
This would be a better reason for the cash to decrease, though the company needs to be
careful it is not over stretching itself and that it can still pay its short term debts. The PPE
and investments bought should produce a good return in the future and hopefully
immediately.
5) Paid off loan

6) Bought back shares
Again this is a far better sign for cash going down than poor performance. However,
whenever you see a company paying off a loan you should check if this actually was the
best use of the cash. Let me explain… let’s say a company makes a return generally of
10%, it has lots of cash so it decides to pay off its 6% loan.
This means it is using this cash to save 6% (this is the same as getting a 6% return). This
is not a good idea as they should have left the loan and instead expanded their business
as they can make a 10% return at that.
Buying back shares is sometimes necessary because the shareholders have had a
disagreement and the company wishes to get rid of the ‘rogue shareholder’.
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So step 1 was to look at the cash and bank figures and try to see why these have moved.
Now let’s look at…
Step 2: Look at Sales and Profits
If Sales Increase
This is generally good news but what you also have to then do is to see if gross profit and
net profit have gone up in line with them also.
The following ratios will help here (simply hover over these for their formula):
Gross Profit % 
Operating Profit % 
Net Profit %
If they have increased with line then the business has done well.
If they have not increased in line then you need to see why - which expense is to blame?
The following ratios will help here.
(Whichever) Expense margin
Of course, the scenario may well explain to you the possible reasons,
e.g. New revaluation policy (therefore extra depreciation)

New advertising campaign (therefore extra expenses)
New products (Therefore different margins on them expected)
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Interpretations of accounts step 3
Step 3 - look at Non current assets figures
If they have increased:
Possible reasons why need to be investigated:
1) Just a revaluation upwards - this is not good news (but not bad news either). It simply
explains why NCA have increased. It will though have the effect of decreasing ROCE and
net profit%.
2) Due to purchases of NCA. This is good news as the business is, at the very least we
hope, maintaining its physical capital and hopefully expanding.
Expect depreciation to increase, but also profits as an absolute figure to increase ROCE
should ideally stay the same (you bought assets and they are getting you a return) but in
practice it may temporarily fall because the asset may take some time to start working to
full capacity or may not have been bought at the start of the year (so not a full year’s
returns are in the income statement).
You should also look at the NCA purchased and compare it to the depreciation charged.
The company would want the purchase to at least equal the depreciation charge otherwise
assets are wearing out faster than we can replace them.
Ratios that could help here then (hover over for formula):
ROCE 
Asset utilisation 
Purchase to depreciation
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If NCA has decreased:
Again we need to look at why:
1) No purchases - just depreciating away. This is worrying as the current performance

cannot be maintained like this
2) Disposals - Here you need to look at a few things:

Was there a profit on sale? - If so it may mean that other assets are not being depreciated
enough. Similarly a loss on sale would mean perhaps the depreciation charge is too great.
There will also be a profit/loss on sale which will affect the income statement and so the
performance figures in step 2.
Remember this is just a one off income/loss.
The final thing you need to question is why they are selling their assets and to what use
are they putting the proceeds? You would hope the assets are being replaced rather than
just being used to cover losses etc.
Step 4: Look at the shares and loans
If they have increased
This means the company has had an influx of money - we then have to see why and what
it was spent on. (By this stage you will have had an idea due to the previous steps).  
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However, possible options are:
1) To buy new NCA
This is good news and bodes well for the future. The only downside is that the company
may be expanding too quickly and do not have the cash reserves to finance the increased
working capital.
2) To finance working capital
This is worrying - if it is getting lost in the accounts and you cannot see new investments
being made and the cash figure still falling, this means the cash from the shares or loan is
being used to run the daily business (working capital). this is a desperate measure as an
overdraft and good management should be able to handle this.
3) To pay a dividend
The problem companies have is that if an expected dividend is not paid, this sends signs
to the market that the company is in trouble, so often loans are taken out to pay for this.
This though is not a sustainable strategy and dividends should be made out of operating
profits.
Effect on ratios (hover over them for formulas):

