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CAA – Our Services

Chartered accountants (ICAZ) Consulting :
CTA, ITC, APC IFRS, TAX, Audit, Advisory,
ACCA & CIS
Skills and professional

Facilitated Technical Training

In-house Training on IFRS, TAX,
Audit and Financial Management
Publications

2
 Lecturers
Anesu Daka Webster Sigauke

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 FAC4863

2017 Study Pack

 CA(Z) RA
CTA

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 Meaning of “Applied”
Lets say YOU are a Doctor (IFRS Consultant)

You give medical remedy/medicine

for the disease(s)- (Apply IFRS
principles to the ISSUE to get a
CONCLUSION)

You do DIAGNOSIS to a patient to

identify the disease(s) -(IFRS
Issue(s))

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 APPLIED FINANCIAL ACC
• Key Areas to focus on:
– Identifying the Issue in the question (problem
diagnosis)
– Application of accounting, auditing, FinAcc and
taxation principles to reach a conclusion on the
issue identified (remedy application).
– UNDERSTANDING THE REQUIRED
– Exam technique for both theory and calculation
questions (Answering the question).
– Workings & Referencing

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APPLIED FINANCIAL ACCOUNTING
• Key Areas to focus on:
– Time management
– Layout and presentation
– Hand-writing, verbosity, clear and concise
– Recommendations/interpretations
• NB: 5 marks are allocated to: Arrangement
and layout, clarity of explanation, logical
argument and language usage.

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Questions

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The Accounting Treatment Framework
Purpose:
The understanding of The Accounting Treatment
Framework will aid in the following better
understanding of how IFRSs are structured
and enhances comprehensive application of
the IFRS requirements to a particular
accounting issue by students, preparers or
practitioners.

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 The Accounting Treatment Framework
• Objective
• Scope- is it covered under this standard?
• Identification/definitions
• Initial recognition-is it an asset, a liability, equity instrument, expense or income
and what type (PPE, Inventory, intangible, financial, investment property etc )?
• Initial measurement-Cost/FV
• Subsequent Recognition:-depreciation/amortisation, impairment, revaluation/fair-
valuation, gains or losses on disposals, amortisation of interest, e.g..
• Subsequent measurement:- should it be carried at FV, Rev amt, NRV, cost, PV,
replacement cost, Cost less acc depr & impair (HCA) and realisable/settlement
value.
• Derecognition- settlement
• Presentation:-is an SoFP item (NCA, CA, NCL, CL, EQUITY) or SCI item (P/L or OCI)?
• Disclosure;-what information should support the figures presented.

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 Identify
transaction-
What
standard is
applicable?

Presentation Measurement

Accounting
Treatment

Disclosure Recognition

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 Which element of
AFS?- A, L, E or I & E
as per the
Conceptual
Framework

Subsequent
recognition: how
Timing: should - fv
When should the adjustments,
item be recognised in revaluation,
the AFS? depreciation,
amortization,
impairments, e.g.?

Recognition

Classification: What
is the type of Derecognition –
element?- When should the
And what exactly ,e.g. element be removed
for IAS 17 Finance or from the books
operating lease?

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 • Initial measurement:
How is the item
measured at initial
recognition date?
• Subsequent
Measurement measurement: At what
value do you carry the
element and how are is
the closing balance
measured- FV or Cost-
Acc Dep and
impairment ?

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 SoP/L • Is it P/L?
& OCI • Is it OCI?

Presentatio
n
• Is it Non-Current? or
SOFP • Is it Current

• Is it Owners Equity?,
SOCIE or
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Accounting
Specific
Policy
Notes
Notes

Disclosure

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CBC Test 1 Revision4

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Answer the question, please!!!!!

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 Structure: Theory Question
• Identification of issue(s)
– Whether an asset should be recognised for the transportation of Tramline
passengers?
– Whether a provision should be recognised for the free transportation of the
Transline Passengers/
• Application/Discussion
– Apply the definition of asset on the scenario to prove an asset
– Apply the definition of a provision to prove a provision
• Conclusion
– Do not recognise an asset
• Recommendation:
Dr Expense
Cr Asset/Bank
Correcting JE
Prior period errors

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Questions.

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TUT 102

Test 1
 Tutorial Letter 102
1. The Conceptual Framework
2. Presentation of financial
statements
3. Income taxes
4. Accounting policies, changes in
accounting estimates and errors
5. Inventories
6. Fair Value Measurement

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 Examinability
• FQE • UNISA CTA Exams

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 Examinability
2017 Possible areas of focus:
Theory questions mainly focusing on:
- wide application of definition of Asset and Liability
-Use of qualitative characteristics to assess whether
AFS or accounting treatment is in compliance with
IFRS

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 Overview
Purpose and
Status

Underlying Qualitative
Objective
Assumption Characteristics

Elements

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 Financial Reporting
Definition: Financial statements:

The provision of financial Principle way of providing

information about an entity financial information to its
to external users, that is users
useful to them in making
economic decision

For assessing the Summary of the

effectiveness of the entity’s performance and financial
management position of the entity for the
reporting period

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The importance of the conceptual
framework
Assists IASB in developing and reviewing standards

Promotes harmonisation of standards and reduces alternatives

Assists national standard setters to comply with international

principles

Assists auditors on forming an opinion on whether statements

conform with IFRS

Assist users in interpreting financial statements

Provides information on the work carried out by IASB

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 Financial statements users & their information
needs
• Information for risk and return/ability to pay dividend
Investors

• Provides information on an entity's stability and

Employees profitability
• Job security

Lenders • Ability to repay loans and related interest

• Ability to repay amounts due

Suppliers and other trade payables

• To assess if the company is a going concern that can be

Customers
relied upon

• Taxation correctly accounted for

Government
• Allocation of resources

• Provide information on trends / developments

Public
• Gain public favour

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 Underlying Assumptions
• PRIOR • CURRENT
• Going Concern • Going Concern
• Accrual Basis • Accrual Basis
Note:
The accrual basis has been removed as an underlying assumption under the
Conceptual Framework (IAS 1.27)

Going concern:
Entity will continue to trade for the
foreseeable future

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Qualitative characteristics of financial
statements • Relevant if it has the ability to influence economic decision
and is provided in time to do so
Relevance • Predictive Value
• Confirmatory value

Faithful Representation • Complete, neutral and free from error

• Information should be consistently prepared

Comparability • Achieved by adopting the same accounting policies from
one period to the next

• Helps assures users that information is faithfully

Verifiability represented

Timeliness • Information must be available to users on time to be useful

• Presentation of information needs to be understandable to

users based on:
Understandability • The user having reasonable knowledge
• The users willingness to study the information provided

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 Elements of Financial statements: Asset
Elements Definition Recognition Criteria

Assets 1. A resource 1. Future economic

4.4(a) 2. controlled by an entity benefits probable
3. as a result of past events and 2. Reliably measurable
from which
4. future economic benefits are
expected to flow to the entity

Examples:
Cash, inventories, plant, property and
equipment, intangible assets

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 How to use the definition of “asset”
• The definition of asset should be used in the
following circumstances;
– Proving whether an item/expenditure should be
recognised as an asset.
– To disapprove an expense, if an expenditure is an
asset it is therefore not an expense, vice versa.
NB: Once an asset is proved, the next step is to
CLASSIFY the asset into PPE, Intangible, Financial
asset, e.t.c (see next slide)

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 Elements of Financial statements: Liability
Elements Definition Recognition Criteria

Liability 1. A present obligation 1. Future economic

2. of the entity outflow probable
3. arising from past events, 2. Reliably measurable
4. the settlement of which is
expected to result in an outflow
of an entity’s resources.

Examples:
Trade payables, unpaid taxes and
outstanding loans

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 When to use the definition of a
“liability”
• Use the definition of a liability as follows:
– To prove existence of a liability or disapprove
equity
– To prove a provision (a “liability” of uncertain
timing or amount).
• Key element on proving a liability is to prove
existence of present obligation, as shown in
the next slide.

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 Elements of Financial statements: Equity

Elements Definition Comment

Equity The residual interest in an Equity = ownership
entity’s assets after deducting all interest – net assets
its liabilities
Recognition: Reliably
measurable

Examples:
Share capital, retained earnings and
revaluation reserves

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 Elements of Financial statements: Income
Elements Definition Comment
Income 1. Increases in economic Revenue and gains
benefits Recognition: Reliably
2. Not resulting from measurable, revenue
contributions made by equity must be earned
holders

Examples:
Revenue revaluations, profit on the sale of a non- current asset and
interest received on investments
NB: Never use this definition, rather use the definition of revenue as per
IAS 18, if inflows are not revenue they are either other income (gains) or
capital contribution by equity holders or debt from lenders.

