SBR – Notes

Standards:

▪ IFRS 13 - Fair Value Measurement (Highest best use for PPE & intangible assets):
- 3 Elements: Physically, Legally & Financially Possible.
- 3 Levels: Observable Inputs L1, Observable Inputs not L2, Unobservable Inputs L3
- Unobservable Inputs: Principal market vs. Most advantageous

▪ IFRS 5 Non-Current Assets Held for Sale (AHFS) & Discontinued Operations

Asset is classified as held for sale if it meets the following criteria:

- Items classified as AHFS should be measured at the LOWER of: CA vs. FV-COS.
- Items no longer classified as AHFS should be measured at LOWER of: CA vs. RA (FV-COS vs.VIU)
- Adjust for Revaluation & Depn

▪ IAS 1 - Presentation of Financial Statements

▪ IAS 8 - Changes in Accounting Policy - Retrospectively vs. Prospectively

▪ IAS 34 - Interim Financial Reporting - Required for listed companies.

Revenue Recognition:

▪ IFRS 15 - Revenue Recognition (5 Steps)

- The 5 Steps: Identify Contract, Performance Obligation, Determine Price, Allocate Price, Recognise
Revenue.

Non-Current Assets:

▪ IAS 16 – PPE (includes Assets Held for Sale)

- Recognition: Cost directly attributable to bringing asset into working use.
- This includes Interest cost, Delivery cost, dismantling & land restoration cost.
- Subsequent: Either the Cost Model or Revaluation Model (Increase to OCI) – assets depr over UEL.
- Capitalise: cost is capitalised if meets the following criteria:
▪ IAS 23 – Borrowing Cost
- Capitalise if they relate to the acquisition, construction, or production.

▪ IAS 20 – Government Grants

- Revenue Grant: Deferred Income
- Capital Grant: Cost deducted vs. Deferred Income

▪ IAS 40 - Investment Property (Cost vs. Revaluation Model)

- Investment property to owner-occupied: Measure at Fair value at the date of the change for (under IAS
16). Increase recognised in SPL cause it’s an investment property.

- Investment property to Inventory: Measure at Fair value at the date of the change for (under IAS 2
Inventories – lower of cost & NRV). Increase recognised in SPL cause it’s an investment property.

- Inventory to Investment Property: Measure at Fair value. Any change in the CA caused by the transfer
should be recognised in SPL.

- Owner-occupied to Investment Property (IAS 16 to IAS 40): Measure at Fair Value. Any increase is
recognised as OCI and CR to the revaluation surplus in equity. If the revaluation causes a decrease in
value, charge to SPL.

▪ IAS 38 – Intangibles:
- Recognition: Recognise Intangible Assets that are NOT internally generated and amortise on a straight-
line basis.
- Research cost: Research expenditure is charged to the P&L in the year in which it is incurred.
- Development Cost: Can be capitalised when it meets the following criteria:
 ▪ IAS 36 – Impairment (Recoverable Amount < Carrying Amount)
- Recoverable Value: HIGHER OF Fair Value - Cost to sell vs. value in use (VIU)
- If FV is higher than the carrying amount than no impairment.
- CGU: If output isn’t sold to an external market, then it’s a cash-generating unit.
- Corp Assets & Goodwill: do not independently generate cash inflows and must be assigned to a CGU.
- A CGU to which goodwill has been allocated must be tested for impairment annually.
- Impairment for CGU must be allocated to Goodwill first then remaining NCA.
- NCA: Impairment loss is allocated using a pro-rata basis only on assets that are impaired (CA < FV).
- Impairment loss cannot be set against cash/receivables as these assets will be realised in full.
- Reversal: The recoverable amount is re-calculated, Gain charged to P&L or OCI if impairment loss was
previously charged to revaluation surplus.
- Reversal CA: The reversal must not take the value of the asset above the amount it would have been if
the original impairment had never been recorded.
- Goodwill: Remember Impairment of Goodwill CANNOT be reversed!!

Inventory:

▪ IAS 2 – Inventory (LOWER of cost vs. NRV):

- Recognition: Inventories are initially measured at cost
- Subsequent: LOWER of cost (materials, labour) vs. NRV (Seling price – costs to complete/sell)
- 3 Methods to determine cost: FIFO, AVCO, Actual unit cost.
- Raw Materials: are NOT written down below cost if the finished good will be sold at a profit.
- However, a decline in raw material prices would suggest that NRV has fallen below purchase cost.
- Therefore, the replacement cost of the raw materials is used to determine the NRV.

▪ IAS 41 – Farm/Biological Assets Inventory:

- A biological asset: is a living plant or animal i.e. cows, growing grapes, tomato plants.
- Agricultural Produce: is the harvested product of the entity’s biological assets.
- Biological PPE Grape Vines are PPE, Grapes growing on vine is Bio Asset, Grapes harvested agri produce.
- These are known as Bearer Plants and treated as PPE under IAS 16 (Grape vines, tea plants).
- Recognition: Biological assets/agri produce are initially measured at fair value less ESTIMATED costs to
sell.
- Subsequent: At each reporting date, biological assets are revalued to fair value less costs to sell.
- IMPORTANT: If market prices are unavailable, then the BA is measured at: cost less accum depn and
accum impairment losses.
- Gov Grant: Either recognised using Cost Model (under IAS 20) or Fair Value (Under IAS 40).
- IMPORTANT: Calculation uses Balancing figure: FV @ Year Start + revaluations/adj > BF< FV at Year End.

Foreign Exchange:

▪ IAS 21 – The Effects of Changes in Foreign Exchange Rates:

- Functional Currency: The currency of the primary economic environment the entity operates in.
- To determine FC:
o Primary Factors: Sales price, Operating Cost & Currency held in bank.
o Secondary Factors: Company Financing & Customer Receipts

- Presentation currency: The currency in which the entity presents its financial statements.

- Note: Transactions that are in other currencies must be translated into the Functional Currency to
record them.
Recognition:

- Tran Date: Record at FX rate (spot rate) on date of transaction

- Settled Balance: Retranslate on date of settlement (FX gain or loss to P&L).
- Unsettled Balance (Monetary): Retranslate using YE FX rate (payable, receivable, loan etc.)
- Unsettled Balance (Non-Mon): Are not retranslated (PPE, Inventory, Investments).
- Note: However, if non-monetary items are measured using FV then they must be retranslated when
revalued.
- IMPORTANT: Calculation uses Balancing figure: FX at Tran date + FX retranslate > BF< FV at Year End.

Lease:

▪ IFRS 16 – Lessee Accounting:

- IMPORTANT: Lessees must recognise both an asset and a liability for all leases.
- ROU Asset: You recognise the lease as an asset on the SFP under "Right-of-use" asset.
- Short Life/Low Value: Have minimal value.
- Recognition & Subsequent:
o Recognition: You must recognise both an asset and a liability.
o Present Value: You must discount the future payments for the PV.
o Depreciation: The ROU asset must be depreciated after the PV is calculated (deposit + PV of
future payments).
o Interest: Interest is calculated on the PV of the future payments.
o CPI: When there is a change of the CPI during the year – For example moving from 125 to 140 on
£1m payment, you must calculate: £1m x (140/125) = £1.12m.

IMPORTANT: Note that the PV of the lease liability + initial payment/deposit is depreciated
▪ IFRS 16 – Lessor Accounting (Issuer):

Finance Lease:

- Finance Lease: is a lease where substantially all of the risks and rewards of the underlying asset transfer
to the lessee and cash receipts reduces the receivable.
- Recognition: Lessors recognise finance lease as a trade receivable (PV of payments). DR TR, CR Asset CA
- Subsequent: Interest earned on the lease is recognised as finance income on the on the SPL.
- Interest income is also recorded to trade receivable & increases the balance. CR Fin Income, DR TR
- Repayment: The carrying amount of the lease receivable is reduced by cash receipts. (DR Cash, CR TR)

Operating Lease:

- Operating Lease: is a lease that does not meet the definition of a finance lease.
- Recognition: Operating lease is recognised on a straight-line basis over the lease term.
- Any direct costs of negotiating the lease are added to the cost of the underlying asset.
- Subsequent: The underlying asset should be depreciated (IAS 16 PPE) or IAS 38 for Intangible Assets
(amortization).
- Deferred Income: For lease payments made at the beginning of year, a deferred income account must
be created for the remaining balance after payments are recognised on straight-line basis. For example,
Lessee pays £175k paid on 1 Jan 20X1 – £85k recognised in P&L, remaining £90k as DI (Oroc example)
 Sale and Leaseback: Sale of asset ONLY considered a Sale if meets performance obligations (IFRS 15). If not,
then it’s considered to be a loan (substance over form). Painting Example.

Painting Example:

▪ IAS 19 - Employee Benefits:

Defined Contributions DCP (variable):

- Calculate: An entity pays contributions, i.e. 5% x employee salary (No obligation)

- Pension Expense: The entity should charge the agreed pension contribution to the P&L as an
employment expense in each period.
- Pension Accrual: An accrual or prepayment arises if the cash paid does not equal the value of
contributions due for the period.
- Contributions/Payment: DR Employee Cost (P&L), CR Cash

Defined Benefits DCP (fixed):

- Calculate: Salary @ retirement x no of years/60 years (An obligation)

- Pension Liability: Must be measured at present value.
- Pension Fund: Must be measured at fair value (market value of shares/property) – Basically current
value of the pension fund.
- Contributions/Payment: DR Pension Liability, CR Cash
- Pension Deficit: If the obligation exceeds the assets, there is a plan deficit (the usual situation) and a
liability is reported in the SFP.
- Pension Surplus: If the assets exceed the obligation, there is a surplus and an asset is reported in the
SFP.
- Asset Ceiling: Relates to DBP in surplus – an asset can only be recognised up to the level of the asset
ceiling. The asset ceiling is the PV of the future economic benefits.
- Measured: At LOWER of PV of refunds from plan & reduction of future contr. Or normal value
- Short-term Benefits: Accumulative vs. Non-Accumulating Benefits
- Long-term Benefits: Are of long-service leave, long-term disability benefits and other long-service
benefits.
- Termination Benefits: Benefits: Redundancy Pay.

Reconciliation of Net Obligation for 20X1 and 20X2 - The Liability:

20X1 20X2
Obligation b/f x x
Plan Assets b/f x x
Net Obligation/(Asset) b/f x/(x) x/(x)

Net Interest Component x * 5% x * 5%

(Net Obligation x Discount Rate)

Service Cost Component

Current Service Cost x x
Past Service Cost x x
Settlement x x
x x

Contributions into Plan (x) (x)

Benefits paid - -
x x

Remeasurement component (B) x x

Net Obligation c/f (W1) x x

W1:
PV Obligation x x
PV Plan Assets x x
Closing Net Liability/(asset) x/(x) x/(x)

Statement of Profit or Loss:

20X1 20X2
Net Interest Obligation x x
Service Cost Component x x
x x

Other Comprehensive Income:

20X1 20X2
Remeasurement Component x x

Total Comprehensive Income charge x x

FRS 2 - Share-Based Payments (SBP):

- Share-Based Payments: An entity buys goods & services and makes payment by issuing shares or share
options or incurs liabilities based on the price of the entity's shares.

- Grant Date: The date that the agreement is made between both parties.

- Vesting Date: The date that the rights pass on to the holder and entitled to receive cash/equity
instruments.

- Exercise Period: The period that the equity/cash instrument can be exercised.

- Vest Estimates: The expense recognised at each reporting date, based on the BEST ESTIMATE of the
number of equity instruments expected to vest.

Equity-Based:

- Equity-Settled: Transaction settled by issuing equity instruments (Share Options).

- Grant Value: SBP measured using the FV of the instrument at grant date (start of year 1).
- Estimate: Entity must estimate no. shares expected to vest using the value of the option of the
arrangement.
- Calculation: (500 employees x 80%) x 100 options x $15 GV x 1/3 years = $200,000
- Service-Condition: Receipt of shares is conditional based on employees remaining in company for a
period of time.
- Performance Condition: Receipt of shares is conditional based on for example, completion of project or
employee increasing company’s profit. ONLY consider non-market conditions.
- Initial Recognition: DR Expense SPL, CR Equity (CR SPL if it’s an Asset)
- Recognition - Option exercised (Beginner Q. Example):
o DR Equity £2.7m - Total value of shares previously estimated to vest.
o DR Cash received £18m – Actual cash received during vesting.
o CR Share Capital - £9m (£9m options x £1 nominal value).
o CR Share Premium (B) - £11.7m - Remaining value allocated to SP.

- Recognition - Not Exercised: £2.7m recognised in equity reserve remains, this can be transferred to
retained earnings.
- IMPORTANT: The entry to equity is normally reported in 'other components of equity'. Share capital is
not affected until the share-based payment has 'vested'.

Cash-Based (Growler):

- Cash-Settled: Transaction settled by issuing cash based on the FV of equity instruments.

- Share Appreciation Rights (SAR): Employees become entitled to a future cash payment based on the
increase in the entity’s share price over a specified period of time.
- The right to shares that are redeemable, thus entitling the holder to a future payment of cash.
- Recognition: The SAR is measured using the Fair Value DR Expense SPL, CR Liabilities
- Remeasurement: The entity remeasures the FV of the liability arising under a cash-settled scheme at
each reporting date.
- IMPORTANT: The main difference between cash-settled and equity-settled is that the options are
remeasured at FV at each reporting date.
- Intrinsic Value: At the exercise period, SARs are measured at the intrinsic value on the exercised day.
- Post Exercise Period: After the exercise period the intrinsic value equals the fair value.
 - Gain Or Loss: is the balancing figure through the P&L.

- Choice of Settlement: At the vesting date, employees have a choice to receive cash based on the share
price or Equity in the form of options (Know how to calculate).

Q. Growler - Pg.247

A)
Reporting Date Options Price Workings Liability (SFP) Expense (SPL)
31/12/X4 200 £ 5.00 230,000 230,000 230,000
31/12/X5 200 £ 7.00 638,400 638,400 408,400

B)
456 Employees to exercise their rights in full

Reporting Date Employees Options Price Workings

31/12/X6 257 200 £ 7.00 £ 359,800
31/12/X7 199 200 £ 10.00 £ 398,000

Year Ended 31/12/20X6

Libility b/f 638,400

Cash Payment - 359,800
Profit or Loss (B) 39,800
Libility c/f 318,400

Year Ended 31/12/20X7

Libility b/f 318,400

Cash Payment - 398,000
Profit or Loss (B) 79,600
Libility c/f -

▪ IAS 10 - Events after the reporting period:

- Adjusting Event:
- Non - Adjusting Event:

▪ IAS 37 – Provision & contingent liability/asset:

Contingent (Subjective):

- Contingent Liability (Uncertain): Possible obligation resulting from past event in which the outcome is
uncertain & out of entity’s control. Outflow of economic benefits is NOT probable/possible to make a
reliable estimate.

- Contingent Asset (Uncertain): Should be disclosed that the inflow of future economic benefits might be
PROBABLE. If future economic benefit is CERTAIN, then it should be recognised as normal asset. (Court
case/Insure. claim).

- Onerous Contract: unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received.

Provisions (Probable):
- Provision: Present obligation resulting from past event and probable outflow of economic benefit.
- Recognition:
- Subsequent:
- Derecognition:
 - Environmental Provision
- Restructuring t Provision:

▪ IAS 37 – Warranty Provision

- Warranty purchase separately has its own Performance obligation.
- Recognition:
- Subsequent:
- Variable Consideration: Entity must estimate the amount it will be entitled to (No reversal
probable).
- Transaction Price: If it’s highly probable that there will be no reversal then the var consideration is
included in the transaction price prorated during the service (£12m + £3m VC= £15m).

▪ IAS 39, IFRS 9 - Financial Instruments

Financial Liability:
- Amortised Cost:
- Calculation: O/B + Finance Cost (EIR) – Cash Payments = Closing Balance
- Fair Value Through SPL:
- Accounting Mismatch:

Compound Instrument (IAS 32):

Financial Asset – Equity Instrument:

Financial Asset – Debt Instrument:

-
▪ IAS 12 – Income Taxes
- Taxable Temp Difference:
- Deductible Temp Difference:

Single:

- DT Offsetting:
- DT SBP:
- DT Leases:

Groups:

- DT revaluation/FV
- DT FV Adj:
- DT PURP:

Important:

- Unused Tax Losses:

- Goodwill

IFRS 8 – Segment Reporting:

▪ Segment Revenue:
▪ Segment P&L:
▪ Segment Assets:
▪ External Revenue
IAS 24 – Related Party Disclosures:

IFRS 3 – Business Combinations

IFRS 11 – Joint Arrangements

Chapter 1 - Frameworks

Qualitative characteristics:

▪ Relevance:

- Decision-Making: Information that affects decision-making users

- Material: An item is material if omitting, misstating or obscuring it would influence the economic
decisions of users.

▪ Faithful Representation (Represents economic substance over form):

- Complete: Info should be complete; no material info should be omitted.

- Neutral: Free from Bias

- No Error: Free from misstatements & Error

▪ Additional Elements:

- Prudence: Assets & Income should not be overstated, and liabilities & expenses should not be
understated.

- Substance over form: Transactions must be presented according to their economic substance rather than
their legal form.

▪ Enhancing Characteristics:

- Timeliness: Info should be up to date - older info is less useful.

- Comparability: Investors should be able to compare fin stats year-on year and with another entity.

- Verifiability: Users should be able to agree & come to the same conclusion that a particular depiction of a
transaction offers a faithful representation. Data can be verified e.g. Cash can be verified by counting/
PPE can be verified by physical inspection.

- Understandability: Info should be presented as clearly & concisely as possible.

Conceptual Framework (Elements):

▪ Asset: A present economic resource controlled by an entity as a result of past events. An asset is a resource
controlled in which future economic benefit is generated.

▪ Liability: A present obligation to transfer an economic resource as a result of past events.

▪ Income: Increases in assets or decreases in liabilities that result in an increase to equity (excluding
contributions from SH).

▪ Expenses: Decreases in assets or increases in liabilities, that result in decreases in equity (excluding
contributions from SH). Depreciation meets this definition because it reduces the carrying amount of the
related asset.

▪ Equity: Equity is the residual interest in the assets of the entity after deducting all of its liabilities. Ordinary
share capital, retained earnings and revaluation surplus meet the definition of equity since the total of these
balances is equal to the remaining balance of assets after all liabilities are deducted.
Fin Stats should be prepared on the assumption that the entity is a going concern. This means that it will continue to
operate for the foreseeable future. If the assumption is not accurate, then the Fin Stats should be prepared on a
different basis.

Items are recognised on the fin stats if they meet the definition of one of these elements. However, some items may
not be recognised as they do not provide useful/relevant info. For example, if there is uncertainty over the existence
of an item or low probability of economic inflow/outflow.

Some elements require judgements such as estimation of useful life of an asset. If an asset or liability is not
recognised, then disclosures are required.

Derecognition is the removal of some or all of an asset or liability from the SFP. This normally happens when the
entity loses control of the asset (disposal) or has no present obligation for the liability.

Measurement (There are two measurement basis):

▪ Historical Cost

▪ Current Value (this includes Current Cost, fair value & Value in Use)

Presentation & Disclosure: Should be effective and enable comparisons to be drawn year-on-year and with other
entities.

Classification: Assets and liabilities should be presented separately – they should not be offset against each other
unless there is a contractual agreement to do so.

Aggregate: You are allowed to aggregate items if they are similar or not material.

Remember the SPL records recognised/realised gains & losses, whereas the OCI records transactions of gains that are
not yet realised (unrealised gains).
Materiality:

IFRS 13 – Fair Value Measurement (pg. 41)

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. (Exit Price)

IMPORTANT: This does not apply to share-based transactions (different to quoted shares on stock exchange) (IFRS 2)
and Leases (IFRS 16).

Fair Value is determined by the following 3 Levels:

▪ Level 1: Observable Input:

- Quoted prices for identical assets in active markets.

▪ Level 2: Observable Inputs that are not L1:

 - Inputs other than quoted prices that can be observed directly or indirectly (derived from prices).

For example:

- Quoted prices for similar assets in active markets.

- Quoted prices for identical assets in less active markets.
- Observable inputs that are not prices (Such as interest rates)

▪ Level 3: Unobservable inputs: (Estimation methods must be disclosed)

- Principal Market: If there are no quoted prices then you must use the FV from the principal market if
there is one. This is the market that has the greatest activity for the asset/liability. To make comparisons
for principal market you only deduct transportation cost for the net price.

- Most Advantageous market: If there is no principal market, then use the prices from the most
advantageous market (best after transaction & transportation cost deducted).

This is the market that maximises the net amount received from selling. To determine the best price, you
deduct both transaction and transportation cost. However, you will only recognise the price adjusted for
transportation cost in the accounts.

According to IFRS, a Level 1 observable input should be used. However, the building is unique and there are no
quoted process on an active market. However there has been sales of similar buildings in the local area, therefore a
level 2 observable input for similar assets in active markets should be used and not a L3. Hence, estimating FV based
on the PV of net cash flows is incorrect.
 A) Market 1 price is 24 and Market 2 price is 23 after deducting transport cost, therefore market 1 is the
principal market. (Remember you don’t deduct transaction cost for principal market).

B) If there is no principal market, you would consider the price minus all cost therefore market 2 would be the
best as the net price is 22 after deducting transaction & transportation cost. However, the price to be
recognised within the accounts would be 23 as you don’t adjust for transaction cost.

IFRS 13 Fair Value for Non-Financial Asset (Highest & Best Use)

IFRS 13 says that the fair value of a non-financial asset should be based on its highest and best use.

Non-Financial Assets:

▪ PPE
▪ Intangible assets

The highest and best use are (3 elements):

1. Physically Possible
2. Legally Possible
3. Financially Possible
The highest and best use for the land would be $6m for residential use minus the transformation cost, therefore
$5.7m as its physically and legally possible to use the land for residential purposes. Planning has been granted for
similar plots therefore there’s a high probability that Five Quarters will have permission approved.
IFRS 13 - Fair Value Usefulness Question
Chapter 2 – The Professional & Ethical Duty (5 – 10 marks)

In the exam there will be a scenario where the CFO/FC/FD has done something to breach the code of conduct. This is
when you will begin to talk about the code of ethics – Only apply the relevant points to answer the question.

▪ Code of Ethics: (COPPI)

Confidentiality - confidentiality of information

Objectivity - do not allow bias, conflict of interest.
Professional competence & due care
Professional behaviour - comply with laws & regulations.
Integrity - honest in all business & professional relationships

▪ Threats to Independence:

Management threat

Advocacy threat

Self-interest

Self-review threat

Intimidation threat

Familiarity threat

Integrity & Objectivity:

Professional Competence & Due Care

Insider Trading breaches confidentiality & Integrity:

Ethics & AI

Chapter 3 – Performance Reporting

IAS 1 Presentation of Financial Statements:

A complete set of Fin Stats must have the following:

▪ Statement of Financial Position (SFP)

▪ Statement of Profit & Loss (SPL)
▪ Statement of Changes In Equity (SOCE)
▪ Statement of Cash Flows (SCF)
▪ Accounting Policies Notes & other explanatory notes.

Other Comprehensive Income (OCI): Is not part of the double-entry system. There are no debits or credits to OCI.
The OCI is used to present other forms of income such as rev surplus/gains or losses for PPE. Transactions that go
through OCI are reflected in the SOCE.

Total Comprehensive Income (TCI): Is profit for the year plus OCI. For group fin stats when attributing sums to the
parent and NCI you use the TCI not OCI.

Statement of Changes in Equity (SOCE): Reflects all movements within the reserves – they reflect the equity section
of the SFP. The year-end balance is what is reflected in the SFP.

Assets: Items held for trading or will be realised within 12 months of the reporting date.
SPL and OCI combined:
SOCE:
Going Concern: Mang must assess whether the preparing fin stats on a going concern basis is appropriate.

The following are indicators of a going concern uncertainty:

▪ Low Cash: A lack of cash and cash equivalents

▪ Increased Overdraft: Increased levels of overdrafts and other forms of short-term borrowings

▪ Debt due: Major debt repayments due within the next 12 months

▪ Payable Days: A rise in payables days.

▪ High Gearing: Increased levels of gearing.

▪ Negative cash flows: particularly in relation to operating activities.

▪ Legal Claims: Disclosures or provisions relating to material legal claims.

▪ High Impairment: Large impairment losses.

Aggregation: Immaterial items may be aggregated with amounts of a similar nature, as long as aggregation does not
reduce understandability.

