IFRS Separate Fincancial Statements Up Date

International Financial Accounting.
3. Accounting in Separate Financial Statements.
3.1 Main Balance Sheet Items.
1 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Topics – Survey.
3. Accounting in Separate Financial Statements

3.1 Main Balance Sheet Items
3.1.1 Assets
3.1.1.1 Property, Plant and Equipment
3.1.1.2 Intangible Assets
3.1.1.3 Impairment of Assets
3.1.1.4 Capitalisation of Borrowing Costs
3.1.1.5 Inventories
3.1.1.6 Financial Assets
3.1.2 Debt, Equity
3.1.2.1 Financial Liabilities
3.1.2.2 Provisions and Contingencies
3.1.2.3 Equity

Preparation Process for Group Financial Statements 1/2.
 An international capital market related company that prepares IFRS group

financial statements will normally do the following process steps:
Preparation of separate financial

Obligation for preparation/
statements according to local
1 publication (e.g. annual report
accounting principles for all group
according to HGB)
entities and the parent company
Preparation of separate financial

statements according to IFRS for No obligation for preparation/
2 group entities and for the parent publication (eventually only so
company called “reporting packages“)
Preparation of group financial Obligation for preparation/

3 statements according to IFRS publication due to IAS
Regulation

Preparation Process for Group Financial Statements 2/2.
 In a simple group structure, this can be show as follows:

Separate financial
statements AG
according to HGB (PC)
PC
AG Separate financial
statements AG
Control according to IFRS (PC)
S1 S2 S3
GmbH AG Ltd. Group financial
statements AG
according to IFRS
(PC)
Separate fin. statements Separate fin. statements Separate fin. statements
according to HGB GmbH according to HGB AG (TU 2) according to UK-GAAP Ltd.
Separate fin. statements Separate fin. statements Separate fin. statements
according to IFRS GmbH according to IFRS AG (TU 2) according to IFRS Ltd.
PC = Parent company; S = Subsidiary

3.1 Main Balance Sheet Items – Survey.
Assets IFRS balance sheet (main items) Debt, equity

Property, plant and equipment Financial liabilities
Intangible assets Provisions
Inventories Equity
Financial assets
Impairment of assets
Capitalisation of borrowing costs
Financial instruments

3.1 Main Balance Sheet Items – Accounting Steps.
 In general, a accounting procedure can be divided into four steps:
 Recognition in the balance sheet yes or no?

1 Recognition
 If so, recognition at what time?
 Value measure?
2 Initial measurement
 Measurement components?
Subsequent  Value measure?

3 measurement  Measurement components?
 Derecognition out of the balance sheet yes or no?

4 Derecognition
 If so, derecognition at what time?

3.1.1.1 Property, Plant and Equipment – Relevant
Standards.
 IAS 16 "Property, Plant and Equipment" is the main Standard of relevance for
the accounting treatment and recognition of property, plant and equipment.
 For provisions regarding the impairment of property, plant and equipment,
refer also to IAS 36 "Impairment of Assets" (see bullet 3.1.1.3).
 The cases when borrowing costs must be capitalised as part of the cost of
property, plant and equipment are regulated in IAS 23 "Borrowing Costs" (see
bullet 3.1.1.4).
 IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" contains the
requirements for the capitalisation of decommissioning liabilities (see also
bullet 3.1.2.2).

3.1.1.1 Property, Plant and Equipment –Definition,
Examples.
Property, plant and equipment are tangible items that:
 are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
 are expected to be used during more than one period (IAS 16.6).
 Spare parts and servicing equipment are not usually carried under
property, plant and equipment (but rather inventories) (IAS 16.8).
 However, major spare parts and stand-by equipment qualify as property,
plant and equipment when an entity expects to use them during more
than one period.
 Similarly, if the spare parts and servicing equipment can be used only in
connection with an item of property, plant and equipment, they are
accounted for as property, plant and equipment.
 Examples of property, plant and equipment include: land, buildings, operating
and office equipment (machinery, furniture and fixtures, computers, etc.).

3.1.1.1 Property, Plant and Equipment – Recognition:
Conditions.
Pursuant to IAS 16.7, the cost of an item of property, plant and equipment shall
be recognised as an asset if, and only if, the following conditions are met:
 The item meets the definition criteria of property, plant and equipment
according to IAS 16.
 It is probable that future economic benefits associated with the item of
property, plant and equipment will flow to the entity.
 The cost of the item can be measured reliably.
 As a rule, items of property, plant and equipment must be recognised

individually. However, it may be appropriate, in accordance with IAS 16.9, to
aggregate individually insignificant items, such as moulds, tools and dies, and
to apply the criteria to the aggregate value (combined accounting).

3.1.1.1 Property, Plant and Equipment – Initial
Measurement: Value Measure.
An item of property, plant and equipment shall initially be measured at cost
(IAS 16.15).
Cost is the amount of cash or cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its acquisition
or construction or, where applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements or other IFRS,
for example IFRS 2 (IAS 16.6).
 An entity shall evaluate all its property, plant and equipment costs at the time
they are incurred (IAS 16.10).
 These costs include costs incurred initially to acquire or construct an item
of property, plant and equipment and costs incurred subsequently to add
to, replace part of, or service it (IAS 16.10).

Measurement: Costs (Elements 1/2).
 The cost of an item or property, plant and equipment comprises (IAS 16.16):
 its purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates;
 and all costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner
intended by management;
 the initial estimate of the costs of dismantling and removing the item
("decommissioning liabilities") and restoring the site on which it is
located ("restoration liabilities").
 Furthermore, cost shall also include borrowing costs, as appropriate
pursuant to IAS 23 (see bullet 3.1.1.4).

Measurement: Costs (Elements 2/2).
 According to IAS 37, provisions for decommissioning or restoration shall
be recognised eventually; the recognition is not via profit or loss; instead, the
obligation amount increases the carrying amount of the asset (IAS 16.18).
 Cost is thus comprises the following:
Acquisition costs Production costs
Acquisition price Components of production costs according
./. Acquisition price reductions IAS 2 (production based full costs)
+ All costs directly attributable
+ Costs to dismantle, remove or restore the items
+ Borrowing costs See bullet 3.1.1.5
./. Government grants
+ Subsequent acquisition or production costs
= Acquisition or production costs

Measurement: Costs (Negative Examples for Elements).
 Examples of costs, that are not costs of an item of property, plant and
equipment (IAS 16.19):
 costs of opening a new facility;
 costs of introducing a new product or service (including costs of
advertising etc.);
 costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
 administration and other general overhead costs.
 Pursuant to IAS 16.22, 12, the following are also not included in the cost of
the asset:
 any internal profits;
 cost of abnormal amounts of wasted material, labour, or other
resources;
 costs of the day-to-day servicing.

Measurement: Costs (Costs Directly Attributable).
 Examples of directly attributable costs are (IAS 16.17):
 costs of employee benefits (as defined in IAS 19) arising directly from
the construction or acquisition of the item of property, plant and
equipment;
 costs of site preparation;
 initial delivery and handling costs;
 installation and assembly costs;
 costs of testing whether the asset is functioning properly, after deducting
the net proceeds from selling any items produced while bringing the asset
to that location and condition (such as samples produced when testing
equipment); and
 professional fees.

3.1.1.1 Property, Plant and Equipment – Subsequent
Measurement: Overview of Methods.
 There are the following methods to choose from for measurement after
initial recognition, and the method shall be applied to an entire class of
property (IAS 16.29):
Subsequent recognition
Cost model (IAS 16.30) Revaluation model (IAS 16.31-42)
Property, plant and equipment is Property, plant and equipment is

carried at its cost less any carried at fair value less any
accumulated depreciation and subsequent accumulated
any accumulated impairment depreciation and any
losses accumulated impairment

Measurement: Depreciation versus Impairment 1/2.
 IAS 16 differentiates between (scheduled) "depreciation" and (unscheduled)
"impairment":
Basic principles of depreciation
Scheduled depreciation Impairment (extraordinary depreciation)
Systematic allocation of the Recognition of a loss in value if it is

depreciable amount of an asset over established, based on an impairment
its useful life test, that the recoverable amount is
lower than the carrying amount
see bullet 3.1.1.3

Measurement: Depreciation versus Impairment 2/2.
 “Depreciation“ and “depreciable amount“ are defined within IAS 16 as follows:
Depreciation is the systematic allocation of the depreciable amount of an

asset over its useful life (IAS 16.6).
The depreciable amount is the cost of an asset, or other amount substituted

for cost in the financial statements, less its residual value (IAS 16.6).
 There is no definition for “impairment“ within the IFRS; it is an extraordinary

depreciation or value reduction.
An impairment loss is the amount by which the carrying amount of an asset

exceeds its recoverable amount (IAS 16.6).

Measurement: Depreciation (Calculation of Amounts).
The depreciable amount of an asset shall be allocated on a systematic
basis over its useful life (IAS 16.50); it is determined after deducting its
residual value (IAS 16.53).
Useful life is (IAS 16.6):

 the period over which an asset is expected to be available for use by an
entity; or
 the number of production or similar units expected to be obtained from
the asset by an entity.
 The useful life of an asset is defined in terms of the asset's expected utility
to the entity (IAS 16.57).
The residual value of an asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the estimated
costs of disposal, if the asset were already of the age and in the condition
expected at the end of its useful life (IAS 16.6).

Measurement: Depreciation (Recognition of Amounts).
The depreciation charge for each period shall generally be recognised in
profit or loss (IAS 16.48, 49).
 Recognition in profit or loss may only be omitted if the depreciation charge
is included in the carrying amount of another asset (IAS 16.48).
 Pursuant to IAS 16.49, this is the case when the depreciation charge
constitutes part of the cost of another asset.
 For example, the depreciation of technical plant and operating and
office equipment shall be included in the costs of conversion of
inventories (see bullet 3.1.1.5).
 Similarly, the depreciation of property, plant and equipment used for
development activities may be included in the cost of an intangible
asset recognised in accordance with IAS 38 (see bullet 3.1.1.2).

Measurement: Depreciation (Requirements for the Method).
 A variety of depreciation methods can be used, including the following
(IAS 16.62):
 straight-line method,
 diminishing balance method,
 units of production method.
 The following requirements also apply (IAS 16.60-62):
 The entity shall select the depreciation method that most closely reflects
the expected pattern of consumption of the future economic benefits
embodied in the asset.
 This shall be reviewed at least at each financial year-end.
 If there are significant changes in the expected pattern of consumption
of the future economic benefits, the method shall be adjusted.
 The selected depreciation method shall be normally applied consistently
from period to period.

Measurement: Depreciation (Straight-line Method).
Straight-line depreciation results in a constant charge over the useful life, if
the asset's residual value does not change (IAS 16.62).
 The following example illustrates the procedure for straight-line depreciation:
 Purchase of a machine for € 600; estimated useful life: 5 years; estimated
residual value after 5 years: € 0.
 Depreciation table:
(1) (2) (3) = (€ 600 ./. € 0) / 5 years (4) = (2) ./. (3)
Year Carrying amount beginning Depreciation Carrying amount end
20X1 € 600 € 120 € 480
20X2 € 480 € 120 € 360
20X3 € 360 € 120 € 240
20X4 € 240 € 120 € 120
20X5 € 120 € 120 €0
Total € 600

Measurement: Depreciation (Diminishing Balance Method).
The diminishing balance method results in a decreasing charge over the
useful life (IAS 16.62).
 The following example illustrates the procedure for applying the diminishing
balance method:
 Purchase of a machine for € 650; annual depreciation rate: 40% of the
carrying amount, estimated residual value after 5 years: € 50
(1) (2) (3) = (2) · 40% (4) = (2) ./. (3)
Year Carrying amount beginning Depreciation Carrying amount end
20X1 € 650 € 260 € 390
20X2 € 390 € 156 € 234
20X3 € 234 € 94 € 140
20X4 € 140 € 56 € 84
20X5 € 84 € 34 € 50
Total € 600

Measurement: Depreciation (Units of Production Method).
The units of production method results in a charge based on the expected
use or output (IAS 16.62).
 For this, the following example:
 Purchase of a machine for € 650; estimated useful life: 5 years or 7,800
operating hours; estimated residual value after 5 years: € 50.
(1) (2) (3) (4) = (€ 650 ./. € 50) / 7,800 · (3) (5) = (2) ./. (4)
Carrying amount Carrying amount
Year Operating hours Depreciation
beginning end
20X1 € 650 1,600 € 123 € 527
20X2 € 527 1,400 € 108 € 419
20X3 € 419 1,500 € 115 € 304
20X4 € 304 1,700 € 131 € 173
20X5 € 173 1,600 € 123 € 50
Total 7,800 € 600

3.1.1.1 Property, Plant and Equipment – Subsequent Measu-
rement: Revaluation Model (Basic Rule; Group Measurement).
After recognition as an asset, an item of property, plant and equipment whose
fair value can be measured reliably shall be carried at a revalued amount
(IAS 16.31).
 The revalued amount is the fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated
impairment losses (IAS 16.31).
 Revaluations shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which would be
determined using fair value at the end of the reporting period (IAS 16.31).
If an item of property, plant and equipment is revalued, the entire class of

property, plant and equipment to which that asset belongs shall be revalued
(IAS 16.36, 38).
A class of property, plant and equipment is a grouping of assets of a

similar nature and use in an entity's operations (IAS 16.37).

Measurement: Revaluation Model (Accounting Method 1/3).
 The fair value change of the tangible asset shall be recognised as follows
(IAS 16.39, 40):
 If an asset's carrying amount is increased as a result of a revaluation,
the increase shall be credited in OCI and accumulated in equity under the
heading of “revaluation surplus” (RS).
 However, the increase shall be recognised in profit or loss to the
extent that it reverses a revaluation decrease of the same asset
previously recognised in profit or loss.
 If an asset's carrying amount is decreased as a result of a revaluation,
the decrease shall be recognised in profit or loss.
 However, the decrease shall be debited directly to OCI (within RS) to
the extent of any credit balance existing in the revaluation surplus in
respect of that asset.
 The rules above are illustrated by the following example.

Fair values in t
€ € 180 € 60
€ 160
Accumulation
Cancellation
of RS (€ 80)
In- Accumulation
in RS (€ 80)
come in RS (€ 60)
€ 100
Cost
pense
Ex-
€ 40 € 40
Time
t0 t1 t2 t3
Initial measurement Subsequent measurement

 Initial measurement t0:
Equipment € 100 Cash € 100
 Subsequent measurement t1:

Equipment € 80 RS (gain) € 80

RS (cancellation gain) € 80 Equipment € 120
Expense of revaluation € 40

Equipment € 100 Income of revaluation € 40
RS (gain) € 60

3.1.1.1 Property, Plant and Equipment – Derecognition:
Criteria, Determination/Recognition of Profit or Loss.
Pursuant to IAS 16.67, the carrying amount of an item of property, plant and
equipment shall be derecognised:
 on disposal; or
 when no future economic benefits are expected from its use or disposal.
 The gain or loss arising from the derecognition of an item of property, plant
and equipment shall be determined as the difference between the net
disposal proceeds, if any, and the carrying amount of the item (IAS 16.71).
 The gain or loss arising from the derecognition of an item of property, plant
and equipment shall be included in profit or loss (IAS 16.68).

3.1.1.2 Intangible Assets – Relevant Standards.
 Accounting and disclosure requirements relating to intangible assets are

primarily contained in IAS 38 "Intangible Assets".
 IAS 38 contains illustrative examples that are not an integral part of the
Standard; accordingly, these examples were not considered in the EU
endorsement process.
 For provisions regarding the impairment of intangible assets, refer also to
IAS 36 "Impairment of Assets” (see bullet 3.1.1.3).
 The cases when borrowing costs must be capitalised as part of the cost
intangible assets are regulated in IAS 23 "Borrowing Costs“ (see bullet
3.1.1.4).

3.1.1.2 Intangible Assets – Intangible Resources: Origin,
Examples.
 Entities frequently expend resources, or incur liabilities, on the
acquisition, development, maintenance or enhancement of intangible
resources (IAS 38.9).
 Intangible resources may arise e.g. through (IAS 38.9):
 the use of scientific or technical knowledge;
 the design and implementation of new processes or systems;
 the use of licenses, intellectual property, market knowledge and
trademarks (including brand names and publishing titles).
 Common examples of rights and assets encompassed by the heading
"intangible resources" are computer software, patents, copyrights, motion
picture films, customer lists, mortgage servicing rights, fishing licences, import
quotas, franchises, customer or supplier relationships, customer loyalty,
market share and marketing rights (IAS 38.9).

3.1.1.2 Intangible Assets – Intangible Resources: Overview
of Recognition Alternatives.
 Expenses relating to intangible resources may be treated as follows in the
accounts:
Expenses relating to intangible resources
Capitalisation as intangible asset Recognition as an expense
This is associated with the following

conditions:
 The definition criteria of an intangible asset
are fulfilled;
 the recognition criteria for intangible assets
are fulfilled.