1) Gearing - a loan will increase it, shares will decrease it
2) Interest cover - a loan will decrease this (if returns arent made)
3) Dividend cover - share issues will ultimately decrease this if profits don’t increase also
If shares/loans decrease
This could be a useful way to use up surplus cash AS LONG AS extra cash cannot be
made elsewhere with better returns. If you pay off a 8% loan - you are effectively making
an 8% return. This is good only if all other uses of the cash would have a ROCE of less
than 8%.
Always compare the loan rate to the ROCE currently being achieved by the company.
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Earnings per Share (IAS 33)
This key ratio must be disclosed in the income statement
Basic earnings per share
Calculation
PAT - Preference dividends

Weighted average number of ordinary shares
The profit figure is simply taken straight from the income statement. The shares figure can
be a little trickier…
Example - Weighted average number of shares calculation

1/1 100 shares
1/4 Full market price issue of 200 shares
1/7 1 for 3 Bonus issue
Always produce a table like this…..

Date Total Shares Time Bonus Fraction WA
1/1 100 3/12 4/3 33
1/4 300 3/12 4/3 100
1/7 400 6/12 200
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You will notice that I have included a bonus fraction. What this is trying to do is put the
bonus issue (or rights issue) to the start of the year
We do this so we can compare it to last year. As we will pretend that the bonus issue also
happened last year
How to Calculate the Bonus Fraction - Bonus issue

1 for 2 Bonus issue - now got 3 used to have 2 = 3/2
2 for 5 Bonus Issue - now got 7 used to have 5 = 7/5
3 for 4 Bonus Issue - now got 7 used to have 4 = 7/4
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Bonus Fraction Calculation - Rights issue
2 for 3 Rights Issue @ $4 (MV $5)
Being offered 2 shares @ $4 = $8

For every 3 shares @ $5 = $15
So now have 5 @ $23 = $4.6 each - MV is $5 so 5/4.6
Diluted EPS
This is the basic EPS adjusted for the potential effects of a convertible loan (currently in
the SFP) being converted and options (currently in issue) being exercised
Basic EPS Convertible Loan Share options
Earning 100 + Interest saved (tax adj)

Shares 50 + Convertible shares + Free shares
Illustration
5% 800 convertible loan - each 100 can be converted into 20 shares (tax 30%)
100 share options @ $2 (MV $5)
How to calculate Interest Saved

5% x 800 = 40 x 70% (tax adjusted) = 28
How to calculate the extra convertible shares

800/100 x 20 = 160
How to calculate the free shares in share options

Cash in from option $200, this would normally mean the company issuing (200/5) 40
shares instead of the 100, so there has effectively been 60 shares issued for ‘free’. We
use this figure in the diluted eps calculation
An alternative calculation is:

100 x (5-2) / 5 = 60
Solution
Basic EPS Convertible Loan Share options Total
Earnings 100 + 28 128
Shares 50 + 160 + 60 270
Diluted EPS = 128 / 270 = 0.47
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Partly Paid Shares
The shares figure in EPS is based on fully-paid ordinary shares
Sometimes shares are paid for in stages, in this case just use the equivalent number of
fully paid up shares
Illustration
A company has 100 shares in issue 70 ($1) are fully paid up.
The other 30 are paid by 80c at the start of the year, and then fully paid by half way
through the year
The shares figure would be as follows:

Fully paid 70
Partly paid 30 x $0.8 x 6/12 = 12
30 x $1 x 6/12 = 15
Total = 97
Contingently Issuable Shares

These are issued for little or no cash when certain conditions are met. Eg. An employee
meets certain performance targets.
These should be included in the diluted EPS if the conditions have been met only
Employee Incentive Schemes

