CERTIFIED FINANCE & ACCOUNTING PROFESSIONAL 1

ADVANCED ACCOUNTING
&
FINANCIAL REPORTING

Edition 2025

Volume 2

COMPILED BY: MURTAZA QUAID, ACA

 “My prayer, my offering, my life and my death is for Allah, the Lord of all the worlds”
(6:162)

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Disclaimer
Although utmost care and caution is exercised, but error or omission can creep being to err is
human and perfection is the name. Hopefully, the patrons will bear me and discrepancy, if any,
noted my please be brought to my knowledge for future improvement.
No responsibility is taken for any error or omission. The author / publisher disclaims liability, if
any, occurred as a consequence thereof. The readers are, therefore, advised to seek professional
advice before action is taken on application of any of the content of this book.
S.No CONTENTS PAGE No.

1 Group Financial Statements / Consolidation (Basics) 05 TO 44

2 Investment in Associate 45 TO 63

3 Group FinancialStatements / Consolidation (Advanced) 64 TO 138

4 Specialized financial statements and areas 139 TO 168

5 Professional Ethics 169 TO 180

6 IAS 24: Related Party Disclosure 181 TO 185

7 IAS 34: Interim Financial Reporting 186 TO 189

8 IFRS 13: Fair value measurement 190 TO 203

9 IFRS 7: Financial Instruments-Disclosures 204 TO 208

10 IAS 29: Accounting for Hyperinflation 209 TO 218

11 Islamic Accounting Standards 219 TO 229

12 IAS 38: Intangible Assets(with SIC 32: Website Costs) 230 TO 288
IAS 8: Accounting Policies, Changes in Accounting Estimates &
13 Errors
289 TO 307

14 IAS 33: Earning Per Share 308 TO 352

15 IAS 23-Borrowing Cost 353 TO 368

16 IAS 40-Investment Property 369 TO 395

IAS 20-Accounting for Government Grants and Disclosure for
17 Government Assistance
396 TO 418

18 IFRS 8-Operating Segments 419 TO 440

IFRIC 1-Changes in Existing Decommissioning Restoration and

19 Similar Liabilities
441 TO 451
 AAFR VOLUME 2

GROUP FINANCIAL STATEMENTS

[CONSOLIDATION]
(Basics)

CONSOLIDATION

GROUP Parent and its Subsidiaries

Entity that controls Entity that is controlled by

one or more entities another entity [i.e. Parent Co.]

Investor is exposed to / has right to variable return from investee

CONTROL AND
Investor has ability to affect those returns

Practically, achieved
through buying
“Contolling Shares” Shares which gives more than 50% of the voting right in a Company

Page 5
 AAFR VOLUME 2

Examples where Control = 100%

Company A Company A Company A Company A

100% 80% Bank of Co. A

45% 45%
10%
Company B Company B Company B Company B

Other shares of Bank of Co. A has

Company B are held agreed to use its votes
by large number of as directed by Co. A
investors

Vertical Group / Sub Subsidiary

Company A

Company A controls Even though, Effective

60% Control
Company C (indirectly) holding of Company A
through its ownership in in Company C is
Company B
Company B
60% x 70% = 42%
Control 70% This is called,
“Extension of Control”
Company C

Complex / D-shaped Group

Company A, together Effective Holding of Company A in Company C

Company A with Company B, holds - Directly 30%
30% more than 50% shares - Indirectly (Through Co. B) 15% (60% of 25%)
Control 60% of Company C 45%

Company B Company C
25%

Financial Statements
Separate Financial Statements Required by
Companies Act, 2017
Parent Company Consolidated Financial Statements
Required by
IAS / IFRS
Subsidiary Company Separate Financial Statements

Consolidated Financial Statements Financial Statements of the group in which assets, liabilities,
equity, income, expenses and cash flows of the parent &
subsidiaries are presented as those of a single economic entity

Page 6
 AAFR VOLUME 2

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1 Chicken = Rs. 2,000

1 Chicken with 5 eggs = Rs. 2,500 5 eggs = Rs. 500

1 Chicken with 5 eggs = Rs. 2,500 3 eggs = Rs. 300

1 Chicken with 2 eggs = Rs. 2,200

Page 7
 AAFR VOLUME 2

Example
- Debentures [Face Value] = Rs. 100
- Interest / Coupon = 12% per annum [Payment at the end of year]
- Company A purchased the Debenture for Rs. 100 on 1 January 2023
- Company A sold such debenture to Company B for Rs. 108 on 31 August 2022

Company A Company B

Subsidiary Company

At Acquisition At Year end

1 January 2023 31 December 2023

- Total Assets 500,000 750,000 Consolidated Balance Sheet

- Total Liabilities 200,000 200,000 Consolidated Balance Sheet

- Net Assets 300,000 550,000

- Equity 300,000 550,000

Net increase = 250,000 Consolidated Balance Sheet

Page 8
 AAFR VOLUME 2

Loan = Rs. 10M

Balance Sheet Balance Sheet
Loan Receivable Rs. 10M Cash Rs. 10M
Net Assets Rs. 10M Loan Payable Rs. 10M
Net Assets -

Mr. Quaid Mr. Murtaza

Quaid & Sons

Balance Sheet
Cash Rs. 10M
Net Assets Rs. 10M

Parent Company Subsidiary Company Consolidated

Statement of Financial Position Statement of Financial Position Statement of Financial Position

Assets Assets Assets

- Investment in Subsidiary 500 - Other assets 850 - Other assets
- Loan Receivable (Sub Co.) 200
- Other assets 800 Liabilities Liabilities
1,500 - Loan Payable (Patent Co.) 200 - Other liabilities
- Other liabilities 150
Liabilities 350 Net Assets
- Other Liabilities. 600
Net Assets 500 Equity
Net Assets 900 - Share Capital
Equity - Retained Earnings
Equity - Share Capital 250
- Share Capital 300 - Retained Earnings 250
- Retained Earnings 600 500
900

Page 9
 AAFR VOLUME 2

Non-Controlling Interest
Equity in a subsidiary not attributable directly or indirectly to a parent

Parent Subsidiary Parent Subsidiary

100% 80%

Method 1:
NCI = 0% NCI = 20% At proportionate share of the fair
value of the net assets of subsidiary
Measurements
Method 2:
At Fair Value
(Based on market value of shares
held by NCI)

Page 10
 AAFR VOLUME 2

Goodwill
Asset representing future economic benefits arising from
other assets acquired in a business combination that are not
individually identified and separately recognized

Measurement
Method 1: Partial Goodwill Method
Fair value of Consideration (i.e. Cost of Investment) XXXX
Less. Fair Value of Net Assets of Subsidiary (At Acq. Date) (XXX)
[Fair Value of Net Assets x Parent Shareholding% in Subsidiary]
Goodwill - At Acquisition date XXXX
Less. Impairment (if any) (XXX) Group Reserve
Goodwill - At Reporting date XXXX

Method 2: Full Goodwill Method

Fair value of Consideration (i.e. Cost of Investment) XXXX
Fair Value of NCI at acquisition Date XXXX
Less. Fair Value of Net Assets of Subsidiary (At Acq. Date) (XXX)
Goodwill - At Acquisition date XXXX Group Reserve
Less. Impairment (if any) (XXX)
NCI
Goodwill - At Reporting date XXXX

100% - Carrying Amount of Net Assets 50M

- Fair Value of Net Assets 65M
- Fair Value of Business 90M

Investor IQ School

Separate Books

Consolidated Books

Page 11
 AAFR VOLUME 2

NCI 20%

80%
- Carrying Amount of Net Assets 50M
- Fair Value of Net Assets 65M
- Fair Value of Business 90M
Investor IQ School

Separate Books

(A) NCI at Proportionate share of Net Assets [Partial Goodwill Method]

Consolidated Books

(B) NCI at Fair Value [Full Goodwill Method]

Consolidated Books

Impairment of Goodwill IAS 36 Impairment

Carrying Amount exceeds Recoverable Amount

• Any goodwill arising on a business combination should be
tested annually for impairment,

• Irrespective of whether there are any specific indicators of

impairment

• Any impairment may b expressed as a amount or as a

percentage

Recognition of Impairment Depends on how you measure non-controlling interest

Method 1: Method 2:
At proportionate share of the fair value of At Fair Value
the net identifiable assets of subsidiary

Debit: Group Retained Earning XXXX Debit: Group Retained Earning XXXX
Credit: Goodwill XXXX Debit: Non-Controlling Interest XXXX
Credit: Goodwill XXXX

!!! NO REVERSAL OF IMPAIRMENT LOSS ON GOODWILL

Page 12
 AAFR VOLUME 2

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Page 17
AAFR VOLUME 2

Page 18
 AAFR VOLUME 2

GROUP FINANCIAL STATEMENTS

[CONSOLIDATION]
Practice Questions (Basics)
ADVANCED ACCOUNTING & FINANCIAL REPORTING
COMPILED BY: MURTAZA QUAID, ACA

Page 19
AAFR VOLUME 2

Page 20
 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

GROUP FINANCIAL STATEMENTS

[CONSOLIDATION]
Practice Questions (Basics)
Question No. 1 [Basic Example]
▪ Mommy Limited has owned 100% shares of Baby Limited since Baby's incorporation (i.e. 1
January 20X4).
▪ Below there are statements of financial positions of both Mommy and Baby at 31 December
20X4.
Statement of financial position as at 31 December 20X4 Amount in CU

Mommy Ltd. Baby Ltd.

ASSETS
Non-current assets
Property, plant and equipment 124,000 90,000
Investment in Baby Ltd. (80,000 shares at 1 CU) 80,000 -
204,000 90,000
Current assets
Inventories 55,000 34,000
Trade and other receivables
- Baby Ltd 10,000 -
- Other receivables 30,000 18,000
Cash and cash equivalents 8,000 5,000
103,000 57,000

TOTAL ASSETS 307,000 147,000

EQUITY & LIABILITIES

Equity
Share Capital (1 CU each) 200,000 80,000
Retained earnings 62,000 45,000
262,000 125,000
Liabilities
Current liabilities
Trade payables
- Mommy Corp. - 10,000
- Other payables 35,000 12,000
Loans repayable within 12 months 10,000 -
45,000 22,000

TOTAL EQUITY & LIABILITIES 307,000 147,000

Required: Prepare consolidated statement of financial position of Mommy Group as at 31 December

20X4.

IQ School of Finance

Page 21
 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

Question No. 2 [Concept of Goodwill and NCI]

▪ Daddy Limited acquired 80% shares in Son Limited on 30 June 20X4 when Son's retained
earnings amounted to CU 12 000. The market price of Son's shares just before the acquisition
date was CU 1.2 per share.
▪ Daddy’s and Son's separate statements of financial position at 31 December 20X4 are below:
Statement of financial position as at 31 December 20X4 Amount in CU

Daddy Ltd. Son Ltd.

ASSETS
Non-current assets
Property, plant and equipment 124,000 90,000
Investment in Son Ltd. (64,000 shares) 80,000 -
204,000 90,000
Current assets
Inventories 55,000 24,000
Trade and other receivables 43,000 12,000
Cash and cash equivalents 28,000 8,000
126,000 44,000

TOTAL ASSETS 330,000 134,000

EQUITY & LIABILITIES

Equity
Share Capital (1 CU each) 200,000 80,000
Retained earnings 90,000 17,000
290,000 97,000
Liabilities
Current liabilities
Trade payables 30,000 22,000
Short term Loan 10,000 15,000
40,000 37,000

TOTAL EQUITY & LIABILITIES 330,000 134,000

Required: Prepare consolidated statement of financial position of Daddy Group as at 31 December

20X4 if:
a) Daddy decided to measure NCI at its proportionate share of Son's net assets.
b) Daddy decided to measure NCI at its fair value.

IQ School of Finance

Page 22
 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

Question No. 3 [Consolidated Income Statement] [CAF 5: FAR 2 – ICAP Study Text]
Plan Limited (PL) bought 80% of Scan Limited (SL) several years ago. The statements of
comprehensive income for the year to 31 December 20X1 are as follows:

Required: Prepare consolidated statement of comprehensive income for the year ended 31
December 20X1.

Question No. 4 [Concept of Full Goodwill and NCI at Fair Value] [CAF 5: FAR 2 – ICAP Study Text]
Port Limited (PL) acquired 80% shares of Sort Limited (SL) on 1 January 2022 for Rs. 980 million. SL
has 50 million shares in issue and the market value of one share in SL was Rs. 24 and Rs. 26 on 1
January 2022 and 31 December 2022 respectively.

The fair value of net assets acquired in SL on 1 January 2022 has been measured at Rs. 1,100 million.

Required: Calculate goodwill at the date of acquisition. NCI is measured at fair value.

Question No. 5 [Concept of Partial Goodwill and NCI at Proportionate Share]

[CAF 5: FAR 2 – ICAP Study Text]
Chart Limited (CL) acquired 80% shares of Smart Limited (SL) on 1 January 2022 for Rs. 980 million. SL
has 50 million shares in issue.

The fair value of net assets acquired in SL on 1 January 2022 has been measured at Rs. 1,100 million.

Required: Calculate goodwill at the date of acquisition. NCI is measured at proportionate share of
subsidiary’s identifiable net assets.

IQ School of Finance

Page 23
 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

Question No. 6 [Concept of Partial Goodwill and NCI at Proportionate Share of Net Assets]
[CAF 5: FAR 2 – ICAP Study Text]
Park Limited (PL) acquired 80% of Scan Limited (SL) on 1 January 20X1 for Rs. 230,000. The retained
earnings of SL were 100,000 at that date. It is PL’s policy to recognise non-controlling interest at the
date of acquisition as a proportionate share of net assets.

The statements of financial position PL and SL as at 31 December 20X1 were as follows:

Required: Consolidated statement of financial position as at 31 December 20X1 for Park Limited.

IQ School of Finance

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 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

Question No. 7 [Concept of Partial Goodwill and NCI at Proportionate Share of Net Assets]
[CAF 5: FAR 2 – ICAP Study Text]
Plus Limited (PL) acquired 80% of Shoe Limited (SL) several years ago for Rs. 30 million. The balance
on SL’s retained earnings was Rs. 5,000,000 at the date of acquisition. PL’s policy is to measure non-
controlling interest at the date of acquisition as a proportionate share of net assets.

The draft statements of financial position of the two companies at 31 December 20X1 are:

Required: Prepare a consolidated statement of financial position as at 31 December 20X1 for PL.

IQ School of Finance

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 AAFR VOLUME 2

Consolidation: Practice Questions Compiled by: Murtaza Quaid, ACA

Question No. 8 [Impairment of Partial Goodwill] [CAF 5: FAR 2 – ICAP Study Text]
Path Limited (PL) acquired 80% of Slot Limited (SL) when the retained earnings of SL were Rs. 20,000.
The values for assets and liabilities in the statement of financial position for SL represent fair values.
A review of goodwill at 31 December 20X1 found that goodwill had been impaired, and was now
valued at Rs. 55,000.

The statements of financial position of a PL and SL at 31 December 20X1 are as follows:

Required: Prepare the consolidated statement of financial position as at 31 December 20X1.

Question No. 9 [Impairment of Partial Goodwill] [CAF 5: FAR 2 – ICAP Study Text]
Pool Limited (PL) acquired 80% of Sole Limited (SL) 3 years ago. Goodwill on acquisition was Rs.
200,000. The annual impairment test on goodwill has shown it to have a recoverable amount of only
Rs. 175,000. Thus a write down of Rs. 25,000 is required.

Extracts of the statements of comprehensive income for the year to 31 December 20X1 are as
follows:

Required: Prepare consolidated statement of comprehensive income for the year ended 31
December 20X1.

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Question No. 10 [Impairment of Partial Goodwill] [CAF 5: FAR 2 – ICAP Study Text]
Badar Limited (BL) acquired 70% ordinary shares of Kashif Limited (KL) on 1 July 2021. The
statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

Additional information: BL measures non-controlling interest at proportion of net assets of

subsidiary at the date of acquisition. On 30th June 2022, goodwill was impaired by 10% of its
recognised value.

Required: Prepare for BL, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

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Question No. 11 [Impairment of Full Goodwill] [CAF 5: FAR 2 – ICAP Study Text]
Multan Limited (ML) acquired 70% ordinary shares of Nawab Limited (NL) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

Additional information: ML measures non-controlling interest at its fair value at the date of
acquisition. Market value of one share of NL on 1st July 2021 was Rs. 15. On 30th June 2022,
goodwill was impaired by 10% of its recognised value.
Required: Prepare for ML, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

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Question No. 12 [Bargain Purchase Gain]

Saas Limited acquired 100% share in Bahu Limited on 30 June 20X4 for CU 85,000 paid in cash.
Statement of financial position as at 30 June 20X4 Amount in CU

Saas Limited Bahu Limited

ASSETS
Non-current assets
Property, plant and equipment 120,000 90,000
Investment in Bahu Limited (80,000 shares) 85,000 -
Deferred tax asset 4,000 -
209,000 90,000
Current assets
Inventories 85,000 24,000
Trade and other receivables
- Bahu Limited 8,000 -
- Other receivables 45,000 10,000
Cash and cash equivalents 45,000 5,000
183,000 39,000

TOTAL ASSETS 392,000 129,000

EQUITY & LIABILITIES

Equity
Ordinary shares (1 CU each) 200,000 80,000
Retained earnings 62,000 12,000
262,000 92,000
Liabilities
Current liabilities
Trade payables
- Saas Limited - 8,000
- Other payables 35,000 14,000
Loans repayable within 12 months 95,000 15,000
130,000 37,000

TOTAL EQUITY & LIABILITIES 392,000 129,000

Required: Prepare Saas Group's consolidated statement of financial position as at 30 June 20X4.

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Question No. 13 [Bargain Purchase Gain] [CAF 5: FAR 2 – ICAP Study Text]
Maha Limited (ML) acquired 70% ordinary shares of Anum Limited (AL) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

Additional information: ML measures non-controlling interest at proportion of net assets of

subsidiary at the date of acquisition.
Required: Prepare for ML, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

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Question No. 14 [Fair value of Consideration transferred] [CAF 5: FAR 2 – ICAP Study Text]
Hamid Limited (HL) bought 60% ordinary shares of Rashid Limited (RL) on 1st January 2022.
Additional information:
▪ HL’s total share capital (before this acquisition) is Rs. 300 million consisted of 30 million shares of
Rs. 10 each.
▪ RL’s total share capital is Rs. 100 million consisted of 10 million shares of Rs. 10 each.
▪ On 1st January 2022, market value of one share of HL and RL was Rs. 29 and Rs. 21 respectively.
▪ Appropriate discount rate is 10%.
Amounts paid or commitments made for the acquisition:
i. One share in HL was given for every two shares in RL.
ii. Rs. 4 per share was paid immediately to previous owners of RL. Further Rs. 3 per share shall be
paid three years later. Furthermore, Rs. 2 per share shall be paid two year later provided that
profits of RL exceed a certain benchmark. The fair value of this conditional payment has been
estimated at Rs. 5.48 million.
iii. Legal advisor was paid Rs. 0.5 million and a consultancy fee of Rs. 1.5 million was paid to
financial consultant.
Required:
a) Calculate Investment in RL at cost in the above business combination.
b) Calculate fair value of NCI at the date of acquisition.

Question No. 15 [Fair value of Consideration transferred] [SBR – BPP Workbook]

Pau, a public company, purchases a 60% interest of another company, Pol, on 1 January 20X1.
Scheduled payments comprised:
▪ Rs. 160 million payable immediately in cash
▪ Rs. 120 million payable on 31 December 20X2
▪ An amount equivalent to three times the profit after tax of Pol for the year ended 31 December
20X2, payable on 31 March 20X3
▪ Rs. 5 million of fees paid for due diligence work to a firm of accountants.
On 1 January 20X1, the fair value attributed to the consideration based on profit was Rs. 54 million.
By 31 December 20X1, the fair value was considered Rs. 65 million. The change arose as a result of a
change in expected profits.
An appropriate discount rate for use where necessary is 5%.
Required: Explain the treatment of the payments for the acquisition of Pol in the financial
statements of the Pau Group for the year ended 31 December 20X1.

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Question No. 16 [Fair value of Consideration transferred] [CAF 5: FAR 2 – ICAP Study Text]
Maria Limited (ML) acquired 90% ordinary shares of Saima Limited (SL) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

(i) The break-up of investment figure is as follows:

*legal and consultancy fee

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(ii) The arrangement for acquisition of SL also included following which have not been accounted
for yet:
▪ Share exchange: One share in ML for every two shares acquired in SL. At the date of
acquisition market value of one share of ML and SL was Rs. 28 and Rs. 21 respectively.
▪ Future cash payment: Additional Rs. 4 per share shall be paid on 3o June 2024.
▪ Conditional cash payment: Another additional Rs. 2 per share shall be paid on 30 June
2023 provided that SL earns continues to earn profit of Rs. 100 million or above till then.
The fair value of this conditional payment was estimated to be Rs. 50 million on 1 July
2021. However, on 30th June 2022 the fair value has been estimated at Rs. 48 million
only.
The appropriate discount rate is 9%.
(iii) ML measures non-controlling interest at fair value on the date of acquisition.
Required: Prepare for ML, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

Question No. 17 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
Peak Limited (PL) bought 80% of Seek Limited (SL) 2 years ago. At the date of acquisition SL’s retained
earnings stood at Rs. 600,000.
The fair value of its net assets was not materially different from the book value except for the fact
that it had a brand which was not recognised in SL’s accounts. This had a fair value of Rs. 100,000 at
this date and an estimated useful life of 20 years.
The statements of financial position PL and SL as at 31 December 20X1 were as follows:

Required: Prepare a consolidated statement of financial position as at 31 December 20X1.

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Question No. 18 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
Pack Limited (PL) bought 80% of Sack Limited (SL) 2 years ago. At the date of acquisition SL’s retained
earnings stood at Rs. 600,000.
The fair value of SL’s net assets were Rs. 1,000,000. This was Rs. 300,000 above the book value of the
net assets at this date. The revaluation was due to an asset that had a remaining useful economic life
of 10 years as at the date of acquisition.
The statements of financial position PL and SL as at 31 December 20X1 were as follows:

Required: Prepare a consolidated statement of financial position as at 31 December 20X1.

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Question No. 19 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
On 1 January 2012, Hello acquired 60% of the ordinary share capital of Solong for Rs.110,000. At that
date Solong had a retained earnings balance of Rs.60,000. The following statements of financial
position have been prepared as at 31 December 2015.

The fair value of Solong’s net assets at the date of acquisition was determined to be Rs.170,000. The
difference between the book value and the fair value of the new assets at the date of acquisition was
due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required: Prepare the consolidated statement of financial position of Hello and its subsidiary as at
31 December 2015.

Question No. 20 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
Pipe Limited (PL) acquired 80% of Ship Limited (SL) 3 years ago. At the date of acquisition SL had an
office equipment with a fair value of Rs. 120,000 in excess of its book value. This asset had a useful
life of 10 years at the date of acquisition.
Extracts of the statements of comprehensive income for the year to 31 December 20X1 are as
follows:

Required: Prepare consolidated statement of comprehensive income for the year ended 31
December 20X1.

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Question No. 21 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
The summarized draft statement of financial positions of the companies in a group at 31 December
2018 were:

Additional information is as follows:

(a) BL acquired 80% ordinary shares in FL on 1 January 2018, when FL had accumulated profits of
Rs.6,000.
(b) The subsidiary has not incorporated the fair values in its separate books and fair value
adjustments identified by the parent company at the date of acquisition are as follows:

The group has a policy of measuring non-controlling interest at proportionate share of net assets at
the date of acquisition. The 20% of goodwill has impaired to date.
Required: Prepare the consolidated statement of financial position at 31 December 2018.

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Question No. 22 [FV Adjustment in Net Assets of Subsidiary] [CAF 5: FAR 2 – ICAP Study Text]
Ruby Limited (RL) acquired 80% ordinary shares of Adeel Limited (AL) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as under:

Additional information:
(i) RL measures non-controlling interest at fair value at the date of acquisition that was calculated at Rs. 225
million. Goodwill has not impaired.
(ii) At the date of acquisition, all the assets of AL had fair value equal to their carrying amount except as
follows:

Required: Prepare for RL, consolidated statement of financial position as at June 30, 2022 and consolidated
statement of comprehensive income for the year then ended.

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Question No. 23 [Mid-Year Acquisition] [CAF 5: FAR 2 – ICAP Study Text]

Sana Limited (FL) acquired 75% ordinary shares of Amna Limited (AL) on 1 October 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

Non-controlling interest is measured at fair value at the date of acquisition that was determined at
Rs. 225 million.
Required: Prepare for SL, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

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Question No. 24 [Mid-Year Acquisition] [CAF 5: FAR 2 – ICAP Study Text]

Pear Limited (PL) bought 70% of Sail Limited (SL) on 31st March this year. SL’s profit for the year was
Rs. 12,000. The statements of financial position PL and SL as at 31 December 20X1 were as follows:

Required: Prepare the consolidated statement of financial position as at 31 December 20X1.

Question No. 25 [Mid-Year Acquisition] [CAF 5: FAR 2 – ICAP Study Text]

Poet Limited (PL) acquired 80% of Scar Limited (SL) on 1 October 20X1. Year end is 31 December. The
statements of comprehensive income for the year to 31 December 20X1 are as follows.

Required: A consolidated statement of comprehensive income for the year ended 31 December
20X1.

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Question No. 26 [Mid-Year Acquisition] [CAF 5: FAR 2 – ICAP Study Text]

Fahad Limited (FL) acquired 75% ordinary shares of Aashir Limited (AL) on 1 October 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

Profits of both companies accrued evenly throughout the year.

Non-controlling interest is measured at fair value at the date of acquisition that was determined at
Rs. 225 million.
Required: Prepare for FL, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

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Question No. 27 [Comprehensive Example] [CAF 5: FAR 2 – ICAP Study Text]

Tooba Limited (TL) acquired 80% ordinary shares of Maheera Limited (ML) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as under:

Additional information:
▪ During the year ML sold goods to TL for Rs. 75 million. These goods were priced at cost plus 25% mark-up.
TL has sold 80% of these goods at further mark-up of 15% to entities outside group. By the year-end, TL
has paid (and ML has received) 50% of the amount due.
▪ On 1st January 2022, TL transferred one of its plant to ML for Rs. 140 million. The book value of this plant
on the date of transfer was Rs. 100 million and it had remaining useful life of 8 years at this date. ML had
immediately paid this amount to TL.
▪ TL measures non-controlling interest at fair value as at the date of acquisition that was measured at Rs.
225 million.
Required: Prepare for TL, consolidated statement of financial position as at June 30, 2022 and consolidated
statement of comprehensive income for the year then ended.

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Question No. 28 [Comprehensive Example] [CAF 5: FAR 2 – ICAP Study Text]

Haseeb Limited (HL) acquired 80% ordinary shares of Raheem Limited (RL) on 1 July 2021.
The statements of financial position of both companies as at 30 June 2022 are as under:

The statements of comprehensive income of both companies for the year ended 30 June 2022 are as under:

Additional information:
▪ During the year HL sold goods to RL for Rs. 80 million. These goods were priced at 25% margin. RL has sold
half of these goods to entities outside group.
▪ On 1st January 2022, RL transferred one of its plant to HL for Rs. 130 million. The book value of this plant
on the date of transfer was Rs. 100 million and it had remaining useful life of 8 years at this date.
▪ On 30 June 2022, HL books show a receivable of Rs. 25 million from RL which does not match with RL
books which show a different payable balance to HL due to a cheque in transit of Rs. 7 million.
▪ HL measures non-controlling interest at fair value as at the date of acquisition that was measured at Rs.
225 million.
Required: Prepare for HL, consolidated statement of financial position as at June 30, 2022 and consolidated
statement of comprehensive income for the year then ended.

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Question No. 29 [Comprehensive Example] [CAF 5: FAR 2 – ICAP Study Text]

Following is the summarised trial balance of Fatima Limited (FL) and its subsidiary, Ali Limited (AL) for the year
ended December 31, 2018:

Following additional information is also available:

(i) On January 1, 2018, FL acquired 480 million shares of AL from its major shareholder for Rs.10,500
million.
(ii) The following inter-company sales were made during the year 2018:

(iii) On January 2, 2018, FL sold certain plants and machineries to AL. Details of the transaction are as
follows:

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(iv) The plants and machineries were purchased two years ago and were being depreciated on straight
line method over a period of five years. AL computed depreciation thereon using the same method
based on the remaining useful life.
(v) FL billed Rs. 100 million to AL for management services provided during the year 2018 and credited it
to operating expenses. The invoices were paid on December 15, 2018.
(vi) Details of cash dividend are as follows:

AL has not recorded payment of dividend yet and FL has not recorded declaration of dividend yet. However, FL
has recorded receipt of payment from AL.
Required: Prepare consolidated statement of financial position and statement of comprehensive income of FL
for the year ended December 31, 2018. Ignore tax and corresponding figures.

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- As per IFRS 9 (FVOCI or FVPL)

Voting Power - Less than 20%

- As per IFRS 9 (FVOCI or FVPL)

 Simple Investment

- At Cost
Voting Power – 20% to 50% - As per IFRS 9 (FVOCI or FVPL)
(Significant Influence) - Equity Accounting

 Associate
- Equity Accounting

 Parent Company
- At Cost
Voting Power – More than 50% - As per IFRS 9 (FVOCI or FVPL)
(Control)

 Subsidiary Company - Consolidation

CONSOLIDATION

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Fair value (IFRS 9) Fair value (IFRS 9) Fair value (IFRS 9)

Cost or
Equity Accounting Equity Accounting
Fair value (IFRS 9)

Cost or
N/A Consolidation
Fair value (IFRS 9)

Compiled by: Murtaza Quaid, ACA

(1) Initial Recognition – Cost of Investment XXXX

(2) Add/(less): Share of Profit / (Loss) from Associate (Net Profit x Investor %) XX/(XX)
(3) Add/(less): Share of Other Comprehensive Income / (Loss) from Associate (OCI x Investor %) XX/(XX)
(4) Less. Dividend received from Associate (XXXX)
(5) Less. Investor’s share in unrealized profit (Unrealized Profit x Investor %) (XXXX)
(6) Less. Impairment (if any) (XXXX)
XXXX

(1) Investment in Associate XXXX (4) Cash (Dividend from Associate) XXXX
Cash/Bank XXXX Investment in Associate XXXX

(2) Investment in Associate XXXX

(5) To be discussed later
Share of Profit from Associate – P/L XXXX

(3) Investment in Associate XXXX (6) Impairment loss – P/L XXXX

Share of OCI from Associate – OCI XXXX Investment in Associate XXXX

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Associate is not part of group, therefore, inter-company balances (receivable / payable) and transactions
(sale / purchase) are not eliminated.

Group Reserve (Share of Associate’s profit) XXXX Share of Profit from Associate – G/R XXXX
Investment in Associate XXXX Inventory (Parent) XXXX
(Unrealized Profit x Parent %) (Unrealized Profit x Parent %)

Cost of Sales – P/L XXXX Share of Profit from Associate – P/L XXXX
Investment in Associate XXXX Inventory (Parent) XXXX
(Unrealized Profit x Parent %) (Unrealized Profit x Parent %)

CONSOLIDATION

Group Reserve (Share of Associate’s profit) XXXX Share of Profit from Associate – G/R XXXX
Investment in Associate XXXX PPE (Parent) XXXX
(Undepreciated Gain x Parent %) (Undepreciated Gain x Parent %)

Cost of Sales / Other Income – P/L XXXX Share of Profit from Associate – P/L XXXX
Investment in Associate XXXX PPE (Parent) XXXX
(Undepreciated Gain x Parent %) (Undepreciated Gain x Parent %)

CONSOLIDATION

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IAS 28:
INVESTMENT IN ASSOCIATES
PRACTICE QUESTIONS
ADVANCED ACCOUNTING & FINANCIAL REPORTING
COMPILED BY: MURTAZA QUAID, ACA

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IAS 28: Investment in Associates – Practice Questions

Question 1. [Equity Accounting] [CAF 5 ICAP Study Text]
▪ Entity P acquired 30% of the equity shares in Entity A during Year 1 at a cost of Rs. 147,000 when the
fair value of the net assets of Entity A was Rs. 350,000.
▪ Entity P is able to exercise significant influence over Entity A.
▪ At 31 December Year 5, the net assets of Entity A were Rs. 600,000.
▪ In the year to 31 December Year 5, the profits of Entity A after tax were Rs. 80,000 and other
Comprehensive income was Rs. 5,000.
Required: Compute the figures that must be included to account for the associate in Entity P’s
consolidated financial statements for the year to 31 December Year 5.

Question 2. [Equity Accounting] [CAF 5 ICAP Study Text]

▪ Entity P acquired 40% of the equity shares in Entity A during Year 1 at a cost of Rs. 128,000 when the
fair value of the net assets of Entity A was Rs. 250,000.
▪ Since acquisition of the investment, there has been no change in the issued share capital of Entity A,
nor in its share premium reserve or revaluation reserve.
▪ On 31 December Year 5, the net assets of Entity A were Rs. 400,000.
▪ In the year to 31 December Year 5, the profits of Entity A after tax were Rs. 50,000.
▪ It has also been assessed after accounting for all the above information that the investment in the
associate has been impaired by Rs. 8,000.
Required: Compute the figures that must be included to account for the associate in Entity P’s
consolidated financial statements for the year to 31 December Year 5.

Question 3. [Cost Method and Equity Accounting] [CAF 5 ICAP Study Text]
Kashif Limited (KL) acquired 30% shares in Hasan Limited (HL) on January 01, 20X1. Both company’s
year-end is December 31.
Following are the details of events during the year:
(i) KL purchased 30% shares at a cost of Rs. 30 million.
(ii) HL Limited’s profit for the year 20X1 is Rs. 10 million.
(iii) HL Limited distributed Rs. 5 million of dividend to its shareholders.
Required: Prepare extract of statement of financial position as at 31 December 20X1 and extract of
statement of profit or loss for the year then ended, using:
a) Cost method
b) Equity method

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Question 4. [Equity Accounting] [CAF 5 ICAP Study Text]

The draft statements of financial position as at 31 December 2016 of three companies are set out below:

The reserves of Sulphur and Arsenic when the investments were acquired were Rs. 70,000 and Rs.
30,000 respectively.
Required: Prepare the consolidated statement of financial position as at 31 December 2016.

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Question 5. [Equity Accounting] [CAF 5 ICAP Study Text]

Hark acquired the following non-current investments on 1 April 2015:
▪ 4 million equity shares in Spark, by means of an exchange of one share in Hark for every one share in
Spark, plus Rs. 6.05 million in cash. The professional fees associated with the acquisition amounted
to Rs. 1 million, and is still unpaid. The market price of shares in Hark at the date of the acquisition
was Rs. 9 per share. The market price of Spark shares just before the acquisition was Rs. 7. The cash
part of the consideration is deferred and will not be paid until two years after the acquisition.
▪ 25% of the equity shares in Ark, at a cost of Rs. 6 per share. The money to make this payment was
obtained by issuing one million new shares in Hark at Rs. 9 per share.
None of these transactions has yet been recorded in the summary statements of financial position that
are shown below.
The summarised draft statements of financial position of the three companies at 31 March 2016 are as
follows.
Statement of financial position

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The following information is relevant:

(i) Hark has chosen to value the non-controlling interest in Spark using the fair value method.
(ii) At the date of acquisition of Spark, the fair values of its assets were equal to their carrying
amounts.
(iii) The cost of capital of Hark is 10% per year.
(iv) During the year ended 31 March 2016, Spark sold goods to Hark for Rs. 3.6 million, at a mark-up
of 50% on cost. Hark had 75% of these goods in its inventory at 31 March 2016.
(v) There were no intra-group receivables and payables at 31 March 2016.
(vi) On 1 April 2015, Hark sold a group of machines to Spark at their agreed fair value of Rs. 3 million.
At the time of the sale, the carrying amount of the machines was Rs. 2 million. Plant and
machinery is depreciated to a residual value of nil using straight-line depreciation and at 1 April
2015 the machines had an estimated remaining life of five years.
(vii) “Other equity investments” are included in the summary statement of financial position of Hark at
their fair value on 1 April 2015. Their fair value at 31 March 2016 is Rs. 0.65 million. These
investments have been classified as fair value through profit or loss.
(viii) Impairment tests were carried out on 31 March 2016. These show that there is no impairment of
the value of the investment in Ark or in the consolidated goodwill.
(ix) No dividends were paid during the year by any of the three companies.
Required: Prepare the consolidated statement of financial position for Hark as at 31 March 2016.