3.1.1.2 Intangible Assets – Intangible Resources:
Recognition as an Expense 1/3.
Expenses for an intangible item are generally recognised as an expense in
the period in which they occurred (IAS 38.10, 68).
 There are two exceptions to this rule (IAS 38.10, 68):

 The expenses form part of the cost of an intangible asset that meets
the recognition criteria.
 The item is acquired in a business combination and cannot be
recognised as an intangible asset. In this case, the expenses form part
of the amount that was recognised as goodwill at the date of
acquisition (see bullet 5.2).
Expenditure on an intangible item that was initially recognised as an expense

shall not be recognised as part of the cost of an intangible asset at a later
date (IAS 38.71).

 Examples of expenditure that is recognised as an expense when it is
incurred include (IAS 38.69):
 expenditure on research, except when it is acquired as part of a business
combination and forms part of the acquisition costs;
 expenditure on start-up activities (i.e., establishment and start-up costs,
e.g. pre-opening costs or pre-operating costs), unless this expenditure is
included in the cost of an item or property, plant and equipment in
accordance with IAS 16 (see already bullet 3.1.1.1);
 expenditure on training activities;
 expenditure on advertising and promotional activities;
 expenditure on relocating or reorganising part or all of an entity.

For subsequent expenditures, i.e. expenses that arise upon initial
recognition of an acquired intangible asset or upon completion of an
internally generated intangible asset, the following applies (IAS 38.20):
 Because it is often difficult to attribute subsequent expenditure directly to a
particular intangible asset, they will only rarely be recognised in the
carrying amount of an asset.
 Consistently with IAS 38.63, subsequent expenditure on brands,
mastheads, publishing titles, customer lists and items similar in
substance (whether externally acquired or internally generated) is always
recognised in profit or loss as incurred.
 This is because such expenditure cannot be distinguished from expenditure

to develop the business as a whole (IAS 38.20).

3.1.1.2 Intangible Assets – Defining Characteristics:
Survey.
An intangible asset is an identifiable non-monetary asset without physical
substance (IAS 38.8).
Pursuant to IAS 38.8, an asset is a resource:

 controlled by an entity as a result of past events; and
 from which future economic benefits are expected to flow to the entity.
 Intangible assets are therefore defined based on the following characteristics:

 identifiability;
 non-monetary character;
 control of resources with potential future economic benefit;
 no physical substance.

Identifiability.
 The definition of an intangible assets requires an intangible asset to be
identifiable to distinguish it from goodwill (for more details see bullet 5.2)
(IAS 38.11).
 Under IAS 38.12, an asset is identifiable, if it:
 is separable, i.e., is capable of being separated or divided from the entity
and sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, identifiable asset or liability, regardless of
whether the entity intends to do so; or
 arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from other
rights and obligations.

3.1.1.2 Intangible Assets – Defining Characteristics: Non-
monetary Character.
 For the defining characteristics of an intangible asset to be met, the item must
be non-monetary in nature.
 What constitutes monetary assets is defined as follows:
Monetary assets are money held and assets to be received by the entity in
fixed or determinable amounts of money (IAS 38.8).

Control 1/2.
 Pursuant to IAS 38.13, an entity controls an asset if:
 the entity has the power to obtain the future economic benefits flowing
from the underlying resource and
 the entity can restrict the access of others to those benefits.
 Pursuant to IAS 38.13, the capacity of an entity to control the future economic
benefits from an intangible asset would normally stem from legal rights
that are enforceable in a court of law.
 In the case of market and technical knowledge an entity controls those
benefits if, for example, the knowledge is protected by legal rights such as
copyrights, a restraint of trade agreement (where permitted) or by a legal duty
on employees to maintain confidentiality (IAS 38.14).

Control 2/2.
 Where training given to a team of employees results in intangible resources,
an entity will usually have insufficient control over the expected future
economic benefits (IAS 38.15).
 For a similar reason, it is unlikely that an entity will be able to control
specific management or technical talent, unless it is protected by legal
rights to use it and to obtain the future economic benefits expected from it,
and it also meets the other parts of the definition (IAS 38.15).
 If an entity has a portfolio of customers or a market share and there is an
absence of legal rights to protect, or other ways to control, the relationships
with customers or the loyalty of the customers to the entity, the entity usually
has insufficient power of control; therefore, such items (e.g. portfolio of
customers, market shares, customer relationships and customer loyalty) do
not generally meet the definition of intangible assets (IAS 38.16).

3.1.1.2 Intangible Assets – Defining Characteristics: Future
Economic Benefit.
 Pursuant to IAS 38.17, the prevailing future economic benefits expected to
meet the definition of an intangible asset may include:
 revenue from the sale of products or services;
 cost savings or other benefits resulting from the use of the asset by the
entity.
 The use of intellectual property in a production process may reduce future
production costs rather than increase future revenues (IAS 38.17).

3.1.1.2 Intangible Assets – Recognition and Initial
Measurement: General Recognition Requirements.
An item shall be recognised as an intangible asset at cost, if it meets the
following requirements (IAS 38.18, 21):
 The item meets the definition of an intangible asset in accordance with
IAS 38.
 The following recognition criteria are met:
 It is probable that the expected future economic benefit from the asset
will flow to the entity; and
 The cost of the asset can be reliably measured.

An intangible asset shall be measured initially at cost (IAS 38.24).
Cost is the amount of cash or cash equivalents paid or the fair value of
other consideration given to acquire an asset at the time of its acquisition
or construction, or, when applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements of other IFRS,
e.g. IFRS 2 (IAS 38.8).
 Cost includes costs incurred initially to acquire or internally generate an

intangible asset and those incurred subsequently to add to, replace part of,
or service it (IAS 38.18).

Measurement: Differentiation by Nature of Origin.
 With regard to the requirements for subsequent recognition and initial
measurement after the generation of intangible assets, IAS 38
distinguishes between:
Acquired intangible assets Internally generated intangible assets
Acquired in a
Separate (Other) intangible
business Goodwill
acquisition asset
combination
See bullet 5.2
By way of a In exchange of
For a consideration
government grant assets
Not discussed in any greater detail here

Measurement: Separate Acquisition for a Consideration 1/3.
 Normally, the price an entity pays to acquire separately an intangible asset
reflects expectations about the probability that the expected future
economic benefits embodied in the asset will flow to the entity; therefore,
the recognition criterion concerning the probability of future economic
benefit is always considered to be satisfied for separately acquired
intangible assets (IAS 38.25).
 In addition, the cost of a separately acquired intangible asset can usually be
measured reliably. This is particularly so when the purchase consideration is
in the form of cash or other monetary assets (IAS 38.26).
The cost of a separately acquired intangible asset comprises (IAS 38.27):

 its purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates; and
 any directly attributable cost of preparing the asset for its intended use.

 costs of employee benefits (as defined in IAS 19) arising directly from
bringing the asset to its working condition;
 professional fees arising directly from bringing the asset to its working
condition; and
 costs of testing whether the asset is functioning properly.
 Examples or expenditures that are not part of the cost of an intangible
asset are (IAS 38.29):
 costs of introducing a new product or service (including costs of
advertising and promotional activities);
…

 costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
 administration and other general overhead costs.
 Recognition of costs in the carrying amount of an intangible asset ceases
once the asset is in the condition necessary for it to be capable of
operating in the manner intended by management (IAS 38.30).

Measurement: Internally Generated Items (Differentiation).
 In the preparation procedure under IAS 38.52, a distinction is made in the
recognition between the following phases:
Phases in the preparation procedure
Research phase Development phase
No recognition as an intangible Recognition as an intangible asset

asset (i.e. recognition of the eventually possible
expenditures as an expense)
 If an entity cannot distinguish the research phase from the development
phase of an internal project, the entity shall treat the expenditure on that
project as if it were incurred in the research phase only (IAS 38.53).

3.1.1.2 Intangible Assets – Recognition and Initial Measure-
ment: Internally Generated Items (Research Phase 1/2).
Research is original and planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge and understanding
(IAS 38.8).
 Examples of research activities are (IAS 38.56):

 activities aimed at obtaining new findings;
 the search for, evaluation and final selection of, applications of
research results or other knowledge;
 the search for alternative materials, devices, products, processes,
systems or services; and
 the formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services.

ment: Internally Generated Items (Research Phase 2/2).
No intangible asset arising from research (or from the research phase of an
internal project) shall be recognised (IAS 38.54, 55).
 An entity cannot demonstrate that an intangible asset exists that will generate
probable future economic benefits.
 Therefore, expenditure on research (or on the research phase of an internal
project) shall be recognised as an expense in profit or loss in the period in
which it is incurred.

ment: Internally Generated Items (Development Phase 1/3).
Development is the application of research findings or other knowledge to
a plan or design for the production of new or substantially improved
materials, devices, products, processes, systems or services.
Development takes place before the start of commercial production or use
(IAS 38.8).
 Examples of development activities (IAS 38.59):

 the design, construction and testing of pre-production or pre-use
prototypes and models;
 the design of tools, jigs, moulds and dies involving new technology;
 the design, construction and operation of a pilot plant that is not of a
scale economically feasible for commercial production; and
…

 the design, construction and testing of a chosen alternative for new
or improved materials, devices, products, processes, systems or
services.
An intangible asset arising from development (or from the development phase
of an internal project) shall only be recognised, if, and only if, an entity can
demonstrate all of the following (IAS 38.57):
 The technical feasibility of completing the intangible asset so that it will be
available for use or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the intangible asset.
…

 How the intangible asset will generate probable future economic benefits
(e.g. the existence of a market for the output of the intangible asset or the
intangible asset itself).
 The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible
asset during its development.
Internally generated brands, mastheads, publishing titles, customer lists

and items similar in substance shall not be recognised as intangible
assets, as these cannot be distinguished from the cost of developing the
business as a whole (IAS 38.63, 64).

ment: Internally Generated Items (Cost Elements 1/2).
The cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce, and prepare the asset to be
capable of operating in the manner intended by management (IAS 38.66).

 costs of materials and services used or consumed in generating the
intangible asset;
 costs of employee benefits (as defined in IAS 19) arising from the
generation of the intangible asset;
 fees to register a legal right; and
 amortisation of patents and licences that are used to generate the
intangible asset.

ment: Internally Generated Items (Cost Elements 2/2).
 IAS 38.66 goes on to clarify that IAS 23 specifies criteria for the recognition of
interest as an element of the cost of an internally generated intangible asset.
(see bullet 3.1.1.4).
 The following are not components of the cost of an internally generated
intangible asset (IAS 38.67):
 selling, administrative and other general overhead expenditure,
unless this expenditure can be directly attributed to preparing the asset for
use;
 identified inefficiencies and initial operating losses incurred before the
asset achieves planned performance; and
 expenditure on training staff to operate the asset.

ment: Internally Generated Items (Period of Cost Recognition).
 With regard to the period of cost recognition, IAS 38.65 specifies that the cost
of an internally generated intangible asset is the sum of expenditure
incurred from the date when the intangible asset first meets the
recognition criteria in IAS 38.21, 22 and 57.
 The period of cost recognition ends once the asset is in the condition
necessary for it to be capable of operating in the manner intended by
management (analogy to IAS 38.30).
Reinstatement of expenditure previously recognised as an expense is

prohibited (IAS 38.65).

3.1.1.2 Intangible Assets – Subsequent Measurement:
Overview of Methods.
 There are essentially the following methods to choose from for
measurement after recognition; when using the revaluation model, all the
other assets in its class shall also be accounted for using the same model,
unless there is no active market for those assets (IAS 38.72):
Subsequent measurement
Cost model (IAS 38.74) Revaluation model (IAS 38.75-87)
The intangible asset is carried at its The intangible asset is carried at fair
cost less any accumulated value less any subsequent
amortisation and any accumulated amortisation and any
accumulated impairment losses accumulated impairment

Amortisation versus Impairment 1/2.
 IAS 38 differentiates between (scheduled) "depreciation" and (unscheduled)
"impairment":
Basic principles of amortisation
Scheduled amortisation Impairment (extraordinary amortisation)
Systematic allocation of the Recognition of a loss in value if it is

depreciable amount of an asset over established, based on an impairment
its useful life test, that the recoverable amount is
lower than the carrying amount
See bullet 3.1.1.3

Amortisation versus Impairment 2/2.
 “Amortisation“ and “depreciable amount“ are defined within IAS 38 as follows:
Amortisation is the systematic allocation of the depreciable amount of an
intangible asset over its useful life (IAS 38.8).

for cost, less its residual value (IAS 38.8).
 There is no definition for “impairment“ within the IFRS; it is an extraordinary

amortisation or value reduction.

exceeds its recoverable amount (IAS 38.8).

Amortisation (Differentiation by Nature of Useful Life).
 Whether an intangible asset is subject to scheduled amortisation depends on
the nature of its useful life (IAS 38.89):
Useful life
Finite Indefinite
Scheduled amortisation No scheduled amortisation
Useful life is (IAS 38.8):

 the period over which an asset is expected to be available for use by an
entity; or
 the number of production or similar units expected to be obtained from
the asset by an entity.

Amortisation (Finite versus Indefinite Useful Life).
 An intangible asset shall be regarded by an entity as having an indefinite
useful life when, based on an analysis of all the relevant factors, there is
no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity (IAS 38.88).
 Pursuant to IAS 38.91, the term "indefinite" does not mean "infinite".
 An asset is said to have an indefinite useful life, if, at the time the useful life
of the asset is estimated, there is no evidence to suggest that the asset will
cease to generate positive cash flows from a particular point in time
(IAS 38.91).
 Whether or not regular expenditure will be required to maintain the asset
is immaterial, provided that the asset's standard of performance is
maintained and the entity intends to bear the expenditure necessary to
maintain this standard in future (IAS 38.91).

Amortisation (Determining Useful Life 1/2).
 The following factors must be considered when determining the useful life
of an intangible asset (IAS 38.90):
 the expected usage of the asset by the entity and whether the asset
could be managed efficiently by another management team;
 typical product life cycles for the asset and public information on
estimates of useful lives of similar assets that are used in a similar way;
 technical, technological, commercial or other types of obsolescence;
 the stability of the industry in which the asset operates, and changes in
the market demand for the products or services output from the asset;
…

Amortisation (Determining Useful Life 2/2).
 expected actions by competitors or potential competitors;
 the level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entity's ability and
intention to reach such a level;
 the period of control over the asset and legal or similar limits on the
use of the asset, such as the expiry dates of related leases; and
 whether the useful life of the asset is dependent on the useful life of
other assets of the entity.
 In addition, for determining useful life the requirements in IAS 38.92-96 are
relevant.

Amortisation (Determination and Recognition of Amounts).
The depreciable amount of an intangible asset with a finite useful life shall be
allocated on a systematic basis over its useful life (IAS 38.97); it shall be
determined after deducting its residual value (IAS 38.101).
The amortisation charge for each period shall be recognised in profit or loss
unless IAS 38 or another Standard permits or requires it to be included in the
carrying amount of another asset (IAS 38.97).
 This is the case when the amortisation charge constitutes part of the cost
of the other asset and is included in its carrying amount (IAS 38.99).
 For example, the amortisation of intangible assets used in a production
process is included in the carrying amount of inventories according to
IAS 38.99 (see bullet 3.1.1.5).

Amortisation (Beginning and End of Amortisation).
 Amortisation of an intangible asset with a finite useful life shall
 begin when the asset is available for use, i.e., when it is in the location
and condition necessary for it to be capable of operating in the manner
intended by management.
 cease at the earlier of the date that the asset is classified as held for
sale (or included in a disposal group that is classified as held for sale) in
accordance with IFRS 5 (see bullet 3.3.4) and the date that the asset is
derecognised (IAS 38.97).
 IAS 38.117 states that amortisation does not cease when the intangible
asset is no longer in use, unless the asset has been fully amortised or is
classified as held for sale (or included in a disposal group that is classified as
held for sale) in accordance with IFRS 5).

Amortisation (Requirements for Amortisation Method).
 The amortisation method used shall reflect the pattern in which the asset's
future economic benefits are expected to be consumed by the entity
(IAS 38.97).
 If that pattern cannot be determined reliably, the straight-line method
shall be used (IAS 38.97).
 In principle, a variety of amortisation methods can be used, including the
following (IAS 38.98):
 straight-line method,
 diminishing balance method,
 units of production method.
 For examples regarding the amortisation methods see already bullet 3.1.1.1.

Amortisation (Requirements for Residual Value).
The residual value of an intangible asset is the estimated amount that an
entity would currently obtain from disposal of the asset, after deducting the
estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life (IAS 38.8).
The residual value of an intangible asset with a finite useful life shall generally
be assumed to be zero (IAS 38.100).
 For exceptional cases of a residual value unequal to be zero see IAS 38.100.
 If the residual value of an asset equals or increases the asset's carrying
amount, no amortisation charge will be recognised (IAS 38.103).
 Pursuant to IAS 38.102, the residual value is reviewed at least at each
financial year-end. A change in the asset's residual value is accounted for
as a change in an accounting estimate in accordance with IAS 8 (see bullet
3.4.5).

