College of Business, Hospitality and Tourism Studies

School of Accounting

ACC702: International Corporate Reporting

COURSE BOOK

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SCHEDULE OF TOPICS, LECTURE AND TUTORIAL GUIDES

WEEK 1
The IASB and its Conceptual Topic 1 Alfredson et. al Chapter 1
Framework

WEEK 2
Revenue Topic 2 Alfredson et. al Chapter 3

WEEK 3
Related Party Disclosures Topic 3 IAS 24

WEEK 4
Provisions, Contingent Liabilities and Topic 4 Alfredson et. al Chapter 4
Contingent Assets

WEEK 5
Topic 5 Alfredson et. al Chapter 5
Financial Instruments

WEEK 6 Property, Plant and Equipment

Topic 6 Alfredson et. al Chapter 9

WEEK 7
Intangible Assets Topic 7 Alfredson et. al Chapter 10

WEEK 8
Business Combinations Topic 8 Alfredson et. al Chapter 11

WEEK 9
Impairment of Assets Topic 9 Alfredson et. al Chapter 12

WEEK 10
Employee Benefits Topic 10 Alfredson et. al Chapter 15

WEEK 11
Agriculture Topic 11 Alfredson et. al Chapter 16

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Topic 1: The IASB and its Conceptual Framework

Learning Outcome:

–Evaluate the structure of the IASB and its standard setting role;
–Analyze the purpose of conceptual framework – who uses it and why
–Analyze the qualitative characteristics of the information in the current conceptual framework
proposed changes to these characteristics
–Evaluate the principles for recognizing the elements of financial statements.

Relevant Accounting standard

IAS 1 — Presentation of Financial Statements

http://www.iasplus.com/en/standards/ias/ias1

IAS 7 — Statement of Cash Flows http://www.iasplus.com/en/standards/ias/ias7

IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

http://www.iasplus.com/en/standards/ias/ias8

The International Accounting Board

Development of IFRS
The International accounting standard committee (IASC) was established in 1973. The founding members
were the professional accounting bodies of Australia, Canada, France, Germany, Japan, Mexico, The
Netherlands, The UK and the US. This marked the beginning of international efforts to develop global
accounting standards. The IASC undertook the development of international accounting standard, including
the development of an International framework. However in many cases the professional bodies, who were
members of the IASC, were not the domestic standard-setting authority and thus there was little full scale
adoption of International accounting standards.

In 1977 the IASC undertook a strategic review of its structure and processes culminating in the
replacement of IASC with the International Standard setting Board (IASB), whose members are appointed
by the Trustees of the International accounting standards committee foundation (IASCF). The reforms
established a partnership between the IASB and national standard – setting bodies to strengthen the
development of an internationally accepted set of accounting standards. Refer to the “About Us” page on
the IASB website; < http: // www.iasb.org >

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Regulatory Framework

The International Accounting Standards Board (IASB)

• Overseen by the International Accounting Standards Committee (IASC) Foundation

• An independent standard-setting board
• Accountable to the public interest
• Supported by the following:
– Standards Advisory Committee (SAC)
– International Financial interpretations committee (IFRIC)
– Previously International Accounting Standards Committee (IASC) – issued International
Accounting Standards (IASs)

Key objectives of the IASC

1. The development of a single set of high quality understandable and enforceable global accounting
standards that require high quality, transparent and comparable information in financial statements
and other financial reporting to help participants in the world’s capital markets and other users
make economic decisions
2. To promote the use and application of these standards

3. To take into account the needs of small and medium-sized entities and emerging economies
4. To bring abound convergence of accounting standards

Roles of IASB

 The IASB has complete responsibility for issuing International Financial Reporting Standards
(IFRS), including preparing exposure drafts (EDs), discussion papers, dealing with dissenting
opinions etc
 Also required to liaise with national standards setters to promote the convergence of national
accounting standards and IFRSs

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 Research Question 1. “Practice of financial accounting is quite heavily
regulated’ Research the above statement and critique the arguments for and
against such financial accounting regulations.

Domestic adoption of IFRS

• Fiji adopted IFRSs for reporting periods commencing on or after 1 January 2006 – voluntary.

IFRS for SME’s

• While adopting IFRS provides benefits in terms of facilitating international capital flows, they are
costly for preparers to implement.
• Some preparers or potential prepares may be unlikely to directly benefit from access to global
capital markets. For examples small and medium sized entities that are not listed on stock
exchange are less likely to participate in international capital markets.
• In responding to the need for accounting standards for SMEs the IASB issues IFRS for SMEs in
July 2009.
• IFRS for SMEs is a stand alone document that is intended to reflect the need of users of SME’s
financial statements and cost- benefit considerations.
• IFRS for SMEs omit some standards that do not apply to SMEs, reduces the choice of accounting
policies and prescribes fewer disclosures.

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 Task 1: What is meant by “IFRSs”?

Task 2. Discuss why a company may consider changing to preparing its financial
statements under IFRSs.

Conceptual Framework

Define Conceptual Framework

“A coherent system of interrelated objectives and fundamentals that is expected to lead to consistent
standards and that prescribes the nature, function and limits of financial accounting and reporting.”

Role of framework: Facilitate consistency in financial reporting by;

+ Guiding the development of accounting standards

-accounting standards should be based on a common set of principles derived from objectives and
assumptions
-providing a basis for standard setters to respond to demands of lobby groups.

+ Guiding the development of accounting practice

- providing guidance on accounting for transactions and other events not specifically addressed by
accounting standards.

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 Task 3: Describe the IASB structure and the key players in setting IFRSs.

Objective of general purpose financial reporting

To provide information about the entity’s financial position, changes in it, and performance that is useful to
users for economic decision making

The Framework identifies seven main user groups:

– Investors and their advisors
– Employees and their representative groups
– Lenders
– Suppliers and other trade creditors
– Customers
– Governments and their agencies
– The public

Assumptions underlying the financial statements

The Framework assumes that all entities apply the following fundamental assumptions
The accruals basis of accounting
The going concern basis of accounting

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 Task 4: Describe the purpose of a conceptual framework – who uses it and why

Qualitative characteristics in the current Framework

2 fundamental qualitative characteristics of financial statements:

Relevance and faithful representation
4 enhancing qualitative characteristics:

Comparability, Understand ability, Verifiability and Timeliness.

It also identifies two constraints to achieving these: Materiality and Cost

Qualitative characteristics

The revised Conceptual Framework says that ‘the qualitative characteristics of useful financial information
identify the types of information that are likely to be most useful to the existing and potential investors in
making decisions (IASB, 2010) The qualitative characteristics of useful financial reporting identify the types
of information are likely to be most useful to users in making decisions about the reporting entity on the
basis of information in its financial report.

Financial information is useful when it is relevant and represents faithfully what it purports to represent. The
usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.

Relevance

Relevant financial information is capable of making a difference in the decisions made by users. Financial
information is capable of making a difference in decisions if it has predictive value, confirmatory value, or
both. The predictive value and confirmatory value of financial information are interrelated.

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Materiality

Is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which
the information relates in the context of an individual entity's financial report.

Faithful representation

General purpose financial reports represent economic phenomena in words and numbers, to be useful,
financial information must not only be relevant, it must also represent faithfully the phenomena it purports to
represent. This fundamental characteristic seeks to maximize the underlying characteristics of
completeness, neutrality and freedom from error. Information must be both relevant and faithfully
represented if it is to be useful.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the
usefulness of information that is relevant and faithfully represented.

Comparability

Information about a reporting entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another date. Comparability
enables users to identify and understand similarities in, and differences among, items.

Verifiability

Verifiability helps to assure users that information represents faithfully the economic phenomena it purports
to represent. Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation.

Timeliness

Timeliness means that information is available to decision-makers in time to be capable of influencing their
decisions.

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Understandability

Classifying, characterizing and presenting information clearly and concisely make it understandable. While
some phenomena are inherently complex and cannot be made easy to understand, to exclude such
information would make financial reports incomplete and potentially misleading. Financial reports are
prepared for users who have a reasonable knowledge of business and economic activities and who review
and analyses the information with diligence. (www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb)

Task 5: Explain the qualitative characteristics that make information in financial statements
useful.

Research Question 2: ‘The Financial accounting conceptual framework has

evolved over the years’ Research the above statement and critique the existing
conceptual framework. .

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Reading Resources

Text Book : Chapter 1: The IASB and its conceptual framework, pp. 3-30.

Reading 1: David Lont, Norman Wong, (2010),"Issues in financial accounting and reporting: a Pacific Rim
focus“, Pacific Accounting Review, Vol. 22 Iss: 2 pp. 85 – 91

Reading 2: Ruth D. Hines, (1989),"Financial Accounting Knowledge, Conceptual Framework Projects and
the Social Construction of the Accounting Profession", Accounting, Auditing & Accountability Journal, Vol. 2
Iss: 2

Reading 3: Wagenhofer. A, (2009), “Global accounting standards: reality and ambitions”, Accounting
Research Journal Vol. 22 No. 1, 2009 pp. 68-80

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Tutorial Questions for Week 2

1. Possies Ltd considers that its most valuable assets is its employees-yet it has to leave them off the
balance sheet. Explain this situation.

2. How can a local standard-setting body, such as the FIA, contribute to the development of IFRSs?

3. What is a general purpose financial report?

4. what does it mean for financial information to be ‘reliable’?

5.How would you determine whether an item is material? And what are the disclosure implications if an item
is deemed to be material?

6. Hines (1991) argues that conceptual framework ‘presume, legitimize and reproduce the assumption of
an objective world and as such they play a part in constituting the social world… conceptual frameworks
provide social legitimacy to the accounting profession’. Try to explain what she means.

7. On 5th March 2014 $20 000 cash was stolen from Ming Lee Ltd’s night safe. Explain how Ming Lee
should account for this event, justifying your answer by reference to relevant Conceptual Framework
definitions and recognition criteria.

8. ABC cosmetics has spent $220 000 this year on a project to develop a new range of chemical-free
cosmetics. As yet it is too early for ABC’s management to be able to predict whether this project will prove
to be commercially successful.
Required: Explain whether ABC Cosmetics should recognize this expenditure as an asset, justifying your
answer by reference to the Conceptual Framework asset definition and recognition criteria.

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Summary of Readings

Reading 1: David Lont, Norman Wong, (2010),"Issues in financial accounting and reporting: a Pacific Rim
focus“, Pacific Accounting Review, Vol. 22 Iss: 2 pp. 85 – 91

Abstract: This paper is to provide insight into recent developments in financial accounting issues in the
Pacific Rim area. The paper focuses on the impact of international financial reporting standards (IFRS) and
provides a commentary, as well as context, for the papers that appear in this special issue.

Note: Full Readings can be download from University library website also it will be provided in the moodle.

Reading 2: Ruth D. Hines, (1989),"Financial Accounting Knowledge, Conceptual Framework Projects and
the Social Construction of the Accounting Profession", Accounting, Auditing & Accountability Journal, Vol. 2
Iss: 2

Abstract: Professional practitioners have the power to define individuals and situations, prescribe and
predicate consequences for the individual and for society based on those definitions, determine what is
normal, stigmatize or normalize the individual, monitor individuals, make decisions for them, alter the
personal and property rights of individuals, define, or override social taboos and mores, and even shorten
or prolong individual life. The vast powers are generally considered legitimize because of the expertise of
professionals, which is seen as being founded on their body of knowledge. For the exercise of this power
based on their expertise and knowledge, professionals are able to command high financial rewards,
prestige and social influence.

Note: Full Readings can be download from University library website also it will be provided in the moodle.

Reading 3: Wagenhofer. A, (2009), “Global accounting standards: reality and ambitions”, Accounting
Research Journal Vol. 22 No. 1, 2009 pp. 68-80

Abstract: The enormous success of International Financial Reporting Standards (IFRS) in becoming
globally accepted accounting standards leads to challenges in the future. The purpose of this paper is to
outline challenges that arise from political influences and from the pressure to sustain a successful path in
the development of standards. It considers two strategies for future growth which the International
Accounting Standards Board (IASB) follows: the work on fundamental issues and diversification to private
entities.

Note: Full Readings can be download from University library website also it will be provided in the moodle.

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Topic 2: Revenue

Learning Outcome:

– Understand the definition of Income under the framework

–Apply the recognition criteria for revenue, distinguishing between sales of goods and the rendering
of services.
–Apply the recognition criteria for Interest, royalties and dividends.
–Evaluate issues influencing the timing of recognition of revenues
–Evaluate the timing differences between revenue recognition and the actual flow of assets to the
entity as the final component of the earning process
–Provide the disclosure requirement of IAS 18.

Relevant Accounting standard

IAS 18 Revenue http://www.iasplus.com/en/standards/ias/ias18

Revenue definitions

Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary
operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and
dividends).

Scope of IAS 18

• Establishes the principles of recognising revenue from:

– The sale of goods
– The rendering of services; and
– The use by others of entity assets yielding interest, royalties and dividends.
– The following are specifically excluded from IAS 18:
– Constructions contracts
– Insurance contracts
– Leases

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 Task 1: Discuss the background to the development of IAS 18 Revenue.

Measurement of revenue

IAS 18 requires that revenue be measured at the “fair value of the consideration received or receivable”.

In most cases the measurement of revenue is straight forward.

An exchange for goods or services of a similar nature and value is not regarded as a transaction that
generates revenue.

However, exchanges for dissimilar items are regarded as generating revenue.

If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less
than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate.

– Exchanges of goods
– Sometimes two sellers may swap goods that are of a similar nature and value
– Example: crude oil suppliers may exchange inventory in different locations to fulfill demand
on a timely basis
– Exchanges of goods similar in nature does not result in revenue – revenue is not
recognised until the asset is sold to an external customer
– Exchanges of goods dissimilar in nature does result in revenue
– IAS 18 does not define “dissimilar”
– Recognition of revenue

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The issue of when to recognise revenue is of critical importance

A significant portion of financial statement restatements (due to errors in prior period reports) arise as a
result of errors in revenue recognition

Key issues to be considered in determining the timing of recognising revenue include:

– When are the goods delivered/services performed?