Offsetting: IAS 1 says that assets and liabilities, and income and expenses, should only be offset when required or
permitted by an IFRS standard.

Comparative Information: Comparative information for the previous period should be disclosed.

Disclosure Note Presentation: Should follow the order in which items are presented in the SPL and SFP.

Compliance with IFRS Standards: Entities should make an explicit and unreserved statement that their financial
statements comply with IFRS Standards.

Accounting Policies:

Entities must produce an accounting policies disclosure note that details its material accounting policies.
Accounting policies are likely to be material if related to material transactions and:

▪ The entity changed the accounting policy during the reporting period, or

▪ The entity chose its accounting policy from one or more options, or the policy was developed in the absence
of a specific IFRS Standard, or

▪ The accounting policy relates to an area where significant judgements are required, or

▪ The accounting treatment of the transaction is complex.

Sources of Uncertainty: An entity should disclose information about the key sources of estimation uncertainty that
may cause a material adjustment to assets and liabilities within the next year e.g. key assumptions about the future.

An operation is held for sale if its carrying amount will not be recovered principally by continuing use. To be
classified as held for sale at the reporting date, it must meet the following criteria:

IAS 8 Changes in Accounting Policy

An entity should only change its accounting policies if required by a standard, or if the change results in more reliable
and relevant information.

Accounting Policy: Revenue Recognition, Cost model vs Fair Value

Accounting Estimate: Depreciation

▪ Acc. Policy - Retrospectively: Changes in accounting policy should be applied retrospectively. The entity
adjusts the opening balance of each affected component of equity, and the comparative figures are
presented as if the new policy had always been applied.

▪ Acc. Estimates - Prospectively: Changes in accounting estimate must be recognised prospectively by

including it in the statement of profit or loss and other comprehensive income for the current period and
any future periods that are also affected.

▪ Prior Period Errors – Retrospectively: Are treated in the same way as accounting policies. Material errors
(misstatements/omissions) should be corrected retrospectively.
IAS 34 Interim Financial Reporting (Required for listed companies)

Interim financial reports are prepared for a period shorter than a full financial year. If they are prepared, they must
have the following components:

▪ Shorter SFP for the current interim period with a prior year comparative as at the year-end of the previous
year (For example 6 -month interim compared to Year-End figures).

▪ Shorter SPL and Comprehensive Income for:

- The current interim period with a prior year interim comparative. For example, comparing 6 months
current year with 6 months in prior year (For a Dec Year-End, you would prepare the SPL up to June).

- The cumulative to date for the year and cumulative to date for previous year. For example, a December
Year-End, the interim will be for June and the cumulative to date would be for the quarter i.e. 3 months to
June.

▪ Shorter SOCE for the current interim period with a prior year interim comparative. 6 months current year
compared with 6 months in prior year (June 2022 compared with June 2023).

▪ Shorter SCF for the current interim period with a prior year interim comparative. 6 months current year
compared with 6 months in prior year (June 2022 compared with June 2023).

▪ Selected explanatory notes.

▪ Basic and diluted EPS should be presented on the face of interim statements of profit & loss.

Chapter 4 – Revenue Recognition IFRS 15

IFRS 15 Revenue Recognition for Contracts with Customers 5 Steps:

1. Is there a Contract: Identify the Contract (Agreement between two parties).

2. Performance Obligations (PO): Identify the separate performance obligations within a contract.

3. Determine Price: What the company is likely to receive for the transaction.

4. Allocate Price to PO: Allocate the transaction price to the performance obligations in the contract.

5. Recognise revenue: when (or as) a performance obligation is satisfied.

Performance Obligations:

▪ Principles & Agents: Principal provides the goods & services directly. Whereas agents arrange for another
party (principal) to provide the goods & services.

▪ For example, if you are an insurance broker, you are an agent selling insurance policies on behalf of
Insurance companies (Principal). If you sell a policy for £150 and pay the insurance company £130, this
means that £20 is your commission. However, you do not recognise your revenue as £150 and COS as £130
because this would be an overstatement of revenue. You must only recognise the £20 as income.

IAS 37 - Warranties

Most of the time, a warranty is assurance that a product will function as intended. If this is the case, then the
warranty will be accounted for in accordance with lAS 37 Provisions, Contingent Liabilities and Contingent Assets.

▪ If the customer has the option to purchase the warranty separately, then it should be treated as a distinct
performance obligation. This means that a portion of the transaction price must be allocated to it.

Variable consideration: If a contract includes variable consideration, then an entity must estimate the amount it will
be entitled to. To recognise this there must be a high probability that there will be no reversal to the variable amount
from revenue recognised.
Variable Consideration
 ▪ The $3m is the variable consideration and the performance obligation is low mistakes below the acceptable
threshold.

Revenue based on number of mistakes below the acceptable threshold:

▪ Bristow has Experience - High probability: $12 + $3m = $15 x (1/12) = $1.25m

▪ Bristow has No Experience - High probability: $12 + $0m = $15 x (1/12) = $1m

▪ Rudd has met the PO by selling the item therefore revenue can be recorded, however must be discounted
for the PV as the income will be received over 2 years.

▪ PV: $1m x (1/1.1^2) = $826,446 – this value will be recorded as revenue in the current period (T0).
 ▪ Then you would show the unwinding of the discount (interest) as future interest receivable ($90,909.99 +
$82, 644.63).

Technical Support Example – Split

▪ The machine selling price £95k and the usual selling price of the technical support is £30K (£20k plus 50%
markup) therefore the total real price of the goods is £125k.

▪ The customer is however only paying 100k meaning they are given a 20% discount (£25,000/125,000 = 20%)

▪ IFRS15 state that discounts relate to all PO unless stated otherwise, therefore only 80% of the total full price
of both the machine & technical support is allocated to the PO.

▪ This means that the price of the machine is 80% x £95k = £76k and for technical support is 80% x £30k =
£24k.

▪ Therefore £76k would be recognised for the sell of the machine and £24k revenue recognised over the
course of the year when the tech support is given.

▪ The remaining £25k is the 20% discount applied.

▪ The payroll services meet the performance obligation 12 times a year as they are provided monthly,
therefore the accruals concept is applied.

▪ Revenue is recognised on a accruals basis therefore the income to be stated at 30 June 20X1 is
£120k x (6/12) = £60k
 This is an example of a Performance Obligation satisfied at a point in time.

▪ Note that the construction is specialised item and has no other use.

▪ Crawford can recognise revenue ONLY when they have completed the construction of the factory therefore
revenue is recognised at a point in time.

This is an example of a Performance Obligation satisfied over time.

 ▪ This is a long-term contract of a specialised construction item and has no other use therefore you can
include both the revenue and cost incurred.

▪ The bonus element is a variable consideration and based on the scenario above it’s likely that the 18-month
completion performance obligation will not be obtained, therefore the £400k should not be recognised.

▪ Revenue Recognised: £2m x 2/3 (£1m cost incurred/1.5m total cost) = £1.3m

▪ COS is £1m, therefore profit would be £1.3m - £1m = £300k profit.

An entity controls an asset if it can direct its use and obtain most of its remaining benefits. Control also includes
the ability to prevent other entities from obtaining benefits from an asset.

Indicators of the transfer of Control:

Chapter 5 – Non-Current Assets
PPE is defined as items held for use in production and the supply of goods & services and expected to be used for
more than one period (12 months).

IAS 16 – Property, Plant & Equipment (PPE)

Initial Recognition:

Recognise costs directly attributable to bringing asset into working use (costs to obtain & make it work).

▪ Purchase cost,
▪ Delivery & dismantling cost (at present value)
▪ Interest cost

Subsequent Recognition:

▪ Cost Model: Asset depreciated over UEL when it is ready for use: DR SPL, CR PPE.

▪ Revaluation Model: Asset is revalued to Fair Value, if Fair Value is greater than the carrying amount:
DR PPE CA, CR OCI.

▪ The revalued asset is then deprecated over UEL.

Capitalisation:

To capitalise an asset means to recognise the expenditure on your balance sheet (and fixed asset register). The
benefit of capitalisation is that companies don’t need to charge the full cost of the asset as an expense to the P&L in
that period. However, they get to depreciate it over several periods.
You capitalise the asset if it meets the criteria:

1. Asset Controlled: Must be controlled by the company and future economic benefits are probable.

2. Necessary Cost: You capitalise costs directly attributable to bringing asset into working use (costs to obtain
& make it work).

3. Interest Cost: This also Includes interest costs on loans used to construct the asset.

4. Capitalise from: when expenditure incurred on asset and work begins to construct (but only depreciate the
asset once it’s ready for use).

5. Dismantle Cost: Also capitalise costs to dismantle asset and restore land (provisions).

Expense to P&L:

▪ Repairs will NOT produce additional future economic benefits.

▪ You expense costs NOT directly attributable to bringing asset into working use.

▪ Depreciate asset to SPL from date the asset is in working condition even if it's not operated.

Government Grants – IAS 20:

Government grants: are transfers of resources to an entity in return for past or future compliance with certain
conditions. They exclude government assistance that cannot be valued (see below) and normal trade with
governments.

Government assistance: is government action designed to provide an economic benefit to a specific entity. It does
not include indirect help such as infrastructure development. Government assistance helps businesses through
advice, procurement policies and similar methods. It is not possible to place reliable values on these forms of
assistance, so they are not recognised in the financial statements.

Grant Recognition: IAS 20 says that government grants should not be recognised until the conditions for receipt
have been complied with and there is reasonable assurance that the grant will be received.

Grants should be MATCHED with the expenditure towards which they are intended to contribute in the statement
of profit or loss:

▪ Remember gov grants must be matched to the period they are used and you must consider whether they
are revenue or capital.

Revenue Grants:

▪ If they are revenue grants, they will be deducted from the relevant cost within the SPL.

▪ Revenue grants given to subsidise expenditure should be MATCHED to the related costs.

▪ Revenue grants given to help achieve a non-financial goal (such as job creation) should be matched to the
costs incurred to meet that goal.
Capital Grants:

▪ If they are capital grants, they can either be deducted from the cost of the asset or

▪ You would create a deferred income account and match the income in the P&L as the item is depreciated
(Clock Example).

▪ This means that the grant is subsequently recognized as income over the useful life of the related asset,
effectively matching the benefit from the grant with the depreciation expense.

Repayments: A government grant becomes repayable if the conditions for the grant have not been made.

1. Revenue Grants (Treated a Deferred Income): Firstly, debit the repayment to deferred income (Remember
DI is a liability, therefore, to debit reduces the liability). Any excess repayment must be charged to profits
immediately.

2. Capital Grants (Deducted from cost): Increase the cost of the asset with the repayment, which will also
increase the amount of depreciation that should have been charged in the past. This cumulative extra
depreciation should be recognised and charged immediately.

3. Capital Grants (Treated a Deferred Income): Firstly, debit the repayment to any liability for deferred
income. Any excess repayment must be charged against profits immediately.

Capital Grant: Cost vs. Deferred Income Example

▪ Reduce Cost:
- Initial: DR Gov Grant Rec, CR Building CA?
- Grant Received: CR Gov Grant Rec, DR Cash

▪ Deferred Income:
- Initial: DR Gov Grant Rec, CR Deferred Income
- Grant Received: CR Gov Grant Rec, DR Cash
- Amortised: DR Deferred Income, CR SPL
Borrowing Costs (For constructing assets) – IAS 23

Borrowing costs are defined as 'interest and other costs that an entity incurs in connection with the borrowing of
funds’. Borrowing costs should be capitalised if they relate to the acquisition, construction, or production of a
qualifying asset.

Capitalisation on Borrowing Cost:

▪ Borrowing costs should only be capitalised while construction is in progress and when expenditure for the
asset & interest costs are being incurred.

▪ The interest cost is included with the cost of the asset recognised on the balance sheet under fixed
assets/PPE (hidden with the fixed asset balance).

▪ Capitalisation of borrowing costs should cease when all the activities that are necessary to get the asset
ready for use are complete (then assets should start to be depreciated).

▪ Capitalisation of borrowing costs should be suspended during extended periods in which active
development is interrupted.

Investment Property – IAS 40

IAS 40 Investment Property relates to 'property (land or buildings) held (by the owner or by the lessee as a right-of-
use asset) to earn rentals or for capital appreciation or both' (IAS 40, para 5)

Example:

▪ Land held for capital appreciation.

▪ Land held for undecided future use.
▪ Buildings leased out under an operating lease.

Investment property doesn’t include:

▪ Property held for sale in the ordinary course of business or in the process.
▪ Property rented out to employees by the company.
▪ Property held for use in the production or supply of goods & services.
▪ Property being constructed or developed on behalf of third parties.

Measurement:

▪ Cost model: Investment properties are held at cost less accumulated depreciation. No revaluations are
permitted if measured using the cost model.

▪ The fair Value Model: The entity remeasures its investment properties to fair value each year. No
depreciation is charged and gains & losses on revaluation are recognised in the P&L.

▪ If, in exceptional circumstances, it is impossible to measure the fair value of an individual investment
property reliably then the cost model should be adopted.

Transfers:

Transfers to or from investment property can only be made if there is a change of use. There are several possible
situations in which this might occur and the accounting treatment for each is set out below:
Note: To measure at fair value means to revalue the asset.

▪ Investment property to owner-occupied: Use the fair value at the date of the change for (under IAS 16).
Increase goes to the P&L cause it’s an investment property.

▪ Investment property to Inventory: Use the fair value at the date of the change for (under IAS 2 Inventories
– lower of cost & NRV). Increase goes to the P&L cause it’s an investment property.

NRV: Selling Price – cost to sell.

 ▪ Owner-occupied to Investment Property to be carried at Fair Value (From IAS 16 to IAS 40): The
investment property is measured at fair value. Any increase is recognised as OCI and credited to the
revaluation surplus in equity in accordance with IAS 16.

If the revaluation causes a decrease in value, then it should be charged to profits.

▪ Inventory to Investment Property to be carried at Fair Value: The investment property is measured at fair
value. Any change in the carrying amount caused by the transfer should be recognised in P&L.

IMPORTANT - The difference between IAS 16 and IAS 40:

For Subsequent Measurement:

▪ For IAS 16 an entity must either choose the cost model or revaluation model and they must deduct
accumulated depreciation for both models.

▪ However, IAS 40 is applied ONLY for Investment Properties where the entity can either:

- Choose the cost model and must deduct accumulated depreciation or

- Choose the revaluation model and are not required to deduct depreciation but must revalue annually. Any
gain or loss is charged to the P&L.

Owner-Occupied Property Example (IAS16 – Treated as PPE):

▪ The property is considered under property, plant & Equipment and not Investment Property as it’s rented
to employees.

▪ The FV method is used which means that the property is revalued, and the revaluation gain is recorded to
OCI (recognised in revaluation surplus within equity) with any gains or losses charged to the P&L also.

▪ The revalued amount is then depreciated over the remaining useful economic life of the asset.

Investment Property Example (IAS 40 – Treated as Inv. Property):

 ▪ Under the fair value model, the investment property must be revalued at the date of transfer and must be
revalued at year-end (no dep. Deducted).

▪ The initial revaluation is recorded in the OCI and recognised within the revaluation surplus.

▪ The subsequent gain (or loss) at year-end is only recorded within the P&L.

Disclosures:

Example:
Intangible Assets – IAS 38

Intangible Assets Includes:

▪ Goodwill acquired.
▪ Patents
▪ Copyrights
▪ Licences
▪ Marketing Rights
▪ Franchises
▪ Customer List/ customer & supplier relationships
▪ Import Quotas
▪ Motion Picture Films
▪ Computer Software

According to IAS 38, an intangible asset can be recognised if:

▪ It is probable that expected future economic benefits attributable to the asset will flow to the entity.
▪ The cost of the asset can be measured reliably.

Cost Model:

▪ Intangible Assets are recognised at cost and amortised over useful economic life when it is ready for use.
▪ The useful economic life is the legal right to use the Intangible Asset or expected sales period.
▪ The straight-line method is ALWAYS used for amortisation.

IMPORTANT: Intangible assets that have an indefinite useful life are NOT amortised.

Revaluation Model:

▪ The revaluation model can ONLY be used if there is an active market for the asset.

▪ Therefore, this CANNOT be applied to most Intangible Asset as most are unique.

▪ The residual value is usually ZERO for the same reason.

The same treatment applies to Intangible Assets as physical assets for:

▪ Impairment
▪ Assets Held for Sale (AHFS)
▪ Disposal

▪ The Our Sports Brand is internally generated and cannot be recognised as an intangible asset as the cost
cannot be measured reliably.

▪ The Pets & Me Brand has been acquired therefore the cost can be measured reliably and in intangible asset
can be recognised.
Research & Development
IAS 38 says that Development Expenditure can only be recognised as an intangible asset if the entity can
demonstrate that:

1. Technically Feasible: The project is technically feasible.

2. Project Intended: The entity intends to complete the intangible asset, and then use it or sell it.

3. Adequate Resources: It has adequate resources to complete the project.

4. Future Benefit: The intangible asset will generate future economic benefits.

5. Reliably Measured: It can reliably measure the expenditure on the project.

The Intangible Asset will be capitalised and amortised only when production begins or when the development
expenditure is used.

R&D / Capitalisation Example

 ▪ Research into materials, market research and employee training cannot be capitalised.

▪ The expenditure on development activities can be recognised, however it was only from May that market
research indicated that the product was likely to be profitable.

▪ Therefore, you can only capitalise from May to June: £900k x 8/12 = £600k.

▪ The remaining amounts must be recognised as an expense to the P&L £300k + £500k + £400 + £200k =
£1.4m.

Impairment – IAS 36

An asset is impaired if the recoverable amount is lower than the carrying amount.

The recoverable amount is higher of:

▪ Fair Value – COS (What the asset can be sold for minus the cost of sell).

▪ Value in Use (VIU) (The future cashflows that will be generated).

IMPORTANT: If, FV less costs to sell is higher than the carrying amount, there is no impairment and no need to
calculate value in use.

An impairment review should be carried out annually if:

▪ An intangible asset is not being amortised because it has an indefinite useful life.

▪ Goodwill has arisen on a business combination.

 Otherwise, an impairment review is required only where there is an indication of impairment:

External Sources:

▪ A significant decline in the asset’s market value more than expected by normal use or passage of time.

▪ A significant adverse change in the technological, economic or legal environment.

Internal Sources:

▪ Obsolescence or physical damage

▪ Evidence that asset’s economic performance will be worse than expected.

▪ Operating losses or net cash outflows for the asset.

▪ Loss of key employee.

▪ Significant changes, in the period or the way the asset is being used:

- Asset becomes idle.

- Plans for early disposal
- Discontinuing/restructuring the operation where the asset is used.

Recognition:

An impairment loss is normally charged immediately to the P&L or OCI:

▪ Charged to OCI: If the asset has previously been revalued upwards, the impairment is recognised as a component
of OCI and is debited to the revaluation surplus until the surplus relating to that asset has been reduced to nil.

▪ Charged to P&L: The remainder of the impairment loss is recognised in profit or loss.

▪ The remaining carrying amount of the asset is then depreciated/amortised over its remaining useful life.
Note: The remaining carrying amount after impairment has been recognised, will then be depreciated as
usual.
 Cash-Generating Units (CGU):

A cash-generating unit is the smallest group of assets that generates independent cash flows.

It is not usually possible to identify cash flows relating to particular assets.

For example, a factory production line is made up of many individual machines, but the revenues are earned
by the production line as a whole.

In these cases, value in use must be calculated for groups of assets (rather than individual assets). These
groups of assets are called cash-generating units (CGUs).

▪ A is a cash-generating unit as it creates goods that are also sold in the external market.

▪ B is NOT a cash-generating unit as the output of B has no external market and only transferred to C
using an internal transfer price.

▪ C is a cash-generating unit as its sales the finished product to an external market.

▪ Therefore, A is a CGU separately and B &C are GGU’s separately together.

There may be particular divisions, rather than an individual asset that are impaired.

This causes 2 problems:

▪ Corporate assets: assets that are used by several cash-generating units (e.g. a head office building or a
research centre).

▪ Corporate assets do not generate their own cash inflows, so DO NOT individually qualify as cash
generating units.
 ▪ Goodwill usually does not generate cash flows independently of other assets and often relates to a whole
business.

▪ Corporate assets and goodwill should be allocated to cash-generating units on a reasonable and consistent
basis. A CGU to which goodwill has been allocated must be tested for impairment annually.

If there is impairment to CGU, it must be allocated in the following order:

1. Goodwill
2. Remaining non-current assets (pro-rata)

Remember, the carrying amount of an asset cannot be reduced below the highest of:

▪ FV - COS
▪ VIU
▪ Nil.
For this example, we must analyse the separate components that make up the CGU to assess where to apply
impairment:

▪ Goodwill: Firstly, allocate the impairment to Goodwill – this means that £13m should be allocated. £41m -
£13m = £28m left to allocate.

▪ Property: Property has a market value of £35m which is above the £20m carrying amount therefore it is not
impaired, and no impairment should be allocated to it.

▪ Net Monetary Assets (receivables, cash): The impairment loss cannot be set against cash/receivables as
these assets will be realised in full.

▪ Remaining assets: You will allocate the impairment to the remaining assets on a pro-rata basis:

- Machinery: £49/ (£49 + £35 + £14) = 50% x £28m = £14m

- Vehicles: £35/ (£49 + £35 + £14) = 36% x £28m = £10m

- Patents: £14/ (£49 + £35 + £14) = 14% x £28m = £4m

Reversal of Impairment:

The calculation of impairment losses is based on predictions of what may happen in the future. Sometimes, actual
events turn out to be better than predicted. If this happens, the recoverable amount is re-calculated, and the
previous write-down is reversed.

▪ Impaired assets should be reviewed at each reporting date to see whether there are indications that the
impairment has reversed.

▪ P&L: A reversal of an impairment loss is recognised immediately as income in profit or loss.

▪ OCI: If the original impairment was charged against the revaluation surplus, it is recognised as other
comprehensive income and credited to the revaluation surplus.

▪ The reversal must not take the value of the asset above the amount it would have been if the original
impairment had never been recorded. The depreciation that would have been charged in the meantime
must be considered.

▪ The depreciation charge for future periods should be revised to reflect the changed carrying amount.

IMPORTANT: An impairment loss recognised for Goodwill CANNOT be reversed in a subsequent period.

Impairment Reversal Example:

▪ The recoverable amount is now £40k, therefore there is no impairment, and we can reverse the impairment
written down.

▪ Although the original impairment written off was £8k, the reversal of impairment cannot cover the full £8k.

▪ This is because you can only reverse impairment up to the original historical cost minus depreciation (The
carrying amount the asset would be if it was never impaired).

▪ The original historical cost is £30k – £15k depreciation (£3k x 5 years) = £15k.

▪ Therefore, only a max of £5k can be reversed as (current carrying amount is £10k + £5k = £15k)

▪ Double Entry: Dr PPE £5k, Cr P&L £5k

Impairment Reversal for CGU:

▪ Remember impairment loss on Goodwill CANNOT be reversed, therefore the reversal will only be applied to
PPE.

▪ Notice that the original historical cost of the asset is depreciated over 8 years and therefore the carrying
amount is for the remaining 5 years as 3 years has been depreciated: £400k x 5/8 = £250k.

▪ Notice that the value of the asset after impairment is depreciated over 6 years as impairment was applied 2
years after depreciation and therefore the carrying amount is for the remaining 5 years as 1 year has been
depreciated before the reversal: £180k x 5/6 = £150k.

▪ Therefore, the carrying amount can only be increased by £100k up to the original cost of the asset (minus
depn.) before impairment applied which is £250k.

▪ Double Entry: Dr PPE £100k, Cr P&L £100k

Non-Current Assets Held for Sales – IFRS 5

▪ The carrying amount of AHFS will be recovered primarily through a sale transaction rather than through
continuing use.

▪ An operation is held for sale if it’s carrying amount will not be recovered principally by continuing use. To
be classified as held for sale at the reporting date, it must meet the following:

The criteria to recognise AHFS:

1. Immediate Sale: The operation is available for sale immediately in its current condition.

2. High Probability of Sale: The sale is highly probable and is expected to be completed within 1 year.

3. Mang Commitment: Management is committed to the sale.

4. Sale Marketed: The operation is being actively marketed.

5. Price reasonably: The operation is being offered for sale at a reasonable price in relation to its current fair
value.