These are included in diluted EPS from the grant date, it is assumed that the vesting
condition of time has already been met
If the vesting condition is performance based then it is treated as a contingently issuable

share as above 
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EPS exposure draft
Basic and diluted EPS presented with equal prominence in Income statement
Also for continuing/discontinued if appropriate
Basic EPS
Profit for loss ordinary shareholders
Weighted average number of ordinary shares
The denominator includes ordinary shares issuable for little or no cash
Diluted EPS
Basic EPS adjusted for the effects of all dilutive potential ordinary shares that are not
measured at fair value through profit or loss (FVTPL)
Dilutive means EPS would decrease if exercised
FVTPLs change goes to the income statement and so the numerator of the EPS.
Therefore it is not necessary to adjust the denominator
Types of ordinary share

An entity might have issued more than one class of ordinary shares
To calculate EPS, an entity allocates profit or loss of the period to the different classes of
ordinary shares and to those participating instruments that are not measured at fair value
through profit or loss.
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Interim Financial Reporting (IAS 34)
Objective
Prescribe the minimum content of an interim financial report and the principles for
recognition and measurement in financial statements presented for an interim period.
Key Definitions
Interim period:
A financial reporting period shorter than a full financial year
Interim financial report:

A financial report that contains either a complete or condensed set of financial statements
for a period shorter than an enterprise's full financial year.
IAS 34 does not mandate:

Which enterprises should publish interim financial reports,
How frequently, or
How soon after the end of an interim period.
Such matters will be decided by national governments, securities regulators, stock

exchanges, and accountancy bodies
The Standard encourages, at least as of the end of the first half of their financial year,
made available not later than 60 days after the end of the interim period
Minimum Content of an Interim Financial Report
1. a condensed balance sheet,

2. a condensed income statement,
3. a condensed statement of changes in equity,
4. a condensed cash flow statement and
5. selected explanatory notes.
If the entity provides a complete set of FS then it should comply with IAS 1
If condensed, they should include each of the headings and sub-totals included in the
most recent annual financial statements and the explanatory notes required by IAS 34.
Additional line-items should be included if their omission would make the interim financial
information misleading
The interim accounts are designed to provide an update so should focus on new events
and not duplicate info already reported on
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Measurement
Items are measured on a year to date basis
Lets say a company produces quarterly interim accounts and in the first quarter it writes off
some inventory, but then in the next quarter it actually sells it
In the second quarter interim accounts therefore the write down is reversed
Estimates
These will be used more heavily in interim accounts
Pensions
No need for an actuarial valuation. Just use the most recent and roll it forward
Provisions
No need for expert guidance at the interim stage
Inventories
No need for a full stock count. Make an estimate based in sales margins to get a valuation
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Recognition
Intangible Assets
If development costs do not meet the capitalisation criteria at the interim date they should
not be capitalised, even if they are expected to be reached by the financial year end
Tax
This should be accrued using the tax rate that would be applicable to total expected
earnings
The periods to be covered by the interim financial statements are as follows:
Balance sheet
as of the end of the current interim period and a comparative balance sheet as of the end
of the immediately preceding financial year;
Income statements
for the current interim period and cumulatively for the current financial year to date, with
comparative income statements for the comparable interim periods of the immediately
preceding financial year;
Changes in equity
cumulatively for the current financial year to date, with a comparative statement for the
comparable year-to-date period of the immediately preceding financial year; and
Cash flow statement

cumulatively for the current financial year to date, with a comparative statement for the
comparable year-to-date period of the immediately preceding financial year.
If the company's business is highly seasonal, IAS 34 encourages disclosure of financial

information for the latest 12 months, and comparative information for the prior 12-month
period, in addition to the interim period financial statements
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Syllabus H: CURRENT DEVELOPMENTS
Syllabus H1. Environmental and social reporting
Syllabus H1a) Appraise the impact of environmental, social, and ethical factors on
performance measurement.
Syllabus H1c) Discuss why entities might include disclosures relating to the environment
and society
Framework for environmental and sustainability

reporting
The idea here is that everything must be able to continue in the future
We must not use up resources, social or environmental, without replacing them