– When does title to the goods pass to the customer?

Recognition criteria:

 it is probable that any future economic benefit associated with the item of revenue will flow to the
entity, and
 the amount of revenue can be measured with reliability

Revenue from sale of goods

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

– Risks and rewards of ownership have been transferred

– The entity retains no managerial involvement and exerts no effective control over the
goods
– The amount of revenue can be reliably measured
– It is probable that benefits will flow to the seller
– The costs of the transaction can be measured reliably

Revenue from services

Revenue from services is recognised based on the percentage of completion of the service project

• The following conditions must first have been satisfied:

– The amount of revenue can be reliably measured
– It is probable that benefits will flow to the seller
– The costs of the transaction can be measured reliably
– Note that these are the same as the last three conditions relating to the sale of goods

Interest, Royalties, and Dividends

• Interest: using the effective interest method as set out in IAS 39

• Royalties: on an accruals basis in accordance with the substance of the relevant agreement
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• Dividends: when the shareholder's right to receive payment is established

Task 2: Compare and contrast the revenue recognition criteria for the sale of goods with
those for the rendering of services?

Task 3: IAS18 states that: ‘An exchange for goods or services of a similar nature and value is
not regarded as a transaction that generates revenue’. Critically discuss with example.

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Recognition of revenue
At what point during the earning process can revenue be recorded as earned because there is
sufficient evidence?

Task 4: When would it be appropriate to recognise revenue at completion of production

rather than at the point of sale?

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 Task 5: If an entity applies the percentage of completion method, would this approach be
considered more conservative than an approach that differ profit recognition until the
completion of the contract? Explain

Disclosure Requirement

1. accounting policy for recognising revenue

2. amount of each of the following types of revenue:
– sale of goods
– rendering of services
– interest
– royalties
– dividends
– within each of the above categories, the amount of revenue from exchanges of goods or
services

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 Research Question 1: ‘Organization can recognize income at different points
in the operating cycle’
Research the above statement and discuss the issues associated with
recognizing revenue for Long-Term Construction projects.

Reading Resource Materials

Text: Chapter 3: Revenue pp.81-116.

Reading1: D.G. Gouws, A. Rehwinkel, (2004),"Financial accounting and reporting: Sustaining relevance in
the present time paradigm", Meditari Accountancy Research, Vol. 12 Iss: 1 pp. 77 – 99

Reading 2: Alfred Wagenhofer, (2009),"Global accounting standards: reality and ambitions", Accounting
ResearchJournal, Vol. 22 Iss: 1 pp. 68 – 80

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Tutorial Questions for Week 3

1. When would it be appropriate to recognise revenue at completion of production rather than at the point of
sale?

2. Coombes and Martin (1982) argue that accountants would be indifferent to the point chosen for revenue
recognition if there were a constant and repetitive process of purchasing and selling goods or services at
set prices. Explain this argument.

3. Company R sells plastic bottles. Wholesale customers that purchase more than 10 000 bottles per
month are entitled to a discount of 6% on their purchases. On 1 March 2011 Customer P ordered 10 crates
of bottles from Company R. Each crate contains 2000 bottles. The normal selling price per crate is $400.
Company R delivered the 10 crates on 15 March 2011. Customer P paid for the goods on 15 April 2011.
The end of Company R’s reporting period is 30 June.

Required: Prepare the journal entries to record this transaction by Company R for the year ended 30 June
2011.

4. In each of the following situations, state at which date, if any, revenue will be recognised:

• A contract for the sale of goods is entered into on 1 May 2011. The goods are delivered on 15 May
2011. The buyer pays for the goods on 30 May 2011. The contract contains a clause that entitles
the buyer to rescind the purchase at any time. This is in addition to normal warranty conditions.
• A contract for the sale of goods is entered into on 1 May 2011. The goods are delivered on 15 May
2011. The buyer pays for the goods on 30 May 2011. The contract contains a clause that entitles
the buyer to return the goods up until 30 June 2011 if the goods do not perform according to their
specification.
• A contract for the sale of goods is entered into on 1 May 2011. The goods are delivered on 15 May
2011. The contract contains a clause that states that the buyer shall only pay for those goods that it
sells to a third party for the period ended 31 August 2011. Any goods not sold to a third party by
that date will be returned to the seller.
• Retail goods are sold with normal provisions allowing the customer to return the goods if the goods
do not perform satisfactorily. The goods are invoiced on 1 May 2011 and the customer pays cash
for them on that date.

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5. In each of the following situations, state at which date/s, if any, revenue will be recognised:

• A contract for the rendering of services is entered into on 1 May 2011. The services are delivered
on 15 May 2011. The buyer pays for the services on 30 May 2011.
• A contract for the rendering of services is entered into on 1 May 2011. The services are delivered
continuously over a 1-year period commencing on 15 May 2011. The buyer pays for all the services
on 30 May 2011.
• A contract for the rendering of services is entered into on 1 May 2011. The services are delivered
continuously over a 1-year period commencing on 15 May 2011. The buyer pays for the services
on a monthly basis, commencing on 15 May 2011.
• Company A is an insurance agent and provides insurance advisory services to Customer B.
Company A receives a commission from Insurance Company I when Company A places Customer
B’s insurance policy with Insurance Company I, on 1 April 2011. Company A has no further
obligation to provide services to Customer B.

6. What are the recognition criteria for income under the Conceptual Framework? How do these differ from
the key stated purpose of IAS 18?

7. What is an ‘executory contract’? How does this affect the dates on which revenue is recognised under
the Conceptual Framework?

8. Explain why IAS 18 does not permit exchanges of goods similar in nature as revenue i.e. revenue is not
recognized. (2.5 marks)

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Summary of Readings

Reading 1: Wagenhofer. A, (2009)," Global accounting standards: reality and ambitions, Accounting
Research Journal Vol. 22 No. 1, 2009 pp. 68-80

The enormous success of International Financial Reporting Standards (IFRS) in becoming globally
accepted accounting standards leads to challenges in the future. The purpose of this paper is to outline
challenges that arise from political influences and from the pressure to sustain a successful path in the
development of standards. It considers two strategies for future growth which the International Accounting
Standards Board (IASB) follows: the work on fundamental issues and diversification to private entities.

Note: Full Readings can be download from University library website also it will be provided in the moodle.

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Topic 3: Related Party Disclosures

Learning Outcome:

- Evaluate what are Related Parties and Related Party Transactions?

- Analyze when it is deemed not to be related?
- Apply disclosure requirement for related party transactions?

Relevant Accounting standard

- IAS 24 Related Party Transactions

The objective of IAS 24 is to ensure:

- an entity's financial statements contain the disclosures necessary to draw attention to the possibility that
its financial position and profit or loss may have been affected by the existence of related parties and by
transactions and outstanding balances with such parties.

Who Are Related Parties?

A related party is a person or entity that is related to the entity that is preparing its financial statements
(referred to as the 'reporting entity').

Related parties
if one party has the ability to significantly influence or control the activities of another; or
if both parties are under the common control of another party

Related party
(a) A person or a close member of that person's family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity.

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Related party
(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

Key definitions related to categories of related parties

Control
the power to govern an entity’s financial and operating policies to obtain benefits from its activities the
power does not have to be exercised

Significant influence
the power to participate in (but not control) an entity’s financial and operating policy decisions
the most common relationship in this regard is that between investor and associate

Key management personnel are:

persons having authority and responsibility for an entity’s planning, directing and controlling activities,
including any director of the entity

Close family members of such personnel are related parties, i.e. domestic partner, children and dependants

What Are Related Party Transactions?

Related-party transaction the transfer of resources, services or obligations between related parties,
regardless of whether a price is charged

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 Discussion Question 1
Do you consider that disclosure of related party information is of value:
a) to financial statement users. Why?
b) The organization that making the disclosure. Why?

……………………………………………………………………………………………………………………………
………………………………………………………………

…………………………………………………………….
……………………………………………………………………………………………………………………………
…

………………………………………………………………………………………………………………………….
…………………………………………………………………

……………………………………………………………………………………………………………………………
………………………………………………………….

Major issues to be considered:

Identifying related parties
Identifying related party arrangements
Deciding on the type and extent of the disclosure
Identifying Related Parties
Identifying Related Parties
Disclosure

Relationships between parents and subsidiaries. Regardless of whether there have been transactions
between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the
ultimate controlling party.

Management compensation. Disclose key management personnel compensation in total and for each of
the following categories:
- short-term employee benefits

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 - post-employment benefits
- other long-term benefits
- termination benefits
- share-based payment benefits

Disclosure

Related party transactions.

If there have been transactions between related parties, disclose the nature of the related party relationship
as well as information about the transactions and outstanding balances necessary for an understanding of
the potential effect of the relationship on the financial statements.
These disclosure would be made separately for each category of related parties and would include:

-the amount of the transactions

-the amount of outstanding balances, including terms and conditions and guarantees
-provisions for doubtful debts related to the amount of outstanding balances
-expense recognised during the period in respect of bad or doubtful debts due from related parties

Examples of the Kinds of Transactions that Are Disclosed If They Are with a Related Party
• purchases or sales of goods
• purchases or sales of property and other assets
• rendering or receiving of services
• leases
• transfers of research and development
• transfers under licence agreements
• transfers under finance arrangements (including loans and equity contributions in cash or in kind)
• provision of guarantees or collateral
• commitments to do something if a particular event occurs or does not occur in the future,
including executory contracts (recognised and unrecognised)
• settlement of liabilities on behalf of the entity or by the entity on behalf of another party

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Reading Resource Materials

• IAS 24 Related party disclosures: refer to the website < http: // www.iasplus.com/ standard/
ias24.htm> (Accessed January 2012)

• Nekhili, M. and Cherif, M. (2011) ‘Related parties transactions and firm's market value: the French
case’, Review of Accounting and Finance , Volume: 10 Issue: 3, 3p.

• Bouvier, S. (2011) ‘IASB to Amend Related Party Disclosure Requirements’, Accounting Policy &
Practice Report, Washington, Vol. 7, Nov. Issue. 24, pp.924- 925, 2p.

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Tutorial Questions for Week 4

1. Do you think that an organization which provides information about it related party transactions
would be more favorably viewed by investors than an organization that does not provide any such
information? Explain you answer.

2. Explain why key management personnel are regarded as related parties and identify the types of
information that much be disclosed in relation to key management personnel related transaction.

3. A review of key management personnel disclosure notes will often show that a component of the
salary executives is paid is linked to corporate performance. Why do you think organization would
not just pay directors a fixed salary rather than one based on performance?

4. Review the executive and director disclosures made by Fijian Holding Ltd in its most recent annual
report ( you will need to go to the Fijian Holdings website) and identify which transactions would
cause you most concern. Explain why this is the case.

5. Review a number of SPSE listed company’s annual reports for the content of their related party
disclosures. Click on website link: http://www.spse.com.fj/Company-Information/Listed-Companies-
Annual-Report/2010-Annual-Report-s-(1).aspx
(Identify which company you have reviewed) and list the headings of the various related party
disclosure being made.
Do you think that the costs involved in making related party disclosure would exceed the benefits?
What would be some of the costs and what would be some of the benefits.

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6. Why do standard setters formulate rules for the disclosure of related party relationships?

7. Explain why a parent company and its subsidiary entities are regarded as related parties.

8. Distinguish between control and significant influence.

9. Provide four examples of related party transactions that must be disclosed by a related party
disclosing entity.

10. Identify the disclosures that IAS 24 requires to be provided regarding remuneration paid to key
management personnel. Do you think the costs of making such disclosures outweigh the benefits?
Explain your answer.

11. Choose one entity from each of the following three business sectors and identify the types of
transactions (e.g. goods and services) that the entities might engage in with related parties under
normal commercial terms and conditions.
(a) Transport sector
(b) Retailing sector
(c) Construction sector
(d) Banking sectors

Research Question :

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‘Investors are exposed to risks and opportunities as a result of related party transactions’.

Research the above statement and enlighten the various disclosure requirements included within the
Corporation Act and IAS24-Related party disclosure. (Support your research findings with SPSE’s listed
entities)

Topic 4: Provision, contingent liabilities and contingent liabilities

Learning Objectives
– Discuss the concept of provision.
– Understand how to distinguish provisions from other liabilities.
– Analyze the concept of a contingent liability.
– Discuss when provision should be recognized.
– Provide the definition, recognition and measurement criteria for provision and contingent liabilities
to practical situations.
– Discuss the concept of a contingent asset
– Carry out the disclosure requirement for provision, contingent liabilities and contingent liabilities.

Relevant Accounting standard

IAS 37 Provision, contingent liabilities and contingent liabilities

Objective IAS 37
• The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases
are applied to provisions, contingent liabilities and contingent assets and that sufficient information
is disclosed in the notes to the financial statements to enable users to understand their nature,
timing and amount.
• The key principle established by the Standard is that a provision should be recognised only when
there is a liability i.e. a present obligation resulting from past events.
• The Standard thus aims to ensure that only genuine obligations are dealt with in the financial
statements - planned future expenditure, even where authorised by the board of directors or
equivalent governing body, is excluded from recognition

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IAS 37 addresses the recognition, measurement and presentation of:
 Provisions (excluding those covered by another IAS – eg. income taxes, leases, employee
benefits)
 Contingent assets and liabilities
 Restructuring provisions
 Onerous contracts

Definition of a provision
 A provision is a subset of liabilities,
o defined as liability of uncertain timing or amount

 The Framework defines a liability as:

o a present obligation
o arising from a past event
o that is expected to result in an outflow of economic resources
 A present obligation exists only where the entity has no reasonable alternative but to settle the
obligation.