6. No Changes to Plan: It is unlikely that the plan will change or be withdrawn.

Assets Held For Sale (AHFS) Question:

Assets Held For Sale (AHFS) Answer:

▪ A) Not available for Sale: The property doesn’t meet the criteria of being available for sale in its current
condition.

▪ B) Not accurately priced: The subsidiary cannot be classified as AHFS as it does not meet the criteria of being
reasonably priced (fair value). As they have rejected an offer for £2m and have not reduced the sale value
from £3m to £2.5m, it cannot be classified as AHFS.

Discontinued Operations:

Discontinued Operations is a component of an entity that has been sold, or classified as held for sale, and which is:

▪ A separate line of business (either in terms of operations or location)

▪ Part of a plan to dispose of a separate line of business, or
▪ A subsidiary acquired solely for the purpose of resale.
Discontinued Operation Question:

Discontinued Operation Answer:

▪ The announcement and conditions for discontinued operation for Croatia was made post year-end.
Therefore, Croatia is a non-adjusting balance sheet event.
Measurement of Assets & Disposal of Groups/Subsidiary Held For Sale - IFRS 5:

Items classified as held for sale should be measured at the LOWER of:

1. Carrying Amount

2. Fair Value less costs to sell.

▪ Where fair value less costs to sell is lower than carrying amount, the item is written down and the write
down is treated as an impairment loss.

▪ IMPORTANT: For a NCA measured using a revaluation model should be revalued to fair value immediately
before it is classified as held for sale. The asset is then revalued again at the lower of the carrying amount
and the fair value less costs to sell. The difference is the selling costs and should be charged against profits in
the period.

DISPOSAL GROUP AHFS:

▪ When a disposal group is being written down to fair value less costs to sell, the impairment loss reduces the
carrying amount of assets in the order prescribed by IAS 36 (1st Goodwill, 2nd remaining NCA).

▪ A gain can be recognised for any subsequent increase in fair value less costs to sell, but not in excess of the
cumulative impairment loss that has already been recognised, either when the assets were written down to
fair value less costs to sell or previously under IAS 36.

▪ An asset held for sale is NOT depreciated, even if it is still being used by the entity.

Note: NCA stands for Non-Current Assets.

 Carrying Amount vs. Fair Value - COS

▪ REMEMBER: That AHFS are measured at lower Carrying Amount and Fair Value less COS.

▪ A) The carrying amount is lower than the fair value, therefore the carrying amount is used.

▪ B) The Fair value minus cost to sell is lower, therefore FV is used with impairment loss & COS charged to the
P&L.
 IMPORTANT EXAMPLE – AHFS Cost Model vs. Revaluation Model:

▪ Notice that the building is immediately revalued when classified as ASHFS as it uses the revaluation model.

▪ The revaluation on 31 Dec 20X3 is £1.1m – this is less than the carrying amount of £1.175m.

▪ Therefore, the AHFS should be measured using the fair value of £1.1m.

▪ The value of the AHFS is further reduced by £50k selling cost to £1.05m.

▪ The loss is recorded in OCI to reduce the initial revaluation upwards which was recorded in 21 Dec 20X2.
Discontinued Operations presentation in SPL:

Assets Held FOR Sale (AHFS) presentation in SFP:

IMPORTANT – Assets No Longer Held Fors Sale:

If a sale does not take place within one year, the asset can still be classified as held for sale if:

▪ The delay has been caused by events or circumstances beyond the entity’s control.

▪ There is sufficient evidence that the entity is still committed to the sale.

If the criteria for ‘held for sale’ are no longer met, then the entity must cease to classify the assets or
disposal group as held for sale.

The assets or disposal group must be measured at the LOWER OF:

1. It’s carrying amount before classified as AHFS with an adjustment for depn, amortisation, revaluation if it
had not been classified as AHFS.

2. Its recoverable amount at the date of the subsequent decision not to sell (Higher of FV-COS vs. VIU).

Chapter 6 – Agriculture & Inventories

IAS 41 – Agriculture

A biological asset: is a living plant or animal - Animals, growing grapes, tomato plants are examples of biological
assets.

Agricultural Produce: is the harvested product of the entity’s biological assets.

▪ Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.

▪ For example, tomato plants are biological assets, whereas the harvested tomato are agricultural
produce. Moreover, animals are biological assets, however when they are slaughtered for meat they
become agricultural produce.
IAS 2 – Agricultural Produce Inventory

Milk from a cow is the agricultural produce and is held for resale – at this point it becomes inventories.

A biological asset should be recognised if:

▪ It is probable that future economic benefits will flow to the entity from the asset.

▪ The cost or fair value of the asset can be reliably measured.

▪ The entity controls the asset.

Recognition:

Biological assets are initially measured at fair value less Estimated costs to sell.

Gains and losses may arise in P&L when a biological asset is first recognised.

For example:

▪ A loss can arise because estimated selling costs are deducted from fair value.

▪ A gain can arise when a new biological asset (such as a lamb or a calf) is born.

Subsequent Measurement:

▪ At each reporting date, biological assets are revalued to fair value less costs to sell.

▪ Gains and losses arising from changes in fair value are recognised in P&L for the period in which
they arise.

▪ The fair value of a biological asset may change because of its age, or because prices in the market
have changed.

IAS 41 recommends separate disclosure of physical and price changes because this information is likely to be of
interest to users of the Fin Stats. However, this is not mandatory. Biological assets are presented separately on the
face of the SFP within non-current assets.

Inability to Measure at Fair Value:

IAS 41 presumes that the fair value of biological assets should be capable of being measured reliably.

If market prices are not available, then the biological asset should be measured at:

▪ cost less accumulated depreciation and accumulated impairment losses.

Once the asset's fair value can be measured reliably, it should be remeasured to fair value less costs to sell.
Biological Assets Example:

▪ Opening balance: 100 Cows is £10k, Purchases: 20 Cows is £1,176 (minus fee), Closing Balance: 120 Cows at
£10, 584.

▪ Notice that the auctioneers’ fees of 2% is recognised in the P&L as a loss: (20 x £60 =£1,200 - £1,176 = £24)

▪ To work out the YE balance, you must have the opening balance plus purchases then the closing balance.

▪ The difference between Opening + Purchases and closing balance is the balancing figure which is a loss in
the example.
 ▪ Equation: Opening + Purchases – Closing balance = Balance Figure.

Agriculture Produce:

At the date of harvest, agricultural produce should be recognised and measured at fair value less estimated costs to
sell.

▪ Gains and losses on initial recognition are included in P&L (operating profit) for the period.

▪ After produce has been harvested, it becomes an item of inventory.

▪ Therefore, IAS 41 ceases to apply – They are now ready for resale and will be treated as inventories.

Outside Scope of IAS 41 - Bearer Plants treated as PPE

▪ Bearer Plants: Are used to produce agricultural produce for more than one period and can last up to several
years. Therefore, they are treated as PPE (IAS 16).

▪ Examples of bearer plants are grape vines/tea business.

▪ IMPORTANT: Any unharvested produce growing on a bearer plant, such as grapes GROWING on a grape
vine, is a biological asset and so is accounted for in accordance with IAS 41.

▪ REMEMBER: Land is not a biological asset and is treated as PPE (IAS 16)

PPE, Biological Asset, Agricultural Produce Example:

▪ Land: is recognised as PPE and measured using the revaluation model and is NEVER depreciated – the £100k
increase is recognised in OCI.

▪ Grape Vines (bearer plant): Are recognised as PPE and should be depreciated over the UEL (£300k/20 years
=£15k). Therefore, carrying amount is £285k.

Note: The vine uses a cost model as the question doesn’t indicate that they have been revalued.

▪ Grapes Growing: are biological assets and should be revalued at year end (FV – costs to sell). Opening Balance is
£500k and Closing Balance is £520K, therefore £20k gain recognised in P&L.

▪ Harvested Grapes: are an agricultural produce should be recognised at FV- cost to sell. The fair value of the
grapes was £100k – this should be recognised as gain within the P&L.

Note: Harvested grapes are recognised as inventory until they ae sold.

Agriculture and Government Grant

Government Grants for Biological Assets:

▪ Cost Model: If biological asset is measured at cost less accumulated depreciation than it is accounted for
the same as IAS 20 (Gov Grants).

▪ Fair Value: If biological asset is measured at FV less cost to sell than it is accounted for under IAS 41:

- Unconditional Grant: Is recognised in P&L when it becomes a receivable.

- Conditional Grant: Is recognised in the P&L when the conditions attaching to the government grant are
met.

IMPORTANT: There is No spreading /allocating or prorating grant balance or deferred income like in IAS 20.

Inventory – IAS 2:

Initial Recognition:

▪ Inventories are initially measured at cost.

▪ This Includes purchase cost (purchase prices less discounts), import duties, conversion cost (materials &
labour) and any cost directly attributable to acquiring inventories.

▪ For example, costs to buy & make inventories: Delivery, Materials, Labour, Production overheads (variable).

▪ Costs NOT directly attributable to acquiring inventories (Storage, selling, distribution) should be expensed to
P&L.

Subsequent Measurement:

Variable Production Overheads:

▪ Per unit amount: Total Overheads / Actual Units Produced

Fixed Production Overheads:

▪ Per unit amount: Total Overheads / Normal Volume of Units Produced

3 Methods to determine costs:

▪ FIFO: First in, first out.

▪ AVCO: Average Cost (weighted)
▪ Actual: Actual Unit Cost

Subsequent Measurement:

Inventory is measured at LOWER of:

▪ Cost
▪ Net Realisable Value (Selling Price – cost to sell.)

NOTE: That the NRV is the estimated price, therefore estimated proceeds expected from sell.

Raw Materials Measurement

▪ Raw materials are not written down below cost if the finished good they will form a part of will be sold at a
profit.

▪ However, a decline in raw material prices would suggest that their NRV has fallen below purchase cost. In
such cases, the replacement cost of the raw materials provides evidence of their NRV.

▪ Therefore, the replacement cost of the raw materials is used to determine the NRV.

▪ The cost is £16,800 – this is the cost of the equipment constructed.

▪ The NRV is £18,000 - £2,100 = £15,900
▪ The NRV is lower than the cost of the equipment.
▪ Therefore, inventory is measured using the NRV of £15,900.
When inventory is sold, recognize the cost of goods sold (COGS) as an expense and decrease the inventory
account:

▪ DR Cost of Goods, CR Inventory

Chapter 7 – Foreign Currency in individual Fin Stats

IAS 21 – The Effects of Changes in Foreign Exchange Rates

Note: Exam question to determine the functional currency.

Functional currency: is the currency of the primary economic environment where the entity operates. This is
deemed to be where the entity generates and expends cash.

Primary Factors to determine Functional Currency:

▪ Sales Price: The currency that dominates the determination of the sales prices.

▪ Operating Costs: The currency that most influences operating costs

 ▪ Currency Held: The currency in which an entity’s finances are denominated is also considered.

Secondary Factors to consider (if primary is unclear):

▪ Financing Activities: The currency in which funds from financing activities are generated.

▪ Customer Receipts: The currency in which receipts from operating activities are retained.

Foreign Subsidiary Functional Currency:

▪ Should normally use the functional currency of the parent.

▪ The sub should operate as an extension of the parent, rather than having significant autonomy.
▪ The sub should have regular transactions with parent.

Presentation Currency: The presentation currency is defined by IAS 21 as the currency in which the entity presents
its financial statements. This can be different from the functional currency.
 ▪ Notice that the primary factors are unclear to determine the functional currency, therefore we must
consider the secondary factors.

▪ Chive sales prices are mainly denominated in USD, however inventory and operating costs are in GBP – this
means It’s unclear to determine using primary factors therefore, we must consider secondary factors.

▪ Based on secondary factors, chive’s functional currency is USD as the company is financed through loans in
USD.

Recognition of Individual Transactions:

▪ At Tran Date: Record the transaction at the FX rate (spot rate) in place on the date the transaction occurs.

▪ At Year-End Date:

- Settled Balance: Retranslate the balance of the payment/receipt at FX rate on the settlement date. You
will have an FX gain or loss.

- Unsettled Balances (Monetary): Retranslate the balance using the year-end rate. Monetary items are
anything that can be translated to cash (payable, receivable, loan etc.).

- Unsettled Balances (Non-Monetary): These balances are NOT retranslated. Non-monetary items are
Inventory, PPE & Investments). However, if they have measured using fair value then they must be
retranslated when they are revalued.
FX Rate on Settlement Example – Customer Receipt:

FX rate at Year-End on Monetary Items – Customer Receipt:

FX rate at Year-End on Non-Monetary Items (Purchase):
FX on Supplier Purchase & Loan
▪ The retranslation on the settlement date has increased from $29,058 to $29,643 by $585.

▪ The $585 is an increase in payment therefore an FX loss should be charged to the P&L.
▪ Firstly, translate the loan using the FX rate on the day it’s received: K120k x $2 = $240K

▪ Then translate the repayment using the FX rate on that day: K40k x $3 = $120k

▪ Translate the remaining loan balance at Year-end using the YE FX rate: K120k – K40k = K80k) K80k x 3.5 =
$280k.

▪ The difference between the closing balance at year-end is the balancing figure: $240k - $120k = $120k -
$280k = $160k B.

▪ There is an FX loss of $160k which will be charged to the P&L.

▪ Increase loan balance by $160k.

 ▪ Land is a non-monetary item and therefore it is not retranslated when using the cost model.

▪ Therefore, at year-end the balance translated at date of purchase still remains.

▪ However, if the land was held at fair value, then the carrying amount of the land would be retranslated at
year-end.

▪ If the land is an investment property IAS 40 then the gain will be recorded in the P&L.

▪ If the land is held as PPE under IAS 16, then the gain will be recorded in OCI.

When translating foreign currency, the rule is as follows:

If the home currency is £1, then you divide. For example, if you are based in the UK and translating receipts of $150
to the functional currency which is GBP and FX rates are presented as:

▪ £1: $1.50 – You take the foreign receipt amount and divide by the foreign rate $150/$1.50 = £100

If the foreign currency is $1, then you multiply. For example, if you are based in the UK and translating receipts of
$150 to the functional currency which is GBP and FX rates are presented as:

▪ $1: £0.67 - You take the foreign receipt amount and multiply by the home rate $150 x £0.67= £100
 ▪ PPE is a non-monetary item therefore they are not retranslated at year-end.

▪ Once you subtract the balance for payment, you have the remaining balance at year-end. The difference
is the balancing figure which is the FX loss.

▪ REMEMBER: The depreciation is calculated on the original cost before deductions for any payment.

Criticism’s of IAS 21

Lack of theoretical underpinning:

▪ It is not clear why foreign exchange gains and losses on monetary items are recorded in profit or loss, yet
foreign exchange gains and losses arising on consolidation of a foreign operation are reported in other
comprehensive income (see Chapter 20).

▪ It is argued that recording foreign exchange gains or losses on monetary items in profit or loss increases the
volatility of reported profits. As such, it has been suggested that foreign exchange gains or losses should be
recorded in OCI if there is a high chance of reversal.

Long-term items:

▪ It is argued that retranslating long-term monetary items using the closing rate does not reflect economic
substance. This is because a current exchange rate is being used to translate amounts that will be repaid in
the future.

▪ Foreign exchange gains and losses on long-term items are highly likely to reverse prior to repayment/receipt,
suggesting that such gains and losses are unrealised. This provides further weight to the argument that
foreign exchange gains and losses on at least some monetary items should be recorded in OCI.

Chapter 8 – Leases IFRS 16

 ▪ Lessor: A person who leases or lets out (issuer/provider of the lease).

▪ Lessee: The person who holds the lease (receiver of lease).

Accounting Recognition for Lessee Accounting:

Identifying a Lease:

▪ IFRS 16 Leases requires lessees to recognise an asset and a liability for all leases.

▪ A contract contains a lease if it conveys 'the right to control the use of an identified asset for a period of
time in exchange for consideration' (IFRS 16, para 9).

Two types of Leases:

▪ Right-of-Use Asset: When you enter into a lease you recognise the lease as an asset on the SFP under "Right-
of-use" asset.

▪ Short-term & low value lease: minimal value.

For leases you must recognise both an asset and liability:

Lease Liability - Initial Recognition:

▪ Liability initially measured at Future payments discounted to PV:

NOTE: Fixed payments, termination penalties and options to purchase the asset (highly probable) are recognised as
part of the lease liability.

Lease Liability – Subsequent measurement:

▪ Effective Interest Rate (EIR) rate will increase the initial liability to the actual amount of cash paid.

10%
b/f Interest Paid c/f
17,355 1,736 - 10,000 9,091
9,091 909 - 10,000 -

Asset (ROU) – Initial Recognition:

▪ Capitalised as part of PPE (ROU Asset)

▪ Costs directly attributable to leasing asset is capitalised.
▪ Costs to dismantle asset and restore land (provision) is capitalised.
▪ Future payments discounted to PV (lease liability above).

Asset (ROU) - Subsequent Measurement:

▪ Depreciate the lease over the useful economic life.

▪ However, if the lease is shorter than UEL than depreciate over the period of the lease.

For lease calculations the main elements for Lessee accounting are:

▪ Recognition: You must recognise both an asset and a liability.

▪ Present Value: You must discount the future payments for the PV.
▪ Depreciation: The ROU asset must be depreciated after the PV is calculated (deposit + PV of future
payments).
▪ Interest: Interest is calculated on the PV of the future payments.
▪ CPI: When there is a change of the CPI during the year – For example moving from 125 to 140 on £1m
payment, you must calculate: £1m x (140/125) = £1.12m.
NOTE: If lease payments are, for example, linked to a price index, then the lease liability will change. There will be a
corresponding change in the carrying amount of the right-of use asset. So, if the lease liability increases by $1 million,
the adjustment will be Dr ROU asset, Cr Lease liability with $1 million.

Double Entries for Lease:

▪ Record Asset & Liability: Dr ROU Asset, Cr Lease Liability

▪ Record Initial Payment/Deposit: Dr ROU Asset, Cr Cash

▪ Reimbursement of Deposit: Dr Cash, Cr ROU Asset

▪ Record Interest on Lease: Dr Finance Cost, Cr Lease Liability

▪ Cash payments reducing liability: Dr Lease Liability, Cr Cash

▪ Recording Depreciation: Dr Depn. (P&L), Cr ROU asset

Accounting Recognition for Lessee:

Lease Example – Payment at Year Ending

▪ IMPORTANT: Note that the PV of the ROU asset + initial payment/deposit is depreciated.

▪ Depreciate asset over the period of the lease term (3 years not 10 years): $33,552/ 3 = $11,184.

▪ When recording the liability in the SFP, you must deduct the closing balance of year 1 from year 2 to
get the current liability: $23,130 - $14,287 = $8,843

▪ This means that $8,843 is what you paid during the year and the current liability.

▪ The closing balance of year 2 is a non-current liability: $14,287.

▪ To check calculation is correct: $8,843 + $14,287 = $23, 130.

 Splitting Cost – Lease vs Maintenance

▪ To determine the how much of the annual payment is allocated to the lease and
maintenance cost, you calculate the following:

- Lease Crane: £160k/£200k (160k+£40k) = 80% x £60k = £48,000

- Maintenance: £40k/£200k (160k+£40k) = 20% x £60k = £12,000

IMPORTANT: Note that the carrying amount for the ROU asset and liability is different.
▪ ROU Asset CA: £130,715 - £43,572 = £87,143 (PV asset – depn)

▪ ROU Liability CA: (£130,715 + £6,536) - £48k = £89,251 (PV asset + Interest – repayment)
Lease Example – Payment at Beginning of Year
 A) Recognition for the first year of lease contract:

▪ The first thing to note is that the lease payments are at the beginning of the year.

▪ The payment for the first year is treated as a deposit.

▪ For the first year you will recognise the £1m lease payment and credit cash as it’s paid at the
beginning of year. (Dr ROU Asset, Cr Cash).

▪ The CPI for the first year is 125, therefore the payments will remain at £1m.

▪ The remaining payments for the 3 years must be discounted for the PV (£2.72m).

▪ You then depreciate the payments for the 4-year contract: (£1m + £2.72m)/4 = £930k.

▪ Depreciation charge is £930k (Dr Depn £930k, Cr ROU Asset £930k

▪ The ROU carrying amount at reporting date is £3.72m – 930k = £2.79m

▪ The interest charge is calculated on the PV Lease Payments: £2.72m x 5% = £14,000 (DR Fin cost, Cr
Lease Liability). (Mistake in text, calculates on the £2.79m ROU CA)

▪ The lease liability carrying amount is the PV Lease Payments plus interest: £2.72m + £14k = £2.86m.

B) Recognition for the first day of the second year of lease contract:

▪ There are three remaining payments within the second year.

▪ The payments have increased to £1.12m due to the increase in CPI (£1m x 140/125).

▪ The increased payments are then discounted @5% for the PV – note that there is no discount rate
for year 2 as payment happens at the beginning of the year. Year 3 & 4 is discounted at 0.95 and
0.90.

▪ The ROU asset and liability must be increased by £350k (£3.21m – £2.86m) Dr ROU, Cr Lease
Liability.

▪ Notice that the £2.86m is the b/f prior year balance from year 1 (Opening balance + Interest).

▪ The payment of £1.12m will then reduce the lease liability: (Dr Lease Liability, Cr Cash)

▪ The ROU asset carrying amount will be £2.79m + £350k = £3.14m which will be depreciated over
the remaining 3 years.

▪ Notice that ROU CA asset doesn’t include the interest - interest payment is recognised within
finance cost & Lease liability (DR Finance Cost, CR Lease Liability).

IMPORTANT: In this example there is no column for repayments in the workings as payment for the lease
is made at the beginning of the year. Therefore, you only show the PV of the remeasured (CPI) lease
liability.
Short-term Leases and Low Value Assets (straight-line basis)

Recognition: The lease payments is recognised in SPL on a straight-line basis

If the lease is short-term (twelve months or less at the inception date) or of a low value, then a simplified treatment
is allowed.

IFRS 16 does not specify a particular monetary amount below which an asset would be considered ‘low value’ but
instead gives the following examples of low value assets:

▪ Tablets
▪ Small personal computers
▪ Telephones
▪ Small items of furniture.

The assessment of whether an asset qualifies as having a ‘low value’ must be made based on its value when new.
Therefore, a car would not qualify as a low value asset, even if it was very old at the commencement of the lease.

In these cases, the lessee can choose to recognise the lease payments in profit or loss on a straight-line basis.

IMPORTANT: No lease liability or right-of-use asset would therefore be recognised.

Accounting Recognition for Lessor IFRS 16:

A LESSOR must classify its leases as finance leases or operating leases:

A finance lease is a lease where substantially all of the risks & rewards of the underlying asset transfer to the lessee.

An operating lease is a lease that does not meet the definition of a finance lease.
The lease is a finance lease if one or more of the following apply:

1. Risks & Rewards: of ownership transferred to lessee then it’s a finance lease.

2. Transfer of Ownership: Asset is LEGALLY transferred to the lessee at the end of the lease.

3. Majority Lease term: The lease term is for the major part of the asset’s economic life.

4. Majority Lease Value: The PV of the lease payments amounts to substantially the fair value of the leased
asset.

5. Secondary Period: The lessee can continue the lease for a secondary period in exchange for substantially
lower than market rent payments.

6. Purchase Option: Option to purchase asset at below fair value at end of lease and reasonably certain option
will be exercised.

7. Specialised Asset: The leased assets are of a specialised nature so that only the lessee can use them without
major modifications being made.

8. Compensation: The lessee will compensate the lessor for their losses if the lease is cancelled.

Finance Lease Initial Recognition:

1. Trade Receivable: Lessors recognise assets held under a finance lease as a receivable (value of the lease
asset discounted). (DR Lease Receivable, CR Asset CA)

Note: Gain/Loss on Asset: Is the difference between the carrying amount of the leased asset and the lease
receivable amount. (DR/CR SPL) for example, DR Leased Asset £1000, CR CA £900, CR SPL £100 gain.

2. Record Interest: Record interest income on the receivable.

(CR Finance Income (SPL), DR Lease Receivable).

3. Record Payments: Record finance lease receipts as a reduction in the receivable.

(DR Cash, CR Lease Receivable)

The value of the receivable is calculated as the present value of:

▪ Fixed payments

▪ Variable payments that depend on an index or rate, valued using the index or rate at the lease
commencement date.

▪ Residual value guarantees

▪ Unguaranteed residual values

▪ Purchase options that are reasonably certain to be exercised

▪ Termination penalties, if the lease term reflects the expectation that these will be incurred.
Finance Lease Subsequent Treatment:

▪ The carrying amount of the lease receivable is increased by finance income earned, which is also recognised
as income on the SPL.