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 Elements of Financial statements: Expense

Elements Definition Comment

Expenses 1. Decreases in economic Expenses include
benefits losses
2. Not resulting from Recognition: Reliably
distributions to equity measured
holders

Examples:
Materials and labour costs, depreciation and interest paid on loans

NB: Never use this definition, always use the definition of an asset, if it is
not an asset it is therefore and expense.

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 Measurement Bases in financial statements
• Assets- recorded
at their original
costs • Assets-amount to be
• Liabilities- paid out at the end
recorded at: of the reporting
period for an
• the original equivalent asset
amount
received Historical Cost Current Cost • Liability - value they
could be settled for
• cash expected at the end of the
in settlement accounting period

Realisable/
Present Value
settlement value
• Discounts future • Assets- amount
cash flows to sold out for now
account for time
• Liabilities- amount
value of money
settled for now

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 Apply Your Knowledge
• Attempt the question below from Tut 102:
– Q2.1 – 2012 FQE Exam

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 Identify
transaction-
What
standard/s is
applicable?

Presentation Measurement

Accounting
Treatment

Disclosure Recognition

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 Which element of
AFS?- A, L, E or I & E
as per the
Conceptual
Framework

Classification: What
is the type of
element?- PPE, Inv Derecognition –
Prop, Inventory, e.g. When should the
And what exactly ,e.g. element be removed
for IAS 17 Finance or from the books
operating lease?

Recognition
Subsequent
recognition:
Timing: treatment of - fv
adjustments,
When should the revaluation,
item be recognised in depreciation,
the AFS? amortization,
impairments, e.g.?

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 • Initial measurement:
How is the item
measured at initial
recognition date?
• Subsequent
Measurement measurement: At what
value do you carry the
element and how are is
the closing balance
measured- FV or Cost-
Acc Dep and
impairment ?

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Presentation of Statements: IAS 1

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 Examinability
FQE UNISA CTA Exams
An element of IAS 1 has been • Examined in:
examined in almost all FQE – 2015
exams (Consolidation Format – 2014
or Separate Accounts). – 2013
Most Examined: – 2012
– 2009
•P/L + OCI
•SCE
•Extracts of CF Statement

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 Examinability
2017 Possible areas of focus:
• SFP
• Consolidated Profit and Loss account + Other
Comprehensive Income
• Consolidated Statement of Changes in Equity + Link
with OCI
• Notes to financial statements
• Current vs Non-current (theory)
• Off-setting principle (theory)
NB: Its most critical to know the formats and how each
standard affect the above. A must Learn

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 Overview

Presentation of
Financial Statements

Overall Structure and IAS 7

Statement of
considerations content Cash Flows

Statement Statement of
of Financial Comprehensive SOCIE Notes
Position Income

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 Overall considerations

• Fair presentation
• Going concern
• Accrual basis
• Consistency
• Materiality and aggregation
• Offsetting
• Comparatives.

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 “Fair Presentation”
IAS 1.15 “Present fairly” means …

• “faithful representation of the effects of

– transactions
– other events and
– conditions

• in accordance with the definitions and recognition

criteria … set out in the Framework”.

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 Compliance with IFRS
• An entity shall make an explicit and
unreserved statement of compliance with
IFRSs in the notes.
• An entity shall not describe financial
statements as complying with IFRSs unless
they comply with all the requirements of
IFRSs.

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IFRS Compliance Statement

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 Underlying Assumptions

• PRIOR • CURRENT
• Going Concern • Going Concern
• Accrual Basis • Accrual Basis
Note:
The accrual basis has been removed as an underlying assumption under the
Conceptual Framework (IAS 1.27)

Going concern:
Entity will continue to trade for the
foreseeable future- IAS1.25

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 Accrual basis of accounting
IAS1.27: An entity shall prepare its financial
statements, except for cash flow information,
using the accrual basis of accounting.

Under Accrual Basis: Transactions & events are

recorded when event occurs and not when
cash is received or paid.

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 Consistency of Presentation

• The presentation and classification of items in

the financial statements shall be retained from
one period to the next unless a change is
justified either by a change in circumstances
or a requirement of a new IFRS. [IAS 1.45]

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 Materiality and aggregation

Material Immaterial
items items

 Present separately  Aggregate with

amounts of similar
nature or function
 Need not present
separately

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 Offsetting- IAS1.32
• Assets and liabilities should not be offset
except when required or permitted by another
IAS.

• Items of income and expense should be offset

when required or permitted by an IAS
– where gains, losses, etc. arising from the same or similar
transactions/events are not material.

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The most significant change to IAS 1 is that Other
Comprehensive Income will be
separated into two sections

Section 1 will include all items that will not be reclassified

subsequently to profit or loss.

Section 2 will include items that will be subsequently

reclassified to profit or loss when specific conditions are
met.

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 Comparative information

Numerical Narrative
information information

 DISCLOSE unless  INCLUDE where relevant

an IAS permits/ to understanding current
requires period’s financial
otherwise statements

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 The Complete Set of Financial Statements

Complete set of
financial statements

Statement of Statement of Statement of

Statement of
financial comprehensive changes in Notes
cash flows
position income equity

Assets, Liabilities Income Significant

All changes in Major cash
and equity (including gains) Accounting
equity inflows and
and expenses Policies / other
outflows
(including Explanatory
losses) notes

IAS 1 requires the individual components of the financial statements to be presented with
equal prominence in an entity’s complete set of financial statements. [IAS 1.11]

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 Statement of Financial Position

Current/non-current distinction of assets and liabilities

Overall structure – 2 formats illustrated

Net assets (assets – liabilities ) = Capital

Assets = Capital + Liabilities

Certain items (“line items”) must be shown on the face of the

statement of financial position.

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 Current / non-current Distinction

Current / Non-current

IAS 1 requires that both For most businesses it will

assets and liabilities be appropriate to identify
should be classified this classification with
separately as current and reference to their
non-current. operating cycle.

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 Current assets
• Expected to be realised in the normal course of
the operating cycle (RM + WIP)
• Held primarily for trading purposes (FG)
• Expected to be realised within 12 months (IFRS
5)
• Cash or a cash equivalents
• All other assets classified as “non-current”.

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Four criteria for identifying a current asset

• The entity expects to use or sell the asset in its

normal operating cycle,
• it holds the asset primarily for trading rather than
long-term usage within the business,
• it expects to realise the asset, sell it for cash,
within twelve months after the reporting period,
• the asset is cash or a cash equivalent to which the
entity has access within twelve months after the
reporting period. [IAS 1.66]

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 Illustration of Current Asset classification

• An entity supplies seasoned timber to furniture

manufacturers. The operating cycle is clearly
defined and timber is matured over a three to
five year period.
• The cost of the timber inventories would be
classified as a current asset, as they are realised
within the operating cycle. The entity should
disclose the amount of inventories to be realised
more than twelve months after the reporting
period.

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 Current liabilities

• Expected to be settled in the normal course of

operating cycle
• Within 12 months of the end of the reporting
period
• All other liabilities classified as “non-current”.

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Four criteria for identifying a current liability:

• The entity expects to settle the liability within its normal

operating cycle,
• it holds the liability primarily for trading purposes,
• the liability is due to be settled within twelve months
after the reporting period or
• the entity has no unconditional rights to defer payment
for at least twelve months after the reporting period.
[IAS 1.69]

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 Statement of P&L and OCI
Total Comprehensive income
• includes profit or loss for that period plus other
comprehensive income recognised in that period.
• All items of income and expense recognised in a period
must be included in profit or loss unless a Standard or
an Interpretation requires otherwise. [IAS 1.88] Some
IFRSs require or permit that some components to be
excluded from profit or loss and instead to be included
in other comprehensive income. [IAS 1.89]
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 Statement of Comprehensive Income
An entity has a choice of presenting:
• a single statement of comprehensive income
or
• two statements:
– an income statement displaying components of
profit or loss and
– a statement of comprehensive income that begins
with profit or loss (bottom line of the income
statement) and displays components of other
comprehensive income [IAS 1.81]
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IAS 1R - Separate disclosure of owner
changes and comprehensive income
Presentation of Statement of P&L and OCI

Single statement either/or Two statements

1) Statement displaying
components of profit or
loss and

2) Statement beginning with

profit or loss and
displaying components of
other recognised income
and expense

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 Statement of Comprehensive Income

• Certain items (“line items”) must be shown on

the face
• Expenses analysed by function, or nature
• Functional classification requires additional
disclosures of nature of expenses
• Overall structure - 2 formats illustrated.

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Profit or Loss by function

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Profit or loss by Nature

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Presentation of the OCI(incl tax)

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Presentation of OCI (net of tax)

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Attributable Section

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 Statement of Changes in Equity

• Separate statement showing results of dealing

with equity owners only.
• Will include:
– Profit or loss for period
– Other comprehensive income adjustments
– Cumulative effect of changes in accounting policy
or correction of errors
– New share issues
– Dividends to equity holders.