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Question 6. [Unrealized profit on Inventory] [CAF 5 ICAP Study Text]

▪ Entity P acquired 40% of the equity shares of Entity A several years ago. The cost of the investment
was Rs. 205,000.
▪ As at 31 December Year 6 Entity A had made profits of Rs. 275,000 since the date of acquisition.
▪ In the year to 31 December Year 6, Entity P sold goods to Entity A at a sales price of Rs. 200,000 at a
mark-up of 100% on cost.
▪ Goods which had cost Entity A Rs. 30,000 were still held as inventory by Entity A at the year-end.
Required: How the above investment would be presented in the financial statements.

Question 7. [Unrealized profit on Inventory] [CAF 5 ICAP Study Text]

▪ Entity P acquired 30% of the equity shares of Entity A several years ago at a cost of Rs. 275,000.
▪ As at 31 December Year 6 Entity A had made profits of Rs. 380,000 since the date of acquisition.
▪ In the year to 31 December Year 6, the reported profits after tax of Entity A were Rs. 100,000.
▪ In the year to 31 December Year 6, Entity A sold goods to Entity P for Rs. 180,000 at a mark-up of
20% on cost. Goods which had cost Entity P Rs. 60,000 were still held as inventory by Entity P at the
year-end.
Required: Compute the figures that must be included to account for the associate in Entity P’s
consolidated statement of financial position as at 31 December Year 6.

Question 8. [Unrealized profit on Sale of Property, Plant & Equipment] [CAF 5 ICAP Study Text]
▪ Entity P acquired 40% of the equity shares of Entity A several years ago. The cost of the investment
was Rs. 205,000.
▪ As at 31 December Year 6 Entity A had made profits of Rs. 275,000 since the date of acquisition.
▪ On 1 January Year 6, Entity P sold an item of Property, Plant & Equipment to Entity A at a price of Rs.
200,000 at a Profit of 100%. Useful life of such asset is 4 years.
Required: Compute the figures that must be included to account for the associate in Entity P’s
consolidated statement of financial position as at 31 December Year 6.

Question 9. [Unrealized profit on Sale of Property, Plant & Equipment] [CAF 5 ICAP Study Text]
▪ Entity P acquired 40% of the equity shares of Entity A several years ago. The cost of the investment
was Rs. 205,000.
▪ As at 31 December Year 6 Entity A had made profits of Rs. 275,000 since the date of acquisition.
▪ On 1 January Year 6, Entity A sold an item of Property, Plant & Equipment to Entity P at a price of Rs.
200,000 at a Profit of 100%. Useful life of such asset is 4 years.
Required: Compute the figures that must be included to account for the associate in Entity P’s
consolidated statement of financial position as at 31 December Year 6.

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Question 10. [Comprehensive Example] [CAF 5 ICAP Study Text]

Hamachi Limited (HL) acquired 90% of Saba Limited (SL)’s Rs. 10 ordinary shares on 1 April 2014 paying
Rs. 30 per share. The balance on SL’s retained earnings at this date was Rs. 800,000. On 1 October 2015,
HL acquired 30% of Anogo Limited (AL)’s Rs. 10 ordinary shares for Rs. 35 per share. The statements of
financial position of the three companies at 31 March 2016 are shown below:

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The following information is relevant

(i) On 1 April 2014 SL owned an investment property that had a fair value of Rs. 120,000 in excess of its
carrying value (book value). The value of this property has not changed since acquisition. This
property is included within investments in the statement of financial position.
Just prior to its acquisition, SL was successful in applying for a six-year licence to dispose of
hazardous waste. The licence was granted by the government at no cost, however HL estimated that
the licence was worth Rs. 180,000 at the date of acquisition.
(ii) In January 2016 HL sold goods to AL for Rs. 65,000. These were transferred at a mark-up of 30% on
cost. Two thirds of these goods were still in the inventory of AL at 31 March 2016.
(iii) To facilitate the consolidation procedures the group insists that all inter-company current account
balances are settled prior to the year-end. However a cheque for Rs. 40,000 from SL to HL was not
received until early April 2016. Inter-company balances are included in accounts receivable and
payable as appropriate.
(iv) AL is to be treated as an associated company of HL.
(v) An impairment test at 31 March 2016 on the consolidated goodwill of SL concluded that it should be
written down by Rs. 468,000. No other assets were impaired.
Required: Prepare the consolidated statement of financial position of HL as at 31 March 2016.

Question 11. [Comprehensive Example] [CAF 5 ICAP Study Text]

Hide holds 80% of the ordinary share capital of Seek (acquired on 1 February 2016) and 30% of the
ordinary share capital of Arrive (acquired on 1 July 2015).
Hide had no other investments.
The draft statements of profit or loss for the year ended 30 June 2016, are set out below.

Included in the inventory of Seek at 30 June 2016 was Rs. 50,000 for goods purchased from Hide in May
2016 which the latter company had invoiced at cost plus 25%. These were the only goods sold by Hide to
Seek but it did make sales of Rs. 180,000 to Arrive during the year. None of these goods remained in
Arrive’s inventory at the year end.
Required: Prepare a consolidated statement of profit or loss for Hide for the year ended 30 June 2016.

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Question 12. [Comprehensive Example] [CAF 5 ICAP Study Text]

The statements of financial position of three entities Pious Limited (PL), Satan Limited (SL) and Angel
Limited (AL) are shown below, as at 31 December 2022. However, the statement of financial position of
PL records its investment in AL incorrectly.

Additional information
(i) PL bought 15,000 shares in SL several years ago when the fair value of the net assets of SL was Rs.
340,000.
(ii) PL bought 3,000 shares in AL several years ago when AL’s accumulated profits were Rs. 150,000.
(iii) There has been no change in the issued share capital or share premium of either SL or AL since PL
acquired its shares in them.

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(iv) There has been impairment of Rs. 20,000 in the goodwill relating to the investment in SL, but no
impairment in the value of the investment in AL.
(v) At 31 December 2022, AL holds inventory purchased during the year from PL which is valued at
Rs. 16,000 and PL holds inventory purchased from SL which is valued at Rs. 40,000. Sales from PL
to AL and from SL to PL are priced at a mark-up of one-third on cost.
(vi) None of the entities has paid a dividend during the year.
(vii) PL uses the partial goodwill method to account for goodwill and no goodwill is attributed to the
non-controlling interests in SL.
Required: Prepare the consolidated statement of financial position of the PL group as at 31 December
2022.

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Question 13. [Comprehensive Example] [CAF 5 ICAP Study Text]

Bilal Limited (BL) acquired a subsidiary Mishal Limited on July 01, 2014 and an associate Zoha Limited
(ZL), on January 01, 2017. The details of the acquisition at the respective dates are as follows:

Statement of financial position as at June 30, 2018

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Statement of comprehensive income for the year ended June 30, 2018

Additional information:
(i) The BL Group has the policy of measuring NCI at fair value at the date of acquisition and fair
value of NCI in ML was Rs. 210 million at the date of acquisition.
(ii) Neither ML nor ZL had reserves other than retained earnings and share premium at the date of
acquisition. Neither issued new shares since acquisition.
(iii) The fair value difference on the subsidiary relates to property, plant and equipment being
depreciated through cost of sales over the remaining useful life of 10 years from the acquisition
date. The fair value difference on the associate relates to a piece of land which has not been
sold since acquisition.
(iv) ML’s intangible assets include Rs. 87 million of training and marketing cost incurred during the
year ended June 30, 2018. The directors of ML believe that these should be capitalized as they
relate to the start-up period of a new business and intend to amortize the balance over five
years from July 01, 2018.
(v) During the year ended June 30, 2018 ML sold goods to BL for Rs. 1,300 million. The company
makes a profit of 30% on the selling price. Rs. 140 million of these goods were held by BL on
June 30, 2018.
(vi) BL sold goods worth Rs. 1,000 to ZL during the year by charging 25% margin on sales, 10% of the
goods still remains unsold by ZL.
(vii) Annual impairment tests have indicated impairment losses of Rs. 100 million relating to the
recognized goodwill of ML including Rs. 25 million in the current year. No impairment losses to
date have been necessary for the investment in ZL.
Required: Prepare the Consolidated statement of financial position and the statement of
comprehensive income for the year ended June 30, 2018 for the BL Group.

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Question 14. [Comprehensive Example] [CAF 5 ICAP Study Text]

Qudsia Limited (QL) has investments in two companies as detailed below:

Manto Limited (ML)

▪ On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained earnings were
Rs. 150 million.
▪ The fair value of ML’s net assets on the acquisition date was equal to their carrying amounts.
Hali Limited (HL)
▪ On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained earnings
stood at Rs. 224 million.
▪ The purchase consideration was made up of:
- Rs. 190 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QL’s shares were being traded at Rs. 15 per
share but the price had risen to Rs. 16 per share by the time the shares were issued on 1 January
2013.
The draft summarised statements of financial position of the three companies on 31 December 2012 are
shown below:

The following additional information is available:

(i) As on 31 December 2012, the recognised goodwill is to be written down by Rs. 30 million.
(ii) QL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s net identifiable assets.

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(iii) On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had been purchased
on 1 October 2010 for Rs. 26 million. The machine was originally assessed as having a useful life of
ten years and that estimate has not changed.
(iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was Rs. 52 million.
These goods remained unsold at year end and the invoiced amount was also paid subsequent to
the year end.
Required: Prepare a consolidated statement of financial position for QL as on 31 December 2012.

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 IFRS 10 Consolidated Financial Statements requires a parent to present

consolidated financial statements in which the accounts of the parent and
subsidiaries are combined and presented as a “S ”

 Uniform accounting policies should be used. Adjustments must be made

where members of a group use different accounting policies, so that their
financial statements are suitable for consolidation.

 Under IAS 27 Separate Financial Statements, the investment in a

subsidiary, associate or joint venture can be carried in the investor’s
separate financial statements either:
 At ;
 At (IFRS 9 Financial Instruments); or
 Using the (IAS 28 Investments in Associates & Joint
Ventures.
 If the investment is carried at fair value under IFRS 9, both the investment
(at fair value) and the revaluation gains or losses on the investment must
be cancelled on consolidation.
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Fair value (IFRS 9) Fair value (IFRS 9) Fair value (IFRS 9)

Cost or
Equity Accounting Fair value (IFRS 9) or Equity Accounting
Equity Accounting

Cost or
N/A Fair value (IFRS 9) or Consolidation
Equity Accounting

Compiled by: Murtaza Quaid, ACA

 For example,
60% to 80%
shareholding

 For example,  For example,

10% to 80% 30% to 80%
shareholding shareholding

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Calculate goodwill at the date of acquisition Calculate goodwill at the date of acquisition (
(i.e. the parent achieves control) as follow: i.e. the parent achieves control) as follow:

- Fair value of Consideration transferred XXXX - Fair value of Consideration transferred XXXX
- Non-Controlling Interest XXXX - Non-Controlling Interest
Less. FV of Identifiable Net Assets of subsidiary (XXX) XXXX
Less. FV of Identifiable Net Assets of subsidiary (XXX)

Consolidate goodwill, assets, liabilities and NCI of the subsidiary at the year end.
Journal Entry at the date the parent achieves control is as follow:
Debit: Goodwill XXXX
Debit: Net Assets of Subsidiary XXXX
Credit: FV of Consideration transferred XXXX
Credit: Non-Controlling Interest XXXX

Compiled by: Murtaza Quaid, ACA

- In substance, an investment has been ‘sold’ and a subsidiary has been ‘purchased’.
- The investment previously held is remeasured to fair value at the date of control and a gain/(loss) is recognized. The
fair value gain/(loss) is recognized in P/L or OCI (as per the classification of investment under IFRS 9)

- Remeasure the investment to fair value at the date the parent achieves control. Journal Entry would be as follow:
Debit: Equity Investment XXXX
Credit: Fair Value Gain / (Loss) – XXXX
- Consolidate the results as a subsidiary from the date the parent achieves control.

- Calculate goodwill at the date the parent achieves control as follow:
Add. Fair value of investment previously held XXXX
Add. Fair value of Consideration transferred XXXX
Add. Non-Controlling Interest XXXX
Less. FV of Identifiable Net Assets of subsidiary (at the date of control) (XXX)

- Consolidate goodwill, assets, liabilities and NCI of the subsidiary at the year end. Journal Entry at the date the
parent achieves control is as follow:
Debit: Goodwill XXXX
Debit: Net Assets XXXX
Credit: FV of investment previously held XXXX
Credit: FV of Consideration transferred XXXX
Credit: Non-Controlling Interest XXXX
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- In substance, an associate has been ‘sold’ and a subsidiary has been ‘purchased’.
- The investment previously held is remeasured to fair value at the date of control and a gain/(loss) is recognized. The fair
value gain/(loss) is recognized in P/L.

- Equity accounting as an associate to the date the parent achieves control.
- Remeasure the investment to fair value at the date the parent achieves control. Journal Entry would be as follow:
Debit: Equity Investment XXXX
Credit: Fair Value Gain / (Loss) – XXXX
- Consolidate the results as a subsidiary from the date the parent achieves control.

- Calculate goodwill at the date the parent achieves control as follow:
Add. Fair Value of investment previously held XXXX
Add. Fair Value of Consideration transferred XXXX
Add. Non-Controlling Interest XXXX
Less. FV of Identifiable Net Assets of subsidiary (at the date of control) (XXX)

- Consolidate goodwill, assets, liabilities and NCI of the subsidiary at the year end. Journal Entry at the date the parent
achieves control is as follow:
Debit: Goodwill XXXX
Debit: Net Assets XXXX
Credit: FV of investment previously held XXXX
Credit: FV of Consideration transferred XXXX
Credit: Non-Controlling Interest XXXX
Compiled by: Murtaza Quaid, ACA

In substance, there has been no acquisition because the entity is still a subsidiary. Instead this is a transaction between
group shareholders (i.e. the parent is buying shares from the non-controlling interests).


- Consolidate as a subsidiary in full for the whole period
- Share of NCI before and after further acquisition, would be based on original NCI% and revised NCI%
respectively as follow:
NCI at acquisition (when control achieved) XXXX
Share of NCI in post-acquisition reserves to date of further acquisition (as per original NCI%) XXXX

Decrease in NCI on date of XXXX

Share of NCI in post-acquisition reserves from further acquisition to year end (as per revised NCI%) XXXX

- Consolidate goodwill, assets, liabilities and NCI (as calculated above) of the subsidiary at the year end.
Journal Entry at the further acquisition date is as follow:

Debit: Non-Controlling Interest (NCI) XXXX

Debit: Consolidated R/E (with adjustment to equity) XXXX (post it to the
Credit: Cash / Consideration paid XXXX parent’s column in the consolidated
retained earnings working)
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This scenario is not specifically covered under any of IFRS 3 Business Combinations,
IFRS 10 Consolidated Financial Statements or IAS 28 Investments in Associates and
Joint Ventures. Interpretative guidance from Deloitte (2008: p99) suggests that there
are two possible treatments in the group accounts:

Remeasure the existing investment to Record both the original investment

fair value on the date significant and the new investment at cost on the
influence is achieved with any basis that IAS 28 (para. 10) states,
corresponding gain or loss recognised ‘under the equity method, on initial
in Profit or (loss) or other recognition the investment in an
comprehensive income (OCI) associate or a joint venture is recognised
(depending upon the classification of at cost’.
investment under IFRS 9)

Compiled by: Murtaza Quaid, ACA

 For example,
80% to 60%
shareholding

 For example,  For example,

80% to 10% 80% to 30%
shareholding shareholding

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- Consolidate the results to the date of disposal as “ ”

- Show a group profit or loss on disposal in “ ” to be calculated as follow:

Fair value of consideration received XXXX

Less: Net Assets of Subsidiary (XXX)
Less: Goodwill (XXX)  Carrying amount on the date of disposal
Add. Non-Controlling Interest (NCI) XXXX

- No consolidation of goodwill, assets, liabilities and NCI of the subsidiary as there is no subsidiary at the year end.
Journal Entry at the disposal date is as follow:

Debit: Fair value of consideration received XXXX

Debit: Non-Controlling Interest (NCI) XXXX
Credit: Net Assets of Subsidiary XXXX
Credit: Goodwill XXXX
Credit: Gain / (Loss) on disposal – P/L XXXX

Compiled by: Murtaza Quaid, ACA

In substance, the parent has ‘sold’ a subsidiary and ‘purchased’ an investment.


- Consolidate the results to the date of disposal as “ ”
- Show a group profit or loss on disposal in “Discontinued Operation” to be calculated as follow:
Fair value of consideration received XXXX
Fair value of any investment retained XXXX
Less: Net Assets of Subsidiary (XXX)
Less: Goodwill (XXX)  Carrying amount on the date of disposal
Add. Non-Controlling Interest (NCI) XXXX
)
- Treat as an investment in equity instruments under IFRS 9 at FVPL or FVOCI.

- No consolidation of goodwill, assets, liabilities and NCI of the subsidiary as there is no subsidiary at the year end.
Journal Entry at the disposal date is as follow:
Debit: Fair value of consideration received XXXX
Debit: Equity Investment at Fair value (IFRS 9) XXXX
Debit: Non-Controlling Interest (NCI) XXXX
Credit: Net Assets of Subsidiary XXXX
Credit: Goodwill XXXX
Credit: Gain / (Loss) on disposal – P/L XXXX

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In substance, the parent has ‘sold’ a subsidiary and ‘purchased’ an associate.


- Consolidate the results to the date of disposal as “ ”
- Show a group profit or loss on disposal in “Discontinued Operation” to be calculated as follow:
Fair value of consideration received XXXX
Fair value of any investment retained XXXX
Less: Net Assets of Subsidiary (XXX)
Less: Goodwill (XXX)  Carrying amount on the date of disposal
Add. Non-Controlling Interest (NCI) XXXX

- Treat as an associate thereafter (i.e. equity account)


- No consolidation of goodwill, assets, liabilities and NCI of the subsidiary as there is no subsidiary at the year end.
Journal Entry at the disposal date is as follow:
Debit: Fair value of consideration received XXXX
Debit: Investment in Associate (IAS 28) XXXX
Debit: Non-Controlling Interest (NCI) XXXX
Credit: Net Assets of Subsidiary XXXX
Credit: Goodwill XXXX
Credit: Gain / (Loss) on disposal – P/L XXXX

Compiled by: Murtaza Quaid, ACA

- Consolidate as a subsidiary in full for the whole period

- Share of NCI before and after disposal, would be based on original NCI% and revised NCI% respectively as
follow:

NCI at acquisition (when control achieved) XXXX

Share of NCI in post-acquisition reserves to date of disposal (as per original NCI%) XXXX

Increase in NCI on date of disposal XXXX

Share of NCI in post-acquisition reserves from disposal date to year end (as per revised NCI%) XXXX

- Consolidate goodwill, assets, liabilities and NCI (as calculated above) of the subsidiary at the year end.
Journal Entry at the disposal date is as follow:

Debit: Cash / Consideration received XXXX

Credit: Non-Controlling Interest (NCI) XXXX
Credit: Consolidated R/E (with adjustment to equity) XXXX (post to the
parent’s column in the consolidated
retained earnings working)
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 The treatment in the parent’s separate financial statements follows the legal form of the
transaction – i.e. shares have been sold. Therefore, the treatment in the parent’s separate
financial statements is the same whether or not control is lost.
 In the parent’s separate financial statements, investments in subsidiaries are held at cost or at fair
value under IFRS 9.
 Consequently, the gain or loss on disposal is different from the group gain or loss on disposal:
Fair value of consideration received XXXX
Less. Carrying amount of investment disposed of (XXX)

Compiled by: Murtaza Quaid, ACA

 A‘ occurs when a subsidiary issues new shares and the parent does not take up
all of its rights such that its holding is reduced.
 In substance this is a disposal and is therefore accounted for as such. The percentages owned by
the parent before and after the subsidiary issues new shares must be calculated and accounted for
accordingly:
 Where control is Lost
- Subsidiary to Simple Investment
- Subsidiary to Associate
 Where control is Retained

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 A subsidiary is an entity controlled by another entity (its parent company)

either directly or indirectly through one or more intermediaries.

 A group structure in which a parent has a subsidiary and that subsidiary is

itself a parent of another subsidiary (sub-subsidiary of ultimate parent) is
known as a vertical group.

 It is the control and not ownership that is relevant in deciding whether a

company is consolidated in a group.

 In the example, Company A is referred to as the ultimate parent company

of Company C. Even if the effective holding is less than 50% of sub-
subsidiary, the results are consolidated as far as subsidiary of a parent
controls sub-subsidiary.

 The main subsidiary (Company B) is consolidated by the parent (Company

A) in the usual way.

 The sub-subsidiary (Company C) is also consolidated by the parent

(Company A) in the usual way using the effective holding with one further
adjustment. The cost of investment in Sub-Subsidiary (Company C) is split.
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 A subsidiary must be consolidated from the date of acquisition.

 The date of acquisition of the sub-subsidiary is the later of:
 the date on which the main subsidiary was purchased by the parent and
 the date on which the sub-subsidiary was purchased by the main subsidiary.

Acquisition Dates = 1 Jan 20X1 Acquisition Dates = 1 Jan 20X3

Acquisition Dates = 1 Jan 20X3 Acquisition Dates = 1 Jan 20X1

 In a mixed group, the parent has both direct and indirect interests in
the sub-subsidiary.

 In the example of a mixed group, Company A has two interests in

Company C:

 It has a direct interest in Company C, with the shares that it owns in

Company C.

 It also has an indirect interest in Company C, through its control of

Company B, which also owns shares in Company C.
 The group interest in the Company C is the sum of the direct interest
and the indirect interest in Company C as follows:
 Company A’s direct holding in Company C 40%
 Company A’s indirect holding in Company C (60% x 20%) 12%
Company A’s effective holding in Company C
Non-controlling interest in T (100% - 52%)

 The same rules apply to mixed groups as they do to vertical groups.

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30% 30%
1 May 20X2 1 May 20X2
80% 80%
1 May 20X1 1 May 20X4

45% 45%
1 May 20X3 1 May 20X1

 Co. A obtains control of Co. B on 1 May 20X1.  Co. A achieves significant influence over Co. C on 1 May
20X2.
 Co. A obtains control of Co. C on 1 May 20X3 when Co.
B acquires its stake in Co. C.  Co. A obtains control of Co. B on 1 May 20X4. Thus Co. A
also obtains control of Co. C due to gaining indirect
 From 1 May 20X2 to 1 May 20X3, Co. C is an associate control over Co. B’s holding in Co. C.
of Co. A.
 From 1 May 20X2 to 1 May 20X4, Co. C is an associate of
 From 1 May 20X3 onwards, Co. C is a subsidiary of Co. Co. A.
A and Co. A has an effective holding of 66% (30% +
(80% × 45%)) in Co. C.  From 1 May 20X4 onwards Co. C is a subsidiary of Co. A.

 An arrangement of which two or more parties

have
 The contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant
activities require unanimous consent of the parties sharing control.

A joint arrangement has the following characteristics:

a) The parties are bound by a contractual arrangement
b) The contractual arrangement gives two or more of those parties joint control of the
arrangement.

Joint arrangements may take the form of either:

a) Joint operations
b) Joint ventures.
The key distinction between the two forms is based upon the parties’ rights and obligations under
the joint arrangement.

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A joint arrangement whereby the

A joint arrangement whereby the
parties that have joint control of the arrangement
parties that have joint control of the arrangement
have have of the arrangement.
relating to the arrangement.

 Under these definitions, the accounting treatment is determined based on

the substance of the joint arrangement.
 If no separate entity has been created, the investor should separately
recognise in its financial statements the direct rights it has to the assets and
the obligation it has for liabilities under that arrangement.
 If a separate vehicle (entity) is created, the venturer accounts for its share of
that entity using equity accounting.

Entity considers:
 Legal form
 Terms of the contractual
Joint operation Joint venture arrangement
(line by line accounting) (equity accounting)  (Where relevant) other
facts and circumstances
Compiled by: Murtaza Quaid, ACA

 Under IFRS 3, Investment in Joint Operations is accounted for as

follow:  Investments in joint ventures are carried
in the investor’s separate financial
 Acquisition costs are expensed to profit or loss as incurred statements:
 The identifiable assets and liabilities of the joint operation  At cost;
are measured at fair value  At fair value (IFRS 9); or
 The excess of the consideration transferred over the fair  Using the equity method (IAS 28)
value of the net assets acquired is recognised as goodwill.
 Where a joint venturer has no
 At the reporting date, the separate financial statements of joint subsidiaries, the equity method must be
operator will recognise: used.
 its share of assets held jointly
 its share of liabilities incurred jointly
 Joint ventures are accounted for using
 its share of revenue from the joint operation the equity method in the consolidated
 its share of expenses from the joint operation financial statements in exactly the same
way as for associates.

 No adjustments are necessary on consolidation as the figures are

already incorporated correctly into the separate financial
statements of the joint operator.

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 On acquisition, the subsidiary’s assets and liabilities must be recognized and measured at their
except in

 Initial accounting for goodwill may be determined on a provisional basis and must be finalized
by the end of a Measurement Period.
 Measurement period ends as soon as the acquirer receives the information it was seeking about
facts and circumstances that existed at the acquisition date.
 However, measurement period shall not exceed one year from the acquisition date.
 During the measurement period new information obtained about facts and circumstances that
existed at the acquisition date might lead to the adjustment of provisional amounts or
recognition of additional assets or liabilities with a corresponding change to goodwill.
 Any adjustment restates the figures as if the accounting for the business combination had been
completed at the acquisition date.

Compiled by: Murtaza Quaid, ACA

Lower of:
Fair Value  Costs (i.e. Fair Value at Acquisition Date)
 Net Realizable Value

As per the Group Policy, i.e.

Fair Value  Cost Model
 Revaluation Model

As per the Group Policy, i.e.

Fair Value  Cost Model
 Fair Value Model

Fair Value As per IFRS 9

Fair Value As per IFRS 9

Compiled by: Murtaza Quaid, ACA

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 Exceptions to the recognition and/or measurement principles in IFRS 3 are as follows.

Higher of:
 Fair Value at Acquisition Date
Fair Value
 Amount to be recognized under
IAS 37

(Amounts recoverable Valuation is the same as the valuation of contingent liability

relating to a contingent indemnified less an allowance for any uncollectable amounts
liability)

(For The asset recognised is amortised

Fair value is based on the
example, a license granted over the remaining contractual
remaining term, ignoring
to the subsidiary before it period of the contract in which the
the likelihood of renewal
became a subsidiary) right was granted.

Compiled by: Murtaza Quaid, ACA

 Exceptions to the recognition and/or measurement principles in IFRS 3 are as follows.

As per IAS 12 As per IAS 12

As per IAS 19 As per IAS 19

As per IFRS 2 As per IFRS 2

As per IFRS 5
As per IFRS 5
 At fair value less costs to Sell

As per IFRS 16
 Measure the lease liability at the present
value of the remaining lease payments as
if the acquired lease were a new lease at As per IFRS 16
the acquisition date.
 Measure the right-of-use asset at the same
amount as the lease liability,)

Compiled by: Murtaza Quaid, ACA

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GROUP FINANCIAL STATEMENTS

[CONSOLIDATION]
Practice Questions (Advanced)
ADVANCED ACCOUNTING & FINANCIAL REPORTING
COMPILED BY: MURTAZA QUAID, ACA

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Gain on revaluation of property (net of deferred tax) 60 40

Total comprehensive income for the year 450 400

Additional information:
(1) Constance acquired an 80% investment in Spicer on 1 April 20X5. It is group policy to
measure non-controlling interests at fair value at acquisition. Goodwill of $100,000 arose on
acquisition. The fair value of the net assets was deemed to be the same as the carrying
amount of net assets at acquisition.
(2) An impairment review was conducted on 31 December 20X5 and it was decided that the
goodwill on the acquisition of Spicer was impaired by 10%.
(3) On 31 October 20X5, Spicer sold goods to Constance for $300,000. Two-thirds of these
goods remain in Constance’s inventories at the year end. Spicer charges a mark-up of 25%
on cost.
(4) Assume that the profits and other comprehensive income of Spicer accrue evenly over the
year.
Required
Prepare the consolidated statement of profit or loss and other comprehensive income for the
Constance group for the year ended 31 December 20X5.

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Debit Share of profit of associate $60,000

Credit Inventories $60,000
3

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Step Acquisi�on of Subsidiary – From Simple Investment to Subsidiary

Alpha acquired a 15% investment in Beta in 1 January 20X6 for $360,000 when Beta’s retained earnings
were $100,000. At that date, Alpha had neither significant influence nor control of Beta.
On ini�al recogni�on of the investment, Alpha made the irrevocable elec�on permited in IFRS 9 to
carry the investment at fair value through other comprehensive income. The carrying amount of the
investment at 31 December 20X8 was $480,000. At 1 July 20X9 the fair value of the investment was
$500,000.
On 1 July 20X9, Alpha acquired an addi�onal 65% of the 2 million $1 equity shares in Beta for
$2,210,000 and gained control on that date. The retained earnings of Beta at that date were
$1,100,000. Beta has no other reserves. Alpha elected to measure non-controlling interest at fair value
at the date of acquisi�on. The non-controlling interest had a fair value of $680,000 at 1 July 20X9.
There has been no impairment in the goodwill of Beta to date.
Required
1. Explain, with appropriate workings, how goodwill related to the acquisi�on of Beta should be
calculated for inclusion in Alpha’s group accounts for the year ended 31 December 20X9.
2. Explain, with appropriate workings, the treatment of any gain or loss on remeasurement 2 of the
previously held 15% investment in Beta in Alpha’s group accounts for the year ended 31 December
20X9.
Solu�on

1. Goodwill
From 1 January 20X6 to 30 June 20X9, Beta is a simple equity investment in the group accounts of
Alpha. On acquisi�on of the addi�onal 65% investment on 1 July 20X9, Alpha obtained control of
Beta, making it a subsidiary. This is a step acquisi�on where control has been achieved in stages.
In substance, on 1 July 20X9, on obtaining control, Alpha ‘sold’ a 15% equity investment and
‘purchased’ an 80% subsidiary. Therefore, goodwill is calculated using the same principles that
would be applied if Alpha had purchased the full 80% shareholding at fair value on 1 July 20X9 as
that is the date control is achieved.
IFRS 3 requires that goodwill is calculated as the excess of:
The sum of:
 The fair value of the considera�on transferred for the addi�onal 65% holding, which is the
cash paid at 1 July 20X9; plus
 The 20% non-controlling interest, measured at its fair value at 1 July 20X9 of $680,000; plus
 The fair value at 1 July 20X9 of the original 15% investment ‘sold’ of $500,000.
Less the fair value of Beta’s net assets at 1 July 20X9.

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Goodwill is calculated as:

$’000 $’000
Considera�on transferred (for 65% on 1 July 20X9) 2,210
Non-controlling interests (at fair value)1 680
Fair value of previously held investment (15%) 2
500
Fair value of iden�fiable net assets at acquisi�on:
- Share capital 2,000
- Retained earnings (1 July 20X9) 1,100
- (3,100)
Goodwill – At Acquisi�on 290
Notes.
1 Relates to the 20% not owned by the group on 1 July 20X9
2 Fair value at date control is achieved (1 July 20X9)

2. Gain or loss on remeasurement

On 1 July 20X9, when control of Beta is achieved, the previously held 15% investment is
remeasured to fair value for inclusion in the goodwill calcula�on. On ini�al recogni�on of the
investment, Alpha made the irrevocable elec�on under IFRS 9 to carry the investment at fair value
through other comprehensive income, therefore any gain or loss on remeasurement is recognised
in consolidated OCI.
The gain or loss on remeasurement is calculated as follows.
$’000
Fair value at date control achieved (1.7.X9) 500
Carrying amount of investment (fair value at previous year end: 31.12.X8) (480)
Gain on remeasurement 20

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Step Acquisi�on of Subsidiary – From Associate to Subsidiary

Peace acquired 25% of Miel on 1 January 20X1 for $2,020,000 and exercised significant influence over
the financial and opera�ng policy decisions of Miel from that date. The fair value of Miel’s iden�fiable
assets and liabili�es at that date was equivalent to their carrying amounts, and Miel’s retained earnings
stood at $5,800,000. Miel does not have any other reserves.
A further 35% stake in Miel was acquired on 30 September 20X2 for $4,200,000 (paying a premium
over Miel’s market share price to achieve control). The fair value of Miel’s iden�fiable assets and
liabili�es at that date was $9,200,000, and Miel’s retained earnings stood at $7,800,000. The
investment in Miel is held at cost in Peace’s separate financial statements.
At 30 September 20X2, Miel’s share price was $14.50.
EXTRACTS FROM THE STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2
Peace Miel
$’000
Revenue 10,200 4,000
Profit for the year 840 320
EXTRACTS FROM THE STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 20X2
Peace Miel
Equity $’000
Share Capital ($1 shares) 10,200 800
Retained Earnings 39,920 7,900
50,120 8,700
The difference between the fair value of the iden�fiable assets and liabili�es of Miel and their carrying
amount relates to Miel’s brands. The brands were es�mated to have an average remaining useful life
of five years from 30 September 20X2.
Income and expenses are assumed to accrue evenly over the year. Neither company paid dividends
during the year.
Peace elected to measure non-controlling interests at fair value at the date of acquisi�on. No
impairment losses on recognised goodwill have been necessary to date.
Required: Calculate the following amounts, explaining the principles underlying each of your
calcula�ons:
1. For inclusion in the Peace Group’s consolidated statement of profit or loss 1 for the year to 31 Dec
20X2:
(a) Consolidated revenue
(b) Share of profit of associate
(c) Gain on remeasurement of the previously held investment in Miel
2. For inclusion in the Peace Group’s consolidated statement of financial posi�on at 31 Dec 20X2:
(a) Goodwill rela�ng to the acquisi�on of Miel
(b) Group retained earnings
(c) Non-controlling interests

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Solu�on
(a) Consolidated revenue
Explana�on:
This is a step acquisi�on where control of Miel has been achieved in stages. Peace obtained control
of Miel on 30 September 20X2. Therefore per IFRS 3, revenue earned by Miel from 30 September
20X2 to the year end of 31 December 20X2 should be consolidated into the Peace Group’s
accounts. As Miel’s revenue is assumed to accrue evenly over the year, this can be es�mated as
three months’ worth of Miel’s total revenue for 20X2. For the first nine months of the year ended
31 December 20X2, Miel was an associate so for this period the group share of profit for the year
should be included and revenue should not be consolidated.
Calcula�on:
Consolidated revenue = (10,200,000 + (4,000,000 × 3/12)) = $11,200,000
(b) Share of profit of associate
Explana�on:
Peace exercised significant influence over Miel from 1 January 20X1 un�l 30 September 20X2
(when control was obtained). Therefore per IAS 28, Peace’s investment in Miel should be equity
accounted over that period. Peace’s share of the profits of Miel from 1 January 20X2 to 30
September 20X2 should be recorded in the consolidated statement of profit or loss for the year to
31 December 20X2:
Calcula�on:
Share of profit of associate = (320,000 × 9/12 × 25%) = $60,000
(c) Gain on remeasurement of the previously held investment in Miel
Explana�on:
On obtaining control of Miel, IFRS 3 requires the previously held investment in Miel to be
remeasured to fair value for inclusion in the goodwill calcula�on. Any gain or loss on
remeasurement is recognised in profit or loss. This treatment reflects the substance of the
transac�on which is that an associate has been ‘sold’ and a subsidiary ‘purchased’.
Calcula�on:
$’000
Fair value at date control obtained (800,000 × 25% × $14.50) 2,900
Carrying amount of associate
(2,520)
(2,020 cost + ([7,800 – 5,800] × 25%) share of post-acquisi�on reserves)
Gain on remeasurement 380

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(a) Goodwill
Explana�on:
IFRS 3 requires that goodwill is calculated as the excess of:
The sum of:
 The fair value of the considera�on transferred for the addi�onal 35% holding, which is the
cash paid on 30 September 20X2; plus
 The fair value at 30 September 20X2 of the original 25% investment ‘sold’ of $2,900,000 (part
(a)(iii)); plus
 The 40% non-controlling interest, measured at its fair value (per Peace’s elec�on) at 30
September 20X2
Less the fair value of Miel’s net assets of $9,200,000 30 September 20X2.
Calcula�on:
$’000
Considera�on transferred (for 35%) 4,200
FV of previously held investment (part (1)(c)) 2,900
Non-controlling interests (800,000 × 40% × $14.50) 4,640
Fair value of iden�fiable net assets at acquisi�on (9,200)
Goodwill 2,540
(b) Group retained earnings
Explana�on:
Peace should include in consolidated retained earnings:
 Its own retained earnings at 31 December 20X2, plus the gain on remeasurement of the
previously held investment in Miel which is recognised in consolidated profit or loss.
 Its 25% share of Miel’s retained earnings from acquisi�on on 1 January 20X1 un�l control is
achieved on 30 September 20X2. This reflects the period that Miel was an associate by
including the group share of post-acquisi�on retained earnings generated under Peace’s
significant influence.
 Its 60% share of Miel’s retained earnings since obtaining control on 30 September 20X2, a�er
adjustment for amor�sa�on of the fair value upli� rela�ng to Miel’s brands recognised on
acquisi�on. This reflects the period that Miel was a subsidiary by including the group share of
post-acquisi�on retained earnings generated under Peace’s control.