Any that is not replaced is often termed the social or environmental footprint
Reporting Sustainability
• Voluntary
• Increasingly popular (often put on website too)
• Sometimes called ‘the triple bottom line’ (Profits, people and planet)
Environmental Reporting
1. Can be in the published annual report
2. Can be a separate report
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3. No mandatory standards to follow
4. Covers inputs (Using up of resources)
5. Covers outputs (Pollution etc.)
Its voluntary basis causes problems:

Users can disclose the good but not the bad
No external influence means less confidence in the report
Benefits of an Environmental Report

• Can highlight inefficiencies
• Identifies opportunities to reduce waste
• Can create a positive image as a good corporate citizen
• Increased consumer confidence in it
• Employees like it
• Investors look for environmental concerns nowadays
• Reduces risk of litigation against it
• Can give competitive edge
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Syllabus H1b) Evaluate current reporting requirements in the area including the
development of integrated reporting.
Purpose and content of an integrated report
To explain to providers of financial capital how an organisation creates value

over time.
The ‘building blocks’ of an integrated report are:

Guiding principles
These underpin the integrated report
They guide the content of the report and how it is presented
Content elements
These are the key categories of information
They are a series of questions rather than a prescriptive list
Guiding Principles
1. Are you showing an insight into the future strategy..?

2. Are you showing a holistic picture of the organisation's ability to create value over
time? 
Look at the combination, inter-relatedness and dependencies between the factors that
affect this.
3. Are you showing the quality of your stakeholder relationships?
4. Are you disclosing information about matters that materially affect your ability to create
value over the short, medium and long term?
5. Are you being concise?  
Not being burdened by less relevant information.
6. Are you showing Reliability, completeness, consistency and comparability when
showing your own ability to create value?
Content Elements
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1. Organisational overview and external environment 
What does the organisation do and what are the circumstances under which it
operates?
2. Governance 
How does an organisation’s governance structure support its ability to create value in
the short, medium and long term?
3. Business model  
What is the organisation’s business model?
4. Risks and opportunities  
What are the specific risk and opportunities that affect the organisation’s ability to
create value over the short, medium and long term? And how is the organisation
dealing with them?
5. Strategy and resource allocation 
Where does the organisation want to go and how does it intend to get there?
6. Performance 
To what extent has the organisation achieved its strategic objectives for the period and
what are its outcomes in terms of effects on the capitals?
7. Outlook 
What challenges and uncertainties is the organisation likely to encounter in pursuing its
strategy, and what are the potential implications for its business model and future
performance?
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Syllabus H2. Convergence between national and
international reporting standards
Syllabus H2a) Evaluate the implications of worldwide convergence with International

Financial Reporting Standards.
Syllabus H2b) Discuss the influence of national regulators on international financial

reporting.
Convergence
Norwalk agreement
In the US the FASB issues their accounting standards and recently they also recognised the need
to follow a 'principles-based' approach to standard-setting (as the IASB has always done)
Common conceptual framework

In 2004 the IASB and FASB agreed to develop a common conceptual framework
The IASB maintains a policy of dialogue with other key standard setters around the world, in the
interest of harmonising standards across the globe.
Partner standard setters are often involved in the development of Discussion Papers and Exposure
Drafts on new areas.
However, many fundamental disagreements exist between countries and organisations about the
way forward.
A particular problem is the different reporting needs in developed (and non-developed) countries
Barriers to harmonisation
• Different purposes of financial reporting - For tax assessment or investor decision-making?