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 Statement of Changes in Equity
IAS 1 requires an entity to present a statement of changes in equity as
a separate component of the financial statements. The statement
must show: [IAS 1.106]
• total comprehensive income for the period, showing separately
amounts attributable to owners of the parent and to non-
controlling interests
• the effects of retrospective application, when applicable, for each
component
• reconciliations between the carrying amounts at the beginning and
the end of the period for each component of equity, separately
disclosing:
– profit or loss
– each item of other comprehensive income
– transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control
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 Statement of Changes in Equity
• The following amounts may also be presented
on the face of the statement of changes in
equity, or they may be presented in the notes:
[IAS 1.107]
• amount of dividends recognised as
distributions, and
• the related amount per share

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 Statement of Cash Flows
Cash flow information provides users of the financial
statements with information to:

• Assess an entity’s ability to generate cash

• Indicate how it utilises the cash in its operations.

Requirements for the preparation of a statement of Cash

Flows are set out in IAS 7 Statement of Cash Flows.

Note: Dealt with under Module 105

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 Notes to the Financial Statements
The notes must: [IAS 1.112]
• present information about the basis of preparation of
the financial statements and the specific accounting
policies used
• disclose any information required by IFRSs that is not
presented elsewhere in the financial statements and
• provide additional information that is not presented
elsewhere in the financial statements but is relevant to
an understanding of any of them

• Notes should be cross-referenced from the face of the

financial statements to the relevant note. [IAS 1.113]
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 Notes to the Financial Statements

• IAS 1.114 suggests that the notes should normally be presented in

the following order:
• a statement of compliance with IFRSs
• a summary of significant accounting policies applied, including: [IAS
1.117]
– the measurement basis (or bases) used in preparing the financial
statements
– the other accounting policies used that are relevant to an
understanding of the financial statements
• supporting information for items presented on the face of the
statement of financial position (balance sheet), statement of
comprehensive income (and income statement, if presented),
statement of changes in equity and statement of cash flows, in the
order in which each statement and each line item is presented

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 Notes to the Financial Statements

• other disclosures, including:

– contingent liabilities (see IAS 37) and unrecognised contractual
commitments
– non-financial disclosures, such as the entity's financial risk
management objectives and policies (see IFRS 7)

Disclosure of judgements. New in the 2003 revision to IAS 1,

an entity must disclose, in the summary of significant
accounting policies or other notes, the judgements, apart
from those involving estimations, that management has
made in the process of applying the entity's accounting
policies that have the most significant effect on the
amounts recognised in the financial statements. [IAS 1.122]

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 Notes to the Financial Statements

• Disclosure of key sources of estimation

uncertainty. Also new in the 2003 revision to IAS
1, an entity must disclose, in the notes,
information about the key assumptions
concerning the future, and other key sources of
estimation uncertainty at the end of the
reporting period, that have a significant risk of
causing a material adjustment to the carrying
amounts of assets and liabilities within the next
financial year. [IAS 1.125] These disclosures do
not involve disclosing budgets or forecasts. [IAS
1.130]
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Questions ?

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 Apply IAS 1- Knowledge
Try the following Questions
• Module 102 Question 3.1

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Inventory: IAS 2

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IAS 2: INVENTORIES

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 Examinability
Past ITC/FQE Exams Past CTA Exams
Past FQE Exams • 2011 only
- Not examined in the last 10
yrs

Prepared by Anesu Daka CA (SA) (Z) 101

 Examinability
2017 Possible areas of focus:
- UNISA had it the 2011 CTA exam- it could be
coming- see UNISA Question at end of the
Inventory section (Woodi Ltd – Part C)

Prepared by Anesu Daka CA (SA) (Z) 102

 Key Areas of Focus
• Accounting for manufactured inventories:
– Cost of purchase, including rebates, settlement
discounts and deferred settlement terms
– Calculate Raw-material, WIP and FG balance,
taking into account NRV
– Calculate cost of sales
– Calculate the inventory write down

Prepared by Anesu Daka CA (SA) (Z) 103

 Inventories is:
• assets held for sale in the ordinary course of
business (finished goods),
– assets in the production process for sale in the
ordinary course of business (work in process),
– and materials and supplies that are consumed in
production (raw materials).
– Consumables (include insignificant PPE items,
stationery, etc.)

Prepared by Anesu Daka CA (SA) (Z) 104

 Fundamental Principle
• Inventories are valued at the lower of:
– cost and
– net realisable value (NRV). [IAS 2.9] (NRV is excluded
from IFRS 13)

• Exam approach:
– First determine the cost,
– Then NRV (estimated SP- estimated cost to
completion & cost to sell)
• Determine which one of the two is lower.
Prepared by Anesu Daka CA (SA) (Z) 105
 Measurement of Inventory
• Cost should include all: [IAS 2.10]
– costs of purchase (including taxes, transport, and handling) net
of trade discounts, rebates and settlement discount received or
receivable.
– costs of conversion (including fixed and variable manufacturing
overheads) and
– other costs incurred in bringing the inventories to their present
location and condition

• IAS 23 Borrowing Costs identifies some limited

circumstances where borrowing costs (interest) can be
included in cost of inventories that meet the definition of a
qualifying asset. [IAS 2.17 and IAS 23.4]- wine production,
ship building, e.g.

Prepared by Anesu Daka CA (SA) (Z) 106

 Measurement of Inventory
• Inventory cost should NOT include: [IAS 2.16 and
2.18]
– abnormal waste
– storage costs
– administrative overheads unrelated to production
– selling costs
– foreign exchange differences arising directly on the
recent acquisition of inventories invoiced in a foreign
currency
– interest cost when inventories are purchased with
deferred settlement terms.

Prepared by Anesu Daka CA (SA) (Z) 107

Prepared by Anesu Daka CA (SA) (Z) 108
 Measurement of Inventory
• For inventory items that are not interchangeable, specific costs are
attributed to the specific individual items of inventory. [IAS 2.23]
• For items that are interchangeable, IAS 2 allows the FIFO or
weighted average cost formulas. [IAS 2.25] The LIFO formula,
which had been allowed prior to the 2003 revision of IAS 2, is no
longer allowed.
• The same cost formula should be used for all inventories with
similar characteristics as to their nature and use to the entity. For
groups of inventories that have different characteristics, different
cost formulas may be justified. [IAS 2.25]
• The standard cost and retail methods may be used for the
measurement of cost, provided that the results approximate actual
cost. [IAS 2.21-22]

Prepared by Anesu Daka CA (SA) (Z) 109

 Cost of inventories
• Cost of inventories depends on whether the
inventory is being bought or manufactured
from within as follows:
Type of inventory Bought Manufactured/converted
Raw-material (RM) Use Cost formulas-
FIFO/WACO
Merchandise/Finished Use Cost formulas- Direct material used +
goods FIFO/WACO labour used + direct
overheads + allocated fixed
costs
Work-in-progress N/A Direct material used +
conversion cost

Prepared by Anesu Daka CA (SA) (Z) 110

 Accounting Discounts & Rebates
• Apply Circular 09/2006 (refer to your SAICA
handbook on circulars- Vol 3)

Prepared by Anesu Daka CA (SA) (Z) 111

 Discounts and rebates on Inventory
Purchases (Learn to identify these in
Q)
a) Trade discount- discount given to all traders and bulk buyers
b) Cash discounts received- discount given on all cash purchases
c) Settlement discount receivable- discount receivable after paying
within a certain stipulated time
d) Volume rebates receivable- Customer has to achieve a certain
level of purchases before being awarded a rebate.

NB:*c and d are complex

Prepared by Anesu Daka CA (SA) (Z) 112

 Discounts and rebates on Inventory
Purchases
• a)Trade and cash discounts received
-Deduct from inventory
-Easy to account for – deducted at point of sale

• b)Settlement discount receivable

-Deduct from inventory ONLY when receivable (check probability of
receivability from the Q)

• c)Volume rebates receivable

-Deduct from inventory ONLY when receivable (check probability of
receivability from the Q)

Prepared by Anesu Daka CA (SA) (Z) 113

 Raw material (RM) Cost
• Determine the cost of RM:
– Identify the cost formula used to measure RM:
• FIFO – RM cost is based on the cost of the last purchase
• Weighted Average Cost- determine total cost of all
purchases/weighted average number of units of RM
purchased.