Amortisation (with Indefinite Useful Life).
An intangible asset with an indefinite useful life is not amortised (IAS 38.107).
 Instead, the item must be tested for impairment at least once a year in
accordance with IAS 36 (see bullet 3.1.1.3).
 The useful life of an intangible asset that is not amortised shall be reviewed
each period to determine whether events and circumstances continue to
support an indefinite useful life assessment for that asset (IAS 38.109,
110).
 If they do not, the change in the useful life assessment from indefinite to
finite shall be accounted for as a change in an accounting estimate in
accordance with IAS 8 (see bullet 3.4.5).
 Moreover, reassessing the useful life of an intangible asset as finite
rather than indefinite is an indicator according to IAS 36; the item has to
be tested for impairment.

Impairment (Frequency of Testing).
 The frequency of impairment testing thus depends on whether the intangible
asset is amortised or not (IAS 36.10, IAS 38.108):
Scheduled amortisation No scheduled amortisation
Indefinite useful life; intangible asset is

Finite useful life
not yet available for use
Impairment testing takes place Impairment testing is performed

whenever there is an indication that  annually and
the item may be impaired.
 whenever there is an indication
that the item may be impaired.

3.1.1.2 Intangible Assets – Derecognition: Criteria,
Determination/Recognition of Profit or Loss.
An intangible asset shall be derecognised (IAS 38.112):
 on disposal; or
 when no future economic benefits are expected from its use or disposal.
 The gain or loss arising from the derecognition of an intangible asset shall be
recognised in profit or loss when the asset is derecognised (IAS 38.113).
 The gain or loss arising from the derecognition of an intangible asset shall be
determined as the difference between the net disposal proceeds and the
carrying amount of the asset (IAS 38.113).

3.1.1.3 Impairment of Assets – Relevant Standard and
Scope.
 IAS 36 "Impairment of Assets” is primarily relevant for that topic.
 IAS 36 contains an Appendix A and an Appendix C, that are integral
part of the Standard.
 In addition, there are illustrative examples that are not an integral part of
the Standard; accordingly, these examples were not considered in the EU
endorsement process.
 The impairment requirements in IAS 36 basically apply to the following asset:
Primary scope of IAS 36
Property, plant and equipment (inclusive

Intangible assets (inclusive goodwill)
certain investment properties)

3.1.1.3 Impairment of Assets – Impairment (Test): Definition
1/3.
 A single asset or a cash-generating unit is impaired when its carrying
amount exceeds its recoverable amount (IAS 36.8, 90):
Impairment
Impairment test
Carrying
amount Recoverable
Comparison
amount
The carrying amount is the amount at which an asset is recognised after

deducting any accumulated depreciation (amortisation) and accumulated
impairment losses thereon (IAS 36.6).
An impairment test is the process of determining the recoverable amount
and the following comparison with the carrying amount.

2/3.
Depreciation (amortisation) is the systematic allocation of the depreciable
amount of an asset over its useful life (IAS 36.6).

for cost in the financial statements, less its residual value (IAS 36.6).
The recoverable amount of an asset or a cash-generating unit is the higher of

its fair value less costs to sell and its value in use (IAS 36.6, 18):
Fair value ./. costs to sell

Recoverable = Max
amount
Value in use

3/3.
The fair value less costs to sell is the amount obtainable from the sale of an
asset or cash-generating unit in an arm's length transaction between
knowledgeable, willing parties, less the costs of disposal (IAS 36.6).
Costs of disposal are incremental costs directly attributable to the

disposal of an asset or cash-generating unit, excluding finance costs and
income tax expense (IAS 36.6).
The value in use is the present value of the future cash flows expected to
be derived from an asset or cash-generating unit (IAS 36.6).

3.1.1.3 Impairment of Assets – Impairment (Test):
Reference Items (Differentiation).
 IAS 36 distinguishes between the following reference items or test levels for
impairment:
Reference items or test levels
Individual asset Cash-generating unit (CGU)
The term "individual asset" is not

defined.
A cash-generating unit is the smallest identifiable group of assets that

generates cash inflows that are largely independent of the cash inflows
from other assets or groups of assets (IAS 36.6).

Reference Items (Selection).
 If there is any indication that an asset may be impaired (see section below),
the following shall apply with regard to selecting the reference item
(IAS 36.66):
Is it possible to estimate the recover- Yes Determination for the
able amount of the individual asset? individual asset
No
Determination of the recoverable

amount based on the asset's cash-
generating unit

Reference Items (Identification of the CGU).
If recoverable amount cannot be determined for an individual asset, an
entity identifies the lowest aggregation of assets that generate largely
independent cash inflows (IAS 36.68).
 Cash inflows are inflows of cash and cash equivalents received from
parties external to the entity (IAS 36.69).

Reference Items (Carrying amount of the CGU).
The carrying amount of a cash-generating unit shall be determined on a basis
consistent with the way the recoverable amount of the cash-generating
unit is determined (IAS 36.75).
 Pursuant to IAS 36.76, the carrying amount of a cash-generating unit

includes:
 the carrying amount of only those assets that can be attributed
directly, or allocated on a reasonable and consistent basis, to the
cash-generating unit and will generate the future cash inflows used in
determining the cash-generating unit's value in use; and
 not the carrying amount of any recognised liability, unless the
recoverable amount of the cash-generating unit cannot be determined
without consideration of this liability.
 Allocation problems basically arise with acquired goodwill and with
corporate assets.

3.1.1.3 Impairment of Assets – Impairment Test: Frequency
of Execution (Survey).
Test trigger or occasion (IAS 36.9, 10)
Indications at the end of

Ongoing routine test once a year
the period
Test is obligatory Test is – whether there are indications or not –

 for all types of assets; obligatory to conduct for
 for cash-generating
units intangible assets goodwill
 with indefinite useful acquired in a business

life or combination
 those that are not yet
available for use

3.1.1.3 Impairment of Assets – Impairment Test: Indications
1/7.
An entity shall assess at each reporting date whether there is any indication
that an asset may be impaired (IAS 36.9).
 An asset is impaired when its carrying amount exceeds its recoverable

amount.
 If any of those indications is present, an entity is required to make a
formal estimate of recoverable amount (IAS 36.8).
 If no indication of an impairment loss is present, IAS 36 does not require
an entity to make a formal estimate of recoverable amount, unless an
ongoing test has to be conducted (IAS 36.8).
 IAS 36.12-14 describe some indications that an impairment loss may have
occurred (IAS 36.8).
 With respect to the indications there is a differentiation between external and
internal sources of information.

2/7.
 An entity shall consider, as a minimum, the following indications, which are
based on external sources of information (IAS 36.12):
 During the period, an asset's market value has declined significantly
more than would be expected as a result of the passage of time or normal
use.
 Significant changes with an adverse effect on the entity have taken
place during the period, or will take place in the near future, in the
technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
…

3/7.
 Market interest rates or other market rates of return on investments
have increased during the period, and those increases are likely to affect
the discount rate used in calculating an asset's value in use and decrease
the asset's recoverable amount materially.
 The carrying amount of the net asset of the entity is more than its
market capitalisation.
 As a minimum, the following indications based on internal sources of
information shall also be taken into consideration (IAS 36.12):
 There is evidence of obsolescence or physical damage of an asset.
…

4/7.
 Significant changes with an adverse effect on the entity have taken
place during the period, or are expected to take place in the near future, in
the extent to which or manner in which an asset is used or is
expected to be used. These changes include the asset becoming idle,
plans to discontinue or restructure the operation to which an asset
belongs, plans to dispose of an asset before the previously expected
date, and reassessing the useful life of an asset as finite rather than
indefinite.
 Evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.
…

5/7.
 for an investment in a subsidiary, jointly controlled entity or
associate, the investor recognises a dividend from the investment and
evidence is available that:
 the carrying amount of the investment in the separate financial
statements exceeds the carrying amounts in the consolidated
financial statements of the investee’s net assets, including
associated goodwill; or
 the dividend exceeds the total comprehensive income of the
subsidiary, jointly controlled entity or associate in the period the
dividend is declared.

6/7.
 IAS 36.13 explicitly states that the list of indications under IAS 36.12 is not
exhaustive.
 The following factors shall also be considered as evidence from internal
reporting of impairment (IAS 36.14):
 cash flows for acquiring the asset, or subsequent cash needs for
operating or maintaining it, that are significantly higher than those
originally budgeted;
 actual net cash flows or operating profit or loss flowing from the asset
that are significantly worse than those budgeted;
 a significant decline in budgeted net cash flows or operating profit,
or a significant increase in budgeted loss, flowing from the asset; or
…

7/7.
 operating losses or net cash outflows for the asset, when the current
period amounts are aggregated with budgeted amounts for the
future.

3.1.1.3 Impairment of Assets – Impairment Test: Ongoing
Routine Test (Intangible Assets).
An intangible asset with an indefinite useful life or an intangible asset not yet
available for use shall be tested for impairment annually by comparing its
carrying amount with its recoverable amount (IAS 36.10 (a)).
 This is also relevant for assets that are tested for impairment via a cash-
generating unit (IAS 36.89).
 This impairment test may be performed at any time during an annual
period, provided it is performed at the same time every year (IAS 36.10
(a)).
 Different intangible assets may be tested for impairment at different
times (IAS 36.10 (a)).
 However, if such an intangible asset was initially recognised during the
current annual period, that intangible asset shall be tested for impairment
before the end of the current annual period (IAS 36.10 (a)).

3.1.1.3 Impairment of Assets – Impairment Test: Ongoing
Routine Test (Goodwill).
Also an annual impairment test is necessary for goodwill acquired in a
business combination in accordance with IAS 36.80-99 (IAS 36.10 (b)).
 See bullet 5.2.

 In addition, goodwill has to be tested eventually when there is an
indication.

3.1.1.3 Impairment of Assets – Determining the Fair Value.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an oderly transaction between market participants at
the measurement date under current market conditions, regardless of
whether the price is directly observable or estimated using another
valuation technique (IFRS 13.9, IFRS 13.24, slide 93).
 IFRS 13.16 states that fair value measurement assumes that the transaction
to sell the asset or to transfer the liability takes place either:
a) In the principal market for the asset or liabilty; or
b) In the absence of a principal market, in the most advantageous market
for the asset or liability.
An entity shall measure the fair value of an asset or a liability using the
assumptions that market participants would use when pricing the asset or
liability, assuming that market participants act in their economic best interest
(IFRS 13.22).

3.1.1.3 Impairment of Assets – Measuring the Recoverable
Amount: Fair Value ./. Costs to Sell versus Value in Use.
 It is not always necessary to determine both an asset's fair value less
costs to sell and its value in use:
If either of these amounts exceeds the asset's carrying amount, the asset
is not impaired and it is not necessary to estimate the other amount
(IAS 36.19).
 IAS 36.20 states that it may be possible to determine fair value less costs
to sell, even if an asset is not traded in an active market.
If there is no reason to believe that an asset's value in use materially

exceeds its fair value less costs to sell, the asset's fair value less costs to
sell may be used as its recoverable amount (IAS 36.21).
 This will often be the case for an asset that is held for disposal
(IAS 36.21).

Amount: Individual versus Group Determination.
The recoverable amount is normally determined for an individual asset
(IAS 36.22).
 Excepted from this are assets that do not generate cash inflows that are
largely independent of those from other assets or groups of assets
(IAS 36.22).
 If this is the case, the recoverable amount shall normally be determined for
the cash-generating unit to which the asset belongs (IAS 36.22).

Amount: Fair Value ./. Costs to Sell 1/2.
 A kind of measurement hierarchy is specified for determining fair value less
costs to sell (see IFRS 13.76-90):
Is there a fixed price in a binding sell Yes Price in a binding sell agreement
agreement in an arms length ./. Additional directly attributable costs
transaction? = Fair value ./. costs to sell
No
Is the asset traded in an active Yes Market price

market? ./. Costs to sell
= Fair value ./. costs to sell
No
The fair value is based on the best

information available to reflect the
amount that an entity could obtain after
considering the outcome of recent
transactions for similar assets.

Amount: Fair Value ./. Costs to Sell 2/2.
An active market is a market in which transactions for the asset or liability
take place with sufficient frequency and volume to provide pricing
information on an ongoing basis (IFRS 13 Appendix A).
 Examples of costs to sell pursuant to IAS 36.28 are legal costs, stamp
duty and similar transaction taxes, costs of removing the asset and
direct incremental costs to bring an asset into condition for its sale.

Amount: Value in Use (Elements).
 The following elements shall be reflected in the calculation of an asset's
value in use (IAS 36.30, A1):
 an estimate of the future cash flows the entity expects to derive from
the asset;
 expectations about possible variations in the amount or timing of
those future cash flows;*
 the time value of money, represented by the current market risk-free
rate of interest;
 the price for bearing the uncertainty in the asset; and
 other factors, such as illiquidity, that market participants would reflect in
pricing the future cash flows the entity expects to derive from the asset.*
* The elements identified can be reflected either as adjustments to the future cash flows or as
adjustments to the discount rate (IAS 36.32).

Amount: Value in Use (Estimation Steps).
 Estimating the value in use of an asset involves the following steps
(IAS 36.31):
 estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
 applying the appropriate discount rate to those future cash flows.
Steps for value in use estimation
1. Estimation of future cash flows 2. Discounting with appropriate rate

Amount: Value in Use (Further Requirements).
 In terms of estimating cash flows and discounting these, requirements
shall apply in relation to the following aspects:
Requirement for cash flow estimation
Composition of Foreign currency

Basis for estimates Discount rate
cash flows cash flows
(IAS 36.33-38) (IAS 36.55-57)
(IAS 36.39-53) (IAS 36.54)
Not discussed in any greater detail here

3.1.1.3 Impairment of Assets – Recognition of an
Impairment Loss: Rules to be Applied.
or a cash-generating unit exceeds its recoverable amount (IAS 36.6).
 The rules to be applied for the recognition of impairment losses shall depend
on whether an individual asset or a cash-generating unit/goodwill is
impaired:
Recognition of an impairment loss
For a cash-generating unit or their

For an individual asset:
goodwill:
IAS 36.59-64
IAS 36.66-108; Appendix C

Impairment Loss: for an Individual Asset.
If the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset shall be reduced to its recoverable amount.
That reduction is an impairment loss (IAS 36.59).
The impairment loss shall be recognised immediately in profit or loss
normally (IAS 36.60).
 Excepted from recognition in profit or loss are assets carried at a revalued

amount in accordance with another standard (for example, in accordance
with the revaluation model in IAS 16; see already bullet 3.1.1.1) (IAS 36.60,
61).
 When the amount estimated for an impairment loss is greater than the
carrying amount of the asset to which it relates, an entity shall recognise a
liability if, and only if, that is required by another standard (IAS 36.62).

Impairment Loss: for CGU/Goodwill 1/2.
An impairment loss shall be recognised if the recoverable amount of a cash-
generating unit (or group of cash-generating units) is less than its carrying
amount (IAS 36.90, 104).
Pursuant to IAS 36,104, the impairment loss shall be allocated to reduce the
carrying amount of the assets of the unit (group of units) in the following
order:
 first, to reduce the carrying amount of any goodwill allocated to the cash-
generating unit (group of units); and
 then, to the other assets of the unit (group of units) on the basis of the
carrying amount of each asset in the unit (group of units).
 These reductions in carrying amounts shall be treated as impairment losses

on individual assets and recognised in accordance with IAS 36.60 (i.e.
normally in profit or loss) (IAS 36.104).

Impairment Loss: for CGU/Goodwill 2/2.
 In allocating an impairment loss in accordance with IAS 36.104, an entity
shall not reduce the carrying amount of an asset below the highest of
the following (IAS 36.105):
 its fair value less costs to sell (if determinable);
 its value in use (if determinable); and
 zero.
 The amount of the impairment loss that would otherwise have been allocated
to the asset shall be allocated pro rata to the other asset of the unit (group
of units) (IAS 36.105).

3.1.1.3 Impairment of Assets – Reversal of Impairment:
Frequency of Testing and Triggers.
An entity shall assess at the end of each reporting period whether there is an
indication that an impairment loss recognised in prior period for an asset
other than goodwill may no longer exist or may have decreased. If any such
indication exists, the entity shall estimate the recoverable amount of that asset
(IAS 36.110).
 If any such indication exists, the entity shall estimate the recoverable
amount of that asset (IAS 36.110).
 The indications specified in IAS 36.111 for possible reductions of an
impairment loss to a large extend reflect the indications for a possible
impairment loss according to IAS 36.12 (IAS 36.112).

Recognition (General Requirements).
An impairment loss recognised in prior periods for an asset other than
goodwill shall be reversed if, and only if, there has been a change in the
estimates used to determine the asset's recoverable amount since the last
impairment loss was recognised (IAS 36.114).
 If this is the case, the carrying amount of the asset shall be normally
increased to its recoverable amount (IAS 36.114).
 Examples of changes in estimates include (IAS 36.115):
 a change in the basis for recoverable amount (i.e. whether recoverable
amount is based on fair value less costs to sell or value in use);
 a change in the amount or timing of estimated future cash flows or in
the discount rate; or
 a change in estimate of the components of fair value less costs to
sell.