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Calcula�on:
Peace Miel Miel
25% 60%
$’000 $’000 $’000
At year end/date control obtained 39,920 7,800 7,900
Fair value movement
- - (30)
((9,200 – (800 + 7,800)/5 years × 3/12)
Gain on remeasurement of associate (1(c)) 380 - -
At acquisi�on - (5,800) (7,800)
2,000 70
Group share of post-acquisi�on retained earnings:
Miel – 25% (2,000 × 25%) 500
– 60% (70 × 60%) 42
Consolidated retained earnings 40,842
(c) Non-controlling interests
Explana�on:
The non-controlling interests (NCI) balance in the consolidated statement of financial posi�on
shows the propor�on of Miel which is not owned by Peace at the year end (40%). This is calculated
as the non-controlling interests at 30 September 20X2 when control was obtained (measured at
fair value per Peace’s elec�on) plus the NCI share of post acquisi�on retained earnings from the
date control was obtained to the year end (from 30 September 20X2 to 31 December 20X2).
Calcula�on:
$’000
NCI at the date control was obtained (part (2)(a)) 4,640
NCI share of retained earnings post control:
- Miel – 40% ((part (2)(b)) 70 × 40%) 28
Non-controlling interests 4,668

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Step Acquisition of Subsidiary (Simple Investment to Subsidiary)

Consolidated Statement of Financial Position

The draft statements of financial position of Oceana Global Limited (OGL), and its subsidiary
Rivera Global Limited (RGL) as of March 31, 2011 are as follows:
OGL RGL
Rs. in million
Assets
Property, plant and equipment 700 200
Intangible assets 4 -
Investment in RGL (opening balance) 23 -
Investment in RGL (acquired during the year) 108 -
Current assets 350 150
1,185 350
Equity and Liabilities
Share capital (Ordinary shares of Rs. 100 each) 300 100
Retained earnings 550 80
Fair value reserve 3 -
853 180
Non-current liabilities 150 40
Current liabilities 182 130
1,185 350
The details of OGL’s investments in RGL are as under:
Face value of Purchase
Acquisition date shares acquired consideration
Rs. in million
July 1, 2009 10 20
October 1, 2010 45 108
Other information relevant to the preparation of the consolidated financial statements is as under:

(i) On October 1, 2010 the fair value of RGL’s assets was equal to their carrying value except for
non-depreciable land which had a fair value of Rs. 35 million as against the carrying value of
Rs. 10 million.
(ii) On October 1, 2010 the fair value of RGL’s shares that were acquired by OGL on July 1,
2009 amounted to Rs. 28 million.
(iii) RGL’s retained earnings on October 1, 2010 amounted to Rs. 60 million.
(iv) Intangible assets represent amount paid to a consultant for rendering professional services for
the acquisition of 45% equity in RGL.
(v) During February 2011 RGL sold goods costing Rs. 25 million to OGL at a price of Rs 30
million. 25% of these goods were included in OGL’s closing inventory and 50% of the
amount was payable by OGL, as of March 31, 2011.
(vi) OGL follows a policy of valuing non-controlling interest at its fair value. The fair value of
non-controlling interest in RGL, on the acquisition date, amounted to Rs. 70 million.

Required:
Prepare a consolidated statement of financial position for Oceana Global Limited as of March 31,
2011 in accordance with International Financial Reporting Standards.

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Consolidated Statement of Profit and Loss

Step Acquisition - Simple Investment to Subsidiary

G
Ayre has owned 90% of the ordinary shares of Fleur for many years.
Ayre also has a 10% investment in the shares of Byrne, which was
measured at fair value through profit or loss and held in the

A
consolidated statement of financial position as at 31 December 20X6 at

C
$24,000 in accordance with IFRS 9 Financial Instruments. On 30 June
20X7, Ayre acquired a further 50% of Byrne’s equity shares at a cost of
AC
$160,000.
The draft statements of profit or loss for the three companies for the
year ended 31 December 20X7 are presented below:
Statements of profit or loss for the year ended 31 December 20X7
Ayre Fleur Byrne
$000 $000 $000
Revenue 500 300 200
Cost of sales (300) (70) (120)
––––– ––––– –––––
Gross profit 200 230 80
Operating costs (60) (80) (60)
––––– ––––– –––––
Profit from operations 140 150 20
Income tax (28) (30) (4)
––––– ––––– –––––
Profit for the period 112 120 16
––––– ––––– –––––

The non-controlling interest is calculated using the fair value method.

On 30 June 20X7, fair values were as follows:
 Byrne’s identifiable net assets – $200,000
 The non-controlling interest in Byrne – $100,000
 The original 10% investment in Byrne – $26,000

Required:
Prepare the consolidated statement of profit or loss for the Ayre
Group for the year ended 31 December 20X7 and calculate the
goodwill arising on the acquisition of Byrne.

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Step Acquisi�on of Associate – From Simple Investment to Associate

Bravado has two subsidiaries. It also has an investment in a third company, Clarity. Bravado acquired a
10% interest in Clarity on 1 June 20X7 for $8 million. The investment was accounted for as an
investment in equity instruments and the IFRS 9 irrevocable elec�on was made to take changes in fair
value through other comprehensive income. At 31 May 20X8, the 10% investment in Clarity was
revalued to its fair value of $9 million. On 1 June 20X8, Bravado acquired an addi�onal 15% interest in
Clarity for $11 million and achieved significant influence. Clarity made profits a�er dividends of $6
million and $10 million for the years to 31 May 20X8 and 31 May 20X9. Clarity’s only reserves are
retained earnings.
Required: Calculate the investment in associate for inclusion in the Bravado consolidated statement
of financial posi�on as at 31 May 20X9 under the following assump�ons:
(a) Following the IFRS 3 principles for business combina�ons
(b) Following the IAS 28 principles for equity accoun�ng

Solu�on
(a) Following the IFRS 3 principles, the investment in associate is calculated as follows:
$m
Cost = fair value at date significant influence is achieved ($9m + $11m) 20.0
Share of post-acquisi�on reserves ($10m × 25%) 2.5
Investment in associate 22.5
Notes.
1. Do not record the ini�al 10% investment at its 1 June 20X7 cost of $8m. Instead, record it at its fair
value of $9m at the date significant influence is achieved (1 June 20X8), as in substance, a 25%
associate was ‘purchased’ on 1 June 20X7. No gain on remeasurement of the 10% investment is
recognised in this Illustra�on because the investment had already been remeasured to fair value
at 31 May 20X8 in the parent’s (Bravado’s) individual accounts.
2. The new 15% investment is recorded at its cost on the date significant 2 influence is achieved (1
June 20X8). In substance, it is as if Bravado ‘purchased’ a 25% associate on 1 June 20X8.
3. Post-acquisi�on reserves should only be included from the date Clarity becomes an associate (1
June 20X8). By the year end of 31 May 20X9, Clarity has only been associate for a year and given
that Clarity’s only reserves are retained earnings, the profit a�er dividends for the year ended 31
May 20X9 represents the post-acquisi�on reserves. The profit a�er dividends for the year ended
31 May 20X8 is ignored because Clarity was only a simple investment at that stage.
4. On the date significant influence is achieved (1 June 20X8), Bravado has a 25% stake (10% + 15%)
in Clarity. In substance, Bravado has ‘sold’ a 10% investment and ‘purchased’ a 25% associate.

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(b) Following the IAS 28 principles for equity accoun�ng, the investment in associate is calculated as
follows:
$m
Cost = fair value at date significant influence is achieved ($8m + $11m) 19.0
Share of post-acquisi�on reserves ($10m × 25%) 2.5
Investment in associate 21.5

Notes.
1. Under this method, the 10% is recorded at its original cost on 1 June 20X7 of $8m which means
the revalua�on gain of $1m recognised to date ($9m fair value at 31 May 20X8 less $8m cost)
would have to be reversed as a consolida�on adjustment.
2. The new 15% investment is recorded at its cost on the date significant influence is achieved (1
June 20X8).

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Further Acquisi�on of Subsidiary's Share - Adjustment to Equity

Stow owned 70% of Needham’s equity shares on 31 December 20X2. Stow purchased another 20% of
Needham’s equity shares on 30 June 20X3 for $900,000 when the exis�ng non-controlling interests in
Needham were measured at $1,200,000.
Required: Calculate the adjustment to equity to be recorded in the group accounts on acquisi�on of
the addi�onal 20% in Needham.

Further Acquisi�on of Subsidiary's Share

On 1 January 20X2, Denning acquired 60% of the equity interests of Heggie. The purchase
considera�on comprised cash of $300 million. At acquisi�on, the fair value of the non-controlling
interest in Heggie was $200 million. Denning elected to measure the non-controlling interest at fair
value at the date acquisi�on. On 1 January 20X2, the fair value of the iden�fiable net assets acquired
was $460 million. The fair value of the net assets was equivalent to their carrying amount.
On 31 December 20X3, Denning acquired a further 20% interest in Heggie for cash considera�on of
$130 million.
The retained earnings of Heggie at 1 January 20X2 and 31 December 20X3 respec�vely were $180
million and $240 million. Heggie had no other reserves. The retained earnings of Denning on 31
December 20X3 were $530 million.
There has been no impairment of the goodwill in Heggie.
Required: Calculate, explaining the principles underlying each of your calcula�ons, the following
amounts for inclusion in the consolidated statement of financial posi�on of the Denning Group as at
31 December 20X3:
(a) Goodwill
(b) Consolidated retained earnings
(c) Non-controlling interests
Solu�on
(a) Goodwill
Explana�on:
Denning obtained control of Heggie on 1 January 20X2. Goodwill is therefore calculated at that
date. The subsequent purchase of a further 20% interest in Heggie on 31 December 20X3 is a
transac�on between owners, being Denning and the NCI in Heggie. This addi�onal investment
does not affect the goodwill calcula�on because in substance, a business combina�on has not
taken place on this date – Denning already had control of Heggie when the addi�onal interest was
acquired.
Calcula�on:
$m
Considera�on transferred (for 60%) 300
Non-controlling interests (at fair value) 200
Fair value of iden�fiable net assets at acquisi�on (460)
Goodwill 40

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(b) Consolidated retained earnings

Explana�on:
Denning should include in consolidated retained earnings:
 Its own retained earnings at 31 December 20X3, less an adjustment to equity represen�ng the
transac�on between owners on purchase of the addi�onal 20% holding in Heggie. This is
calculated as the difference between the considera�on paid and the decrease in the
noncontrolling interest.
 Its 60% share of Heggie’s retained earnings from the date of acquisi�on (1 January 20X2). As
the addi�onal purchase of 20% did not occur un�l the final day of the repor�ng period, no
addi�onal retained earnings in respect of the addi�onal shareholding are recorded in
consolidated retained earnings for this year.
Calcula�on:
Denning Heggie
$m $m
At year end 530 240
Adjustment to equity (W2) (18)
At acquisi�on (180)
60
Group share of post-acquisi�on retained earnings: (60 × 60%) 36
548
(c) Non-controlling interests
Explana�on:
The non-controlling interests (NCI) balance in the consolidated statement of financial posi�on
shows the propor�on of Heggie which is not owned by Denning at the repor�ng date (20%).
However, as the NCI owned a 40% share in Heggie up to 31 December 20X3, the NCI’s 40% share
of retained earnings between 1 January 20X2 and 31 December 20X3 must first be allocated to
them. The NCI balance at the year end is calculated as follows:
Calcula�on:
$m
NCI at acquisi�on 200
NCI share of post-acquisi�on reserves up to step acquisi�on
24
(40% × 60 (part (b))
NCI at date of step acquisi�on 224
Decrease in NCI on date of step acquisi�on (224 × 20%/40%) (112)
NCI at year end 112

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Workings
1. Group structure

2. Adjustment to equity on acquisi�on of addi�onal 20% of Heggie

$m
Fair value of considera�on paid (130)
Decrease in NCI (224 (part (c)) × 20%/40%) 112
(18)

Further Acquisi�on of Subsidiary's Share

On 1 June 20X6, Robe acquired 80% of the equity interests of Dock. Robe elected to measure the non-
controlling interests in Dock at fair value at acquisi�on.
On 31 May 20X9, Robe purchased an addi�onal 5% interest in Dock for $10 million. The carrying
amount of Dock’s iden�fiable net assets, other than goodwill, was $140 million at the date of sale. On
31 May 20X9, prior to this acquisi�on, non-controlling interests in Dock amounted to $32 million.
In the group financial statements for the year ended 31 May 20X9, the group accountant recorded a
decrease in non-controlling interests of $7 million, being the group share of net assets purchased ($140
million × 5%). He then recognised the difference between the cash considera�on paid for the 5%
interest and the decrease in non-controlling interests in profit or loss.
Required: Explain to the directors of Robe, with suitable calcula�ons, whether the group accountant’s
treatment of the purchase of an addi�onal 5% in Dock is correct, showing the adjustment which needs
to be made to the consolidated financial statements to correct any errors by the group accountant.
Solu�on:
Explana�on
Prior to the acquisi�on of the addi�onal 5% stake, Robe controlled Dock through its 80% shareholding,
making Dock a subsidiary of Robe, with a 20% non-controlling interest (NCI). On the purchase of the
addi�onal 5%, Robe’s controlling interest in its subsidiary increased to 85% whilst NCI fell to 15%. As
Dock remains a subsidiary, no ‘accoun�ng boundary’ has been crossed and, in substance, no
acquisi�on has taken place. Therefore, the group accountant was wrong to record the difference
between the considera�on paid and the decrease in NCI in profit or loss. This means that this
difference of $3 million ($10 million – $7 million) needs to be reversed from profit or loss.
Instead, since Robe is buying shares from the NCI, this should be treated as a transac�on between
group shareholders and recorded in equity. The difference between the considera�on paid for the
addi�onal 5% and the decrease in non-controlling interests should be recorded in group equity and
atributed to the parent.
The group accountant has correctly recorded a decrease in non-controlling interests but at the wrong
amount, as he has calculated the decrease as the percentage of net assets purchased. This does not

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 AAFR VOLUME 2

take into account the fact that the full goodwill method has been selected for Dock; therefore, the NCI
at disposal will also include an element of goodwill. The decrease in NCI must be adjusted to take into
account the goodwill atributable to the NCI. This results in a further decrease in NCI of $1 million
(being the $8 million decrease in NCI that the group accountant should have recorded less the $7
million he actually recognised).
Since the decrease in equity was incorrect, the difference between the considera�on paid and
decrease in NCI was also incorrect. An adjustment to equity of $2 million rather than a loss of $3 million
in profit or loss should have been recorded.
Calcula�ons
Decrease in NCI  $32 million × 5%/20% = $8 million
Adjustment to equity
$m
Fair value of considera�on paid (10)
Decrease in NCI ($32m × 5%/20%) 8
Adjustment to equity (2)
Correc�ng entry
The correc�ng entry to record the further decrease in NCI, reverse the original entry in profit or loss
and record the correct adjustment to equity is as follows:
Debit Group retained earnings £2 million
Debit Non-controlling interests $1 million
Credit Profit or loss $3 million
Working
Group structure

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Further Acquisition of Subsidiary's Share

Consolidated Statement of Financial Position

TRAVELER
Data
Traveler, a public limited company, operates in the manufacturing sector. The draft
statements of financial position are as follows at 30 November 20X1:
Traveler Captive
$m $m $m
Assets:
Non-current assets
Property, plant and equipment 439 810 620
Investments in subsidiaries
Data 820
Captive 541 ––––––
Financial assets 108 820
10 20
–––––– ––––––
1,908 –––––– 640
Current assets 1,067 781 350
–––––– –––––– ––––––
Total assets 2,975 1,601 990
–––––– ––––––
Equity and liabilities:
Share capital 1,120 600 390
Retained earnings 1,066 ––––––
442 169
Other components of equity 60 37 45
–––––– –––––– ––––––
Total equity 2,246 1,079 604
–––––– ––––––
Non-current liabilities 455 ––––––
323 73
Current liabilities 274 199 313
–––––– –––––– ––––––
Total equity and liabilities 2,975 1,601 990
–––––– ––––––

The following information is relevant to the preparation of the group financial statements:
1 On 1 December 20X0, Traveler acquired 60% of the equity interests of Data, a public
limited company. The purchase consideration comprised cash of $600 million. At
acquisition, the fair value of the non-controlling interest in Data was $395 million.
Traveler wishes to use the ‘full goodwill’ method. On 1 December 20X0, the fair value
of the identifiable net assets acquired was $935 million and retained earnings of Data
were $299 million and other components of equity were $26 million. The excess in
fair value is due to non-depreciable land.
On 30 November 20X1, Traveler acquired a further 20% interest in Data for a cash
consideration of $220 million.

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2 On 1 December 20X0, Traveler acquired 80% of the equity interests of Captive for a
consideration of $541 million. The consideration comprised cash of $477 million and
the transfer of non-depreciable land with a fair value of $64 million. The carrying
amount of the land at the acquisition date was $56 million. At the year end, this asset
was still included in the non-current assets of Traveler and the sale proceeds had
been credited to profit or loss.
At the date of acquisition, the identifiable net assets of Captive had a fair value of
$526 million, retained earnings were $90 million and other components of equity
were $24 million. The excess in fair value is due to non-depreciable land. This
acquisition was accounted for using the partial goodwill method in accordance with
IFRS 3 Business Combinations.
3 Goodwill was impairment tested after the additional acquisition in Data on
30 November 20X1. The recoverable amount of Data was $1,099 million and that of
Captive was $700 million.
Required:
Prepare a consolidated statement of financial position for the Traveler Group for the
year ended 30 November 20X1.

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Full Disposal of Subsidiary

Consolidated Statement of Financial Position
The statements of financial position of Habib Limited (HL), Faraz Limited (FL) and Momin
Limited (ML) as at June 30, 2009 are as follows:

HL FL ML
Rupees in million
Assets
Non-current assets
Property, plant and equipment 978 595 380
Investments in FL - at cost 520 - -
Investments in ML - at cost 300 - -
1,798 595 380
Current assets
Stocks in trade 210 105 125
Trade and other receivables 122 116 128
Cash and bank 20 38 37
352 259 290
Total assets 2,150 854 670

Equity and liabilities

Equity
Ordinary share capital (Rs. 10 each) 800 360 100
Retained earnings 784 354 450
1,584 714 550
Non-current liabilities
12% debentures 270 - -
Current liabilities
Short term loan 124 - -
Trade and other payables 172 140 120
296 140 120
Total equity and liabilities 2,150 854 670

Following additional information is also available:

(i) HL acquired 60% shares of FL on January 1, 2003 for Rs. 400 million when the
retained earnings of FL stood at Rs. 250 million. On January 1, 2006, a further 20%
shares in FL were acquired for Rs. 120 million. FL’s retained earnings on the date of
second acquisition were Rs. 400 million.
(ii) 70% shares of ML were acquired by HL for Rs. 300 million, on July 1, 2006 when
ML’s retained earnings stood at Rs. 260 million. On December 31, 2008, HL disposed
off its entire holding in ML for Rs. 500 million. The disposal of shares has not yet
been recorded in HL’s financial statements.
(iii) On January 1, 2009, FL purchased a machine for Rs. 20 million and immediately sold
it to HL for Rs. 24 million. However, no payment has yet been made by HL. The
estimated useful life of the machine is 4 years and HL charges depreciation on the
straight line method.
(iv) During the year, HL sold finished goods to FL at cost plus 20%. The amount invoiced
during the year amounted to Rs. 75 million. 60% of these goods had been sold by FL
till June 30, 2009.
(v) During the year ended June 30, 2009, FL and ML earned profits of Rs. 10 million and
Rs. 50 million respectively. The profits had accrued evenly, throughout the year.
(vi) An impairment review at year end indicated that 15% of the goodwill recognised on
acquisition of FL, is required to be written off.
(vii) HL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s identifiable net assets.
Required:
Prepare the consolidated statement of financial position of HL as at June 30, 2009 in
accordance with the requirements of International Financial Reporting Standards. (Ignore
current and deferred tax implications.)
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 AAFR VOLUME 2

Full Disposal of Subsidiary

Consolidated Statement of Profit / (loss) & Consolidated Statement of Changes in Equity

Following are the extracts from the draft financial statements of three companies for the yea
ended 30 June 2012:
INCOME STATEMENTS
Tiger Limited Panther Limited Leopard Limited
(TL) (PL) (LL)
-------------------Rs. in million-------------------
Revenue 6,760 568 426
Cost of sales (4,370) (416) (218)
Gross profit 2,390 152 208
Operating expenses (1,270) (54) (132)
Profit from operations 1,120 98 76
Investment income 730 - 10
Profit before taxation 1,850 98 86
Income tax expense (400) (20) (17)
Profit for the year 1,450 78 69

STATEMENTS OF CHANGES IN EQUITY

Ordinary share capital
Retained earnings
of Rs. 10 each
TL PL LL TL PL LL
---------------------------Rs. in million--------------------------
As on 1 July 2011 10,000 800 600 2,380 270 70
Final dividend for the year
ended 30 June 2011 - - - (1,000) - (60)
Profit for the year - - - 1,450 78 69
As on 30 June 2012 10,000 800 600 2,830 348 79

The following information is also available:

(i) Several years ago, TL acquired 64 million shares in PL for Rs. 1,000 million when PL’s
retained earnings were Rs. 55 million. Up to 30 June 2011, cumulative impairment
losses of Rs. 50 million had been recognized in the consolidated financial statements, in
respect of goodwill.
On 31 December 2011, TL disposed off its entire holding in PL for Rs. 1,300 million.
(ii) On 1 July 2011, 42 million shares of LL were acquired by TL for Rs. 550 million. An
impairment review at 30 June 2012 indicated that goodwill recognized on acquisition
has been impaired by Rs. 7 million.
(iii) During the year, LL sold goods costing Rs. 50 million to TL at a mark-up of 20% on
cost. 40% of these goods remained unsold on 30 June 2012.
(iv) Investment income appearing in TL’s separate income statement includes profit on sale
of PL’s shares and dividend received from LL.
(v) TL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s identifiable net assets.
It may be assumed that profits of all companies had accrued evenly during the year.

Required:
Prepare TL’s consolidated income statement and consolidated statement of changes in equity
for the year ended 30 June 2012 in accordance with the requirements of International
Financial Reporting Standards. (Ignore deferred tax implications)

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 AAFR VOLUME 2

Par�al Disposal of Subsidiary’ Share with Loss of Control - Subsidiary to Investment

Vail purchased a 60% interest in Nest for $80 million on 1 January 20X4 when the fair value of
iden�fiable net assets was $100 million. Vail elected to measure the non-controlling interest in Nest at
the propor�onate share of the fair value of iden�fiable net assets.
An impairment of $4 million arose on the goodwill in Nest in the year ended 31 December 20X5.
Vail sold a 50% stake in Nest for $75 million on 31 December 20X5. The fair value of the Vail’s remaining
investment in Nest was $15 million at that date. The carrying amount of Nest’s iden�fiable net assets
other than goodwill was $130 million at the date of sale.
Vail had carried the investment at cost. The Finance Director calculated that a gain of $10 million arose
on the sale of Nest in the group financial statements, being the sales proceeds of $75 million less $65
million, being the percentage of iden�fiable net assets sold (50% × $130 million).
Required: Explain to the directors of Vail, with suitable calcula�ons, how the group profit on disposal
of the shareholding in Nest should have been accounted for.
Solu�on:
The Finance Director has calculated the group profit on disposal incorrectly. Prior to the disposal, Nest
was a 60% subsidiary. A�er selling a 50% stake, Vail is le� with a 10% simple investment in Nest with
no significant influence or control. In substance, Vail has ‘sold’ a 60% subsidiary, so Nest should be
deconsolidated and a group profit or loss on disposal recognised. On the same date, in substance, Nest
has ‘purchased’ a 10% investment, so this remaining investment should be remeasured to its fair value
at the date control was lost (31 December 20X5).
The Finance Director was correct to calculate a group profit on disposal but he made three errors in
his calcula�on. Firstly, he has deconsolidated the por�on of net assets sold (50%) rather than 100% of
net assets and a 40% non-controlling interest. As Nest is no longer a subsidiary, it should have been
fully deconsolidated. Secondly, he has forgoten to deconsolidate goodwill. Thirdly, he did not
remeasure the remaining 10% investment to fair value.
The corrected group loss on disposal calcula�on is shown below. The correc�on results in the Finance
Director’s profit of $10 million becoming a loss of $4 million.
Calcula�on:
Group profit or loss on disposal
$m $m
Fair value of considera�on received (for 50% sold) 75
Fair value of 10% investment retained 15
Less: Share of consolidated carrying amount when control lost
- Net assets 30
- Goodwill (W2) 16
- Less non-controlling interests (W3) (52)
(94)
Group loss on disposal (4)

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 AAFR VOLUME 2

Workings
1. Group structure

2. Goodwill
$m
Considera�on transferred 80
Non-controlling interests (100 × 40%) 40
Less fair value of iden�fiable net assets at acquisi�on (100)
20
Impairment (4)
16
3. Non-controlling interests (SOFP) at date of loss of control
$m
NCI at acquisi�on (100 × 40%) 40
NCI share of post-acquisi�on reserves ((130 – 100)* × 40%) 12
52
*Post-acquisi�on reserves can be calculated as the difference between net assets at disposal and net
assets at acquisi�on. This is because net assets equal equity and, provided there has been no share
issue since acquisi�on, the movement in equity and net assets is solely due to the movement in
reserves.

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Par�al Disposal of Subsidiary’ Share without Loss of Control - Subsidiary to Subsidiary

On 1 December 20X0, Trail acquired 80% of Dial’s 600 million $1 shares for a cash considera�on of
$800 million and obtained control over Dial. At that date, the fair value of the non-controlling interest
in Dial was $190 million. Trail wishes to measure the non-controlling interest at fair value at the date
of acquisi�on. On 1 December 20X0, the retained earnings of Dial were $300 million and other
components of equity were $10 million. The fair value of Dial’s net assets was equivalent to their
carrying amounts.

On 30 November 20X1, Trail sold a 5% shareholding in Dial for $60 million but retained control. At 30
November 20X1, Dial had retained earnings of $450 million and other components of equity of $30
million.
Required: Explain, with appropriate workings, how the following figures in rela�on to Dial should be
calculated for inclusion in the consolidated statement of financial posi�on of the Trail group as at 30
November 20X1:
1. Non-controlling interests
2. The adjustment required to equity as a result of the disposal
Solu�on
1. Non-controlling interests
Explana�on:
The non-controlling interests (NCI) balance in the consolidated statement of financial posi�on shows
the propor�on of Dial which is not owned by Trail at the year end (25%). The NCI are allocated their
20% share of retained earnings and other components of equity up to 30 November 20X1. NCI is then
adjusted as a result of the 5% increase in NCI on the 30 November 20X1. This means that at the year
end the NCI will represent the 25% share of Dial that Trail do not own. The NCI balance at the year end
is calculated as follows:
Calcula�on:

$m
NCI at acquisi�on 190
NCI share of post-acquisi�on retained earnings to disposal (20% × [450 – 300]) 30
NCI share of post-acquisi�on other components of equity to disposal (20% × [30 – 10]) 4
NCI at date of disposal 224
Increase in NCI on date of disposal (224 × 5%/20%) 56
NCI at year end 280
2. Adjustment to equity

Explana�on:

This is a transac�on between shareholders of Dial: Trial has sold of a 5% shareholding in Dial to the
NCI of Dial. In substance then, no disposal has taken place and no profit on disposal should be
recognised. Instead an adjustment to equity should be recorded, atributed to the owners of Trail,
being the difference between the considera�on received for the shareholding and the increase in the
NCI.

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 AAFR VOLUME 2

Calcula�on:
$m
Fair value of considera�on received 60
Increase in NCI (56)
Adjustment to equity 4
Working
Group structure

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 AAFR VOLUME 2

Disposal of Subsidiary's Share with and without loss of control

Consolidated Statements of Financial Posi�on

GRANGE

Grange, a public limited company, operates in the manufacturing sector. The dra� statements of
financial posi�on of the group companies are as follows at 30 November 2009:

Grange Park Fence

$m $m $m
Assets:
Non-current assets
Property plant and equipment 257 311 238
Investments in subsidiaries
- Park 340
- Fence 134
Investment in Si�n 16
747 311 238
Current assets 475 304 141
Total assets 1,222 615 379

Equity and liabili�es:

Equity share capital 430 230 150
Retained earnings 410 170 65
Other components of equity 22 14 17
Total equity 862 414 232
Non-current liabili�es 172 124 38
Current liabili�es:
Trade and other payables 178 71 105
Provisions for liabili�es 10 6 4
Total equity and liabili�es 1,222 615 379

The following informa�on is relevant to the prepara�on of the group financial statements:

(i) On 1 June 2008, Grange acquired 60% of the equity interests of Park, a public limited company.
The purchase considera�on comprised cash of $250 million. Excluding the franchise referred
to below, the fair value of the iden�fiable net assets was $360 million. The excess of the fair
value of the net assets is due to an increase in the value of non-depreciable land.

Park held a franchise right, which at 1 June 2008 had a fair value of $10 million. This had not
been recognised in the financial statements of Park. The franchise agreement had a remaining
term of five years to run at that date and is not renewable. Park s�ll holds this franchise at the
year-end.

Grange wishes to use the ‘full goodwill’ method for all acquisi�ons. The fair value of the non-
controlling interest in Park was $150 million on 1 June 2008. The retained earnings of Park
were $115 million and other components of equity were $10 million at the date of acquisi�on.

Grange acquired a further 20% interest from the non-controlling interests in Park on 30
November 2009 for a cash considera�on of $90 million.

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 AAFR VOLUME 2

(ii) On 31 July 2008, Grange acquired a 100% of the equity interests of Fence for a cash
considera�on of $214 million. The iden�fiable net assets of Fence had a provisional fair value
of $202 million, including any con�ngent liabili�es. At the �me of the business combina�on,
Fence had a con�ngent liability with a fair value of $30 million. At 30 November 2009, the
con�ngent liability met the recogni�on criteria of IAS 37 Provisions, con�ngent liabili�es and
con�ngent assets and the revised es�mate of this liability was $25 million. The accountant of
Fence is yet to account for this revised liability.

However, Grange had not completed the valua�on of an element of property, plant and
equipment of Fence at 31 July 2008 and the valua�on was not completed by 30 November
2008. The valua�on was received on 30 June 2009 and the excess of the fair value over book
value at the date of acquisi�on was es�mated at $4 million. The asset had a useful economic
life of 10 years at 31 July 2008.

The retained earnings of Fence were $73 million and other components of equity were $9
million at 31 July 2008 before any adjustment for the con�ngent liability.

On 30 November 2009, Grange disposed of 25% of its equity interest in Fence to the non-
controlling interest for a considera�on of $80 million. The disposal proceeds had been credited
to the cost of the investment in the statement of financial posi�on.

(iii) On 30 June 2008, Grange had acquired a 100% interest in Si�n, a public limited company, for
a cash considera�on of $39 million. Si�n’s iden�fiable net assets were fair valued at $32
million.

On 30 November 2009, Grange disposed of 60% of the equity of Si�n when its iden�fiable net
assets were $35 million. The sale proceeds were $23 million and the remaining equity interest
was fair valued at $13 million. Grange could s�ll exert significant influence a�er the disposal
of the interest. The only accoun�ng entry made in Grange’s financial statements was to
increase cash and reduce the cost of the investment in Si�n.

(iv) Grange acquired a plot of land on 1 December 2008 in an area where the land is expected to
rise significantly in value if plans for regenera�on go ahead in the area. The land is currently
held at cost of $6 million in property, plant and equipment un�l Grange decides what should
be done with the land. The market value of the land at 30 November 2009 was $8 million but
as at 15 December 2009, this had reduced to $7 million as there was some uncertainty
surrounding the viability of the regenera�on plan.

(v) Grange an�cipates that it will be fined $1 million by the local regulator for environmental
pollu�on. It also an�cipates that it will have to pay compensa�on to local residents of $6
million although this is only the best es�mate of that liability. In addi�on, the regulator has
requested that certain changes be made to the manufacturing process in order to make the
process more environmentally friendly. This is an�cipated to cost the company $4 million.

(vi) Grange has a property located in a foreign country, which was acquired at a cost of 8 million
dinars on 30 November 2008 when the exchange rate was $1 = 2 dinars. At 30 November 2009,
the property was revalued to 12 million dinars. The exchange rate at 30 November 2009 was
$1 = 1.5 dinars. The property was being carried at its value as at 30 November 2008. The
company policy is to revalue property, plant and equipment whenever material differences

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exist between book and fair value. Deprecia�on on the property can be assumed to be
immaterial.

(vii) Grange has prepared a plan for reorganising the parent company’s own opera�ons. The board
of directors has discussed the plan but further work has to be carried out before they can
approve it. However, Grange has made a public announcement as regards the reorganisa�on
and wishes to make a reorganisa�on provision at 30 November 2009 of $30 million. The plan
will generate cost savings. The directors have calculated the value in use of the net assets (total
equity) of the parent company as being $870 million if the reorganisa�on takes place and $830
million if the reorganisa�on does not take place. Grange is concerned that the parent
company’s property, plant and equipment have lost value during the period because of a
decline in property prices in the region and feel that any impairment charge would relate to
these assets. There is no reserve within other equity rela�ng to prior revalua�on of these non-
current assets.

Required: Prepare a consolidated statement of financial posi�on of the Grange Group at 30 November
2009 in accordance with Interna�onal Financial Repor�ng Standards.

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Disposal of Subsidiary's Share with and without loss of control
Consolidated statements of profit or loss and other comprehensive income

MARCHANT

The following draft financial statements relate to Marchant, a public limited company.
Marchant Group: Draft statements of profit or loss and other comprehensive income for the
year ended 30 April 2014.
Marchant Nathan Option
$m $m $m
Revenue 400 115 70
Cost of sales (312) (65) (36)
–––– –––– –––
Gross profit 88 50 34
Other income 21 7 2
Administrative costs (15) (9) (12)
Other expenses (35) (19) (8)
–––– –––– –––
Operating profit 59 29 16
Finance costs (5) (6) (4)
Finance income 6 5 8
–––– –––– –––
Profit before tax 60 28 20
Income tax expense (19) (9) (5)
–––– –––– –––
Profit for the year 41 19 15
–––– –––– –––
Other comprehensive income – revaluation surplus 10 – –
–––– –––– –––
Total comprehensive income for year 51 19 15
–––– –––– –––

The following information is relevant to the preparation of the group statement of profit or loss and
other comprehensive income:
1 On 1 May 2012, Marchant acquired 60% of the equity interests of Nathan, a public limited
company. The purchase consideration comprised cash of $80 million and the fair value of the
identifiable net assets acquired was $110 million at that date. The fair value of the non-
controlling interest (NCI) in Nathan was $45 million on 1 May 2012. Marchant wishes to use
the ‘full goodwill’ method for all acquisitions. The share capital and retained earnings of
Nathan were $25 million and $65 million respectively and other components of equity
were $6 million at the date of acquisition. The excess of the fair value of the identifiable
net assets at acquisition is due to non-depreciable land.
Goodwill has been impairment tested annually and as at 30 April 2013 had reduced in value
by 20%. However at 30 April 2014, the impairment of goodwill had reversed and goodwill was
valued at $2 million above its original value. This upward change in value has already been
included in above draft financial statements of Marchant prior to the preparation of the
group accounts.
2 Marchant disposed of an 8% equity interest in Nathan on 30 April 2014 for a cash consideration
of $18 million and had accounted for the gain or loss in other income. The carrying value of the
net assets of Nathan at 30 April 2014 was $120 million before any adjustments on consolidation.
Marchant accounts for investments in subsidiaries using IFRS 9 Financial Instruments and has
made an election to show gains and losses in other comprehensive income. The carrying value of
the investment in Nathan was $90 million at 30 April 2013 and $95 million at 30 April 2014
before the disposal of the equity interest

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3 Marchant acquired 60% of the equity interests of Option, a public limited company, on 30
April 2012. The purchase consideration was cash of $70 million. Option’s identifiable net
assets were fair valued at $86 million and the NCI had a fair value of $28 million at that date.
On 1 November 2013, Marchant disposed of a 40% equity interest in Option for a
consideration of $50 million. Option’s identifiable net assets were $90 million and the value
of the NCI was $34 million at the date of disposal. The remaining equity interest was fair
valued at $40 million. After the disposal, Marchant exerts significant influence. Any
increase in net assets since acquisition has been reported in profit or loss and the
carrying value of the investment in Option had not changed since acquisition. Goodwill
had been impairment tested and no impairment was required. No entries had been
made in the financial statements of Marchant for this transaction other than for cash
received.
4 Marchant sold inventory to Nathan for $12 million at fair value. Marchant made a loss on
the transaction of $2 million and Nathan still holds $8 million in inventory at the year end.
5 The following information relates to Marchant’s pension scheme:
Plan assets at 1 May 2013 48
Defined benefit obligation at 1 May 2013 50
Service cost for year ended 30 April 2014 4
Discount rate at 1 May 2013 10%
Re-measurement loss in year ended 30 April 2014 2
Past service cost 30 April 2014 3
The pension costs have not been accounted for in total comprehensive income.