Prepared by Anesu Daka CA (SA) (Z) 114

 Cost of goods Manufactured
Direct material used (do T account)
+ labour used (actual + normal loss hrs X rate)
+ direct overheads (allocated based on actual
units)
+ allocated fixed costs (allocated based on
normal capacity)

(see diagram below)

Prepared by Anesu Daka CA (SA) (Z) 115
Allocation of Conversion Costs

Prepared by Anesu Daka CA (SA) (Z) 116

 Write-Down to Net Realisable Value
• NRV is the estimated selling price in the
ordinary course of business, less the
estimated cost of completion and the
estimated costs necessary to make the sale.
[IAS 2.6] Any write-down to NRV should be
recognised as an expense in the period in
which the write-down occurs. Any reversal
should be recognised in the income statement
in the period in which the reversal occurs. [IAS
2.34]
Prepared by Anesu Daka CA (SA) (Z) 117
 Expense Recognition
• Cost of inventory is recognised as COST OF SALES
(COS) comprising of:
– cost-of-goods-sold (number of units sold X
manufacturing cost p/unit)
• + Normal wastage (included in cost of inventory)
– Any write-down to NRV, and
– any inventory losses are also recognised as an expense
when they occur:
• Abnormal wastage (not included in inventory but included
directly in COS
• -Over/+under-recovery of fixed overheads ( [IAS 2.34]

Prepared by Anesu Daka CA (SA) (Z) 118

 Disclosure
• Required disclosures: [IAS 2.36]
• accounting policy for inventories
• carrying amount, generally classified as merchandise, supplies, materials, work in progress, and
finished goods. The classifications depend on what is appropriate for the entity
• carrying amount of any inventories carried at fair value less costs to sell
• amount of any write-down of inventories recognised as an expense in the period
• amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
• carrying amount of inventories pledged as security for liabilities
• cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some
enterprises classify income statement expenses by nature (materials, labour, and so on) rather than
by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to
disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised
during the period by nature of the cost (raw materials and consumables, labour costs, other
operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is
consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses
by function or nature.

Prepared by Anesu Daka CA (SA) (Z) 119

 Apply IAS 2
Level 2
Try the following:
• Tut 102 Question 4.1-2

Prepared by Anesu Daka CA (SA) (Z) 120

 Case Study

CTA 2-Case Study 7 Question 2

Prepared by Anesu Daka CA (SA) (Z) 122
Prepared by Anesu Daka CA (SA) (Z) 123
Prepared by Anesu Daka CA (SA) (Z) 124
 Planning the answer
• Calculation WIP transferred to FGs account :
– Approach:
• calculate the cost of goods produced:
– RM used (op RM + Purchases+ normal wastage – clo RM)
– + direct labour (productive + normal loss hrs) X rate per hr
– + variable overheads (units produced * variable cost/unit or
given amt)
– + allocated fixed overheads (units produced/normal capacity *
total fixed overheads

Using T Accounts or Pro-forma (Manufacturing Account Format)

may work

Prepared by Anesu Daka CA (SA) (Z) 125

Prepared by Anesu Daka CA (SA) (Z) 126
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INCOME TAXES: IAS 12

Prepared by Anesu Daka CA (SA) (Z) 128

 Examinability
FQE UNISA CTA Exams
Jan 2017 • 2014
2014 Jan • 2013
2013 Jan • 2012
2012 • 2011
2010 • 2009
2009
2008
2006

Prepared by Anesu Daka CA (SA) (Z) 129

 Examinability
2017 Possible areas of focus:
big question like the 2012 question. Plus
deferred tax discussion or calc could still come
though

Prepared by Anesu Daka CA (SA) (Z) 130

 IAS 12- Possible Exam Questions
• Presentation of Income Taxes on P/L, OCI, SoFP &
SOCIE
• Disclosure notes for Income Taxes
• Calculation of Tax Expense
• Calculation of Temporary Differences using the SOFP
method
• Calculation of Deferred Tax Asset/Liability
• Calculation of Taxable Income & Current Tax
• Dealing with Assessed Losses & tax credits
• Theory question on current + deferred tax implications

Prepared by Anesu Daka CA (SA) (Z) 131

 What is income Taxes?
• Tax levied on both local and foreign income
earned by an entity, e.g.:
– Normal corporate tax (28%) ito the Income Tax Act
– Capital gain tax ito of Schedule 8 of the RSA
Income Tax Act
– Dividend tax

Anesu Daka CA (SA) Chartered Accountants

Academy
Presentation of Income Taxes

Prepared by Anesu Daka CA (SA) (Z) 133

Presentation of Income Taxes

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Disclosure of Income Taxes

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Prepared by Anesu Daka CA (SA) (Z) 136
Deferred Tax Disclosure

Prepared by Anesu Daka CA (SA) (Z) 137

Calculation of Income Taxes

Calculate the tax expense:

 Current Tax
+ Movement of Deferred Tax
recognised in P/L
Calculation of the Tax Expense

Prepared by Anesu Daka CA (SA) (Z) 139

 Components of Tax Expense
Income Tax expense may include the following components:
• Current tax
– Current Year (Taxable income X Current tax rate)
– Prior Year: Less Over/add under provision
• Deferred Tax:
– Current deferred tax (mvt btwn current closing & op DT bals)
– +/-Effect of tax rate change (%change/prior rate X opening bal)
– -Recognised deferred tax asset on assessed & capital losses
– -/+ unrecognised deferred tax asset on prior period assessed
loss
• Dividend tax
• Foreign tax expense (foreign income X foreign tax rate)

Prepared by Anesu Daka CA (SA) (Z) 140

 Current tax defined

• Current tax: amount of income tax

payable/refundable based on taxable
profit/loss for the current period or past
periods

Anesu Daka CA(SA) Chartered Accountants

141
Academy
 Deferred tax defined
• Deferred tax: tax payable/recoverable in
the future period as a result of past
transactions
• Carrying amount: measurement under
IFRSs
• Tax base: measurement under tax law
• Temporary difference: difference in
carrying amount of an item in the
statement of financial position and its tax
base
Anesu Daka CA(SA) Chartered Accountants
142
Academy
 Current Tax Calculation Formula
$
Profit Before Tax 240,000
Add/Less Permanent Differences (non-taxable income & expenses) xxxxx

Less: Mvt in temporary differences as per the SOFP (100,000)

Taxable Profit 140,000

Current Tax @ 25.75% of 140,000 35,000

Deferred Tax@25,75% of 100,000 25,000
Tax expense (Profit before Tax x 25.75%) 240,000 x 25.75% 60,000

Anesu Daka CA(SA) Chartered

143
Accountants Academy
 Relationship between Taxable Income
and PBT
Profit before tax (PBT) Taxable Income
Revenue XX Profit before tax X
Less: Cost of Sales (X) +/- Permanent differences:
Gross Profit X - Non-taxable items (X)
Plus: Other Income X +Non-deductible items X
Total accrued trade inc X
Less: Operating expenses(X)
+/- mvt in temporary diffs
Profit before tax X
through profit and loss X
Less: Tax Loss c/f (X)
Taxable inc/(acc tax loss) X

Anesu Daka CA (SA) Chartered Accountants

Academy
 PBT
Revenue and Other Income: Operating and Other Expenses:
• Revenue from contracts with • Operating expenses (COS,
customers salaries, rentals, e.tc)
• Other Income: • Other Expenses:
– Dividends received
– Donations
– Fair value adjustments on non-
current assets – Fines
– Impairment reversal – Impairment of goodwill
– Interest Income – Impairment loss
– Gain on disposal – Share based payment expense
– Deferred income recognised – Loss on disposal
– Exchange gain/loss – Transaction costs
– Gain on bargain purchase – Fines
– Gain/loss on loss of control
– Finance costs

Anesu Daka CA (SA) Chartered Accountants

Academy
 Taxable Inc = Gross Taxable Income
Which income is not
less
taxable/not
trade?
in deductible expense in trade
Which expense is
not deductible/not
Revenue and Other Income: for trade?
Operating and Other Expenses:
• Revenue from contracts with • Operating expenses (COS,
customers salaries, rentals, e.tc)
• Other Income:
– Dividends received • Other Expenses:
– Fair value adjustments on non- – Donations
current assets – Fines
– Impairment reversal
– Impairment of goodwill
– Interest Income
– Gain on disposal – Impairment loss
– Deferred income recognised – Share based payment expense
– Exchange gain/loss – Loss on disposal
– Gain on bargain purchase – Transaction costs
– Gain/loss on loss of control
– Finance costs

Anesu Daka CA (SA) Chartered Accountants

Academy
 Permanent Differences:
Non-taxable items in PBT Non-deductible expenses in PBT
– Dividends received – Donations
– Fair value adjustments on – Fines
non-current assets – Impairment of goodwill
– Impairment reversal – Impairment loss
– Interest Income – Share based payment
– Gain on disposal expense
– Deferred income recognised – Loss on disposal
– Exchange gain/loss – Transaction costs
– Gain on bargain purchase – Finance costs
– Gain/loss on loss of control

Anesu Daka CA (SA) Chartered Accountants

Academy
 Relationship between Taxable Income
and PBT
Profit before tax (PBT) Taxable Income
Revenue XX Profit before tax X
Less: Cost of Sales (X) +/- Permanent differences:
Gross Profit X - Non-taxable items (X)
Plus: Other Income X +Non-deductible items X
Total accrued trade inc X
Less: Operating expenses(X)
+/- mvt in temporary diffs
Profit before tax X
through profit and loss X
Less: Tax Loss c/f (X)
Taxable inc/(acc tax loss) X

Anesu Daka CA (SA) Chartered Accountants

Academy
Relationship between PBT and Taxable
Income
PBT Taxable Income
• Determine by the • Determined by the taxman
accountant • Based on tax legislation (Zim
Tax Act)
• Based on IFRS
• Include only income and
• Include all income and expenditure from trade
expenses • Deducts tax loss b/f from
• Based on substance only previous period/s
• Based on legal form
• Includes net income taxable
• Only includes income taxed in
in current and future current period (+/- mvtin
periods temporary differences)

Anesu Daka CA (SA) Chartered Accountants

Academy
 therefore
which of the following is true?