Present obligation
 A present obligation may be:
o Legal >
o Equitable – arising from normal business practice or custom
o Constructive – arising from established pattern of past practice
o -arising from an established pattern of past practice where the entity has indicated that it
will accept certain responsibilities and where it has created a valid expectation that it will
discharge those responsibilities.
 arises when the decision is publicly communicated

Distinguishing provisions from other liabilities

 Key distinguishing factor is the uncertainty relating to either the timing or the amount

 Typical provisions are for:

o warranty

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 o restoration
o restructuring
o onerous contracts.
 Employee benefits are not provisions covered IAS 37 but IAS 19

Recognition criteria for provisions

3 criteria – all must be met
o Present obligation as a result of a past event (legal or constructive)
o Probable outflow of resources to settle (i.e. more likely than not)

o Amount of obligation can be reliably estimated (where a number of possible outcomes

exist it is still possible that the provision is capable of reliable estimation)

- An entity has no realistic alternative but to settle the obligation

• Constructive obligation

An obligation that drives from an entity’s action where

• a) by an established pattern of past practice, published policies , the entity has indicated to other
parties that it will accept certain responsibilities and
• b) as a result the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.

Disclosure of provision
For each class of provision an entity shall disclose:
a) the carrying amount at the beginning and end of the period;
b) additional provisions made in the period, including increases to existing provisions;
c) amount used (i.e. incurred and charged against the provisions during the period;
d) unused amounts reversed during the period a
e) the increase during the period in the discounted amount arising from the passage of time and
the effect of any change in the discount rate.
Comparative information is not required.

• An entity shall disclose the information for each class of provision

• a) a brief description of the nature of the obligation and the expected timing of any resulting
outflows of economic benefits
• b) an indication of the uncertainties about the amount or timing of those outflows.

Where necessary to provide adequate information, an entity shall disclose the major assumptions made
concerning future events.

Discussion question:

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Review the FSC financial report for 2010 accounting policy on provisions and discuss how FSC has
complied with the requirement of IAS37 – their disclosure

……………………………………………………………………………………………………………………………
………………………………………………………………

…………………………………………………………….
……………………………………………………………………………………………………………………………
…

………………………………………………………………………………………………………………………….
…………………………………………………………………

……………………………………………………………………………………………………………………………
………………………………………………………….

Discussion question: Base on the definition of provision

Discuss whether each of the following is a provision or another form of liability.
A) obligation to pay a refund for goods sold
B) warranty given for a television sold by a retailer
C) annual leave

……………………………………………………………………………………………………………………………
………………………………………………………………

…………………………………………………………….
……………………………………………………………………………………………………………………………
…

………………………………………………………………………………………………………………………….
…………………………………………………………………

……………………………………………………………………………………………………………………………
………………………………………………………….

Restructuring provisions
Restructuring is defined as a programme that is planned and controlled by management and materially
changes either the scope of a business undertaken by an entity or the manner in which that business is
conducted

The most difficult aspect of accounting for restructuring is deciding when a provision should be recognized
and which future expenditures should be included in the provision.

The entity should…

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 a) has developed a detailed formal plan for restructuring identifying at least:
i) The business or part of a business concerned;
ii) The principal locations affected
iii) The location, function and approximate number of employees who will be compensated for
terminating their services;
iv) The expenditures that will be undertaken and
v) When the plan will be implemented

b) Has raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan and announcing its main features to those affected by it.

Example restructuring provisions include: terminating contract as direct result of restructuring

Cost not included in restructuring provisions
- Consultant cost

- Retraining or relocating staff

- Marketing or investment in new system
-Expense that relate to future conduct of the business

Contingent liabilities are either:

(a) A possible obligation whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly in control of the entity;
eg. a guarantee on a loan for another entity
OR…

Contingent liabilities
 (b) A present obligation that fails the recognition criteria because
 it is not probable an outflow of eco resources will be required to settle the
obligation; or
 the amount cannot be measured reliably;
eg. a law suit where amount of damages is uncertain

Contingent liabilities are not recognised in the financial statements but must be disclosed in the notes to
the financial statements.

Discussion questions

Review the FSC financial report for 2010 accounting policy on Contingent liabilities and
discuss how FSC has complied with the requirement of IAS37 – their disclosure

……………………………………………………………………………………………………………………………
………………………………………………………………
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…………………………………………………………….
……………………………………………………………………………………………………………………………
…

………………………………………………………………………………………………………………………….
…………………………………………………………………

……………………………………………………………………………………………………………………………
………………………………………………………….

Contingent Assets

Possible asset arising from a past event whose existence will be confirmed by the occurrence/non-
occurrence of one or more uncertain future events not within the control of the entity.

Contingent assets are not recognised in the statement of financial position but must be disclosed in the
notes to the financial statements where an inflow of benefits is probable.

Disclosure
 IAS 37 paras 84- 92 outline the disclosure requirements
– Disclosure for each class of provision required
– Disclosure for each class of contingent liability required
– Disclosure of nature of contingent assets
– Exemptions permitted in rare cases (para 92)

Many analysts consider the contingent liabilities note to be one of the most important

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Discussion questions

a. i) Entity ABC Limited gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract for sale the entity undertakes to make good, repair or replacement,
manufacturing defects that become apparent within 3 years from the date of sale. On the basis of
experience, it is probable that there will be some claims under the warranties.
Required: Discuss how ABC Limited should treat this case in their financials.

ii) Entity ABC has made a written pledge to contribute a substantial sum of money toward the
construction of a new performing arts centre in its community. Executives of the entity appeared in a
press conference to announce the pledge. With the entity’s consent, the charitable organisation that
is building the arts centre has cited the entity’s pledge in its materials soliciting additional pledges for
construction. Under local law, pledges to charitable organisations are not legally enforceable.
Required: Discuss how ABC Limited should treat this case in their financials.

iii) A customer has initiated a lawsuit against an Entity ABC Limited associated with personal injury
when using one of the entity’s products. The entity’s lawyers estimate from experience that at the
reporting date (31 December 20X1) the entity has a 30 per cent chance of being ordered to pay the
customer compensation of $2 million and a 70 per cent chance of being ordered to pay compensation
of $300,000. The ruling is expected to take place in two years’ time.
Required: Discuss how ABC Limited should treat this case in their financials.

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b. i) Waste from Entity’s XYZ Limited’s production process contaminated the groundwater at the
entity’s plant. There is no court case. However, the entity is required by law to restore the
contaminated environment. The entity estimates that such restoration will cost between $50000
and $100000 dollars. The entity is unsure of the date by which it will be required to complete the
restoration.
Required: Discuss how XYZ Limited should treat this case in their financials

ii) Waste from an Entity’s XYZ Limited’s production process contaminated the groundwater at the
entity’s plant. The entity is not required by law to restore the contaminated environment and there
is no court case. However, before the end of the current reporting period the entity made a public
announcement that it would restore the contaminated environment within the next 12 months.
Required: Discuss how XYZ Limited should treat this case in their financials.

iii) Entity XYZ Limited has determined that it will cost approximately $15million to clean up a site that
it previously contaminated as a result of its operation.
Required: Pursuant to IAS37, what attributes should this proposed cleanup have if it is to satisfy the
requirements necessary for labeling it a provision?

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 Research Question

‘Significant judgments are required in accounting for and reporting

provisions, contingent liabilities and contingent assets’.

Research the above statement and explain the financial effect of

contingent liabilities and contingent assets in financial statements
(Support your research findings with SPSE’s listed entities)

Tutorial Questions for Week 5

1. i) What are the characteristics of a provision?

ii). Define a constructive obligation.

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 iii). At what point would a contingent liability become a provision?
iv). Explain how a borrowing cost could arise as part of the measurement of a provision. Illustrate your
explanation with a simple example.

2. The government introduces a number of changes to the Value added tax system. As a result of these
changes Company A, a manufacturing company, will need to retain a large proportion of its administrative
and sales workforce in order to ensure continued compliance with the new taxation regulations. At the end
of the reporting period, no retraining of staff has taken place. Should company A provide for the costs of the
staff training at the end of the reporting period?

3. Company B, a listed company, provides food to function centres that host events such as weddings and
engagement parties. After an engagement party held by one of Company B’s customers in June 2012, 100
people become seriously ill, possibly as a result of food poisoning from products sold by Company B.

Legal proceedings were commenced seeking damages from Company B, which disputed liability by
claiming that the function centre was at fault for handling the food incorrectly.

Up to the date of authorisation for issue of the financial statements for the year to 30 June 2012, Company
Lawyers advised that it was probable that company B would not be found liable. However, two weeks after
the financial statements were published, Company B’s lawyer’s advice that, owing to developments in the
case, it was probable that Company B would be found liable and the estimated damages would be material
to the company’s reported profits.

Required: Should company B recognise a liability for damages in its financial statements at 30 June 2012?
How should it deal with the information it receives two weeks after the financial statements are published?

4. Identify whether each of the following would be a liability, a provision or a contingent liability, or none of
the above, in the financial statements of company A as at the end of the reporting period of 30 June 2013.
Assume that company A’s financial statements are authorised for issue on 24 August 2013.

(a) An amount of $35 000 owing to company Z for services rendered during May 2013
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(b) Long-service leave, estimated to be $500 000, owing to employees in respect of past services
(c) Costs of $26 000 estimated to be incurred for relocating employee D from company A’s head office
location to another city. The staff member will physically relocate during July 2013
(d) Provision of $50 000 for overhaul of a machine. The overhaul is needed every five years and the
machine was five years old as at 30 June 2013
(e) Damages awarded against Company A resulting from a court case decided on 26 June 2013. The
judge has announced that the amount of damages will be set at a future date, expected to be in
September 2013. Company A has received advice from its lawyers that the amount of the damages
could be anything between $20 000 and $7million.

5. A customer filed a lawsuit against Comapny A in December 2012, for costs and damages allegedly
incurred as a result of the failure of one of Company A’s electrical products. The amount claimed was
$3million.

Company A’s Lawyer has advised that the amount claimed is extortionate and that Company A has a good
chance of winning the case. However, the lawyers have also advised tat, if Company A lose the case, it is
expected costs and damages would be about $500000.

How should company A disclose this event in its financial statements as at 31 December 2012?

6. In each of the following scenarios, explain whether or not company G would be required to recognise a
provision.
(a) As a result of its plastics operations, company G has contaminated the land on which it operates. There
is no legal requirement to clean up the land and company G has no record of cleaning up land that it
has contaminated.

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(b) As a result of its plastics operations, company G has contaminated the land on which it operates. There
is a legal requirement to clean up the land.
(c) As a result of its plastics operations, company G has contaminated the land on which it operates. There
is no legal requirement to clean up the land, but company G has a long record of cleaning up land that
it has contaminated.

7. Company A acquires Company B, effective 1 st March 2012. At the date of acquisition, Company A intends
to close a division of Company B. As at the date of acquisition, management has developed and the board
has approved the main features of the restructuring plan and based on available information, best
estimates of the costs have been made.

As at the date of acquisition, a public announcement of Company A’s intentions has been made and
relevant parties have been informed of the planned closure.
Within a week of the acquisition being effected, management commences the process of informing unions,
lessors, institutional investors and other key stakeholders of the board characteristics of its restricting
program. A detailed plan for the restructuring is developed within 3 months and implemented soon
thereafter. Should company A create a provision for restructuring as part of its acquisition accounting
entries? Explain your answer. How would your answer change if all the circumstances are the same as
those above except that company A decided that, instead of closing a division of company B, it would close
down one of its own facilities?

Topic 4: Financial instruments

Learning Objectives
- Evaluate the concept of financial instruments and derivative
- Apply the definitions of the financial assets and financial liabilities
- Contrast between equity instruments and financial liabilities
- Apply the concept of a compound financial instrument.
- Apply the recognition criteria for financial instruments and provide the main disclosure requirement of
IFRS 7.
Relevant Accounting standard
IAS 32 Financial Instruments: Presentation
IAS 39 Financial Instruments: Recognition and Measurements
IFRS 7 Financial Instruments: Disclosures
Introduction to IAS 32, IFRS 7 and IAS 39
• IAS 32 sets out the definitions of financial assets, liabilities and equity instruments
• IFRS 7 contains many of the disclosure requirements of IAS 32 as well as new requirements
• IAS 39 originally based on FASB standard. Includes procedures for the recognition and
measurement of financial instruments.
• IFRS 9 formulated to replace IAS 39 (as yet lacks endorsement by the European parliament

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One of the most controversial development areas in recent times, especially hedge accounting
What is a financial instrument?
Financial Instrument: “ any contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity
Primary instruments:
– Cash, receivables, investments, payables
Secondary (derivative) instruments:
– Value is derived from underlying item: share price, interest rate, etc.
– Financial options, forward exchange contracts
What is a financial instrument?

A two-sided contract. All financial instruments will give rise to a financial asset of one party, with a
corresponding financial liability or equity instrument of another party.

 Eg – sales contract gives rise to a receivable in the sellers books and a payable in the
purchasers books.