6 On 1 May 2012, Marchant purchased an item of property, $m plant and equipment for $12
million and this is being depreciated using the straight line basis over 10 years with a zero
residual value. At 30 April 2013, the asset was revalued to $13 million but at 30 April 2014,
the value of the asset had fallen to $7 million. Marchant uses the revaluation model to
value its non-current assets. The effect of the revaluation at 30 April 2014 had not been
taken into account in total comprehensive income but depreciation for the year had been
charged.

7 On 1 May 2012, Marchant made an award of 8,000 share options to each of its seven
directors. The condition attached to the award is that the directors must remain
employed by Marchant for three years. The fair value of each option at the grant date
was $100 and the fair value of each option at 30 April 2014 was $110. At 30 April
2013, it was estimated that three directors would leave before the end of three years. Due
to an economic downturn, the estimate of directors who were going to leave was revised to
one director at 30 April 2014. The expense for the year as regards the share options had
not been included in profit or loss for the current year and no directors had left by 30 April
2014.

8 A loss on an effective cash flow hedge of Nathan of $3 million has been included in the
subsidiary’s finance costs.

9 Ignore the taxation effects of the above adjustments unless specified. Any expense
adjustments should be amended in other expenses.

Required:
Prepare a consolidated statement of profit or loss and other comprehensive income for the year
ended 30 April 2014 for the Marchant Group.

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Deemed Disposal

At 1 January 20X2 Rey Co (Rey), a public limited company, owned 75% of the equity shares of Mago
Co (Mago) and had control over it.
The consolidated carrying amount of Mago’s net assets on 1 September 20X2 was $14 million.
Goodwill of $2 million was recognised upon the ini�al acquisi�on of Mago, and has not subsequently
been impaired. Rey Co elected to measure the non-controlling interests in Mago at fair value at
acquisi�on. At 1 September 20X2, non-controlling interests (based on the original shareholding in
Mago) amounted to $3.9 million.
On 1 September 20X2, Mago issued new shares for $5 million, which were all purchased by a new
investor unrelated to Rey. The fair value of Mago at that date (before the share issue) was $18 million.
A�er the share issue, Rey retained an interest of 40% of the equity shares of Mago and retained two
of the six seats on the board of directors (previously Rey held five of the six seats).
Required: Explain the accoun�ng treatment for Mago in the consolidated financial statements of the
Rey group for the year ended 31 December 20X2.
Solu�on:
From the beginning of the repor�ng period up to 31 August 20X2, Mago should be consolidated as a
subsidiary because Rey has control over Mago.
On 1 Sep 20X2, as a result of the share issue, Rey’s shareholding is reduced to 40% and it retains just
two of the six seats on the board of directors. This would appear to give Rey significant influence over
Mago, but not control. In IAS 28, significant influence is presumed to exist when an en�ty holds at least
20% of the equity shares of the investee. IAS 28 also states that representa�on on the board of
directors provides evidence that significant influence exists. To have control over Mago, amongst other
considera�ons, Rey would need to have the power to direct the ac�vi�es of Mago and this is unlikely
to be the case when Rey can only appoint two out of six directors. Assuming therefore that Rey lost
control of Mago on 1 September 20X2, this is a deemed disposal and a loss of $2.9 million on the
deemed disposal should be recognised in the consolidated statement of profit or loss, calculated as:
$m $m
Fair value of considera�on received 0
Fair value of 40% investment retained ((18 + 5) × 40%) 9.2
Less: Share of consolidated carrying amount when control lost
- Net assets 14
- Goodwill (W2) 2
- Less non-controlling interests (W3) (3.9)
(12.1)
Loss on disposal (2.9)
The amount recognised in profit or loss includes a loss on disposal of the 35% shareholding and a profit
on the upli� of the retained interest to fair value; the fair value of the retained interest is the deemed
cost for equity accoun�ng purposes. For the final four months of the year, Rey has significant influence
over Mago, and therefore Mago should be equity accounted as an associate in the consolidated
financial statements. In the consolidated statement of financial posi�on, the investment in Mago
should be ini�ally recognised on 1 September 20X2 at its deemed cost of $9.2 million and then
subsequently measured by adding Rey’s 40% share of Mago’s post-acquisi�on reserves less any
impairment losses.

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Ver�cal Group / Sub-Subsidiary

H Ltd acquired 75% of S Ltd on 1 January 20X4 when the retained profits of S were 40,000$.
S Ltd acquired 60% of T Ltd on 30 June 20X4 when the retained profits of T Ltd were 25,000$. They had
been 20,000$ on the date of H Ltd’s acquisi�on of S Ltd.
Dra� statements of financial posi�on of H Ltd, S Ltd and T Ltd, as at 31 December 20X4, are as follows:
H Ltd S Ltd T Ltd
$000 $000 $000
Other assets 280 110 100
Investment in S 120 - -
Investment in T - 80 -
400 190 100

Share capital 200 100 50

Retained profits 100 60 30
Liabili�es 100 30 20
400 190 100

Required: Consolidated Statement of Financial Posi�on as at 31 December 20X4.

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Vertical Group / Sub-Subsidiary

Consolidated Statement of Financial Position

MINNY
Minny is a company which operates in the service sector. Minny has business relationships
with Bower and Heeny. All three entities are public limited companies. The draft
statements of financial position of these entities are as follows at 30 November 2012:
Minny Bower Heeny
$m $m $m
Assets:
Non-current assets
Property, plant and equipment 920 300 310
Investments in subsidiaries
Bower 730
Heeny 320
Investment in Puttin 48
Intangible assets 198 30 35
––––– ––––– –––––
1,896 650 345
––––– ––––– –––––
Current assets 895 480 250
––––– ––––– –––––
Total assets 2,791 1,130 595
––––– ––––– –––––
Equity and liabilities:
Share capital 920 400 200
Other components of equity 73 37 25
Retained earnings 895 442 139
––––– ––––– –––––
Total equity 1,888 879 364
––––– ––––– –––––
Non-current liabilities 495 123 93
––––– ––––– –––––
Current liabilities 408 128 138
––––– ––––– –––––
Total liabilities 903 251 231
––––– ––––– –––––
Total equity and liabilities 2,791 1,130 595
––––– ––––– –––––

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The following information is relevant to the preparation of the group financial statements:
(1) On 1 December 2010, Minny acquired 70% of the equity interests of Bower. The
purchase consideration comprised cash of $730 million. At acquisition, the fair value of the
non-controlling interest in Bower was $295 million. On 1 December 2010, the fair value of
the identifiable net assets acquired was $835 million and retained earnings of Bower
were $319 million and other components of equity were$27 million. The excess in
fair value is due to non-depreciable land.
(2) On 1 December 2011, Bower acquired 80% of the equity interests of Heeny for a cash
consideration of $320 million. The fair value of a 20% holding of the non-controlling
interest was $72 million, a 30% holding was $108 million and a 44% holding was$161
million. At the date of acquisition, the identifiable net assets of Heeny had a fair value of
$362 million, retained earnings were $106 million and other components of equity were
$20 million. The excess in fair value is due to non-depreciable land.
It is the group’s policy to measure the non-controlling interest at fair value at the date
of acquisition.
(3) Both Bower and Heeny were impairment tested at 30 November 2012. The
recoverable amounts of both cash generating units as stated in the individual
financial statements at 30 November 2012 were Bower, $1,425 million, and Heeny,$604
million, respectively. The directors of Minny felt that any impairment of assets was due to
the poor performance of the intangible assets and it was deemed that other assets were
already held at recoverable amount. The recoverable amounts have been determined
without consideration of liabilities which all relate to the financing of operations.
(4) Minny acquired a 14% interest in Puttin, a public limited company, on 1
December 2010 for a cash consideration of $18 million. The investment was
accounted for under IFRS 9 Financial Instruments and was designated as at fair value
through other comprehensive income. On 1 June 2012, Minny acquired an additional 16%
interest in Puttin for a cash consideration of $27 million and achieved significant influence.
The value of the original 14% investment on 1 June 2012 was $21 million. Puttin made
profits after tax of $20 million and $30 million for the years to 30 November 2011
and 30 November 2012 respectively. On 30 November 2012, Minny received a
dividend from Puttin of $2 million, which has been credited to other components of
equity.
(5) Minny purchased patents of $10 million to use in a project to develop new products on 1
December 2011. Minny has completed the investigative phase of the project, incurring
an additional cost of $7 million and has determined that the product can be developed
profitably. An effective and working prototype was created at a cost of$4 million and in
order to put the product into a condition for sale, a further$3 million was spent.
Finally, marketing costs of $2 million were incurred. All of the above costs are included in
the intangible assets of Minny.
(6) Minny intends to dispose of a major line of the parent’s business operations. At the date
the held for sale criteria were met, the carrying amount of the assets and liabilities
comprising the line of business were:
$m
Property, plant and equipment (PPE) 49
Inventory 18
Current liabilities 3
It is anticipated that Minny will realise $30 million for the business. No adjustments have
been made in the financial statements in relation to the above decision.
Required:
Prepare the consolidated statement of financial position for the Minny Group as at 30 November 2012.

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Mixed Group / D-Shaped Group

The statements of financial posi�on H, S and T as at 31 December 20X7 were as follows:

H Ltd S Ltd T Ltd
$000 $000 $000
Investment in S 5,000 - -
Investment in T 1,000 1,750 -
Other Assets 11,900 9,000 2,400
17,900 10,750 2,400

Share capital 10,000 3,000 300

Retained profits 5,900 4,750 1,600
Liabili�es 2,000 3,000 500
17,900 10,750 2,400
 H acquired its 80% investment in S on 1 June 20X1.
 H acquired its 10% investment in S on 15 October 20X2.
 S acquired its 45% investment in T on 1 May 20X3.
The following informa�on is available:
Retained Retained
Earnings of S Ltd Earnings of T Ltd
$000 $000
1 June 20X1 2,000 500
15 October 20X2 2,300 650
1 May 20X3 3,000 800
The fair value of H’s 10% holding in T was Rs. 1,500,000 on 1 May 20X3.
Required: Prepare the consolidated statement of financial posi�on for the H Group as at 31 December
20X7.

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Solu�on:
From the beginning of the repor�ng period up to 31 August 20X2, Mago should be consolidated as a
subsidiary because Rey has control over Mago.
On 1 Sep 20X2, as a result of the share issue, Rey’s shareholding is reduced to 40% and it retains just
two of the six seats on the board of directors. This would appear to give Rey significant influence over
Mago, but not control. In IAS 28, significant influence is presumed to exist when an en�ty holds at least
20% of the equity shares of the investee. IAS 28 also states that representa�on on the board of
directors provides evidence that significant influence exists. To have control over Mago, amongst other
considera�ons, Rey would need to have the power to direct the ac�vi�es of Mago and this is unlikely
to be the case when Rey can only appoint two out of six directors. Assuming therefore that Rey lost
control of Mago on 1 September 20X2, this is a deemed disposal and a loss of $2.9 million on the
deemed disposal should be recognised in the consolidated statement of profit or loss, calculated as:
$m $m
Fair value of considera�on received 0
Fair value of 40% investment retained ((18 + 5) × 40%) 9.2
Less: Share of consolidated carrying amount when control lost
- Net assets 14
- Goodwill (W2) 2
- Less non-controlling interests (W3) (3.9)
(12.1)
Loss on disposal (2.9)
The amount recognised in profit or loss includes a loss on disposal of the 35% shareholding and a profit
on the upli� of the retained interest to fair value; the fair value of the retained interest is the deemed
cost for equity accoun�ng purposes. For the final four months of the year, Rey has significant influence
over Mago, and therefore Mago should be equity accounted as an associate in the consolidated
financial statements. In the consolidated statement of financial posi�on, the investment in Mago
should be ini�ally recognised on 1 September 20X2 at its deemed cost of $9.2 million and then
subsequently measured by adding Rey’s 40% share of Mago’s post-acquisi�on reserves less any
impairment losses.

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Complex Group / D-Shaped Group

Consolidated Statement of Financial Position

TRAILER

Trailer, a public limited company, operates in the manufacturing sector. Trailer has
investments in two other companies. The draft statements of financial position at
31 May 2013 are as follows:
Trailer Park Caller
$m $m $m
Assets:
Non-current assets
Property, plant and equipment 1,440 1,100 1,300
Investments in subsidiaries
Park 1,250
Caller 310 1,270
Financial assets 320 21 141
–––––– –––––– ––––––
3,320 2,391 1,441
–––––– –––––– ––––––
Current assets 895 681 150
–––––– –––––– ––––––
Total assets 4,215 3,072 1,591
–––––– –––––– ––––––
Equity and liabilities:
Share capital 1,750 1,210 800
Retained earnings 1,240 930 350
Other components of equity 125 80 95
–––––– –––––– ––––––
Total equity 3,115 2,220 1,245
–––––– –––––– ––––––
Non-current liabilities 985 765 150
–––––– –––––– ––––––
Current liabilities 115 87 196
–––––– –––––– ––––––
Total liabilities 1,100 852 346
–––––– –––––– ––––––
Total equity and liabilities 4,215 3,072 1,591
–––––– –––––– ––––––

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The following information is relevant to the preparation of the group financial

statements:
(1) On 1 June 2011, Trailer acquired 14% of the equity interests of Caller for a cash
consideration of $260 million and Park acquired 70% of the equity interests of Caller for
a cash consideration of $1,270 million. At 1 June 2011, the identifiable net
assets of Caller had a fair value of $990 million, retained earnings were $190 million
and other components of equity were $52 million. At 1 June 2012, the identifiable net
assets of Caller had a fair value of$1,150 million, retained earnings were $240 million
and other components of equity were $70 million. The excess in fair value is due to
non-depreciable land. The fair value of the 14% holding of Trailer in Caller, which was
classified as fair value through profit or loss, was $280 million at 31 May 2012 and
$310 million at 31 May 2013. The fair value of Park’s interest in Caller had not changed
since acquisition.
(2) On 1 June 2012, Trailer acquired 60% of the equity interests of Park, a public limited
company. The purchase consideration comprised cash of$1,250 million. On 1
June 2012, the fair value of the identifiable net assets acquired was $1,950 million
and retained earnings of Park were $650 million and other components of equity were
$55 million. The excess in fair value is due to non-depreciable land. It is the group’s
policy to measure the non-controlling interest at acquisition at its proportionate share
of the fair value of the subsidiary’s net assets.
(3) Goodwill of Park and Caller was impairment tested at 31 May 2013. There was no
impairment relating to Caller. The recoverable amount of the net assets of Park was
$2,088 million. There was no impairment of the net assets of Park before this date and
any impairment loss has been determined to relate to goodwill and property, plant and
equipment.
(4) Trailer has made a loan of $50 million to a charitable organisation for the building of
new sporting facilities. The loan was made on 1 June 2012 and is repayable on maturity
in three years’ time. Interest is to be charged one year in arrears at 3%, but Trailer
assesses that an unsubsidised rate for such a loan would have been 6%. Trailer
recorded a financial asset at $50 million and reduced this by the interest received in
the year. The loss allowance has been correctly dealt with.

(5) On 1 June 2011, Trailer acquired office accommodation at a cost of $90 million with a 30-
year estimated useful life. During the year, the property market in the area slumped
and the fair value of the accommodation fell to $75 million at 31 May 2012 and this was
reflected in the financial statements. However, the market recovered unexpectedly
quickly due to the announcement of major government investment in the area’s
transport infrastructure. On 31 May 2013, the valuer advised Trailer that the offices
should now be valued at $105 million. Trailer has charged depreciation for the year but
has not taken account of the upward valuation of the offices. Trailer uses the
revaluation model and records any valuation change when advised to do so.
(6) Trailer has announced two major restructuring plans. The first plan is to reduce its capacity
by the closure of some of its smaller factories, which have already been identified. This
will lead to the redundancy of 500 employees, who have all individually been selected
and communicated with. The costs of this plan are $9 million in redundancy costs, $4
million in retraining costs and $5 million in lease termination costs. The second plan is to
re-organise the finance and information technology department over a one-year period
but it does not commence for two years. The plan results in 20% of finance staff losing
their jobs during the restructuring. The costs of this plan are $10 million in
redundancy costs, $6 million in retraining costs and $7 million in equipment lease
termination costs. No entries have been made in the financial statements for the above
plans.

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(7) The following information relates to the group pension plan of Trailer:
1 June 2012 31 May 2013
$m $m
Fair value of plan assets 28 29
Actuarial value of defined benefit obligation 30 35
The contributions for the period received by the fund were $2 million and the
employee benefits paid in the year amounted to $3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is $1 million. The above figures have not been taken into
account for the year ended 31 May 2013 except for the contributions paid
which have been entered in cash and the defined benefit obligation.

Required:
Prepare the group consolidated statement of financial position of Trailer as at 31 May 2013.

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Acquisition and Disposal of Subsidiary

Consolidated Statement of Cash flows [Indirect Method]

Consolidated financial statements of Malik Group of Companies (MGC) for the year ended
31 December 2014 are presented below:

Consolidated statement of financial position as on 31 December 2014

2014 2013 2014 2013
Equity Rs. in million Non-current assets Rs. in million
Ordinary shares (Rs.10 each) 15,000 15,000 Goodwill 19,300 18,500
Retained earnings 17,550 10,850 Property, plant and equipment 25,450 16,250
Other reserves * 7,500 5,250 Investment in associate 6,200 5,400
40,050 31,100 50,950 40,150
Non-controlling interest 3,100 3,200

Non-current liabilities Current assets

Loans from banks 5,000 3,000 Inventories 4,700 4,350
Deferred tax 1,500 1,050 Trade and other receivables 3,900 3,300
Cash and bank 2,100 1,400
Current liabilities
Trade and other payables 8,000 7,250
Income tax 3,875 3,525
Accrued interest 125 75
61,650 49,200 61,650 49,200
* include revaluation reserve

Consolidated statement of comprehensive income for the year ended 31 December 2014
Rs. in million
Revenue 20,900
Operating expenses (11,550)
Profit from operations 9,350
Gain on disposal of subsidiary 1,000
Finance cost (350)
Income from associates 1,150
Profit before taxation 11,150
Income tax expense (2,250)
Profit for the year 8,900
Other comprehensive income for the year
Re-measurement of post-employment benefits 2,000
Other comprehensive income from associates 500
Total comprehensive income 11,400

Profit attributable to:

 Parent shareholders 7,950
 Non-controlling interest 950
8,900

Total comprehensive income attributable to:

 Parent shareholders 10,200
 Non-controlling interest 1,200
11,400

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Additional information:
(i) During the year, MGC acquired 80% holding in Gomel Limited (GL) against a cash
consideration of Rs. 15,000 million. On the date of acquisition, the non-controlling
interest’s holding was measured at its fair value of Rs. 3,400 million. The fair value of
net assets of GL at acquisition comprised of the following:

Rs. in million
Property, plant and equipment 12,800
Inventory 1,500
Trade and other receivables 2,400
Cash and bank 800
Loans from banks (400)
Trade and other payables (1,800)
Income tax (400)
14,900

(ii) During the year, MGC also disposed of its 60% shareholdings in Stone Limited (SL)
and realised cash proceeds of Rs. 8,500 million. This subsidiary had been acquired
several years ago for Rs. 6,000 million. At acquisition, the fair value of SL’s net assets
and non-controlling interest was Rs. 7,300 million and Rs. 3,200 million respectively.
On the date of disposal, the net assets of SL had a carrying value in the consolidated
statement of financial position as follows:

Rs. in million
Property, plant and equipment 7,250
Inventory 1,650
Trade and other receivables 1,500
Cash and bank 500
Loans from banks (300)
Trade and other payables (800)
9,800

(iii) Property, plant and equipment:

 Depreciation charge for the year is Rs. 3,850 million.
 A plant having carrying value of Rs. 2,500 million was sold for
Rs. 2,750 million. Gain on disposal has been credited to operating expenses.
 On the basis of a professional valuation report, increase of Rs. 2,000 million has
been recognized in the value of property, plant and equipment.

(iv) During the year, Rs. 1,250 million was paid as final dividend to ordinary
shareholders.

Required:
Prepare consolidated statement of cash flow of MGC for the year ended 31 December
2014, using the indirect method.

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Step Acquisition of Subsidiary (From Simple Investment to Subsidiary)

Consolidated Statement of Cash flows

JOCATT GROUP

The following draft group financial statements relate to Jocatt, a public limited company:
Jocatt Group: Statement of financial position as at 30 November
2010 2009
$m $m
Non-current assets
Property, plant and equipment 327 254
Investment property 8 6
Goodwill 48 68
Intangible assets 85 72
Investment in associate 54
Financial assets at FV through OCI 94 90
––––– –––––
616 490
Current assets
Inventories 105 128
Trade receivables 62 113
Cash and cash equivalents 232 143
––––– –––––
Total assets 1,015 874
––––– –––––
Equity and Liabilities $m $m
Equity attributable to the owners of the parent:
Share capital 290 275
Retained earnings 343 324
Other components of equity 23 20
––––– –––––
656 619
Non-controlling interest 55 36
––––– –––––
Total equity 711 655
Non-current liabilities:
Long-term borrowings 67 71
Deferred tax 35 41
Long-term provisions-pension liability 25 22
Current liabilities:
Trade payables 144 55
Current tax payable 33 30
––––– –––––
Total equity and liabilities 1,015 874
––––– –––––

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Jocatt Group: Statement of profit or loss and other comprehensive income for the year
ended 30 November 2010
$m
Revenue 434
Cost of sales (321)
–––––
Gross profit 113
Other income 15
Distribution costs (55.5)
Administrative expenses (36)
Finance costs paid (8)
Gains on property 10.5
Share of profit of associate 6
–––––
Profit before tax 45
Income tax expense (11)
–––––
Profit for the year 34
–––––
Other comprehensive income after tax – items that will not be reclassified $m
to profit or loss in future accounting periods:
Gain on financial assets at FV through OCI 2
Losses on property revaluation (7)
Net remeasurement component gain on defined benefit plan 8
–––––
Other comprehensive income for the year, net of tax 3
–––––
Total comprehensive income for the year 37
–––––
Profit attributable to:
Owners of the parent 24
Non-controlling interest 10
–––––
34
–––––
Total comprehensive income attributable to:
Owners of the parent 27
Non-controlling interest 10
–––––
37
–––––

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Jocatt Group: Statement of changes in equity for the year ended 30 November 2010
Share Retained Other Total Non- Total
capital earnings component controlling equity
of equity interest

$m $m $m $m $m $m
Balance at 1 Dec 2009 275 324 20 619 36 655
Share capital issued 15 15 15
Dividends (5) (5) (13) (18)
Rights issue 2 2
Acquisitions 20 20
Total comp inc for year 24 3 27 10 37
–––– –––– –––– –––– –––– ––––
Balance at 30 Nov 2010 290 343 23 656 55 711
–––– –––– –––– –––– –––– ––––

The following information relates to the financial statements of Jocatt:

(i) On 1 December 2008, Jocatt acquired 8% of the ordinary shares of Tigret. On
recognition, Jocatt had properly designated this investment as fair value through
other comprehensive income in the financial statements to 30 November 2009. On
1 December 2009, Jocatt acquired a further 52% of the ordinary shares of Tigret and
gained control of the company. The consideration for the acquisitions was as follows:
Holding Consideration
$m
1 December 2008 8% 4
1 December 2009 52% 30
––– –––
60% 34
––– –––
At 1 December 2009, the fair value of the 8% holding in Tigret held by Jocatt at the
time of the business combination was $5 million and the fair value of the non-
controlling interest in Tigret was $20 million. No gain or loss on the 8% holding in
Tigret had been reported in the financial statements at 1 December 2009. The
purchase consideration at 1 December 2009 comprised cash of $15 million and
shares of $15 million.
The fair value of the identifiable net assets of Tigret, excluding deferred tax assets
and liabilities, at the date of acquisition comprised the following:
$m
Property, plant and equipment 15
Intangible assets 18
Trade receivables 5
Cash 7
The tax base of the identifiable net assets of Tigret was $40 million at
1 December 2009. The tax rate of Tigret is 30%.
(ii) On 30 November 2010, Tigret made a rights issue on a 1 for 4 basis. The issue was
fully subscribed and raised $5 million in cash.

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(iii) Jocatt purchased a research project from a third party including certain patents on
1 December 2009 for $8 million and recognised it as an intangible asset. During the
year, Jocatt incurred further costs, which included $2 million on completing the
research phase, $4 million in developing the product for sale and $1 million for the
initial marketing costs. There were no other additions to intangible assets in the
period other than those on the acquisition of Tigret.
(iv) Jocatt operates a defined benefit scheme. The current service costs for the year
ended 30 November 2010 are $10 million. Jocatt enhanced the benefits on
1 December 2009, however these do not vest until 30 November 2012. The total cost
of the enhancement is $6 million. The net interest cost of $2 million is included
within finance costs.
(v) Jocatt owns an investment property. During the year, part of the heating system of
the property, which had a carrying value of $0.5 million, was replaced by a new
system, which cost $1 million. Jocatt uses the fair value model for measuring
investment property.
(vi) Jocatt had exchanged surplus land with a carrying value of $10 million for cash of
$15 million and plant valued at $4 million. The transaction has commercial substance.
Depreciation for the period for property, plant and equipment was $27 million.
(vii) Goodwill relating to all subsidiaries had been impairment tested in the year to
30 November 2010 and any impairment accounted for. The goodwill impairment
related to those subsidiaries which were 100% owned.
(viii) Deferred tax of $1 million arose on the gains on the financial assets designated as fair
value through other comprehensive income in the year.
(ix) The associate did not pay any dividends in the year.

Required:
Prepare a consolidated statement of cash flows for the Jocatt Group using the
indirect method under IAS 7 ‘Statement of Cash Flows’.
Note: Ignore deferred taxation other than where it is mentioned in the question.

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 AAFR VOLUME 2

Consolidated Statement of Cash flows [Direct Method]

Alpha Pakistan Limited (APL) is a listed company and has 60% holding in Bravo Limited (BL). The
company is in the process of preparation of its consolidated financial statements for the year ended
30 September 2011. Following are the extracts from the information that has been gathered so far:
Consolidated Statement of Comprehensive Income (Draft)
2011
Rs. in million
Sales 65,000
Cost of products sold (59,110)
Other operating income 2,000
Operating expenses (3,000)
Financial expenses (890)
Income tax expense (1,200)
Profit for the year 2,800
Profit attributable to

Owners of the holding company 2,500

Non-controlling interest 300
2,800

Consolidated Statement of Financial Position (Draft)

2011 2010 2011 2010
Rs. in million Rs. in million
Equity and liabilities Assets
Share capital (Rs. 10 each) 550 500 Property, plant and equipment 1,100 900
Retained earnings 5,950 3,600 Goodwill 15 15
Non-controlling interest 235 120 Long term receivables 24 29
Long term loans 440 145 Stock in trade 6,760 4,280
Deferred tax 210 10 Trade debts 7,534 5,421
Trade and other payables 4,688 3,970 Other receivables 900 725
Accrued financial expenses 35 30 Cash and bank balances 2,645 2,980
Provision for taxation 200 25
Short term borrowings 6,670 5,950
18,978 14,350 18,978 14,350

Following additional information is available:

(i) During the year, BL sold goods amounting to Rs. 140 million to APL at a margin of 25% of
cost. 40% of the above amount remained unpaid and 30% of the goods remained unsold as on
30 September 2011. No adjustments in this regard have been made in the above statements.
(ii) Depreciation charge for the year was Rs. 75 million and Rs. 15 million for APL and BL
respectively.
(iii) During the year APL acquired property, plant and equipment amounting to Rs. 250 million
against a long term loan.
(iv) The amount of long term receivables represents present value of interest free loans to
employees. The gross value of the loans is Rs. 27 million (2010: Rs. 33 million).
(v) Operating expenses include bad debt expenses amounting to Rs. 44 million. During the year,
trade debtors amounting to Rs. 30 million were written off.
(vi) Trade and other payables include APL’s unclaimed dividend amounting to Rs. 8 million (2010:
Rs. 10 million). At APL’s Board meeting held on 30 November 2011, final cash dividend of Rs.
3.0 per share has been proposed (2010: Final cash dividend of Rs 2.0 per share and 10% bonus
shares).

Required:
Prepare a consolidated statement of cash flows including all relevant notes for Alpha Pakistan
Limited for the year ended 30 September 2011 using the direct method in accordance
with International Financial Reporting Standards. (Ignore corresponding figures.)

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Foreign Subsidiary
MEMO
Memo, a public limited company, owns 75% of the equity share capital of Random, a public
limited company which is situated in a foreign country. Memo acquired Random on 1
May 20X3 for 120 million crowns (CR) when the retained earnings of Random were 80
million crowns. Random has not revalued its assets or issued any equity capital since its
acquisition by Memo. The following financial statements relate to Memo and Random:
Statements of financial position at 30 April 20X4
Memo Random
$m CRm
Property, plant and equipment 297 146
Investment in Random 48 –
Loan to Random 5 –
Current assets 355 102
–––– ––––
705 248
–––– ––––

Equity and liabilities $m CRm

Equity shares of $1/1CR 60 32
Share premium account 50 20
Retained earnings 360 95
–––– ––––
470 147
Non-current liabilities 30 41
Current liabilities 205 60
–––– ––––
705 248
–––– ––––

Statements of profit or loss for year ended 30 April 20X4

Memo Random
$m CRm
Revenue 200 142
Cost of sales (120) (96)
–––– ––––
Gross profit 80 46
Distribution and administrative expenses (30) (20)
–––– ––––
Operating profit 50 26
Investment income 4 –
Finance costs – (2)
–––– ––––
Profit before taxation 54 24
Income tax expense (20) (9)
–––– ––––
Profit for the year 34 15
–––– ––––

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There were no items of other comprehensive income in the financial statements of either
entity.
The following information is relevant to the preparation of the consolidated financial
statements of Memo:
(a) During the financial year Random has purchased raw materials from Memo and
denominated the purchase in crowns in its financial records. The details of the
transaction are set out below:
Date of Purchase Profit percentage
transaction price on selling price
$m
Raw materials 1 February 20X4 6 20%
At the year-end, half of the raw materials purchased were still in the inventory of
Random. The inter-company transactions have not been eliminated from the
financial statements and the goods were recorded by Random at the exchange rate
ruling on 1 February 20X4. A payment of $6 million was made to Memo when the
exchange rate was 2.2 crowns to $1. Any exchange gain or loss arising on the
transaction is still held in the current liabilities of Random.
(b) Memo had made an interest free loan to Random of $5 million on 1 May 20X3. The
loan was repaid on 30 May 20X4. Random had included the loan in non-current
liabilities and had recorded it at the exchange rate at 1 May 20X3.
(c) The fair value of the net assets of Random at the date of acquisition is to be assumed
to be the same as the carrying value. Memo uses the full goodwill method when
accounting for acquisition of a subsidiary. Goodwill was impairment tested at the
reporting date and had reduced in value by ten per cent. At the date of acquisition,
the fair value of the non-controlling interest was CR38 million.
(d) Random operates with a significant degree of autonomy in its business operations.

(e) The following exchange rates are relevant to the financial statements:
Crowns to $
30 April/1 May 20X3 2.5
1 November 20X3 2.6
1 February 20X4 2
30 April 20X4 2.1
Average rate for year to 30 April 20X4 2
(f) Memo has paid a dividend of $8 million during the financial year.

Required:
Prepare a consolidated statement of profit or loss and other comprehensive income for
the year ended 30 April 20X4 and a consolidated statement of financial position,
including separate disclosure of the group foreign exchange reserve, at 30 April 20X4 in
accordance with International Financial Reporting Standards.

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8,920 12,880

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 DECEMBER 20X2

Bennie Jennie
$’000 J’000
Revenue 9,840 14,620
Cost of sales (5,870) (8,160)
Gross profit 3,970 6,460
Operating expenses (2,380) (3,570)

Dividend from Jennie 112 –––––

Profit before tax 1,702 2,890
Income tax expense (530) (850)
Profit/total comprehensive income for the year 1,172 2,040

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Current liabilities 2,590 3,880

9,070 11,840

Exchange rates were as follows:

1 January 20X1 $1: 12 Jens

31 December 20X1 $1: 10 Jens
31 December 20X2 $1: 8 Jens
Weighted average rate for 20X1 $1: 11 Jens
Weighted average rate for 20X2 $1: 8.5 Jens

The fair values of the identifiable net assets of Jennie were equivalent to their book values at the
acquisition date. Bennie chose to measure the non-controlling interests in Jennie at fair value at
the date of acquisition. The fair value of the non-controlling interests in Jennie was measured at
2,676,000 Jens on 1 January 20X1.
An impairment test conducted at the year-end 31 December 20X2 revealed impairment losses of
1,870,000 Jens on recognised goodwill. No impairment losses were necessary in the year ended 31
December 20X1.
Ignore deferred tax on translation differences.
Required
Prepare the consolidated statement of financial position as at 31 December 20X2 and
consolidated statement of profit or loss and other comprehensive income for the Bennie Group for
the year then ended.

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Foreign Subsidiary
Consolidated Statement of Cash flows [Indirect Metod]

Set out below is a summary of the accounts of Weller for the year ended 31
December 20X7.

Consolidated statement of total comprehensive income for the year ended 31

December 20X7.

$000
Revenue 44,754
Cost of sales and other expenses (39,613)
Income from associates 30
Finance cost (note 3) (305)
------------
Profit before tax 4,866
Income tax (2,038)
-------------
Profit for the period 2,828

Other comprehensive income: items that may be reclassified to

profit or loss in future periods
Group exchange difference on retranslation of foreign subsidiary 302
(note 5)
------------
Total comprehensive income 3,130
------------

Profit for the year attributable to:

Attributable to owners of the parent 2,805
Attributable to Non-controlling interests 23
------------
Profit for the period 2,828
------------

Attributable to owners of the parent 3,107

Attributable to Non-controlling interests 23
-------
Total comprehensive income 3,130
-------

Statement of Changes in Group Equity

Shares OCE Retained Earnings NCI Total

$000 $000 $000 $000 $000

Opening balance 7,000 805 6,359 17 14,181
Comprehensive income 302 2,805 23 3,130
Dividends paid (445) (20) (465)
Acquisition of a subsidiary 150 150
-------- ------- ---------- ----- ---------
Closing balance 7,000 1,107 8,719 170 16,996
--------- ------- ---------- ----- -------

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Consolidated statements of financial position at 31 December

20X7 20X6
Note $000 $000 $000 $000
Non-current assets
Intangible asset goodwill (4&5) 500 85
Tangible assets (1) 11,157 8,900
Investment in associate 300 280
----------- -----------
11,957 9,265
Current assets
Inventories 9,749 7,624
Receivables 5,354 4,420
Investments (30 day bonds) 1,543 741
Cash at bank and in hand 1,013 17,659 394 13,179
------------- ---------- ---------- -----------
29,616 22,444
---------- ----------
Equity and liabilities
Equity share capital 7,000 7,000
OCE 1,107 805
Retained earnings 8,719 6,359
NCI 170 17
----------- ----------
Total equity 16,996 14,181
Non-current liabilities:
Loans 2,102 1,682
Provision for deferred tax 555 689
Pension deficit (3) 735 246

Current liabilities (2) 9,228 5,646

---------- ----------
29,616 22,444
----------- ----------

Notes to the accounts

(1) Tangible assets

Non-current asset movements included the following:
$000
Disposals at carrying amount 305
Proceeds from asset sales 854
Depreciations provided for the year 907

(2) Current liabilities

20X7 20X6
$000 $000
Bank overdraft 1,228 91
Trade payables 4,278 2,989
Tax 3,722 2,566
--------- --------
9,228 5,646
--------- --------

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(3) Pension fund deficit

The company has a defined benefit pension fund and the

reconciliation of its deficit is as follows.