1. PBT Taxable Income

2. PBT Taxable Income

2 is correct

Anesu Daka CA (SA) Chartered Accountants

Academy
 Deferred Tax Key principle
• Temporary Differences = Carrying Amt less Tax Base
– CA= determined in accordance with IFRS
– TB= determined in accordance with tax law
• The tax base of an item on the statement of financial
position is determined as follows:
Asset: is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to an
enterprise when it recovers the carrying amount of the
asset.
Liability: is its CA less any amount that will be deductible for
tax purpose in future periods.
Revenue received in advance: is its CA less any amount of
the revenue that will NOT be taxable in future periods.

Prepared by Anesu Daka CA (SA) (Z) 151

IAS 12 EXAMPLE (FLOW OF NOTES)

ILLUSTRATING STATEMENT OF FINANCIAL POSITION METHOD

• Included in the accounting profit of R1 000 000 are dividends received of R12 500
that are not taxable and a penalty of R5 000 that is not deductible for tax
purposes. On 31 December 20.11 there were no temporary differences.
• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over four years on the straight line basis. The depreciation is included
in the accounting profit. The SARS allows a S12C deduction of 40% in the first year
and 20% per year for the subsequent three years.
• Deasy Ltd acquired office buildings on 1 January 20.12 for R450 000 which is
depreciated over 25 years on the straight line basis. The depreciation is included
in the accounting profit. The SARS does not allow any tax allowance from the use
of office buildings.
• The prepaid expenses for 20.12 R15 000 and income received in advance was R30
000.
• Normal tax rate is 28%

Prepared by Anesu Daka CA (SA) (Z) 152

 Approach to IAS 12 Question
• Step 1- Identify all requirements of the
question
• Step 2- Prepare Skeletons of the required, e.g.:
– P/L, OCI, SOFP, SOCIE
– Notes: Tax Expense + Reconciliation, Deferred Tax,
Current Tax Payable/Receivable
• Step 3: Prepare supporting calculations for
each of the key figures on the items in Step 2.

Prepared by Anesu Daka CA (SA) (Z) 153

 Approach to IAS 12 Question
• Step 4: Enter all items not requiring complex
calculations on the required in Step 2.
• Step 5. Make all the two most important
calculations in the following order:
– 1st-Deferred Tax calculation (usually more marks)
– 2nd-Current Tax Calculation (considerable marks)

Prepared by Anesu Daka CA (SA) (Z) 154

 IAS 12 (FLOW OF NOTES)
C1. Current tax 20.12
R
Profit before tax 1 000 000 BREAK DOWN OF EFFECT ON CURRENT TAX CALC
Non-taxable/non-deductible
items: -
Dividends received (12 500) DEPRECIATION INCLUDED IN
Fine 5 000 A PROFIT BEFORE TAX
Depreciation: office buildings 18 000
ADD: BACK DEPRECIATION 75 000
Movement in temporary differences
(taxable) [C2] (30 000) LESS:TAX ALLOWANCE (120 000)
tax loss 980 500
Unused tax loss of prior year -
Taxable profit 980 500 PREPAID EXPENSE NOT
Tax at 28% 274 540 B RECOGNISED IN TEMRS OF IFRS
TAXABLE TEMPORARY
DECREASES TAXABLE PROFIT
DT at 28%
(asset)/ IRO TAX ACT DEDUCTIBLE IN THE
C2. Deferred tax CA TB TD liability CURRENT YEAR (15 000)
R R R R

31 Dec 20.12
REVENUE NOT RECOGNISED IN
Machinery 225 000 180 000 A 45 000 12 600
C TEMRS OF IFRS
IAS12.15
DEDUCTIBLE TEMPORARY
Office buildings 450 000 - exemption -
INCREASES TAXABLE PROFIT
Prepaid expense 15 000 - B 15 000 4 200
IRO TAX ACT TAXABLE IN THE
Revenue received CURRENT YEAR 30 000
in advance 30 000 - C (30 000) C (8 400)
Net deferred tax liability
Prepared
30 000 by Anesu Daka
8 400 CA (SA) (Z) (30
155000)
IAS 12 (FLOW OF NOTES)

DT at 28% (asset)/
C2. Deferred tax CA TB TD liability
R R R R
31 Dec 20.12
Machinery 225 000 180 000 45 000 12 600

Office buildings 450 000 - IAS12.15 exemption -

Prepaid expense 15 000 - 15 000 4 200

Revenue received in
advance 30 000 - (30 000) (8 400)

Net deferred tax liability 30 000 8 400

DEFFERRED TAX NOTE 20.12

R
ANALYSIS OF TEMPORARY DIFFERENCE
- PROPERTY PLANT EQUIPMENT
ACCELERATED DEDUCTION FOR TAX PURPOSES 12 600
PRE-PAID EXPENSE 4 200
REVENUE RECEIVED IN ADVANCE (8 400)

NET DEFERRED TAX LIABILITY 8 400

Prepared by Anesu Daka CA (SA) (Z) 156

 Current Tax
a) Is the amount of income taxes payable or recoverable in respect of the
taxable profit or loss for a period.
b) Refer above slide: current tax is part of tax expense (NB: current tax will
be zero if there is a current assessed loss/no tax payable);
c) Interest and penalties arising from late payment of current tax expense
shall be recognised separately as finance cost and other admin costs,
respectively. Do NOT recognise these items as part of the tax expense;
d) Interest and penalties for late payments are not deductible tax expense,
hence, treat them as non-deductible permanent differences when
calculating taxable income and add these back to profit b4 tax.
e) Over/under provision- always compare final tax payment for prior year
current tax payable(after deducting interest and penalties, referred
above) to the opening tax provision outstanding. Recognise the
over/under provision as part of the tax expense for the current year as
shown in slide above. Do not restate prior tax balances.

Prepared by Anesu Daka CA (SA) (Z) 157

 Current Tax JEs
Dr Creditor: SARS (outstanding prior provision)
Dr Finance costs (interest accrued on late payment of tax)
Dr Other expenses (penalties on late or incorrect provision)
Dr (under) /Cr (over) Income tax expense (overprovision prior
year) B/F
Cr Bank
Final pmt of prior assessment

Dr Creditor: SARS
Cr Bank
1st & 2nd provisional pmt current year

Prepared by Anesu Daka CA (SA) (Z) 158

What is the over/under provision?

Prepared by Anesu Daka CA (SA) (Z) 159

 Current Tax JEs
Dr Creditor: SARS (outstanding prior provision) 2650 000
Dr Finance costs (interest accrued on late payment of tax)
Dr Other expenses (penalties on late or incorrect provision)
Dr (under) /Cr (over) Inc tax expense (overprovision ) 40 000
Cr Bank 2610 000
Final pmt of prior assessment

Dr Creditor: SARS 1600 000

Cr Bank 1600 000
1st & 2nd provisional pmt current year

Prepared by Anesu Daka CA (SA) (Z) 160

IAS 12 EXAMPLE 1

TREATEMENT OF TAX LOSS WHEN FUTURE PROFITS ARE PROBABLE

• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over four years on the straight line basis. The depreciation
charge is included in the accounting profit. The SARS allows a S12C
deduction of 40% in the first year and 20% per year for the subsequent
three years.
• The accounting loss for the year ended 31 December 20.12 is R500 000.
• Future taxable profits are probable for the financial year ending 20.12
• Normal tax rate is 28%

Required
Prepare the income tax note together with the tax rate reconciliation to the
financial statements of Deasy Ltd for the year ended 31 December 20.12

Prepared by Anesu Daka CA (SA) (Z) 161

 IAS 12 EXAMPLE 1
C1. Current tax 20.12 DEASY LTD
R
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.12
Loss before tax (500 000)