▪ The carrying amount of the lease receivable is reduced by cash receipts.

Operating Lease Recognition:

▪ A lessor recognises income from an operating lease on a straight-line basis over the lease term.

▪ Any direct costs of negotiating the lease are added to the cost of the underlying asset.

▪ The underlying asset should be depreciated (IAS 16 PPE) or IAS 38 for Intangible Assets (amortization).

Finance or Operating Lease?

Finance Lease Example:

▪ The current asset at the end of the first year, is Year 2’s payment minus interest incurred (£2k - £685 =
£1,315). REMEMBER current assets are anything within the next 12 months.

▪ The non-current asset is the lease value b/f into year 2 minus the current asset balance in year 2 (£4,566 -
£1,315 = £3,251.

▪ The £3,251 represents balance outstanding beyond 12 months.

Operating Lease Oroc Example:

▪ Note that the asset has a useful life of 25 years, however the asset is being leasing the asset out for only 7
years for nearly 70% of the assets value (£595k/£880k.

▪ Therefore, it is clearly an operating lease as the asset isn’t being leased for a majority of its useful economic
life.

▪ Operating leases must be depreciated on a straight-line basis: £175k + (£70k x 6) = £595k/7 = £85k

▪ You must recognise deferred income for receipts above £85k: (£175k - £85k) = £90k

▪ Journals:
- Depreciation: DR SPL Depn, CR Asset CA
- Rental Income: CR Rental Income, DR Cash
Sale and Leaseback

A sale and leaseback transaction occurs when one entity (seller) transfers PPE to another entity (buyer) who then
leases the asset back to the original seller (lessee).

The companies are required to account for the transfer contract and the lease applying IFRS 16, however
consideration is first given to whether the initial sale of the transferred asset is a sale under IFRS 15.

If the lease term is similar to the asset life, it is likely that the transaction is NOT a sale.

It is in substance a loan secured on the PPE - as when you might raise a loan from a bank.

Transfer is NOT a Sale – DOESN’T meet performance obligations (Recognised as Loan):

If the transfer is not a sale, then IFRS 16 states that:

▪ Seller recognises Loan Liability: The seller-lessee continues to recognise the transferred asset and will
recognise a financial liability equal to the transfer proceeds (Long-term loan) DR Bank, CR Financial Liability

▪ Buyer recognises Loan Asset: The buyer-lessor will not recognise the transferred asset and will recognise a
financial asset equal to the transfer proceeds (CR Cash, DR Financial Asset Receivable).

▪ Interest payment: Finance income is recognised in the SPL for interest received.

▪ In simple terms, the transfer proceeds are treated as a loan. The detailed accounting treatment of financial
assets and financial liabilities is covered in Chapter 12.

Transfer is a Sale – DOES meet performance obligations:

If the transfer does qualify as a sale, then IFRS 16 states that:

▪ Seller recognises Sale: The seller-lessee must measure the right-of-use asset as the proportion of the
previous carrying amount that relates to the rights retained. This means, how much of the assets value is
transferred to Lessor.

▪ Buyer Recognises Sale: The buyer-lessor accounts for the asset purchase under IAS 16 PPE. They also
recognise a lease under IFRS 16 lessor accounting (Finance vs. Operating).

▪ Operating Lease: You recognise rental income if it’s recognised as an operating lease: DR PPE, CR Cash

▪ Finance Lease: You recognise finance income if it’s recognised as a finance lease: DR PPE, CR Cash.
Sale & Leaseback Example – (Transfer is a Sale) Painting:
Accounting treatment for the 1 January 20X1:

For Painting:

▪ This transaction is treated as a sale as performance obligations have been met.

▪ Painting should remove the carrying amount of the asset and recognise a ROU asset for the lease.

▪ The CA is £1.2m and the ROU asset is measured as a proportion of the CA that relates to the rights
retained:

REMEMBER: The £3m cash received for the asset comprises of both the element that relates to the ROU asset (lease)
retained and the proceeds from the part of the asset sold. The £1.9m lease payment represents the element of the
ROU asset retained.

ROU Asset Retained (Lease) Calculation:

- Calculate %: £1.9m PV Lease Payment/£3m = 63%

- Proportion of ROU retained from CA: 63% x £1.2m = £760k

Proceeds received from the element of asset sold:

- Calculate Sale Proceeds: £3m - £1.9m PV Lease Payment = £1.1m

- Calculate %: £1.1m/£3m = 37%
- Proportion of gain on asset sale: 37% x £1.8m gain = £660k

REMEMBER: The gain from the sale is the £3m cash - £1.2m Carrying amount = £1.8m gain from the sale.

▪ The Double Entries for the Seller are as follows:

- Dr Cash: £3m
- Dr ROU Asset £760k
- Cr Machine/PPE: £1.2m
- Cr Lease Liability: £1.9m
- Cr P&L: £660k (B)

▪ Notice that the £660k is a balancing figure which is recognised within the P&L as a gain.

To Summarise: The fair value (market value) of the asset is £3m, the seller is extracting £1.9m of the value
by leasing it back which means the remaining £1.1m is a gain on sale. However, we can only recognise the
portion of the gain that doesn’t relate to the ROU retained in the sale. Hence, a percentage is calculated
(£1.1m/£3m = 37%) Only 37% of the gain is recognised in the P&L which is also the balancing figure. The
£660k is the portion of the gain outside of the ROU asset.

For Collage:

▪ The lease is an operating lease because the PV of the lease payments is not substantially the same as the
asset's fair value, and the lease term is not for the majority of the asset's useful life.

▪ Collage should recognise the purchase of the asset as normal, therefore the entry would be:
- DR Machine (PPE) £3m, Cr Cash £3m

▪ Collage should record rental income in P&L for the lease on a straight-line basis.
- CR P&L Rental Income
Chapter 9 – Employee Benefits IAS 19

When a company sets up a pension plan it will make contributions to the plan in line with the guidance of an actuary.
When the employees retire the plan will pay out benefits in accordance with the rules of the plan.

Double Entry for salary expense:

▪ When salaries incurred: DR Salary Expense, CR Salary Payable

▪ When salaries are paid: DR Salary Payable, CR Cash

Post-employment Benefit: General terminology for pension plan. Pension plan consists of investment funds, cash
and sometimes properties.

There are two types of plans:

▪ Defined Contribution Plan (Variable): The company promises a level of contribution, but no guarantee is
given of what benefits may ultimately be paid out by the plan. The employee takes all the risk.

▪ Defined Benefit Plan (Fixed): The company promises a level of benefit (based on years of service and salary
while in service). In this case the company faces uncertainty over the level of contributions that will be
required to fund the benefits. Thus, the company takes all the risk.
Identifying whether it is a DCP or DBP:
 ▪ Although the scenario mentions that it is a defined contribution plan, it is actually a defined benefit plan.

▪ This is because the fund promises a fixed amount based on final salary and number of years worked.

▪ Deller bears the investment risk if the fund continues and will need to make up any shortfall to pay
employees.

▪ Although, the fund can be cancelled – Deller has a strong reputation of being a good & honest employer.
Therefore, there is constructive Obligation to continue the lease.

Accounting for Defined Contribution Plan:

▪ Pension Expense: The entity should charge the agreed pension contribution to the P&L as an employment
expense in each period.

▪ The expense of providing pensions in the period is often the same as the amount of contributions paid.

▪ Pension Accrual: However, an accrual or prepayment arises if the cash paid does not equal the value of
contributions due for the period.

Defined Contribution Example:

Accounting for Defined Benefit Plan:

Under a defined benefit plan, an entity has an obligation to its employees. The entity therefore has a long-term
liability. The entity will also be making regular contributions into the pension plan. These contributions will be
invested (pension fund) and the investments will generate returns.

▪ Pension Liability: Must be measured at present value.

▪ Pension Fund: Must be measured at fair value (market value of shares/property) – Basically current value of
the pension fund.

Recognition on the SFP:

An entity offsets its pension obligation and pension plan asset value and reports the net position:

▪ Pension Deficit: If the obligation exceeds the assets, there is a plan deficit (the usual situation) and a liability
is reported in the SFP.

▪ Pension Surplus: If the assets exceed the obligation, there is a surplus and an asset is reported in the SFP.

NOTE: It is difficult to calculate the size of the defined benefit pension obligation and plan assets. It is therefore
recommended that entities use an expert known as an actuary.

The year-on-year Movement in the SFP:

An entity must account for the year-on-year movement in its defined benefit pension scheme deficit (or surplus).
DBP Liability Proforma & Formula IAS 19:
Reconciliation of Net Obligation for 20X1 and 20X2 - The Liability:

20X1 20X2
Obligation b/f x x
Plan Assets b/f x x
Net Obligation/(Asset) b/f x/(x) x/(x)

Net Interest Component x * 5% x * 5%

(Net Obligation x Discount Rate)

Service Cost Component

Current Service Cost x x
Past Service Cost x x
Settlement x x
x x

Contributions into Plan (x) (x)

Benefits paid - -
x x

Remeasurement component (B) x x

Net Obligation c/f (W1) x x

W1:
PV Obligation x x
PV Plan Assets x x
Closing Net Liability/(asset) x/(x) x/(x)

Statement of Profit or Loss:

20X1 20X2
Net Interest Obligation x x
Service Cost Component x x
x x

Other Comprehensive Income:

20X1 20X2
Remeasurement Component x x

Total Comprehensive Income charge x x

▪ Net Interest Component: Unwind the discount rate from pension liability. For example: 5% x £100k pension
liability/asset. (Dr P&L, Cr Pension Liability)

▪ Service Cost Component: The employee has worked for another year therefore and additional year of
pension must be added (Discounted for the PV) (Dr P&L, Cr Pension Liability)
 This is comprised of 3 elements:

- Current service cost: (Add Year) Present value of additional 1 year of pension obligation.

- Past service cost (Amendment): Change in PV of pension obligation resulting from a plan amendment or
curtailment (reduction in employee number).

- Settlement (Payout): Any gain or loss on settlement payment made to employee (new pension provider)
when they leave & join a new company.

▪ Contributions into Plan: The employer pays money into the pension fund - this increases the value of the
fund. (Dr Pension Liability, Cr Cash).

▪ Benefits Paid: Payout made to retired employees, therefore, reducing the pension plan liability and asset
(pension Fund) (Dr Pension Liability, Cr Pension Asset).

▪ Remeasurement Component: After accounting for the above, the net pension deficit will differ from the
amount calculated by the actuary as at the current year end.

▪ This is due to actuary calculations based on assumptions on life expectancy/final salary and actual returns
from the plan. The adjustment is made and is recorded in OCI.

Note - Settlement: For example, an employee may leave the entity for a new job elsewhere, and a payment is made
from that pension plan to the pension plan operated by the new employer.

The gain or loss on settlement is the difference between the fair value of the pension fund (assets) paid out and the
reduction in the PV of the defined benefit obligation. The gain or loss forms part of the service cost component.
 ▪ The b/f obligation and asset for 20X4 is given in the first paragraph.

▪ However, the brought forward obligation and asset for 20X5 is the closing balance for 20X4.

▪ The net Interest Component unwinds the discount rate from pension liability of the current year
net obligation.

▪ Service Cost Component is given in the detail of the question.

▪ Benefits paid have a nil effect – both the obligation and asset is reduced simultaneously.
▪ The closing net liability is calculated using the PV obligation – asset.

▪ P&L: The net interest obligation & service cost component is charged to the P&L.

▪ The remeasurement component is the balancing figure of the b/f liability + adjustments with the
year and closing liability. The remeasurement component is recorded in OCI.

▪ IMPORTANT: The net pension obligation calculated by actuary for the year was £80m (long-term
liability on SFP), however the pension pot has only £67.4m, therefore there is a deficit of £12.6m
which is a loss.
Past Service Cost Example:
Defined Benefit Plan (DBP) - Example
▪ The net obligation is £48m which is given in the question.

▪ The unwinding of the discount is £48m x 6.25% = £3m. This is charged through the SPL as a wages
expense, pension liability is also increased. (DR P+L, CR Pension).

▪ Current service cost is £12m and an additional benefit of £4m is included as an amendment.
(DR P+L, CR Pension)

▪ Pension Contribution of £8m is made to reduce the liability (DR Pension, CR Cash).

▪ Benefit paid has a nil effect – it reduces both the liability and asset.

▪ The net pension balance calculated by the actuary was £55m, however we have a pension pot of
£59m, meaning that we have a surplus of £4m remeasurement gain which is recorded in OCI.

▪ The £55m net pension obligation c/f is shown as a long-term liability on the SFP.
Curtailment Example
▪ IMPORTANT: Notice that a contribution was made immediately at the start of the pension
scheme, therefore the discount rate is deducted from the pension liability instead of added.
This is credited to the P&L.
▪ Redundancy (curtailment): DR Pension £300k, CR Cash £300k

▪ Curtailment Loss: DR P&L £100k, CR Pension £100k

under
Asset Ceiling:
Surplus: There are instances where the Defined Benefit Plan is in surplus. They can only be recognised up to
the level of the asset ceiling. The asset ceiling is the PV of the future economic benefits.

If a defined benefit plan is in surplus, IAS 19 states that the surplus must be measured at the LOWER OF:

▪ The amount calculated as normal (see example below) or;

▪ The PV of Refunds from the plan, or Reductions in future contributions to the plan.

Note: If the net defined benefit asset exceeds the asset ceiling, the excess must be adjusted. The excess will
be written off by reducing the expense in OCI.
Short-term Benefits:

▪ Wages & Salaries: Accounted for using the accruals concept. Wages expense charged to the SPL.

▪ Compensated Absences: Such as s holiday pay, sick leave, maternity leave, jury service, study leave and
military service are also accounted for using the accruals concept. However, we must consider whether they
accrue over time or not:

- Accumulating Benefits:

o Accumulating benefits are employee benefits that accumulate over time and can be carried forward
for future use, for example ANNUAL LEAVE.

o This will typically result in the recognition of a liability at the reporting date for the expected cost of the
accumulated benefit earned but not yet claimed by an employee.

- Non-Accumulating Benefits:

o An expense should ONLY be recognised when the absence occurs. For example, absence due to
sickness.

o A charge to the SPL is made ONLY when the authorised absence occurs.

▪ Termination Pay: For example, redundancy pay will be recognised in the SPL. If it’s settled within 12 months
then it’s recognised as a short-term benefit, however if it’s over 12 months then it’s recognised as a long-
term benefit.

▪ Other Long-term benefits: This comprises of long-service leave, long-term disability benefits and other long-
service benefits. These employee benefits are accounted for in a similar manner to accounting for post-
employment benefits. As benefits are payable more than twelve months after the period in which services
are provided by an employee. However, any remeasurement components are recorded in SPL rather than in
OCI.

Chapter 10 – Share-Based Payments IFRS 2

Measurement:

Share-based payments refer to transactions in which:

▪ An entity buys goods & services and makes payment by issuing shares or share options.

▪ Or incurs liabilities based on the price of the entity's shares.

Share Options: Allows the holder to buy a share in the future for a fixed price (exercise price). If the exercise price is
less than the fair value of a share at the exercise date, then the option holder is essentially getting a discount and so
the option is said to be ‘in the money’.

Grant Date: The grant date is the date at which the entity and another party agree to the arrangement. This is usually
the case for employees, they have an option to buy shares in the company on a certain date (vesting date) if they are
still working for the company.

Vesting Date: is the date by which the rights to an asset pass to a recipient. The recipient entitled to receive the cash
or equity instruments under the arrangement.
Vesting Estimates: The expense recognised at each reporting date should be based on the BEST ESTIMATE of the
number of equity instruments expected to vest.

On the vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately
vest.

There are two main types:

▪ Equity-settled: The entity settles the transaction by issuing equity instruments (shares/share options). DR
Expense SPL, CR Equity (CR SPL if it’s an Asset).

▪ Cash-settled: The entity settles the transaction by paying cash based on the fair value of its equity
instruments. DR Expense SPL, CR Liability (CR SPL if it’s an Asset).

▪ Note: The entry to equity is normally reported in 'other components of equity'. Share capital is not affected
until the share-based payment has 'vested'.
Equity-Settled (SBP):
Recognition: DR Expense SPL, CR Equity (CR SPL if it’s an Asset)
IMPORTANT: The entry to equity is normally reported in 'other components of equity'. Share capital is not
affected until the share-based payment has 'vested'.
Employee Share Options (service-based):
Equity-Settled (SBP) – Calculating Expectation Example
Note: This is a service-based agreement, the agreement for employees to receive the shares is conditional
and based on employees remaining with the company for a period of time.

▪ Grant Value: This is the value on the day of the arrangement which is $15.

▪ Year 1 - The entity must estimate the no. of shares expected to vest:
(500 employees x 80%) x 100 options x $15 x 1/3 = $200,000

▪ Year 2 - The entity must estimate the no. of shares expected to vest:
(500 employees x 85%) x 100 options x $15 x 2/3 = $425,000
You increase Equity by $425k-$200k = $225k

▪ Year 3 - The entity must calculate ACTUAL the no. of shares vested in final year:
(500 employees – 50) x 100 options x $15 x 3/3 = $675,000
You increase Equity by $675k - $425k= $250k

▪ The SPL will recognise staff cost each year for the movement of estimated/actual share options
calculated.

▪ In equity, the closing balance of share options each year will be recognised under other components
of equity.

▪ Note: That the initial calculation is based on estimation (expected expense).

Year-Ended Dec 20X1:

200,000 SPL charge

Year-Ended Dec 20X2:

425,000 SFP YE Balance
- 200,000
225,000 SPL Charge

Year-Ended Dec 20X3:

675,000 SFP YE Balance
- 425,000
250,000 SPL Charge

The double entry each year would be : DR Expense (SPL) , CR Equity (SFP)

Performance conditions:
In addition to service conditions, some share-based payment schemes have performance conditions that
must be satisfied before they vest (employee increasing entity’s profit/completion of project).
There are two types of performance conditions:
▪ A market condition: is related to the market price of the entity’s equity instruments.
An example of a market condition is that the entity must attain a minimum share price by the vesting date for
scheme members to be eligible to participate in the share-based payment scheme.

▪ Non-market performance condition: are not related to the market price of the entity's equity
instruments.

Examples of non-market performance conditions include EPS or profit targets.

IMPORTANT: We only consider non-market conditions when accounting for SBP and recognising the
expense in the accounts. Market conditions have already been factored in when determining the FV.
▪ The expense calculated is based on the no. of employees expected to satisfy the service condition only.

▪ (100 employees – 20) x 50 options x $1 FV x ½ = $2k.

▪ The expense recognised in the SPL is £2k for year 1 (DR SPL, CR Equity).
When the vesting period is over, the employees will either exercise the option and take up the shares or the entity
(employer) will allow the option to lapse (employees don’t exercise the option).

Equity- Settled SBP: Options Exercised vs. Lapsed

Cash-Settled (SBP):
▪ Share Appreciation Rights (SARs): Employees become entitled to a future cash payment based on
the increase in the entity’s share price from a specified level over a specified period of time.

▪ The right to shares that are redeemable, thus entitling the holder to a future payment of cash.
Recognition:
▪ Double Entry: DR Expenses SPL, CR Liabilities

▪ Fair Value: The entity remeasures the fair value of the liability arising under a cash-settled scheme
at each reporting date.

IMPORTANT: The main difference between cash-settled and equity-settled is that the options are
remeasured at FV at each reporting date.
Share Appreciation Rights (SAR) Example
IMPORTANT TOPIC TESTED IN EXAM!! – Share Appreciation Rights (SAR)
Q. Growler - Pg.247

A)
Reporting Date Options Price Workings Liability (SFP) Expense (SPL)
31/12/X4 200 £ 5.00 230,000 230,000 230,000
31/12/X5 200 £ 7.00 638,400 638,400 408,400

B)
456 Employees to exercise their rights in full

Reporting Date Employees Options Price Workings

31/12/X6 257 200 £ 7.00 £ 359,800
31/12/X7 199 200 £ 10.00 £ 398,000

Year Ended 31/12/20X6

Libility b/f 638,400

Cash Payment - 359,800
Profit or Loss (B) 39,800
Libility c/f 318,400

Year Ended 31/12/20X7

Libility b/f 318,400

Cash Payment - 398,000
Profit or Loss (B) 79,600
Libility c/f -

▪ Actual liability: The actual liability calculated at the end 31/12/20X6 is £638,400 - £359,800 =
£278,600.

▪ Balancing Figure: This is less than the estimated C/F liability for 31/12/20X7, therefore there is a
balancing figure of £39,800 (£398,000 – £278,400) which is recognised as a gain within the SPL.
IMPORTANT:
▪ Fair Value: SARs are measured at FV at each reporting date.
▪ Intrinsic Value: During the exercise period (between 20X6-7) SARs are measured at the intrinsic
value ONLY on the day they are actually exercised.
▪ After the exercise period (post Dec 20X7), the intrinsic value equals the fair value.

IMPORTANT: Notice that the £318k c/f balance for the remaining 199 employees at 20X6, uses the FV of $8
at the end of 20X6 instead of FV $7. It doesn’t use the IV of $7 as the intrinsic value is only applied on the
day the SARs are exercised. The $10 FV rate is only at the end of 20X7 therefore, you would use the FV $8
for the c/f balance for the 199 employees. AS 31 Dec 20X7 the intrinsic value is $10 which is the same as
the FV.
SAR’s Exercised:
Intrinsic Value: When SARs are exercised, they are accounted for at their intrinsic value at the exercise
date. The fair value of a SAR could exceed its intrinsic value at this date. This is because SAR holders who do
not exercise their rights at that time have the ability to benefit from future share price rises.
Fair Value: At the end of the exercise period, the intrinsic value of a SAR will equal its fair value. The
liability will be cleared, and any remaining balance taken to profit or loss.
Choice Of Settlement (SAR) – Cash vs. Options (Equity Component)
Chapter 11 - Events after the reporting period, provisions, and contingencies

Events after the reporting period are events ‘that occur between the reporting date and the date on which the
financial statements are authorised for issue' (IAS 10, para 3).

There are two types of events after the reporting period – IAS10:

▪ Adjusting Events: Adjusting events are events that provide additional evidence about conditions that
existed at the end of the reporting period.

- Examples: Inventory sold for less after reporting date – the NRV will have to adjusted. Settlement of court
case, discovery of fraud or error, bankruptcy of customer (bad debt write off).

▪ Non-Adjusting Events: are events that indicate conditions that arose after the reporting period and do not
affect the fin stats for the reporting period.

- Examples: Asset destroyed by fire or flood, disposal of asset/subsidiary, discontinue an operation after the
reporting period, dividends declared after reporting date, Large FX rate changes.

Note: NAE must be disclosed in the Fin Stats, however if the events will impact an entity and it’s not a going concern
of the business than it must be adjusted for in the fin stats.
Adjusting vs. non-adjusting

Provision – IAS 37 (Present obligation & Probable Outflow)

TWO IMPORTANT CONDITIONS:
▪ Present obligation resulting from past event.

▪ Probable that an outflow of economic benefits

Provision 3 Criteria:

1. Present Obligation: There must be a present obligation (legal or constructive) as a result of a past event. A
constructive obligation arises from an entity's actions (implied, pass behaviour or policy)

2. Probable Outflow: It must be probable that an outflow of economic benefits (e.g., cash) will be required to
settle the obligation.

3. Reliable Estimate: The amount of the obligation must be capable of being reliably estimated.

Measurement:

▪ Best Estimate: A provision is measured at the best estimate of the expenditure required to settle the
present obligation at the reporting date (discounted for PV if time value is material – pre-tax discount rate
used.

▪ Expected value: An expected value for a large population of items (such as a warranty provision).
Recognition:

▪ To record provision: DR SPL (Warranty Expense), CR Provision (SFP)

Subsequent:

If a provision has been discounted to present value, then the discount must be unwound and presented in finance
costs in the statement of profit or loss:

▪ Unwound Discount: DR Finance costs (SPL), CR Provision (SFP)

Derecognition:

At the reporting date, a provision should be reversed if it is no longer probable that an outflow of economic benefits
will be required to settle the obligation.

▪ To remove provision: DR Provision, CR SPL

Contingent Liability (possible & present obligation):

▪ A possible obligation that arises from past events - the outcome of future events is uncertain (NOT
PROBABLE) and outside of the control of the entity.

▪ A present obligation that arises from past events but does not meet the criteria for recognition as a
provision. Outflow of economic benefits is not probable or not possible to make a reliable estimate of the
obligation.