$000
At 31 December 20X6 246
Net finance cost 29
Current service cost 560
Cash contribution (100)
---------
At 31 December 20X7 735
---------
(4) Hannah

During the year, the company acquired 82% of the issued equity capital of
Hannah for a cash consideration of $1,268,000. The non-controlling interest is
valued using the proportion of net assets method
$000
Non-current assets 208
Inventories 612
Trade receivables 500
Cash in hand 232
Trade payables (407)
Debenture loans (312)
---------
833
-------

(5) Group Exchange gains

Exchange gains on translating the financial statements of a wholly-owned

subsidiary have been taken to equity and comprise differences on the
retranslation of the following:
$000
Goodwill 9
Non-current assets – PPE 100
Inventories 116
Trade receivables 286
Trade payables (209)
---------
302
-------

Required:

Prepare the statement of cash flows for the Weller group for the year ended 31
December 20X7 using the indirect method.

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Joint arrangement – Joint Opera�on

ABM Mining entered into an arrangement with another en�ty, Delta Extrac�ve Industries, and the
na�onal Government to extract coal from a surface mine. Under the terms of the agreement, each of
the two en��es is en�tled to 40% of the income from selling the coal with the remainder allocated to
the government. Machinery is purchased by each investor as necessary and all costs (including
deprecia�on in the case of the machinery which remains the property of each en�ty) are shared in the
same propor�ons as the income. Coal inventories on hand at any point in �me belong to the three
par�es in the same propor�ons. All decisions must be made unanimously by the three par�es.
During the first accoun�ng period where the arrangement existed, 460,000 tons of coal were extracted
by ABM and sold at an average market price of $120 per ton. 540,000 tons were extracted and sold by
Delta at an average price of $118 per ton. All coal extracted was sold before the year end. The price of
coal at the year end was $124 per ton.
Required: Discuss, with suitable computa�ons, the accoun�ng treatment of the above arrangement
in ABM Mining’s financial statements during the first accoun�ng period.
Solu�on
The rela�onship between the three par�es qualifies as a joint arrangement as decisions have to be
made unanimously. It appears that each party has direct rights to the assets of the arrangement,
illustrated by the ownership of coal inventories. Similarly, each party has obliga�ons for the liabili�es
as all costs are shared in the same propor�ons as the income. Consequently, the arrangement should
be accounted for as a joint opera�on.
Total revenue earned by the opera�on in the period is $118.92 million ((460,000 × $120) + (540,000 ×
$118)). ABM’s share of this revenue recognised in its own financial statements is 40%, i.e. $47,568,000.
The remainder of the revenue ABM collects of $7,632,000 ((460,000 × $120) – $47,568,000) is
recognised as a liability (in the joint opera�on account), represen�ng amounts owed to the na�onal
government.
ABM will record the machinery it purchased in full in its own financial statements. 40% of the
deprecia�on will be charged to cost of sales and the remainder recognised as a receivable balance (in
the joint opera�on account). The same treatment will apply to other joint costs incurred by ABM. ABM
is also required to recognise a 40% share of costs incurred by the other operators and a corresponding
liability (in the joint opera�on account).

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Joint arrangement – Joint Opera�on

Blast has a 30% share in a joint opera�on. The assets, liabili�es, revenues and costs of the joint
opera�on are appor�oned on the basis of shareholdings. The following informa�on relates to the joint
arrangement ac�vity for the year ended 30 November 20X2:
 The manufacturing facility cost $30m to construct and was completed on 1 December 20X1 and is
to be dismantled at the end of its es�mated useful life of 10 years. The present value of this
dismantling cost to the joint arrangement at 1 December 20X1, using a discount rate of 8%, was
$3m.
 During the year ended 30 November 20X2, the joint opera�on entered into the following
transac�ons:
- goods with a produc�on cost of $36m were sold for $50m
- other opera�ng costs incurred amounted to $1m
- administra�on expenses incurred amounted to $2m.
Blast has only accounted for its share of the cost of the manufacturing facility, amoun�ng to $9m. The
revenue and costs are receivable and payable by the two other joint opera�on partners who will setle
amounts outstanding with Blast a�er each repor�ng date.
Required: Show how Blast will account for the joint opera�on within its financial statements for the
year ended 30 November 20X2.

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Joint Venture and Joint Operation

Statement of Financial Position

On 1 July 2012 Alpha Limited (AL) and Beta Limited (BL) entered into an agreement to set
up two Separate Vehicles (SVs) to manufacture and distribute their products. Each company
has 50% share in both SVs. The following are the extracts from draft statements of financial
position and comprehensive income of AL and the SVs for the year ended 30 June 2016.

Statements of financial position

AL SV-1 SV-2 AL SV-1 SV-2
Rs. in million Rs. in million
Property, plant and equipment 2,650 750 365 Capital 2,000 400 200
Investment in SVs - at cost 443 - - Accumulated profit 1,193 55 305
Stock in hand 695 250 140 10% bank loan 500 320 -
Other assets 570 180 80 Current liabilities 665 405 80
4,358 1,180 585 4,358 1,180 585

Statement of comprehensive income

AL SV-1 SV-2
-------- Rs. in million --------
Sales 4,250 650 1,000
Less: Cost of sales (2,993) (480) (750)
Gross profit 1,257 170 250
Less: Expenses (657) (145) (200)
Net profit 600 25 50

Additional information:
(i) SV-1 is classified as joint operation whereas SV-2 is classified as joint venture.
(ii) On 1 July 2015, AL acquired 60% of BL’s ownership in SV-1 at Rs. 140 million. AL
also incurred acquisition related costs amounting to Rs. 3 million which were
capitalized.
(iii) The details of transactions made during the year 2016 between AL and the SVs and
their subsequent status are given below:

Amount receivable/
Included in buyer’s
Sales (payable) in the Profit % on
closing inventories
books of AL sales
--------------- Rs. in million ---------------
AL to SV-1 350 220 320 10
AL to SV-2 250 110 70 20
SV-1 to AL 190 150 (150) 30
SV-2 to AL 60 38 (20) 15

(iv) AL follows the equity method for recording its investment in joint venture whereas
investment in joint operations is recorded in accordance with IFRS-11.

Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare AL’s separate statements of financial position and comprehensive income for the
year ended 30 June 2016.

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SPECIALIZED FINANCIAL
STATEMENTS
- Banks
- Insurance Companies
- Mutual Funds
- IAS 26: Retirement Benefit Plans
- IFRS for Small and Medium Sized Entities (SMEs)

ADVANCED ACCOUNTING & FINANCIAL REPORTING

COMPILED BY: MURTAZA QUAID, ACA

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Specialized Financial Statements: Banks

ICAP Past Paper Questions
Question No. 3(a) of Winter 2023, 7 marks – Statement of Profit or Poss
The following amounts pertain to Cancer Bank Limited (CBL) for the year ended 31 December 2022:

Required: Prepare the statement of profit or loss for the year ended 31 December 2022 of CBL.
(Notes to the financial statements are not required)

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 5 of Summer 2022, 8 marks – Lending to Financial Institutions

Following disclosures have been extracted from the draft financial statements of Falcon Bank Limited for
the year ended 31 December 2021:

Required: Prepare list of errors and omissions in the above disclosures.

(Note: There are no casting errors in the given information. Redrafting of the note is not required)

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 3 of Summer 2019, 10 marks - Advances

Cyprus Bank Limited (CBL) is listed on Pakistan Stock Exchange and has 252 branches including 10 overseas
branches. Mansoor has recently joined CBL’s finance team. He has prepared the following draft note on ‘Advances’
for inclusion in the CBL’s financial statements for the year ended 31 December 2018 and has submitted it for your
review:

9 ADVANCES
Performing Non-performing Total
----------------- Rs. in '000 -----------------
Loans, cash credits, running finances, net
3,036,460 264,040 3,300,500
investment in finance lease etc.
Bills discounted and purchased 808,990 16,510 825,500
Advances – gross 3,845,450 280,550 4,126,000
Provision against advances (119,555) (150,445) (270,000)
Advances – net of provision 3,725,895 130,105 3,856,000
9.1 Particulars of advances (Gross)
Rs. in '000
In local currency 2,988,200
In foreign currencies 937,800
3,926,000
9.2 Advances include Rs. 280.55 million which have been placed under non-performing status as detailed
below:
Non-performing
Provision
Category of classification Loans
------------ Rs. in '000 ------------
Other Assets Especially Mentioned 20,050 -
Substandard 47,600 7,375
Doubtful 94,400 47,060
Loss 118,500 112,800
Total 280,550 167,235
9.3 Particulars of provision against advances
Specific General Total
----------------- Rs. in '000 -----------------
Opening balance 134,493 120,938 255,431
Exchange adjustment 10,452 7,457 17,909
Net charge/(reversal) against advances 24,900 (8,840) 16,060
Written off during the year (19,400) - (19,400)
Closing balance 150,445 119,555 270,000
9.4 Particulars of write offs
Rs. in '000
Against provisions 19,400
Directly charged to profit and loss account 3,800
23,200
Required: Prepare list of errors and omissions identified from your review of the above draft note.
(Note: There are no casting errors in the given information. Redrafting of the note is not required)

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 3(b) of Winter 2017, 5 marks – Statement of Financial Position

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 6 of Winter 2016, 10 marks - Investment by type

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 7 of Winter 2015, 10 marks - Cash and Balances with Treasury Banks

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 5 of Summer 2014, 10 marks - Non-Performing Advances and Provisions there against]

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 5 of Winter 2013, 10 marks - Cash and Balances with Treasury Banks’ and ‘Balances with
Other Banks]

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 6 of Winter 2012, 10 marks - Borrowings

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 6 of Winter 2011, 10 marks - Non-Performing Advances and Provisions

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 4 of Summer 2010, 12 marks - Investments by Segments

IQ School of Finance

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Specialized Financial Statements – Banks Compiled by: Murtaza Quaid

Question No. 5 of Winter 2009, 12 marks - Lendings to Financial institutions

IQ School of Finance

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Specialized Financial Statements: Insurance Compiled by: Murtaza Quaid

Specialized Financial Statements: Insurance

ICAP Past Paper Questions
Question No. 3 of Winter 2018, 12 marks - General Insurance: Statement of Comprehensive Income

IQ School of Finance

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Specialized Financial Statements: Insurance Compiled by: Murtaza Quaid

Question No. 5 of Summer 2021, 12 marks - Life Insurance: Statement of Profit and Loss

IQ School of Finance

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Specialized Financial Statements: Insurance Compiled by: Murtaza Quaid

Question No. 5(a) of Winter 2022, 5 marks - General Insurance: Statement of Profit and Loss

A newly hired accountant has prepared the following statement of profit or loss of Polo General
Insurance Limited for the year ended 31 December 2021 and has submitted it for your review.

Required: Prepare list of errors and omissions in the above statement. (Note: There are no casting
errors. Redrafting of the statement is not required)

IQ School of Finance

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Specialized Financial Statements: Mutual Funds Compiled by: Murtaza Quaid

Specialized Financial Statements: Mutual Funds

ICAP Past Paper Questions
Question No. 5 of Summer 2018, 10 marks - Statement of Movement in Unit Holders' Fund

IQ School of Finance

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Specialized Financial Statements: Mutual Funds Compiled by: Murtaza Quaid

Question No. 5 of Winter 2020, 12 marks - Statement of Movement in Unit Holders' Fund

IQ School of Finance

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Specialized Financial Statements: Mutual Funds Compiled by: Murtaza Quaid

Question No. 5(a) of Summer 2023, 6 marks - Statement of Movement in Unit Holders' Fund

Following is the draft statement of movement in unit holders’ fund of Flax Income Fund for the year
ended 30 June 2022:

Required: Prepare list of errors and omissions in the above statement.

(Note: There are no casting errors in the given information. Redrafting of the statement is not
required)

IQ School of Finance

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Specialized Financial Statements: Retirement Benefit Plans Compiled by: Murtaza Quaid

Specialized Financial Statements: Retirement Benefit Plans

ICAP Past Paper Questions
Question No. 4 of Winter 2014, 9 marks - Statement of Net Assets available for Benefits and
Statement of Changes in Net Assets available for Benefits

IQ School of Finance

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Specialized Financial Statements: Retirement Benefit Plans Compiled by: Murtaza Quaid

Question No. 5 of Winter 2021, 12 marks - Financial Statements including relevant notes
Whirlpool Limited (WL) operates an approved and funded gratuity plan for 150 employees. Following
information is available for the preparation of the fund’s financial statements for the year ended 30
September 2021:

Additional information:
(i) An amount of Rs. 4.3 million is payable to outgoing members as at 30 September 2021.
(ii) Increase in fair value of listed securities amounting to Rs. 3.5 million has not been accounted for.
(iii) Audit fee of Rs. 0.5 million has not been accrued.
(iv) The latest actuarial valuation was carried out on 30 September 2021 using the ‘projected unit
credit method’. The actuary has recommended WL to contribute Rs. 13 million during the year
ended 30 September 2021.
(v) Present value of the defined benefit obligations and fair value of the plan assets as on 30
September 2021 amounted to Rs. 207 million and Rs. 168 million respectively. Salary increment
and discount rate of 9% and 7% respectively were used by the actuary in the determination of
liability.
Required: Prepare the financial statements including relevant notes (wherever possible) of WL
employees’ gratuity fund for the year ended 30 September 2021.

IQ School of Finance

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Specialized Financial Statements: Retirement Benefit Plans Compiled by: Murtaza Quaid

IQ School of Finance

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1 IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES (SMEs)

Section overview

 Introduction
 IFRS for SMEs
 Key differences between IFRS for SMEs & full IFRS

1.1 Introduction
International accounting standards are written to meet the needs of investors in international capital
markets. Most companies adopting IFRSs are listed entities. The IASB has not stated that IFRSs
are only aimed at quoted companies, but certainly the majority of adopters are large entities. In
many countries IFRSs are used as national GAAP which means that unquoted small and medium-
sized entities (SMEs) have to apply them. SMEs are defined as entities that do not have public
accountability* and publish general purpose financial statements for external users.
An entity has public accountability* if:
(a) its debt or equity instruments are traded in a public market or it is in the process of issuing
such instruments for trading in a public market; or
(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses (most banks, insurance companies, securities brokers/dealers, mutual funds
and investment banks would meet this second criterion).
The users of financial statements of SMEs are different from the users of the general purpose
financial statements. The only ‘user groups’ that use the financial statements of an SME are
normally:
 its owners who are not involved in managing the business;
 existing and potential creditors and
 credit rating agencies.
The SME is often owned and managed by a small number of entrepreneurs, and may be a family-
owned and family-run business. Large companies, in contrast, are run by professional boards of
directors, who must be held accountable to their shareholders.
Considerations in developing standards for SMEs
The aim of developing a set of accounting standards for SMEs is that they allow information to be
presented that is relevant, reliable, comparable and understandable. The information presented
should be suitable for the uses of the managers and directors and any other interested parties of
the SME.
Additionally, many of the detailed disclosures within full IFRSs are not relevant and the accounting
standards should be modified for this. The difficulty is getting the right balance of modification, too
much and the financial statements will lose their focus and will not be helpful to users.
1.2 IFRS for SMEs
The currently applicable IFRS for SMEs was issued by IASB in May 2015. It is a small Standard
(approximately 250 pages) that is tailored for small companies. While based on the principles in
full IFRS Standards, the IFRS for SMEs Standard is stand-alone. It is organised by topic. The IFRS
for SMEs Standard reflects five types of simplifications from full IFRS Standards:
 Some topics in full IFRS Standards are omitted because they are not relevant to typical
SMEs;
 Some accounting policy options in full IFRS Standards are not allowed because a more
simplified method is available to SMEs;

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 Many of the recognition and measurement principles that are in full IFRS Standards have
been simplified;
 Substantially fewer disclosures are required; and
 The text of full IFRS Standards has been redrafted in ‘simple English’ for easier
understandability and translation.
The IFRS for SMEs does not address the following topics:
 earnings per share (i.e. there is no equivalent to IAS 33);
 interim accounting (i.e. there is no equivalent to IAS 34);
 segment reporting (i.e. there is no equivalent to IFRS 8);
The omission of equivalent rules to those in IAS 33, IAS 34 and IFRS 8 is not surprising as they
are only relevant to listed entities.
Stand-alone document
The IFRS for SMEs is a stand-alone document. This means that it contains all of the rules to be
followed by SMEs without referring to other IFRSs. For example it sets out rules for property, plant
and equipment without specifying that the rules are similar or dissimilar to those found in IAS 16.
In the following pages, we provide an overview of the sections of the IFRS for SMEs and often
refer to similarity or difference to equivalent other IFRSs. This is not what the IFRS for SMEs does
but we adopt the approach to make it easier for you to gain an understanding of the main features
of the standard.
The IFRS for SMEs is derived from rules in other IFRS. You will note that it uses the same
terminology and that many of the rules are identical. However, in several cases , the rules in other
IFRSs from which the IFRS for SMEs derives have been changed whereas the equivalent rules in
this standard have not been changed. For example the rules on joint ventures are based on IFRS
11 which you covered earlier. You should not interpret this as meaning that the standard is out of
date. It simply means that there is a difference between the rules for SMEs and those followed by
other entities. Changes to the main body of standards will not necessarily result in a revision to the
IFRS for SMEs.
1.3 KEY DIFFERENCES BETWEEN IFRS FOR SMEs & FULL IFRS
The key differences between IFRS for SMEs and full IFRS are summarized below:
Financial statement presentation

IFRS for SMEs IFRS

Single statement of income and retained
earnings.
IFRS for SMEs require an entity to present the The IFRSs also require an entity to present the
statement of comprehensive income by either a statement of comprehensive income by either
single statement or two statement approach. a single statement or two statement
Additionally, IFRS for SMEs also permit an entity approach. However, IFRSs do not permit an
to present a combined statement of income and entity to present a combined statement of
retained earnings instead of the statement of income and retained earnings instead of the
comprehensive income and statement of changes statement of comprehensive income and
in equity when changes in equity during the period statement of changes in equity.
arise only from profit or loss, payment of
dividends, correction of prior period errors and
changes in accounting policy.
(IFRS for SMEs – 3.18)

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IFRS for SMEs IFRS

Segment information
The IFRS for SMEs does not require segment The IFRSs require segment information to be
information to be presented in financial presented in financial statements.
statements.
Earnings per share
The IFRS for SMEs does not require earnings per The IFRSs require the entities covered in the
share to be disclosed in the financial statements. scope of IAS 33 ‘Earning per share’ to present
earnings per share in accordance with the
requirements of IAS 33.

Consolidated and separate financial statements

IFRS for SMEs IFRS

Combined financial statements

The IFRS for SMEs defines combined financial Full IFRSs do not include definition or
statements as a single set of financial statements principles for preparation of combined
of two or more entities controlled by a single financial statements.
investor. Although, the IFRS for SMEs does not
require combined financial statements to be
prepared, it does provide basic principles when an
entity voluntarily prepares combined financial
statements in compliance with the IFRS for SMEs.
(IFRS for SMEs – 9.28)

Change in accounting policy and retrospective restatements

IFRS for SMEs IFRS

Third balance sheet

IFRS for SMEs does not require presentation of When financial statements are restated
three statements of financial position when retrospectively, IFRSs require presentation of
financial statements are restated retrospectively. three statements of financial position.

Financial instruments

IFRS for SMEs IFRS

Scope
IFRS for SMEs distinguishes between basic and The IFRSs do not provide distinction between
complex financial instruments. Section 11 basic and complex financial instruments.
establishes measurement and reporting Accordingly, there are no separate
requirements for basic financial instruments; requirements for recognition and
Section 12 deals with complex financial measurement based on complexity of the
instruments. financial instruments.
If an entity enters into only basic financial
instruments transactions then section 12 is not
applicable.
(IFRS for SMEs – 11.1)

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IFRS for SMEs IFRS

Accounting policy choice

An entity has a choice of applying either:
 the requirements of both Sections 11 and 12 The IFRSs do not provide an accounting policy
of IFRS for SMEs in full; or choice for recognition and measurement of
 recognition and measurement requirements financial instruments.
of full IFRS (IAS 39) and disclosure
requirements of IFRS for SMEs under Sections
11 and 12.
(IFRS for SMEs – 11.2)

IFRS for SMEs IFRS

Hedge Accounting
IFRS for SMEs permits specific types of hedging Full IFRSs do not restrict hedge accounting for
that SMEs are likely to use and only allows hedge limited number of risks and hedging
accounting for limited number of risks and hedging instruments.
instruments.
Consequently, hedge accounting is not permitted
under IFRS for SMEs when hedge is done by using
debt instruments such as a foreign currency loan,
or an option- based hedging strategy.
(IFRS for SMEs – 12.17)

Disclosures
IFRS for SMEs does not require disclosures to IFRSs require disclosures to enable
enable evaluation of nature and extent of risks evaluation of nature and extent of risks
arising from financial instruments to which entity arising from financial instruments to which
is exposed at the end of the reporting period. entity is exposed at the end of the reporting
period.

Investment in associates and jointly controlled entities

IFRS for SMEs IFRS

Accounting policy choice for associates and jointly

controlled entities
IFRS for SMEs does not permit the cumulative
The IFRSs require investments in associates
amount of exchange differences relating to a
and jointly controlled entities to be accounted
foreign operation, that were previously recognised
for using the equity method in an investor’s
in other comprehensive income, from being
primary financial statements.
reclassified from equity to profit or loss (as a
reclassification adjustment) when the gain or loss
on disposal of foreign operation is recognised.
(IFRS for SMEs – 14.4 & 15.9)

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Investment property

IFRS for SMEs IFRS

Measurement after initial recognition

Investment property whose fair value can be IFRS allow an accounting policy choice of
measure reliably without undue cost or effort shall either fair value through profit or loss or a
be measured at fair value at each reporting date. cost-depreciation-impairment model (with
All other investment property (whose fair value some limited exceptions). An entity following
cannot be measured reliably without undue cost the cost-depreciation-impairment model is
and effort) shall be measured using cost model. required to provide supplemental disclosure
(IFRS for SMEs - 16.7) of the fair value of its investment property.

Disclosures
Reconciliation of the carrying amount at the IFRS require comparative information in
beginning and end of the reporting period is not respect of previous period for reconciliation of
required for the prior period. the carrying amount at the beginning and end
(IFRS for SMEs – 16.10(e)) of the reporting period.

Property, plant and equipment

IFRS for SMEs IFRS

Disclosures
Reconciliation of the carrying amount at the IFRSs require comparative information in
beginning and end of the reporting period is not respect of previous period for reconciliation of
required for the prior period. the carrying amount at the beginning and end
(IFRS for SMEs – 17.31(e)) of the reporting period.

Non-current assets held for sale

IFRS for SMEs IFRS

Presentation and measurement

The IFRS for SMEs does not require a non-current The IFRSs require a non-current asset held for
asset held for sale to be recognized at the lower of sale (including the non-current assets of a
carrying amount or fair value less cost to sell and discontinued operation) to be carried at the
presented separately as in the statement of lower of its carrying amount and fair value
financial position. less estimated costs to sell the asset. A non-
current asset classified as held for sale and
the assets of a disposal group classified as
held for sale are required to be presented
separately from other assets in the statement
of financial position.

Intangible assets

IFRS for SMEs IFRS

Useful life and amortization

The intangible assets must have a determinable IFRSs require intangible assets with indefinite
useful life, whereas assets with indeterminable life to be carried at cost less impairment loss,
useful life are considered to have ten years of if any and such assets are not depreciated.
useful life.
(IFRS for SMEs – 18.19 & 18.20)

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IFRS for SMEs IFRS

Disclosures

Reconciliation of the carrying amount at the IFRSs require comparative information in

beginning and end of the reporting period is not respect of previous period for reconciliation of
required for the prior period. the carrying amount at the beginning and end
of the reporting period.
(IFRS for SMEs – 18.27(e))

Development expenditure

The development and research expenditures are IFRSs require development costs which meet
always recorded as an expense. the specified condition to be capitalized as an
asset.
(IFRS for SMEs – 18.14)

Business combination

IFRS for SMEs IFRS

Cost of a business combination

The cost of a business combination includes the The IFRSs excludes directly attributable costs
fair value of assets given, liabilities incurred or from the cost of a business combination and
assumed and equity instruments issued by the such costs are required to be recognized in
acquirer, in exchange for the control of the profit or loss when incurred.
acquiree, plus any directly attributable costs.

(IFRS for SMEs – 19.11)

Goodwill

After initial recognition, the goodwill is measured Under the IFRSs, the goodwill acquired in a
at cost less accumulated amortisation and any business combination is not amortised. It is
accumulated impairment losses. Goodwill is required to be subject to impairment testing
amortised over its useful life, which is presumed to at least annually and, additionally, when
be 10 years if the entity is unable to make a there is an indication of impairment
reliable estimate of the useful life.

(IFRS for SMEs – 19.23)

Provision and contingencies

IFRS for SMEs IFRS

Disclosures of provisions

IFRS for SMEs does not require an entity to IFRS require comparative information for the
disclose comparative information in the required previous period in the required disclosures for
disclosures for provisions. provisions.

(IFRS for SMEs – 21.14)

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Government grants

IFRS for SMEs IFRS

Recognition
IFRS for SMEs does not require or permit an entity The IFRSs require government grants to be
to match the grant with the expenses for which it recognised as income over the periods
is intended to compensate or the cost of the asset necessary to match them with the related
that it is used to finance. costs for which they are intended to
(IFRS for SMEs – 24.4) compensate, on a systematic basis.

Measurement
All government grants, including non-monetary The IFRSs permit an entity that receives a
government grants, must be measured at the fair non-monetary grant to either measure both
value of the asset received or receivable. the asset and the grant at a nominal amount
(IFRS for SMEs – 24.5) (often zero) or at the fair value of the non-
monetary asset.
Borrowing costs

IFRS for SMEs IFRS

Recognition
All borrowing costs shall be recognised as an IFRSs require borrowing costs directly
expense in profit or loss. attributable to the acquisition, construction or
production of a qualifying asset to be
(IFRS for SMEs - 25.2)
capitalized as a part of the cost of the asset.
Employee benefits

IFRS for SMEs IFRS

Actuarial gains and losses

Actuarial gains and losses on liabilities are The IFRSs require recognition of actuarial
recognised in full in profit or loss or in other gains and losses for the reporting period in
comprehensive income (without recycling) in the the other comprehensive income.
period in which they occur.
(IFRS for SMEs – 28.24)

Foreign Currency Translation

IFRS for SMEs IFRS

Exchange differences relating to a foreign

operation
IFRS for SMEs does not permit the cumulative
The IFRSs require the cumulative amount of
amount of exchange differences relating to a
exchange differences relating to a foreign
foreign operation, that were previously recognised
operation, that were previously recognised in
in other comprehensive income, from being
other comprehensive income, from being
reclassified from equity to profit or loss (as a
reclassified from equity to profit or loss (as a
reclassification adjustment) when the gain or loss
reclassification adjustment) when the gain or
on disposal of foreign operation is recognised.
loss on disposal is recognised.
(IFRS for SMEs – 30.13)
Note: The students are advised to refer to the latest Financial Statements of SMEs for further
understanding of applicable formats.

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IFRS for Small and Medium Sized Entities (SMEs) Compiled by: Murtaza Quaid

IFRS for Small and Medium Sized Entities (SMEs)

ICAP Past Paper Questions
Question No. 3(a) of Winter 2017, 6 marks
Jabbar (Pvt) Ltd (JPL) was incorporated on 1 July 2016 and is preparing its financial statements for the year
ended 30 June 2017 in accordance with IFRS for Small and Medium-sized Entities (SMEs). The following
matters are under consideration:
(i) JPL has constructed an office building at a cost of Rs. 3.3 million, which was completed on 30 June
2017. The cost includes interest of Rs. 0.3 million relating to a loan specifically obtained to finance
the construction. At year end, recoverable amount of the building has been estimated at Rs. 3.1
million. (02)
(ii) On 1 January 2017 JPL had purchased two shops A and B for Rs. 5 million and Rs. 4 million
respectively. Shop A is being used by JPL for marketing purposes and shop B was rented out soon
after its purchase. At year end, shops A and B have been:
▪ depreciated @ 5% per annum.
▪ revalued to Rs. 6 million and Rs. 5 million respectively. (04)
Required: Discuss how the above matters should be dealt with in the financial statements of JPL in
accordance with IFRS for SMEs. (Assume that cost to sell is negligible)

Question No. 3 of Winter 2019, 12 marks

International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) applies to
all entities that do not have public accountability. The users of financial statements of these entities have
a different focus from those interested in listed companies. IFRS for SMEs attempts to meet the users’
needs while balancing the costs and benefits to preparers. It does not require preparers of financial
statements to cross-refer to full IFRS.

Required: Discuss any eight key differences between requirements of IFRS for SMEs and full IFRS.

Question No. 3(b) of Winter 2023, 3 marks

Discuss key differences between requirements of IFRS for SMEs and full IFRS in respect of Business
combinations.

IQ School of Finance

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Certified Finance and Accounting Professional

Advanced accounting and financial reporting

Professional ethics

Contents
1 The fundamental principles
2 Conflict of interest
3 Section 220: Preparation and Presentation of information

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1 THE FUNDAMENTAL PRINCIPLES

Section overview

 Introduction
 The fundamental principles of the ICAP Code of Ethics
 The conceptual framework

1.1 Introduction
Chartered Accountants are expected to demonstrate the highest standards of professional conduct
for public interest. Ethical behavior by Chartered Accountants plays a vital role in ensuring public
trust in financial reporting and business practices and upholding the reputation of the accountancy
profession.
ICAP’s Code of Ethics for Chartered Accountants (Revised 2019) helps members of the Institute
meet these obligations by providing them with ethical guidance. The Code applies to all members,
students, affiliates, employees of member firms and, where applicable, member firms, in all of their
professional and business activities, whether remunerated or voluntary.
Students are advised to study primarily from original book of ICAP’s Code of Ethics for Chartered
Accountants (Revised 2019) and refer to this chapter as a supplementary study material.

1.2 The fundamental principles of the ICAP Code of Ethics

A chartered accountant shall comply with each of the five fundamental principles of the Code set
out below.

Principle Explanation
Integrity A professional accountant should be straightforward and honest in all
professional and business relationships.
Objectivity A professional accountant should not allow bias, conflict of interest or undue
influence of others to override his or her professional or business judgements.
Professional A professional accountant has a continuing duty to maintain professional
competence knowledge and skill at the level required to ensure that a client or employer
and due care receives competent professional service based on current technical and
professional standards and relevant legislation. A professional accountant
should act diligently and in accordance with applicable technical and
professional standards when providing professional services or working for an
employer.
Confidentiality A professional accountant should respect the confidentiality of information
acquired as a result of professional or business relationships and should not
disclose any such information to third parties without proper and specific
authority unless there is a legal or professional right or duty to disclose.
Confidential information should not be used for the personal advantage of the
professional accountant or third parties.
Professional A professional accountant should comply with relevant laws and regulations
behaviour and should avoid any action or conduct which discredits the profession.

You need to know these five fundamental principles and what each of them means. An exam
question may require you to discuss the relevance of the five fundamental principles to a particular
situation in a case study.

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1.3 The conceptual framework

The application of the fundamental principles set out above is considered by the ICAP Code within
a conceptual framework. This framework, applies to chartered accountants in business and in
practice, acknowledges that these principles may be threatened in a broad range of circumstances.
A chartered accountant shall apply this conceptual framework to:
a) Identify threats to compliance with the fundamental principles;
b) Evaluate the threats identified; and
c) Address the threats by eliminating or reducing them to an acceptable level.
This chapter covers only the professional accountants in business (PAIB)* which are engaged in
an executive or non-executive capacity in such areas as commerce, industry, the public and service
sectors (including public sector bodies), education, the not for profit sector, regulatory bodies or
professional bodies. A PAIB may be a salaried employee, a director (whether executive or non-
executive), an owner manager or another working for one or more employing organisations. The
legal form of the relationship with the employing organisation, if any, has no bearing on the ethical
responsibilities incumbent on the professional accountant in business*.
Exercise of Professional Judgment
CAs are required to exercise professional judgement in undertaking all professional activities. In
exercising professional judgement, CAs apply their relevant training, professional knowledge, skill
and experience. CAs might consider below factors in exercising professional judgement:
 Reason to be concerned that potentially relevant information might be missing from the
known facts and circumstances
 Inconsistency between the known facts and circumstances and CAs’ expectations.
 CAs’ expertise and experience are sufficient to reach a conclusion.
 Need to consult with others with relevant expertise or experience.
 The information provides a reasonable basis on which to reach a conclusion.
 Preconception or bias might affect the exercise of professional judgment.
 Other reasonable conclusions could be reached from the available information.
Threats to the fundamental principles fall into one or more of the following categories:
 Self-interest threat. This arises when the accountant has a financial or other interest in a
matter. Typically, this means that the accountant’s decisions may be influenced by self-
interest and the accountant will therefore not act with objectivity and independence.

Examples of potential self-interest threat

 financial interests, loans or guarantees from the employer
 incentive-based compensation offered by the employer
 inappropriate personal use of corporate assets
 offered a gift or special treatment from a supplier
 concern over employment security
 commercial pressure from outside the employing organization

 Self-review threat. This occurs when an accountant is required to review or re-evaluate (for
a different purpose) a previous judgement they have made or action that they have taken.

Examples of potential self-review threat

 determining the appropriate accounting treatment for a business combination after performing
the feasibility study supporting the purchase decision.

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 business decisions or data being reviewed by the same person who made those decisions or
prepared that data.
 being in a position to exert direct and significant influence over an entity’s financial reports.
 the discovery of a significant error during a re-evaluation of the work undertaken by the
member.

 Advocacy threat. This occurs when the accountant is in a position or option to the point that
subsequent objectivity may be compromised. This would be a threat to objectivity and
independence.
Examples of potential advocacy threat
 opportunity to manipulate information in a prospectus in order to obtain favorable financing.
 commenting publicly on future events.
 situations where information is incomplete or where the argument being supported is against
the law.

 Intimidation threat. This occurs when members may be deterred from acting with
objectivity due to threats, actual or perceived, against them.

Examples of potential intimidation threat

 threat of dismissal or replacement of the member, or a close family member, over a
disagreement about the application of an accounting principle or the way in which information
is to be reported.
 a dominant personality attempting to influence the member’s decisions e.g. regarding the
awarding of contracts or the application of accounting principles.

 Familiarity threat. This occurs when the accountant becomes too sympathetic with others
due to close relationships, for example being responsible for the employing organisation’s
financial reporting when an immediate or close family member employed by the entity makes
decisions that affect the entity’s financial reporting.

Examples of potential familiarity threat

 accepting a gift or preferential treatment, unless the value is trivial and inconsequential.
 long association with business contacts influencing business decisions.

CAs are required to identify, evaluate and respond to such threats. If identified threats are
significant, they must implement safeguards to eliminate the threats or reduce them to an
acceptable level so that compliance with the fundamental principles is not compromised.
CAs shall do so by:
1. Eliminating the circumstances, including interests or relationships, that are creating the
threats;
2. Applying safeguards, where available and capable of being applied, to reduce the threats
to an acceptable level; or
3. Declining or ending the specific professional activity.
EXAM TECHNIQUE POINT
In any scenario-based question regarding the five fundamental principles or any of the situations
causing the five threats to independence, it is important to not only state the basic requirements
of the code that are being breached but also relate them to scenario given.
Also, it helps to give some commentary in relation to the significance of a threat i.e. if the situation
relates to a more senior person on the audit firm (such as the Engagement Partner) the threat is
likely to be significant, with no safeguards being able to eliminate or reduce it to acceptable levels.

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2 CONFLICT OF INTEREST
A conflict of interest creates threats to compliance with the principle of objectivity and might create
threats to compliance with the other fundamental principles. Such threats might be created when:
(a) A chartered accountant undertakes a professional activity related to a particular matter for two or
more parties whose interests with respect to that matter are in conflict; or
(b) The interest of a chartered accountant with respect to a particular matter and the interests of a
party for whom the accountant undertakes a professional activity related to that matter are in
conflict.