3. Income tax expense 20.12

Non-taxable/non-deductible items: -
Movement in other temporary R
differences, except assessed losses
(taxable) [C2] (45 000) Major components of tax
expense
tax loss (545 000)
Unused tax loss of prior year - SA normal tax
Current tax
Cumulative unused tax loss as at 31
December 20.12 (545 000) -Current year [C1] -
Tax at 28% - Deferred tax

-Movement in temporary
differences [C2] (45 000 x 28%) 12 600
DT at 28%
(asset)/ -Unused tax loss recognized
C2. Deferred tax CA TB TD liability [C2] (545 000 x 28%) (152 600)
R R R R
(140 000)

31 Dec 20.12
Tax reconciliation
Machinery 225 000 180 000 45 000 12 600
Accounting Loss (500 000)
45 000 12 600
Tax @ 28% (140 000)

Unused tax loss - 545 000 (545 000) (152 600) Tax effect of non-taxable/non-
deductible items: -
Net deferred Income tax expense (140 000)
tax asset (500 000) (140 000)

Prepared by Anesu Daka CA (SA) (Z) 162

IAS 12 EXAMPLE 2

TREATEMENT OF TAX LOSS WHEN FUTURE PROFITS ARE NOT PROBABLE

• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over four years on the straight line basis. The depreciation is
included in the accounting profit. The SARS allows a S12C deduction of
40% in the first year and 20% per year for the subsequent three years.
• The accounting loss for the year ended 31 December 20.12 is R500 000.
• At the end of the financial year 20.12 there is uncertainty about the
company’s ability to generate taxable profit
• Normal tax rate is 28%

Required
Prepare the income tax note together with the tax rate reconciliation to the
financial statements of Deasy Ltd for the year ended 31 December 20.12

Prepared by Anesu Daka CA (SA) (Z) 163

IAS 12: Dealing with Unused Tax Losses
(IAS 12.34-37)
1. Recognise a deferred tax asset for the carry forward of unused tax losses and unused tax credits .
2. The deferred tax asset should be recognised to the extent that it is probable that future taxable profit
will be available against which the unused tax losses and unused tax credits can be utilised (the benefit
is a future reduced current tax).
 1st - recognise in full if and only if future taxable profits will be available to deduct the loss; or
 2nd – if no future taxable income, recognise an asset equal to the credit balance of the deferred tax
liability before recognising the deferred tax asset. (E.g., if deferred tax asset is $5000 and deferred
tax liability is $4000 before recognising the deferred tax asset. You can recognise $4000 only as a
deferred tax asset, and the deferred tax asset will be zero. Unrecognised deferred tax asset is
$1000($5000-$4000), which is tax reconciling item (increase in unrecognised deferred tax asset
results in a positive impact on the reconciliation, and vice versa for decreases – IAS 12.81(c)).
3. The unrecognised deferred tax asset should be disclosed separately in the notes as required by IAS
12.81(e)
4. If it is however uncertain whether there will be future taxable income, the deferred tax account may not
reflect a debit balance, i.e. deferred tax balance is limited to zero (refer to example above)

• Ref to Next Slide

Prepared by Anesu Daka CA (SA) (Z) 164

IAS 12 EXAMPLE 2

C1. Current tax 20.12 DEASY LTD

R NOTES FOR THE YEAR ENDED 31 DECEMBER 20.12
Loss before tax (500 000)
Non-taxable/non-deductible
items: - 3. Income tax expense 20.12
Movement in temporary differences R
(taxable) [C2] (45 000) Major components of tax
tax loss (545 000) expense
Unused tax loss of prior year -
Cumulative unused tax loss as at 31
SA normal tax
December 20.12 (545 000) Current tax
Tax at 28% - -Current year [C1] -
Deferred tax
-Movement in temporary
DT at 28% differences [C2] (45 000 x 28%) 12 600
(asset)/ -Unused tax loss recognized
C2. Deferred tax CA TB TD liability [C2] (45 000 x 28%) (12 600)
R R R R
-

31 Dec 20.12 Tax reconciliation

Machinery 225 000 180 000 45 000 12 600 Accounting Loss (500 000)
45 000 12 600 Tax @ 28% (140 000)
Tax effect of non-taxable/non-
Unused tax
deductible items: -
loss - 45 000 (45 000) (12 600)
Net deferred Unused tax loss not recognised
tax asset - - (545 000 – 45 000) *28% 140 000
Income tax expense -
Unused Tax loss c/f (545k-45000) 500000 140 000

Prepared by Anesu Daka CA (SA) (Z) 165

IAS 12 EXAMPLE 3

TAX LOSS IS UTILISED

• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over four years on the straight line basis. The depreciation is
included in the accounting profit. The SARS allows a S12C deduction of
40% in the first year and 20% per year for the subsequent three years.
• The accounting loss for the year ended 31 December 20.12 is R500 000.
• At the end of the financial year 20.12 there is uncertainty about the
company’s ability to generate taxable profit
• In 20.13 company generated an accounting profit of R1 000 000
• Normal tax rate is 28%
Required
Prepare the income tax note together with the tax rate reconciliation to the
financial statements of Deasy Ltd for the year ended 31 December 20.13

Prepared by Anesu Daka CA (SA) (Z) 166

IAS 12 EXAMPLE 3

C1. Current tax 20.13 DEASY LTD

R NOTES FOR THE YEAR ENDED 31 DECEMBER 20.12
Accounting before tax 1 000 000
Non-taxable/non-deductible
items: - 3. Income tax expense 20.12
Movement in temporary differences R
(taxable) [C2] 15 000 Major components of tax
tax loss 1 015 000 expense
Unused tax loss of prior year (545 000) SA normal tax
Taxable profit 470 000
Tax at 28% 131 600
Current tax
-Current year [C1] 131 600
Deferred tax
-Movement in temporary
differences [C2] (15 000 x 28%) (4 200)
DT at 28%
(asset)/ -Unused tax loss recognized
C2. Deferred tax CA TB TD liability utilised [C2] (45 000 x 28%) 12 600
R R R R 140 000

31 Dec 20.12 Tax reconciliation

Machinery 225 000 180 000 45 000 12 600 Accounting Loss 1 000 000
45 000 12 600 Tax @ 28% 280 000
Unused tax Tax effect of non-taxable/non-
loss - 45 000 (45 000) (12 600) deductible items: -
Net deferred Unused tax loss not recognised
tax asset - - utilised
31 Dec 20.13 (545 000 – 45 000) *28% (140 000)
Machinery 150 000 120 000 30 000 8 400 Income tax expense 140 000
30 000 8 400
Unused tax
loss - - - -
Net deferred
tax liability 30 000Prepared by Anesu Daka CA (SA) (Z)
8 400 167
 CLASS QUESTION 1
Example 1 – Deasy Ltd
• The accounting profit for the year ended 31 December 20.12 is R500 000.
• Included in the accounting profit are dividends received of R10 000 that
are not taxable and a penalty of R15 000 that is not deductible for tax
purposes.
• On 31 December 20.11 there were no temporary differences except for an
unused tax loss of R550 000 for the year ended 31 December 20.11. The
SARS assessment reflects an assessed tax loss of R550 000.
• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over five years on the straight line basis. The SARS allows a
S12C deduction of 40% in the first year and 20% per year for the
subsequent three years.
• Future taxable profits are probable for both financial years ending 31
December 20.11 and 20.12.

Required
Disclose the income tax note and deferred tax note in the financial
statements of Deasy Ltd for the year ended 31 December 20.12

Prepared by Anesu Daka CA (SA) (Z) 168

CLASS QUESTION 1 - CALCULATIONS
C1 Current tax R
Profit before tax 500 000
Non-taxable/ non-deductible items:
Dividends received not taxable (10 000)
Fine not deductible 15 000
Taxable profit before temporary differences 505 000
Movement in temporary differences
(taxable in future) [C2] (60 000)
Taxable profit before unused tax loss 445 000
Unused tax loss of prior year (given) ????
(550 000)

Cumulative unused tax loss as at 31 December 20.12 (105 000)

Tax at 28% Nil

Prepared by Anesu Daka CA (SA) (Z) 169
 CLASS QUESTION 1 - CALCULATIONS
C2 Deferred tax
Carrying Tax base Temporary Deferred tax at
amount difference 28% (Dr)/Cr
R R R R
31 December 20.11
Unused tax loss - 550 000 (550 000) (154 000)
31 December 20.12
Machinery 240 000 180 000 60 000 16 800
Unused tax loss - 105 000 (105 000) (29 400)
(45 000) (12 600)

Movement in temporary differences (excluding tax loss)

(taxable) (60 000 - 0) 60 000 16 800

Movement in unused tax loss ((105 000) - (550 000)) 445 000 124 600
Total movement in temporary differences
((45 000) - (550 000)) 505 000 141 400

Prepared by Anesu Daka CA (SA) (Z) 170

Deasy Ltd
CLASS QUESTION 1 - DISCLOSURE
Notes to the financial statements for the year ended 31 December 20.12
3. Income tax expense 20.12