 Definition requires a legal/contractual right. Non contractual liabilities are not financial
instruments.
 Eg – income taxes arise from a statutory right.
Non financial assets and liabilities
Contracts to buy or sell non-financial items such as wheat, gold or silver do not satisfy the definition
of a financial instrument where the contract is expected to settled by physical delivery.
Physical assets such as plant eventually be converted to cash but they are not financial assets because
an entity has no present right to receive cash from another entity.
Prepayment are not a financial instrument
Quiz
1. Which of the following assets is not a financial asset?
A. Cash.
B. An equity instrument of another entity.
C. A contract that may or will be settled in the entity's own equity instrument and is not classified as
an equity instrument of the entity.
D. Prepaid expenses.
2. Which of the following liabilities is a financial liability?
A. Deferred revenue.
B. A warranty bligation.
C. A constructive obligation.
D. An obligation to deliver own shares worth a fixed amount of cash.
Derivatives
Derivatives transfer financial risks of the underlying primary financial instrument
One party acquires a right to exchange a financial asset or liability with another party under potentially
favourable conditions. The other party takes on the right to exchange under potentially unfavourable
conditions.
Parties to derivatives are taking bets on what will happen to it in the future.
Debt/equity distinctions are important – affects gearing and solvency ratios, debt covenants, treatment of
payments as either interest or dividends & capital adequacy requirements
A ‘substance over form’ test in IAS 32 aims to limit attraction to misclassify many as equity instruments

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4 common derivative instruments
• Forward exchange contract
• Future contract
• Option contract
• Swap contract – interest rate swap
- cross currency swap
- embedded derivative
Recognition measurement and de-recognition
For financial instrument it is expected that the normal recognition criteria for asset and liabilities are met.
- it is probable that the future economic benefit will eventuate for the assets or will be sacrificed in
the future for the liability and
- The cost or other value can be reliably measured.
IAS 39 measurement rules address:
1. Initial measurement
2. Subsequent measurement
3. Fair value measurement consideration

4. Reclassifications
5. Gain and losses
6. Impairment/uncollectability.
Measurement
Initial measurement : all financial assets and financial liabilities should be initially measured at fair value.
What is fair value: - the amount for which an assets could be exchanged or liability settled between
knowledgeable willing parties in an arm length transaction.
Summary of financial assets categories as per IAS 39 and subsequent measurement requirements
3 Fair value measurement consideration
‘Fair value hierarchy’ determines order of sources of fair value as:
Active market quoted price – normally the current bid or asking price. This is the best estimate of fair
value
No active market -valuation techniques – eg via discounted cash flow analysis
No active market -equity instruments– must be measured at cost
Reclassification
This will only occur in rare circumstances;

• No reversal of any previous recognized gain or loss is allowed

• The fair value at the date of the reclassification becomes the amortized cost going forward.
Gain and losses
• a) gains and losses on finanicial instrument classfieid as at fair value through profit or loss are
reported in the profit and loss for the period.
• b) gain and losses on available for sale securities are recognised in other comprehensive income.
The gain and losses reported in the other comprehensive income remain in equity until the financial
assets is sold or disposed.
Impairment of financial assets- bankruptcy or disapperaance of the issuer or a significant decline in
market price due to a major disaster. Entities should annually assess the recoverable amount
Impairment occurs when RA < CA
Hedge accounting

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 • Hedge arrangements are entered into to protect an entity from risk – e.g. currency or interest rate
risk
• Hedge accounting generally results in a closer matching of the statement of financial position effect
with the profit or loss effect
• Protects the statement of profit or loss and other comprehensive income from volatility caused by
fair value changes over time
Hedge accounting - definitions
Hedging instrument
• A hedging instrument is a financial asset or financial liability whose fair value or cash flows are
expected to offset changes in the fair value or cash flows of a designated hedge item
• Eight essential criteria for an instrument to be classified as a hedging instrument
Hedged item
• A hedged item is an asset, liability or anticipated transaction that:
– Exposes the entity to risk of changes in fair value or future cash flows and
– Is designated as being hedged
Hedge accounting - conditions
Five conditions must be met in order for hedge accounting to be applied:
1. Must be formal designation and documentation of the hedge at inception
2. The hedge must be expected to be highly effective (80% - 125%)

3. For cash flow hedges the transactions must be highly probable

4. The effectiveness of the hedge must be able to be reliably measured
5. The hedge must be assessed on an ongoing basis for effectiveness
Hedge accounting – types of hedges
Fair value hedge-A hedge of the exposure to changes in the FV of an asset, liability or commitment
Cash flow hedge- A hedge of the exposure to the variability in cash flows of a recognised asset or liability
or forecast transaction. Locks in future cash flows
Hedge of a net investment in a foreign operation
Decognition of financial assets and financial liabilities
• Derecognizing financial assets: when the contractual right to the cash flows from the financial
assets expired.
• Derecognizing financial liabilities: when the obligation is discharged or cancelled or expires.

Case Study: This case illustrates the application of the principle for derecognizing of
financial assets Facts During the reporting period, Entity A has sold various financial
assets:
1. Entity A sells a financial asset for $10,000. There are no strings attached to the sale, and
no other rights or obligations are retained by Entity A.
2. Entity A sells an investment in shares for $10,000 but retains a call option to repurchase the shares at
any time at a price equal to their current fair value on the repurchase date.
3. Entity A sells a portfolio of short-term account receivables for $100,000 and promises to pay up to $3,000
to compensate the buyer if and when any defaults occur. Expected credit losses are significantly less than
$3,000, and there are no other significant risks.
4. Entity A sells a portfolio of receivables for $10,000 but retains the right to service the receivables for a
fixed fee (i.e., to collect payments on the receivables and pass them on to the buyer of the receivables).
The servicing arrangement meets the pass-through conditions.

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5. Entity A sells an investment in shares for $10,000 and simultaneously enters into a total return swap with
the buyer under which the buyer will return any increases in value to Entity A and Entity A will pay the buyer
interest plus compensation for any decreases in the value of the investment.

6. Entity A sells a portfolio of receivables for $100,000 and promises to pay up to $3,000 to compensate the
buyer if and when any defaults occur. Expected credit losses significantly exceed $3,000.
Required
Help Entity A by evaluating the extent to which derecognition is appropriate in each of the above cases.

Main risks that pertain to financial instruments.

Market risk is comprised of
(1) currency risk – the risk that the value of a financial instrument will fluctuate because of changes in
foreign exchange rates;
(2) interest rate risk – the risk that the value of a financial instrument will fluctuate because of changes in
market interest rates;
(3) other price risk – the risk that the value of a financial instrument will fluctuate as a result of changes in
market prices. Market risk embodies the potential for both loss and gain.
• Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and
cause the other party to incur a financial loss.
• Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated
with financial liabilities. This is also known as funding risk.
Disclosure issues
The purpose of disclosures prescribed by IFRS 7 is to:
aid understanding of entity’s financial position/ performance/cash flows, and assess amounts, timing and
certainty of future cash flows
Statement of financial position disclosures
- categories of financial assets and liabilities- Carrying value for each of the 4 categories of financial
assets and the 2 categories of financial liabilities.
- Financial assets or financial liabilities at fair value through profit and loss – requires specific
disclosures about any loan or receivables that an entity has designated at fair value through profit and loss.
Reclassification- disclosure of the amount reclassified together with the reasons for the reclassification.
Decognition- disclosure of assets that was dercognised during the year.
Statement of comprehensive income & equity disclosures
Disclosure in respect to:
 Net gain and losses on
-
-
-
- financial assets or liabilities at fair value through statement of comprehensive income
- Available for sale financial assets
-Held to maturity investment
-Loans and receivables
-Financial liabilities measured at amortized cost.
- Total interest income and total interest expenses
- Fee Income and expenses
- Interest income on impaired financial assets
- The amount of impairment loss for each class of financial assets.

Discussion question

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This questions illustrates how to apply the definition of a financial instrument and the scope of IAS 32.
Facts: Company A is evaluating whether each of these items is a financial instrument and whether it should
be accounted for under IAS 32:
1. Cash deposited in banks
2. Gold bullion deposited in banks
3. Trade accounts receivable
4. Investments in debt instruments
5. Investments in equity instruments, where Company A does not have significant influence
6. over the investee
7. Investments in equity instruments, where Company A has significant influence over the investee
8. Prepaid expenses
9. Finance lease receivables or payables
10. Deferred revenue
11. Statutory tax liabilities
12. Provision for estimated litigation losses
13. An electricity purchase contract that can be net settled in cash
14. Issued debt instruments
15. Issued equity instruments
Required Help Company A to determine (1) which of the above items meet the definition of a financial
instrument and (2) which of the above items fall within the scope of IAS 32.

Discussion Question
Company A issues redeemable preference shares. The shares are redeemable for
cash at the option of the issuer. The shares carry a cumulative 6% dividend. In
addition, the preference share dividend can be paid only if a dividend on ordinary shares is paid for the
relevant period. Company A is highly profitable and has a history of paying ordinary dividends at a yield of
about 4% annually without fail for the past 25 years. Company A issued the preference shares after
considering various options to raise finance for building a new factory. The market interest rate for long-
term debt at the time the preference shares were issued was 7%.
Required
• Determine whether this financial instrument should be classified as a financial liability or equity
instrument of company A. Give reasons for your answer.

On October 31, 20X5, Entity A issues convertible bonds with a maturity of five years.
The issue is for a total of 1,000 convertible bonds. Each bond has a par value of
$100,000, a stated interest rate is 5% per year, and is convertible into 5,000 ordinary
shares of Entity A. The convertible bonds are issued at par. The per-share price for an
Entity A share is $15. Quotes for similar bonds issued by Entity A without a conversion option (i.e., bonds
with similar principal and interest cash flows) suggest that they can be sold for $90,000.
Required
Indicate how Entity A should account for the compound instrument on initial recognition.
Determine whether the effective interest rate will be higher, lower, or equal to 5%

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Entity A enters into a contract to purchase 5 million pounds of copper for a fixed price at a future date.
Copper is actively traded on the metals exchange and is readily convertible to cash.

Required : Discuss whether this contract falls within the scope of IAS 39.

Explain the following terms with examples

 highly probable
 Financial Instrument
 Fair value hedge
• Cash flow hedge
• Equity risk
• Hedged item
• Hedging instruments
• Derivatives
• Hedge accounting

Tutorial Questions for Week

1. Discuss the concept of ‘equity risk’ and how it is useful in determining whether a financial instrument is a
financial liability or an equity instrument of the issuer.
2. What is the purpose of IFRS 7’s disclosure requirements?
3. Explain what an economic hedge is. Will hedge accounting always result in the same outcome as an
economic hedge?
4. Distinguish, explain and discuss the meaning of ‘highly effective’ and ‘highly probable’ in the context of
the hedge accounting rules in IAS 39.
5. Classify the following items as statement of comprehensive income/statement of changes in equity.

(a) Dividends paid on non-redeemable preference shares

(b) Dividends paid on preference shares redeemable at the holder’s option

(c) Interest paid on a five-year, fixed interest note

(d) Interest paid on a convertible note classified as a compound instrument

6. Which of the following is a financial instrument (i.e. a financial asset, financial liability, or equity
instrument in another entity) within the scope of IAS 32? Give reasons for your answer.
(a) Cash
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(b) Investment in a debt instrument
(c) Investment in a subsidiary
(d) Provision for restoration of a mine site
(e) Buildings owned by the reporting entity
(f) Forward contract entered into by a bread manufacturer to buy wheat
(g) Forward contract entered into by a gold producer to hedge the future sales of gold
(h) General sales tax payable
7. Company A issues 100000 $1 convertible notes. The notes pay interest at 7%. The market rate for
similar debt without the conversion option is 9%. The note is not redeemable, but it converts at the option of
the holder into however many shares that will have a value of exactly $100000.
Required
Determine whether this financial instrument should be classified as a financial liability or equity instrument
of Company A. Give reasons for your answer.
8. Categorise each of the following common financial instruments as financial assets, financial liabilities or
equity instruments - of the issuer or the holder, as specified.
(a) Loans receivable (holder)
(b) Loans payable (issuer)
(c) Ordinary shares of the issuer
(d) The holder’s investment in the ordinary shares in part (c)
(e) Redeemable preference shares of the issuer, redeemable at any time at the option of the holder

(f) The holder’s investment in the preference shares in part (e)

9. Company A issues 100000 $1 redeemable convertible notes. The notes pay interest at 5%. They convert
at anytime at the option of the holder into 100000 ordinary shares.
The notes are redeemable at the option of the issuer for cash after 5 years. If after 5 years the note have
not been redeemed or converted, they cease to carry interest. Market rates for similar notes without the
conversion option are 7%. Determine whether this financial instrument should be classified as a financial
liability or equity instrument of company A. Give reasons for your answer.

Research Question:

‘Financial Instruments are most controversial development areas in

recent times’
Research the above statement and discuss the expected future
developments on accounting for financial instruments and enlighten
the concept of hedge accounting (apply the rules to simple common
cash flow and fair value hedges). (Support your research findings with
SPSE’s listed entities)

Topic 6: Property, plant and equipment

Learning Outcome:

– Evaluate the recognition criteria for property, plant and equipment;

- Analyze the cost model of measurement and understand the nature and calculation of depreciation.
- Apply the revaluation model of measurement.

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- Evaluate the steps involved in derecognizing assets.
- Apply the disclosure requirements of property, plant and equipment..

Relevant Accounting standard

AS 16 – Property Plant and Equipment
The nature of PP&E
IAS 16 defines property, plant & equipment as: Tangible items , Assets with a specific use within the entity
They are expected to be used during more than one period
Excludes assets held for sale
Normally divided into classes:
Land
Buildings,
Machinery,

Motor vehicles
Initial recognition of PP&E
Cost recognised as an asset if:
• it is probable that economic benefits will flow to the entity, and
• the cost can be reliably measured
Where future economic benefits are not expected to flow to the entity, costs incurred should be expensed.