Recognition (Further Requirements: Rules to be Applied).
 The detailed rules to be applied for the recognition of a reversal of
impairment losses shall again depend on whether an individual asset or a
cash-generating unit/goodwill is impaired:
Recognition of a reversal of impairment
For a cash-generating unit or their

For an individual asset:
goodwill:
IAS 36.117-121
IAS 36.122-125

3.1.1.3 Impairment of Assets – Reversal of Impairment: Re-
cognition (Further Requirements: for an Individual Assets).
Because of a reversal of impairment increased carrying amount of the asset
(other than goodwill) shall not exceed the carrying amount that would have
been determined if no impairment loss had been recognised for the asset
in prior years (IAS 36.117).
The reversal of an impairment loss of an asset (other than goodwill) shall be

normally recognised immediately in profit or loss (IAS 36.119).
 Excepted from recognition in profit or loss are assets carried at revalued

amount in accordance with another standard (for example, the revaluation
model in IAS 16) (IAS 36.119).
 Any reversal of an impairment loss of a revalued asset shall be treated as
a revaluation increase in accordance with that other standard
(IAS 36.119).

Recognition (Further Requirements: for CGU/Goodwill).
A reversal of an impairment loss for a cash-generating unit shall be allocated
to the assets of the unit, except for goodwill, pro rata with the carrying
amounts of those assets (IAS 36.122, 123).
 These increases in carrying amounts shall be treated as reversals of
impairment losses and recognised according to IAS 36.119 (i.e. normally in
profit or loss) (IAS 36.122).
 In allocating a reversal of an impairment loss for a cash-generating unit in
accordance with IAS 36.122, the carrying amount of an asset shall not be
increased above the lower of the following (IAS 36.123):
 its recoverable amount (if determinable); and
 the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been recognised
for the asset in prior periods.
An impairment loss recognised for goodwill shall not be reversed in a
subsequent period (IAS 36.124).

3.1.1.4 Capitalisation of Borrowing Costs – Relevant
Standard; Basic Principle of IAS 23.
 The capitalisation of borrowing costs is regulated in IAS 23 "Borrowing
Costs".
Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset are included in the cost of that asset.
Other borrowing costs shall be recognised as an expense (IAS 23.1, 8).
Borrowing costs
Capitalisation Recognition as expense
= Component of the
costs of that asset

3.1.1.4 Capitalisation of Borrowing Costs – Borrowing
Costs: Definition, Composition.
Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds (IAS 23.5).
 Borrowing costs may include (IAS 23.6):

 interest cost calculated using the effective interest method as
described in IAS 39 (see bullet 3.1.2.1);
 finance charges in respect of finance leases (see bullet 3.3.1)
recognised in accordance with IAS 17; and
 exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

3.1.1.4 Capitalisation of Borrowing Costs – Qualifying
Asset: Definition, Possible Items.
A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale (IAS 23.5).
 The following may be qualifying assets (IAS 23.7):

 inventories,
 manufacturing plants,
 power generation facilities,
 intangible assets,
 investment properties.
 Examples of assets that are not qualifying assets are financial assets;
inventories that are manufactured, or otherwise produced, over a short period
of time; assets that are ready for their intended use or sale when acquired
(IAS 23.7).

Costs: Capitalisation Criteria and Commencement.
Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are included in the cost of that asset
(IAS 23.9).
 Capitalisable borrowing costs are those borrowing costs that would have
been avoided if the expenditure on the qualifying asset had not been
made (IAS 23.10).
An entity shall begin capitalising borrowing costs as part of the cost of a

qualifying asset on the commencement date; this is the date when the entity
first meets all of the following conditions (IAS 23.17):
 it incurs expenditures for the asset;
 it incurs borrowing costs; and
 it undertakes activities that are necessary to prepare the asset for its
intended use or sale.

Costs: Determination (Differentiation).
 When determining borrowing costs a distinction is made between two types
of borrowing:
Types of borrowing
Funds borrowed specifically for the Funds borrowed generally and

purpose of obtaining a particular subsequently used for the purpose of
qualifying asset obtaining a qualifying asset

Costs: Determination (Funds Borrowed Specifically).
 When an entity borrows funds specifically for the purpose of obtaining a
particular qualifying asset, the borrowing costs that directly relate to that
qualifying asset can be readily identified (IAS 23.10).
 To the extent that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine, pursuant to IAS 23.12,
the amount of borrowing costs eligible for capitalisation as
 the actual borrowing costs incurred on that borrowing during the
period
 less any investment income on the temporary investment of those
borrowings.
 In determining the amount of borrowing costs eligible for capitalisation during
a period, any investment income earned is deducted from the borrowing
costs incurred (IAS 23.13).

Costs: Determination (General Borrowing).
 To the extent that an entity borrows funds generally, the following applies
(IAS 23.14):
 The entity shall determine the amount of borrowing costs eligible for
capitalisation by applying a capitalisation rate to the expenditures on
that asset (for which according to IAS 23.18 the average carrying amount
is a reasonable approximation).
 The capitalisation rate shall be the weighted average of the borrowing
costs applicable to the borrowings of the entity that are outstanding
during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.
 The amount of borrowing costs that an entity capitalises during a period
shall not exceed the amount of borrowing costs it incurred during that
period.

Costs: Cessation of Capitalisation.
An entity shall cease capitalising borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale
are complete (IAS 23.22).
 An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete, even though routine administrative
work might still continue (IAS 23.23).
 If minor modifications, such as the decoration of a property to the
purchaser's or user's specifications, are all that are outstanding, this
indicates that substantially all the activities are complete (IAS 23.23).

3.1.1.5 Inventories – Relevant Standards.
 IAS 2 "Inventories" is the main standard of relevance for the accounting

treatment and disclosure of inventories.
 The cases when borrowing costs must be capitalised with inventories are
regulated in IAS 23 “Borrowing Costs” (see already bullet 3.1.1.4).

3.1.1.5 Inventories – Definition, Examples.
Inventories are assets:

 held for sale in the ordinary course of business;
 in the process of production for such sale; or
 in the form of materials or supplies to be consumed in the production or in
the rendering of services (IAS 2.6).
 Inventories encompass for example (IAS 2.8):

 merchandise purchased by a retailer and held for resale, or land and
other property held for resale.
 finished goods produced, or work in progress being produced, by the
entity and include materials and supplies awaiting use in the production
process.

3.1.1.5 Inventories – Recognition and Measurement:
Recognition Criteria.
 IAS 2 contains no recognition rules for inventories. Therefore, the general
rules in the Framework (see already bullet 2.5) for the recognition of assets
are relevant.
The recognition criteria are as follows (F.4.4, 38, 44):

 The inventories are controlled by the entity.
 It is likely that a future economic benefit associated with the inventories will
flow into the entity.
 The cost or the value of the inventories can be reliably measured.

3.1.1.5 Inventories – Recognition and Measurement: Value
Measure, Basic Rule 1/2.
Inventories shall be measured at the lower of cost and net realisable value
(IAS 2.9).
Lower value
Cost (IAS 2.10-27) Net realisable value (IAS 2.28-33)

3.1.1.5 Inventories – Recognition and Measurement: Value
Measure, Basic Rule 2/2.
 The procedure is the same as for a lower of cost or market test or
impairment test, i.e. out of two possible values you have to choose the lower
one:
Cost Market
(Measurement ceiling)
Estimated costs
of completion/
for sale
Estimated
selling price
Cost Net realisable
Comparison
value

3.1.1.5 Inventories – Recognition and Measurement: Costs
(Overview of Components).
 The cost of inventories comprises all costs of purchase and costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition (IAS 2.10).
Cost components
Costs of purchase Costs of conversion Other costs

(Costs of Purchase Components).
 The costs of purchase of inventories comprise (IAS 2.11):
 the purchase price,
 import duties and other taxes (other than those subsequently
recoverable by the entity from the taxing authorities),
 transport and handling costs, and
 other costs directly attributable to the acquisition of finished goods,
materials and services.
 Trade discounts, rebates and other similar items shall be deducted in
determining the costs of purchase (IAS 2.11).

(Costs of Conversion Components 1/2).
 The costs of conversion of inventories include (IAS 2.12):
 costs directly related to the units of production (e.g. direct labour);
 systematically allocated fixed and variable production overheads
that are incurred in converting materials into finished goods.
 Fixed production overheads are those indirect costs of production that
remain relatively constant regardless of the volume of production, such
as depreciation and maintenance of factory buildings and equipment, and the
cost of factory management and administration (IAS 2.12).
 Variable production overheads are those indirect costs of production that
vary directly, or nearly directly, with the volume of production, such as
indirect materials and indirect labour (IAS 2.12).

(Costs of Conversion Components 2/2).
 The allocation of production overheads shall be based on the nature of
the costs as follows (IAS 2.13):
Allocation of production overheads
Fixed production overheads Variable production overheads
Allocation based on the normal Allocation based on the actual use

capacity of the production facilities of the production facilities
 Pursuant to IAS 2.13, normal capacity is the production expected to be

achieved on average over a number of periods or seasons under normal
circumstances, taking into account the loss of capacity resulting from
planned maintenance.

(Other Costs Components 1/2).
 Other costs are included in the cost of inventories only to the extent that
they are incurred in bringing the inventories to their present location and
condition (IAS 2.15).
 For example, it may be appropriate to include non-production overheads or
the costs of designing products for specific customers in the cost of
inventories (IAS 2.15).
 Examples of costs excluded from the cost of inventories and recognised
instead as expenses are (IAS 2.16):
 abnormal amounts of wasted materials, labour or other production
costs;
 storage costs, unless those costs are necessary in the production
process before a further production stage;
…

(Other Costs Components 2/2).
 administrative overheads that do not contribute to bringing inventories
to their present location and condition; and
 selling costs.
 IAS 2.17 makes additional reference to IAS 23, which identifies limited
circumstances where borrowing costs are included in the cost of inventories
(see already bullet 3.1.1.4).
 However, this poses the question whether inventories meet the definition
of a qualifying asset.
 The criterion of the substantial period of time to get ready for its intended
use or sale will be predominantly fulfilled only with goods that have a long
maturation (e.g. wine).

(Costs of Conversion Scope 1/2).
 IAS 2 contains no calculation scheme for the determination of cost.
 The following table shows which components must be considered in the costs
of conversion of inventories (source: Pellens et al. 2011, p. 401):
Type of cost Consideration

Direct costs
Direct material costs
Duty
Direct production costs
Special direct production costs
Variable production overheads
Indirect material costs Duty
Indirect production costs
…

(Costs of Conversion Scope 2/2).
Type of cost Consideration
Fixed production overheads
depreciation of property, plant and equipment Duty
General administrative costs
Expenses for social facilities
Duty, as far as production based
Expenses for voluntary social benefits
Expenses for company pension scheme
Other costs
Taxes Duty, as far as production based
Borrowing costs Duty, as far as qualifying asset
Duty, as far as the criteria in
Development costs
IAS 38 are fulfilled
Distribution costs / research costs Prohibition

© Jürgen Stauber
(Allocation of Costs 1/2).
 The cost of inventories shall be identified, pursuant to IAS 2.23-25, either by
specific identification of their individual costs or by way of a cost formula
(IAS 2.23-25):
Determination of costs
Via cost formulas (FIFO method or

Via specific identification
weighted average cost formula)
Mandatory for the following Mandatory for the following

inventories: inventories:
 small number of inventories which  large number of inventories that
are not ordinarily are ordinarily interchangeable;
interchangeable;  inventories that are not produced
 inventories that are produced and and segregated for specific
segregated for specific projects. projects.

(Allocation of Costs 2/2).
 An entity shall use the same cost formula for all inventories having a similar
nature and use to the entity (IAS 2.25).
 For inventories with a different nature or use, different cost formulas may
be justified (IAS 2.25).
 For example, inventories used in one operating segment may have a use
to the entity different from the same type of inventories used in another
operating segment.
 However, a difference in geographical location of inventories (or in the
respective tax rules), by itself, is not sufficient to justify the use of different
cost formulas.

(FIFO Method 1/3).
 Within the cost formulas, the first-in, first-out (FIFO) method is allowed.
 The FIFO method is an order-of-consumption method.
 It assumes that the items of inventory that were purchased or produced
first are sold first, and consequently the items remaining in inventory at the
end of the period are those most recently purchased or produced (IAS 2.27).
 The following example shows the FIFO formula.

(FIFO Method 2/3).
 Original data:
Date Units Amount per unit Total amount
Opening balance 01.01.2008 4,200 € 15.10 € 63,420.00
Addition 17.02.2008 800 € 15.40 € 12,320.00
Addition 14.05.2008 1,200 € 14.95 € 17,940.00
Addition 19.09.2008 700 € 15.80 € 11,060.00
Disposal 13.02.2008 -1,800
Disposal 04.04.2008 -1,750
Disposal 18.07.2008 -400
Disposal 24.11.2008 -1,350
Closing balance 31.12.2008 1,600

(FIFO Method 3/3).
 Determination of the disposal (expense) and the closing balance:
Opening balance 01.01.2008 4,200 € 15.10 € 63,420.00
1. addition 17.02.2008 800 € 15.40 € 12,320.00
2. addition 14.05.2008 1,200 € 14.95 € 17,940.00
3. addition 19.09.2008 700 € 15.80 € 11,060.00
Total 6,900 € 104,740.00
1. disposal 13.02.2008 -1,800 € 15.10 € -27,180.00
2. disposal 04.04.2008 -1,750 € 15.10 € -26,425.00
3. disposal 18.07.2008 -400 € 15.10 € -6,040.00
4. disposal 24.11.2008 -1,350
subset 1 -250 € 15.10 € -3,775.00
subset 2 -800 € 15.40 € -12,320.00
subset 3 -300 € 14.95 € -4,485.00
Total disposals (= expense) -5,300 € -80,225.00
Closing balance 31.12.2008 1,600 € 15.32 € 24,515.00
Amount per unit of the closing balance
(€ 24,515 / 1,600 units)

(Weighted-average Cost Formula 1/3).
 Under the weighted average cost formula, the cost of each item is determined
from the weighted average of the cost of similar items at the beginning of
a period and the cost of similar items purchased or produced during the
period (IAS 2.27).
 The weighted average may be calculated on a periodic basis, or on a
sliding basis as each additional shipment is received, depending upon the
circumstances of the entity (IAS 2.27).
 The following example illustrates the weighted-average cost formula (original
data see FIFO method).

 Determination of the disposal (expense) and the closing balance on periodic
basis:
Opening balance 01.01.2008 4,200 € 15.10 € 63,420.00
1. addition 17.02.2008 800 € 15.40 € 12,320.00
2. addition 14.05.2008 1,200 € 14.95 € 17,940.00
3. addition 19.09.2008 700 € 15.80 € 11,060.00
Total 6,900 € 15.18 € 104,740.00
1. disposal 13.02.2008 -1,800
2. disposal 04.04.2008 -1,750
3. disposal 18.07.2008 -400
4. disposal 24.11.2008 -1,350
Total disposals (= expense) -5,300 € 15.18 € -80,452.46
Closing balance 31.12.2008 1,600 € 15.18 € 24,287.54

 Determination of the disposal (expense) and the closing balance on sliding
basis:
Opening balance 01.01.2008 4,200 € 15.10 € 63,420.00
1. disposal 13.02.2008 -1,800 € 15.10 € -27,180.00
Balance 2,400 € 36,240.00
1. addition 17.02.2008 800 € 15.40 € 12,320.00
Balance 3,200 € 15.18 € 48,560.00
2. disposal 04.04.2008 -1,750 € 15.18 € -26,556.25
Balance 1,450 € 22,003.75 Amounts per unit
2. addition 14.05.2008 1,200 € 14.95 € 17,940.00
(amount / units)
Balance 2,650 € 15.07 € 39,943.75
3. disposal 18.07.2008 -400 € 15.07 € -6,029.25
Balance 2,250 € 33,914.50
3. addition 19.09.2008 700 € 15.80 € 11,060.00
Balance 2,950 € 15.25 € 44,974.50
4. disposal 24.11.2008 -1,350 € 15.25 € -20,581.55
Closing balance 31.12.2008 1,600 € 15.25 € 24,392.95
Total disposals (= expense) -5,300 € -80,347.05

3.1.1.5 Inventories – Recognition and Measurement: Net
Realisable Value (Definition).
The net realisable value is
 the estimated selling price attainable in the ordinary course of business
 less the estimated costs of completion and the estimated costs
necessary to make the sale (IAS 2.6).
 Net realisable value refers to the net amount that an entity expects to realise
from the sale of the inventory in the ordinary course of business; it is an
entity-specific value and may differ from the fair value less costs to sell
(IAS 2.7).
The fair value is the price that would have be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (IAS 2.6, IFRS 13.9).

Realisable Value (Reasons for Lower Value).
 Pursuant to IAS 2.28, the cost of inventories may not be recoverable in
certain circumstances, for example:
 if the inventories are damaged, if they have become wholly or partially
obsolete, or if their selling prices have declined;
 if the estimated costs of completion or the estimated costs to be
incurred to make the sale have increased.
 The practice of writing inventories down below cost to net realisable value is
consistent with the view that assets should not be carried in excess of
amounts expected to be realised from their sale or use (IAS 2.28).

Realisable Value (Specific versus Group Write-downs).
 Inventories are usually written down to net realisable value item by item
(IAS 2.29):
Determination of allowances
Normal case: specific allowances Exceptional case: group allowances
 Pursuant to IAS 2.29, grouping is allowed

 for inventories relating to the same product line that have similar
purposes or end uses; or
 for inventories that are produced and marketed in the same
geographical area, and cannot be practicably evaluated separately
from other items in that product line.