Major components of tax expense R

SA normal tax
Current tax
- Current year [C1] -
Deferred tax
- Movement in temporary [C2] (60 000 x 28%) 16 800
- Unused tax loss utilised [C2] (445 000 x 28%) 124 600
141 400

Tax reconciliation
Accounting profit 500 000
Tax @ 28% 140 000
Tax effect of non-deductible/non-taxable items:
- Dividends received (10 000 x 28%) (2 800)
- Penalty (15 000 x 28%) 4 200
Income tax expense 141 400
Prepared by Anesu Daka CA (SA) (Z) 171
 CLASS QUESTION 1 - DISCLOSURE
Deasy Ltd
Notes to the financial statements for the year ended 31 December 20.12
10. Deferred tax 20.12
R

Analysis of temporary differences:

16 800
Property, plant and equipment
(29 400)
- Accelerated deductions for tax purposes
(12 600)
Unused tax loss for normal tax
Net deferred tax asset

Prepared by Anesu Daka CA (SA) (Z) 172

 CLASS QUESTION 2
Example 2 – Deasy Ltd
• The accounting profit for the year ended 31 December 20.12 is R500 000.
• Included in the accounting profit are dividends received of R10 000 that are not
taxable and a penalty of R15 000 that is not deductible for tax purposes.
• On 31 December 20.11 there were no temporary differences except for an unused
tax loss of R550 000 for the year ended 31 December 20.11. The SARS
assessment reflects an assessed tax loss of R550 000.
• Deasy Ltd acquired machinery on 1 January 20.12 for R300 000 which is
depreciated over five years on the straight line basis. The SARS allows a S12C
deduction of 40% in the first year and 20% per year for the subsequent three
years.
• Assume that future taxable profits are probable as at 31 December 20.11 but
when re-evaluated as at 31 December 20.12, that they are not.

Required
Disclose the income tax note and deferred tax note in the financial statements of
Deasy Ltd for the year ended 31 December 20.12

Prepared by Anesu Daka CA (SA) (Z) 173

 CLASS
C1 Current tax
QUESTION 2 - CALCULATIONS
R
Profit before tax 500 000
Non-taxable/ non-deductible items:
Dividends received not taxable (10 000)
Fine not deductible 15 000
Taxable profit before temporary differences 505 000
Movement in temporary differences
(taxable in future) [C2] (60 000)
Taxable profit before unused tax loss 445 000
Unused tax loss of prior year (given) ????
(550 000)

Cumulative unused tax loss as at 31 December 20.12 (105 000)

Tax at 28% Nil

Prepared by Anesu Daka CA (SA) (Z) 174
 CLASS QUESTION 2 - CALCULATIONS
C2 Deferred tax
Carrying Tax base Temporary Deferred tax at
amount difference 28% (Dr)/Cr
R R R R
31 December 20.11
Unused tax loss - 550 000 (550 000) (154 000)
31 December 20.12
Machinery 240 000 180 000 60 000 16 800
Unused tax loss - 105 000 (60 000) (16 800)
- -

Movement in temporary differences (excluding tax loss)

(taxable) (60 000 - 0) 60 000 16 800
Movement in unused tax loss (550 000) - 60 000) 490 000 137 200
Total movement in temporary differences
((45 000) - (550 000)) 550 000 154 000

Prepared by Anesu Daka CA (SA) (Z) 175

 CLASS QUESTION 2 - DISCLOSURE
Deasy Ltd
Notes to the financial statements for the year ended 31 December 20.12
3. Income tax expense 20.12

Major components of tax expense R

SA normal tax
Current tax
- Current year [C1] -
Deferred tax
- Movement in temporary [C2] (60 000 x 28%) 16 800
- Unused tax loss utilised [C2] (490 000 x 28%) 137 200
154 000

Tax reconciliation
Accounting profit 500 000
Tax @ 28% 140 000
Tax effect of non-deductible/non-taxable items:
- Dividends received (10 000 x 28%) (2 800)
- Penalty (15 000 x 28%) 4 200
- Unused tax loss not recognised [C2] (105 000 - 60 000 = 45 000 x 28%) 12 600
Income tax expense Prepared by Anesu Daka CA (SA) (Z) 154 000176
 Apply IAS 12
Try the following questions in TUT 102:
– Question 5.1-2

Prepared by Anesu Daka CA (SA) (Z) 177

Fair Value Measurement: IFRS 13

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 Examinability
FQE UNISA CTA Exams
Not Yet directly examined • 2012

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 Examinability
2017 Possible areas of focus:
• Highly Examinable together with PPE, IFRS 5,
Inv property, Fin Instruments, e.g.

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 Objective of IFRS 13
• IFRS 13: [IFRS 13:1]
– defines fair value
– sets out in a single IFRS a framework for
measuring fair value
– requires disclosures about fair value
measurements.

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 When does IFRS 13 apply?
For example, if you own a biological asset…

IAS 40
FVTPL Financial Assets shall be What
measured on initial recognition and and
at the end of each reporting period at when
its fair value

13

© IFRS Foundation 182

What does IFRS 13 not apply to?
Excluded from the • IFRS 2 and IAS 17
scope
Disclosures in IFRS • Plan assets (IAS 19)
13 not required for • Retirement benefit plan
investments (IAS 26)
• Assets for which recoverable
amount is fair value less cost
of disposal (IAS 36)
Not required for • IAS 2 (net realisable value)
measurement similar • IAS 36 (value in use)
to fair value

© IFRS Foundation 183

 Key Definitions: Fair Value
• The price that would be received to sell an asset
or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date
• Key Elements of the FV definition:
– An asset or a liability
– A transaction
– Orderly
– Market participants
– The price
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 Key Principles
• Principal market: The market with the greatest
volume and level of activity for the asset or
liability

• Most advantageous market: The market that

maximises the amount that would be received to
sell the asset or minimises the amount that
would be paid to transfer the liability, after taking
into account transaction costs and transport costs
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 Key Principles
• Active market: A market in which transactions
for the asset or liability take place with
sufficient frequency and volume to provide
pricing information on an ongoing basis

• Exit price: The price that would be received to

sell an asset or paid to transfer a liability

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 Key Definitions: Fair Value
• Key Elements of the FV definition:
– An asset or a liability
• FV is particular to assets and liabilities
• entity should take into account all characteristics that
market participants would take into account when
pricing the asset or liability, e.g:
– The condition and location of the asset
– Restrictions on the sale or use of the asset
• The asset or liability measured at fair value could be a
stand-alone asset or liability, or part of a group of
assets and/or liabilities, such as a cash generating unit.

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 A hypothetical sell transaction
Principal market (or most
advantageous market)

Market Market
participant buyer participant seller

an asset
at the
Fair value of measurement
a liability date

© IFRS Foundation 188

 Where would the transaction take
place?
• In most cases, these markets will be the same
– arbitrage opportunities will be competed away
• The entity must have access to the principal (or
most advantageous) market
Fair value is the price in the …
Or, if no principal market, the
Principal market
most advantageous market

The market with the greatest volume The market that maximises the
and level of activity for the asset or amount that would be received to sell
liability the asset and minimises the amount
that would be paid to transfer the
liability
© IFRS Foundation 189
Anesu Daka CA (SA) Chartered Accountants
Academy
 Quiz & Answers
Q- Which market is the principal market?
A- Market A (20000 units- highest volume)
Q- Which market is the most-advantageous
market?
A- Market C (4,300)
Q- What is the fair value of the machine?
A- 5000 (Market A- principal market)

Anesu Daka CA (SA) Chartered Accountants

Academy
 transaction
• Refer to page 77-Example 2

Prepared by Anesu Daka CA (SA) (Z) 192

 Key Definitions: Fair Value
• Key Elements of the FV definition:
– Orderly
• An orderly transaction is one that would be
expected to take place under normal conditions.
• It would allow for the necessity of marketing
activities that are usual and customary for the
asset or liability in question and therefore does
not reflect a forced transaction (such as a distress
sale). Refer to page 77-Example 1
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Who would transact for the
item?
• Market participants are buyers and sellers in the principal
(or most advantageous) market who are:

Independent Knowledgeable

Able to enter into a Willing to enter into

transaction a transaction
• Market participants act in their economic best interest
– Maximise the value of the asset
– Minimise the value of the liability

© IFRS Foundation 194

 Key Definitions: Fair Value
• Key Elements of the FV definition:
The price (IFRS 13.24-26)
– An important consideration is that fair value is a market-based
measure of an exit price that is receivable and is therefore not
an entity-specific value.
– As such, an entity’s intention with regard to the asset is NOT
relevant when determining fair value.
• The fair value of the asset or liability shall NOT be adjusted
for transaction costs.
• If location is a characteristic of the asset (as might be the
case, for example, for a commodity), the price in the
principal (or most advantageous) market shall be adjusted
for the transport costs.