Examples of circumstances that might create a conflict of interest include:

 Serving in a management or governance position for two employing organizations and
acquiring confidential information from one organization that might be used by the chartered
accountant to the advantage or disadvantage of the other organization.
 Undertaking a professional activity for each of two parties in a partnership, where both parties
are employing the accountant to assist them to dissolve their partnership.
A CA should take reasonable steps to identify circumstances that might create a conflict of interest, and
therefore a threat to compliance with any of the fundamental principles:
Safeguards to address threats created by conflicts of interest include:
 Restructuring or segregating certain responsibilities and duties.
 Obtaining appropriate oversight, for example, acting under the supervision of an executive or non-
executive director.
Disclosure and consent
A CA is required to exercise professional judgement to determine whether specific disclosure and explicit
consent are necessary to mitigate the threat created by the conflict of interest. Disclosures might be
“General”, such as a common commercial practice by the CA or “Specific” to the circumstances of the
particular conflict.
Members are encouraged to make disclosure or consent in writing. However, if these are not in writing, a
CA should sufficiently document the nature of the circumstances, safeguards applied, and consents
obtained.

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3 SECTION 220: PREPARATION AND PRESENTATION OF INFORMATION

Section overview

 Professional Accountants in Business(PAIBs)

 Preparation and Presentation of Information

3.1 Professional Accountants in Business (PAIBs)

Professional Accountants in business are often responsible for the preparation of accounting
information.
PAIBs need to ensure that they do not prepare financial information in a way that is misleading or
that does not show a true and fair view of the entity’s operations.
PAIBs who are responsible for the preparation of financial information must ensure that the
information they prepare is technically correct, reports the substance of the transaction and is
adequately disclosed.
There is a danger of influence from senior managers to present figures that inflate profit or assets
or understate liabilities. This puts the accountant in a difficult position. On one hand, they wish to
prepare proper information and on the other hand, there is a possibility they might lose their job if
they do not comply with their managers’ wishes.
In this case, ethics starts with the individual preparing the information. They have a difficult decision
to make; whether to keep quiet or take the matter further. If they keep quiet, they will certainly be
aware that they are not complying with the ethics of the accounting body they belong to. If they
speak out, they may be bullied at work into changing the information or sacked.

3.2 Preparation and Presentation of Information

Chartered accountants in business at all levels are often involved in the preparation and
presentation of information that may either be made public or used by others inside or outside the
employing organisation including:
 Management and those charged with governance.
 Investors and lenders or other creditors.
 Regulatory bodies.
Such information may include financial or management information, for example:
 Operating and performance reports.
 Decision support analysis.
 Forecasts and budgets;
 Information provided to the internal and external auditors.
 Risk analyses.
 General and special purpose financial statements.
 Tax returns.
 Reports filed with regulatory bodies for legal and compliance purposes.

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When preparing or presenting information, a chartered accountant shall:

 Prepare or present the information in accordance with a relevant reporting framework, where
applicable;
 Prepare or present the information in a manner that is intended neither to mislead nor to
influence contractual or regulatory outcomes inappropriately;
 Exercise professional judgment to:
 Represent the facts accurately and completely in all material respects;
 Describe clearly the true nature of business transactions or activities;
 Classify and record information in a timely and proper manner; and
 Not omit anything with the intention of rendering the information misleading or of
influencing contractual or regulatory outcomes inappropriately.
Use of Discretion in Preparing or Presenting Information

Preparing or presenting information might require the exercise of discretion in making professional
judgments. The chartered accountant shall not exercise such discretion with the intention of
misleading others or influencing contractual or regulatory outcomes inappropriately.

Examples of ways in which discretion might be misused to achieve inappropriate outcomes include:

 Determining estimates, for example, determining fair value estimates in order to

misrepresent profit or loss.
 Selecting or changing an accounting policy or method among two or more alternatives
permitted under the applicable financial reporting framework, for example, selecting a policy
for accounting for long- term contracts in order to misrepresent profit or loss.
 Determining the timing of transactions, for example, timing the sale of an asset near the end
of the fiscal year in order to mislead.
 Determining the structuring of transactions, for example, structuring financing transactions
in order to misrepresent assets and liabilities or classification of cash flows.
 Selecting disclosures, for example, omitting or obscuring information relating to financial or
operating risk in order to mislead.
When performing professional activities, especially those that do not require compliance with a
relevant reporting framework, the chartered accountant shall exercise professional judgment to
identify and consider:

(a) The purpose for which the information is to be used;

(b) The context within which it is given; and
(c) The audience to whom it is addressed.
For example, when preparing or presenting pro forma reports, budgets or forecasts, the inclusion
of relevant estimates, approximations and assumptions, where appropriate, would enable those
who might rely on such information to form their own judgments.

The chartered accountant might also consider clarifying the intended audience, context and
purpose of the information to be presented.
Relying on the Work of Others

A chartered accountant who intends to rely on the work of others, either internal or external to the
employing organization, shall exercise professional judgment to determine what steps to take, if
any, in order to fulfill his responsibilities

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Factors to consider in determining whether reliance on others is reasonable include:

 The reputation and expertise of, and resources available to, the other individual or
organization.
 Whether the other individual is subject to applicable professional and ethics standards.
Such information might be gained from prior association with, or from consulting others about, the
other individual or organization.
Addressing Information that is or might be misleading

When the chartered accountant knows or has reason to believe that the information with which the
accountant is associated is misleading, the accountant shall take appropriate actions to seek to
resolve the matter including:
 Discussing concerns that the information is misleading with the chartered accountant’s
superior and/or the appropriate level(s) of management within the accountant’s employing
organization or those charged with governance, and requesting such individuals to take
appropriate action to resolve the matter. Such action might include:
 Having the information corrected.
 If the information has already been disclosed to the intended users, informing them of
the correct information.
 Consulting the policies and procedures of the employing organization (for example, an ethics
or whistle-blowing policy) regarding how to address such matters internally.
The chartered accountant might determine that the employing organization has not taken
appropriate action. If the accountant continues to have reason to believe that the information is
misleading, the following further actions might be appropriate provided that the accountant remains
alert to the principle of confidentiality:
Consulting with:
 A relevant professional body.
 The internal or external auditor of the employing organization.
 Legal counsel.
 Determining whether any requirements exist to communicate to: 
 Third parties, including users of the information.
 Regulatory and oversight authorities.
If after exhausting all feasible options, the chartered accountant determines that appropriate action
has not been taken and there is reason to believe that the information is still misleading, the
accountant shall refuse to be or to remain associated with the information.
In such circumstances, it might be appropriate for a chartered accountant to resign from the
employing organization.
Documentation

The chartered accountant is encouraged to document:

 The facts.
 The accounting principles or other relevant professional standards involved.
 The communications and parties with whom matters were discussed.
 The courses of action considered.
 How the accountant attempted to address the matter(s).

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Illustration 01:
Ibrahim is member of ICAP working as a unit accountant.
He is a member of a bonus scheme under which, staff receive a bonus of 10% of their annual salary
if profit for the year exceeds a trigger level.
Ibrahim has been reviewing working papers prepared to support this year’s financial statements.
He has found a logic error in a spreadsheet used as a measurement tool for provisions.
Correction of this error would lead to an increase in provisions. This would decrease profit below
the trigger level for the bonus.
Analysis:
Ibrahim faces a self-interest threat which might distort his objectivity.
Ibrahim has a professional responsibility to ensure that financial information is prepared and
presented fairly, honestly and in accordance with relevant professional standards. He has further
obligations to ensure that financial information is prepared in accordance with applicable
accounting standards and that records maintained represent the facts accurately and completely
in all material respects.
Ibrahim must make the necessary adjustment even though it would lead to a loss to himself.

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Professional Ethics Compiled by: Murtaza Quaid

Professional Ethics - ICAP Past Paper Questions

Question No. 5(b) of Winter 2017, 4 marks
On receiving the revised financial statements, the CEO called Faraz and briefed him in the following
manner:
“Since the position of the CFO is vacant, I intend to promote you as CFO. GL has been through a rough
year and has some disappointing results but a reasonable profit needs to be reported for the mutual
benefit of all stakeholders. Moreover, the financial statements would also be scrutinized by the bank to
ensure that the loan covenants are met which include maintaining total assets at 1.5 times the total
liabilities.
Therefore, I want you to confirm the draft financial statements without making any adjustment for
presentation before the Board and submission to the bank.”
Required: Briefly explain the potential threats that Faraz may face in the above situation and how he
should respond.
Solution:
In the given situation, Faraz may face following threats:
(i) Self-interest threat
Self-interest threat occurs as Faraz has been told by the CEO that he would be promoted to CFO.
(ii) Intimidation threat
Faraz may quit this job if he would not confirm the draft financial statement as per CEO’s
instructions.
Available safeguards:
Where it is not possible to reduce the threats to an acceptable level, Faraz:
(i) should refuse to remain associated with information which is or may be misleading;
(ii) should consider to consult with superiors such as audit committee or those charged with
governance;
(iii) consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally;
(iv) consider consulting with the relevant professional body, internal or external auditor, legal counsel
or informing third parties or appropriate authorities in line with the ICAP guidance on
confidentiality;
(v) may resign.

IQ School of Finance

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Professional Ethics Compiled by: Murtaza Quaid

Question No. 1(b) of Winter 2022, 8 marks

You have recently joined as Finance Manager of Soccer Limited (SL), a football manufacturer. Being one
of the sponsors for the upcoming world cup in Qatar, SL’s delegation has been invited to watch few
matches of the world cup in the stadium.
You have been informed that the statutory audit of SL for the year ended 30 June 2022 is in final stage
and the auditor has recommended certain material adjustments in the financial statements before issuing
an unmodified audit report. In a meeting with CFO, who is a chartered accountant, you have been
informed about the disappointment of the SL’s directors due to selected audit adjustments which slide
SL’s profit below the target. Therefore, CFO has asked you to take up the matter with the audit
engagement partner regarding the selected adjustments and also asked you to invite the audit partner to
the trip to Qatar with SL’s delegation.
Required: Briefly explain how CFO may be in breach of the fundamental principles of ICAP’s Code of Ethics
for Chartered Accountants. Also state the potential threats that you may face in the above circumstances
and how you should respond.
Solution:
In the given situation, CFO might be in breach of following fundamental principles of Code of Ethics for
Chartered Accountants (CA):
(i) Integrity:
CA should be straightforward and honest in all professional and business relationships. Offering a
trip to audit partner instead of discussing the selected audit adjustments causing decline in profit
create doubts over the integrity of CFO.
(ii) Objectivity:
CA should not compromise professional or business judgements because of bias, conflict of
interest or undue influence of others. Offering a trip to audit partner in order to meet the targets
and to avoid the disappointment of directors is affecting the objectivity of CFO.
(iii) Professional behavior:
CA should comply with relevant laws and regulations and avoid any conduct that might discredit
the profession. Offering a trip to audit partner with an intention to influence him is the non-
compliance of ICAP’s code of ethics and is reflective of non-professional behavior of CFO.
In the given situation, following threats to compliance with the fundamental principles arises for me:
(i) Intimidation threat:
CA will be deterred from acting objectively because of pressures or exercise of undue influence
over him. I may feel intimidation threat due to perceived pressure exerted by the disappointment
of directors.
(ii) Self-interest threat:
CA’s judgement or behavior may be inappropriately influenced by financial or other interest. I
may feel self-interest threat due to losing a job in case profit target is missed.

IQ School of Finance

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Professional Ethics Compiled by: Murtaza Quaid

In order to reduce the threat to an acceptable level, one or more of the following safeguards should be
applied:
(i) Refuse to offer trip to the audit partner.
(ii) Discuss all the audit adjustments with CFO on their merit and then select the disagreed
adjustments which needs to be discussed with audit partner.
(iii) Discuss the selected adjustments with audit engagement partner on the basis of merits as per
applicable financial reporting framework.
(iv) If CFO refuses to correct the financial statements, I should consider informing appropriate
authorities such as CEO or the audit committee.
(v) Refuse to remain associated with misleading financial statements.
(vi) Resign from the job.

IQ School of Finance

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2 IAS 24: RELATED PARTY DISCLOSURES

Section overview

 Impact on the financial statements

 The objective and scope
 Definitions
 Disclosure requirements

2.1 Impact on the financial statements

A user of financial statements will normally expect the financial statements to reflect transactions
that have taken place on normal commercial terms (‘at arm’s length’). The user of the financial
statements would want to be informed if:
 Transactions have taken place that were not at ‘arm’s length’; or
 There are parties that could enforce transactions on the entity that are not on an ‘arm’s
length’ basis.
For example, in a group of companies, an entity might sell goods to its parent or fellow-subsidiaries
on more favourable terms than it would sell to other customers.
In this situation, the financial performance or financial position reported by the financial statements
would be misleading. In each situation there is a special relationship between the parties to the
business transactions. This is referred to as a ‘related party relationship’.

2.2 The objective and scope

The objective of IAS 24 is to ensure that an entity’s financial statements contain sufficient
disclosures to draw attention to the possibility that the entity’s financial position, or profit or loss
may have been affected by:
 the existence of related parties; and
 transactions and outstanding balances with related parties.
IAS 24 is neither deal with classification, recognition and measurement but it is only a disclosure
standard.
It shall be applied in:
(a) identifying related party relationships and transactions;
(b) identifying outstanding balances, including commitments, between an entity and its related
parties; and
(c) determining the disclosures to be made about those items.

2.3 Definitions
IAS 24 provides a lengthy definition of a related party and also a definition of a related party
transaction.
Related party

Definition: Related party

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

a) A person or a close member of that person’s family is related to a reporting entity if that
person:

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i) has control or joint control over the reporting entity;

ii) has significant influence over the reporting entity; or

iii) is a member of the key management personnel of the reporting entity or of a parent
of the reporting entity.

b) An entity is related to a reporting entity if any of the following conditions applies:

i) The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).

ii) One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).

iii) Both entities are joint ventures of the same third party.

iv) One entity is a joint venture of a third entity and the other entity is an associate of the
third entity.

v) 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. If the reporting entity is
itself such a plan, the sponsoring employers are also related to the reporting entity.

vi) The entity is controlled or jointly controlled by a person identified in (a).

vii) A person identified in (a)(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).

viii) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity of to the parent of the reporting entity.

A parent entity is related to its subsidiary entities (because it controls them) and its associated
entities (because it exerts significant influence over them). Fellow subsidiaries are also related
parties, because they are under the common control of the parent.
In considering each possible related party relationship the entity must look to the substance of the
arrangement, and not merely its legal form. Although two entities that have the same individual on
their board of directors would not meet any of the above conditions for a related party, a related
party relationship would nevertheless exist if influence can be shown.
Some examples are given by IAS 24 of likely exemptions, where a related party relationship
would usually not exist. However, the substance of the relationship should always be considered
in each case.
Examples of entities that are usually not related parties are:
 two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity
has significant influence over the other entity.
 Two venturers that simply share joint control over a joint venture
 Providers of finance (such as a lending bank or a bondholder)
 Trade unions
 Public utilities
 Government departments and agencies
 Customers, suppliers, franchisors, distributors or other agents with whom the entity transacts
a significant volume of business.

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Close family members

Definition:
Close family members
Close family members are those family members who may be expected to influence, or be
influenced by that individual.

Close family members include:

 an individual’s partner, spouse, children and dependants; and
 children or dependants of the individual’s partner or spouse.

Related party transactions

Definition:
Related party transaction
A related party transaction is a transfer of resources, services or obligations between a reporting
entity and a related party, regardless of whether a price is charged.

The following examples of related party transactions are given in IAS 24. (These are related party
transactions when they take place between related parties.)
 Purchases or sales of goods
 Purchases or sales of property and other assets
 Rendering or receiving of services
 Leases
 Transfer of research and development costs
 Finance arrangements (such as loans or contribution to equity)
 Provision of guarantees
 commitments to do something if a particular event occurs or does not occur in the future,
including executory contracts (recognised and unrecognised); and
 Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.

Example: Related party transactions

In the following examples, identify related party relationships between all parties and state any
additional factors to consider in order to form a conclusion:
(a) W Plc holds a controlling interest in X Ltd and Y Ltd. Z Ltd is a wholly owned subsidiary of X
Ltd.
(b) Mr Z holds 75% of the voting capital of A Ltd and 40% of the voting capital of B Ltd.
(c) H and W (who are husband and wife) are the directors and majority shareholders of Q Ltd.
The company makes purchases from P Ltd, a company jointly controlled by W and their
daughter, D. D is a director of P Ltd but holds no share in Q Ltd.

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Answer
(a) W Plc
W PLC is related to both X Ltd and Y Ltd (both subsidiaries) because of its controlling interest.
X Ltd and Y Ltd are related because they are under the common control of W PLC.
Z Ltd is related to X Ltd because of its subsidiary status.
Z Ltd is also related to W PLC as he is indirectly controlled by W PLC through W PLC’s holding
of X Ltd.
(b) Mr Z
Mr Z is related to A Ltd because of the subsidiary status of A Ltd.
As an associate of Mr Z, B Ltd is also a related party
A Ltd and B Ltd are not related. Although they are both owned by Mr Z, there is no common
control because Mr Z only has a 40% stake in B Ltd.
(c) Q Ltd
H and W are both related to Q Ltd, because they are key management of the entity
D could be considered to be close family to H and W, but this is only true if it can be shown
that she is influenced by them in business dealings (and there is insufficient information in
this example to ascertain whether this is true).
P Ltd is related to Q Ltd as it is jointly controlled by a member of the key management of Q
Ltd. Therefore any business dealings between the two entities will need to be disclosed.

2.4 Disclosure requirements

IAS 24 requires disclosure in the notes to the financial statements of the following, whether or not
transactions have taken place between those related parties:
 the name of the entity’s parent
 if different, the name of the ultimate controlling party
Where transactions have taken place between the related parties, irrespective of whether a price
was charged, the following should be disclosed:
 The nature of the related party relationship
 The amount of the transactions
 In respect of outstanding balances
 the amount
 their terms and conditions
 any guarantees given or received
 any provision for doubtful/irrecoverable debts
 The expense recognised in the period in respect of irrecoverable debts due from related
parties.
The above disclosures should be given separately for each of the following categories of related
party:
 The parent
 Entities with joint control or significant influence over the entity
 Subsidiaries
 Associates

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 Joint ventures in which the entity is a venturer

 Key management personnel of the entity or its parent
 Other related parties
In addition, IAS 24 requires disclosure of compensation to key management personnel, in total,
and for each of the following categories:
 Short-term employee benefits
 Post-employment benefits
 Other long-term benefits
 Termination benefits
 Share-based payments.

Illustration: Disclosure note

An example of a note to the financial statements for related party transactions of a large quoted
company is shown below:
Trading transactions

Purchases Amounts owed Amounts owed

Sales to from related by related to related
related parties parties parties parties

Rs. m Rs. M Rs. m Rs. m

Associates - 48 - 17

Joint ventures 57 14 12 -

Non-trading transactions

Loans to Loans from

related parties related parties

Rs.m Rs.m

Associates - 11

Joint ventures 33 -

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1 IAS 34: INTERIM FINANCIAL REPORTING

Section overview

 Scope of IAS 34
 Form and content of interim financial statements
 Periods for which interim financial statements must be presented
 Recognition and measurement
 Use of estimates in interim financial statements
 Disclosures

1.1 Scope of IAS 34

IAS 1 requires that financial statements should be produced at least annually. Many companies
are required by national regulations to produce accounts on a half-yearly basis or sometimes on a
quarterly basis. For example, the Listing Regulations of Pakistan requires listed companies whose
shares are traded on the Pakistan Stock Exchange to present financial statements on quarterly,
half yearly and annual basis.
IAS 34 Interim financial reporting does not specify the frequency of interim reporting. However,
governments, securities regulators, stock exchanges, and accountancy bodies often require
entities whose debt or equity securities are publicly traded to publish interim financial reports. IAS
34 focuses on providing guidance on the form and content of these interim accounts.
It encourages publicly-traded entities to prepare interim financial reports at least as of the end of
the first half of their financial year and to file them with the regularity authority no later than 60 days
after the end of the interim period.

1.2 Form and content of interim financial statements

IAS 34 requires that, as a minimum, an interim financial report should include:
 a condensed statement of financial position
 a condensed statement of profit or loss and other comprehensive income, presented as
either a condensed single statement or a condensed separate statement of profit or loss
followed by a condensed statement of other comprehensive income
 a condensed statement of changes in equity
 a condensed statement of cash flows, and
 selected explanatory notes.
In the statement that presents the components of profit or loss an entity should present the basic
and diluted EPS for the period.
If an entity publishes a set of condensed financial statements in its interim financial report, those
condensed statements shall include, at a minimum, each of the headings and subtotals that were
included in its most recent annual financial statements and the selected explanatory notes as
required by this Standard. Additional line items or notes shall be included if their omission would
make the condensed interim financial statements misleading
The interim statements are designed to provide an update on the performance and position of the
entity. It should focus on new activities, events, and circumstances that have occurred since the
previous annual financial statements were issued. They should not duplicate information that has
already been reported in the past.

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1.3 Periods for which interim financial statements must be presented

Interim reports must include the following financial statements (condensed or complete):
 a statement of financial position at the end of the current interim period and a comparative
balance sheet at the end of the previous financial year.
 statements of profit or loss and other comprehensive income for the current interim period
and cumulatively for the current financial year to date.
 comparative statements of profit or loss and other comprehensive income for the
comparable interim period last year, and the comparable cumulative period last year.
 a statement of changes in equity for the current financial year to date, with a comparative
statement for the comparable year-to-date period in the previous year.
 a statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period in the previous year.

Example: Periods for which interim financial statements must be presented

X plc publishes interim financial reports quarterly.
The entity's financial year ends 31 December (calendar year).
The statements that must be presented in the quarterly interim report as of 30 June 20X7:
31st
30th June 30th June
December
20X6 20X7
20X6
Statement of financial position -  

Statement of profit or loss and

other comprehensive income
6 months ending  - 
3 months ending  - 

Statement of cash flows

6 months ending  - 
3 months ending - - -

Statement of changes in equity

6 months ending  - 
3 months ending - - -

Note: the profit and loss statement will have four columns.

1.4 Recognition and measurement

An entity should use the same accounting policies in the interim accounts that it uses in the annual
financial statements.
Measurement for interim purposes should be made on a year-to-date basis. For example, suppose
that a company uses quarterly reporting and in the first quarter of the year, it writes down some
inventory to zero. If it is then able to sell the inventory in the next quarter, the results for the six-
month period require no write-down of inventory, and the write-down of inventory should be
reversed for the purpose of preparing the interim accounts for the first six months of the year.
An appendix to IAS 34 gives some guidance on applying the general recognition and measurement
rules from the IASB Conceptual Framework to the interim accounts. Some examples are given
below.

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Intangible assets
The guidance in IAS 34 states that an entity should follow the normal recognition criteria when
accounting for intangible assets. Development costs that have been incurred by the interim date
but do not meet the recognition criteria should be expensed. It is not appropriate to capitalise them
as an intangible asset in the belief that the criteria will be met by the end of the annual reporting
period.
Tax
Interim period income tax expense is accrued using the tax rate that would be applicable to
expected total annual earnings, that is, the estimated average annual effective income tax rate
applied to the pre-tax income of the interim period.
The following examples illustrate the application of the foregoing principle.

Example: Interim period income tax expense

An entity publishes interim financial reports quarterly.
It expects to earn Rs. 10,000 pre-tax each quarter and operates in a jurisdiction with a tax rate of
20% on the first 20,000 of annual earnings and 30% on all additional earnings.
Actual earnings match expectations.
The following table shows the amount of income tax expense that is reported in each quarter:
1st 2nd 3rd 4th Annual
Quarter Quarter Quarter Quarter total
Tax expense 2,500 2,500 2,500 2,500 10,000
Rs. 10,000 of tax is expected to be payable for the full year on Rs. 40,000 of pre-
tax income.
An entity publishes interim financial reports quarterly.
The entity earns 15,000 pre-tax profit in the first quarter but expects to incur losses of 5,000 in
each of the three remaining quarters (thus having zero income for the year), and operates in a
jurisdiction in which its estimated average annual income tax rate is expected to be 20%.
The following table shows the amount of income tax expense that is reported in each quarter:
1st 2nd 3rd 4th Annual
Quarter Quarter Quarter Quarter total
Tax expense 3,000 (1,000) (1,000) (1,000) nil

1.5 Use of estimates in interim financial statements

The interim financial statements should be reliable and relevant. However, IAS 34 recognises that
the preparation of interim accounts will generally rely more heavily on estimates than the annual
financial statements. An appendix of IAS 34 provides examples.
Pensions
A company is not expected to obtain an actuarial valuation of its pension liabilities at the interim
date. The guidance suggests that the most recent valuation should be rolled forward and used in
the interim accounts.
Provisions
The calculation of some provisions requires the assistance of an expert. IAS 34 recognises that
this would be too costly and time-consuming for the interim accounts. IAS 34 therefore states that
the figure included in the annual financial statements for the previous year should be updated
without reference to an expert.
Inventories
A full count of inventory may not be necessary at the interim reporting date. It may be sufficient to
make estimates based on sales margins to establish a valuation for the interim accounts.

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1.6 Disclosures
The following is a list of events and transactions for which disclosures would be required if they are
significant: the list is not exhaustive.
(a) the write-down of inventories to net realisable value and the reversal of such a write-down;
(b) recognition of a loss from the impairment of financial assets, property, plant and equipment,
intangible assets, assets arising from contracts with customers, or other assets, and the
reversal of such an impairment loss;
(c) the reversal of any provisions for the costs of restructuring;
(d) acquisitions and disposals of items of property, plant and equipment;
(e) commitments for the purchase of property, plant and equipment;
(f) litigation settlements;
(g) corrections of prior period errors;
(h) changes in the business or economic circumstances that affect the fair value of the entity’s
financial assets and financial liabilities, whether those assets or liabilities are recognised at fair
value or amortised cost;
(i) any loan default or breach of a loan agreement that has not been remedied on or before the
end of the reporting period;
(j) related party transactions;
(k) transfers between levels of the fair value hierarchy used in measuring the fair value of financial
instruments;
(l) changes in the classification of financial assets as a result of a change in the purpose or use
of those assets; and
(m) changes in contingent liabilities or contingent assets
An entity shall include the following information, in the notes to its interim financial statements or
elsewhere in the interim financial report. The information shall normally be reported on a financial
year-to-date basis.
(a) a statement that the same accounting policies and methods of computation are followed in the
interim financial statements as compared with the most recent annual financial statements
(b) explanatory comments about the seasonality or cyclicality (particularly revenue) of interim
operations.
(c) the nature and amount of items affecting assets, liabilities, equity, net income or cash flows
that are unusual because of their nature, size or incidence.
(d) the nature and amount of changes in estimates of amounts reported in prior interim periods of
the current financial year or changes in estimates of amounts reported in prior financial years.
(e) issues, repurchases and repayments of debt and equity securities.
(f) dividends paid (aggregate or per share) separately for ordinary shares and other shares.
(g) the disclosure of segment information is required in an entity’s interim financial report only if
IFRS 8 Operating Segments requires that entity to disclose segment information in its annual
financial statements)
In addition to above, other specific disclosure shall be required pertaining to following IFRS;
(h) IAS 10
(i) IFRS 3
(j) IFRS 7 and IFRS 13
(k) IFRS 10 and IFRS 12
(l) IFRS 15

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Certified Finance and Accounting Professional

Advanced accounting and financial reporting

IFRS 13: Fair Value Measurement

Contents
1 Introduction to IFRS 13
2 Measurement
3 Valuation techniques
4 Liabilities and an entity’s own equity instruments
5 Disclosure

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1 INTRODUCTION TO IFRS 13
Section overview

 Background
 Definition of fair value
 The asset or liability
 Market participants

1.1 Background
There are many instances where particular IAS / IFRS requires or allows entities to measure or
disclose the fair value of assets, liabilities or their own equity instruments.
Examples include (but are not limited to):

Standard
IFRS 2 Requires an accounting treatment based on the grant date fair value of equity
settled share based payment transactions.
IFRS 3 Measuring goodwill requires the measurement of the acquisition date fair value
of consideration paid and the measurement of the fair value (with some
exceptions) of the assets acquired and liabilities assumed in a transaction in
which control is achieved.
IFRS 7 If a financial instrument is not measured at fair value that amount must be
disclosed.
IFRS 9 All financial instruments are measured at their fair value at initial recognition.
Financial assets that meet certain conditions are measured at amortised cost
subsequently. Any financial asset that does not meet the conditions is measured
at fair value.
Subsequent measurement of financial liabilities is sometimes at fair value.
IFRS 16 Lease transactions
IASs 16/38 Allows the use of a revaluation model for the measurement of assets after initial
recognition.
Under this model, the carrying amount of the asset is based on its fair value at
the date of the revaluation.
IAS 19 Defined benefit plans are measured as the fair value of the plan assets net of
the present value of the plan obligations.
IAS 40 Allows the use of a fair value model for the measurement of investment
property.
Under this model, the asset is fair valued at each reporting date.

Other standards required the use of measures which incorporate fair value.

Standard
IAS 36 Recoverable amount is the higher of value in use and fair value less costs of
disposal.
IFRS 5 An asset held for sale is measured at the lower of its carrying amount and fair
value less costs of disposal.

Some of these standards contained little guidance on the meaning of fair value. Others did contain
guidance but this was developed over many years and in a piecemeal manner.

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Purpose of IFRS 13
The purpose of IFRS 13 is to:
 define fair value;
 set out a single framework for measuring fair value; and
 specify disclosures about fair value measurement.
IFRS 13 does not change what should be fair valued nor when this should occur.
The fair value measurement framework described in this IFRS applies to both initial and
subsequent measurement if fair value is required or permitted by other IFRSs.
Scope of IFRS 13
IFRS 13 applies to any situation where IFRS requires or permits fair value measurements or
disclosures about fair value measurements (and other measurements based on fair value such as
fair value less costs to sell) with the following exceptions.
IFRS 13 does not apply to:
 share based payment transactions within the scope of IFRS 2;
 Leasing transactions accounted for in accordance with IFRS 16 Leases; and
 measurements such as net realisable value (IAS 2 Inventories) or value in use (IAS 36
Impairment of Assets) which have some similarities to fair value but are not fair value.
The IFRS 13 disclosure requirements do not apply to the following:
 plan assets measured at fair value (IAS 19: Employee benefits);
 retirement benefit plan investments measured at fair value (IAS 26: Accounting and reporting
by retirement benefit plans); and
 assets for which recoverable amount is fair value less costs of disposal in accordance with
IAS 36.
1.2 Definition of fair value

Definition: Fair value

Fair value is 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 (i.e. it is an exit price).

This definition emphasises that fair value is a market-based measurement, not an entity-specific
measurement. In other words, if two entities hold identical assets these assets (all other things
being equal) should have the same fair value and this is not affected by how each entity uses the
asset or how each entity intends to use the asset in the future.
The definition is phrased in terms of assets and liabilities because they are the primary focus of
accounting measurement. However, the guidance in IFRS 13 also applies to an entity’s own equity
instruments measured at fair value (e.g. when an interest in another company is acquired in a
share for share exchange).
Note that the fair value is an exit price, i.e. the price at which an asset would be sold.

Definition: Exit and entry prices

Exit price: The price that would be received to sell an asset or paid to transfer a liability.
Entry price: The price paid to acquire an asset or received to assume a liability in an exchange
transaction.

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1.3 The asset or liability

A fair value measurement is for a particular asset or liability.
Whether the fair value guidance in IFRS 13 applies to a stand-alone asset or liability or to a group
of assets, a group of liabilities or to a group of assets and liabilities depends on the unit of account
for the item being fair valued.

Definition: Unit of account

Unit of account: The level at which an asset or a liability is aggregated or disaggregated in an IFRS
for recognition purposes.

The unit of account for the asset or liability must be determined in accordance with the IFRS that
requires or permits the fair value measurement.
An entity must use the assumptions that market participants would use when pricing the asset or
liability under current market conditions when measuring fair value. The fair value must take into
account all characteristics that a market participant would consider relevant to the value. These
characteristics might include:
 the condition and location of the asset; and
 restrictions, if any, on the sale or use of the asset.
1.4 Market participants

Definition: Market participants

Market participants: Buyers and sellers in the principal (or most advantageous) market for the
asset or liability.

Market participants have all of the following characteristics:

 They are independent of each other;
 They are knowledgeable, having a reasonable understanding about the asset or liability and
the transaction using all available information, including information that might be obtained
through due diligence efforts that are usual and customary.
 They are able to enter into a transaction for the asset or liability.
 They are willing to enter into a transaction for the asset or liability, i.e. they are motivated but
not forced or otherwise compelled to do so.

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2 MEASUREMENT
Section overview

 Measuring fair value

 Principal or most advantageous market
 Fair value of non-financial assets – highest and best use

2.1 Measuring fair value

Fair value measurement assumes that the asset (liability) is exchanged in an orderly transaction
between market participants to sell the asset (transfer the liability) at the measurement date under
current market conditions.
Sometimes it might be possible to use observable market transactions to fair value an asset or a
liability (e.g. a share might be quoted on the Karachi Stock Exchange). For other assets and
liabilities this may not be possible. However, in each case the objective is the same, being to
estimate the price at which an orderly transaction to sell the asset (or transfer a liability) would take
place between market participants at the measurement date under current market conditions.
Active market
If an active market exists then it will provide information that can be used for fair value
measurement.
 A quoted price in an active market provides the most reliable evidence of fair value and must
be used to measure fair value whenever available.
 It would be unusual to find an active market for the sale of non- financial assets so some
other sort of valuation technique would usually be used to determine their fair value.

Definition: Active market

A market in which transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis.

If there is no such active market (e.g. for the sale of an unquoted business or surplus machinery)
then a valuation technique would be necessary.
2.2 Principal or most advantageous market
Fair value measurement is based on a possible transaction to sell the asset or transfer the liability
in the principal market for the asset or liability.
If there is no principal market fair vale measurement is based on the price available in the most
advantageous market for the asset or liability.

Definitions: Most advantageous market and principal market

Most advantageous market: The market that maximises the amount that would be received to sell
the asset or minimises the amount that would be paid to transfer the liability, after taking into
account transaction costs and transport costs.
Principal market: The market with the greatest volume and level of activity for the asset or liability.

Identifying principle market (or most advantageous market)

It is not necessary to for an entity to make an exhaustive search to identify the principal market (or
failing that, the most advantageous market). However, it should take into account all information
that is reasonably available.
Unless there is evidence to the contrary, principal market (or failing that, the most advantageous
market) is the one in which an entity normally enters into transactions sell the asset or to transfer
the liability being fair valued.

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If there is a principal market for the asset or liability, the fair value measurement must use the
price in that market even if a price in a different market is potentially more advantageous at the
measurement date.
The price in a principle market might either be directly observable or estimated using a valuation
technique.
Transaction costs
The price in the principal (or most advantageous) market used to measure the fair value of the
asset (liability) is not adjusted for transaction costs. Note that:
 fair value is not “net realisable value” or “fair value less costs of disposal”; and
 using the price at which an asset can be sold for as the basis for fair valuation does not
mean that the entity intends to sell it
Transport costs
If location is a characteristic of the asset the price in the principal (or most advantageous) market
is adjusted for the costs that would be incurred to transport the asset from its current location to
that market.

Example: Fair valuation

An entity holds an asset which could be sold in one of two markets.
Information about these markets and the costs that would be incurred if a sale were to be made is
as follows:
Market A Market B
Rs. Rs.
Sale price 260 250
Transport cost (20) (20)
240 230
Transaction cost (30) (10)
Net amount received 210 220
(a) What fair value would be used to measure the asset if Market A were the principal market?
(b) What fair value would be used to measure the asset if no principal market could be
identified?

Answer
(a) If Market A is the principal market for the asset the fair value of the asset would be
measured using the price that would be received in that market, after taking into account
transport costs (Rs. 240).
(b) If neither market is the principal market for the asset, the fair value of the asset would be
measured using the price in the most advantageous market.
The most advantageous market is the market that maximises the amount that would be
received to sell the asset, after taking into account transaction costs and transport costs (i.e.
the net amount that would be received in the respective markets). This is Market B where
the net amount that would be received for the asset would be Rs. 220.
The fair value of the asset is measured using the price in that market (Rs. 250), less
transport costs (Rs. 20), resulting in a fair value measurement of Rs. 230.
Transaction costs are taken into account when determining which market is the most
advantageous market but the price used to measure the fair value of the asset is not
adjusted for those costs (although it is adjusted for transport costs).