3.1.1.5 Inventories – Recogn. and Measurem.: Net Realisable
Value (Frequency of Measurement; Reversal of Impairment).
 A new assessment shall be made of net realisable value in each
subsequent period (IAS 2.33).
 The write-down shall be reversed in the following cases (IAS 2.33):
 When the circumstance that previously caused inventories to be written
down below cost no longer exist.
 When there is clear evidence of an increase in net realisable value
(e.g. the selling price has increased) because of changed economic
circumstances.
 The reversal shall be limited to the amount of the original write-down; the
new carrying amount shall be the lower of the cost and the revised net
realisable value (IAS 2.33).

3.1.1.5 Inventories – Recognition and Measurement:
Recognition of Expenses and Income.
When inventories are sold, the carrying amount of those inventories shall be
recognised as an expense in the period in which the related revenue is
recognised (IAS 2.34).
 IAS 2.34 contains the following provisions for recognising write-downs:

 The amount of any write-down of inventories to net realisable value and
all losses of inventories shall be recognised as an expense in the period
the write-down or loss occurs.
 The amount of any reversal of any write-down of inventories, arising
from an increase in net realisable value, shall be recognised as a
reduction in the amount of inventories recognised as an expense in
the period in which the reversal occurs.
 If inventories are allocated to other asset accounts (e.g. inventory used as
a component of self-constructed property, plant or equipment), they are
recognised as an expense during the useful life of that asset (IAS 2.35).

3.1.1.6/3.1.2.1 Financial Instruments – Relevant Standards.
Financial assets/liabilities are financial instruments.

 Definitions, rules for the differentiation between equity and debt as well as
offsetting rules for financial instruments contains IAS 32 “Financial
Instruments: Presentation“.
 For the accounting of those items is mainly IFRS 9“Financial Instruments:
Recognition and Measurement“ relevant; the disclosure requirements are in
IFRS 7 “Financial Instruments: Disclosures“.
 IFRS 9 will replace IAS 39 in the beginning of 2018.
 IFRS 9 Financial Instruments issued, replacing IAS 39 requirements for
classification and measurement, impairment, hedge accounting and
derecognition.
 Effective for annual periods beginning on or after 1 January 2018.

3.1.1.6/3.1.2.1 Financial Instruments – Definition, Forms.
A financial instrument is any contract that gives rise to a financial asset of

one entity and a financial liability or equity instrument of another entity
(IAS 32.11).
Financial instruments
Financial assets Financial liabilities Equity instruments
 Finally, financial instruments lead to an exchange of cash.

 The progress of this cash exchange is more advanced compared to other
assets (e.g. inventories) or to debt.
 Recognition criterion for a financial instrument is that the arrangement
contains financial issues.

3.1.1.6/3.1.2.1 Financial Instruments – Examples.
Financial assets Financial liabilities Equity instruments
 Cash and cash  Trade liabilities  Non-puttable common

equivalents  Received loans shares
 Bank deposits  Liabilities to banks and  Certain preference
 Trade receivables customers shares
 Shares in other  Financial derivatives with  Certain (written) options
companies negative market value
 Issued (given) loans  Bond debt
 Financial derivatives with
positive market value
 Finance lease receivables  Issued financial guarantee ”Typically“ via IFRS 9
contracts accounted items
 Finance lease liabilities

3.1.1.6/3.1.2.1 Financial Instruments – Scope of IAS 39,
IAS 32 and IFRS 7.
Especially hedge
accounting (see
bullet 3.4.2)

3.1.1.6/3.1.2.1 Financial Instruments – Accounting Steps for
“Typically” Accounted Items.
Financial  Financial instrument yes or no?
1 instrument/scope  Accounting according to IFRS 9?
2 Classification Armortized Cost FVOCI FVTPL
 Recognition yes or no?

3 Initial recognition
 If so, recognition when?
 Value measure?
4 Initial measurement
 Consideration of transaction costs?
Subsequent Armortized Cost FVOCI FVTPL
5 measurement
 Value  Recognition of value changes,

measures? impairments, exchange rate differences?
 Derecognition yes or no?

6 Derecognition
 If so, derecognition when?

3.1.1.6/3.1.2.1 Financial Instruments – Categorisation:
Basics 1/2.
At initial recognition financial instruments normally have to be allocated to
categories which are mentioned in IFRS 9.
 Via these categories the subsequent measurement is determined:

 valuation measure: fair value versus amortised cost;
 recognition of valuation changes: in profit or loss versus in equity (OCI).
 There are three categories for financial assets:
 “financial assets at fair value through profit or loss“ FVTPL;
 “financial assets at amortised cost“ Amortized Cost;
 “financial assets at fair value through other comprehensive income”
FVOCI

Basics 2/2.
 There are two categories for financial liabilities:
 “financial liabilities at fair value through profit or loss“ FVTPL;
 “financial liabilities measured at amortised cost“ Amortized Cost.

3.1.1.6/3.1.2.1 Financial Instruments – Categorisation of
financial assets: Allocation Criteria
 IFRS 9 establishes fundamentally different criteria than IAS 39 for
determining when the Amortized Cost, FVOCI or FVTPL categories apply.
 The new standard is based on the concept that financial assets should be
classified and measured at fair value, with changes in fair value recognized
in profit and loss as they arise (FVTPL), unless restrictive criteria (business
model and streams of cash-flows) are met for classifying and measuring the
asset at either Amortized Cost or Fair Value through other comprehensive
income (FVOCI).

financial assets: Allocation criteria
 The term “business model” refers to the way an entity manages its financial
assets in order to generate cash flows. The entity’s business model
determines whether cash flows will result from collecting contractual cash
flows, selling the financial assets or both. IFRS 9 provides detailed
guidance on how to assess the business model.
 A business model assessment is needed for financial assets that meet the
SPPI* criterion, to determine whether they meet the criteria for classification
as subsequently measured at amortised cost or FVOCI.
* Soley payment of principal and interest

3.1.1.6/3.1.2.1 Financial Instruments – Criteria for
classifying and measuring financial assets
© Adapted from PWC

financial assets: The SPPI criterion
 SPPI stands for solely payments of principal and interest.
 One of the criteria for determining whether a financial asset should be

classified as measured at amortised cost or FVOCI is whether the cash
flows from the financial asset meet the SPPI criterion.
 The SPPI criterion is met when the contractual terms of the financial assets
give rise, on specified dates, to cash flows that are solely payments of
principal and interest.
 If a financial asset does not meet the SPPI criterion it is always measured
at FVTPL, unless it is an equity instrument for which an entity applies the OCI
election.

financial assets: Assessing the business model
An entity’s business model is determines at a level that reflects how groups
of financial assets are managed. The entity’s business model does not
depend on management’s intentions for an individual instrument. It is not an
instrument-by-instrument approach to classification and should be
determined on a higher level of aggregation.
The assessment is not performed at the entity level, and an entity may have
more than one business model for managing financial instruments. (IFRS 9
B4.1.2)
An entity’s business model for managing financial assets is a matter of fact. It is

typically observable through the activities that the entity undertakes to
achieve the objective of the business model. An entity will need judgement
when assessing the business model and must consider all relevant evidence
that is available. (IFRS 9 B4.1.2B.)

financial assets: Assessing the business model
Such relevant evidence includes, but is not limited to:
a) How the performance of the business model and the financial assets held
within that business model are evaluated and reported to the entity’s key
management personnel.
b) The risks that affect the performance of the business model (and the
financial assets held within that business model) and the way in which those
risks are managed.
c) How managers of the business are compensated – e.g. whether the
compensation is based on the fair value of the assets managed or the
contractual cash flows collected. (IFRS 9 B4.1.2B)
In addition, an entity considers the frequency, volume and timing of sales in

prior periods, the reasons for such sales, and its expectations about future
sales activity. However, information about sales activity is not considered in
isolation, but as part of an holistic assessment of how the entity’s stated
objective for managing the financial assets is achieved and how cash flows are
realised. (IFRS 9 B4.1.2C)
financial assets: Held-to-collect business model
 Financial assets in a held-to-collect business model are managed to
realise cash flows by collecting payments of principal and interest over the
life of the instruments.
 An entity need not hold all these assets until maturity. Therefore, a
business model’s objective can be hold financial assets to collect contractual
cash flows even when some sales of financial assets have occurred or are
expected to occur.
 IFRS 9 gives the following examples of sales that may be consistent with
the held-to-collect business model
The sales are due to an increase in the credit risk of an financial asset.
The sales are infrequent or are insignificant individually and in aggregate.
The sales take place close to the maturity of the financial asset and the proceeds
from the sales approximate the collection of the remaining contractual cash flows.

financial assets: Held-to-collect business model
 An increase in the frequency or value of sales in a particular period is not
necessarily inconsistent with a held-to-collect business model if an entity can
explain the reasons for those sales and why those sales do not reflect a
change in the entity’s business model.
 Measured at Amortised Cost.
Example – Sales in a held-to-collect business model

Company C has a portfolio of financial assets that it has determindes to be part of a
held-to-collect business model. A change in the regulatory treatment of these assets
has caused C to undertake a significant rebalancing of ist portfolio in a particular
period. However, C does not change ist assessment of the business model, as the
selling activity is considered an isolated – i.e. one-time – event.
By contrast, suppose that C were required by ist regulator to routinely sell financial
assets from a portfolio to demonstrate that the assets were liquid, and that the value of
the assets sold was significant. In this case, C‘s business model for managing that
portfolio would not be held-to-collect.
financial assets: Both held-to-collect and for sale business
model
 An entity may hold financial assets in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial
assets.
 There is no threshold for the frequency or amount of sales that have to

occur in this business model, because both of these activities are integral to
achieving its objective.
 Collecting contractual cash flows, or selling financial assets, or both, may

not be the objective of the business model in itself. This business model
category is often to hold a portfolio of liquid assets in order to meet expected
or unexpected commitments, or to funds anticipated acquisitions. The
classification of those assets focuses not on the business model itself but
rather on the way that the assets are managed in order to meet the
objective of the business model.
financial assets: Both held-to-collect and for sale business
model
 Measured at FVOCI
Example – Holding investments in anticipation of capital expenditure

Company C anticipates capital expenditures in five years. To be able to fund the
expenditure, C invests excess cash in short-term and long-term financial assets. Many
of the financial assets have contractual lives that exceed C‘s anticipated investment
period.
C intends to hold the financial assets, but when an opportunity arises, it will sell them to
invest in assets with a higher return. The portfolios‘s managers are remunerated based
on the overall return from the portfolio of assets.
C‘s ojective for managing financial assets is therefore achieved by both collecting cash
flows and selling financial assets

financial assets: Other business models
 Financial assets in any other business model are measured at FVTPL
(except when an entity elects to present in OCI subsequent changes in the
fair value of an investment in an equity instrument).
 Examples include:
- Assets managed with the objective of realising cash flows through sale.
- A portfolio that is managed, and whose performance is evaluated, on a
fair value basis.
- A portfolio that meets the definition of “held for trading”.

Overview of business models
Business model Key features Measurement
category
Held-to-collect • The objective of the business model is to hold
assets to collect contractual cash flows
• Sales are incidental to the objective of the Armortised
model cost *
• Typically lowest sales (in frequency and
volume)
Both held to collect and • Both collecting contractual cash flows and
for sale sales are integral to achieving the objective of
the business model FVOCI*
• Typically more sales (in frequency and volume)
than held-to-collect business model
Other business models, • Business model is neither held-to-collect nor
including: both held to collect and for sale
• Trading • Collection of contractual cash flows is incidental
• Managing assets on a to the objective of the model FVTPL**
fair value basis
• Maximising cash flows
through sale
* Subject to meeting the SPPI criterion and the fair value option
** SPPI criterion is irrelevant – assets in all such business models are measured at FVTPL
financial liabilities
 The classification of financial liabilities retains almost all existing
requirements from IAS 39.
 This means that under IFRS 9, financial liabilities are classified as

subsequently measured at amortised cost except for the following
instruments (IFRS 9.4.2.1).
a) Financial liabilities that are held for trading – including derivatives
b) Financial liabilities that are designated as at FVTPL on initial recognition
(IFRS 9.4.2.1a).
+ there are four more exceptions, but only for really specific contracts under
certain conditions (IFRS 9.4.2.1b-e)

financial liabilities: Fair value option
 IFRS 9 provides the option to designate irrevocably on initial recognition a
financial liability at FVTPL. This “fair value option” is subject to the following
criteria:
 The designation has to eliminate or significantly reduce a measurement or
recognition inconsistency that would otherwise arise from measuring assets
or liabilities, or from recognising the gains and losses on them, using
different bases (IFRS 9.4.2.2a).
 A group of financial liabilities, or a group of financial assets and financial
liabilities, has to be managed, and its performance evaluated, on a fair value
basis in accordance with a documented risk management or investment
strategy (IFRS 9.4.2.2b).
 If a contract contains one or more embedded derivatives and the host is not
a financial assets in the scope of IFRS 9, then an entity may designate the
entire hybrid contract as FVTPL (IFRS 9.4.3.5).

3.1.1.6/3.1.2.1 Financial Instruments – Reclassification
Reclassification of financial assets is required if, and only if, the objective of
the business model for managing those financial assets changes.
Reclassification shall be reclassified in accordance with paragraphs 4.1.1-4.1.4
(IFRS 9.4.4.1).
 Such changes are expected to be very infrequent and can result from
external or internal changes.
 These changes have to be significant to the entity’s operations and
demonstrable to external parties.
 Possible examples are if the entity has acquired, disposed of or terminated a
business line.

3.1.1.6/3.1.2.1 Financial Instruments – Initial measurement
On initial recognition, financial assets and financial liabilities are measured

at fair value plus, for financial instruments not at FVTPL, eligible transaction
costs (IFRS 9.5.1.1).
 The fair value of financial instruments is determined in accordance with IFRS

13 Fair Value Measurement.
 The best evidence of fair value at initial recognition is normally the
transaction price – i.e. the fair value of the consideration given or received
for the financial instrument.
 If there is a difference between the entity’s estimate of fair value at initial
recognition and the transaction price (IFRS 9.5.1.1A), then:
- If the estimate of fair value uses only data from observable markets,
then the difference is recognised in profit or loss; or
- In all other cases, the difference is deferred as an adjustment to the
carrying amount of the financial instrument (IFRS 9.B5.1.1).

3.1.1.6/3.1.2.1 Financial Instruments – Value measures:
Amortised cost
Under IFRS 9 the calculation of amortised cost for a financial assets or a
financial liability is unchanged. But IFRS 9 introduces the concept of ‘gross
carrying amount’ for financial assets (IFRS 9 Appendix A).

3.1.1.6/3.1.2.1 Financial Instruments – Subsequent
measurement: Financial assets
After initial recognition, a financial asset is subsequently measured at
amortised cost. FVOCI or FVTPL (IFRS 9.5.2.1)
Measurement category Recognition of presentation of gains and losses
Amortised cost The following items are recognised in profit or loss:

- interest revenue usind the effective interest method;
- expected credit losses and reversals; and
- foreign exchange gains and losses.
When the financial asset is derecognised, the gain or loss is
recognised in profit or loss.
FVOCI Gains and losses are recognised in OCI, except for the following
items, which are recognised in profit or loss in the same manner as
for financial assets measured at amortised cost:
- interest revenue usind the effective interest method;
- expected credit losses and reversals; and
- foreign exchange gains and losses.
When the financial assets is derecognised, the cumulative gain or
loss previously recognised in OCI is reclassified from equity to profit
or loss.
FVTPL Gains and losses, both on subsequent measurement and
derecognition, are recognised in profit or loss.
3.1.1.6/3.1.2.1 Financial Instruments – Subsequent
measurement: Financial liabilities
After initial recognition, an entity shall measure a financial liability in
accordance with paragraphs IFRS 9.4.2.1 – 9..4.2.2. Accordingly financial
liabilities are generally subsequently measured at amortised cost or at
FVTPL.

3.1.1.6/3.1.2.1 Financial Instruments – Impairment
Expected credit losses

Expected credit losses are calculated by:
(a) identifying scenarios in which a loan or receivable defaults;

(b) estimating the cash shortfall that would be incurred in each scenario if a
default were to happen;
(c) multiplying that loss by the probability of the default happening; and
(d) summing the results of all such possible default events.
Because every loan and receivable has at least some probability of

defaulting in the future, every loan or receivable has an expected credit loss
associated with it—from the moment of its origination or acquisition.

Recognition and measurement of expected credit

losses
Expected losses are recognized and measured according to one of three
approaches—a general approach, a simplified approach and the so-called
“credit adjusted approach” (not part of lecture):

Basic principles
IFRS 9 provides that in measuring expected credit losses an entity must
reflect:
• An unbiased evaluation of a range of possible outcomes and their
probabilities of occurrence.
• Discounting for the time value of money.
• Reasonable and supportable information that is available without undue
cost or effort at the reporting date about past events, current conditions
and forecasts of future economic conditions.
IFRS 9 emphasizes that estimating expected credit losses may not

necessarily need to be a complex process and that an entity need not
identify every possible scenario. It also permits the use of models for
estimating expected losses that do not require explicit scenario and
probability analysis.