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 Key Definitions: Fair Value
• Key Elements of the FV definition:
The price
– Example : Entity’s intention
A Ltd holds an office building that is leased out to third parties and carried under
the fair value model in IAS 40. At reporting date, the fair values for similar
properties have declined due to an economic downturn. A Ltd calculates that it
would need to recognise a decrease in fair value of R2 million on its office
building, based on the market price movements of similar properties. The
company, however, has the intention and financial ability to hold the building until
it can realise a return on its initial investment of 50%.

Analysis:
The intentions of A Ltd are ignored in determining the fair value of the office
building for financial reporting purposes. Accordingly, A Ltd would need to
recognise the fair value loss of R2 million in its financial statements despite its
intention to hold on to the building until it has recovered the loss.

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 Key Definitions: Fair Value
Key Elements of the FV definition:
The price
Example Transaction costs and transport costs
John Ltd decided to revalue its imported machinery. The
machinery was imported from Germany, which is the principal
and most advantageous market for new and used machinery.
It was determined that the exit price at measurement date of
such a used machine in Germany would be €150 000 before
sales commission of 5% is taken into account. It is also
estimated that John Ltd would incur R35 000 transport costs
to transport the machine to Germany if it were to be sold. The
exchange rate at measurement date is R10,80 to €1.

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 Key Definitions: Fair Value
Key Elements of the FV definition:
The price
Example Transaction costs and transport costs

Analysis:
FV is Exit Price before commission costs (150000*10.80) 1620000
Commission (disregard as per IFRS 13.25)
Transport ( include as per IFRS 13.26) ( 35000)
1585000

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Application to non-financial assets
Principle: Highest and best use for non-financial
assets
• Para 27: A fair value measurement of a non-
financial asset takes into account a market
participant’s ability to generate economic
benefits by using the asset in its highest and best
use or by selling it to another market participant
that would use the asset in its highest and best
use.
• The entity’s intended manner of use of an asset is
not necessarily the highest and best use thereof.
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Application to non-financial assets
Principle: Highest and best use for non-financial
assets
• The highest and best use of a non-financial
asset might provide the maximum value to the
market participants through:
– its use in combination with other assets as a group
or as a business; or
– on a stand-alone basis.

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 Application to financial assets
• In order to determine fair value of financial assets
for recognition or disclosure purposes in terms of
IFRSs 7 and 9, valuation techniques should be
used that maximise the use of observable inputs
and minimise the use of unobservable inputs.
• Entities that hold and manage a group of financial
assets and are exposed to market and credit risk
should apply the guidelines in IFRS 13.48 to .56

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 Liabilities and own equity
instruments
• Fair value measurement assumes that a financial or
non-financial liability (for example, a provision) or an
entity’s own equity instrument (for example, equity
interests issued as consideration in a business
combination) is transferred to a market participant at
the measurement date (IFRS 13.34). The transfer of a
liability or an entity’s own equity instrument assumes
the following:
– a liability will remain outstanding and the entity would be
required to settle the obligation; and
– the entity’s own equity instrument would remain
outstanding and the transferee would take on the rights
associated with the risks.

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 Liabilities and own equity
instruments
• In all cases, valuation techniques should be used
that maximise the use of observable inputs and
minimise the use of unobservable inputs. The fair
value of a financial liability reflects the effect of
non-performance risk.
• Non-performance risk includes, but is not limited
to, the entity’s own credit risk (credit standing)
from the perspective of the market participant
holding the liability of the entity as an asset.
• Non-performance risk is the likelihood that that
the obligation might not be fulfilled.
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Liabilities and equity held as assets by
other entities or parties
• When a quoted price for the transfer of an identical or similar liability or
own equity instrument is not available and the identical item is held by
another party as an asset, the fair value of the liability or equity shall be
determined from the perspective of the market participant that holds
the identical itemas an asset.
• It is important to emphasise that the fair value is determined from the
perspective of the party that holds the liability of the entity as an asset
and not from the perspective of the entity that issued the instrument. The
fair value of such a liability or equity instrument shall be measured as
follows:
– quoted price for an identical item in an active market; or
– if quoted price is not available, use other observable inputs, such as a price in
an inactive market; or
• If neither of the above prices are available, other valuation techniques
such as the present value of cash flows receivable (income approach) or
quoted prices for similar items (market approach) should be used.

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 FV Measurement
• When and How?

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 When to Measure FV?

On Initial Measurement

e.g. Financial Assets & Liabilities, e.g.

On Subsequent Measurement
e.g. Investment property, e.g.

IFRS 13.8

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 How to Measure FV?
Fair Value measurement approach
• The objective is to estimate the price between market participants
at the measurement date under current market conditions.
• A fair value measurement requires an entity to determine all of the
following: [IFRS 13:B2]
– the particular asset or liability that is the subject of the measurement
(consistently with its unit of account)
– for a non-financial asset, the valuation premise that is appropriate for
the measurement (consistently with its highest and best use)
– the principal (or most advantageous) market for the asset or liability
– the valuation technique(s) appropriate for the measurement,
considering the availability of data with which to develop inputs that
represent the assumptions that market participants would use when
pricing the asset or liability and the level of the fair value hierarchy
within which the inputs are categorised.

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 How to Measure FV?
Valuation techniques
IFRS 13 requires an entity, when determining fair
value, to use valuation techniques:
– that are appropriate in the circumstances;
– for which sufficient data are available;
– that maximise the use of relevant observable
inputs; and
– that minimise the use of unobservable inputs.
[IFRS 13:61, IFRS 13:67]

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 Valuation techniques
• The objective of using a valuation technique is to estimate the price at
which an orderly transaction to sell the asset or to transfer the liability
would take place between market participants and the measurement date
under current market conditions. Three widely used valuation techniques
are: [IFRS 13:62]
– market approach – uses prices and other relevant information generated by
market transactions involving identical or comparable (similar) assets,
liabilities, or a group of assets and liabilities (e.g. a business)
– cost approach – reflects the amount that would be required currently to
replace the service capacity of an asset (current replacement cost)
– income approach – converts future amounts (cash flows or income and
expenses) to a single current (discounted) amount, reflecting current market
expectations about those future amounts.
• In some cases, a single valuation technique will be appropriate, whereas in
others multiple valuation techniques will be appropriate. [IFRS 13:63]

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 FV Hierarchy
• Overview
• IFRS 13 seeks to increase consistency and
comparability in fair value measurements and
related disclosures through a 'fair value
hierarchy'. The hierarchy categorises the inputs
used in valuation techniques into 3 levels. The
hierarchy gives the highest priority to
(unadjusted) quoted prices in active markets for
identical assets or liabilities and the lowest
priority to unobservable inputs. [IFRS 13:72]
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 Level 1 inputs
• Level 1 inputs are quoted prices in active
markets for identical assets or liabilities that
the entity can access at the measurement
date. [IFRS 13:76]
• A quoted market price in an active market
provides the most reliable evidence of fair
value and is used without adjustment to
measure fair value whenever available, with
limited exceptions. [IFRS 13:77]

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 Level 2 inputs
• Level 2 inputs are inputs other than quoted market prices included
within Level 1 that are observable for the asset or liability, either
directly or indirectly. [IFRS 13:81]
• Level 2 inputs include:
– quoted prices for similar assets or liabilities in active markets
– quoted prices for identical or similar assets or liabilities in markets
that are not active
– inputs other than quoted prices that are observable for the asset or
liability, for example
• interest rates and yield curves observable at commonly quoted intervals
• implied volatilities
• credit spreads
– inputs that are derived principally from or corroborated by observable
market data by correlation or other means ('market-corroborated
inputs').

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 Level 3 inputs
• Level 3 inputs are unobservable inputs for the asset or
liability. [IFRS 13:86]
• Unobservable inputs are used to measure fair value to
the extent that relevant observable inputs are not
available, thereby allowing for situations in which there
is little, if any, market activity for the asset or liability at
the measurement date. An entity develops
unobservable inputs using the best information
available in the circumstances, which might include the
entity's own data, taking into account all information
about market participant assumptions that is
reasonably available. [IFRS 13:87-89]

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 Detailed Disclosure Requirements
• Refer to the detailed Summary of IFRS 13 for
the required disclosures

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 IFRS 13-Exam Approach
• State and Apply the following:
– Fair value definition
– Identify the elements of the definition that are an
issue in the scenario and further define them, eg:
• State para 2
• State para 16 to chose the market
• Apply highest and best use principle for non-financial
assets
– Identify the hierarchy
Try Q7.2

Anesu Daka CA (SA)

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Do 2015 Test 1 and compare answer to
your attempt

Prepared by Anesu Daka CA (SA) (Z) 220

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