▪ IMPORTANT: A contingent liability appears only in the DISCLOSURE NOTES, whereas provisions are in the
SFP under Liabilities.

Contingent Asset (winning a court case/insurance claim):

▪ A contingent asset should be disclosed if the inflow of future economic benefits is PROBABLE.

▪ If the future inflow of benefits is certain, then it CEASES to be a contingent asset and should be recognised
as a normal asset.

▪ IMPORTANT: A contingent asset MUST BE disclosed.

Onerous Contract: An onerous contract is a contract in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received.

Examples:

▪ Long-term supply contracts where the cost of fulfilling the contract rises significantly due to market changes,
causing a loss.

▪ Lease contracts where the entity vacates a leased property but continues to pay rent due to lease terms, with
no sublease possibilities.

If an entity has an onerous contract, a provision should be recognised and measured at the LOWER OF:

▪ The cost of fulfilling the contract, or

▪ The cost of terminating it and suffering any penalties.

The costs required to fulfil a contract include incremental costs such as materials and direct labour. As well
as a proportion of the depreciation charge for an item of property, plant & equipment used to fulfil the
contract.
No Provision required – Example:

▪ Future Operating Loss: No Provision is required for future operating loss – there is no present obligation here
therefore it doesn’t meet the criteria for provision.

▪ Building Repairs: No provision required for the building repairs as there is no present obligation as a result of
past events.

No Provision required due to no obligation – Example:

Environmental Provision (usually discounted to PV:

Environmental provisions are often referred to as clean-up costs as they usually relate to the cost of
decontaminating and restoring an industrial site after production has ceased.

A provision is recognised if a past event has created an obligation to repair environmental damage:

▪ A provision can only be set up to rectify environmental damage that has already happened. There is no
obligation to restore future environmental damage because the entity could cease its operations.

▪ Merely causing damage or intending to clean-up a site DOES NOT create an obligation.

However, an entity may have a constructive obligation to repair environmental damage if it publicises
policies that include environmental awareness or explicitly undertakes to clean up the damage caused by
its operations.

Environmental Provision:
Note: Only recognise provision for best estimate of damaged caused ONLY up to the reporting date.

Constructive Obligation - Provision generating Asset example:

When completing this question, the 4 areas of calculation to consider is:

1. Movement on Provision: PV of provision + interest

2. Initial cost of PPE: Cost of Asset & PV Provision.

3. Stat of Profit & Loss: Account for depreciation& interest charge in SPL.

4. Stat of Fin Position:

- Under assets: PPE cost (asset & provision), dep charge & Carrying Amount.
- Under Liabilities: PV of provision of clean up each year-end.
Question Analysis:

▪ The provision is a constructive obligation – expected from past behaviour/policy/brand image.

▪ Provision calculated: £3m x (1/1.1^3) = £2,253

▪ Scrubber could not carry out its operations without incurring the cleanup costs.

▪ This means that incurring the costs gives it access to future economic benefits.

▪ The estimated clean-up costs are therefore included in the cost of PPE:
DR PPE £2,253, CR Provision £2,253

▪ The discount is unwound yearly and charged to the SPL and increases provision liability on SFP (current
liability). DR Finance Cost, CR Provision

Q.Scrubber - Pg. 267

10% Yr 1 Yr 2 Yr 3
£ 2,253,944 £ 2,479,339 £ 2,727,273
Unwound
£ 225,394 £ 247,934 £ 272,727
Discount
YE Provision
£ 2,479,339 £ 2,727,273 £ 3,000,000
Balance

Asset £ 5,000,000
2,253,944
7,253,944 Depreciate over 3 years.

Restructuring:

In simple terms, is where the business is redefining itself. This may involve:

▪ The closure or sale of a line of business

▪ The closure of business locations in a country
▪ The relocation of business activities from one country to another.

A restructuring provision can ONLY be recognised where an entity has a constructive obligation to carry out the
restructuring.

A board decision alone DOES NOT create a constructive obligation. IAS 37 states that a constructive obligation exists
only if:

▪ Formal Plan: There is a detailed formal plan for restructuring, that identifies the businesses, locations and
employees affected as well as an estimate of the cost and timings involved.

▪ Employee Expectation: The employees affected have a valid expectation that the restructuring will be
carried out, either because the plan has been formally announced or because the plan has started to be
implemented.
 ▪ The constructive obligation must exist at the reporting date.

▪ Disclosure: An obligation arising AFTER the reporting date requires disclosure as a non-adjusting event
under IAS 10 Events after the Reporting Period.

The following costs CANNOT be included in a restructuring provision:

▪ Retraining and relocating staff

▪ Marketing products
▪ Expenditure on new systems
▪ Future operating losses (unless these arise from an onerous contract)
▪ Profits on disposal of assets.

Estimating Provision:

▪ Best Estimate: The amount recognised should be the best estimate of the expenditure required and it
should take into account expected future events.

▪ Actual Cost: This means that expenses should be measured at their actual cost if known.

▪ Adjust Event: If this was only discovered after the reporting date then this would be an adjusting event after
the reporting period per IAS 10.
IMPORTANT: Profit on disposal CANNOT be netted off against the provision for expected costs.
Chapter 12 – Financial Instruments IAS 39, IFRS 9

Financial Asset:

▪ Cash or an equity/debt instrument of another entity.

▪ A contractual right to receive cash or another financial asset from another entity.

▪ A contractual right to exchange financial Instruments with another entity under conditions that are
potentially favourable.

▪ A non-derivative contract for which the entity is obliged or may be obliged to receive a variable number of
the entity's own equity instruments. (IAS 32).

Financial Liability:

▪ A contractual obligation to deliver cash or another financial asset to another entity.

▪ A contractual obligation to exchange financial instruments with another entity under conditions that are
potentially unfavourable.
 ▪ A non-derivative contract for which the entity is obliged or may be obliged to deliver a variable number of
the entity’s own equity instruments.'(IAS 32).

Classification (Substance vs. Legal Form):

▪ Fin instruments must be classified as either a Fin Asset or Fin Liability according to their actual substance
rather than legal form.

▪ Preference Shares: For example, redeemable preference shares are treated as loans, whereas irredeemable
preference shares are treated as equity.

▪ Convertible Bonds: Another example is convertible bond. This is a bond that grants the holder the right to
convert it into a fixed number of shares in the issuing company at a specified future date.

▪ Legal Form: The legal form of the instrument is a bond (a financial liability) with an embedded option to
convert it into equity.

▪ Substance: The convertible bond comprises two components:

- A financial liability (the bond itself), representing the obligation to repay the principal and interest.
- An equity component (the conversion option), representing the holder's right to convert the bond into a
fixed number of shares.

Fin Asset or Liability

Contract settled by entity’s VARIABLE NUMBER of equity instruments:

▪ £1m Preference Shares (Liability): Coasters is required to redeem the pref. shares (buy back) by issuing
ordinary shares equal to the same value of the £3m received for the pref. shares issued initially. Therefore,
classified as Liability.

Contract settled by entity delivering a FIXED NUMBER of its equity instruments:

▪ £2m Preference Shares (Equity): Coasters will redeem the second preference share issue with a fixed
number of ordinary shares. However, this doesn’t equal the value of the pref. shares. Therefore the £5.6m
should be classified as equity as the £3m ordinary share issued at NV (e.g. £1) could be lower than £5.6m.

No contractual obligation to deliver cash or fin asset:

▪ £4m Preference Shares (Equity): There is no obligation to redeem the preference share or pay dividends,
therefore it is not a liability and should be classified as equity.
Financial Liabilities – IFRS 9

Initial Recognition: At initial recognition, financial liabilities are measured at fair value.

Subsequent Recognition:

Financial liabilities can be measured at either:

▪ FV through P&L: If held at fair value through profit or loss, transaction costs should be expensed to the SPL.

▪ Amortised Cost: If NOT held at fair value through profit or loss, transaction costs should be deducted from
it carrying amount.

IMPORTANT: The main difference between FVTSPL and amortised cost approach is that transaction cost are
expensed to the SPL if the FV through SPL is used. However, if amortised cost is used transaction cost are deducted
after the capital/principal value is amortised.

▪ Amortised cost:
- Fair Value: Measured at FV LESS transaction cost (issue cost).
- Finance cost: Calculated using the EIR.
- Cash Payments: Based on % of the liability nominal value.
- Calculation: (O/B – Tran & cost) X Finance Cost (EIR%) – Cash Paid(%NV) = Closing Balance

▪ Fair value (FVTPL):

- Fair Value: Measured by discounting fair value through P&L.
- Transaction Cost: Are EXPENSED to SPL.
- Calculation: All Cashflow (Interest & Principal) X Discount% = PV
- At the reporting date: The asset is revalued to fair value with the gain or loss recognised in SPL.

Calculating Amortised Cost

▪ Fair Value: The initial carrying amount of the fin liability measured at amortised cost, is the fair value less
any transaction costs (Issue Cost) – This equals the net proceeds.

▪ Finance Cost: is charged on the liability using the EIR. The finance cost will increase the carrying amount of
the liability: Dr Finance Cost EIR (SPL), Cr Liability

▪ Cash Payments: The liability is reduced by any cash payments made during the year: Dr Liability, Cr Cash

Effective Interest Rate (EIR) – Spread cost of liability evenly:

▪ Amortised Cost: The effective interest rate is used to calculate the amortized cost of a financial instrument.

▪ Calculation: The EIR discounts the estimated future cash flows.

▪ Deductions: Transaction costs, issue cost and loan/bond discounts are deducted before calculated the EIR.
Financial Instruments Offsetting:

A financial asset and a financial liability may only be offset in very limited circumstances. The net amount may only
be reported when the entity:

▪ Has a legally enforceable right to set off the amounts.

▪ Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Debt vs. Equity Example

EIR Example:
Amortisation Table:

Loan Notes - Amortised Cost Calculation:

IMPORTANT:

▪ Discount: The loan note discount was £50,000 x 16% = £8,000

▪ Notice that you calculate a single value to deduct from the loan note as discount and it’s different to
calculating PV.

▪ Interest: The 5% interest is calculated on the £50,0000 Loan note.

IMPORTANT:

▪ Notice that the cash payments made is much lower than the EIR charged therefore the c/f balance is
greater.

▪ The finance cost (12%) recognised in the SPL each year is greater than actual cash payments made.

▪ This means that the carrying amount of the liability increases over the life of the instrument until it equals
the redemption value at the end of its term £54,611.

▪ In years 1 to 4 the balance shown as a liability is less than the amount that will be payable on redemption.

▪ Therefore, the full amount payable must be disclosed in the notes to the Fin Stats.

IMPORTANT DISTINCTION – Fin Instruments Vs. Leases:

▪ Higher closing Balance: For Lease payments, the cash repayments are greater than the interest incurred,
therefore the closing balance reduces each year.

▪ Repayments: For leases the cash repayments are intended to reduce the liability over the lease term. For Fin
Instruments the cash repayments don’t decrease the o/s liability as the EIR charged is greater than the
repayment.

▪ Fixed Interest: For leases the interest charged each year decreases as it’s based on the O/B. However for
loan notes/bonds the interest is based on the EIR and is greater than the cash repayments.

▪ Discount: Notice that you calculate a single value to deduct from the loan note as discount and it’s different
to calculating PV.

Amortised Cost: Example

Cash Payments:

▪ For Loan notes & bonds, the cash payments is for the interest charged on the loan nominal value.

▪ Do not reduce the principal loan value of £9.5k as the EIR charged is greater than the interest cash payments.
 ▪ Discount & Issue Cost: You deduct the loan note discount and issue cost before calculating EIR.

Zero-Rate Bond Example

▪ Nil Interest: There are no interest payments paid on this bond.

Derivatives - FVTPL:

▪ Derivatives (out of the money) and liabilities held for trading are measured at fair value through profit or
loss.

Credit Risk - Switching from Amortised Cost to Fair Value

▪ An entity can measure a liability at Fair Value that would normally be measured at amortised cost if it would
eliminate or reduce an accounting mismatch.

▪ The change in FV may be due to the entity’s own credit risk. This is the risk that the entity which issued the
fin liability won’t be able repay or discharge it.

Therefore, movement in FV is split into:

▪ OCI: This change in FV due to entity’s risk is presented in OCI. (DR Liability, CR OCI)

▪ SPL: The remaining FV change is recorded in SPL. (DR Liability, CR SPL

Fair Value Through Profit & Loss (FVTPL) – Financial Liability Example

▪ FVTPL: This is a liability held for trading, therefore must be measured at FVTPL.

▪ Active Market: If there is no active market to determine the FV then FV can be calculated by discounting
future cashflows at market rate of interest.

▪ Cashflow: The cashflow is the interest payable in year 1 and both the interest and nominal value in Year 2.

▪ Discount Rate: The discount rate has increased to 10% on 31 Dec 20X1.

▪ The FV of the liability is £9.13m – The increase is £10m-£9.13m = £0.87m

▪ FV Gain: The gain is recognised in the SPL: DR Liability, CR SPL

Switching from FVTPL to Amortised Cost – Credit Risk (Accounting Mismatch)

▪ The reduction in the liability will be recognised as a gain in both the SPL and OCI:

- OCI: £10m will be recorded in the OCI as it relates to the entity’s credit worthiness (CR OCI, DR Liability).

- SPL: £20m will be recorded in the SPL (CR SPL, DR Liability)

Compound Instrument – Convertible Bonds (IAS 32):

▪ Compound financial instruments contain both a liability and equity element. For example, debt that can be
redeemed either in cash or in a fixed number of equity shares:

The compound Instrument must be split into two components:

- A financial liability to repay the debt holder in cash.

- An equity instrument such as the option to convert into shares.

 - These two elements must be shown separately in the Fin Stats.

Recognition:

▪ Splitting Components: The equity component is calculated as the difference between the cash proceeds
from the issue and the present value of the liability component.

▪ Liability Measured: The liability component is calculated the same as amortised cost, which is PV of the
repayments (% of similar instrument without conversion).

▪ Liability Rate: Using a discount rate for a SIMILAR instrument without conversion rights.

Compound Instruments - Convertible Bonds Example (Redeemable)

Splitting the proceeds:

▪ Calculation: All Cashflow (Interest & Principal) X Discount% = PV

▪ Liability Component: All future cashflows discounted to PV of £44,291m.
▪ Equity component: £50m proceeds - £44,291m = £5,708.1

Measuring the Liability:

▪ Amortised Cost: Liability is measured at amortised cost.

▪ Finance Cost: This shows the finance cost recorded in the SPL each year.
▪ Calculation: O/B + Finance Cost (EIR) – Cash Payments = Closing Balance
▪ IMPORTANT: Note that the 15% used to discount the cashflow is also used to calculate the finance cost for
the amortised cost calculation.
▪ The closing balance shows the carrying amount of the liability in the SFP at each reporting date.

The Conversion Bond:

▪ At 1 Jan 20X4 the equity is £5,708.1 and liability £50,000.

▪ Two shares for every £1: £50m x 2 = £100m
▪ Share Nominal Value: Each share is 0.25 x 2: 0.50 x £50m = £25m
▪ Therefore £100 shares are issued for the nominal value of £25m.
▪ Share Capital: £25m is classified as SC.
▪ Share Premium: £30,708.1m is classified as SP.
▪ IMPORTANT: There is no remaining liability after the conversion.
The Double Entries:

£000
DR Other Components of Equity 5,708.1
DR Liability 50,000
CR Share Capital 25,000
CR Share Premium 30,708.1
Financial Assets – Investment in Equity Instruments:
IFRS 9 says that an entity should recognise a financial asset:

▪ Only when the entity becomes party to the contractual provisions of the instrument.

Recognition Examples:

▪ A sales order will not be recognised as revenue and a trade receivable until the goods have been delivered.

▪ Forward contracts are recognised on the commitment date, not on the date when the item under contract
is transferred from seller to buyer.

▪ Option contracts are recognised on the date the contract is entered into, not on the date when the item
subject to the option is acquired.

Classification:

Investments in equity instruments such as ordinary shares are measured at either:

▪ Fair value SPL (FVTPL):

- Equity is held short-term for trading.
- Equity instruments are recorded as fair value through SPL.

▪ Fair value OCI (FVOCI):

- Equity is held long-term and NOT for trading.
- Equity instruments are recorded as fair value through OCI.
- There must have been an irrevocable choice for this upon initial recognition of the asset.

Measurement - Investment in Equity Instruments:

FVTPL:

▪ Fair Value: Measured by discounting fair value through P&L.

▪ Transaction costs: Are EXPENSED to SPL.
▪ Calculation: All Cashflow (Interest & Principal) X Discount% = PV
▪ At the reporting date: The asset is revalued to fair value with the gain or loss recognised in SPL.

FVOCI:

▪ Fair Value: Measured by discounting fair value through OCI.

▪ Transaction Cost: Are INCLUDED in recognition through OCI.
▪ Calculation: All Cashflow + Tran (Interest & Principal) X Discount% = PV
▪ At each reporting date (also before disposal): Asset is revalued to FV with the gain or loss recognised in OCI.
▪ Not Reclassified: This gain or loss will NOT be reclassified to profit or loss in future periods.
FVTOCI – Ethical Question

FVTOCI – Ethical Question

Financial Assets – Investment in Debt Instruments:

Classification:

Investments in Debt instruments can be measured in 3 ways:

▪ Amortised Cost: Holds asset to maturity/redemption.

Investments can be measured using amortised if:

- Business Model: The entity has a business model where they DON’T PLAN TO SELL THE ASSET before
maturity but holds it until redemption.

- Principal & Interest: Cashflows generated by the asset are solely payments of the principal amount and
interest based on the principal amount outstanding.

- Measurement (Hummings):
o Fair Value: Measured at FV PLUS transaction cost.
o Transaction Cost: Are INCLUDED with the FV.
o Interest Income: Calculated using the EIR.
o Calculation: (O/B + Tran) + Finance Income (EIR) - Cash Receipt = Closing Balance

Interest - 8% Carrying
B/F Cash Paid
EIR Amount
10,000,000 800,000 - 500,000 10,300,000

▪ Fair value through OCI (FVOCI): Holds asset for cashflow & sells to buy better investments.

- Business Model: The entity has a business model that HOLDS THE ASSET TO COLLECT CASH FLOWS and to
SELL FOR BETTER INVESTMENT OPPORTUNITIES.

- Principal & Interest: Cashflows generated by the asset are solely payments of the principal amount and
interest based on the principal amount outstanding.
 - Measurement – Klancet, Aron, Carsoon pg.140 Example:
o Fair Value: Measured by discounting fair value through OCI.
o Transaction Cost: Are INCLUDED in recognition through OCI.
o Interest Income: Calculated using the EIR.
o Calculation: (O/B + Tran) + Finance Income (EIR) - Cash Receipt = Closing Balance, CB -FV =
Gain/(Loss)
o At each reporting date: The asset is revalued to FV with the gain or loss recognised in OCI.
o Reclassified at Disposal: Any amounts held in OCI will be reclassified to SPL when the asset is
disposed.

▪ Fair value through SPL (FVTPL): When entity neither uses Amortised Cost or FVTOCI.

- An investment in a debt instrument that is NOT measured at amortised cost or FVTOCI will be measured
at FVTPL.

- Measurement:
o Fair Value: FV through SPL.
o Transaction costs: are expensed to SPL.
o Calculation: O/B + Finance Income (EIR) - Cash Receipt = Closing Balance, CB -FV = Gain/(Loss)
o At the reporting date: The asset is revalued to fair value with the gain or loss recognised in SPL.

▪ Reclassification: If an entity changes its business model for managing debt financial assets, all affected
financial assets are reclassified (e.g. from FVTPL to amortised cost).
Impairment of Financial Assets - Loss Allowance IFRS 9 (Amortised Cost & FVTOCI):

Credit Risk is the risk that the customer is going to default on payments. Therefore, a loss allowance should be
recognised for Fin Assets measured at Amortised Cost or FVTOCI.

Credit Risk is determined by:

▪ Assess Risk: Entities must compare the asset's risk of default at the reporting date with risk at initial
recognition.

▪ Present Info: Entities should not rely on past information to determine if credit risk has increased
significantly.

▪ Low Credit Risk: Indicates that there are NO significant changes or increases to credit risk at the reporting
date.

▪ Overdue Payments: Increased risk if contractual payments are more than 30 days overdue at the reporting
date.
Loss Allowance Details:

A loss allowance should be recognised for financial assets that are debt instruments and which are measured at
AMORTISED COST or at FVTOCI using the Calculation.

The Loss Allowance is determined by:

▪ No Increase to Credit Risk: The loss allowance should be equal to 12-month expected credit losses.

▪ Increase to Credit Risk: The loss allowance should be equal to the lifetime expected credit losses.

▪ Adjustments: to the loss allowance are debited or credited to the SFP (Provision).

The flowing details must also be considered:

▪ At Reporting date: Expected credit losses should be measured if the asset is credit impaired.

▪ Credit-Impaired: This means that there is a difference between the CA of the asset and PV of future
cashflows (caused by default, bankruptcy of the issuer/borrower).

▪ Interest Income: If an asset is credit-impaired, interest income is calculated on the asset's net carrying
amount (Eve).

▪ Trade Receivables: For TR lifetime expected losses are calculated. (Janne).

▪ Calculation: Expected credit losses are estimated by calculating the PV of cashflow and multiplying by
probability percentage.

Trade Receivable – Loss Allowance (Janne):

▪ Calculation: Cashflow x Discount Factor (EIR) = PV x % Probability

No Credit Impairment - Loss Allowance (Napa)

▪ Calculation: Cashflow x Discount Factor (EIR) = PV

Credit Impaired Assets – Loss Allowance (Eve):

▪ Loss Allowance Calculation:

- Cashflow x Discount Factor (EIR) = PV
- Gross CA – PV = Loss Allowance

▪ Interest Income Calculation:

PV (Gross CA – Loss Allowance) x EIR%
Amortised Cost – Loss Recognition:

For expected Loss on Fin Assets measured using amortised cost, the loss is recognised in the SPL

- Recognition: DR Impairment SPL, CR Fin Asset CA

FVOCI - Recognition

For expected Loss on Fin Assets measured using FVOCI, the loss is recognised in the OCI:

- Loss from Revaluation: DR OCE (OCI), CR Fin Asset CA

- Loss from Credit Loss: DR Impairment (SPL), CR OCE (OCI)

Important Definitions to Remember:

▪ Credit loss: The PV difference between the contractual cash flows and expected cash flows.

▪ Expected Credit Losses: The weighted average credit losses.

▪ Lifetime expected credit losses: The overall expected credit losses t from all possible default events.

▪ 12-month expected credit losses: The portion of lifetime expected credit losses that might occur 12 months
after the reporting date.

Impairment Reversals:

▪ At each reporting date, the loss allowance is recalculated.

▪ Credit risk may have reduced leading to only 12-month expected credit losses instead of lifetime losses.
▪ Therefore, a substantial reduction in the allowance is required.
▪ Gains or losses on remeasurement of the loss allowance are recorded in SPL.

Derecognition of Fin Stats:

A financial asset should be derecognised if one of the following has occurred:

▪ The contractual rights have expired.

▪ For example, an option held by the entity has lapsed and become worthless.

▪ Risk & Rewards ownership: The fin asset has been sold and substantially all the risks & rewards of
ownership have been transferred from the seller to the buyer.

▪ However, If an entity has retained substantially all of the risks & rewards of a financial asset then it should
NOT be derecognised, even if it has been legally 'sold' to another entity.
A financial liability should be derecognised when the obligation is discharged, cancelled or expires.

The treatment for derecognition:

▪ The Carrying Amount of the asset or liability LESS amount received or paid for it should be recognised in the
SPL.

▪ Equity Instruments: held at FV through OCI, the cumulative gains & losses recognised in OCI are NOT
reclassified to SPL on disposal.

▪ Debt Instruments: held at FV through OCI, the cumulative gains & losses recognised in OCI are reclassified
to SPL on disposal.

Credit Risk Example:

Loss Allowance Example:
Loss Allowance – Amortised Cost
Loss Allowance - FVTOCI
Credit-Impaired Assets
Derecognition Example:

▪ First Receivable: Debt Factoring – No Recourse is treated as cash as risks & rewards have been transferred.
DR Cash £180k, DR SPL £20k, CR Receivable £200k

▪ Second Receivable: Debt-Factoring – with Recourse is treated as a loan as risks & rewards are not
transferred. DR Cash £70k, CR Loan £70k
Risk & Rewards of Ownership
Derecognition for FVTOCI & FVTPL
Modification of Debt:

If an existing loan is exchanged for a new loan, the treatment will depend on whether the change is substantially
different based on:

▪ The PV of the cash flows under the new arrangement, including fees, discounted at the original effective
interest rate.