3.1.2.2 Provisions/Contingencies – Obligations: Survey and
Main Distinctions.
Present obligations Possible obligations
Debt (liabilities) = on-balance obligations Off-balance obligations
Provisions Other debt (liabilities) Contingent liabilities
Uncertainty related to Amount and timing of Obligation is either

 timing future expenditures are  not present but only
 amount definite possible or
of future expenditures  indeed present, but
outflow is not probable
or not quantifiable

3.1.2.2 Provisions/Contingencies – Obligations: Definitions
1/2.
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits (IAS 37.10).
A provision is a liability of uncertain timing or amount (IAS 37.10).
 Provisions can be distinguished from other liabilities (financial liabilities),

because there is uncertainty about the timing or amount of the future
expenditure required in settlement (IAS 37.11).

3.1.2.2 Provisions/Contingencies – Obligations: Definitions
2/2.
Pursuant to IAS 37.10, a contingent liability is:
 a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity,
or
 a present obligation that arises from past events but is not recognised
because
 it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, or
 the amount of the obligation cannot be measured with sufficient
reliability.
 Contingent liabilities are not accounted; there are only disclosure

requirements in the financial statements (see separate slides).

3.1.2.2 Provisions/Contingencies – Overview of Types of
Provisions 1/2.
Types of provisions
Not personnel related provisions Personnel provisions
 Product liability and compensation

(risks of litigation)
 Warranty and product guarantee Break down see following slide
 Accommodation obligation
 Tax obligation
 Contamination and environment risks
 Onerous contracts
(provision for contingent losses)
 Restructuring e.g. severance payment Special issues
 Disposal and restructuring obligation

3.1.2.2 Provisions/Contingencies – Overview of Types of
Provisions 2/2.
Personnel provisions
Pension provisions Other personnel provisions
 For short term benefits like entitlements

for holidays and extra work
 Caused by the ending of the
employment contract
 From other obligations such as jubilee
payments, allowances and part-time
payments
Not discussed in any greater detail

here

3.1.2.2 Provisions/Contingencies – Relevant Standards.
 Accounting and disclosure requirements for provisions can be found primary

in two standards:
Standards for provisions
IAS 37
IAS 19
“Provisions, Contingent Liabilities and
“Employee Benefits“
Contingent Assets“
 IAS 37 contains four appendices (A, B, C, D) and IAS 19 eight appendices

(A-H), none of which are an integral part of this Standard and are thus not
enacted in European law.

3.1.2.2 Non-personnel-related Provisions – Recognition:
Overview of Criteria 1/2.
Pursuant to IAS 37.14, a provision shall be recognised when:
 an entity has a present obligation (legal or constructive) as a result of a
past event;
 it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation, and
 a reliable estimate can be made of the amount of the obligation.
 Are these criteria not met, no provision shall be recognised (IAS 37.14).

Overview of Criteria 2/2.
 The recognition criteria can thus be listed as follows:
Recognition criteria for provisions
Present obligation
resulting from a past event Probable outflow of
Reliable estimability
resources
(obligating event)
 Only when all criteria are met may a provision be recognised.

Decision Tree.
 Appendix B of IAS 37 presents the following decision tree relating to the
recognition criteria for provisions:
Is there a present obligation No No
Is an obligation possible?
caused by an obligating event?
Yes Yes
Yes
Is the outflow of resources No Is the outflow of resources
probable? remote?
Yes
No (seldom) No
Can the amount estimated
reliably?
Yes
Disclosure of a Neither recognition nor
Recognition of a provision
contingent liabilitiy disclosure required

Criterion for a Present Obligation 1/3.
An obligating event is a past event that creates a legal or constructive
(present) obligation that results in an entity having no realistic alternative to
settling that obligation (IAS 37.10, 17).
 The fact that no realistic alternative to settling is the case only:

 where the settlement of the obligation can be enforced by law; or
 in the case of a constructive obligation, where the event (which may be
an action of the entity) creates valid expectations in other parties that
the entity will discharge the obligation (IAS 37.17).

 Accordingly, the obligating event does give rise to either a legal or a
constructive obligation:
Result of the obligating event
Legal obligation Constructive obligation
Criteria:
 Past event
 Abstraction is not possible
Examples:
Example:
 Warranties based on laws or
contractual agreements  Voluntary acceptance of returned
goods
 Claims for damages

A legal obligation is an obligation that derives from:
 a contract (through its explicit or implicit terms);
 legislation; or
 other operation of law (IAS 37.10)
A constructive obligation is an obligation that derives from an entity's

actions where:
 by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
 as a result, the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities (IAS 37.10).

Criterion for Probable Outflow of Resources 1/2.
Pursuant to IAS 37, an outflow of resources or other event shall be regarded as
probable if the event is more likely than not to occur, i.e., the probability that
the event will occur is greater than the probability that it will not
(IAS 37.23).
 Where there are a number of similar obligations (e.g. product warranties or

similar contracts), the probability of an outflow of resources shall be
determined by considering the class of obligations as a whole
(IAS 37.24).
 Although the likelihood of outflow for any one item may be small, it
may well be probable that some outflow of resources will be needed to
settle the class of obligations as a whole.
 If that is the case, a provision is recognised (if the other recognition
criteria are met).

Criterion for Probable Outflow of Resources 2/2.
 The relationship between recognition and probability of the outflow of
resources regarding a present obligation can be illustrated as follows:
Probability
Virtually
Improbable Possible Probable certain
0% ≈ 5% 50% ≈ 95% 100%
Recognition of a
Recognition of a provision
contingent liability [Disclosure of a
contingent liability]
Recognition of a liability
Neither disclosure nor [receivable]
recognition

3.1.2.2 Non-personnel-related Provisions – Disclosure Obli-
gations for Contingent Assets and Contingent Liabilities 1/2.
An entity shall not recognise contingent liabilities and contingent assets
(IAS 37.27, 31).
A contingent asset is a possible asset that arises from past events and
whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the
control of the entity (IAS 37.10).
 An example is a claim that an entity is pursuing through legal processes,

where the outcome is uncertain (IAS 37.32).
Contingent liabilities and contingent assets shall be disclosed, as required by

IAS 37.86, 89, as far as the possibility of an outflow of resources
embodying economic benefit is not remote or the inflow of economic
benefits is probable (IAS 37.28, 34).

3.1.2.2 Non-personnel-related Provisions – Disclosure Obli-
gations for Contingent Assets and Contingent Liabilities 2/2.
 The following cases lead to a contingent liability and therefore to a disclosure
requirement:
Disclosure requirement as contingent liability
Case 1 Case 2 Case 3
 Obligation is possible  Obligation is present  Obligation is present

(contingent)  Outflow of resources is  Outflow of resources is
 Outflow of resources is unlikely, but not remote likely (i.e. probability >
not remote (i.e. (i.e. probability > 5% 50%)
probability > 5%) <=50%)  Reliable estimability not
possible
Normal case in practice

Criterion for Making a Reliable Estimate.
 The use of estimates is an essential part of the preparation of financial
statements and does not undermine their reliability (IAS 37.25).
 This is especially true in the case of provisions, which by their nature are
more uncertain than most other items in the balance sheet (IAS 37.25).
 Generally, an entity will be able to determine a range of possible
outcomes and will therefore be able make an estimate of the obligation
that is sufficiently reliable to use in recognising a provision (IAS 37.25).
 Only in extremely rare cases will it be impossible to make a reliable
estimate. In such a rare case, the entity shall disclose a contingent liability in
accordance with IAS 37.86 (IAS 37.26).

Accounting.
 Provisions shall generally be accounted for as follows:
Expense € 100 Provision € 100
Recognition either under Normally account allocation

 the corresponding expense type (normal case) according to types of
provisions
 other operating expenses

3.1.2.2 Non-personnel-related Provisions – Initial
The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the
reporting period (IAS 37.36).
 The best estimate of the expenditure required to settle the present obligation
is the amount that an entity would rationally pay to settle the obligation at
the end of the reporting period or to transfer it to a third party at that time
(IAS 37.37).
 The estimate of the amount that an entity would rationally pay to settle or
transfer the obligation is also the best estimate when it is impossible or
prohibitively expensive to settle or transfer an obligation at the end of the
reporting period (IAS 37.37).

Measurement: Consideration of Uncertainties (Survey).
 Uncertainties surrounding the amount to be recognised as a provision shall
be dealt with by various means depending on the number of obligations
associated with the provision (IAS 37.39):
Consideration of uncertainty
Single obligation Large number of obligations
Most probable outcome Expected outcome
With similar probabilities: midpoint of With similar probabilities: midpoint of

the range the range

3.1.2.2 Non-personnel-related Provisions – Initial Measure-
ment: Consideration of Uncertainties (Single Obligation 1/5).
When a single obligation is being measured, the individual most likely
outcome shall be the best estimate of the liability (IAS 37.40).
 For example:
 There are two conceivable scenarios with respect to a case of litigation:
 Scenario 1: estimated costs € 100 with a probability of 70%.
 The provision is measured based on the highest probability of
occurrence (mode); € 100 is carried under liabilities.

Other possible outcomes must also be considered (IAS 37.40).
 Where other possible outcomes are either mostly higher or mostly lower
than the most likely outcome, the best estimate will be a higher or lower
amount (IAS 37.40).
 For example, if an entity has to rectify a serious fault in a major plant that it
has constructed for a customer, and the individual most likely outcome may
be for the repair to succeed at the first attempt at a cost of € 1,000, but a
provision for a larger amount is made if there is a significant chance that
further attempts will be necessary (IAS 37.40).

 Here is another example:
 Another case of litigation gives rise to the following scenarios:
 The scenario with the highest probability shows the lowest amount;
the amounts for all other possible outcomes is higher.
…

 Therefore, an amount higher than € 100 must be recognised; IAS 37 does
not specify how to determine this amount.
 The expected value of € 130, for instance [(40% of € 100) + (35% of
€ 120) + (20% of € 150) + (10% of € 180)] may be used.

Where there is a continuous range of possible outcomes, and each point in
that range is as likely as any other, the mid-point of the range shall be used
(IAS 37.39).
 The following example illustrates this:

 Two conceivable scenarios are assumed for a case of litigation
proceedings:
 The probabilities within the range are the same; the mid-point of the
range, or the average, is used; the provision amounts to € 60.

ment: Consid. of Uncert. (Large Number of Obligations 1/2).
Where the provision being measured involves a large population of items,
the obligation shall be estimated by weighting all possible outcomes by their
associated probabilities (IAS 37.39).
 The name for this statistical method of estimation is "expected value“

(IAS 37.39).
 The provision will therefore be different depending on whether the
probability of a loss of a given amount is, for example, 60% or 90%
(IAS 37.39).
 The following is an example of the expected value method (IAS 37.39):
 An entity sells good with a warranty under which customers are
covered for the cost of repairs of any manufacturing defects that
become apparent within the first six months after purchase.
…

ment: Consid. of Uncert. (Large Number of Obligations 2/2).
 If minor defects were detected in all products sold, repair costs of
€ 1 million would result. If major defects were detected in all products
sold, repair costs of € 4 million would result.
 The entity's past experience and future expectations indicate that 75% of
the goods sold will have no defects, 20% will have minor defects and
5% will have major defects.
 In accordance with IAS 37.24, an entity assesses the probability of an
outflow for the warranty obligations as a whole. The expected value of
the cost of repairs is: (75% of nil) + (20% of € 1 million) + (5% of € 4
million) = € 400,000.
 Where there is a range of possible outcomes, and each point in that range
is as likely as any other, the mid-point of the range shall be used –
according to the same procedure as for a single obligation (IAS 37.39).

Measurement: Accounting for the Time Value of Money 1/3.
Where the effect of the time value of money is material, the amount of a
provision shall be the present value of the expenditures expected to be
required to settle the obligation (IAS 37.45).
 Because of the time value of money, provisions relating to cash outflows

that arise soon after the end of the reporting period are more onerous
than those where cash outflows of the same amount arise later.
Provisions are therefore discounted, where the effect is material (IAS 37.46).
 The discount rate(s) shall be a pre-tax rate (or rates) that reflect(s) current
market assessments of the time value of money and the risks specific to
the liability (IAS 37.47).
 The discount rate(s) shall not reflect risks for which future cash flow
estimates have been adjusted (IAS 37.47).

 Below is an example of the recognition of the time value of money for the
formation and adjustment of provisions:
 It is expected that the following warranty payments will be made in the
next five years:
 in one year: € 500,
 in two years: € 600,
 in three years: € 700,
 in four years: € 650,
 in five years: € 680.
 The specific risks have already been taken into account in cash flow
estimates.
…

 The risk-free interest rates can therefore be used for discounting; no risk
premium is necessary. At the time of measurement, the risk-free interest
rate for 1-3 years is 5%; the rate for 4-5 years is 6%.
 The provision is determined by discounting the estimated individual
expenses; this results in a present value of € 2,648.09:
(1) (2) (3) (4) = (2) / (1+(3))^(1) (5) = (2) ./. (4)
Year Estimated expense Risk free interest Present value Interest effect
+1 € 500.00 5% € 476.19 € 23.81
+2 € 600.00 5% € 544.22 € 55.78
+3 € 700.00 5% € 604.69 € 95.31
+4 € 650.00 6% € 514.86 € 135.14
+5 € 680.00 6% € 508.14 € 171.86
Total € 3,130.00 € 2,648.09 € 481.91
 This is recognised as follows:

Expense € 2,648.09 Provision € 2,648.09

3.1.2.2 Non-personnel-related Provisions – Subsequent
Measurement: Usage.
A provision shall only be used for expenditures for which the provision was
originally recognised (IAS 37.61).
 Only expenditures that relate to the original provision are set against it
(IAS 37.62).
 Setting expenditures against a provision that was originally recognised for
another purpose would conceal the impact of two different events (IAS 37.62).
 For use against cash payment, the following may be entered in the accounts,
for example:
Provision € 100 Cash € 100

Measurement: Adjustment, Reversal.
 Provisions shall be reviewed at the end of each reporting period and
adjusted to reflect the current best estimate (IAS 37.59).
 If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision
shall be reversed (through profit or loss) (IAS 37.59).
 This shall be recognised in the accounts as follows:
Provision € 100 Expense (income) € 100

Measurement: Provisions Measured at Present Value 1/4.
 For provisions measured at their present value, the carrying amount of a
provision shall increase in each period to reflect the passage of time
(IAS 37.60).
 This increase shall be recognised as a borrowing cost (IAS 37.60).
 For clarification, the example on the accounting treatment of provisions
with the time value of money is continued below:
 At 31.12.X0 the present value was calculated as € 2,648.09; the
provision was recorded in this amount:
(1) (2) (3) (4) = (2) / (1+(3))^(1) (5) = (2) ./. (4)
+1 € 500.00 5% € 476.19 € 23.81
+2 € 600.00 5% € 544.22 € 55.78
+3 € 700.00 5% € 604.69 € 95.31
+4 € 650.00 6% € 514.86 € 135.14
+5 € 680.00 6% € 508.14 € 171.86
Total € 3,130.00 € 2,648.09 € 481.91
…
 At 31.12.X1 the first payment of € 500 is due.
 Prior to the reversal, the effect of unwinding of the discount of € 23.81
is recognised as an interest cost; the carrying amount of the provision
increases accordingly:
Interest cost € 23.81 Provision € 23.81
Provision € 500.00 Cash € 500.00
 The provision therefore amounts to € 2,171.90 (€ 2,648.09 + € 23.81 ./.

€ 500).
…

 The remaining payments thus have a present value of € 2,306.47:
(1) (2) (3) (4) = (2) / (1+(3))^(1) (5) = (2) ./. (4)
+1 € 600.00 5% € 571.43 € 28.57
+2 € 700.00 5% € 634.92 € 65.08
+3 € 650.00 5% € 561.49 € 88.51
+4 € 680.00 6% € 538.62 € 141.38
Total € 2,630.00 € 2,306.47 € 323.53
 The amount of the provision must be adjusted to the present value; the
difference is also an interest cost and amounts to € 134.57 (€ 2,306.47
./. € 2,171.90).
 This is recognised as follows:
Interest cost € 134.57 Provision € 134.57
…

 Therefore, total interest costs recognised in X1 amounted to € 158.38.
 The procedure continues in the same way for years X2-X5.
 The table below summarises the development of provisions for the
individual years:
(1) (2) (3) (4) (5) = (2) + (3) ./. (4)
Total Carrying amount 01.01. Interest Release Carrying amount 31.12.
X0 € 2,648.09
X1 € 2,648.09 € 158.38 € 500.00 € 2,306.47
X2 € 2,306.47 € 137.18 € 600.00 € 1,843.65
X3 € 1,843.65 € 92.18 € 700.00 € 1,235.83
X4 € 1,235.83 € 61.79 € 650.00 € 647.62
X5 € 647.62 € 32.38 € 680.00 - €
€ 481.91 € 3,130.00

3.1.2.2 Non-personnel-related Provisions – Special Issues:
Survey.
 The following types of provisions are herein subject to special issues:
Special issues
Decommissioning and
Onerous contracts Restructuring measures
restoration liabilities

Onerous Contracts (Definition 1/2).
An onerous contract is a contract in which the unavoidable costs of meeting
the obligations under the contract exceed the economic benefits expected
to be received under it (IAS 37.10).
 The unavoidable costs under a contract reflect the least net cost of exiting
from the contract (IAS 37.68).
 The costs referred to are therefore the costs necessary to withdraw from
the contractual obligation.