Complex Assets
Component parts (with different useful lives) are required to be separately accounted for.
Eg. An aircraft –
Measurement
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are
recognised as an expense. [IAS 23.8]
Subsequent to initial recognition
Accounting policy choice of this decision based primarily on relevance of information.
The policy that is chosen must be applied to a whole class of assets
May change policy, but only if results in more relevant/ reliable information
The Cost Model
IAS 16 requires that assets are carried at cost less any accumulated:
Depreciation
Impairment losses
Repair and maintenance costs are expensed as incurred, not capitalised
Capitalisation requires increased probable future economic benefit (at time of expenditure)
The Revaluation Model
As an alternative to the cost model IAS 16allows the revaluation model to be used for classes of assets
Measurement basis is fair value (FV)
Frequency of revaluations is not specified, but must be performed with sufficient regularity such that the
carrying amount of assets is not materially different from their FV
Revaluation performed on a class basis
Accounting performed on an asset-by-asset basis

Choosing Between the Cost Model & the Revaluation Model

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Revaluation model provides more relevant information
However, there is a cost disincentive of adopting the revaluation model
Cost model harmonises with US GAAP
Differing impacts on profit & loss
De-recognition
IAS 16 para 67 identifies two occasions where derecognition should occur:
On disposal
Where no future economic benefits are expected
When items are sold a gain or loss is recognised, and included in the profit or loss for the period
Cost Model
Revaluation Model

1. Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the
private jet is $15 million and can be depreciated either using a composite useful life or
useful lives of its major components. It is expected to be used over a period of 7 years.
The engine of the jet has a useful life of 5 years. The private jet's tires are replaced every
2 years. The private jet will be depreciated using the straight-line method over:
A. 7 years composite useful life.
B. 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the
balance cost of the jet.
C. 2 years useful life based on conservatism (the lowest useful life of all the parts of the jet).
D. 5 years useful life based on a simple average of the useful lives of all major components of the jet

2. An entity imported machinery to install in its new factory premises before year-end.
However, due to circumstances beyond its control, the machinery was delayed by a few
months but reached the factory premises before year-end. While this was happening,
the entity learned from the bank that it was being charged interest on the loan it had
taken to fund the cost of the plant. What is the proper treatment of freight and interest
expense under IAS 16?

A. Both expenses should be capitalized.

B. Interest may be capitalized but freight should be expensed.
C. Freight charges should be capitalized but interest cannot be capitalized under these circumstances.
D. Both expenses should be expensed

Research Question:

‘Significant judgments that are required in accounting for property, plant

and equipment’
Research the above statement and evaluate the cost model and the
revaluation model of measurement for property, plant & equipment.
Discuss the factors to consider when choosing which measurement
model to apply. (Support your research findings with SPSE’s listed
entities)
Tutorial Questions for Week 7

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1.i) What assets constitute property, plant and equipment?
ii) What are the recognition criteria for property, plant and equipment?
iii) How should items of property, plant and equipment be measured at point of initial recognition, and
would gifts be treated differently from acquisitions?
iv). How is cost determined?
v) . When should property, plant and equipment be derecognised?
2. The management of an entity has decided to use the fair value basis for the measurement of its
equipment. Some of this equipment is very hard to obtain and has in fact increased in value over the
current period. Management is arguing that, as there has been no decline in fair value, no depreciation
should be charged on these pieces of equipment. Discuss
3. On 30th June 2012, the statement of financial position of Meezen Ltd showed the following non-current
assets after charging depreciation:
Building $300000
Accumulated depreciation (100000)
$200000
Motor Vehicle 120000
Accumulated depreciation (40000)

$80000

The company has adopted fair value of the valuation of non-current assets. This has resulted in the
recognition in previous periods of an asset revaluation surplus for the building of $14000. On 30 June 2013,
an independent valuer assessed the fair value of the building to be $160000 and the vehicle to be $90000.
The income tax rate is $30%
a. Prepare any necessary entries to revalue the building and the vehicle as at 30 June 2012
b. Assume that the building and the vehicle had remaining useful lives of 25 years and 4 years
respectively, with zero residual value. Prepare entries to record depreciation expense for the year ended
30 June 2013 using the straight-line method.
4. Rennau Ltd has acquired a new machine, which it has had installed in its factory. Which of the following
items should be capitalised into the cost of the building?
(a) Labour and travel costs for managers to inspect possible new machines and for negotiating for a new
machine
(b) Freight costs and insurance to get the new machine to the factory
(c) Costs for renovating a section of the factory, in anticipation of the new machine’s arrival, to ensure that
all the other parts of the factory will have easy access to the new machine
(d) Cost of cooling equipment to assist in the efficient operation of the new machine
(e) Costs of repairing the factory door, which was damaged by the installation of the new machine
(f) Training costs of workers who will use the machine
5. Mehna Ltd has acquired a new building for $500 000. It has incurred incidental costs of $10 000 in the
acquisition process for legal fees, real estate agent’s fees and stamp duties. Management believes that
these costs should be expensed because they have not increased the value of the building and, if the
building was immediately resold, these amounts would not be recouped. In other words, the fair value of
the building is considered to still be $500 000.
Discuss how these costs should be accounted for.

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 5. Nassau ltd uses many kinds of machines in its operations. It constructs some of these machines
itself and acquires other from the manufactures. The fol
6. lowing information relates to two machines that it has recorded in the 2012-2013 period. Machine A
was acquired and Machine B was constructed by Nassau Ltd.

Machine A
Cash paid for equipment including GST of $8000 $88000
Costs of transporting machine – insurance and transport 3000
Labour costs of installation by expert fitter 5000
Labour costs of testing equipment 4000
Insurance costs for 2012- 2013 1500
Costs of training for personnel who will use the machine 2500
Costs of safety rails and platforms surrounding machine 6000
Costs of water devices to keep machine cool 8000
Costs of adjustments to machine during 2012- 2013 to make it
operate more efficiently 7500
Machine B
Cost of material to construct machine, including GST of $7000 $77000
Labour costs to construct machine 43000
Allocated overhead costs- electricity, factory space etc 22000
Allocate interest costs of financing machine 10000
Cost of installation 12000
Insurance for 2012-2013 2000
Profit save by self construction 15000
Safety inspection costs prior to use 4000
Required: Determine the amount at which each of these machines should be recorded in the records of
Nassau Ltd. For items not included in the cost of the machines, note how they should be accounted for.
7. Eros Ltd constructed a building for use by the administration section of the company. The completion
date was 1st July 2002, and the construction cost was $840000. The company expected to remain in the
building for the next 20 years, at which time the building would probably have no real salvage value and
have to be demolished. It is expected that demolition costs will amount to $15000.
In December 2008, following some severe whether in the city the roof of the administration building was
considered to be in poor shape so the company decided to replace it.
On 1st July, a new roof was estimated to have cost only $140000 in the original construction, although at the
time of construction it was thought that the roof would last for the 20 years that the company expects to use
the building.
Because the company had spent the money replacing the roof, it thought that it would delay construction of
a new building, thereby extending the original life of the building from 20 years to 25 years.
Required
Discuss how you would account for the depreciation of the building and how the replacement of the roof
would affect the depreciation calculation. (10 marks)

Topic 7: Intangible Assets

Learning Outcome:

– Discuss the key characteristics of intangible assets.

– Evaluate the criteria relating to the initial recognition of intangible assets and their
measurement at point of initial recognition.

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– Distinguish between acquired and internally generated intangibles.
– Apply the disclosure requirements of IAS 38.

Relevant Accounting standard

IAS 38 – Intangible Assets
The objective of IAS 38
• is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in
another IFRS.
• The Standard requires an entity to recognise an intangible asset if, and only if, certain criteria are
met.
• The Standard also specifies how to measure the carrying amount of intangible assets and requires
certain disclosures regarding intangible assets.

Scope IAS 38
• IAS 38 applies to all intangible assets other than:
• financial assets
• exploration and evaluation assets (extractive industries)
• expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
• intangible assets arising from insurance contracts issued by insurance companies
• intangible assets covered by another IFRS, such as intangibles held for sale, deferred tax assets,
lease assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS3.
The nature of intangible assets
• IAS 38 provides the following definition for intangibles:
“An identifiable non-monetary asset without physical substance”
• Two key characteristics of intangibles:
• They are identifiable
• They lack physical substance (this is a key characteristic that separates intangibles from
PP&E)
• The nature of intangible assets: identifiability
For an intangible to be identifiable one of the following two criteria must be met:
• is separable from the entity, capable of being transferred
• customer lists
• non-contractual customer relationships
• arises from contractual or other legal rights
• trademarks
• franchise agreements
• The nature of intangible assets:
lack of physical substance
The reason for distinguishing between physical and non-physical assets is due to the fact that the nature of
non-physical assets requires different recognition and measurement requirements to a physical asset
Non-physical assets have a number of unique characteristics.
• Non-physical assets are non-rival assets i.e they can be used at the same time for multiple entries
as there is no opportunity costs for using the asset
• Non-physical assets have large fixed costs and marginal variable costs
• Non-physical assets are not subject to diminishing returns characteristics

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 • Non-physical assets have network effect i.e value of item increases as number of users increases
• Non-physical assets are difficult to manage as they are easy to steal
• Ownership rights are harder to determine
• There is general absence of organised or competitive markets for them
• There is a high degree of uncertainty regarding the future benefits
• Hard to analyse risks and return on investment on non-physical assets
Examples of possible intangible assets include:
• computer software (copyright)
• Patents &copyrights
• motion picture films
• customer lists
• mortgage servicing rights
• licenses
• import quotas
• franchises
• customer and supplier relationships
• marketing rights
How is the useful life of an intangible asset determined?
Useful life must be assessed as finite or indefinite.
Many factors are considered in determining the useful life of an intangible asset, including:
• (a) the expected usage of the asset by the entity and whether the asset could be
managed efficiently by another management team ;
• (b) typical product life cycles for the asset and public information;
• (c) technical, technological, commercial or other types of obsolescence;
• (d) 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;
• (e) expected actions by competitors or potential competitors;
• (f) the level of maintenance expenditure required to obtain the expected future economic
benefits from the asset;
• (g) 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
• (h) whether the useful life of the asset is dependent on the useful life of other assets of the
entity.
Why are intangibles important?
• Have been increasing in importance over time due to:
•

• Intensified business competition

• The advent of information technologies
The above factors have resulted in a fundamental corporate change.
• Identifying intangible assets
• An asset is defined in the Framework as a resource controlled by the entity.
• Control usually stems from legal or other rights and can be difficult to establish.
Example: highly trained staff do not qualify as intangibles due to lack of control.
• Much debate about such items – hence the requirement of identifiably (and separability).
• As good staff relations do not meet the separability criteria they cannot be recognised as an
intangible asset.
• If at all, may be recognised as part of goodwill.
Recognition & initial measurement
Once it has been determined that an item meets the definition of an intangible it must then meet the
following recognition criteria before it can be recognised as an asset.

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 • It is probable that future economic benefits attributable to the asset will flow to the entity
• The cost of the asset can be measured reliably.
• Intangibles that fail the recognition criteria must be expensed.
• Intangibles are required to be initially measured at cost (purchase price + directly attributable costs)
Recognition & initial measurement
• Intangibles may be acquired in the following ways:
• 1. By separate acquisition
• 2. As part of a business combination
• 3. By way of a government grant
• 4. By exchanges with another intangible
• They may also be internally generated
Internally generated goodwill is not recognised as an asset.
• Goodwill is recognised only when acquired as part of a business combination, and is initially
measured at cost.

What intangibles can never be recognised if internally generated? Why?

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
shall not be recognised as intangible assets
Reason:
Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance cannot be distinguished from the cost of developing the business as a whole.
Therefore, such items are not recognised as intangible assets.

• Recognition & initial measurement:

Internally generated intangibles: R&D
• For development costs to be capitalised, the entity must meet all of the following criteria:
• Technical feasibility
• Intention to complete and sell
• Ability to use or sell
• Existence of a market
• Availability of resources
• Ability to measure costs reliably
Explain the difference between ‘research’ and ‘development’.
Research is original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
• examples of research activities:
• (a) activities aimed at obtaining new knowledge;
• (b) the search for, evaluation and final selection of, applications of research findings or other
knowledge;
• (c) the search for alternatives for materials, devices, products, processes, systems or
services; and
• (d) the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.
• continued
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
before the start of commercial production or use.
• examples of development activities:

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 • (a) the design, construction and testing of pre-production or pre-use prototypes and models;
• (b) the design of tools, jigs, moulds and dies involving new technology;
• (c) the design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
• (d) the design, construction and testing of a chosen alternative for new or improved materials,
devices, products, processes, systems or services
Key disclosure requirements
• For each class of intangible asset, disclose:
• Method of amortisation used
• useful life or amortisation rate
• gross carrying amount, accumulated amortisation and impairment losses as at the beginning
and the end of the period.
• reconciliation of the carrying amount at the beginning and the end of the period showing:
– additions (business combinations separately); assets held for sale; retirements and other
disposals; revaluations; impairments; reversals of impairments; amortisation; foreign
exchange differences; other changes
• basis for determining that an intangible has an indefinite life
• description and carrying amount of individually material intangible assets
• Additional disclosures are required about:
• intangible assets carried at revalued amounts

• the amount of research and development expenditure recognised as an expense in the current
period

In relation to a major Television company such as Fiji TV, discuss what intangible
assets are probably not on the statement of financial position, and possible reasons for
their non-recognition.

Case Study
Brilliant Inc. acquires copyrights to the original recordings of a famous singer. The agreement with
the singer allows the company to record and rerecord the singer for a period of five years. During
the initial six-month period of the agreement, the singer is very sick and consequently cannot
record. The studio time that was blocked by the company had to be paid even during the period the
singer could not sing. These costs were incurred by the company:
• Legal cost of acquiring the copyrights $10 million
• Operational loss (studio time lost, etc.) during start-up period $ 2 million
• Massive advertising campaign to launch the artist $ 1 million

Required
Which of the above items is a cost that is eligible for capitalization as an intangible asset?