▪ The PV of the remaining cash flows under the original arrangement.

▪ If the difference between these two amounts is 10% or more of the PV of the cash flows under the original
arrangement, then the terms are deemed to be different.

Treatment:

▪ Substantially Different: The original liability is derecognised, and a new liability recognised in its place at the
FV of the new liability. Any difference is recognised in the SPL with any fees incurred.

▪ Substantially Different: The original liability is deemed to have been modified, so it is not derecognised. The
liability is restated to the PV of the revised cash flows, with any fees paid being deducted. Any difference is
taken to the SPL.
Extinguished Debt example:
Modified Debt Example:

Derivatives

Examples of Derivatives are:

▪ Forward Contracts: Obliged to buy or sell a defined amount of a specific underlying asset, at a specified
price at a specified future date.

▪ Futures Contracts: Similar to forward contract but have standard terms and traded on financial exchange.

▪ Swaps: Two parties agree to exchange periodic payments at specified intervals over a specified time period.
For example, in an interest rate swap, the parties may agree to exchange fixed and floating rate interest
payments calculated by reference to a notional principal amount.

Recognition:

FVTPL: Derivatives are measured at Fair Value through SPL.

Transactions Costs: Are expensed to SPL.

Derivatives Example:
 ▪ Option A - Sold: the option is initially recognised: DR Asset £500, CR Cash £500 then derecognised when
sold:
DR Cash £1,500 CR Asset £500.

▪ Option B - Lapses: Is treated as a sale with no proceeds, therefore we derecognise the asset and charge a
loss to the SPL – DR SPL £500, CR Asset £500

▪ Option C - Exercised: If option is exercised then option is derecognised, and a gain on the option is
recognised as the market value is £25 per option, however only £10 was paid.

DR Asset - Investment (£100 x £25) £ 2,500

CR Cash (£100 x £10) £ 1,000
CR Asset - Option £ 500
CR SPL £ 1,000

Derivative – Investor Perspective

Hedge accounting (Matching movements):

▪ Hedge accounting aims to match the timing of the recognition of gains and losses on the hedging instrument
and the hedged item, thus reducing volatility in the income statement.

▪ Is a method of managing risk by designating a hedging instrument so that change in FV is OFFSET by the
change in FV or cash flows of a hedged item.

There are 3 types of hedged item:

▪ A recognised asset or liability

 ▪ An unrecognised firm commitment: a binding agreement for the exchange of a specified quantity of
resources at a specified price on a specified future date

▪ A highly probable forecast transaction: An uncommitted but anticipated.

There are two types of Hedge:

Fair Value Hedge (To hedge price of Inventory/commodity):

▪ A hedge of the exposure to changes in fair value of a recognised asset or liability (debtor, payable).

▪ An unrecognised firm commitment that is attributable to a particular risk and could affect P&L
(or OCI for equity investments measured at FVTOCI).

Cash Flow Hedge (To hedge customer order – hedge against change in FX rate):

▪ A cashflow hedge if for an item that hasn’t been recognised yet i.e. Payment for customer order to be
fulfilled in 6 months.

▪ A hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a
recognised asset.

▪ Liability or a highly probable forecast transaction and that could affect P&L.

Hedging Relationship - IMPORTANT:

1. Relationship: The hedging relationship consists only of eligible hedging instruments and hedged items – You
must be able to match the movements. For example, if the price of a share falls below $10, the fair value of a
futures contract to sell the share for $10 rises.

2. Formal: At the inception of the hedge there must be formal documentation identifying the hedged item &
hedging instrument. For example, hedged item is equity instrument & hedged instrument is futures
contract.

3. Designation: State designation – whether through SPL or OCI.

4. Effectiveness Requirements: The objective is to ensure that the hedge is effective in offsetting changes in
the fair value or cash flows of the hedged item. This effectiveness criteria must be met.

NOTE: That the hedging instrument and hedge item have an opposing effect when one moves in one direction, the
other moves in the opposite direction.

IMPORTANT: In all questions you must state in your answer:

“The fair value hedge was correctly documented and designated upon initial recognition. All effectiveness criteria
are complied with.”

Hedging Instrument: A hedging instrument is a designated derivative.

Fair Value Hedge:

Recognition: Recognised at Fair value

Reporting Date:

▪ The hedging instrument will be remeasured to FV.

▪ Hedged Item: The CA of the hedged item will be adjusted for the change in FV since the inception of the
hedge.

▪ SPL: The gain or loss on the hedging instrument & hedged item is recorded in SPL.

▪ OCI: If the hedged item is an investment in equity that is measured at FVOCI.

Cash Flow Hedge:

Recognition: Recognised at Fair value

Reporting Date:

▪ The hedging instrument will be remeasured to FV.

▪ OCI: The gain or loss is normally recorded in OCI.

▪ SPL: If the gain or loss on the hedging instrument is greater than on the hedged item then the excess gain or
loss on the instrument must be recognised in SPL.

Hedge Accounting – Investor Perspective

Fair Value Hedge – Designated through OCI Example

You must identify 3 things:

▪ Hedged Item: Is the Equity Instrument

▪ Hedging Instrument: Is the Futures Contract

▪ Criteria: It has all been documented & designated upon initial recognition and all effectiveness criteria has
been met.
Cashflow Hedge Example

▪ Scenario A: The hedging instrument of £8.5k is less than the movement in the hedged item which has
cashflow of £9.1k. Therefore, the movement is recorded in OCI.

▪ Scenario B: The hedging instrument of £10k is more than the movement in the hedged item which has
cashflow of £9.1k. Therefore, the gain above £9.1k is recorded in SPL.
Chapter 13 - Tax IAS 12

▪ Current Tax: The amount payable to the tax authorities in relation to the trading activities of the current
period.

▪ Deferred Tax: An accounting measure used to match the tax effects of transactions with their accounting
treatment. It is NOT a tax levied by the government that needs to be paid, but simply an application of the
accruals concept.

▪ Tax Expense Calculation: Current Tax - (deduct over provision)/ + (under provision) Adjust for movement in
deferred tax provision for year.

▪ SPL: The deferred tax provision (movement between prior & current year) is what is recorded in the SPL.

▪ SFP – CL: There is a current tax liability for the current year.

▪ SFP - NCL: There is non-current tax liability at Year-End.

Current Tax Recognition:

▪ DR Tax Expense (SPL), CR Tax Payable (SFP)

Current tax accounting is often based on estimates, and the final amount payable might not be finalised until after
the Fin Stats have been authorised for issue:

▪ Payment less than Estimate: If the tax payable is less than the tax estimate previously recognised, then this
will reduce the current tax expense in the next accounting period.

▪ Payment more than Estimate: If the tax payable is more than the tax estimate previously recognised then
this will increase the current tax expense in the next accounting period.

Deferred Tax:

Differences between the principles in an accounting standard and the tax rules in a particular jurisdiction mean that
accounting profits will not be the same as taxable profits.

Temporary Differences: is the difference between the carrying amount of an asset or liability and its tax base.

Tax Base: is the amount attributed to an asset or liability for tax purposes. The tax base of an asset is the amount
that will be deductible against taxable economic benefits from recovering the carrying amount of the asset. The tax
base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject
to taxation by a tax authority.

Examples of Temporary Differences (IMPORTANT):

▪ PPE: Tax deductions for items of PPE that have a different pattern to the write-off of the asset in the Fin
Stats.

▪ Intra-group profits: in inventory that are unrealised for consolidation purposes yet taxable in the
computation of the group entity that made the unrealised profit.

▪ Losses reported: in the Fin Stats but the related tax relief is only available to carry forward against future
taxable profits.
 ▪ Revalued Assets: Assets are revalued upwards in the Fin Stats, but no adjustment is made for tax purposes.

▪ Development costs: are capitalised and amortised to profit or loss in future periods but were deducted for
tax purposes as incurred.

When looking at the difference between the carrying amount and the tax base of an asset or liability:

▪ Taxable Temp Difference (TTD): If the CA exceeds the tax base, the temp difference will give rise to a
deferred tax liability.

▪ Deductible Temp Difference (DTD): If the tax base exceeds the CA, the deductible temporary difference will
give rise to a deferred tax asset.

▪ Share Option Cost: The cost of granting share options to employees is recognised in SPL, but no tax
deduction is obtained until the options are exercised.

Assets:

▪ NCA: The CA is more than the tax base therefore will give rise to a TTD (deferred tax liability).

▪ Interest: The tax authorities will not have recorded finance income receivable, therefore a TTD (deferred tax
liability would be recorded.

▪ Receivables: Revenue already included in SPL – therefore Nil effect (No Temp Difference).

▪ Inventory: The CA is £4.5k however still showing a tax base of £5k therefore giving rise to a DTD (deferred
tax asset).

Liability:

▪ Accrued Expense (cash basis): The tax authority would not be showing an accrual until it’s been paid with
cash, the tax base would be Nil and the accrual is -£1k which is a CA smaller then the tax base, therefore a
DTD.

▪ Accrued Expense: The expense has been deducted from the Fin Stats & tax authority, therefore having a Nil
effect (No Temp Difference).

IMPORTANT:

Deferred Tax Liability:

▪ Deferred tax should be provided on all temporary differences.

▪ However, NO Deferred Tax is required for the recognition of Goodwill.

Deferred Tax Asset:

▪ Deferred tax assets should be recognised on all deductible temporary differences.

▪ However, none is recognised if insufficient taxable profits are expected to be available in the future against
which the deductible temporary difference can be utilised.
DT Measurement:

▪ DT assets and liabilities are NEVER discounted to present value.

▪ DT is the difference between the net liability or asset at the beginning of the year and the net liability or
asset at the end of the year.

▪ SPL: If the item giving rise to the DT is dealt with in profit or loss, the related DT should also be presented
SPL.

▪ OCI: If the item giving rise to the DT is dealt with in OCI, the related DT should be recorded in OCI under
equity.

Non-Current Liability: Deferred tax liabilities and assets are presented as non-current on the statement of financial
position.

DT Offsetting:

DT assets and liabilities can be offset as long as:

▪ The entity has a legally enforceable right to set off current tax assets and current tax liabilities.

▪ The deferred tax assets and liabilities relate to tax levied by the same tax authority.

DT - Revaluation/Fair Value - GROUP -Q1 Exam

▪ PPE: DT should be recognised on PPE – revaluations increase the CA, therefore the CA will be greater than
the tax base.

▪ OCI: Revaluation gains are recorded in OCI, therefore DT on the revaluation must also be recorded in OCI

DT - Share Based Payment (SBP) – Share Options

▪ Equity-Settled SBP are recognised as an expense on the SPL (DR Expense SPL, CR Equity)

▪ Tax Relief: is not granted for Equity SBP until options are exercised.

▪ Tax Base: is the expected future tax relief accrued up to the reporting date (based on options intrinsic
value).

▪ Intrinsic Value: Tax relief is based on the intrinsic value. (market price of shares @ date - exercise price).

▪ DT Asset: This delayed tax relief means that equity-settled share-based payment schemes give rise to a
deferred tax asset (DTD).
 SBP Carrying Amount Nil
Less Tax Base (x)
x Tax % x
DT Asset x
IMPORTANT: If the future tax deduction exceeds the accumulated expense, this indicates that the deduction relates
to both an expense and equity. Therefore, the DT must be recognised partly in SPL and Equity.

DT - Leases

For leases you recognise both a ROU asset and a lease liability unless the lease is short-term or of minimal value.

Some jurisdictions grant tax relief on the leased asset, whereas other grant it on the lease liability. Therefore,
Temporary differences may be created.

There are 2 types of DT:

▪ ROU Asset – Tax relief:

- Normally has no temp differences as the CA amount and tax base is the same, therefore NO DT Liability
- The tax base is usually the same as the carrying amount.

▪ DT Lease Liability – Tax relief (Bittern Example):

- ROU Asset: The tax base for the ROU asset is NIL as no tax relief is given, the CA is £10m so there is a TTD.
- Lease Liability: The tax base for the lease liability is Nil (CA - future tax relief ), however the CA is -£10m so
there is a DTD.
- Carrying Amount: The CA for both the ROU and the lease liability is £10m, therefore both a TTD & DTD
arises.
- Calculation: £10m x 30% = £3m
- Recognition: DR DT Asset £3m, CR DT Liability £3m.

DT – Unused Tax Loses

If an entity has unused tax losses to carry forward, a deferred tax asset should be recognised to the extent that it is
possible that future taxable profits will be available against which the losses will be offset.

Under IAS 12 (Income Taxes), unused tax losses refer to tax losses that have not been utilized to offset taxable profits
in the current period and can be carried forward to future periods to reduce taxable income. These unused tax losses
can potentially be recognized as deferred tax assets, provided that it is probable that future taxable profits will be
available against which the unused tax losses can be utilized.

Deferred Tax asset should be recognised if:

▪ Whether an entity has sufficient taxable temporary differences against which the unused tax losses can be
offset.

▪ Whether it is probable the entity will make taxable profits before the tax losses expire.

▪ IMPORTANT: If the exam Q. says that the entity has budgeted to return to profit in the foreseeable future
then you can show a DT asset. However, if the Q states that the entity is not expected to return to profit
soon then NO DT Asset should be recognised.
DT – Provision for Unrealised Profits (PURP) – GROUP -Q1 Exam

▪ Business Combination: Accounting for a business combination, such as the consolidation of a subsidiary, can
have several deferred tax implications.

Fair Value Adjustments - TTD:

▪ The assets & liabilities of the acquired subsidiary are consolidated at FV but the tax base derives from the
values in the subsidiary's individual Fin Stats. Therefore, a temporary difference is created, and DT must be
recognised in the consolidated Fin Stats.

▪ The DT recognised is treated as part of the net assets of the subsidiary at the acquisition date and, as a
result, affects the amount of goodwill recognised.

Goodwill:

▪ The goodwill itself does not give rise to deferred tax because IAS 12 specifically excludes it.

▪ The calculation of goodwill in the consolidated fin stats DOES NOT give rise to a TTD as the tax authorities
never recognise goodwill.

▪ It is therefore considered to be a permanent difference and no deferred tax arises.

PURP Adjustments:

▪ Profit made between group companies from sale of inventory are eliminated as a PURP adjustment at Year-
End.

▪ Therefore, any tax on the profit made will need to be eliminated which will give rise to a deferred tax asset.

▪ When goods are sold outside of the group in subsequent years the DT asset can be released.

▪ Removing Inventory Recognition: DR COS (SPL), CR Inventory (SFP)

▪ IMPORTANT: If the sub is the seller you would DR COS of sub, CR Inventory of the group to eliminate the
unrealised gain.
DT - Proforma
Carrying Amount Vs Tax Base

Liabilities are always shown as Negative numbers.

DT - Calculation Example:
Deferred Tax - Dive - Pg. 348

TTD DTD
NCA £ 12,000
Interest £ 1,000
Inventory -£ 500
Accrual -£ 1,000

£ 11,500

Tax rate 30%

£ 3,450

There is an overall TTD when all balances are added.

Therefore, there is a DT expense:
DR Tax Expense (SPL), CR DT Liability (SFP)

DT - Revaluation Example:
 ▪ Tax Base: The tax base is £100k - £50k = £50k

▪ Carrying Amount: £90k revaluation (from £60k CA to £90k) - £50k = £40k TTD

▪ DT Liability: £40k x 30% = £12k

▪ Before revaluation: the CA of the asset was £100k - £40k = £60k

▪ After revaluation: The CA is £90k, therefore £30k increase (£90k-£60k)

▪ OCI Tax Charge: £30k x 30% = £9k, therefore the DT liability is recorded as:

DR OCI £ 9,000
DR SPL (B) £ 3,000
CR DT Liability £ 12,000

▪ The revaluation reserve would be £30k - £9k = £21k

DT – Share-Based Payment (SBP) Example:

▪ The Tax Base is £300k, however the accumulated expense is £250k – this means that’s £50k relates to Equity.

▪ Therefore, you would allocate to Equity: £50k x 30% = £15k (CR Equity)

▪ The remaining DTA on £250k is allocated to the SPL: £250k x 30% = £75k (CR SPL)
DT – ROU Asset Example

▪ In this example, the tax jurisdiction gives capital allowances.

▪ Tax base is £4m and ROU asset is £4m, therefore there is no TTD and no DT to be recognised.

DT – Lease Liability Example

DT – Lease Liability Example

IMPORTANT: Always state “This transaction is not a business combination, and it affects neither accounting profit
nor taxable profit. However, equal amounts of deductible and taxable temporary differences are created.”
DT – Lease Liability Example
IMPORTANT: Always state “This transaction is not a business combination, and it affects neither accounting profit
nor taxable profit. However, equal amounts of deductible and taxable temporary differences are created.”

Unused Tax Losses

 ▪ Recognition: DR DT Asset £70k, CR SPL £700k

DT - Revaluation/Fair Value
 ▪ Goodwill: The DT on the uplift deducted from the net assets increases the Goodwill balance.

▪ DT Liability: The uplift gives rise to a DT Liability of £1.5k.

▪ Therefore, you will: DR Goodwill, CR DT Liability

DT - PURP
PURP:

▪ Profit: £250 x 40% = £100k

▪ PURP: £100k x 25% = £25k,
▪ Recognition: DR COS £25k (Sub), CR Inventory £25k (Group)

DT Asset:

▪ Carrying amount: The CA of Asset is £25k lower than the tax base, therefore creating a DT Asset.
▪ DT Asset: £25k x 20% = £5k
▪ This gives a £5k DT asset in the consolidated fin stats and also reduces the tax expense in the consol SPL.
▪ Recognition: DR DT Asset (SFP), CR Tax Expense (SPL)
▪ When the parent sales on the inventory and the profit is realised, there will be no tax expense on the profit
as it’s been paid already but the DT asset will be recognised in the SPL.
Chapter 14 – Segment Reporting – QB.Klancet

Segment Reporting – Applies to ALL PUBLIC LISTED COMPANIES:

Large corporations such as Virgin and M&S have multiple products and services/geographical areas within their
business. Segment reporting aims to separately show Revenue/Expenses & profits for each segment.

In order to this they must identify operating segments which reflects internal management reports. Certain entities
need to disclose information about each of its operating segments. Therefore, Management must identify a single set
of components on which to base the segmental disclosures.

Segment Report - Users:

▪ Management Perspective: Segment reporting enables for users of fin stats (Investors etc.) to make
informed decisions about the business by looking at the business performance from management
perspective.

▪ Future Performance: Different parts of the business will have different growth opportunities. Segmental
info may help investors to better predict future performance & future cash flows.

▪ Geographical disclosures: are useful for investors in multi-national businesses because each
country/location may face different risks (political risks) & growth rates.

Operating Segment (Reportable Segments):

Not every part of an entity is necessarily an operating segment or part of an operating segment:

▪ Corporate headquarters and other similar departments DO NOT earn revenue and are therefore not
operating segments.

▪ An entity’s pension plan is NOT an operating segment.

Operating Segment Criteria:

▪ Revenue & cost: The operating segment is a component of an entity which engages in business activities
and earns revenues and incur costs.

▪ Discrete Info: In addition, discrete financial information should be available for the segment.

▪ CODM: The results should be REGULARLY REVIEWED by the entity’s chief operating decision maker (CODM)
when making decisions about resource allocation to the segment and assessing its performance.

▪ Integral Part: If a function is an integral part of the business, it may be disclosed as a segment even if it
DOES NOT earn revenue.

Aggregation: You can aggregate two or more segments into one single operating segment if they have similar
ECONOMIC CHARATERISTICS:

▪ Similar products & services (cars, phones)

▪ Similar Price
▪ Similar Production process
▪ Types of Customers
▪ Distribution Methods
Quantitative Thresholds:

These thresholds determine what will be disclosed & not disclosed.

An operating segment should be reported if it meets one of the following quantitative thresholds:

▪ Segment Revenue: is 10% or more of the total revenue (Internal & External revenue combined).

▪ Segment Profit & Loss: Reported profit or loss for segment is 10% or more of:

- Total profits of all segments in profit, and

- Total losses of all segments in loss.

▪ Segment Assets: are 10% or more of total assets.

▪ External Revenue: If total segment revenue DOES NOT make up 75% of EXTERNAL REVENUE, then
additional segments will need to be disclosed until the 75% threshold is met.

Disclosure:

IFRS 8 requires disclosure of the following:

▪ Factors used to identify reportable segments.

▪ The types of products & services sold by each reportable segment.

Profit or Loss:

For each reportable segment an entity should report:

▪ A measure of profit or loss

▪ A measure of total assets.
▪ Other information should be disclosed if REGULARLY PROVIDED to the CODM.

Segment Reports Limitations:

Segment reporting requires JUDGEMENT and companies tend not to disclose detailed info to restrict their
competitors from having access to the info.

1. Over Aggregate: Many entities over-aggregate segments, which reduces the level of detail reported to
stakeholders.

2. Distorted Info: Trading between segments may distort the results of each operating segment, particularly if
the transactions DO NOT occur at fair value.

3. Comparison Limitation: Segments should reflect the way in which the entity is managed. This means that
segments info is not useful for comparing the performance of different entities.

4. Management Perspective: The process is based on management perspective. Some users lack trust in
management's intentions. Management may attempt to conceal loss-making areas of the business within a
larger, profitable reportable segment.

5. Common costs: may be allocated to different segments in any way the entity chooses (random basis). This
may prevent direct comparison.
Operating Segment/Aggregation Example

IMPORTANT: No right or wrong answer here – Just state the relevant recognition criteria and apply to information
given.
Identifying Reportable Segments
▪ 10% of Total Revenue: Continents over £1m x 10% = £100,000 (External £612k + Internal £388k = £1m) –
Europe, Asia, North Ameria

▪ 10% of profit-making segments: 10% x (£98k+£47k+£121k+£12k) = £27.8m

▪ 10% of loss-making segments: 10% x (£26k +£15k) = £4.1m

▪ The greatest value between the profit-making and loss-making companies is the £27.8m, therefore this is
the threshold to be used.

▪ All companies that make a profit or loss greater than £27.m are to be reported (Europe, Asia, North
America)

▪ 10% of Total Assets: 10% x £10m = £1m – All segments which have assets over £1m are to be reported
(Europe & North America)

▪ Therefore, Europe, Asia & North America are reportable as it meets one of the threshold criteria, whereas
Middle East, Central America and South America are not.

▪ We must now check if the Europe, Asia & North America combined have an external revenue of 75%.

▪ 75% External Revenue: £140m + £150m + £195m = 485/612 = 79% - We can confirm that they meet the
75% threshold.

▪ Therefore, the results for Europe, Asia and North America will be shown separately while the other
continents will be aggregated together and called ‘Other’.
Chapter 15 – Related Parties IAS 24

Related Party Transaction: is defined as the transfer of resources, services or obligations between related parties,
REGARDLESS of whether a price is charged.

A person/close member of that person’s family is a related party if:

▪ Control or Joint Control: Has control or joint control over the reporting entity.

▪ Significant Influence: Has significant influence over the reporting entity.

▪ Key Management Personnel: Is a member of the key management personnel of the reporting entity or
parent of the reporting entity.

Close family members are related parties such as:

▪ A persons Children
▪ Persons Spouse
▪ Dependents of the person or spouse

An entity is related to a reporting entity if any of the following conditions applies:

1. Same Group: The entity & reporting entity are members of the same group (which means that each parent,
subsidiary, and fellow subsidiary is related to the others).

2. Associates or Joint Ventures: 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).

3. Joint Ventures of the Same 3rd Party: Both entities are joint ventures of the same 3rd party.

4. Associates of the Same 3rd Party: One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.

5. Post-employment Benefit Plans: The entity is a post-employment benefit plan for the benefit of employees
of either the reporting entity or an entity related to the reporting entity.

6. Controlled by a Related Person: The entity is controlled or jointly controlled by a person identified in point
1.
7. Significant Influence or Control by Related Person: A person identified in point 1(b)(i) has significant
influence over the entity or is a member of the key management personnel of the entity (or of a parent of
the entity).

Not a Related Party Consideration:

▪ Common Director: Two entities that share the same Director or member of key management is not
automatically a RP.

▪ Two joint venturers. Are not necessarily a related party just because they share joint control of a joint
venture.