Onerous Contracts (Definition 2/2).
 The unavoidable costs correspond to the lower of the costs of fulfilment
and any compensation or penalties arising from non-fulfilment (IAS 37.68):
Costs of fulfilment
Unavoidable = Min
costs Compensation payments/
penalties

Onerous Contracts (Recognition Criteria).
If an entity has a contract that is onerous, the present obligation under the
contract shall be recognised and measured as a provision (IAS 37.66).
 Whether or not an obligation is to be recognised for a contract depends,

however, on whether it can be cancelled or not (IAS 37.67):
Do the terms of the contract permit cancellation without payment of
compensation to the other party?
Yes (cancellation possible) No (cancellation not possible)
No obligation (no recognition of a Recognition of a provision, if the

provision) contract is onerous

Onerous Contracts (Example 1/2).
 Accounting treatment of an onerous contract pertaining to the following:
 A company concluded a long-term service contract on 01.01.X0; this
brings income of € 8 million p.a.; on 31.12.X0 the contract is valid for
another 2 years.
 To date, the costs of fulfilling the service contract are estimated at € 7.2
million p.a.
 It is then estimated, on 31.12.X0, that the annual costs will increase to
€ 8.3 million in X1 and to € 8.5 million in X2.
 Non-fulfilment of the annual delivery shall result in a penalty for breach
of contract of € 0.4 million.
…

Onerous Contracts (Example 2/2).
 The annual fulfilment costs are determined as follows:
 for X1: € 8 million ./. € 8.3 million = € -0.3 million;
 for X2: € 8 million ./. € 8.5 million = € -0.5 million.
 Since the lower of fulfilment costs and penalties must be taken into
account when determining the unavoidable costs, the agreed penalty for
non-fulfilment (€ -0.4 million) is considered for X2.
 The carrying amount of the provision at 01.01.X0 is determined by
discounting the obligation amounts with the risk-free interest rate,
which is presumed to be 5% for terms up to 2 years: € 0.3 million /
(1+5%)1 + € 0.4 million / (1+5%)2 = € 0.649 million.

Restructuring Measures (Definition, Examples, Rules 1/2).
A restructuring measure is a programme that is planned and controlled by
management and either:
 the scope of a business undertaken by the entity; or
 the manner in which that business is conducted
materially changes (IAS 37.10).
 The following are examples of events that may fall under the definition of
restructuring (IAS 37.70):
 sale or termination of a line of business;
 the closure of business locations in a country or region or the
relocation of business activities from one country or region to another;
…

Restructuring Measures (Definition, Examples, Rules 2/2).
 changes in management structure, e.g. eliminating a layer of
management; and
 fundamental reorganisation that has a material effect on the nature and
focus of the entity's operations.
 A provision for restructuring costs is recognised only when the general

recognition criteria for provisions set out in IAS 37.14 are met (IAS 37.71).
 Additional information how the general recognition criteria apply to
restructurings are in IAS 37.72-83 (IAS 37.71); the main requirements are
explained as follows.

Restructuring Measures (Sales).
No obligation arises for the sale of an operation until a purchaser is
identified and there is a binding sale agreement (IAS 37.78) – i.e., a legal
obligation is required.
 This also applies when the entity has taken a decision to sell an operation
and has announced that decision publicly. (IAS 37.79).
 When the sale of an operation is envisaged as part of a restructuring, the
assets of the operation shall be reviewed for impairment in accordance with
IAS 36 (IAS 37.79).
 When a sale is only part of a restructuring, a constructive obligation can
arise for the other parts of the restructuring before a binding sale
agreement exists (IAS 37.79).

Restructuring Measures (Constructive Obligations).
Pursuant to IAS 37.72, a constructive obligation to restructure arises only
when an entity:
 has a detailed, formal plan for the restructuring identifying at least:
 the business or part of a business concerned;
 the principal locations affected;
 the location, function and approximate number of employees who will
be compensated for terminating their services;
 the expenditures that will be undertaken;
 when the plan will be implemented; and
 has raised 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.

Restructuring Measures (Measurement).
 A restructuring provision shall include only the direct expenditures arising
from the restructuring, which are those that are both (IAS 37.80):
 necessarily entailed by the restructuring; and
 not associated with the ongoing activities of the entity.
 A restructuring provision shall not include such costs as (IAS 37.81):
 retraining or relocating continuing staff;
 marketing; or
 investment in new systems and distribution networks.
 Identifiable future operating losses up to the date of a restructuring shall
not be included in a provision, unless they relate to an onerous contract as
defined in IAS 37.10 (IAS 37.82).

Decommissioning and Restoration Liabilities 1/4.
 Pursuant to IAS 16.16, the cost of an item of property, plant and equipment
comprises the initial estimate of the costs of dismantling and removing the
item ("decommissioning liabilities") and restoring the site on which it is
located ("restoration liabilities").
 Guidance for the accounting consequences of measurement changes
for existing provisions concerning decommissioning, restoration and similar
obligations contains IFRIC 1 "Changes in Existing Decommissioning,
Restoration and Similar Liabilities“.
 Pursuant to IFRIC 1.2, a provision for decommissioning, restoration or similar
liabilities may, for example, exist
 for decommissioning a plant,
 for rehabilitating environmental damage in extractive industries or
 for removing equipment.

 The rules applicable in IFRIC 1 depend on whether for the asset
 the cost model or
 the revaluation model (not discussed here) is used.
 Under the cost model, the following is relevant (IFRIC 1.5):
 An increase or reduction in the provision shall be added to, or deducted
from, the cost of the related item of property, plant and equipment:
Property € 100 Provision € 100
Provision € 100 Property € 100
 The former increase in the provision can be taken as an indication of

impairment. If such indications exist, an impairment test shall be carried
out.
…

 In the case of a reduction in the carrying amount of the property, plant
and equipment, however (i.e., the provision is also reduced), it should be
noted that the deducted amount must not exceed the carrying
amount; any surplus must be immediately recognised in profit or
loss.
 If, for example, the carrying amount of the item of property, plant and
equipment is € 100 and the provision has been reduced by € 120, the
following shall be entered in the accounts:
Provision € 120 Property € 100
Income € 20
 The adjusted depreciable amount of the asset shall be depreciated over

its useful life (IFRIC 1.7).
 Therefore, once the related asset has reached the end of its useful life, all
subsequent changes in the provision shall be recognised in profit or
loss as they occur (IFRIC 1.7).

 The periodic unwinding of the discount shall be recognised in profit or loss
as a finance cost as it occurs. Capitalisation under IAS 23 is not permitted
(IFRIC 1.8).
 The carrying amount of the provision and the asset thus fluctuates due
to
 discount rates changing over time;
 changes in estimates of the liability.
 As the item of property, plant and equipment – including the amount
capitalised for the provision – is subject to scheduled depreciation, the
realisation through profit or loss of the liability shall occur through
periodic depreciation.
 Due to the unwinding of the discount on the liability, however, only the
carrying amount of the provision shall be affected (no effect on profit or
loss).

3.1.2.2 Provisions for Pensions – Post-employment Benefit
Plans: Definition.
Provisions for pensions normally are based on pension commitments that are
formally fixed via post-employment benefit plans.
Post-employment benefit plans are formal or informal arrangements under

which an entity provides post-employment benefits for one or more
employees (IAS 19.8, 32).

Plans: Classification.
 Post-employment benefit plans are classified as either one of the following,
depending on their economic substance as derived from their principal
terms and conditions (IAS 19.27):
Classification of plans
Defined contribution plans Defined benefit plans
Obligation to pay fixed Plans that do not fall within the

contributions into a separate entity definition of defined contribution
(a fund); no obligation to pay plans
further contributions beyond
these amounts
No risk Risk

Plans: Risk-bearing.
 With defined contribution plans, therefore,
 the actuarial risk (that benefits will be less than expected) and
 the investment risk (that assets invested will be insufficient to meet
expected benefits)
fall on the employee (IAS 19.28).
 Under defined benefit plans,

 the actuarial risk and
 the investment risk fall,
in substance, on the entity (IAS 19.30).

3.1.2.2 Provisions for Pensions – Defined Contribution
Plans: Accounting.
When an employee has rendered service to an entity during a period, the entity
shall recognise the contribution payable to a defined contribution plan in
exchange for that service as follows (IAS 19.51):
 as a liability (accrued expense), after deducting any contribution already
paid. If the contribution already paid exceeds the contribution due for service
rendered before the end of the reporting period, the entity shall recognise that
excess as an asset (prepaid expense) to the extent that the prepayment will
lead to, for example, a reduction in future payments or a cash refund; and
 as an expense, unless another Standard requires or permits the inclusion of
the contribution in the cost of an asset (see for example IAS 2 and IAS 16).
 These are therefore the normal recognition in profit or loss or the accrual
accountings: expense and cash; entries for receivables against pension
funds or liabilities against pension funds.

3.1.2.2 Provisions for Pensions – Defined Benefit Plans:
Overview of Accounting Concept 1/2.
Provision X8 X9
€ 30 + € 20 € 20 € 30 Recognition in
€ 20 + € 10 profit or loss
Obligation
+ € 10
Obligation
Service cost + € 13
+€3
assets
Interest cost*
Plan
assets
Plan
Return on plan assets* - € 2,4

AL from obligation +€4
AG from plan assets - € 7,6
€ 80 € 100 € 90 € 120 + € 10
Immediate
31.12.X8 31.12.X9 Δ X8/X9 Recognition
in OCI
*this values are presented netted in the annual statement AL = actuarial loss
AG = actuarial gain

Overview of Accounting Concept 2/2.
 Accounting entries X9:
Service cost (profit or loss) € 13 Defined benefit obligation € 13
Interest cost (profit or loss) € 3 Defined benefit obligation €3

€ €
Plan assets Return on plan assets (P&L)
2,4 2,4
Actuarial loss (OCI) € 4 Defined benefit obligation €4
€ €
Plan assets Actuarial gain (OCI)
7,6 7,6
 Development of balances:
Obligation Plan assets
Opening balance € 100 Opening balance € 80
Service cost € 13 Return on plan assets € 2,4
Interest cost €3 AG € 7,6
AL €4 Closing balance € 90
Closing balance € 120

Recognition in the Balance Sheet 1/2.
 The amount recognised as a defined benefit liability (asset) shall be
determined as follows (IAS 19.57):
Item Calculation example

Present value of defined benefit obligation € 1,200
./. Plan assets at fair value € 900
= Amount recognised (positive = liability; negative = asset) € 300

Recognition in the Balance Sheet 2/2.
The present value of a defined benefit obligation is the present value,
without deducting any plan assets, of expected future payments required
to settle the obligation resulting from employee service in the current and
prior periods (IAS 19.8).
Plan assets comprise:

 assets held by a long-term employee benefit fund; and
 qualifying insurance policies (IAS 19.8).
The fair value is the price that would have be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (IAS 19.8, IFRS 13.9).

Recognition in Profit or Loss and OCI 1/3.
 The net total of the following amounts shall be normally recognised in profit or
loss (IAS 19.120):
Recognition in financial result
Current service Actuarial

Net Interest cost
cost gains/losses
Profit or loss Profit or loss OCI*
* Revised IAS 19 restricts the entity choice to use Corridor method for re measurements and
requires immediate recognition of Actuarial Gain or (Loss) in Other Comprehensive Income (OCI)

Recognition in Profit or Loss 2/3.
Current service cost is the increase in the present value of a defined
benefit obligation resulting from employee service in the current period
(IAS 19.8).
Net Interest cost is the product of Net Defined Benefit Liability / (Asset)
and the discount rate. (IAS 19.123)

Recognition in OCI 3/3.
Actuarial gains and losses comprise:
 experience adjustments (the effects of differences between the previous
actuarial assumptions and what has actually occurred); and
 the effects of changes in actuarial assumptions (IAS 19.8).
 They are always present when

 differences between estimates (target values) and the actual values
occur (e.g. the expected return on plan assets is € 100, the actuarial
return on plan assets is € 120, the actuarial gain is € 20);
 valuation or estimation parameters change (e.g. an obligation of 90 €
was determined based on an interest rate of 10%; after an interest rate
change to 8% the obligation has an amount of € 100 and there is an
actuarial loss of € 10).

Accounting Steps 1/2.
 Accounting by an entity for defined benefit plans involves the following
4 steps (IAS 19.57):
 Employee service
 in the current period
 in prior periods
Determination of the obligation  Application of the Projected Unit Credit
1 (IAS 19.67-74, IAS 19.83-86, Method
IAS 19.113-115)  Determination
 of the present value of the defined
benefit obligation
 of the current service cost
 Adjustments for any effect of limiting a net

Determination of the net defined benefit to the asset ceiling
2 defined benefit liability (asset)
(IAS 19.64)

Accounting Steps 2/2.
 Determine
 current service cost
Determination of amounts to
be recognised in profit or loss  any past service cost and
3 (IAS 19.70-74, IAS 19.99-112,
gain or loss in settlement
IAS 19.123-126)  net interest on the net
defined liability
 Comprising
Determination of the  actuarial gains and losses
remeasurements of the net
 return on plan assets
4 defined benefit liability (asset)
 any change in the effect of the
(IAS 19.64, IAS 19.128-130) asset ceiling
 Where an entity has more than one defined benefit plan, these entity applies
these procedures for each material plan (IAS 19.57).
International Financial Accounting · 3. Separate Fin. Statements: Main Items
265
Step 1 and 2 (Procedure 1/3).
 The ultimate cost of a defined benefit plan
 may be influenced by many variables, such as final salaries, employee
turnover and mortality, medical cost trends and – for a funded plan – the
investment earnings on the plan assets;
 is uncertain and this uncertainty is likely to persist over a long period of
time (IAS 19.66).
 In order to measure the present value of post-employment benefit obligations
and the related current service cost, it is necessary to (IAS 19.66):
 apply an actuarial valuation method (see IAS 19.67-69);
 attribute benefit to periods of service (see IAS 19.70-74); and
…

 make actuarial assumptions (see IAS 19.75-98).
To measure the pension obligation the entity has to do the following for each
relevant employee:
1. Estimation of the future payments for pensions in their absolute amount;
2. Discounting them to the start date of the pension (retirement date); and
3. Allocating them to the active service periods of the relevant employee.
 The procedure is illustrated on the following slide.

Pensions commitment Reporting period Pensions start Pensions payments
1
X0 X1 X2 X3 X4 X5 X6 X7 X8
€ 210 € 210 € 210 € 210
Already serviced by employee Not yet serviced
€ 100 € 100 € 100 € 100 € 100 € 100 € 100 € 100
Distribution to total remaining time 3a

€ 51 € 113 € 186
€ 273 € 376
Present € 496 € 636
Present valuevalue Present
of obligation € 100, value Present € 800
7 years, € 200, value Present
at respective 10% 6 years, € 300,
balance sheet 10% 5 years,
value
€ 400, Present
Discounting 2
date 10% 4 years, value
10% € 500, …
3 years,
Distribution to active service periods 3b 10%

Step 1 and 2 (Actuarial Valuation Method 1/3).
An entity shall use the Projected Unit Credit Method to determine the present
value of its defined benefit obligations and the related current service cost and,
where applicable, past service cost (IAS 19.67).
 The Projected Unit Credit Method is sometimes also known as the accrued
benefit method or as the benefit/years of service method, as benefit is
attributed to periods of service on a pro-rated, straight-line basis, or according
to the plan's benefit formula (IAS 19.67).
 It assumes that an additional portion of the final benefit entitlement will
be earned in each year of service (see IAS 19.70-74) and measures each
of these units separately to build up the final obligation (IAS 19.67; see
IAS 19.75-98).