Research Question:

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 ‘Intangibles are an identifiable non-monetary asset without physical substance’
Research the above statement and evaluate the criteria relating to recognition and measurement of
intangible assets. Distinguish between acquired and internally generated intangibles and discuss innovative
suggestions for improving the reporting of intangible assets. (Support your research findings with SPSE’s
listed entities)

Tutorial Questions for Week 8

1. i) What are the key characteristics of an intangible asset?

ii) What intangibles can never be recognised if internally generated? Why?
iii) Explain the difference between ‘research’ and ‘development’.
iv) Explain why managers may prefer to expense outlays on intangibles rather than capitalise them.

2. Discuss the importance of intangible assets to computing and softwarcompanies such

as Microsoft , and analyse whether there are aspects of IAS 38 that prevent such
companies from disclosing more information about their intangible assets.
3. Discuss potential problems associated with the recognition of brands by the acquiring
entity.

4. Energy Ltd is involved in the research and development of a new type of three- finned surfboard.
For this research and development, it has incurred the following expenditure:

 $50000 obtaining a general understanding of water flow dynamics;

 $30000 on understanding what local surfers expect from a surfboard;
 $90000 on testing and refining a certain type of fin and
 $190000 on developing a testing a full prototype of the three- finned board, to be called the
thruster’
There is expected to be a very large market for the product, which will generate many millions of dollars in
revenue.
Required:
Determine how the above expenditure would be treated for accounting purpose. (10 marks)
Topic 8: Business combination

Learning Outcome:

- Evaluate the steps in the acquisition method of accounting for business combinations
- Recognized and measure the assets acquired and liabilities assumed in the business combination.
- Analyze and determine the consideration transferred
- Evaluate the nature of and the accounting for goodwill and gain from bargain purchase.
- Provide the accounting record of the acquiree
- Apply the disclosures required under IFRS 3 – Business combination.
Relevant Accounting standard
IFRS3 Business Combination
Business combination
A business combination is a transaction or event in which an acquirer obtains control of one or more
businesses.
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A business is defined as an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return directly to investors or other owners, members or
participants.
The nature of a business combination
IFRS 3 defines a business combination as: ‘the bringing together of separate entities or businesses into
one reporting entity’

A ‘business’ is not just a group of assets, rather, it is an entity able to produce output
The nature of a business combination
Three general forms of business combination are as follows (assuming the existence of two companies – A
Ltd and B Ltd):
1. A Ltd acquires all assets and liabilities of B Ltd
B Ltd continues as a company, holding shares in A Ltd
2. A Ltd acquires all assets and liabilities of B Ltd
B Ltd liquidates
3. C Ltd is formed to acquire all assets and liabilities of A Ltd and B Ltd
A Ltd and B Ltd liquidate
Accounting for business combinations:
Basic principles
IFRS 3 prescribes the acquisition method in accounting for a business combination. The key steps in this
method are:
1. Identify an acquirer
2. Determine the acquisition date
3. Recognise and measure the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree; and
4. Recognise and measure goodwill or a gain from bargain purchase.
Accounting for business combinations: Identifying the acquirer
The business combination is viewed from the perspective of the acquirer
The acquirer is the entity that obtains control of the acquiree
In most cases this step is straight forward.
In other cases judgement may be required
eg where two existing entities (A&B) combine and a new entity (C) is formed to acquire all the shares of
the existing entities
Who is the acquirer? Cannot be C
Indicative factors contained within Appendix B of IFRS 3 to assist in identifying the acquirer
Accounting for business combinations:
Determining the acquisition date
Acquisition date is the date that the acquirer obtains control of the acquiree
Determining the correct acquisition date is important as the following are affected by the choice of
acquisition date:

The fair values of net assets acquired

Consideration given, where the consideration takes a non-cash form
Measurement of the non-controlling interest
Allocating in the records of the acquirer: assets acquired and liabilities assumed
Fair value allocation occurs at acquisition date and requires the recognition of:
• Identifiable tangible and intangible assets
• Liabilities
• Contingent liabilities

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 • Any non-controlling interest in the acquiree
• Goodwill
FVINA = fair value of identifiable net assets (incl. contingent liabilities)
Purchase of business from another entity involving goodwill
Accounting in the records of the acquirer:
Gain from bargain purchase
Where the acquirer’s interest in the FVINA exceeds the consideration transferred, negative goodwill arises
– this is referred to as a gain on bargain purchase
A gain on bargain purchase for the acquirer arises from:
• Errors in measuring fair value
• Another standard’s requirements
• Superior negotiating skills
The existence of a gain on bargain purchase is a rare event
In the event of a gain on bargain purchase the acquirer is required to recognise any gain immediately in the
profit & loss
Disclosures
IFRS 3 contains extensive disclosure requirements in relation to business combinations
Disclosure of information about current business combinations
The acquirer shall disclose information that enables users of its financial statements to evaluate the
nature and financial effect of a business combination that occurs either during the current reporting
period or after the end of the period but before the financial statements are authorised for issue

Among the disclosures required to meet the foregoing objective are the following:
• name and a description of the acquiree
• acquisition date
• percentage of voting equity interests acquired
• primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree. description of the factors that make
up the goodwill recognised
o qualitative description of the factors that make up the goodwill recognised, such as
expected synergies from combining operations, intangible assets that do not qualify for
separate recognition

o acquisition-date fair value of the total consideration transferred and the acquisition-date fair
value of each major class of consideration
• details of contingent consideration arrangements and indemnification assets
• details of acquired receivables
o the amounts recognised as of the acquisition date for each major class of assets acquired
and liabilities assumed
• details of contingent liabilities recognised
• total amount of goodwill that is expected to be deductible for tax purposes
o details of any transactions that are recognised separately from the acquisition of assets
and assumption of liabilities in the business combination
• information about a bargain purchase ('negative goodwill')
• details about a business combination achieved in stages
• information about the acquiree's revenue and profit or loss
o information about a business combination whose acquisition date is after the end of the
reporting period but before the financial statements are authorised for issue
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 Research Question :

‘Business combination is a transaction or event in which an acquirer

obtains control of one or more businesses’
Research the above statement and discuss the different forms and
steps in the acquisition method of accounting for business
combinations with its disclosures requirements.
(Support your research findings with SPSE’s listed entities)
Tutorial Questions for Week 9
1. i) What is meant by a “business combination”?
ii) Discuss the importance of identifying the acquisition date.
iii) Explain the key steps in the acquisition method.
2. Enna Ltd, a supplier of snooker equipment, agreed to acquire the business of a rival firm, Fozia Ltd,
taking over all assets and liabilities as at 1 June 2010. The price agreed on was $60 000, payable $20 000
in cash and the balance by the issue to the selling company of 16 000 fully paid shares in Enna Ltd, these
shares having a fair value of $2.50 per share.
The trial balances of the two companies as at 1 June 2009 were as follows:

Enna Ltd Fozia Ltd

Dr Cr Dr Cr
Share capital 100,000 90,000
Retained earnings 12,000 24,000
Accounts payable 2,000 20,000
Cash 30,000 -
Plant (net) 50,000 30,000
Inventory 14,000 26,000
Accounts receivable 8,000 20,000
Government bonds 12,000 -
Goodwill - 10,000
$114,000 $114,000 $110,000 $110,000

All the identifiable net assets of Fozia Ltd were recorded by Fozia Ltd at fair value except for the inventory,
which was considered to be worth $28 000 (assume no tax effect). The plant had an expected remaining
life of 5 years.
The business combination was completed and Fozia Ltd went into liquidation. Costs of liquidation
amounted to $1 000. Enna Ltd incurred incidental costs of $500 in relation to the acquisition. Costs of
issuing shares in Enna Ltd were $400.
Required:
1. Show the Liquidation account and the Shareholders’ Distribution account in the records of Fozia
Ltd. (10 Marks)
2. Prepare the acquisition analysis. (3 Marks)

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 3. Prepare the journal entries in the records of Enna Ltd to record the business combination. (5
Marks)
3. On 1st July 2010, Asti Ltd acquired the following assets and liabilities of Ascoli Ltd:
Carrying Amount Fair Value
Land $300000 $350000
Plant ( cost $400000) 280000 290000
Inventory 80000 85000
Cash 15000 15000
Account payable (20000) (20000)
Loans (80000) (80000)
In exchange for these assets and liabilities, Asti Ltd issued 100000 shares that has been issued for $1.20
per shares but at 1 July 2010 had a fair value of $6.50 per share.
Required
1. Prepare the acquisition analysis (4 marks)
2. Prepare the journal entries in the records of Asti Ltd to account for the acquisition of the assets and
liabilities of Ascoli Ltd. (3 marks)
3. Prepare the journal entries assuming that the fair value of the shares was $6.00 per share. (4
marks)
4. On 1st June 2010, Big Ltd acquired the following assets and liabilities of Small Ltd:

Carrying Amount Fair Value

Land $310000 $340000
Plant ( cost $400000) 280000 295000
Inventory 80000 85000
Cash 15000 15000
Account payable (20000) (20000)
Loans (80000) (80000)

In exchange for these assets and liabilities, Big Ltd issued 100000 shares that has been issued for $1.20
per shares but at 1 June 2010 had a fair value of $6.30 per share.
Required: Using knowledge of IFRS 3
1. Prepare the acquisition analysis (5 marks)
2. Prepare the journal entries in the records of Big Ltd to account for the acquisition of the assets and
liabilities of Small Ltd. (5 marks)
3. Prepare the journal entries assuming that the fair value of the shares was $8.00 per share. (5
marks)

Topic 9: Impairment of Assets

Learning Outcome:

– Evaluate the purpose of the impairment test for assets

- Discuss when to undertake an impairment test
- Discuss how to undertake an impairment test for an individual assets

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- Discuss and identify a cash- generating unit and account for an impairment loss for cash generating
unit- not including goodwill.
- Account for the impairment of goodwill
- Apply the disclosure requiremen
Relevant Accounting standard
IAS 36- Impairment of Assets

Introduction to IAS 36
Entities are required to conduct impairment tests to ensure their assets are not overstated
Impairment results when an asset’s carrying amount (CA) is more than its recoverable amount (RA)
Not all assets require this test. Notable exclusions include:
Inventories
Deferred tax assets
Assets held for resale
When to undertake an impairment test
For most assets it is not necessary to conduct impairment tests every year
Assets must be tested for impairment when there is an indication (or evidence) of impairment
The following assets must be tested annually for impairment:
• Intangibles with indefinite useful lives
• Intangibles not yet available for use
• Goodwill acquired in a business combination
Collecting evidence of impairment
External sources of information include
• Decline in market value – due to technological advancements
• Adverse changes in entity’s environment/ market – eg a competitor may have patented a
new product, resulting in a permanent fall in market share of the entity
• Increases in interest rates – affects the PV of future cashflows
• Market capitalisation
Internal sources of information include
• Obsolescence or physical damage
• Change in asset use – has the asset become idle?
• An asset’s economic performance being worse than expected – cash inflows may be
lower/ cash outflows may be higher than expected
Impairment test for an individual asset
From the previous slide it can be seen that there are two possible amounts against which the carrying
amount can be tested for impairment
• Fair value less costs to sell (FVLCTS)
• Value in use (VIU)

Not always necessary to measure both amounts when testing for impairment
If either one of these two amounts is higher than the carrying amount, the asset is not impaired
Therefore if the FVLCTS > CA there is no need to calculate the VIU of the asset
Fair value less costs to sell
Defined as
Two parts to the definition:
• Fair value
• Costs of disposal

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Fair value is determined using the following ‘value hierarchy’
• Price in a binding sale agreement
• Market price (current bid price)
• Appropriate estimation (eg using NPV calculations)
Costs of disposal include:
• legal fees
• stamp duty
• costs of removing the asset etc
Finance costs and income tax are not considered to be costs of disposa
Value in use defined as
Five elements when calculating value in use
• Estimate of future cash flows
• Expectations about possible variations in amount or timing of future cash flows
• Time value of money
• Price for bearing uncertainty inherent in asset
• Other factors such as illiquidity
Object overall is to
• estimate future cash flows; and
• apply a discount rate
Recording an impairment loss for an individual asset
An impairment loss is recognised where CA > RA
Where the asset is accounted for under the cost model the impairment loss is recognised
Where the asset is accounted for under the revaluation model the impairment loss is treated
Any subsequent depreciation/amortisation is based on the new recoverable amount.