▪ Significant Trade: A customer or supplier with significant volume of business with the entity is not a RP.

▪ Substance over form should be applied when deciding if two parties are related.
Joint Venture: Investors have equal control (50% SH).

Associate: Investors have significant influence (20% SH).

Group Structure – Related Party (RP)

Identify the RP for each entity:

▪ Entity A: A is a parent, B and C are subsidiaries therefore RP of A. C has significant influence over D –
because D is part of C’s group, D is also a RP of A.

▪ Entity B: A and C part of the same group therefore a RP. D is an associate of C, therefor a RP.

▪ Entity C: A and B are RP of C as they are in the same group. C has significant influence over D, therefore are
RP.

▪ Entity D: D is a RP of C because C has significant influence over D. C is the same group as A & B, therefore is
also a RP of D.

Individual Shareholdings – Related Party (RP)

In this question you ae not considering Mr. P as he is not an entity and doesn’t need to make any RP disclosures.

We are only considering whether the entity’s are related party’s based on Mr. P’s control/influence.

▪ Situation A: Mr. P is a RP of both entity A & B as he has control over A and sig influence over B.

▪ Situation B: Mr. P is a RP of both entity A & B as he has sig influence over both. However, A & B are NOT
related party’s as Mr. P doesn’t control any of them.

Key Management– Related Party (RP)

 ▪ Mr. P is a related party to all three entities: A, B, & C.

▪ Entity A:
- B is a RP as Mr. P controls A & has sig control in B
- C is a RP as Mr. P controls A & is key mang. in parent (entity B) that controls C

▪ Entity B:
- A is a RP as Mr. P controls A & has sig control in B
- C is a RP as B controls C.

▪ Entity C:
- A & B is a RP of C as Mr. P controls A and is key mang. in B which controls C.

Key Management– Related Party (RP)

Parents & Subs: The relationships between parents and subsidiaries should always be disclosed.

Key Management: All compensation for Directors & senior management paid should be disclosed (Pension, SBP,
termination & short-term benefits).

Disclosures of Transactions:

Transactions between RP should be disclosed:

▪ Nature: The nature of the related party relationship

▪ Description: A description of the transactions
▪ Amount: The amounts of the transactions
▪ O/S Balance: The amounts & details of any outstanding balances
▪ Receivables: Allowances for receivables in respect of the outstanding balances
▪ Irrecoverable debt expense of outstanding balances should be disclosed.
▪ Note: Disclosure should be made whether or not a price was charged.

IMPORTANT: The disclosure must state that transactions were made on an arm’s length basis.
Chapter 16 – Adopting New accounting Standards.

Chapter 17 – Small & Medium Entities

IFRS for small and medium-sized entities (the SMEs Standard) has been issued for use by entities that have no public
accountability. The SMEs Standard reduces the burden of producing information that is not likely to be of interest to
current or potential investors in a small or medium sized entity.

SME – Benefits (Reduced Disclosure):

▪ The SMEs Standard is updated every 3 years.

▪ In contrast, companies that use full IFRS & IAS Standards have to incur the time cost of ensuring compliance
with regular updates.

▪ Full IFRS &IAS Standards requires compliance with 3,000 disclosure points.

▪ However, the SMEs Standard only comprises of 300 disclosure points.

▪ This significantly reduces the time spent and costs incurred in producing financial statements.

▪ SME standards are less complex and simplified (clear & easy to follow) – All standards are found within one
document.
SME - Problems:

There are problems associated with having a set of reporting standards for small & medium entities:

▪ It can be difficult to define a small or medium entity.

▪ If a company ceases to qualify as a small or medium entity, then there will be a cost and time burden in
order to comply with full IFRS & IAS Standards.

▪ There may be comparability problems if one company applies full IFRS and IAS Standards whilst another
applies the SMEs Standard.

SME – Omissions:

The following are omitted from the SME Standard:

▪ Earnings per share (IAS 33)

▪ Interim reporting (IAS 34)
▪ Segmental reporting (IFRS 8)
▪ Assets held for sale (IFRS 5).

Omission are usually because of the fact that the cost of preparing & reporting information exceeds the expected
benefits which users would expect to derive from that information.

Accounting Policy NOT allowed for companies that apply SME Standards:

▪ Goodwill:

- Is always recognised as the difference between the cost of the business combination and the fair value of
the net assets acquired.

- No Fair Value NCI Method: This means that the Fair Value method for measuring the NCI is not available.

▪ Intangible assets:

- ONLY Cost Model: IA must be accounted for at cost less accum. amortisation & impairment.

- The revaluation model is not permitted for intangible assets.

▪ Investment Property:

- ONLY Revaluation Model: Investment property is remeasured to fair value at the year end with gains or
losses recorded in SPL.

- The cost model can only be used if fair value cannot be measured reliably or without undue cost or effort.
SME – Key Simplifications:

▪ Borrowing Cost are always expensed to SPL.

▪ Research & Development cost are always expensed to SPL.

▪ Depreciation & Amortisation estimates are NOT reviewed annually.

▪ Intangible Assets have a useful life of 10 years – It can be more than 10 years if there is a reliable estimate.

▪ Goodwill is amortised over it’s UEL, if this cannot be reliably established then a best estimate of no more
than 10 years should be used.

▪ For Disposal of Sub cumulative exchange rate differences in OCI are not recognised in SPL.

▪ Associates & Joint Ventures can be held at cost or FV as well as Equity accounting for Group consols.

▪ Debt Instruments: are measured at amortised cost.

▪ Investment in Shares: are recognised at FV with changes in FV recorded in SPL. If FV cannot be measured
reliably then the shares are held at cost less impairment.

Chapter 18 – Group Accounting (Basic Groups)

Q1: Prepare Extracts of the Fin Stats – This means preparing small parts of the Group accounts and explaining them
(25 marks).

Subsidiary:

▪ A subsidiary is an entity that is controlled by another entity (parent).

▪ An entity has control over an entity when it has > 50% of the voting rights.

▪ The parent company must prepare consolidated Fin Stats if it has control over one or more subsidiaries.

Associate:

▪ Investors have significant influence if they hold 20% or more of ordinary shares.

Control:

▪ This is the power to govern the financial and operating policies of an entity so as to obtain benefit from its
activities.

▪ Control is usually achieved by the purchase of more than 50% of ordinary share capital. (Luna/Eclip Co
example).

It is possible to own less than 50% of the ordinary share capital of another entity and still exercise control over it:

▪ Exercise of the majority of voting rights in an investee

 ▪ Contractual arrangements between the investor and other parties

▪ Holding less than 50% of the voting shares, with all other equity interests held by a numerically large,
dispersed and unconnected group.

▪ Holding potential voting rights (such as convertible loans) that are currently capable of being exercised.

▪ The nature of the investor's relationship with other parties that may enable that investor to exercise control
over an investee.

A business combination - IFRS 3:

▪ In accordance with IFRS 3 Business Combinations, is a transaction in which the acquirer obtains control over
one or more businesses. (Luna/Eclip Co example).

▪ A Business Combinations must have processes that are able to convert acquired inputs into outputs.

▪ Inputs: are economic resources that can create outputs once processes are applied to them.

▪ Output: result from inputs and the processes applied to inputs. Outputs include goods, services and income.

▪ To meet the definition of a business, there must be inputs and processes that, when applied to acquired
inputs, are capable of producing outputs.

Concentration Test – To determine NOT A Business Combination:

▪ Is used to determine whether an acquired set of assets is NOT a business.

▪ If the fair value of the total asset is CONCENTRATED in a single asset or group of asset then NOT a Business
Combo.

▪ If the concentration test is not met then a more detailed assessment is required to ascertain if a business has
been acquired.

SFP Consolidation – (For Business Combination)

Fair Value of Identifiable Assets & Liabilities:

At Acquisition Date Identifiable Assets & Liabilities must be consolidated at Fair Value. An asset is identifiable if it
can be disposed of separately:

▪ Land: Should be recognised at FV

▪ Intangible Assets: should be recognised at FV
▪ Subs Brand: Internally generated brand from the sub should be recognised at FV
▪ Goodwill: is not an identifiable asset as it cannot be disposed of separately from the rest of the business.
▪ Contingent Liabilities: should be recognised at FV

Goodwill:

▪ Goodwill is recognised on a Business Combination

 ▪ Goodwill is calculated using the FV of consideration paid, NCI @ Acquisition and the FV of identifiable net
assets & liabilities.

Purchase Consideration:

▪ Consideration is measured at FV
▪ Contingent consideration: is included even if payment is not deemed probable.
▪ Acquisition costs: are excluded from the calculation of purchase consideration.

Replacement share-based payment schemes:

Should be split in two parts:

▪ At Acquisition: The SBP offered at acquisition for the purchase consideration e.g. £400k.

▪ Post Acquisition: The Replacement SBP balance above the value at acq should be expensed to SPL e.g. 500k-
400k = £100k SPL

Goodwill Calculation Method (NCI: FV vs. Prop) :

IMPORTANT: The method used to measure the NCI should be decided on a transaction-by-transaction basis.

Negative Goodwill:

If the share of net assets acquired exceeds the consideration transferred, then a gain on bargain purchase ('negative
goodwill') arises on acquisition.

Negative goodwill is rare and may suggest that errors were made when determining the fair value of the
consideration transferred and the net assets acquired.

▪ Errors: The figures should be reviewed for accuracy.

▪ No Errors: If no errors have been made, the negative goodwill is credited immediately to SPL.

Measurement Period:

▪ Allows you to recalculate Goodwill for a more accurate value, up to 12 months after the acquisition date.
Goodwill Impairment (Illustration 4):

There is impairment if Recoverable Amount is more than the Carrying Amount.

▪ FV Method: If the NCI component is measured at FV. Then Goodwill can be added together with the other
net assets of the sub and compared to the recoverable amount of the subs net assets on a like-for-like basis.

▪ Calculation:
- Goodwill: £8m
- Carrying amount: £8m Goodwill + £60 Net Assets = £68m
- Impairment: £68m - £64 RA = £4m x 80% = £3.2m
- NCI: £0.8m is attributable to NCI (£4m-£3.2m)
- Note: For the FV method both Group & NCI was recognised in the Fin Stats, therefore Goodwill
impairment is split between Group & NCI.

▪ Proportionate Method:

- Total Notional Goodwill: Goodwill must be grossed up to include goodwill attributable to the NCI prior to
conducting the impairment review.

▪ Calculation:
- Goodwill: 20/80 x £8m= £2 > (£8m+£2m) = £10
- Carrying amount: £10m Goodwill + £60 Net Assets = £70m
- Impairment: £70m - £64 RA = £6m x 80% = £4.8m
- Goodwill Reduction: £3.2m (£8m- £4.8m)
- Note: For the prop method only Group’s Goodwill was recognised in the Fin Stats, therefore only Group
Goodwill impairment is recognised.

Exemptions from Consolidation:

Valid Reasons:
Invalid Reasons:
Joint Ventures

Joint arrangements may take the form of either:

The key distinction between the two forms is based upon the parties’ rights and obligations under the joint
arrangement.

▪ Joint operations:
- The parties that have joint control have rights to the assets & obligations for the liabilities.
- Two entities coming together to carry out a specific project
- Revenue & expenses, profit are split between the entities.

▪ Joint ventures (unanimous consent):

- The parties have joint control of the arrangement and have rights to the net assets of the arrangement.
- Both parties have UNANIMOUS consent!!
- This will normally be established in the form of a separate entity to conduct the joint venture activities.
- Neither party has direct rights to assets & obligations but only interest in the net assets based on % share
e.g. A - 55%, B -45%.

Example:
Control – An Investor Controls Investee Example
Indirect Holdings Example

▪ H has control over both S and T – it’s not based on the percentage share.
▪ Although the % is less than 50% (75%x60% = 45%), it still has idirect control

NOT a Business Combination Example

A Business Combination Example
Acquisition Accounting (Group Consolidation):

▪ The acquirer is the entity that has assumed control over another entity.

▪ In a business combination, it is normally clear which entity has assumed control

Determine the Acquirer:

Identify The Acquirer (Purchasing a business with Parents share)

Identifiable Assets – Fair Value:
Replacement of Share-Based Payment/ Contingent Consideration:
 ▪ Deferred Cash
▪ Share Consideration
▪ Contingent Consideration
▪ Replacement of Share-Based Payment

Goodwill Impairment – Fair Value vs. Prop Method (Notional Goodwill):

▪ Goodwill Impairment:
- You must first work out the Carrying Amount: Goodwill (acq date) + net assets (report date)
Group SFP – Consideration & Goodwill Impairment Example
▪ NCI @ Acquisition: £8m-£6m = £2m
Joint Operation Example
IFRS 12 – Disclosure of Interests in Other Entities

Chapter 19 – Change in Group Structure

Mid-Year Acquisitions (Group):

▪ A parent entity consolidates a subsidiary from the date that it achieves control.

▪ Pro-rate the results of the subsidiary so that only the post-acquisition income and expenses are
consolidated into the group statement of profit or loss.

Step Acquisition:

A step acquisition occurs when the parent company acquires control over the subsidiary in stages.

No Control to Control (Assoc to Sub:

In this situation A may own 10% or 30% of B. It then buys an additional 50%, taking it over the ‘control threshold’.

Treatment:

The accounting treatment is to treat the original investment as being disposed of at fair value and reacquired at fair
value.

The fair value on re-acquisition plus the extra consideration paid for the additional new shares bought, becomes the
cost of the increased investment.

Steps:

1. Re-measure original investment to fair value and recognise gain to SPL or OCI (depending on designation).

2. Calculate goodwill and NCI (FV or Prop).

IMPORTANT:

▪ Gains or Losses or remeasurement in OCI cannot be reclassified to SPL.

▪ Additional purchase of shares after control has been acquired e.g. 60% to 70% is considered a transaction
between equity holders. Goodwill is NOT calculated.

Calculation to Adjust Goodwill:

Control to Control (80% to 85%):

For example, if the parent holds 80% of the shares in a subsidiary and buys 5% more, then the relationship remains
one of a parent and subsidiary. However, the NCI holding has decreased from 20% to 15%.

The accounting treatment of the above situation is as follows:

▪ The NCI within equity decreases

▪ The difference between the consideration paid for the extra shares and the decrease in the NCI is
accounted for within equity (normally, in 'other components of equity').

Calculation to Adjust NCI:

Disposals:

Disposal - Loss of Control:

If the sale of shares causes control over a subsidiary to be lost, then the treatment is as follows:

1. Consolidate the incomes and expenses of the subsidiary up until the disposal date

2. On disposal of the subsidiary, derecognise its assets, liabilities, goodwill and non-controlling interest and
calculate a profit or loss on disposal

3. Recognise any remaining investment in the shares of the former subsidiary at fair value and subsequently
account for this under the relevant accounting standard.

Disposal – From Control to Associate (20%-50%):

▪ A holding of 20–50% of the shares would probably mean that the remaining investment is an associate and
should be accounted for using the equity method.

▪ Equity Method:
- Group SPL: Showing one line in the SPL for income from Associate (PAT)
- Group SFP: Non-current assets – Investment in Assoc

Fin Instruments (<20%):

▪ A holding of less than 20% of the shares would mean that the remaining investment should be accounted for
under IFRS 9 Financial Instruments.
The following template for calculating profit or Loss on disposal:

Disposal - Reduction in Shares/No control Loss

From the perspective of the group accounts, a sale of shares which results in the parent retaining control over the
subsidiary is simply a transaction between shareholders. The subsidiary will still be consolidated in the group
financial statements. However, the NCI has risen from 20% to 25%.

The treatment would be as follows:

1. The NCI within equity is increased.

2. The difference between the proceeds received and the increase in the NCI is accounted within equity (OCE).

3. Note that no profit or loss arises on the sale of the shares.

4. Goodwill is NOT recalculated.

The following template for calculating Adj to NCI:

IMPORTANT:

▪ The increase in the NCI will be the share of the net assets and goodwill of the subsidiary at the date of
disposal.

▪ Only the Fair Value method is used.

Mid-Year Acquisitions – Example:
Step Acquisition Example (No control to Control)
▪ Tom’s Net assets: £100k share capital + £100k Share Premium
Disposal - Control is Loss Example
Disposal - Control is Loss (Sub 70% to 0%)

Disposal - Control is Loss (Discontinued Operations)

Disposal - Control is Loss (Sub 70% to Assoc 35%) - Kathmandu Part C
Disposal - Reduction in Shares/No control Loss
▪ Increase in NCI: NCI% Increase x (Net Assets & Goodwill) – This represents the total asset of Sub and
NCI increased share of the total asset.

▪ Overall, we have a profit, as the 5% NCI sold was only worth £4.5k, yet we received £5k for it,
therefore a gain of £500.
Disposal – Exam Style Question
Chapter 20 – Group Foreign Exchange

Group FX Translation – SPL & SFP

 ▪ Share Capital: Notice that share capital included is only for parent and requires no translation.

Goodwill – FX Translation

▪ Notice that the movement of Subs net assets at acquisition date and reporting date is equal to profit made
in the year.
Goodwill – FX Gain or Loss

▪ Remember the closing rate for last year is the current year opening rate.
Chapter 21 – Group Statement of Cash Flow

▪ Cash Equivalents: short-term, highly liquid investments that are readily convertible to known amounts of
cash and are subject to an insignificant risk of changes in value.

▪ Acquisitions:

- In the SCF we must record the actual cash flow for the purchase of the subsidiary net of any cash held by
the subsidiary that is now controlled by the group.

- For example, £500k consideration - £25k cash held in sub = £475k

▪ Disposals:

- The SCF will show the cash received from the sale of the subsidiary, net of any cash held by the subsidiary
that the group has lost control over.

- For example, £800k Sub disposal - £70k cash held in sub = £730k

▪ Assets & liabilities (PPE, Tax Liability):

- The cash movement on each item of Assets & Liabilities of the disposed subsidiary must be calculated
during the year.
▪ Cash paid to NCI:
- When a subsidiary that is not wholly owned pays a dividend, some of that dividend is paid outside of the
group to the NCI.

- Dividends paid to NCI should be disclosed separately in the statement of cash flows.

- To calculate the dividend paid, reconcile the NCI in the SFP from the opening to the closing balance.

- You can use a T-account or a schedule to do this.

Cash Equivalents – Group SFP Example
Sub Acquisitions – Group SFP Example

Sub Acquisitions - PPE

Sub Disposal Assets & Liabilities - Group SFP
Dividend Paid to NCI
Associates: Dividend Received, Loans – Group SFP
Chapter 22 – Analysis & Interpretation (Section B)

▪ Performance Ratio: ROCE, profit margin

▪ Liquidity Ratio: Current and acid test ratio
▪ Efficiency: Asset turnover, Inventory days, receivable days, payable days
▪ Solvency Ratio: gearing ratio, interest cover ๏ Investor – EPS, PE ratio, dividend cover

Profitability Ratios:

▪ Gross Profit Margin: expresses a company’s gross profit as a percentage of its sales. This means profit made
from Sales.

Calculated: GPM = Gross profit ÷ Sales × 100%

▪ Net Profit Margin: similar to Gross profit Margin. However, using Profit before tax (some use profit after
tax).

Calculated: NPM = Net Profit ÷ Sales × 100%

▪ Return on Capital Employed (ROCE: The return a company gets back from funds invested – the higher the
return the better the comp is doing. This is ratio is best used to compare different companies. For example,
you may be comparing two companies that are 2 different sizes and have different profit structures therefore
using GPM may not be suitable.

Calculated: Net Profit ÷ Capital Employed × 100%

(Net profit is also profit from operations after removing Admin cost etc.)

Capital Employed is calculated as either:

1. Total Assets less current liabilities

2. Total Equity plus long-term debt.

▪ Asset Turnover/Efficiency: This ratio measures the efficiency with which a company's assets are used to
generate sales revenue.

Calculated: Asset turnover = Sales ÷ Capital Employed

Important: Asset Turnover is expressed as a number: 5 times instead of £5

Liquidity Ratios:

▪ Current Ratio/Working Capital: The purpose of the current ratio is to measure a company's ability to meet
its short-term financial obligations out of its current assets. The current ratio is usually expressed as an
actual ratio (e.g. 1:1 – This means for every £1 of asset, there is £1 of liability.

Calculated: Current ratio = Current assets ÷ Current liabilities.

Note: for most businesses a ratio of 3 is considered healthy or compare to industry average. The higher the
number, the better.

▪ Quick Ratio/Acid Test: Measures the ability of a company to pay its current liabilities. In many cases, a
company's inventories cannot be converted into cash at short notice. Therefore the quick assets ratio
provides a more severe test of liquidity by omitting inventories from the calculation (removes inventory).

Calculated: Quick assets ratio = Current assets - inventories ÷ Current liabilities

Note: The higher the number, the better – this means the company doesn’t have a liquidity problem.

Efficiency Ratios:

▪ Trade receivables (collection) days: The trade receivables collection period measures the average number of
days which elapse between making a credit sale and receiving payment from the customer.

Calculated: TRD = Trade receivables ÷ Credit sales × 365

Note: If the question doesn’t state the credit sales, then you can use total sales instead. If receivable days
are 30, this means that it takes the company 30 days to recover debts from its customers. This ca be
compared to the credit terms offered to customers to determine how successful implementation of the
terms are.

▪ Trade payable (payment) days: The trade payables payment period measures the average number of days
which elapse between the date of a credit purchase and the date on which payment is made to the supplier.

Calculated: TPD = Trade Payables ÷ Credit purchases × 365.

Note: If the question doesn’t state the credit sales, then you can use total sales instead.

▪ Inventory holding period: The inventory holding period measures the average number of days it takes a
business to sell a product.

Calculated: Inventory holding period (Days) = Inventory ÷ Cost of sales × 365

Investment Ratios:

▪ Gearing Ratio: measures the extent to which a company's long-term funds have been provided by lenders
(Debt to Equity ratio). The higher the gearing ratio, the riskier it is to investors/finance providers as the comp
has greater debt and a risk of default.

Calculated using either two methods:

1. Ratio: Debt ÷ Equity = n:n

2. Percentage: Debt ÷ (Debt + Equity) x 100

For example if a company had a debt of £900 and the equity was £300 that would be a gearing ratio of 3:1. To
calculate as a % you would do £900/£1200 – basically adding the ratio 3+1 = 4, therefore 3/4 = 0.75 x100 = 75%.

▪ Interest Cover: Measures the number of times a company can afford to pay the current level interest out of
the current level of profit. The higher the ratio, the better the comp can cover interest. We would expect a
ratio of at least 2 times.

Calculated: Operating Profit ÷ Finance Cost = n times

REMEMBER: Finance cost is the interest paid in the SPL and not the principal loan in the SFP.

▪ Dividend Cover: Similar to the interest cover – measures a comp capability to pay dividends to shareholders
out of profits. The higher the ratio, the better the comp can cover dividends. We would expect a ratio of at
least 2 times.

Calculated: Net Profit ÷ Dividend = n times

Equity vs. Debt - Substance over form

Earnings Per Share Example

Calculate: Profit / Shares = Profit per share

Earnings Per Share - Issues Example
Impact of Policies and Estimates
Usefulness of Cash Flow

There are a number of reasons why it is useful for stakeholder analysis:

▪ Profits can be manipulated through the use of judgement or choice of a particular accounting policy whereas
cash flows are objective and verifiable.

▪ Cash generated from operations is a useful indication of the quality of the profits generated by a business.
Good quality profits will generate cash.

▪ Statements of cash flows provide valuable information to stakeholders on the financial adaptability of an
entity.

▪ Cash flow information has some predictive value. It may assist stakeholders in making judgements about the
amount, timing and certainty of future cash flows.
Cashflow Analysis - Example
Additional Performance Measures (APM):

Users of financial statements are demanding more information. In response, many entities present additional
performance measures (APMs) in their published statements, such as:

▪ EBIT: Earnings before interest and tax

▪ EBITDA: Earnings before interest, tax, depreciation and amortisation

▪ Net financial debt: gross debt less cash and cash equivalents and other financial assets

▪ Free cash flow: cash flows from operating activities less capital expenditure

Benefits:

▪ Helping users of Fin Stats to evaluate an entity through the eyes of management

▪ Enabling comparison between entities in the same sector or industry.

▪ Stripping out elements that are not relevant to current or future year operating performance.

Drawbacks:

Presenting APMs in financial statements can create problems:

▪ An entity might calculate an APM in a different way year-on-year.

▪ Two entities might calculate the same APM in a different way

▪ Entities often provide little information about how an APM is calculated or how it reconciles with the figures
presented in the Fin Stats.