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Example: Fair valuation

An entity owns an item of industrial equipment (asset x) for which it wishes to ascertain a fair value
in accordance with IFRS 13.
Information about the markets in which the asset could be sold and the costs that would be
incurred if a sale were to be made is as follows:

Market A Market B
Rs. Rs.
Sale price 500 505
Transport cost (20) (30)
480 475
Volume of sales of asset x (units) 1,000 29,000

(a) Which is the most advantageous market?

(b) What is the fair value of the asset in accordance with IFRS 13?

Answer
a) Market A is the most advantageous market as it provides the highest return after transaction
costs.
b) The fair value of the asset in accordance with IFRS 13 is $505. This is the price available in
the principal market before transaction costs. (The principal market is the one with the
highest level of activity).

Different entities might have access to different markets. This might result in different entities
reporting similar assets at different fair values.
2.3 Fair value of non-financial assets – highest and best use
Fair value measurement of a non-financial asset must value the asset at its highest and best use.
Highest and best use is a valuation concept based on the idea that market participants would seek
to maximise the value of an asset.

Definition: Highest and best use

Highest and best use: The use of a non-financial asset by market participants that would maximise
the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset
would be used.

This must take into account use of the asset that is:
 physically possible;
 legally permissible; and
 financially feasible.
The current use of land is presumed to be its highest and best use unless market or other factors
suggest a different use.

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Example: Highest and best use

X Limited acquired a plot of land developed for industrial use as a factory. A factory with similar
facilities in Karachi and access has recently been sold for Rs. 50 million.
The plot is located on the outskirts of Clifton in Karachi.
Similar sites nearby have recently been developed for residential use as sites for high-rise
apartment buildings.
X Limited determines that the land could be developed as a site for residential use at a cost of Rs.
10 million (to cover demolition of the factory and legal costs associated with the change of use).
The plot of land would then be worth Rs. 62 million.
The highest and best use of the land would be determined by comparing the following:

Rs. million

Value of the land as currently developed 50

Value of the land as a vacant site for residential use

(Rs. 62 million – Rs. 10 million) 52

Conclusion: The fair value of the land is Rs. 52 million.

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3 VALUATION TECHNIQUES
Section overview

 Valuation techniques
 Inputs to valuation techniques
 Fair value hierarchy
 Bid/offer prices

3.1 Valuation techniques

The objective of using a valuation technique is to estimate the price at which an orderly transaction
to sell the asset (or to transfer the liability) would take place between market participants at the
measurement date under current market conditions.
IFRS 13 requires that one of three valuation techniques must be used:
 market approach – uses prices and other relevant information from market transactions
involving identical or similar assets and liabilities;
 cost approach – the amount required to replace the service capacity of an asset (also known
as the current replacement cost);
 income approach – converts future amounts (cash flows, profits) to a single current
(discounted) amount.
An entity must use a valuation technique that is appropriate in the circumstances and for which
sufficient data is available to measure fair value, maximising the use of relevant observable inputs
and minimising the use of unobservable inputs.

3.2 Inputs to valuation techniques

An entity must use valuation techniques that are appropriate in the circumstances and for which
sufficient information is available to measure fair value.
A valuation technique should be used to maximise the use of relevant observable inputs and
minimise the use of unobservable inputs.

Definition: Inputs
Inputs: The assumptions that market participants would use when pricing the asset or liability,
including assumptions about risk, such as the following:
(a) the risk inherent in a particular valuation technique used to measure fair value (such as a
pricing model); and
(b) the risk inherent in the inputs to the valuation technique.

Quoted price in an active market provides the most reliable evidence of fair value and must be
used to measure fair value whenever available.
3.3 Fair value hierarchy
IFRS 13 establishes a fair value hierarchy to categorise inputs to valuation techniques into three
levels.

Definition Examples
Level 1 Quoted prices in active markets Share price quoted on the Lahore Stock
for identical assets or liabilities Exchange
that the entity can access at the
measurement date

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Definition Examples
Level 2 Inputs other than quoted prices Quoted price of a similar asset to the one
included within Level 1 that are being valued.
observable for the asset or Quoted interest rate.
liability, either directly or indirectly.
Level 3 Unobservable inputs for the asset Cash flow projections.
or liability.

3.4 Bid /Offer prices

For some assets (liabilities) markets quote prices that differ depending on whether the asset is
being sold to or bought from the market.
 The price at which an asset can be sold to the market is called the bid price (it is the amount
the market bids for the asset).
 The price at which an asset can be bought from the market is called the ask or offer price (it
is the amount the market asks for the asset or offers to sell it for).
The price within the bid-ask spread that is most representative of fair value in the circumstances
must be used to measure fair value.
Previously, bid price had to be used for financial assets and ask price for financial liabilities but this
is no longer the case.

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4 LIABILITIES AND AN ENTITY’S OWN EQUITY INSTRUMENTS

Section overview

 General principles
 Liabilities and equity instruments held by other parties as assets
 Liabilities and equity instruments not held by other parties as assets
 Financial assets and financial liabilities managed on a net basis

4.1 General principles

Fair value measurement assumes the transfer of an item to a market participant at the
measurement date.
The fair valuation of a liability assumes that it not be settled with the counterparty at the
measurement date but would remain outstanding. In other words, the market participant to whom
the liability could be transferred would be required to fulfil the obligation.
The fair valuation of an entity’s own equity instrument assumes that market participant to whom
the instrument could be transferred would take on the rights and responsibilities associated with
the instrument.
The same guidance that applies to the fair value of assets also applies to the fair value of liabilities
and an entity’s own equity instruments including that:
 an entity must maximise the use of relevant observable inputs and minimise the use of
unobservable inputs; and
 quoted price in an active market must be used to measure fair value whenever available.
In the absence of an active market there might be an observable market for items held by other
parties as assets.

4.2 Liabilities and equity instruments held by other parties as assets

If a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument
is not available it may be possible to measure fair value from the point of view of a party that holds
the identical item as an asset at the measurement date.
If this is the case fair value is measured as follows:
 using the quoted price in an active market (if available) for the identical item held by another
party as an asset; or failing that
 using other observable inputs (e.g. quoted price in a market that is not active for the identical
item held by another party as an asset); or failing that
 another valuation technique (e.g. using quoted prices for similar liabilities or equity
instruments held by other parties as assets (market approach).
Adjustments to quoted price
There might be factors that are specific to the asset held by the third party that are not applicable
to the fair value of the liability or entity’s own equity.
The quoted price of such items is adjusted for such factors. For example, a quoted price might
relate to a similar (but not identical) liability or equity instrument held by another party as an asset.
However, the price of the asset must not reflect the effect of a restriction preventing the sale of that
asset.

4.3 Liabilities and equity instruments not held by other parties as assets
In this case fair value is measured from the perspective of a market participant that owes the liability
or has issued the claim on equity.

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For example, when applying a present value technique an entity might take into account the future
cash outflows that a market participant would expect to incur in fulfilling the obligation (including
the compensation that a market participant would require for taking on the obligation).

4.4 Financial assets and financial liabilities managed on a net basis

An entity might manage a group of financial assets and financial liabilities on the basis of its net
exposure to either market risks or credit risk.
In this case the entity is allowed to measure the fair value net position (i.e. a net asset or a net
liability as appropriate).
This is an exception to the general rules in IFRS 13 which would otherwise apply separately to the
asset and the liability. It applies only to financial assets and financial liabilities within the scope of
IAS 39: Financial instruments: Recognition and Measurement or IFRS 9: Financial instruments.
The exception is only allowed if the entity does all the following:
 It manages the group of financial assets and financial liabilities on the basis of the entity’s
net exposure to a particular risk (market risk or credit risk of a particular counterparty) in
accordance with its documented risk management or investment strategy;
 It provides information on that basis about the group of financial assets and financial
liabilities to the entity’s key management personnel; and
 It measures those financial assets and financial liabilities at fair value in the statement of
financial position at the end of each reporting period.

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5 DISCLOSURE
Section overview

 Recurring and non-recurring fair value measurement

 Overall disclosure objective
 Disclosures

5.1 Recurring and non-recurring fair value measurement

The fair value measurement of assets and liabilities might be recurring or non-recurring.
 Recurring fair value measurements are those that are required or permitted in the statement
of financial position at the end of each reporting period (e.g. the fair value of investment
property when the IAS 40 fair value model is used);
 Non-recurring fair value measurements are those that are required or permitted in the
statement of financial position in particular circumstances (e.g. when an entity measures an
asset held for sale at fair value less costs to sell in accordance with IFRS 5).
Disclosures are necessary in respect of each of the above.

5.2 Overall disclosure objective

Information must be disclosed to help users assess both of the following:
 the valuation techniques and inputs used to measure the fair value assets and liabilities on
a recurring or non-recurring basis;
 the effect on profit or loss or other comprehensive income for the period of recurring fair
value measurements using significant unobservable inputs (Level 3).
All of the following must be considered to meet the above objectives:
 the level of detail necessary to satisfy the disclosure requirements;
 how much emphasis to place on each of the various requirements;
 how much aggregation or disaggregation to undertake; and
 the need for additional information.

Classes of assets and liabilities

Classes of assets and liabilities must be identified for the purpose of fulfilling the minimum
disclosure requirements of IFRS 15.
Appropriate classes are identified on the basis of the following:
 the nature, characteristics and risks of the asset or liability; and
 the level of the fair value hierarchy within which the fair value measurement is categorised.
5.3 Disclosures
The following information must be disclosed as a minimum for each class of assets and liabilities
measured at fair value in the statement of financial position after initial recognition.

For recurring and non-recurring fair value measurements

The fair value measurement at the end of the reporting period and the reasons for the
measurement for non-recurring fair value measurements
The level of the fair value hierarchy within which the fair value measurements are categorised in
their entirety (Level 1, 2 or 3).

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For fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy:
 a description of the valuation technique(s) and the inputs used in the fair value measurement
for;
 the reason for any change in valuation technique;
Quantitative information about the significant unobservable inputs used in the fair value
measurement for fair value measurements categorised within Level 3 of the fair value hierarchy.
A description of the valuation processes used for fair value measurements categorised within Level
3 of the fair value hierarchy.
The reason why a non-financial asset is being used in a manner that differs from its highest and
best use when this is the case.

For recurring fair value measurements

The amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons
for those transfers and the entity’s policy for determining when transfers between levels are
deemed to have occurred.
For fair value measurements categorised within Level 3 of the fair value hierarchy:
 a reconciliation of opening balances to closing balances, disclosing separately changes
during the period attributable to the following:
 total gains or losses recognised in profit or loss (and the line items in which they are
recognised);
 unrealised amounts included in the above;
 total gains or losses recognised in other comprehensive income (and the line item in
which they are recognised);
 purchases, sales, issues and settlements;
 details of transfers into or out of Level 3 of the fair value hierarchy;
 for recurring fair value measurements categorised within Level 3 of the fair value hierarchy:
 a narrative description of the sensitivity of the fair value measurement to changes in
unobservable inputs;
 the fact that a change to one or more of the unobservable inputs would change fair value
significantly (if that is the case) and the effect of those changes.

Other
If financial assets and financial liabilities are managed on a net basis and the fair value of the net
position is measured that fact must be disclosed.

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Certified Finance and Accounting Professional

Advanced accounting and financial reporting

IFRS 7 Financial Instruments: Disclosures

Contents
 Objectives of IFRS 7
 Statement of financial position disclosures
 Statement of profit or loss disclosures
 Risk disclosures

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3 IFRS 7 Financial Instruments: Disclosures

3.1 Objectives of IFRS 7

All companies are exposed to various types of financial risk. Some risks are obvious from looking
at the statement of financial position. For example, a loan requiring repayment in the next year is
reported as a current liability, and users of the financial statements can assess the risk that the
company will be unable to repay the loan.
However, there are often many other risks that a company faces that are not apparent from the
financial statements. For example, if a significant volume of a company’s sales are made overseas,
there is exposure to the risk of exchange rate movements.

Example:
A UK company has an investment of units purchased in a German company’s floating rate silver-
linked bond. The bond pays interest on the capital, and part of the interest payment represents
bonus interest linked to movements in the price of silver.
There are several financial risks that this company faces with respect to this investment.
It is a floating rate bond. So if market interest rates for bonds decrease, the interest income from
the bonds will fall.
Interest is paid in euros. For a UK company there is a foreign exchange risk associated with changes
in the value of the euro. If the euro falls in value against the British pound, the value of the income
to a UK investor will fall.
A bonus is linked to movements in the price of silver. So there is exposure to changes in the price
of silver.
There is default risk. The German company may default on payments of interest or on repayment
of the principal when the bond reaches its redemption date.
IFRS 7 requires that an entity should disclose information that enables users of the financial
statements to ‘evaluate the significance of financial instruments’ for the entity’s financial position
and financial performance.
There are two main parts to IFRS 7:
A section on the disclosure of ‘the significance of financial instruments’ for the entity’s financial
position and financial performance
A section on disclosures of the nature and extent of risks arising from financial instruments.

3.2 Statement of financial position disclosures

The carrying amounts of financial instruments must be shown, either in the statement of financial
position or in a note to the financial statements, for each class of financial instrument:
 Financial assets at fair value through profit or loss
 Financial assets at amortised cost
 Financial liabilities at fair value through profit or loss
 Financial liabilities measured at amortised cost.

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Financial assets at fair value through profit or loss

If the entity has designated as measured at fair value through profit or loss a financial asset that
would otherwise be measured at fair value through other comprehensive income or amortised cost,
it shall disclose:
(a) the maximum exposure to credit risk of the financial asset at the end of the reporting period.
(b) the amount by which any related credit derivatives or similar instruments mitigate that
maximum exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the financial
asset (or group of financial assets) that is attributable to changes in the credit risk of the
financial asset determined either:
i. as the amount of change in its fair value that is not attributable to changes in market
conditions that give rise to market risk; or
ii. using an alternative method the entity believes more faithfully represents the amount of
change in its fair value that is attributable to changes in the credit risk of the asset. Changes
in market conditions that give rise to market risk include changes in an observed
(benchmark) interest rate, commodity price, foreign exchange rate or index of prices or
rates.
(d) the amount of the change in the fair value of any related credit derivatives or similar instruments
that has occurred during the period and cumulatively since the financial asset was designated.

Financial liabilities at fair value through profit or loss

If the entity has designated a financial liability as at fair value through profit or loss and is required
to present the effects of changes in that liability’s credit risk in other comprehensive income, it shall
disclose:
(a) the amount of change, cumulatively, in the fair value of the financial liability that is attributable
to changes in the credit risk of that liability
(b) the difference between the financial liability’s carrying amount and the amount the entity would
be contractually required to pay at maturity to the holder of the obligation.
(c) any transfers of the cumulative gain or loss within equity during the period including the reason
for such transfers.
(d) if a liability is derecognised during the period, the amount (if any) presented in other
comprehensive income that was realised at derecognition.
The entity shall also disclose:
(a) a detailed description of the methods used including an explanation of why the method is
appropriate.
(b) if the entity believes that the disclosure it has given, either in the statement of financial position
or in the notes, does not faithfully represent the change in the fair value of the financial asset
or financial liability attributable to changes in its credit risk, the reasons for reaching this
conclusion and the factors it believes are relevant.
(c) a detailed description of the methodology or methodologies used to determine whether
presenting the effects of changes in a liability’s credit risk in other comprehensive income
would create or enlarge an accounting mismatch in profit or loss
Investments in equity instruments designated at fair value through other comprehensive income
If an entity has designated investments in equity instruments to be measured at fair value through
other comprehensive income, it shall disclose:
(a) which investments in equity instruments have been designated to be measured at fair value
through other comprehensive income.

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(b) the reasons for using this presentation alternative.

(c) the fair value of each such investment at the end of the reporting period.
(d) dividends recognised during the period,
(e) any transfers of the cumulative gain or loss within equity during the period including the reason
for such transfers.
Other disclosures relating to the statement of financial position are also required. These include
the following:
 Collateral. A note should disclose the carrying amount of financial assets that the entity has
pledged as collateral for liabilities or contingent liabilities, the terms and conditions relating
to its pledge.
 Allowance account for credit losses. The carrying amount of financial assets measured
at fair value through other comprehensive income (in accordance with paragraph 4.1.2A of
IFRS 9) is not reduced by a loss allowance and an entity should not present the loss
allowance separately in the statement of financial position as a reduction of the carrying
amount of the financial asset. However, an entity must disclose the loss allowance in the
notes to the financial statements.
 Defaults and breaches. For loans payable, the entity should disclose details of any defaults
during the period in the loan payments, or any other breaches in the loan conditions.
With some exceptions, for each class of financial asset and financial liability, an entity must disclose
the fair value of the assets or liabilities in a way that permits the fair value to be compared with the
carrying amount for that class. An important exception is where the carrying amount is a reasonable
approximation of fair value, which should normally be the case for short-term receivables and
payables.

3.3 Statement of profit or loss disclosures

An entity must disclose the following items either in the statement of profit or loss or in notes to the
financial statements:
 Net gains or losses on financial assets or financial liabilities at fair value through profit or
loss.
 Net gains or losses on available-for-sale financial assets, showing separately:
 the gain or loss recognised in other comprehensive income (and so directly in equity)
during the period, and
 the amount removed from equity and reclassified from equity to profit and loss through
other comprehensive income in the period.
 Total interest income and total interest expense, calculated using the effective interest
method, for financial assets or liabilities that are not at fair value through profit or loss.
 Fee income and expenses arising from financial assets or liabilities that are not at fair value
through profit or loss.
Other disclosures
IFRS 7 also requires other disclosures. These include the following:
 With some exceptions, for each class of financial asset and financial liability, an entity must
disclose the fair value of the assets or liabilities in a way that permits the fair value to be
compared with the carrying amount for that class. An important exception is where the
carrying amount is a reasonable approximation of fair value, which should normally be the
case for short-term receivables and payables.

3.4 Risk disclosures

IFRS 7 also requires that an entity should disclose information that enables users of its financial
statements to evaluate the nature and extent of the risks arising from its financial instruments.

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These risks typically include, but are not restricted to:

 Credit risk
 Liquidity risk and
 Market risk
For each category of risk, the entity should provide both quantitative and qualitative information
about the risks.
 Qualitative disclosures. For each type of risk, there should be disclosures of the exposures
to risk and how they arise; and the objectives policies and processes for managing the risk
and the methods used to measure the risk.
 Quantitative disclosures. For each type of risk, the entity should also disclose summary
quantitative data about its exposures at the end of the reporting period. This disclosure
should be based on information presented to the entity’s senior management, such as the
board of directors or chief executive officer.
Credit risk
Credit risk is the risk that someone who owes money (a trade receivable, a borrower, a bond issuer,
and so on) will not pay. An entity is required to disclose the following information about credit risk
exposures:
 A best estimate of the entity’s maximum exposure to credit risk at the end of the reporting
period and a description of any collateral held.
Liquidity risk
Liquidity risk is the risk that the entity will not have access to sufficient cash to meet its payment
obligations when these are due. IFRS 7 requires disclosure of:
 A maturity analysis for financial liabilities, showing when the contractual liabilities fall due for
payment
 A description of how the entity manages the liquidity risk that arises from this maturity profile
of payments.
Market risk
Market risk is the risk of losses that might occur from changes in the value of financial instruments
due to changes in:
 Exchange rates,
 Interest rates, or
 Market prices.
An entity should provide a sensitivity analysis for each type of market risk to which it is exposed at
the end of the reporting period. The sensitivity analysis should show how profit or loss would have
been affected by a change in the market risk variable (interest rate, exchange rate, market price of
an item) that might have been reasonably possible at that date.
Alternatively, an entity can provide sensitivity analysis in a different form, where it uses a different
model for analysis of sensitivity, such as a value at risk (VaR) model. These models are commonly
used by banks.

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Certified Finance and Accounting Professional

Advanced accounting and financial reporting

Accounting for hyperinflation

Contents
1 IAS 29: Financial reporting in hyperinflationary economies
2 Restatement of historical cost financial statements
3 Restatement of current cost financial statements
4 Other issues
5 IFRIC 7: Applying the restatement approach under IAS 29

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1 IAS 29: FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

1.1 Introduction
Primary financial statements are normally prepared on the historical cost basis without taking into
account:
 changes in the general level of prices or
 changes in specific prices of assets held (except to the extent that property, plant and
equipment and investments may be revalued).
Some entities may present primary financial statements prepared on a current cost basis. Current
cost accounts reflect the effects of specific price changes on the financial statements of the entity.
They do not reflect the general rate of inflation.
The accounting problem
In a hyperinflationary economy, money loses purchasing power at such a rate that comparison of
amounts from transactions occurring at different times (even within the same accounting period) is
misleading.
Reporting operating results and financial position in a hyperinflationary economy is not useful
without restatement.
What is hyperinflation?
IAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise.
Features of a hyperinflationary economy include (but are not limited to) the following:
 the general population prefers to keep its wealth in non-monetary assets or in a relatively
stable foreign currency. Amounts of local currency held are immediately invested to maintain
purchasing power;
 the general population regards monetary amounts not in terms of the local currency but in
terms of a relatively stable foreign currency. Prices may be quoted in that currency;
 sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short;
 interest rates, wages and prices are linked to a price index; and
 the cumulative inflation rate over three years is approaching, or exceeds, 100%.
It is a matter of judgement when restatement of financial statements in accordance with this
standard becomes necessary.

1.2 Scope
IAS 29 must be applied to the primary financial statements (including the consolidated financial
statements) of any entity whose functional currency is the currency of a hyperinflationary economy.
IAS 29 applies from the beginning of the reporting period in which an entity identifies the existence
of hyperinflation in the country in whose currency it reports.

1.3 Requirements
The financial statements of an entity that reports in the currency of a hyper-inflationary economy
must be stated in terms of the measuring unit current at the end of reporting period date.
This applies to both:
 historical cost accounts; and,
 current cost accounts.
Comparatives should be restated in terms of the measuring unit current at the end of reporting
period date.
The gain or loss on the net monetary position should be included in net income and separately
disclosed.
It is not permitted to present the required information as a supplement to financial statements that
have not been restated. Also, separate presentation of the financial statements before restatement
is discouraged.

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2 RESTATEMENT OF HISTORICAL COST FINANCIAL STATEMENTS

Section overview

 Statement of financial position

 Non-monetary items
 Equity balances
 Statement of profit or loss
 Gain or loss on net monetary position

2.1 Statement of financial position

All balances must be stated in terms of the measuring unit current by applying general price index
at the end of reporting period date.
Not restated
Monetary items – No restatement is necessary as monetary items are already expressed in terms
of the monetary unit current at the end of reporting period date.
Index linked assets and liabilities – The carrying value of these items will already have been
adjusted for inflation. Such items are carried at the adjusted amount in the restated statement of
financial position.
All other assets and liabilities are non-monetary.

2.2 Non-monetary items

Some non-monetary items will already be carried at the amount current at the end of reporting
period date (e.g. net realisable value or market value). These are not restated.
All other non-monetary assets and liabilities are restated. There is a different treatment for items
carried at cost and those not carried at cost.
Non-monetary items carried at cost (or cost less depreciation)
The restated cost (or cost less depreciation) is determined by applying the change in a general
price index from the date of acquisition to the end of reporting period date. Both the cost and the
accumulated depreciation will be restated. Thus the following are restated from the date of
purchase:
 property, plant and equipment;
 investments;
 inventories of raw materials and merchandise;
 goodwill; and
 patents, trademarks and similar assets.
Inventories of partly-finished and finished goods are restated from the dates on which the costs of
purchase and of conversion were incurred.
Non-monetary items carried at amounts other than cost
Revalued items will be indexed from the date of revaluation. No asset must be valued in excess of
its recoverable amount.
Equity accounted investments
Sometimes an entity may hold an investment in another entity that is accounted for under the equity
method and whose functional currency is that of a hyperinflationary economy.
In these cases the statement of financial position and statement of profit or loss of the investee
must be restated in accordance with this standard before applying the equity method.

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Where the restated financial statements of the investee are expressed in a foreign currency they
are translated at closing rates.

2.3 Equity balances

At the beginning of the first period of application of this standard:
 The components of owners' equity (except retained earnings and any revaluation surplus)
are restated by applying a general price index from the dates the components were
contributed/arose.
 Any revaluation surplus that arose in previous periods is eliminated.
 Restated retained earnings are derived from all the other amounts in the restated statement
of financial position.
At the end of the first period and in subsequent periods, all components of owners' equity are
restated by applying a general price index from the beginning of the period (or the date of
contribution, if later).
Practical problems
If detailed records of the date and cost of acquisition of property, plant and equipment are not
available, then an independent professional assessment can be made of the items value in the first
period of restatement.
If a general price index is not available for the whole period (or periods) required then an estimated
index can be used. This could be based on, say, movements in the exchange rate between the
local currency and a relatively stable foreign currency.

2.4 Statement of profit or loss

The statement of profit or loss must be expressed in terms of the measuring unit current at the
reporting date.
All items in the statement of profit or loss will be restated by applying the change in the general
price index from the dates when the items of income and expenses occurred and the reporting
date.
2.5 Gain or loss on net monetary position
During a period of inflation an entity will:
 suffer a loss if it holds net monetary assets during a period of inflation because the
purchasing power of those assets will be eroded.
 make a gain if it holds net monetary liabilities because the burden of the liabilities is reduced
by inflation.
This gain or loss on the net monetary position may be derived as the difference resulting from the
restatement of non-monetary assets, owners' equity and statement of profit or loss items and the
adjustment of index linked assets and liabilities.
The gain or loss may be estimated by applying the change in a general price index to the weighted
average for the period of the difference between monetary assets and monetary liabilities.

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3 RESTATEMENT OF CURRENT COST FINANCIAL STATEMENTS

Section overview

 Statement of financial position

 Statement of profit or loss
 Gain or loss on net monetary position

3.1 Statement of financial position

Items stated at current cost are not restated because they are already expressed in terms of the
measuring unit current at the end of reporting date.
Other items in the statement of financial position are restated.

3.2 Statement of profit or loss

The current cost statement of profit or loss, before restatement, generally reports costs current at
the time at which the underlying transactions or events occurred.
Cost of sales and depreciation are recorded at current costs at the time of consumption;
Sales and other expenses are recorded at their money amounts when they occurred.
All amounts need to be restated into the measuring unit current at the end of reporting period date
by applying a general price index.

3.3 Gain or loss on net monetary position

The gain or loss on the net monetary position is credited or charged to the statement of profit or
loss.

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4 OTHER ISSUES
Section overview

 Cash flow statement

 Corresponding figures
 Consolidated financial statements
 Economies ceasing to be hyperinflationary
 Disclosures

4.1 Cash flow statement

All items in the cash flow statement must be expressed in terms of the measuring unit current at
the end of reporting period.

4.2 Corresponding figures

Corresponding figures for the previous reporting period must be restated by applying a general
price index so that the comparative financial statements are presented in terms of the measuring
unit current at the end of the reporting period.
Information that is disclosed in respect of earlier periods must also be expressed in terms of the
measuring unit current at the end of the reporting period.
This applies to financial statements based on a historical cost approach and on a current cost
approach.

4.3 Consolidated financial statements

A parent that reports in the currency of a hyperinflationary economy may have subsidiaries that
also report in the currencies of hyperinflationary economies.
The financial statements of any such subsidiary must be restated by applying a general price index
of the country in whose currency it reports before they are included in the consolidated financial
statements issued by its parent.
If the subsidiary is a foreign subsidiary, its restated financial statements are translated at closing
rates.
If financial statements with different reporting dates are consolidated, all items, whether non-
monetary or monetary, need to be restated into the measuring unit current at the date of the
consolidated financial statements.

4.4 Economies ceasing to be hyperinflationary

When an economy ceases to be hyperinflationary, an entity will discontinue the preparation and
presentation of financial statements prepared in accordance with IAS 29.
The amounts expressed in the measuring unit current at the end of the previous reporting period
are used as the basis for the carrying amounts in subsequent financial statements.

4.5 Disclosures
An entity must disclose the following:
 the fact that the financial statements and the corresponding figures for previous periods have
been restated for the changes in the general purchasing power of the functional currency
and, as a result, are stated in terms of the measuring unit current at the end of reporting
period date;
 whether the financial statements are based on a historical cost approach or a current cost
approach; and
 the identity and level of the price index at the end of reporting period date and the movement
in the index during the current and the previous reporting period.

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5 IFRIC 7: APPLYING THE RESTATEMENT APPROACH UNDER IAS 29

Section overview

 Applying the restatement approach under IAS 29

 Deferred taxation

5.1 Applying the restatement approach under IAS 29

In the period in which an entity first identifies the existence of hyperinflation in the economy of its
functional currency, it must apply the requirements of IAS 29 as if the economy had always been
hyperinflationary.
This means that non-monetary items in the opening statement of financial position at the beginning
of the earliest period presented must be restated to reflect the effect of inflation.
 Non-monetary amounts carried at historical cost are restated to reflect inflation form the date
of recognition up to the date of the opening statement of financial position.
 Non-monetary amounts carried at revalued amounts are restated to reflect inflation form the
date of revaluation up to the date of the opening statement of financial position.

Example: Restatement
Extracts of X Limited’s IFRS statement of financial position at 31 December 2017 (before
restatement) are as follows:

2017 2016
Rs. m Rs. m
Non-current assets 300 400

All non-current assets were bought in 2015 (i.e. before that start of the comparative period).
X Limited identified that its functional currency was hyperinflationary in 2017.
X Limited has identified the following price indices and constructed the following
conversion factors:

Price indices
2017 223
2015 95

2017 conversion factor

(2015 prices to 2017 prices) = 223/95 =2.347

This conversion factor must be applied to non-current assets from the 2017 and 2016
financial statements to rebase the figure in terms of 2017 prices.

This results in the following restated amounts:

2017 2015
Rs. m Rs. M
Non-current assets
300  2.347 and 400  2.347 704 939

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5.2 Deferred taxation

Deferred tax is calculated by applying the requirements in IAS 12 to the restated balances.
The comparative deferred tax balance is based on the figure that would have been in last year’s
restated financials adjusted for this year’s price movement.

Example: Restatement – deferred tax

Extracts of X Limited’s IFRS statement of financial position at 31 December 2017 (before
restatement) are as follows:

2017 2016
Rs. m Rs. M
Non-current assets 300 400
Deferred tax liability 30 20

All non-current assets were bought in 2015 (i.e. before that start of the comparative period).

The deferred tax liability was calculated as follows

2017 2016
Rs. m Rs. M
Non-current assets 300 400
Tax base 200 333
Temporary difference 100 67
Tax rate 30% 30%
Deferred taxation 30 20

X Limited identified that its functional currency was hyperinflationary in 2017.

X Limited has identified the following price indices and constructed the following conversion
factors:

Price indices
2017 223
2016 135
2015 95

The following conversion factors are required:

2017 conversion factor (1)

(2015 prices to 2017 prices) = 223/95 =2.347

Used to restate non-current assets (as before)

2017 conversion factor (2)

(2016 prices to 2017 prices) = 223/135 = 1.652

Used to restate the deferred tax balance that would have been measured in 2016
if restated financial statements had been prepared into 2017 prices.

2016 conversion factor (3)

(2015 prices to 2016 prices) = 135/95 =1.421

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Example: Restatement – deferred tax (continued)

Used to restate non-current assets to 2016 prices in order to calculate the deferred tax balance
that would have been measured in 2016 if restated financial statements had been prepared.

The 2017 conversion factor (1) is applied to non-current assets from the 2017 and 2016
financial statements to restate the figure in terms of 2017 prices (as before):

2017 2016
Rs. m Rs. m
Non-current assets
300  2.347 and 400  2.347 704 939

The deferred tax liability as at 31 December 2017 is calculated as follows:

2017
Rs. m
Non-current assets 704
Tax base 200
Temporary difference 504
Tax rate 30%
Deferred taxation 151

The 2017 comparative deferred tax liability is

calculated as follows:

2016
Rs. m
Non-current assets (rebased to 2016 prices using
the 2016 conversion factor (3)
400  1.421 568
Tax base 333
Temporary difference 235
Tax rate 30%
Deferred taxation 71
Rebase to 2017 prices using the 2017 conversion
factor (2)  1.652
Tax at 30% 117

The restated deferred tax balances are as follows:

2017 2015
Rs. m Rs. m
Non-current assets
300  2.347 and 400  2.347 704 939

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IAS 29: Accounting for Hyperinflation Compiled by: Murtaza Quaid

IAS 29: Accounting for Hyperinflation

ICAP Past Paper Questions
Question No. 5(b) of Summer 2023, 4 marks
Bluebell Limited (BL) has been operating in a highly inflationary economy for the past three years. The
directors of BL are concerned that the regulator may require a restatement of financial statements
according to IAS 29 at any time. Following is the extract from the draft statement of financial position of
BL as at 31 December 2022 prepared under historical cost:

Required: For each item reported in the statement of financial position, identify whether the balance
reported (including comparatives) under historical cost needs to be restated under IAS 29 or not.
Solution:

IQ School of Finance

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Certified Finance and Accounting Professional

Advanced accounting and financial reporting

Islamic accounting standards

Contents
1 Islamic accounting standards

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1 ISLAMIC ACCOUNTING STANDARDS

Section overview

 Introduction to Islamic finance

 IFAS 1: Murabaha
 IFAS 2: Ijarah
 IFAS on profit and loss sharing deposits

1.1 Introduction to Islamic finance

Note that the Islamic Finance Resource is an excellent website full of useful information and
examples. It is recommended that you visit the site (http://ifresource.com).
The main principles of Islamic finance are that:
 Wealth must be generated from legitimate trade and asset-based investment (the use of
money for the purposes of making money is expressly forbidden).
 Investment should have a social and an ethical benefit to wider society beyond pure return.
 Risk should be shared.
 Harmful activities (haram) should be avoided.
The intention is to avoid injustice, asymmetric risk and moral hazard (where the party who causes
a problem does not suffer its consequences) and unfair enrichment at the expense of another
party.
Permitted activities
Islamic banks are allowed to obtain their earnings through profit-sharing investments or fee-based
returns. If a loan is given for business purposes, the lender should take part in the risk. This usually
involves the lender buying the asset and then allowing a customer to use the asset for a fee.
Specific guidance
The following activities are prohibited:
 Charging and receiving interest (riba).
 Charging interest contradicts the principle that risk must be shared and is also
contrary to the ideas of partnership and justice.
 Using money to make money is forbidden.
 Investment in companies that have too much borrowing is also prohibited. What
constitutes “too much borrowing” is a matter for interpretation but is typically defined
as debt totalling more than 33% of the stock market value over the last 12 months.
 Investments in businesses involved in alcohol, gambling, or anything else that the Shariah
considers unlawful or undesirable (haram).
 Investments in transactions that involve speculation or extreme risk. (This is seen as
gambling).
 Entering into contracts where there is uncertainty about the subject matter and terms of
contracts (This includes a prohibition on short selling, i.e. selling something is not yet
owned).
Financial institutions in Islamic countries face the problem of providing finance in ways which do
not contravene the injunctions of Shariah regarding riba or interest.
There are a number of Shariah compliant financing methods which have become widely used. The
absence of guidance on how to account for these products has led to diversity in practice thus
reducing the usefulness of financial statements.
ICAP has produced several Islamic Financial Accounting Standards (IFAS) to provide appropriate
guidance with the aim of improving comparability of financial statements.

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1.2 IFAS 1: Murabaha

Introduction
The ideal mode of financing according to Shariah would be mudarabah or musharakah.

Definitions
Mudarabah
Mudarabah is a partnership in profit whereby one party provides capital (rab al maal) and the other
party provides labour (mudarib).
In the context of lending, the bank provides capital and the customer provides expertise to invest
in a project. Profits generated are distributed according in a pre-determined ratio but cannot be
guaranteed. The bank does not participate in the management of the business. This is like the bank
providing equity finance.
The project might make a loss. In this case the bank loses out. The customer cannot be made to
compensate the bank for this loss as that would be contrary to the mutual sharing of risk.
Musharakah
Relationship established under a contract by the mutual consent of the parties for sharing of profits
and losses arising from a joint enterprise or venture.
This is a joint venture or investment partnership between two parties who both provide capital
towards the financing of new or established projects. Both parties share the profits on a pre-agreed
ratio, allowing managerial skills to be remunerated, with losses being shared on the basis of equity
participation.