 To illustrate that the following example (IAS 19.68):
 A lump-sum benefit is payable on termination of service and equal to
1% of final salary for each year of service. The salary in year 1 is
€ 10,000 and is assumed to increase at 7% (compound) each year. The
discount rate used is 10% per annum.
 The following table shows how the obligation builds up for an employee
who is expected to leave at the end of year 5, assuming that there are
no changes in actuarial assumptions.
 For simplicity, this example ignores the additional adjustment needed to
reflect the probability that the employee may leave the entity at an earlier
or later date.
…

Interest rate 10%
Year X1 X2 X3 X4 X5
Salary € 10,000 € 10,700 € 11,449 € 12,250 € 13,108
Increase 7% 1% 131 €
Benefit attributed to
- prior years - € € 131 € 262 € 393 € 524
- current year € 131 € 131 € 131 € 131 € 131
Total benefit € 131 € 262 € 393 € 524 € 655
Obligation 01.01. - € € 90 € 197 € 325 € 477

Obligation 31.12. € 90 € 197 € 325 € 477 € 655
Delta Obligation € 90 € 107 € 128 € 152 € 179
Interest cost - € € 9 € 20 € 32 € 48
Current service cost € 90 € 98 € 108 € 119 € 131
Remaining years 5 4 3 2 1
Discounting the so far Delta obligation in X4 (€ 152) minus interest
serviced claim to the cost in X4 (€ 32)
31.12.X1: € 131 / (1+10%)^4 [Alternatively: discounting the periodic serviced
claim to 31.12.X4: € 131 / (1+10%)^1]
Balance obligation 01.01.X2 multiplied with interest rate: € 90 · 10%
Step 1 and 2 (Actuarial Assumptions 1/2).
 Actuarial assumptions comprise (IAS 19.76):
 demographic assumptions about the future characteristics of current
and former employees (and their dependants) who are eligible for
benefits. Demographic assumptions deal with matters such as:
 mortality, both during and after employment;
 rates of employee turnover, disability and early retirement;
 the proportion of plan members with dependants who will be
eligible for benefits; and
 claim rates under medical plans; and
…

Step 1 and 2 (Actuarial Assumptions 2/2).
 financial assumptions, dealing with items such as:
 the discount rate (see IAS 19.83-86);*
 future salary and benefit levels (see IAS 19.87-95);
 in the case of medical benefits, future medical costs, including –
where material – the cost of administering claims and benefit
payments (see IAS 19.96-98); and
 The rate used to discount post-employment benefit obligations (both funded
and unfunded) shall be determined by reference to market yields at the
end of the reporting period on high-quality corporate bonds (IAS 19.83).
* Discount rate: regional market issue. (Annual improvements — 2012-2014 cycle)

Clarifies that the high quality corporate bonds used in estimating the
discount rate for post-employment benefits should be denominated in
the same currency as the benefits to be paid (thus, the depth of the
market for high quality corporate bonds should be assessed at currency
level). (Effective for annual periods beginning on or after 1 January
2016) 273 International Financial Accounting · 3. Separate Fin. Statements: Main Items
Step 3 (Plan Assets: Components, Accounting).
 Pursuant to IAS 19.8, plan assets comprise:
Components of plan assets
Assets held by a long-term employee

Qualifying insurance policies
benefit fund
 The fair value of any plan asset is deducted in determining the deficit or
surplus.(IAS 19.113).

Step 3 (Plan Assets: Measurement).
When no market price is available, the fair value of plan assets shall be
estimated (IAS 19.102).
 This occurs under IAS 19.102, for example by discounting expected future
cash flows to the end of the period (IAS 19.102).
 According to IAS 19.102, the cash flows shall be discounted using a
discount rate that reflects both the risk associated with the plan assets and
the maturity or expected disposal date of those assets (or, if they have no
maturity, the expected period until the settlement of the related obligation).
 Pursuant to IAS 19.115, where plan assets include qualifying insurance
policies that exactly match the amount and timing of some or all of the
benefits payable under the plan, the fair value of those insurance policies
shall be deemed to be the present value of the related obligations.

Step 4 (Actuarial Gains and Losses: Causes 1/2).
 Actuarial gains and losses may result from increases or decreases either
 the present value of a defined benefit obligation or
 the fair value of any related plan assets (IAS 19.128).
 The causes of actuarial gains and losses include, for example (IAS 19.128):
 unexpectedly high or low rates of employee turnover, early
retirement or mortality, or unexpectedly high or low increases in
salaries, ongoing benefits (if the formal or constructive terms of a plan
provide for inflationary benefit increased) or medical costs;
…

Step 4 (Actuarial Gains and Losses: Causes 2/2).
 the effect of changes in estimates of future employee turnover, early
retirement, mortality or of increases in salaries, benefits (if the formal
or constructive terms of a plan provide for inflationary benefit increases)
or medical costs;
 the effect of changes in the discount rate; and
 differences between the actual return on plan assets and the return on
plan assets.

Example (Basis Data).
 An employee is hired 3 years before retirement.
 The retirement pension is 5% of the final salary for 10 years.
 The final salary is € 32,608.40.
 The return on 10-year corporate bonds is assumed as 6%.
 The entity recognises actuarial gains and losses via the OCI method.
Pensions commitment Pensions start

01.01.X1 31.12.X1 31.12.X2 31.12.X3 31.12.X4 31.12.X5
Pensions payments 5% of the

final yearly salary for 10 years

Example (Determination of the Obligation 1/2).
 The Projected Unit Credit Method with assumed straight-line distribution is
applied.
 Based on the final salary of € 32,608.40, the pension payment is € 1,630.42
(€ 32,608.40 · 5%).
 Under consideration of the annuity value formula, at the beginning of the
pension on 31.12.X3 a annuity value of € 12,000.03 is calculated:
(1  i )n  1 (1  6%)10  1
  7,36
i  (1  i ) n
6%  (1  6%)10
Formula for annuity value
7,36  € 1,630.42  € 12,000.03

How is the present value for the 10
payments in the future?
[Alternatively: € 1,630.42 / (1+6%)^1 + € 1,630.42 /
(1+6%)^2 + € 1,630.42 / (1+6%)^3 + …
+ € 1,630.42 / (1+6%)^10)]

Example (Determination of the Obligation 2/2).
 The obligation is calculated over time as follows:
X1 X2 X3
Obligation 01.01. € - € 3,560.00 € 7,547.19
Benefit serviced period € 4,000.01 € 4,000.01 € 4,000.01

Remaining years after 31.12. 2 1 -
Interest on balance 01.01. € - € 213.60 € 452.83

Present value benefit serviced period € 3,560.00 € 3,773.60 € 4,000.01
Obligation 31.12. € 3,560.00 € 7,547.19 € 12,000.03
€ 4,000 / (1+6%)^2 € 4,000 / (1+6%)^1 € 3,560 · 6% € 7,547 · 6%

Example (Determination of Plan Assets).
 Moreover, the company is establishing plan assets to the additional serviced
pension amount; that the plan assets have also an return of 6%:
X1 X2 X3
Plan assets 01.01. € - € 3,560.00 € 7,547.19
Value increase € - € 213.60 € 452.83
Addition 31.12. € 3,560.00 € 3,773.60 € 4,000.01
Plan assets 31.12. € 3,560.00 € 7,547.19 € 12,000.03
€ 3,560 · 6% € 7,547 · 6%

Example (Determination of Pension Expense).
 There are 3 components that determine pension expense:
 Current service cost: increase of periodic serviced benefit (based on the
present value);
 Interest cost: return on the present value of the benefits of past periods
(unwinding in the reporting period);
 Return on plan assets: Total income in the period (interests, dividends,
price increases) from plan assets.
 The amounts are as follows:
X1 X2 X3
Current service cost € -3,560.00 € -3,773.60 € -4,000.01
Interest cost € - € -213.60 € -452.83
Return plan assets € - € 213.60 € 452.83
Pension expense € -3,560.00 € -3,773.60 € -4,000.01

Example (Accounting without Actuarial Gains/Losses 1/2).
 For X1, there are the following entries without actuarial gains/losses:
Pension expense € 3,560.00 Defined benefit obligation € 3,560.00
Plan assets € 3,560.00 Cash € 3,560.00
 For X2, the entries without actuarial gains/losses are as follows:
Interest expense € 213.60 Defined benefit obligation € 213.60
Plan assets € 213.60 Income plan assets € 213.60
Plan assets € 3,773.60 Cash € 3,773.60

Example (Accounting without Actuarial Gains/Losses 2/2).
 For X3, there are these entries without actuarial gains/losses:
Interest expense € 452.83 Defined benefit obligation € 452.83
Plan assets € 4,000.01 Cash € 4,000.01

Example (Actuarial Gains/Losses 1/3).
 Certain “extraordinary“ increases or decreases of the obligation or the plan
assets are recognised separately.
 These actuarial gains/losses result from the following:
 Changes of actuarial assumptions (in the example a salary increase);
 Deviations between the actual and the expected return on plan assets (in
the example a loss on plan assets).

 For X1, the salary increase results in an increase of the pension to € 2,089.94
and of the present value of the obligation to € 15,382.14:
7,36  € 2,089.94  € 15,382.14
 Now, the obligation has the following values over time:
Obligation via
annuity value formula 7.36 € 15,382.14
X1 X2 X3
Obligation 01.01. € - € 4,563.35 € 9,674.30
Benefit serviced period € 5,127.38 € 5,127.38 € 5,127.38

Remaining years after 31.12. 2 1 -
Interest on balance 01.01. € - € 273.80 € 580.46

Present value benefit serviced period € 4,563.35 € 4,837.15 € 5,127.38
Obligation 31.12. € 4,563.35 € 9,674.30 € 15,382.14
Delta compared to initial situation € 1,003.35 € 4,563.35 ./. € 3,560
 The increase of the present value for € 1,003.35 is an actuarial loss in X1.

 Moreover, the stock marked unexpectedly decreases for 20%.
 In the following table, the expected and the actual value development of the
plan assets is shown:
X1 X2 X3
Expectation plan assets 01.01. € - € 3,560.00 € 6,621.59
Expected value increase € - € 213.60 € 397.30
Addition 31.12. € 3,560.00 € 3,773.60 € 4,000.01
Expectation plan assets 31.12. € 3,560.00 € 7,547.19 € 11,018.90
X1 X2 X3
Actual plan assets 01.01. € - € 3,560.00 € 6,621.59
Actual value increase € - € -712.00 € 397.30
Addition 31.12. € 3,560.00 € 3,773.60 € 4,000.01
Actual plan assets 31.12. € 3,560.00 € 6,621.59 € 11,018.90
Delta actual/expected € - € -925.60 € -
 The difference of € 925.60 is an actuarial loss in X2.

Instead a gain of € 213.60 a loss of € 712

Example (Presentation, Accounting with Actuarial G./L. 1/3).
 The liability presented on the face of the balance sheet over time is as
follows:
X1 X2 X3
Present value defined benefit obligation € 4,563.35 € 9,674.30 € 15,382.14
Fair value plan assets € -3,560.00 € -6,621.59 € -11,018.90
Balance sheet liability € 1,003.35 € 3,052.71 € 4,363.24
As far as for X2, X3 no further

actuarial gains or losses arise

 For X1, there are the following entries:
OCI € 1,003.35 Defined benefit obligation € 1,003.35
Plan assets € 3,560.00 Cash € 3,560.00
 For X2, the entries are as follows:

Interest cost € 273.80 Defined benefit obligation € 273.80
Plan assets € 3,773.60 Cash € 3,773.60
OCI € 925.60 Plan assets € 925.60

 For X3, there are these entries:
Interest cost € 580.46 Defined benefit obligation € 580.46
Plan assets € 4,000.01 Cash € 4,000.01

3.1.2.3 Equity – Relevant Standards.
 Accounting and disclosure requirements for equity can be found in these

standards:
Standards for equity
IAS 32 IAS 1
“Financial Instruments: Presentation“ “Presentation of Financial Instruments“
Differentiation to debt Format/grouping requirements,

disclosures

3.1.2.3 Equity – Equity versus Debt Instruments 1/5.
An equity instrument is any contract that evidences a residual interest in the

assets of an entity after deducting all of its liabilities (i.e., in its net assets)
(IAS 32.11; F.49 (c)).
 The IFRSs do not contain any specific definition of the term "debt
instrument".
 Usually, a debt instrument is defined by describing what an equity
instrument is not.
 A distinction can be made between equity instruments and debt instruments
both on the liabilities and on the asset side.

When determining whether an item constitutes equity or debt (liabilities side of

the balance sheet; i.e., it relates to the issue of shares or the issue of liabilities),
equity instruments shall be defined by describing what does not conform to
the characteristics of financial liabilities or debt instruments under
IAS 32.11.
 In this respect, IAS 32.16 stipulates that an equity instrument:

 1. does not include any contractual obligation,
 to deliver cash or another financial asset to another entity; or
 to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the issuer; and
 …

 2. if the financial instrument may be settled in the issuer's own equity

instruments, it may alternatively be the following:
 a non-derivative financial instrument that includes no contractual
obligation for the issuer to deliver a variable number of its own
equity instruments;
 a derivative financial instrument that will be settled only by the
issuer exchanging a fixed amount of cash or another financial
asset for a fixed number of its own equity instruments.

 Pursuant to IAS 32.AG13, examples of equity instruments are

 non-puttable ordinary shares,
 some types of preference shares, warrants or written call options
that allow the holder to subscribe for or purchase a fixed number of non-
puttable ordinary shares in the issuing entity in exchange for a fixed
amount of cash or another financial asset.
 Financial instruments that are not usually classified as equity in the IFRS
sense, however, are those
 that include a repayment requirement,
 for which the issuer has to make ongoing payments; or
 those with holder cancellation rights.

 For the differentiation between equity and debt, the ongoing disposition of
resources is critical:
 Only when, over the whole maturity of the financial instrument, no
payment obligations arise – i.e. especially neither to deliver cash or
other financial assets nor to exchange financial assets or financial
liabilities under conditions that are potentially unfavourable – it may be
classified as equity;
 otherwise the financial instrument is a debt instrument (IAS 32.17).
Crucial criterion for the differentiation between debt and equity instruments is ,
whether or not the entity has entered a (possible) obligation to return (put
back) the shares with the issuance.

3.1.2.3 Equity – Components and Format Alternatives 1/2.
 Equity can be systemised as follows:
Equity
Paid-up capital Capital from economic activities
 Subscribed capital  Retained earnings

 Ordinary shares  Other comprehensive income
 Preference shares (OCI)
 Capital reserve
 Under the subscribed capital (also stated capital or share capital) the paid-in
capital stock is summarised.

3.1.2.3 Equity – Components and Format Alternatives 2/2.
 The IFRS do not explicitly contain an item called capital reserve, with respect
to the principle of fair presentation and in connection with IAS 1.55 it is
necessary.
 It primary contains the payments of the investors that increase the
nominal amounts or initial contributions (premium).
 In addition, under that item regularly equity components of convertible
bonds or callable bonds, option premiums and issuance costs are
recognised.
 The retained earnings can be divided into
 the sum of deducted profits (eventually reduced by losses) of prior
periods plus
 the profit or loss of the current reporting period.
Normally, there is a distinction between legal reserves, statutory reserves, tax
reserves and other retained earnings.

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International Financial Accounting.

3. Accounting in Separate Financial Statements.

3.1 Main Balance Sheet Items.

1 International Financial Accounting · 3. Separate Fin. Statements: Main Items

3. Accounting in Separate Financial Statements

2 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 An international capital market related company that prepares IFRS group

Preparation of separate financial

Preparation of separate financial

Preparation of group financial Obligation for preparation/

3 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 In a simple group structure, this can be show as follows:

PC = Parent company; S = Subsidiary

4 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Assets IFRS balance sheet (main items) Debt, equity

Capitalisation of borrowing costs

5 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 In general, a accounting procedure can be divided into four steps:

 Recognition in the balance sheet yes or no?

Subsequent  Value measure?

 Derecognition out of the balance sheet yes or no?

6 International Financial Accounting · 3. Separate Fin. Statements: Main Items

7 International Financial Accounting · 3. Separate Fin. Statements: Main Items

8 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 As a rule, items of property, plant and equipment must be recognised

9 International Financial Accounting · 3. Separate Fin. Statements: Main Items

10 International Financial Accounting · 3. Separate Fin. Statements: Main Items

11 International Financial Accounting · 3. Separate Fin. Statements: Main Items

12 International Financial Accounting · 3. Separate Fin. Statements: Main Items

13 International Financial Accounting · 3. Separate Fin. Statements: Main Items

14 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Cost model (IAS 16.30) Revaluation model (IAS 16.31-42)

Property, plant and equipment is Property, plant and equipment is

15 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Basic principles of depreciation

Scheduled depreciation Impairment (extraordinary depreciation)

Systematic allocation of the Recognition of a loss in value if it is

16 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Depreciation is the systematic allocation of the depreciable amount of an

The depreciable amount is the cost of an asset, or other amount substituted

 There is no definition for “impairment“ within the IFRS; it is an extraordinary

An impairment loss is the amount by which the carrying amount of an asset

17 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Useful life is (IAS 16.6):

18 International Financial Accounting · 3. Separate Fin. Statements: Main Items

19 International Financial Accounting · 3. Separate Fin. Statements: Main Items

20 International Financial Accounting · 3. Separate Fin. Statements: Main Items

21 International Financial Accounting · 3. Separate Fin. Statements: Main Items

22 International Financial Accounting · 3. Separate Fin. Statements: Main Items

23 International Financial Accounting · 3. Separate Fin. Statements: Main Items

If an item of property, plant and equipment is revalued, the entire class of

A class of property, plant and equipment is a grouping of assets of a

24 International Financial Accounting · 3. Separate Fin. Statements: Main Items

25 International Financial Accounting · 3. Separate Fin. Statements: Main Items

26 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 Subsequent measurement t1:

 Subsequent measurement t2:

 Subsequent measurement t3:

27 International Financial Accounting · 3. Separate Fin. Statements: Main Items

28 International Financial Accounting · 3. Separate Fin. Statements: Main Items

 Accounting and disclosure requirements relating to intangible assets are

29 International Financial Accounting · 3. Separate Fin. Statements: Main Items

30 International Financial Accounting · 3. Separate Fin. Statements: Main Items

Capitalisation as intangible asset Recognition as an expense