▪ APMs might be selected and calculated so as to present an overly optimistic picture of an entity’s
performance.

▪ Too much information can be confusing to users of the financial statements.

▪ Giving an APM undue prominence may mislead users of the financial statements into believing it is a
requirement of IFRS Standards.
Additional Performance Measures (APM) - Example:
Tech Companies (Facebook, Google, Amazon)

There is growing concern that Fin Statsproduced under IFRS Standards (as well as other national accounting
standards) do not produce useful information with regards to tech companies (such as Amazon, Google, Facebook
and Apple).

Tech Companies – SFP

The carrying amounts of net assets in the SFP for a tech company tends to be significantly lower than its market
capitalisation (share price multiplied by number of shares in issue). Tech company financial statements underreport a
significant amount of ‘value’.

Brands: One key reason is that tech companies have powerful and valuable brands. In accordance with IAS 38
Intangible Assets, internally generated brands are not recognised on the SFP.

Assets: Another reason is that operating assets used by many tech companies are not owned or leased by the
company itself (such as the music available on Spotify, or the cars available to ride through the Uber app). Tech
companies benefit from these assets but the assets do not meet the criteria for recognition in the SFP because the
assets are controlled by other parties (such as record labels, or taxi drivers).

Intangible Assets: A further reason is that many intangible assets developed and used by tech companies appreciate
in value as they are used even though accounting standards may require them to be depreciated or amortised.

For example, each new user on a social media platform increases the benefits of the platform for existing users as
well as increasing the advertising fees that the platform owner can charge. Although there will be some incremental
operating costs associated with new users (in relation to help, support and regulation of online behaviour), the
growth is mainly driven by the assets already in place.

Tech Companies – SPL

Many tech companies, such as Uber and Twitter, are valued at billions of dollars even though they have historically
made losses. When assessing economic performance, it would seem that investors increasingly look beyond the SPL.

Tech companies tend to incur high costs in the initial years after incorporation. However, once these costs are
incurred, the further costs required to expand are lower in comparison (for example, companies that offer online
services can expand by adding to server capacity, rather than by acquiring new premises). As such successful tech
companies often report losses for many years but then achieve high margins once established as a market leader.
Therefore, at all stages in the lifecycle of a tech company, the SFP does not effectively match the revenues earned in
the current period with the costs incurred to earn those revenues.

This is not to argue that the SFP is worthless to the analysis of performance. Investors are certainly interested in the
revenue generated by a tech company – after all, this is a good indicator or growth and market share.

Furthermore, the share price of many tech companies rises significantly in the first period when a profit is recorded,
indicating that markets attach some importance to this performance measure. It may be that profit generation
indicates that the business has moved into a different stage in its lifecycle – away from a high risk, cap.

Remedies:

Due to the weaknesses identified above, tech companies may need to report other types of information to investors
and lenders.

Other information can be disclosed via:

▪ Integrated reporting

▪ Online real-time reporting of key performance indicators (such as membership numbers, monetary spend
per user etc.).

Non – Performance Measures:

Due to these limitations, analysis of non-financial performance measures is important. These measures are related to
entity performance but are not expressed in monetary units:

▪ Employee turnover
▪ Absentee rates
▪ Employee satisfaction
▪ Customer satisfaction
▪ Delivery times
▪ Brand awareness and brand loyalty.

Entities are not required to disclose non-financial performance measures. However, many choose to do so in their
annual reports or as part of their integrated report.

Tech Company Example

The impact of ethical, environmental and social factors

Many investors will not financially support entities that they perceive to be unethical or harmful to the environment.
Some investors will only invest in entities that meet the very highest ethical standards, even if this means achieving a
low overall return.

▪ Animal welfare: does the entity test its products on animals?

▪ Military Arms: does the entity, or any entities within its group, manufacture or supply weapons? Or fund
that type of activity?

▪ Emissions: Does the entity monitor and take steps to reduce harmful emissions, such as carbon dioxide?

▪ Energy: Is the entity committed to using renewable energy?

 ▪ Marketing: Does the entity use irresponsible or offensive marketing strategies?

▪ Remuneration: What is the gap between the highest and lowest paid employees?

▪ Supply chain management: are goods and services only purchased from entities that have high ethical
standards?

▪ Tax: does the entity use tax avoidance schemes?

▪ Transparency: Does the entity make enhanced disclosures about its social and environmental impact?

▪ Treatment of workers: are working conditions safe and humane? Investors will prioritise these issues to
different degrees.

Integrated Reporting:

▪ The primary purpose of an integrated report is to explain to providers of financial capital how an entity
creates value over time.

▪ An integrated report benefits all stakeholders interested in an entity’s ability to create value over time,
including employees, customers, suppliers, business partners, local communities, legislators, regulators, and
policymakers.

▪ To improve the quality of information available to providers of financial capital.

The 6 capitals of <IR>:

1. Financial Capital – representative of natural, human, social or manufactured capital; e.g. shares, bonds or
banknotes.

2. Manufactured Capital – e.g. tools, machines and buildings.

3. Intellectual capital – the value of a company or organisation's employee knowledge, business training and
any proprietary information that may provide the company with a competitive advantage.

4. Human capital – people's health, knowledge, skills and motivation.

5. Social capital – the institutions that help us maintain and develop human capital in partnership with others,
e.g. families, communities, businesses, trade unions, schools, and voluntary organisations.

6. Natural capital – the value that nature provides for us, the natural assets that society e.g. land, water,
energy and those factors that absorb, neutralise or recycle wastes and processes – e.g. climate regulation,
climate change, CO2 emissions.
Integrated Reporting Example
Not-for-profit entities (NFP)

A not-for-profit entity does not carry on its activities for the purposes of profit or gain to particular persons and does
not distribute its profits or assets to particular persons.

Objectives:

▪ The main objective of public sector organisations is to provide services to the general public.

▪ Their long-term aim is normally to break even, rather than to generate a surplus.

Most public sector organisations aim to provide value for money, which is usually analysed into the three E’s:

- Economy
- Efficiency
- Effectiveness.

Other not-for-profit entities include charities, clubs and societies whose objective is to carry out the activities for
which they were created.

Assessing Performance:

▪ It can be difficult to monitor and evaluate the success of a not-for-profit organisation as the focus is not on a
resultant profit as with a traditional business entity.

▪ The success of the organisation should be measured against the key indicators that reflect the visions &
values of the organisation. The strategic plan will identify the goals and the strategies that the organisation
needs to adopt to achieve these goals.

▪ The focus of analysis should be the measures of output, outcomes and their impact on what the charity is
trying to achieve.
Chapter 23 – Current Issues

The key issues to consider:

▪ Digital Assets
▪ Natural Disasters
▪ Climate Change
▪ Global Events
▪ Going Concern

Cryptocurrencies:

Cryptocurrencies are virtual currencies that provide the holder with various rights.

▪ No Gov Control: They are not issued by a central authority and so exist outside of governmental control.

▪ Restricted Use: Cryptocurrencies are not yet widely accepted.

▪ Extremely Volatile: The market value is extremely volatile, and some investors make high returns
through short-term trade.

▪ No Clear Acc. Treatment: The accounting treatment of cryptocurrency is not clear cut.

▪ Not Cash: Cryptocurrencies do not constitute ‘cash’ because they cannot be readily exchanged for goods
and services.

▪ Not Cash Equivalent: Moreover, they do not qualify as a ‘cash equivalent’ because they are subject to a
significant risk of a change in value.

Not Investment:

▪ Cryptocurrencies are not considered investments as there is NO contractual rights to receive cash.

Intangible Asset (IAS 38):

▪ Crypto would be closer to an non-monetary asset without physical substance.

▪ Fair Value: The fair value of cryptoc is volatile so a cost-based measure is unlikely to provide relevant
information.

▪ This means that the Revaluation model would be used however this may not be appropriate as Gains would
be recorded in OCI instead of SPL.

▪ Revaluation Model: Gains would be recorded in OCI, however many entities invest in crypto to benefit from
short-term changes in FV and gains or losses on short-term investments recorded in SPL.

▪ In an exam, we must refer to the conceptual framework:

- Define Asset & Liability

- Explain why Crypto is NOT a tangible asset but an intangible asset
- Explain how it would be considered under IAS 38
- Measurement: FV Model vs Rev Model
Initial Coin Offerings (Given Tokens in exchange for cash):

▪ Initial coin offerings (ICO) are a method of raising finance through cryptographic assets.
▪ Investors buy into the ICO and receive tokens in exchange.
▪ This is similar to the approach used in crowdfunding, with ICOs originally being used by tech entrepreneurs.

The tokens received might entitle the holder to cryptocurrencies, or they might be utility tokens (which provide users
with access to a product or service) or security tokens (which might provide an economic stake in an entity, or the
right to receive cash or assets in the future). Tokens can become valuable and can often be traded on a crypto
exchange.

ICO Problems:

▪ Extremely Volatile: The value of ICO will fluctuate

▪ Unregulated: ICOs are largely unregulated, allowing companies to bypass the regulated and lengthy process
of raising finance through a bank.

▪ Accounting Treatment: You would recognise an Asset therefore DR Asset, however where the Credit side
would need to be considered.

ICO – CR Possibilities:

▪ Financial liability: the reporting entity might be contractually obligated to deliver cash or another financial
asset to the holder of the tokens.

▪ Equity: the holder of the token issued through the ICO may be entitled to payments out of distributable
reserves. This token would qualify as equity if the reporting entity was under no contractual obligation to
deliver cash or another financial asset.

▪ Revenue: if the recipient was a customer and if a ‘contract’ exists (as per IFRS 15 Revenue from Contracts
with Customers).

▪ None of the above:

- Provisions: If there is a legal or constructive obligation to the subscriber then a provision should be
recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

- If an entity determines that no specific IFRS Standard applies to its issued tokens, then it should refer to
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

- And also refer to the Conceptual Framework in order to develop an appropriate accounting policy.

Natural Disasters:

A Reporting Company that has been through a natural disaster should consider:

▪ Impairment Review: A natural disaster is likely to trigger an impairment review. The impairment may arise
because individual assets are damaged, or because the economic consequences of the disaster trigger a
decline in customer demand. If PPE is destroyed, then it should be derecognised rather than impaired.

▪ Credit Risk: Whether money lent to debtors/lenders who have suffered a natural disaster can be recovered.
A natural disaster is likely to lead to a higher default rate, so some financial assets will become credit-
impaired.
 ▪ Inventory Damage: Natural disasters may lead to inventory damage. Alternatively, the economic
consequences of the disaster may mean that inventory must be sold at a reduced price. Some inventory may
need to be remeasured from its cost to its NRV.

Natural Disasters – Insurance Claim (Virtually Certain):

▪ Insurance claims can be a difficult accounting issue because of uncertainty regarding the nature of the claim,
the type of coverage provided by the insurance, and the timing and amount of any proceeds recoverable.

▪ Contingent Asset: The standard allows the recognition of an asset from an insurance claim if receipt is
virtually certain. There is a high threshold of probability and so recognition is unlikely. However, if an
insurance payout is deemed probable, then a contingent asset can be disclosed.

Natural Disaster - Additional Liabilities:

As a result of a natural disaster, an entity may decide to sell or terminate a line of business, or to save costs by
reducing employee headcount. A provision will be recognised if there is a present obligation from a past event and
an outflow of economic benefits is probable.

▪ For Provisions:

- Redundancy: An obligation only exists if a restructuring plan has been implemented or if a detailed plan
has been publicly announced.

- When measuring the provision, only the direct costs from the restructuring, such as employee
redundancies, should be included.

- Environmental Provision: Provisions may be required if there is an obligation to repair environmental

damage.

▪ Deferred Tax: A natural disaster may affect a company’s estimate of future taxable profits. Changes to
future taxable profit estimates may mean that deferred tax assets cannot be recognised.

▪ Going Concern:

- Economic Change: Natural disasters will lead to changes in the economic environment, as well as business
interruption and additional costs.

- Bank Covenants: It may be that bank loan covenants are breached.

- Break-Up Basis: If there are material uncertainties relating to going concern, then these must be
disclosed. If the going concern assumption is not appropriate, then the Fin Stats must be prepared on an
alternative basis and this fact must be disclosed.
Going Concern - Example
Conceptual Framework – IMPORTANT Example
Chapter 24 – UK GAAP

The Accounting Standards:

▪ FRS 102:
- Full Disclosure: Is used by most UK companies.

- It is based on IFRS for Small and Medium Entities (the SMEs Standard), although there are some
differences.
▪ FRS 101:
- Reduced Disclosure: Only for Subs that have a Group Parent reporting under IFRS
- Reduced Cost: This results in cost-savings and time-savings for entities without severely impacting the
quality of financial reporting.
▪ FRS 105:
- Reduced Disclosure: Only applicable for Micro-Entities
- Criteria: Turnover £632k, Gross Assets £316k, 10 or less employees.

IMPORTANT: Listed companies, banks and financial institutions MUST prepare accounts under IFRS standards.

FRS 105 – Micro-Entities:

An entity qualifies as a micro-entity if it satisfies two of the following three requirements:

▪ Turnover of not more than £632,000 a year

▪ Gross assets of not more than £316,000
▪ An average number of employees of 10 or less.

FRS 105 - Prohibits:

▪ Deferred Tax: Prohibits accounting for deferred tax.

▪ SBP (Equity): Prohibits accounting for equity-settled share-based payments prior to the issue of the shares.

▪ No Revaluation Model: Prohibits the revaluation model for PPE, intangible assets and investment
properties.

▪ Borrowing Cost: Prohibits the capitalisation of borrowing costs.

▪ Development Cost: Prohibits the capitalisation of development cost as an intangible asset.

▪ Fin Instruments: Simplifies the rules around classifying a Fin instrument as debt or equity.

▪ FX Currency: Removes the distinction between functional and presentation currencies.

▪ Less Disclosures: There are very few disclosure requirements for FRS 105
FRS 102 – Qualitative Characteristics

FRS 102 says that the objective of Fin Stats is to provide information about an entity’s financial position, performance
and cash flows, as well as the results of the stewardship of management. This information should be useful to a range
of users.

1. Materiality: information is material, and is therefore relevant, if its omission or misstatement could
influence the economic decisions of users.

2. Reliability: information is reliable if it is free from material error, bias, and offers a faithful representation of
the transactions an entity has entered into.

3. Relevance: information should be capable of influencing the economic decisions of users.

4. Substance over form: transactions should be accounted for in accordance with their economic substance
rather than their legal form.

5. Prudence: caution should be exercised when making judgements.

6. Completeness: the information included in the Fin Stats should be complete, within the bounds of cost and
materiality.

7. Comparability: users should be able to compare the Fin Stats of an entity through time, and they should also
be able to compare the financial statements of different entities.

8. Understandability: information should be understandable to users with a reasonable knowledge of business

and accounting.

9. Timeliness: information is more relevant if it is provided without undue delay.

10. Balance between benefit and cost: the benefits that information provides to users should exceed the cost of
providing it.

FRS 102 – Elements:

▪ Assets: a resource controlled by an entity from a past event from which future economic benefits are
expected to flow to the entity.

▪ Liabilities: a present obligation of an entity from a past event, the settlement of which is expected to result
in an outflow of economic benefits.

▪ Equity: the residual interest in the assets of the entity after deducting all its liabilities.

▪ Income: increases in economic benefits in the reporting period that result in an increase in equity (other
than contributions from equity investors).

▪ Expenses: decreases in economic benefits in the reporting period that result in a decrease in equity (other
than distributions to equity investors).
FRS 102 - Measurement:

FRS 102 says that there are two common measurement bases:

▪ Historical Cost: The amount of cash & cash equivalents paid to acquire an asset, or the amount of cash and
cash equivalents received in exchange for an obligation.

▪ Fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable
parties in an arm’s length transaction.

▪ Accruals basis: Fin Stats, other than statements of cash flow, are prepared using the accruals basis.

▪ Offsetting: An entity should not offset assets & liabilities unless required to or permitted by FRS 102.

True and fair override

▪ To comply with Companies Act, FRS 102 allows a 'true and fair override'.

▪ If compliance with FRS 102 is inconsistent with the requirement to give a true and fair view, the directors
must depart from FRS 102 to the extent necessary to give a true and fair view.

▪ Reasons for any such departure and its effect must be disclosed.

SFP - Presentation:

IFRS:

- Assets = Capital + Liabilities

- Therefore, Assets are presented at top of SFP and net assets are equal to Capital & Liabilities

FRS 102:

- Assets – Liabilities = Equity

- Under FRS 102 non-current assets & assets are summed up and deducted from Liabilities which gives the
Equity balance.

SPL:

- Under FRS 102 the SPL must be referred to as Income Statement.

Key differences between IFRS and FRS 102 (UKGAAP):

Changes in Accounting Policy (UKGAAP):

▪ A change from cost model to Fair value when a reliable estimate is unavailable is not a change in accounting
policy.

▪ Therefore, not applied retrospectively.

Revenue & Inventories (UKGAAPP):

Revenue:

- There is NO 5-step approach used for Revenue Recognition.

- Revenue on sale of goods to be recognised on transfer of risks & rewards.
- Revenue on sale of services to reflect performance of contract to date.

Inventory: FRS 102 ALLOWS the reversal of Inventory impairment.

PPE – Tangible Asset (UK GAAP):

Investment Property (UKGAAP):

Investment property must be carried at Fair Value under FRS 102, whereas IFRS gives an option between Fair Value
and revaluation model.

Agriculture (UKGAAP):

Choice between Fair Value & Revaluation Model:

▪ FRS 102 says that for biological assets, an entity can choose to use the cost model or the fair value model.

▪ Under the cost model, the asset is measured at cost less accumulated depreciation and impairment losses.

▪ The fair value model is consistent with IAS 41 Agriculture and requires biological assets to be measured using
a fair value model.
 ▪ This means that they are initially recorded at fair value less costs to sell and remeasured to FV less costs to
sell at each reporting date.

▪ Gains & losses recorded in the SPL>

Intangible Asset (UKGAAP):

- Grant: For FRS 102, an intangible asset acquired by way of a grant shall be recognised at its fair value on
the date that the grant is received or receivable.

- Intangible Assets have a useful life of 10 years – It can be more than 10 years if there is a reliable
estimate.
-

Leases (UKGAAP):

Lessee Accounting:

- FRS 102 requires the lessee to distinguish between finance leases and operating leases.

- Finance leases: an asset and liability is recognised at the LOWER of the asset’s FV and the PV of the
minimum lease payments. Depreciation on the asset and interest on the liability is charged to SPL.

- Operating leases: lease payments are recognised as an expense in profit or loss on a straight-line basis.

- This means that no liability is recognised in respect of operating leases in the Fin Stats of a lessee, even
though it meets the definition of a liability as outlined in FRS 102.

- IFRS 16 Leases requires lessees to recognise a lease liability and right-of-use asset in respect of all leases,
unless short-term or of low value.
Fin Instruments (UKGAAP):

- FRS102 has simplified approach to financial instruments.

- Simple debt instruments are measured at amortised cost.

- Complicated debt instruments are measured at FVTPL.

- Investments in shares are measured at FVTPL if their fair value can be reliably measured. Otherwise, they
are measured at cost less impairment.

- Loans issued or received are measured at cost less any impairment.

- There is NO FVTOCI measurement basis.

Earnings Per Share (UKGAAP):

Impairment Fin Instruments (UKGAAP):

- For FRS 102 no need to adopt an expected loss model for Fin Assets recognised at amortised cost & FVOCI.

- Impairment loss is only recognised if there is objective evidence of impairment (bankruptcy of credit
customer).
 - Calculation: Carrying Amount – PV of Expected Future Cashflow

Assets Held for Sale (AHFS) (UKGAAP)

- No AHFS under FRS 102 – assets are depreciated/amortised up to disposal date.

- However, FRS 102 identifies the decision to sell an asset as a potential indicator of impairment, meaning
that an impairment review should be performed.

Continued & Discontinued Operations (UKGAAP):

FRS 102 does not account for assets held for sale, with the decision to sell being classified as an impairment indicator.

FRS102 shows the results of discontinued operations in a separate column in the income statement as opposed to in
a single line item as under IFRS 5.

Government Grants (UKGAAP):

Research & Development:

- FRS 102 says that the capitalisation of development expenditure is optional.

- In contrast IAS 38 Intangible Assets requires that development expenditure is capitalised if certain criteria
are met.

Borrowing costs (UKGAAP):

- Under IFRS must capitalise but FRS 102 allows companies to choose whether to capitalise or expense the
borrowing costs.

- Under IFRS borrowing cost must relate to a qualifying asset.

Foreign Currency Translation (UKGAAP):

A foreign currency translation reserve is NOT used in FRS102.

Related Party Transaction (UKGAAP):

FRS 102 has additional disclosure exemptions:

▪ It states that disclosures are not required for transactions between two or more members of a group where
the sub is fully owned by parent.
Provisions (UKGAAP):

▪ FRS 102 simply states that a provision for restructuring costs should be recognised when a legal or
constructive obligation exists.

▪ A constructive obligation – expected from past behaviour/policy/brand image.

SBP (UKGAAP):

Valuation:

When measuring the fair value of equity instruments granted, FRS 102 requires the use of a three-tier hierarchy:

1. Observable market prices

2. The use of entity specific market data, such as recent transactions in the instrument
3. A valuation method that uses, wherever possible, market data

Recognition:

- FRS 102 provides simpler recognition rules than IFRS 2 Share-based Payment.

- For example, under FRS 102, schemes which offer a choice of settlement are not split into an equity
component and a liability component.

- No Splitting: Instead, FRS 102 provides rules to determine whether to account for them as a wholly cash
settled transaction or a wholly equity-settled transaction.

Income taxes (UKGAAP):

- No significant differences in the treatment of current tax.

- FRS 102 adopts a slightly different approach using a timing differences vs temp differences approach.

- Timing differences are defined as differences between taxable profits and total comprehensive income as
stated in the Fin Stats.

- However, FRS 102 states that deferred tax should also be recognised based on the differences between
the tax value and fair value of assets & liabilities acquired in a business combination.

- In contrast, IAS 12 states that deferred tax should be accounted for based on differences between the
amounts recognised for the entity’s assets & liabilities in the SFP and the recognition by the tax
authorities.

Reporting Performance (UKGAAP):

Events after the end of the Reporting Period (UKGAAP):

▪ Allows dividends declared after the reporting date to be presented as separate component of retained
earnings.

Goodwill (UKGAAP)

▪ Transaction costs are capitalised under FRS102 but are expensed under IFRS.

▪ Contingent consideration is included within the cost of the investment under FRS102 if it is probable and
can be measured reliably. It is recognised at fair value under IFRS.

Goodwill Amortised (FRS 102):

▪ Under IFRS Goodwill is NOT Amortised but reviewed for impairment at each reporting date.

▪ Under FRS 102, Goodwill is amortised over its useful life, which is up to 10 years if cannot be reliably
measured.

▪ Under FRS 102, Negative goodwill is amortised in the same was as positive goodwill and recognised on the
SFP.

NCI (Prop Methos only):

▪ Under FRS 102, only the proportionate method is used for calculating Goodwill.

▪ whereas IFRS uses both the fair value method and the proportionate method.

Fair Value:

▪ There is less detail on fair value measurement in FRS 102 compared with IFRS.
Investments in Associates (UKGAAP):

Goodwill is recognised on acquisition of an associate/joint venture under FRS102, which is then amortised

Company Act:

A company is exempt from the requirement to prepare individual accounts for a financial year if:

- It is itself a subsidiary undertaking.

- It has been dormant throughout the whole of that year, and
- Its parent undertaking is established under the law of an EEA State.
A parent company must prepare group accounts for the year unless one of the following applies:

- A company is exempt from the requirement to prepare group accounts if it is itself a wholly-owned
subsidiary of a parent undertaking.

- A parent company is exempt from the requirement to prepare group accounts if, under section 405 of
Companies Act, all of its subsidiary undertakings could be excluded from consolidation.

- A subsidiary undertaking may be excluded from consolidation if its inclusion is not material for the
purpose of giving a true and fair view.

- Two or more undertakings may be excluded only if they are not material taken together.

- A subsidiary undertaking may be excluded from consolidation where:

o Severe long-term restrictions substantially hinder the exercise of the rights of the parent company
over the assets or management of that undertaking .

o The information necessary for the preparation of group accounts cannot be obtained without
disproportionate expense or undue delay.

o The interest of the parent company is held exclusively with a view to subsequent resale.