• Different legal systems
• Different user groups - In the USA investor and creditor groups are given prominence, while in
Europe employees enjoy a higher profile.
• Developing countries - these are lagging behind and need time to get the principles in place first
• Nationalism - ‘ours is better than yours’
• Circumstances - such as hyperinflation, civil war, currency restriction
• The lack of strong accountancy bodies - so lacking a will and drive for harmonisation
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Advantages of global harmonisation
1. Investors can easily compare international companies and investment across borders is
growing
2. Multinational companies would be easier to control and get investment, especially the
consolidation of foreign subsidiaries
3. A reduction in audit costs  
4. Governments of developing countries would save time and money if they could adopt
international standards
5. Tax authorities - It will be easier to calculate the tax liability of investors, including multinationals
who receive income from overseas sources.  
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ACCA P2 Course Notes

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P2 Course notes

Syllabus A1. Professional behaviour and compliance with accounting standards 3

Syllabus A2. Ethical requirements of corporate reporting 7

Syllabus A3: Social Responsibility 8

Syllabus B: THE FINANCIAL REPORTING FRAMEWORK 16

Syllabus B1. The applications, strengths and weaknesses of an accounting framework 16

Syllabus B2. Critical evaluation of principles and practices 31

Syllabus C: REPORTING THE FINANCIAL PERFORMANCE OF ENTITIES 40

Syllabus C1. Performance reporting 40

Syllabus C2. Non-current Assets 51

Syllabus C3. Financial Instruments 112

Syllabus C4. Leases 159

Syllabus C5. Segmental Reporting 182

Syllabus C6. Employee Benefits 190

Syllabus C7. Income tax 200

Syllabus C8. Provisions 212

Syllabus C9. Related parties 222

Syllabus C10. Share based payment 225

Syllabus D: FINANCIAL STATEMENTS OF GROUPS OF ENTITIES 259

Syllabus D1: Group accounting including statements of cash flows 259

Syllabus D2: Continuing and discontinued interests 309

Syllabus D3: Changes in group structures 319

Syllabus D4: Foreign transactions and entities 321

Syllabus E: SPECIALISED ENTITIES AND SPECIALISED TRANSACTIONS 329

Syllabus E2: Entity reconstructions 331

Syllabus F: IMPLICATIONS OF CHANGES IN ACCOUNTING REGULATION 338

Syllabus F2. Proposed changes to accounting standards 338

Syllabus G: THE APPRAISAL OF FINANCIAL PERFORMANCE 340

Syllabus H: CURRENT DEVELOPMENTS 354

Syllabus H1. Environmental and social reporting 354

Syllabus A1. Professional behaviour and compliance

When giving advice be aware of:

The issues that may threaten this are:

2) Your own objectivity

The issues that may threaten this are:

• Contains a materially misleading statement

Ethical and professional issues

Accounting professionals are expected to be:

A professional’s good reputation is one of their most important assets.

This can create an ethical/professional dilemma.

As accountants also have professional duties to their employer and clients.

• Full disclosure and transparency:

In most cases conformance to acceptable accounting practices is a matter of personal

Reasons for such behaviour often include

Ethical requirements of corporate reporting

Misrepresenting figures in the financial statements may not be illegal but is

Accountants have a responsibility to not mislead the public.

Accountancy is a profession which, like all professions, has:

The professions promise to act in the best public interest.

Transparency & Non-Financial Standards

How is this reported…?

• Corporate Governance Report

• Environmental and social report

• Management commentary is a narrative report that provides a context within which

• Management commentary fulfils an important role by providing users of financial

• The Practice Statement permits entities to adapt the information provided to

Typically, an OFR would comprise some or all of the following:

1. Description of the business and its objectives;

The publication of such a statement would have the following advantages:

1. It could be helpful in promoting the entity as progressive and as eager to

However, there could be some drawbacks:

This is concerned with business ethics and accountability to stakeholders

Arrangements should be put in place to ensure that the business is conducted in a

The reporting of the company's effects on society at large

P2 Course notes 

• Full disclosure and transparency: 

• Are you being concise?  

• Risks and opportunities  

• Strategy and resource allocation 

• The Principal market  

• Decision usefulness & stewardship 

• Capital providers - main users  

1. Substance over form 

2. Represents the economic phenomena 