Recording an impairment loss for an individual asset - examples

Cost model
An asset has a CA of $100 (cost of $160 – accum dep’n of $60) and a RA of $90.
The journal entry to record the impairment loss would be:
Dr Impairment loss 10
Cr Accum. Dep’n & impairment losses 10
Revaluation model
An asset has a CA of $100 (FV of $120 – accum dep’n of $20) and a RA of $90.
This asset was previously revalued upwards by $50 (ARR balance = $35; DTL balance = $15)
The journal entries to record the impairment loss would be:
Dr Accumulated depreciation 20
Cr Asset 20
Dr Asset revaluation reserve 7
Dr Deferred tax liability 3
Cr Asset 10
Cash-generating units (CGUs)

Where the FVLCTS < CA it is necessary to calculate the VIU of an asset to determine whether or not it has
been impaired
It may not be possible to identify an individual assets VIU when the asset only has a value due to its
relationship with other assets. Eg – a machine in a factory works in conjunction with the rest of the assets in
the factory
In such cases the VIU of the asset must be determined in the context of the asset’s cash-generating unit
(CGU)

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Defined as the smallest identifiable group of assets (generating cash flows from continuing use) that are
independent of the cash inflows from other assets or groups of assets
Impairment losses and CGUs –
no goodwill
Where an impairment loss arises in a CGU with no goodwill the loss is allocated across all of the assets in
the CGU on a pro-rata basis based on the CA of each asset relative to the total CA amount of the CGU
Losses are accounted for in the same way as for individual assets discussed earlier

The CA of an individual asset cannot be reduced below the highest of:

• FVLCTS (if determinable);
• VIU (if determinable); or
• Zero
Corporate assets – should try to allocate these across CGUs on a reasonable and consistent basis if
possible
Impairment losses and CGUs – no goodwill: example
A Ltd has identified an impairment loss of $12,000 on one of its CGUs
The CGU consists of the following assets (stated at current carrying amounts):
• Buildings 500,000
• Equipment 300,000
• Land 250,000
• Fittings 150,000
The FVLCTS of the building is $497,000
Required:
Calculate the allocation of impairment loss against all assets in the CGU
Impairment losses and CGUs – no goodwill: example
As the FVLCTS of the building is $497,000, the maximum impairment loss that can be allocated to the
building is $3,000. The remaining $2,000 must be allocated across the other assets in the CGU
Impairment losses and CGUs – no goodwill: example
IAS 36 requires that goodwill be allocated to the lowest level at which management monitors the goodwill
Recall that goodwill is required to be tested for impairment annually (or more frequently if there is an
indication that the CGU may be impaired)
Where an impairment loss arises in a CGU with goodwill the following allocation rules apply:
• To reduce the carrying amount of the CGU’s goodwill to zero
• To the other assets of the CGU on a pro rata basis
Impairment losses and CGUs –
with goodwill: exampleA Ltd has identified an impairment loss of $300,000 on one of its CGUs
The CGU consists of the following assets (stated at current carrying amounts):
• Buildings 500,000
• Equipment 300,000
• Land 250,000
• Goodwill 150,000

Required:
Calculate the allocation of impairment loss against all assets in the CGU.
Impairment losses and CGUs – with goodwill: example
Reversal of an impairment loss
Recognised losses are reassessed annually
Indicators for reversals of impairment losses are the same as those used for initially recognising a loss

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Ability to recognise a reversal of an impairment loss and the accounting for that reversal is dependent on
whether the reversal relates to an individual asset, a CGU, or goodwill
Previously recognised impairment losses in relation to individual assets are able to be reversed.
The new CA cannot be higher than the CA that would have been determined had no impairment loss been
previously recognised (ie for depreciable assets, the impact of depreciation needs to be considered)
Reversal of an impairment loss – individual assets
Cost model
The journal entry to record the reversal of the impairment loss would be:
Dr Accum dep’n & impairment losses xx
Cr Income - impairment loss reversal xx
Revaluation model
Where the impairment loss was taken to the P&L the journal entry would be the same as that shown above
under the cost model
Where the impairment loss was taken against the ARR the journal entry to record the reversal of the
impairment loss would be:
Dr Asset xx
Cr Deferred tax liability xx
Cr Asset revaluation reserve xx
Reversal of an impairment loss – CGUs
Impairment losses relating to goodwill cannot be reversed
The reversal of any impairment loss relating to a CGU is allocated across the assets of the CGU (excluding
goodwill) on a pro-rata basis
The reversals for specific assets will be accounted for in the same way as outlined above for individual
assets
Reversal of an impairment loss – CGUs
The CA of an asset cannot be increased above the lower of:
• its RA (if determinable)
•

• the CA that would have been determined had no impairment loss been recognised in prior
periods
Any excess from the above situation is allocated across the remaining assets in the CGU on a pro-rata
basis
Disclosures
Key disclosures include:
The amount of impairment losses recognised in profit or loss during the period and line on income
statement
The amount of reversals of impairment losses recognised in profit or loss during the period and line on
income statement
The amount of impairment losses on revalued assets recognised directly in equity during the period
The amount of reversals of impairment losses on revalued assets recognised directly in equity during the
period

Research Question

‘Entities are required to conduct impairment tests to ensure their assets are not overstated’
Research the above statement and discuss when to undertake an impairment test. Explain how to
undertake an impairment test for an individual asset and a cash-generating unit.
(Support your research findings with SPSE’s listed entities)
Tutorial Questions for Week 10
1. What is an impairment test?

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2. At 30 June 2010, Cyan ltd is considering an impartment test. Having only recently adopted the
international accounting standard if Cyan Ltd seeks your advice in relation to this test under IAS 36
impairment of assets.
Required: Write a report to management, specifically explaining:
i) The purpose of the impairment test
ii) How the existence of goodwill will affect the impairment test
iii) The basic steps to be following in applying impairment test
3. Violet Ltd has two cash-generating units, Division A and Division B. At 30 June 2010, the net assets of
the two divisions were as follows:

Division A Division B
Cash 12,000 8,000
Inventory 30,000 40,000
Receivables 20,000 8,000
Plant 320,000 0
Accumulated depreciation (plant) (120,000) 0
Land 90,000 150,000
Buildings 110,000 140,000
Accumulated depreciation (buildings) (40,000) (60,000)
Furniture & fittings 0 30,000
Accumulated depreciation (furniture & fittings) 0 (10,000)
Total assets 422,000 306,000
Provisions 20,000 40,000
Borrowings 30,000 66,000
Total Liabilities 50,000 106,000
Net assets $372,000 $200,000
Additional information regarding the division’s assets:

 The receivables of both divisions were considered to be collectible

 Division B’s land had a fair value less costs to sell of $135 000 at 30 June 2010.
At 30 June 2010, Violet Ltd also had the following corporate assets, which the management decided to
allocate equally to the two divisions:
 Goodwill of $14 000
 A head office building with a carrying amount of $160 000 (net of $50 000 accumulated
depreciation).
Violet Ltd’s management conducted impairment testing on the company’s assets at 30 June 2010 and
determined that Division A’s value in use was $415 000 and Division B’s value in use was $310 000.
Required
1. Calculate the amount of the impairment loss, if any, for both divisions.
2. Show the allocation of any impairment loss to both divisions.
3. Prepare the journal entries required at 30 June 2010 to account for any impairment losses.

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4. Tennis Ltd is testing a significant item of equipment for impairment in view of changes in the game. The
equipment is recognised in the statement of financial position at cost of $4 million less accumulated
depreciation of $3 million. Additional information relating to Tennis Ltd and the equipment are provided as
follows:
The equipment will sell for $2 million under normal market conditions;
Future cash flows of $1 million are expected to be derived from Tennis Ltd's continued use of the
equipment;
Present value of future cash flows of $600,000 are expected to be earned from the equipment; and Selling
the equipment costs $50,000.
Required
In accordance with IAS 36 Impairment of Assets, what is the recoverable amount of the equipment? (5
marks) What is the amount of the impairment write-down, if applicable?

5 Cherry Ltd acquired all the assets and liabilities of Hazel Ltd on 1 January 2010. Hazel Ltd’s
activities were run through three separate businesses, namely Sandstone Unit, the Sapphire Unit
and the Silverton Unit. These units are separate cash-generating units.
Cherry Ltd allowed unit managers to effectively operate each of the units, but certain central activities were
run through the cooperate office. Each unit were allocated a share of the goodwill acquired, as well as a
share of the corporate office.
At 31 December 2010, the assets allocated to each unit were as follows:

Sandstone $ Sapphire $ Silverton $

Factory 820 750 460
Accumulated (420) (380) (340)
depreciation
Land 200* 300** 150*
Equipment 300 410 560
Accumulated (60) (320) (310)
depreciation

Inventory 120 80 100*

Goodwill 40 50 30
Corporate property 200 150 120

*these assets have carrying amount less than fair valve less costs to sell.
**this asset has a fair valve less costs to sell of $293.
Cherry Ltd determined the valve in use of each of the business units at 31 December 2010.
Sandstone $ 1170
Sapphire 900
Silverton 800
Required: Using knowledge of IAS 36: Determine how Cherry Ltd should allocate any impairment loss at
31 December 2010.

Topic 10: Employee Benefits

Learning Outcome:

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– Evaluate the rational for accounting for employee benefits
- Discuss and prepare journal entries to account for short-term liabilities for employee benefits such
as wages and salaries, sick leave and annual leave.
- Explain and prepare entries to account and record expenses, assets and liabilities arising from
defined benefit post- employment benefit plans (LSL).
- Discuss when a liability should be recognized for termination benefits
- Provide the disclosure requirement for employee benefits..
Relevant Accounting standard
IAS19 - Employee Benefit
Scope of IAS 19
IAS 19 Employee Benefits applies to all employee benefits except those within the scope of IFRS 2 Share
Based Payments
Purpose of IAS 19 is to prescribe the measurement and recognition of expenses and liabilities arising from
services provided by employers
Obligations that give rise to employee benefits can be legal or constructive
Measurement can be difficult when some benefits are not expected to be paid for a number of years

Employee benefits- Includes all forms of consideration given by an entity in exchange for services
rendered by employees, Usually recognised as expenses.
IAS 19 distinguishes between:
 short-term benefits
 post-employment benefits
 Other long-term employee benefits
Short-term employee benefits Includes:
o wages, salaries, bonuses, profit share
o leave entitlements for compensated absences (eg annual leave and sick leave)
o Benefits may be:
o Monetary
o Non-monetary
o Liabilities for short term employee benefits are recorded at their nominal value, ie the
amount expected to settle the obligation
Short-term compensated absences
 Annual leave and sick leave most common examples
 Loading commonly paid on annual leave (eg 17.5%)
 Need to distinguish between:
o Accumulating vs non-accumulating benefits > Accumulating benefits for unused leave
can be carried forward to future periods.
o Vesting vs non-vesting benefits > Vesting benefits are those where the employer has an
obligation to make a payment to the employee for the sick leave, even if the employee
leaves the company.
 Short-term compensated
absences
 Accounting treatment for different types of benefits is as follows
o Non accumulating – no liability recorded
o Accumulating and vesting – liability recorded at each reporting date.
o Accumulating but non-vesting – liability only recognised for the portion that is expected to
result in additional payment to employees.
Annual leave – example
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ABC has 4 employees who are entitled to 20 days annual leave per annum. The provision for annual leave
balance at 1 July 2008 was $7,200 and leave payments of $9,400 have been made during the year.

At 30 June 2009 a total of 45 days leave was owing to the 4 employees.The average annual salary is
$50,000.
There are 260 working days in a year.
Answers
Current balance in provision account = $2,200 DR
Provision at 30 June 2009 = 45 x $50,000/260 days = $8,654 CR
Accumulating sick leave – example
ABC has 200 employees who are entitled to 8 days non-vesting accumulating sick leave per annum.
At 30 June 2009 30% of employees had taken their full entitlement, the remaining had an average of 4
days accumulated leave.
An average of 12 days accumulated leave exists at 30 June 2009 for each employee (accumulated over a
number of years).
History indicates that employees take an average of 5 days accumulated sick leave in years subsequent to
their accumulation.
The average annual salary is $50,000.
Provision for sick leave at 30 June 2009
200 employees x 5 days x $50,000/260 days = $192,307
Profit-Sharing And Bonus Plans
IAS 19 requires an entity to recognise the expected cost of profit-sharing and bonus arrangements if the
entity has a present obligation to make such payments as a result of past events
Legal obligation may arise from employment contract
Constructive obligation may arise if the entity has an established practice of paying regular annual bonuses
Post-Employment Benefits
• IAS 19 prescribes the employer’s accounting treatment for post-employment benefit plans
• Formal or informal arrangement under which an entity provide post-employment benefits for one or
more employees
• Common examples:
– Superannuation plans
– Employee retirement plans
– Pension plans
– Two types of plans
– Defined contribution plan
– Defined benefit plan

Defined Contribution
Post-Employment Plans
• Benefits paid on retirement are determined with reference to accumulated contributions
and earnings thereon.
• Recorded as expenses in the period that the employee renders the service
• Liability is limited to any contribution outstanding/payable at year end.
• Risk in relation to investment returns lies with employee
• Example in Fiji is the FNPF Contributions
Defined Contribution Example

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ABC Corp is required by Fiji Law to contribute 8% of gross employee emoluments to a superannuation plan
for its employees. ABC Corp makes fixed regularly monthly payment of $25,000. Its gross wages plus
bonus to reporting period ending 31st December 2011 totals $4,000,000.
Calculate any under or overpayment made by ABC Corp and pass the required adjusting journal entry as at
31st December 2011.
Defined Contribution Example Solution
Step 1: Calculate contribution payable
8% * $4,000,000= $320,000
Step 2: Calculate contribution paid during 2011 25,000 * 12= $300,000
Step 3: Calculate contribution payable/overpaid
320,000 – 300,000 = $20,000
Step 4: Prepare adjusting journal entry
DR Wages & Salaries Expense 20,000
CR Superannuation Payable 20,000
(accrual of liability for unpaid superannuation contribution)
Defined Benefit
Post-Employment Plans
• Benefits paid on retirement are based on a formula, incorporating factors such as:
- years of service
- final average salary
• In substance the employer underwrites the risk associated with the fund
• Actuarial assessments used to determine the estimate of the defined benefit obligation

• If there is a shortfall in net assets in the fund, such that they do not cover the defined benefits
owing to members (employees) the company will normally make up the shortfall
• IAS 19 requires employers to recognise an obligation for the accrued benefits owing to
employees
• This obligation is reduced by the assets held in the plan
• Where plan assets > the plan obligation (the fund is in surplus) the company will recognise
an asset
• Methods used to account for defined benefit plans are:
• Net capitalisation method > results in large volatility of earnings and is not allowed
under IAS 19
• Partial capitalisation method > method adopted by IAS 19. Accounting treatment
summarised on following slide
Actuarial gains/(losses)
IAS 19 allows the following methods of recognising actuarial gains/(losses):
• Full recognition in the period in which they are incurred in current year profit and loss
• Full recognition in the period in which they are incurred in other comprehensive income
Other Long-Term Employee Benefits
Long service leave (LSL) the most common example
For example, an employee becomes entitled to 3 months of leave after 10 years of continuing employment
Measured based on the present value of the defined benefit obligation at the reporting date. This requires:
1. Identification of the number of employees who are likely to be paid LSL in the
future
2. Estimation of amount and timing of future cash flows arising from services
provided to employees up to the reporting date. Amount based on annual salary
levels adjusted for inflation and promotions.
3. Discounting of future cash flows to present value

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Steps in Accounting for LSL
Step 1: Estimate the number of employees who are expected to become eligible for long service leave
Step 2: Estimate the projected Salaries
Step 3: Determine the accumulated benefits

Step 4: Measure the present value of the accumulated benefit

LSL Example
A Ltd commenced operation on 1st January 09 with 150 employees. Average Salaries were $60,000 per
annum as at 31st December 2011 . Employees are entitled to 13 weeks LSL after 10 years of employment.
There is a probability that 50% employees will be entitled to LSL in time to come. Expected increase in
salary is 2% per annum. Yield on corporate bonds is 10% in the market.
Step1: Estimate eligible number of employees
50% * 150 = 75 Employees
Step 2: Estimate projected salaries
$60,000 * 75 * (1 + 0.02)9 = $5, 377,917
LSL Example
Step 3: Determine the accumulated benefit
Years of employment * Weeks of paid leave * Projected Salaries
Years required for LSL 52
01 * 13 * $5,377, 917
10 52
= $134,448
Step 4: Measure the present value of accumulated benefit
PV = Accumulated Benefit = 134, 448 = $57,019
(1 + k)ⁿ (1+ 0.1)9

Journal Entry to record change in provision for LSL

DR LSL Expense 57,019
CR Provision for LSL 57, 019
(Record increase in provision for LSL)
Termination benefits
• Payments made to employees who:
• are retrenched (ie their employment is terminated before the normal retirement
date); or
• accept voluntary redundancy
• Provision for redundancy can only be recognised where the entity is ‘demonstrably
committed’ to terminating employment
• Intention is not sufficient
• To be demonstrably committed an entity must have a detailed formal plan for termination
without any realistic possibility of withdrawing

• Plan needs to include the following at a minimum

• Location, function and number of employees to be terminated
• Benefits payable for each job classification or function
• Timing of implementation of plan
Large Ltd provided employees with 4 weeks (20 days) of annual leave for each year of
service. The annual leave is accumulating and investing up to a maximum of 6 weeks.
Thus, all employees take their annual leaves within 6 months after the reporting period
so that it does not lapse. Large Ltd pays a loading of 16.5% on annual leave; that is;

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employees are paid an additional 16.5% of their regular wage while taking annual leave. Refer to the
following extract from Large Ltd’s payroll records for the year ended 30 June 2010.

i) What is the difference between accumulating and non-accumulating sick leave?

How does the recognition of accumulating sick leave differ from the recognition of non-
accumulating sick leave?
ii) What is the difference between vesting and non-vesting sick leave? How does the
recognition of vesting sick leave differ from the recognition of non-vesting sick leave?

Research Question:

‘Employee benefits includes all forms of consideration given by an

entity in exchange for services rendered by employees’
Research the above statement and discuss the principles applied in
accounting for employee benefits and compare defined benefit &
defined contribution post-employment benefit plans.
(Support your research findings with SPSE’s listed entities)
Tutorial Questions for Week 1
1. Narsey Ltd provides 4 weeks (20 days) of accumulating vested annual leave for each year of service.
The company policy is that annual leave must be taken within 6 months of the end of the period in which it
accrues. Annual leave is paid at the base salary rate (which excludes commissions, bonuses and
overtime). A 17.5% loading is applied to annual leave payments.

The following summary data is derived from Narsey Ltd’s payroll records for the year ended 30 June
2010. Base pay rates have increased during the year. The amounts shown are applicable at 30 June 2010

Annual Leave
Base Balance b/d 1 Accumulated
Taken during
Employee category pay /day July 2009 during year
year Days
$ Days Days

Managers 400 100 200 260

Sales staff 200 150 600 590
Office workers 100 120 400 370
Other 80 60 200 210

Additional information:
After leave taken during the year had been recorded, Narsey Ltd’s trial balance revealed that the provision
for annual leave had a credit balance of $230 000 at 30 June 2010.
Required:
1. Calculate the annual leave liability as at 30 June 2010
2. Prepare journal entries to account for the liability for annual leave at 30 June 2010
2. The annual leave is accumulating and investing up to a maximum of 6 weeks. Thus, all employees take
their annual leaves within 6 months after the reporting period so that it does not lapse. Ortrand Ltd pays a
loading of 17.5% on annual leave; that is; employees are paid an additional 17.5% of their regular wage

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while taking annual leave. Refer to the following extract from Ortrand Ltd’s payroll records for the year
ended 30 June 2010.
Employee Wage/day AL July 2009 Increase in AL Taken Days
Days entitlement Days
Chand $160 5 20 15
Kim $120 3 20 16

Smith $150 2 20 14
Zhou $100 4 20 17
Required: Using knowledge of IAS 19 in calculating the amount of annual leave that should be accrued for
each employee.
3. Max Ltd opened a call centre on 1 July 2009. The company provides 1 week (5 Days) of sick leave
entitlement for the employees working at the call centre. The following information has been obtained from
Max Ltd’s payroll records and actuarial assessments for the year ended 30 June 2010. The column
headed “Term. in 2010” indicates the leave entitlement arising from service of employees whose
employment was terminated during the year. The actuary has estimated the percentage of unused leave
that would be taken within 12 months if Max Ltd allowed leave to accumulate. Due to high staff turnover,
the remaining leave would lapse (or be settled in cash, if vesting) within 1 year after the end of the reporting
period.

Leave Estimated
Base Current Term. in Estimated
Employee taken in Termination
pay/day service 2010 leave used
category 2010 2011
$ Days Days 2011 %
Days %

Supervisors 100 30 20 3 90 10

Operators 80 500 400 60 70 30

Required:
1. Calculate the employee benefits expense for sick leave for the year and the amount that should be
recognized as a liability for sick leave assuming that sick leave entitlements are:
a. accumulating and non-vesting (5 Marks)
b. accumulating and vesting. (5 Marks)

Topic 11: Accounting for biological asset -Agriculture

Learning Outcome:

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– Distinguish between agricultural activities, agricultural produce and biological assets.
–Discuss the recognition for biological assets and agricultural produce.
–Evaluate the meaning of fair value when applied to biological assets and agricultural product.
–Provide the disclosure requirement of IAS41.

Relevant Accounting standard

IAS 41 -Accounting for biological asset -Agriculture
Scope of IAS 41
• Applies to accounting for:
o Biological assets
o Agricultural produce
o Government grants
Does not apply to the following assets related to agricultural activity:
o Land – accounted for in accordance with either IAS 16 Property, Plant & Equipment or IAS
40 Investment Properties
o Intangibles – accounted for in accordance with IAS 38 Intangible Assets
Definitions
Agricultural activity – the management by an entity of the transformation of biological assets for sale, into
agricultural produce, or into a additional biological assets
Biological asset – a living animal or plant
Biological transformation – the processes of growth, degeneration, production and procreation that cause
qualitative or quantitative changes in a biological asset
Harvest – the detachment of produce from a biological asset or the cessation of a biological assets life
processes
IAS 41 applies only to the harvested product at the point of harvest.
• Thereafter IAS 2 Inventories (or another applicable standard) is applied.

Recognition criteria
• The following must be met before a biological asset or agricultural produce can be recognised:
o The entity controls the asset as a result of past events
o It is probable that future economic benefits associated with the asset will flow to the entity
o The fair value or cost can be reliably measured
Control can often be problematic – eg a vineyard may be owned by one entity but managed by
another
Control determined by consideration of legal ownership and determining which party bears the
risks and rewards of ownership
Measurement at fair value
• IAS 41 assumes measurement at fair value less estimated point-of-sale costs:
o Biological assets – on initial recognition and at the end of each reporting period
o Agricultural produce – at the point of harvest
o This fair value assumption can only be rebutted:
o On initial recognition of a biological asset
o Where market determined prices are not available and alternative estimates are clearly
unreliable
o In such cases the asset may be measured t cost less accumulated depreciation and
impairment losses
o Once fair value is able to be determined then it shall be applied
Applying the fair value measurement requirement

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 • Guidance to IAS 41 notes the following:
• Assets may be grouped according to significant attributes such as age or quality – eg ‘A’
grade cattle
• Contract prices are not necessarily relevant as they may not represent current market
value
• If an entity has access to two different markets, the active market price should be based on
the most relevant one – eg farm gate vs auction
• Where there is no market price, the PV of future cash flows is used as a proxy for fair
value
• Gains and losses

IAS 41 requires the following gains and losses to be included in profit or loss for the period:
• Biological assets – gains on initial recognition (eg when an animal is born) and gains and losses
due to subsequent changes in fair value
• Agricultural produce - gains on initial recognition at point of harvest
• It is common for companies to separately disclose the fair value movements attributable to
agricultural assets
• Separate disclosure made either on the face of the Statement of Comprehensive Income or in the
Notes to the financial statements
Government grants
• Where biological assets are measured at fair value and a government grant is received the grant is
accounted for under IAS 41
• Treatment depends on whether the grants it conditional or unconditional
• Unconditional grants are recognised as income when the grant becomes receivable
• Conditional grants are recognised as income when the conditions attaching to the grant are met
Disclosures
• Disclosure requirements:
– carrying amount of biological assets.
– description of an entity's biological assets, by broad group.
– change in fair value less costs to sell during the period .
– description of the nature of an entity's activities with each group of biological assets and or
estimates of physical quantities of output during the period and assets on hand at the end
of the period.
– commitments for development or acquisition of biological assets
– methods and assumptions for determining fair value
– reconciliation of changes in the carrying amount of biological assets, showing separately
changes in value, purchases, sales, harvesting, business combinations, and foreign
exchange differences

i) State whether the following are (a) biological assets, (b) agricultural produce or (c)
products that are as a result of processing after harvest:
ii) State whether they would be measured (a) at fair value under IAS 41 or (b) at the
lower of cost and net realisable value under IAS 2:

a. living pigs
b. living sheep
c. pigs’ carcasses
d. pork sausages
e. trees growing in a plantation forest

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 f. furniture
g. olive trees
h. olives
i. olive oil
j. vines growing in a vin
Research Question

‘IAS 41 establishes standards of accounting for agricultural activity,

biological assets and agricultural produce’.
Research the above statement and discuss the meaning of ‘fair
value’ when applied to biological assets and agricultural produce.
Explain the practical implications of measuring these assets at fair
value, including interpreting the disclosures made by companies
applying the standard.
(Support your research findings with SPSE’s listed entitiy
…Tutorial Questions for Week 12
1. Company A owns a plantation forest. As at the end of the reporting period the fair value of the plantation
forest, including the land, was $2.5 million. Company A needs to determine the fair value of the trees
excluding the land to comply with IAS 41 at its reporting period.
Required: How does company A determine the fair value of the trees?
2. Company Z engages in agricultural activities and measures its biological assets at fair value in
accordance with IAS 41. In 2010 company Z received a grant of $250 000 from the government. The grant
was notified to the company on 31 March 2010. The terms and conditions of the grant were as follows:
This grant is effective from 1 July 2010. Company Z must continue to employ staff from Area A in its
agricultural activities until at least 30 June 2015. If Company Z ceases to employ staff from Area A before
that date then company Z shall immediately repay the grant. The amount to be repaid shall be calculated
according to the following formula
A = B-(C x D)

Where
A = amount to be repaid
B = amount of initial grant
C = number of years the company has employed staff in Area A
D = $50 000
The end of company Z’s reporting period is 30 June. The grant was received on 15 April 2010.
Required
• Prepare the journal entries to account for the grant by company Z for the years ended 30 June
2010 and 30 June 2011, assuming company Z complies with the conditions of the grant.
3. What are the arguments for and against the use of fair value as the measurement basis for biological
assets and agricultural produce? Why do you think the IASB settled on requiring fair value?
4. Company C entered into a lease agreement in respect of a vineyard with company L on 1 January 2006.
The lease was classified as a finance lease as it transferred substantially all the risks and rewards of the
vineyard to company C. The lease was for a period of 10 years, with annual lease payments of $212 000.
The vineyard was established on land owned by company L and was recorded as a biological asset at fair
value in the books of company L prior to the lease agreement. The land is classified as an investment
property by company L, using the fair value model under IAS 40. Company C engaged manager M to
manage the vineyard on its behalf.
Company L acquired the land for $5 million in 2000. As at 31 December 2006 the fair value of the land was
independently assessed to be $14 million ($13 million as at 31 December 2005).

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The fair value of the minimum lease payments under the finance lease was $2 million as at 1 January
2006. This was determined to be substantially the same as the fair value of the vineyard as at that date.
Company L determined that the amount of finance lease income for the year ended 31 December 2006
was $12 000.
The fair value of the vineyard was independently assessed to be $2.6 million as at 31 December 2006.
Company C paid manager M $245 000 to manage the vineyard for the year ended 31 December 2006.

The end of the reporting period for company C, company L and manager M is 31 December.
Required:
Prepare the journal entries to record the above transactions in the books of each of company C, company L
and manager M for the year ended 31 December 2006.
5. Company A owns dairy cattle. The market value of cattle is calculated by reference to the litres of milk
able to be produced and the lactation rate of the cows. Cattle are regularly sold at auction. Costs incurred
to transport the cattle to auction are $500 per truck. The normal capacity of a truck is approximately 200
cattle.
Company A has determined that, based on latest auction prices close to the end of the reporting period:
A mature cow’s market value is 5000 litres x lactation rate (0.5) x price of milk ($0.35) = $875; and a heifer’s
market value is 2000 litres x 0.5 x $0.35 = $350.
At the end of the reporting period, Company A had 1000 mature cows and 400 heifers.
Required:
Calculate the fair values of the cows and the heifers at the end of the reporting period, in accordance with
IAS 41. (6 Marks)

The End

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