It is difficult to use mudarabah and musharakah instruments in every type of financing.

Murabaha may be used as a form of providing but should be restricted only to those cases where
the mudarabah and musharakah are not practicable.
Murabaha
In traditional western finance a customer would borrow money from a bank in order to finance
activity, say the purchase of an asset. However, under Sharia the bank cannot charge interest.
Murabaha is a form of trade credit for asset acquisition that avoids the payment of interest. The
bank buys the asset and then sells it on to the customer on a deferred basis at a price that includes
an agreed mark-up for profit. Payment can be made by instalments but the mark-up is fixed in
advance and cannot be increased, even if there is a delay in payment.

Definition
Murabaha: Murabaha is a particular kind of sale where seller expressly mentions the cost he has
incurred on the commodities to be sold and sells it to another person by adding some profit or
mark-up thereon which is known to the buyer.
Thus, murabaha is a cost plus transaction where the seller expressly mentions the cost of a
commodity sold and sells it to another person by adding mutually agreed profit thereon which can
be either in lump-sum or through an agreed ratio of profit to be charged over the cost.

Compliance with Sharia

A loan transaction is not made Shariah compliant by simply changing the term interest or markup
in a contract to profit. A murabaha transaction must satisfy basic conditions as laid down in
Shariah.
A Murabaha transaction is not valid under Shariah unless the subject of the transaction is:
 in existence; and
 owned by the seller; and
 in the physical or constructive possession of the seller.

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The following conditions also apply:

 The sale must be prompt and absolute. Thus a sale attributed to a future date or a sale
contingent on a future event is void.
 The subject matter of sale must be a property of value and must be specifically known and
identified to the buyer.
 The subject matter of sale cannot be a thing which is forbidden (Haram) by Shariah.
There are further principles regarding deferred payment.
 A sale in which the parties agree that the payment of price is deferred is called a Bai'mu'ajjal.
 Bai'mu'ajjal is valid if the price and due date of payment is fixed in an unambiguous manner.
 The due time of payment can be fixed either with reference to a particular date, or by
specifying a period of time, but it cannot be fixed with reference to a future event, the exact
date of which is unknown or is uncertain. If the time of payment is unknown or uncertain, the
sale is void.
 If a particular period (e.g. one month) is fixed for payment, the period is deemed to start at
the date of delivery unless the parties have agreed otherwise.
 A deferred price may be more than the cash price, but it must be fixed at the time of sale.
Further comment on the structure of a Shariah compliant transaction
A bank may purchase the commodity and keep it in its own possession prior to selling it or it could
purchase the commodity through a third person appointed by it as an agent.
A bank is also allowed to appoint the customer in the murabaha transaction as its agent.
In this case the customer (who will eventually buy the commodity from the bank) first purchases
the commodity and takes possession of it on behalf of the bank and then later buys it from the
bank.
The following procedure can be used to accomplish a deal like the one above in a way that is
compliant with Shariah:
 The client and the bank sign an agreement under which the bank promises to sell and the
client promises to buy commodity up to a maximum amount of purchases at an agreed profit
margin.
 The bank appoints the client as his agent for purchasing the commodity on its behalf.
 The client purchases the commodity on behalf of the bank and takes its possession as an
agent of the bank.
 The client informs the bank that the commodity has been purchased for the bank and is in
the client’s possession. (The client is an agent of the bank thus the bank has constructive
possession of the commodity).
 The client (at the same time) makes an offer to purchase the commodity from the bank at
the agreed profit margin referred to above.
 The bank accepts the offer and raises an invoice for the sale. Ownership as well as the risk
of the commodity is transferred to the client.
Standard Accounting Practice
IFAS 1 applies to murabaha transactions undertaken by a bank in historical cost financial
statements.
Cost of inventories should comprise all costs of purchases and other costs incurred in bringing the
inventories to their present location and condition.
Inventories remaining unsold with the bank at the reporting date are inventories of the bank and
must be valued in accordance with IAS 2 and shown under other assets.
The information required by IAS 2 should be disclosed.

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Murabaha receivables must be recorded at the invoiced amounts.

Purchases and sales and the resulting profit are accounted for at the conclusion of a Murabaha
transaction.
Profit on that portion of sales not due for payment should be deferred by debiting to unearned
murabaha income and crediting deferred murabaha income which should be shown as a
liability.

1.3 IFAS 2: Ijarah

Ijarah are leases that are Shariah compliant.
The objective of IFAS 2 is to prescribe the accounting treatment and required disclosures for
lessees and lessors in respect of ijarah.
IFAS 2 does not apply to:
 lease agreements to explore for or use minerals, oil, natural gas and similar non-
regenerative resources;
 licensing agreements for such items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights;
 lessors of investment property leased out under operating leases; and
 lessors of biological assets leased out under operating leases.
Compliance with Sharia (the Shariah essentials)
The following characteristics are necessary for a lease to be compliant with Shariah:
 In Ijara/leasing, the asset that is the subject of the lease remains in the ownership of the
lessor and only its usufruct is transferred to the lessee.
 Only owned assets can be leased out except that a lessee can effect a sub-lease with the
express permission of the lessor.
 Any asset that cannot be used without being consumed cannot be a leased asset (e.g
money, edibles, fuel, etc.).
 Lease rentals do not become due and payable until the assets to be leased are delivered to
the lessee.
 The lessor must retain title to the asset and bear all risks and rewards pertaining to
ownership during the entire term of the lease. However, the lessee is responsible for any
damage or loss caused to the leased asset due to the fault or negligence of the lessee or
from non-customary use of the asset and is also responsible for all risks and consequences
in relation to third party liability, arising from or incidental to operation or use of the leased
assets.
 The insurance of the leased asset should be in the name of lessor and the cost of such
insurance borne by him.
 A lease can be terminated before expiry of the term of the lease but only with the mutual
consent of the parties.
 Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of
lease, or earlier at a price and at such terms and conditions as are agreed. However, the
lease agreement cannot be conditional upon such a sale nor can the lease agreement
contain a term agreeing to transfer of ownership at a future date.
 The amount of rental must be agreed in advance in an unambiguous manner either for the
full term of the lease or for a specific period in absolute terms.
 A lease contract of is considered terminated if the leased asset ceases to give the service
for which it was rented.

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Definitions
Ijarah is a form of lease finance agreement where a bank buys an asset for a customer and then
leases it to the customer over a specific period for agreed rentals which allow the bank to recover
the capital cost of the asset and a profit margin.

Definition: Ijarah (Lease)

Ijarah is a contract whereby the owner of an asset, other than consumables, transfers its usufruct
to another person for an agreed period for an agreed consideration.
Usufruct: The right to use an asset.

The term ijarah also includes a contract of sublease executed by the lessee with the express
permission of the lessor (being the owner).
Whether a transaction is an ijarah or not depends on its substance rather than the form of the
contract provided it complies with the Shariah essentials (as shown above).
An ijarah is an agreement that is cancellable only:
 upon the occurrence of some remote contingency such as force majeure;
 with the mutual consent of the muj’ir (lessor) and the musta’jir (lessee); or
 If the musta’jir (lessee) enters into a new ijarah for the same or an equivalent asset with the
same muj’ir (lessor).

Definitions
Inception of the ijarah: The date the leased asset is put into musta’jir’s (lessee’s) possession
pursuant to an ijarah contract.
The term of the ijarah: The period for which the musta’jir (lessee) has contracted to lease the asset
together with any further terms for which the musta’jir (lessee) has the option to continue to lease
the asset, with or without further payment, which option at the inception of the ijarah it is
reasonably certain that the musta’jir (lessee) will exercise.
Ujrah (lease) payments: Payments over the ijarah term that the musta’jir is, contractually required
to pay.
Economic life: Either the period over which an asset is expected to be economically usable by one
or more users or the number of production or similar units expected to be obtained from the asset
by one or more users.
Useful life: The estimated period, from the beginning of the ijarah term, without limitation by the
ijarah term, over which the economic benefits embodied in the asset are expected to be consumed
by the enterprise.

Ijarah in the financial statements of musta’jir (lessees)

Assets acquired for ijarah are recognised upon acquisition at historical cost which is the net
purchasing price plus all expenditures necessary to bring the asset to its intended use, such as
custom duties, taxes, freight, insurance, installation, testing, etc.
Ujrah payments under an ijarah should be recognised as an expense in the statement of profit or
loss on a straight-line basis over the ijarah term unless another systematic basis is representative
of the time pattern of the user’s benefit.
Ujrah payments are recognised as an expense in the statement of profit or loss on a straight- line
basis unless another systematic basis is representative of the time pattern of the user’s benefit,
even if the payments are not on that basis.
Musta’jir (Lessees) should make the following disclosures for ijarah, in addition to meeting the IFRS
disclosure requirements in respect of financial instruments:
 the total of future ujrah payments under ijarah, for each of the following periods:
 not later than one year;
 later than one year and not later than five years;
 later than five years;

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 the total of future sub-ijarah payments expected to be received under sub-ijarah at the
reporting date;
 ijarah and sub-ijarah payments recognised in income for the period, with separate amounts
for ijarah payments and sub-ijarah payments;
 a general description of the musta’jir’s (lessee’s) significant ijarah arrangements including,
but not limited to restrictions imposed by ijarah arrangements, such as those concerning
dividends, additional debt, and further ijarah.
ijarah in the financial statements of muj’ir (lessors)
Muj’ir (lessors) should present assets subject to ijarah in their statement of financial position
according to the nature of the asset, distinguished from the assets in own use.
Ijarah income from Ijarah should be recognised in income on accrual basis as and when the rental
becomes due, unless another ~ systematic basis is more representative of the time pattern in which
benefit of use derived from the leased asset is diminished.
Costs, including depreciation, incurred in earning the ijarah income are recognised as an expense.
Ijarah income is recognised in income on accrual basis as and when the rental becomes due,
unless another systematic basis is more representative of the time pattern in which use benefit
derived from the leased asset is diminished.
Initial direct costs incurred specifically to earn revenues from an ijarah are either deferred and
allocated to income over the ijarah term in proportion to the recognition of ujrah, or are recognised
as an expense in the statement of profit or loss in the period in which they are incurred.
Assets leased out should be depreciated over the period of lease term using depreciation methods
set out in lAS 16 However, in the event of an asset expected to be available for re-ijarah after its
first term, depreciation should be charged over the economic life of such asset on the basis set out
in IAS 16.
Muj’ir (Lessors) should make the following disclosures for ijarah, in addition to meeting the IFRS
disclosure requirements in respect of financial instruments:
 the future ijarah payments in the aggregate and for each of the following periods:
 not later than one year;
 later than one year and not later than five years;
 later than five years; and
 a general description of the muj’ir (lessor’s) significant leasing arrangements.
In addition, the requirements on disclosure under IAS 16: Property, plant and equipment, IAS 36:
Impairment of assets, IAS 38: Intangible assets and IAS 40: Investment property, apply to assets
leased out under ijarah.
Sale and leaseback transactions
A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of
the same asset back to the vendor.
When an asset is sold with an intention to enter into an ijarah arrangement, any profit or loss based
on the asset’s fair value should be recognised immediately.
If the sale price is below fair value, any profit or loss should be recognised immediately except that,
if the loss is compensated by future lease payments at below market price, it should be deferred
and amortised in proportion to the lease payments over the period for which the asset is expected
to be used.
If the sale price is above fair value, the excess over fair value should be deferred and amortised
over the period for which the asset is expected to be used.

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1.4 IFAS on profit and loss sharing deposits

Financial institutions establish and manage funds for investment. Investors contribute to the funds
and share in the profit or loss of the fund. This is the return on the investments made using the
assets of the fund less the financial institutions management fee.
Each investor owns a share of the fund determined by his investment. The financial institution must
keep records comprising individual accounts for each investor which shows the balance on the
account that belongs to the investor (investment account holder).
Some funds are set up with limitations on the type of investments that can be made by the financial
institution on behalf of the investors. Other funds are set up without such limitations. These funds
are said to be unrestricted.
This standard provides guidance on accounting principles to be followed by Institutions offering
Islamic Financial Services (IIFS). The guidance covers recognition, measurement, presentation
and disclosure in respect of transactions relating to equity (funds) of unrestricted investment /
(Profit/Loss Sharing) PLS deposit account holders and their equivalents (unrestricted funds) in
which the IIFS is acting as mudarib.
The standard only deals with funds which in effect are mudaraba or musharaka contracts. These
definitions are repeated here for your convenience.

Definitions
Mudaraba
Mudaraba is a partnership in profit whereby one party provides capital (rab al maal) and the other
party provides labour (mudarib). (Mudarib may also contribute capital with the consent of the rab
al maal).
Musharaka
Relationship established under a contract by the mutual consent of the parties for sharing of profits
and losses arising from a joint enterprise or venture.

The standard does not address the following:

 The funds received by the IIFS on a basis other than mudaraba or musharaka contracts.
 Bases of calculation of Zakat on funds within the scope of the standard.
The standard addresses two issues:
 The accounting principles relating to funds received by the IIFS for investment in its capacity
as a mudarib at the IIFS's discretion, in whatever manner the IIFS deems appropriate
(unrestricted funds); and
 the disclosure of bases for profit allocation between owners' equity and that of unrestricted
funds.
Definitions

Definition
Unrestricted investment accounts / PLS deposit accounts (unrestricted funds)
Accounts where the investment account holder authorises the IIFS to invest the account holder’s
funds on the basis of Mudaraba or Musharaka contract in a manner which the IIFS deems
appropriate without laying down any restrictions as to where, how and for what purpose the funds
should be invested.
The IIFS might also use other funds which it has the right to use with the permission of Investment
account holders.

The investment account holder authorises the IIFS to invest the account holder’s funds on the
basis of mudaraba or musharaka contract as IIFS deems appropriate without laying down any
restrictions as to where, how and for what purpose the funds should be invested.

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The IIFS can commingle the investment account holder’s funds with its own equity or with other
funds that it has the right to use with the permission of Investment account holders.
Holders of investment accounts appoint IIFS to invest their funds on the basis of an agency contract
in return for a specified fee and perhaps a specified share of the profit if the realised profit exceeds
a certain level.
Profits (calculated after the IIFS has received its share of profits as a mudarib) are allocated
between investment account holders and the IIFS according to relative amount of funds invested
and a pre-agreed profit sharing formula.
Losses are allocated between the investment account holders and the IIFS based on the relative
amount of funds invested by each.
Accounting treatment in respect of unrestricted investment account holders / PLS deposit account
holders

Definition
Funds of unrestricted investment/PLS deposit account holders
The balance, at the reporting date, from the funds originally received by the IIFS from the account
holders plus (minus) their share in the profits (losses) and decreased by withdrawals or transfers to
other types of accounts.

Funds of the account holders are initially measured as the amount invested and the subsequently
measured as follows at each reporting date:

Illustration:

Balance of investment account at the beginning of the period X

Add: Any further deposits X
Less: Any withdrawals (X)
Add: Any share of profits allocated and reinvested X
Less: Any share of losses allocated (X)
Add / less: Any other necessary adjustment. X/(X)
X

Profits of investments jointly financed by the investment account holders and the IIFS are allocated
between them according to the mutually agreed terms.
Profits which have been allocated but have not yet been repaid or reinvested must be recognised
and disclosed as a liability by the IIFS.
Any loss resulting from transactions in a jointly financed investment is accounted as follows:
 as a deduction from any unallocated profits; then
 any loss remaining should be deducted from provisions for investment losses set aside for
this purpose; then
 any remaining loss should be deducted from the respective equity shares in the joint
investment account holders and the IIFS according to each party’s investment for the period.
A loss due to negligence or similar on the part of the IIFS is deducted from its share of the profits
of the jointly financed investment. Any such loss in excess of the IIFS's share of profits is deducted
from its equity share in the joint investment.
Presentation and disclosure in financial statements
Funds of account holders must be accounted for as redeemable capital.
The financial statement must disclose the following in its note on significant accounting policies:

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 the bases applied to allocate profits between owners' equity and the account holders;
 the bases applied by the IIFS for charging expenses to unrestricted account holders;
 the bases applied by the IIFS for charging provisions, such as provision for non performing
accounts, provisions on impairment etc and the parties to whom they revert once they are
no longer required.
The IIFS should disclose significant category of accounts and of the percentage which the IIFS has
agreed to invest in order to produce returns for them.
Disclosure should be made of the aggregate balances of all unrestricted funds (and their
equivalent) classified as to type and also in terms of local and foreign currency.
The following disclosures should be made either in the notes to the financial statements or a
separate statement:
 the total administrative expenses charged in respect of unrestricted funds with a brief
description of their major components;
 details of profit allocation between owner's equity investment account holders applied in the
current financial period;
 the percentage of profit charged by the IIFS as a mudarib during the financial period;
 where the IIFS is unable to utilise all funds available for investment how the investments
made relates to the IIFS and investment account holders.
The following disclosures should also be made:
 the bases and the aggregate amounts (if applicable) for determining incentive profits which
IIFS receives from the profits of unrestricted funds and incentive profits which IIFS pays from
its profits to investment account holders;
 concentration of sources of investment accounts;
 maturity profile of the unrestricted investment funds.
Disclosure should be made of sources of financing of material classes of assets showing
separately those:
 exclusively financed by investment account holders;
 exclusively financed by IIFS; and
 jointly financed by IIFS and investment account holders.
The rights, conditions and obligations of each class of investment account holders shown in the
statement of financial position should be disclosed.
Separate disclosures must be made of all material items of revenues, expenses, gains and losses
classified under the headings appropriate to the IIFS distinguishing those attributable to investment
accounts, IIFS, and IIFS and investment account holders jointly.

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Islamic Accounting Standards Compiled by: Murtaza Quaid

Islamic Accounting Standards

ICAP Past Paper Questions
Question No. 6(a) of Summer 2017, 3 marks
In the light of Islamic Financial Accounting Standards issued by the Institute of Chartered Accountants of
Pakistan, discuss how the gain/loss on ‘sale and lease back transactions’ shall be accounted for in the
financial statements of a listed company if an asset is sold at:
▪ fair value
▪ above fair value
▪ below fair value
Solution:
When an asset is sold with an intention to enter into an ljarah arrangement, gain or loss shall be recorded
as follows:
▪ Sold at fair value:
Profit or loss should be recognized immediately.
▪ Sold at below fair value:
If the sale price is below fair value, any profit or loss should be recognized immediately except that, if
the loss is compensated by future lease payments at below market price, it should be deferred and
amortized in proportion to the lease payments over the period for which the asset is expected to be
used.
▪ Sold at above fair value:
If the sale price is above fair value, the excess over fair value should be deferred and amortized over
the period for which the asset is expected to be used.

IQ School of Finance

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IAS 38
INTANGIBLE ASSETS
Compiled by: Murtaza Quaid, ACA

IAS 38: INTANGIBLE ASSETS

In this Part:
 Scope of IAS 38
 Definition of Intangible Assets
 Recognition of Intangible Assets
 Initial Measurement of Intangible Assets
 Amortization of Intangible Assets
 Measurement after recognition
 Disclosure
Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

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Scope of IAS 38: Intangible Assets

Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible
resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual
property, market knowledge and trademarks (including brand names and publishing titles).
Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films,
customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer
loyalty, market share and marketing rights.
IAS 38 is required to be applied in accounting for intangible assets, except intangible assets that are within the scope of another
Standard;
If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this
Standard. For example, this Standard does not apply to:
a) intangible assets held for sale in the ordinary course of business (IAS 2 is applicable).
b) deferred tax assets (IAS 12 is applicable).
c) leases of intangible assets (IFRS 16 is applicable).
d) financial assets (IAS 32 or IFRS 10/IAS 27/IAS 28 is/are applicable)
e) goodwill acquired in a business combination (IFRS 3 is applicable).
f) assets arising from contracts with customers (IFRS 15 is applicable)
Rights held by a lessee under licensing agreements for items such as motion picture films, video recordings, plays,

What is Intangible Assets?

An intangible asset is an identifiable, non-monetary

asset without physical substance.

Each intangible asset has 3 main characteristics:

1. It is identifiable
2. It is non-monetary
3. No physical substance
Just warning: It can happen that an asset has all 3 characteristics, but you
cannot recognize it in your statement of financial position. The reason is
that it still may not meet the recognition criteria.
For example, A telecom company may have millions of customers.
In this case, such company has a customer list that is an intangible asset,
but it can’t show it in its balance sheet, because it cannot measure its cost.
Just be aware of these situations.

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What is Intangible Assets?

Identifiable Non-monetary asset Without physical substance

An intangible asset must be identifiable. Intangible asset must be a non-monetary

An asset is identifiable if it is either: asset. Some intangible assets may be contained
 is separable (can be exchanged, in or on a physical substance such as a
An intangible asset must meet the
rented, sold or transferred definition criteria of an asset i.e. control  compact disc (in the case of
separately); or over a resource and existence of future computer software),
 arises from contractual or other legal economic benefits.  legal documentation (in the case of
rights, either from contract, An entity controls an asset if the entity a licence or patent) or
legislation etc. In this case, the asset has the power to obtain the future  film.
does not need to be separable. economic benefits flowing from the
Intangible assets may have secondary
underlying resource and to restrict the
physical element. Therefore, although
access of others to those benefits.
these activities may result in an asset
The future economic benefits flowing with physical substance (e.g. a
from an intangible asset may include prototype), the physical element of the
revenue from the sale of products or asset is secondary to its intangible
services, cost savings, or other benefits component, i.e. the knowledge
resulting from the use of the asset by the embodied in it.
entity

Recognition of Intangible Assets

An intangible asset shall be recognised if, and only if:

It is probable that the expected

future economic benefits that The cost of the asset can be
AND
are attributable to the asset reliably measured
will flow to the entity

 Asset  Controlled by the Entity

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Initial Measurement of Intangible Assets

The initial measurement of an intangible
asset depends on how you acquired the
asset. An intangible asset may be acquired in
following ways:
a) Acquired or Purchased Separately
b) Acquired in Exchange of Another Asset
c) Acquired by way of Government Grant
d) Internally Generated Intangibles
(Other than Goodwill)
e) Internally Generated Goodwill
f) Acquired in Business Combination

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement - Intangible Asset Acquired or Purchased Separately

Any directly attributable cost of preparing

COST = Purchase Price + the asset for its intended use

Purchase price Examples of directly attributable costs are:

 plus import duties and non-refundable taxes,  Costs of employee benefits arising directly from
 after deducting trade discounts and rebates bringing the asset to its working condition;
 Professional fees (e.g. legal or consulting fees)
arising directly from bringing the asset to its
Important Considerations working condition; and
 Posts of testing whether the asset is functioning
 Recognition of costs in the carrying amount of an intangible asset ceases when the properly.
asset is in the condition necessary for it to be capable of operating in the manner
Examples of expenditures that are NOT part
intended by management. For example, initial operating losses or cost of redeploying
the asset.
of the cost of an intangible asset are:
 Costs of introducing a new product/service
 Income and expenses relating to incidental operations (not directly attributable) are
(including advertising/promotional activities);
recognised immediately in profit or loss.
 Costs of conducting business in a new location
 If payment for an intangible asset is deferred beyond normal credit terms, its cost is
the cash price equivalent. The difference between the cash price equivalent and the or with a new class of customer (including costs
of staff training); and
total payment is recognized as interest over the period of credit
 Administration and other general overhead
costs.
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Initial Measurement - Intangible Asset Acquired in Exchange of Another Asset

An intangible asset may be acquired in exchange for another asset. The cost of the
intangible asset acquired will be:
 Fair value of the asset given up ± Cash paid (received);
 Fair value of the acquired asset, if this is more clearly evident;
 Carrying amount of the asset given up ± Cash paid (received), if:
 the exchange transaction lacks commercial substance or
 fair value of neither the asset received nor the asset
given up is reliably measurable.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement - Intangible Asset Acquired by way of Government Grant

 In some cases, an intangible asset may be acquired

free of charge, or for nominal consideration, by
way of a government grant.
 This may happen when a government transfers or
allocates to an entity intangible assets such as
airport landing rights, licences to operate radio or
television stations, import licences or quotas or
rights to access other restricted resources.
 In accordance with IAS 20, an entity may choose to recognise both the intangible
asset and the grant initially at fair value.
 Alternatively, the entity recognises the asset initially at a nominal amount plus any
expenditure that is directly attributable to preparing the asset for its intended use.

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Initial Measurement - Internally Generated Intangibles (Other than Goodwill)

 To assess whether an internally generated intangible

asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
a) a research phase; and
b) a development phase.
 Although the terms ‘research’ and ‘development’ are defined, the terms ‘research
phase’ and ‘development phase’ have a broader meaning for the purpose of IAS 38.
 If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity treats the expenditure on
that project as if it were incurred in the research phase only.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement - Internally Generated Intangibles (Other than Goodwill)

Research Development
 Research is original and planned investigation undertaken with  Development is the application of research findings or other
the prospect of gaining new scientific or technical knowledge knowledge to a plan or design for the production of new or
and understanding. substantially improved materials, devices, products, processes, systems
or services before the start of commercial production or use.
 Examples of research activities are:
 Examples of development activities are:
 activities aimed at obtaining new knowledge;  the design, construction and testing of pre-production or
 the search for, evaluation and final selection of, pre-use prototypes and models;
applications of research findings or other knowledge;  the design of tools, jigs, moulds and dies involving new
technology;
 the search for alternatives for materials, devices, products,
processes, systems or services; and  the design, construction and operation of a pilot plant that is
not of a scale economically feasible for commercial production;
 the formulation, design, evaluation and final selection of and
possible alternatives for new or improved materials,  the design, construction and testing of a chosen alternative for
devices, products, processes, systems or services. new or improved materials, devices, products, processes,
 In the research phase of an internal project, an entity cannot systems or services.
demonstrate that an intangible asset exists that will generate  In the development phase of an internal project, an entity can, in
probable future economic benefits. Therefore, this expenditure is some instances, identify an intangible asset and demonstrate that the
recognised as an expense when it is incurred and no intangible asset will generate probable future economic benefits. This is because
asset arising from research (or from the research phase of an the development phase of a project is further advanced than the
internal project) is recognised. research phase. Therefore, this expenditure is capitalised if it meets
certain criteria, otherwise this expenditure is recognised as an expense
when it is incurred.
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Initial Measurement - Internally Generated Intangibles (Other than Goodwill)

Capitalization Criteria for Expenditure in Development Phase

 An intangible asset arising from development (or from the development phase of an internal
project) shall be recognised if, and only if, an entity can demonstrate all of the following:
a) the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
b) its intention to complete the intangible asset and use or sell it.
c) its ability to use or sell the intangible asset.
d) how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset.
e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset.
f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Past expenses not to be recognised as an asset

Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of the cost of an
intangible asset at a later date.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement - Internally Generated Intangibles (Other than Goodwill)

Cost of an Internally Generated Intangible Asset

 The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible
asset first meets the recognition criteria.
 The cost comprises all directly attributable costs:
 costs of materials and services used or consumed in generating the intangible asset;
 costs of employee benefits arising from the generation of the intangible asset;
 fees to register a legal right; and
 amortisation of patents and licences that are used to generate the intangible asset.
 IAS 23 specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset.
 The following are not components of the cost of an internally generated
intangible asset:
 selling, administrative and other general overhead expenditure unless
this expenditure can be directly attributed to preparing the asset for use;
 identified inefficiencies and initial operating losses incurred before the
asset achieves planned performance; and
 expenditure on training staff to operate the asset.

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Initial Measurement - Internally Generated Goodwill

Recognition prohibition

 Internally generated brands, mastheads, publishing titles, customer

lists and items similar in substance shall not be recognised as
intangible assets.
 Expenditure on above items cannot be distinguished from the cost
of developing the business as a whole. Therefore, such items are
not recognised as intangible assets.
 Internally generated goodwill is not recognised as an asset because
it is not an identifiable resource (i.e. it is not separable nor does it
arise from contractual or other legal rights) controlled by the entity
that can be measured reliably at cost.
 Differences between the fair value of an entity and the carrying amount of its identifiable net assets at any time
may capture a range of factors that affect the fair value of the entity. However, such differences do not
represent the cost of intangible assets controlled by the entity.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement – Intangible Asset Acquired in Business Combination

 A transaction or other event in which an acquirer obtains control of
one or more businesses is called business combination. For example,
when a company (the acquirer) buys a controlling interest (usually
50% or more voting power) in another company (the acquiree). In
this case, consolidated financial statements are to be prepared by the
acquirer.
 The cost of that intangible asset is its fair value at the acquisition date.
The fair value of an intangible asset will reflect market participants’
expectations at the acquisition date about the probability that the
expected future economic benefits embodied in the asset will flow to
the entity.
 If an asset acquired in a business combination is separable or arises from contractual or other legal rights,
sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement
criterion is also satisfied.
 Even an intangible asset that was not recognised in the financial statements of the subsidiary (acquiree) might be
recognised (separately from goodwill) in the consolidated financial statements of parent (acquirer) entity.

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Initial Measurement – Intangible Asset Acquired in Business Combination

Acquiree’s in-process research and development project

 This means that the acquirer recognises as an asset separately from

goodwill an in-process R&D project of the acquiree if the project meets
the definition of an intangible asset.
 An acquiree’s in-process R&D project meets the definition of an
intangible asset when it:
a) meets the definition of an asset; and
b) is identifiable, i.e. is separable or arises from contractual or other
legal rights.

Subsequent expenditure on acquired research and development

 Research or development expenditure that relates to an in-process R&D project acquired separately or in a
business combination and recognised as an intangible asset, and is incurred after the acquisition of that project
shall be accounted for in accordance with IAS 38 rules on research and development as explained earlier in this
chapter.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Initial Measurement – Acquired Goodwill

CHOICE

Full Goodwill Partial Goodwill

Measure NCI at acquisition date at fair value Measure NCI at acquisition date at proportionate share of
(i.e. No. of NCI’s shares × Share Price) the fair value of the subsidiary's net assets

Calculate goodwill at the date of acquisition Calculate goodwill at the date of acquisition
(i.e. the parent achieves control) as follow: (i.e. the parent achieves control) as follow:

- Fair value of Consideration transferred XXXX - Fair value of Consideration transferred XXXX
- Non-Controlling Interest (At Fair Value) XXXX - Non-Controlling Interest (At proportionate
Less. FV of Identifiable Net Assets of subsidiary (XXX) share of FV of the subsidiary's net assets) XXXX
Goodwill XXXX Less. FV of Identifiable Net Assets of subsidiary (XXX)
Goodwill XXXX

Consolidate goodwill, assets, liabilities and NCI of the subsidiary at the year end.
Journal Entry at the date the parent achieves control is as follow: Note
Debit: Goodwill XXXX
Debit: Net Assets of Subsidiary XXXX
An impairment
Credit: FV of Consideration transferred XXXX
loss for goodwill is
Credit: Non-Controlling Interest XXXX never reversed

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Useful Life of Intangible Assets

Finite Life Indefinite Life

 If useful life is assessed to be finite, the entity shall assess  An intangible asset shall be regarded by the entity as
that useful life in terms of: having an indefinite useful life when, based on an
a) the length of time period, or analysis of all of the relevant factors, there is no
foreseeable limit to the period over which the asset is
b) number of production or similar units. expected to generate net cash inflows for the entity.
 An intangible asset with a finite useful life shall be  An intangible asset with an indefinite useful life is not
amortized on a systematic basis over its useful life. amortised (rather tested for impairment annually or
 The residual value of an intangible asset with a finite when there is indication for impairment).
useful life shall be assumed to be zero unless:  The intangible assets with indefinite useful life shall be
a) there is a commitment by a third party to purchase reviewed each period to determine whether useful life
the asset at the end of its useful life; or continues to be indefinite.
b) there is an active market for the asset and  The change in the useful life assessment from indefinite
 residual value can be determined by reference to finite shall be accounted for as a change in an
to that market; and accounting estimate in accordance with IAS 8.
 it is probable that such a market will exist at  The change in the useful life assessment from indefinite
the end of the asset’s useful life. to finite is an indicator that the asset may be impaired.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Useful Life of Intangible Assets

Assessment of useful life of intangible assets

 The contractual period and/or renewal options may also
impact the assessment of useful life of intangible assets:
 The useful life of an intangible asset that arises from
contractual or other legal rights shall not exceed the
period of the contractual or other legal rights, but
may be shorter depending on the period over which
the entity expects to use the asset.
 If the contractual or other legal rights are conveyed
for a limited term that can be renewed, the useful life
of the intangible asset shall include the renewal
period(s) only if there is evidence to support renewal
by the entity without significant cost.
 In short, amortization should be worked out at lower of:
 Useful life for which entity expects to use the intangible asset; or
 Contractual or legal life (plus renewal period if renewal cost is not significant)
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Amortization of Intangible Assets (with Finite Life)

 An intangible asset with a finite useful life shall be amortized on a systematic basis over its useful life.
 Amortisation shall begin when the asset is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (IFRS 5)
and the date that the asset is derecognised.
 The amortisation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity. If that pattern cannot be determined reliably, the
straight-line method shall be used. There is a rebuttable presumption that an amortisation method
that is based on the revenue generated by an activity that includes the use of an intangible asset is
inappropriate.
 A variety of amortisation methods can be used;
a) Straight line method,
b) Diminishing balance method;
c) The units of production method.
 The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied
in the asset and is applied consistently from period to period
 The amortisation charge for each period shall be recognised in profit or loss unless IAS 38 or another Standard permits or requires it to
be included in the carrying amount of another asset.
 The amortisation period and the amortisation method for an intangible asset with a finite useful life shall be reviewed at least at each
financial year-end.

Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Subsequent Measurement of Intangible Assets

An entity shall choose either the cost model or the revaluation model as its accounting policy:

COST MODEL REVALUATION MODEL

Cost XXXX Fair Value XXXX

Less. Accumulated Depreciation (XXX) Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX) Less. Accumulated Impairment (XXX)
Carrying Amount XXXX Carrying Amount XXXX

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Revaluation Model for Intangible Assets

 For the purpose of revaluations under IAS 38, fair value shall be measured by reference to an active
market and if an intangible asset is accounted for using the revaluation model, all the other assets in its
class shall also be accounted for using the same model, unless there is no active market for those assets.
 An active market is a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Appendix A]
 If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active
market for this asset, the asset shall be carried at cost model.
 The items within a class of intangible assets are revalued simultaneously to avoid selective revaluation of assets and the reporting of mixed
amounts.
 Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ
materially from its fair value. The frequency of revaluations depends on the volatility of the fair values of the intangible assets being revalued.

Measurement under Revaluation Model

 The revaluation model does not allow:
a) the revaluation of intangible assets that have not previously been recognised as assets e.g. internally generated brand; or
b) the initial recognition of intangible assets at amounts other than cost.
 The revaluation model is applied after an asset has been initially recognised at cost. However, if only part of the cost of an intangible asset is
recognised as an asset because the asset did not meet the criteria for recognition until part of the way through the process (e.g. development
costs), the revaluation model may be applied to the whole of that asset.
 Also, the revaluation model may be applied to an intangible asset that was received by way of a government grant and recognised at a
nominal amount.
Compiled by: Murtaza Quaid, ACA IAS 38: INTANGIBLE ASSETS

Revaluation Model for Intangible Assets

Active market valuation

 It is uncommon for an active market to exist for an intangible asset,
although this may happen. An active market may exist for freely
transferable taxi licences, fishing licences or production quotas.
However, an active market cannot exist for brands, newspaper
mastheads, music and film publishing rights, patents or trademarks,
because each such asset is unique.
 If the fair value of a revalued intangible asset can no longer be
measured by reference to an active market, the carrying amount of
the asset shall be its revalued amount at the date of the last
revaluation by reference to the active market less any subsequent
accumulated amortisation and any subsequent accumulated
impairment losses.
 The fact that an active market no longer exists for a revalued
intangible asset may indicate that the asset may be impaired and that
it needs to be tested in accordance with IAS 36.
 If the fair value of the asset can be measured by reference to an
active market at a subsequent measurement date, the revaluation
model is applied from that date.

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SIC-32 to expenditure on:

 purchasing, developing and operating
hardware of a website. The cost of purchasing,
developing, and operating hardware (e.g.
servers and Internet connections) of a web site
are accounted for as property, plant and
equipment (IAS 16).
 an internet service provider hosting the
entity’s web site. (This expenditure is
recognised as an expense as and when the
services are received)
 the development or operation of a web site
for sale to another entity.

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When accounting for internal expenditure on the development and operation of an entity’s own
web site for internal or external access, the issues are:
 Whether the web site is an internally generated intangible asset that is subject to the
requirements of IAS 38 Intangible Assets
 The appropriate accounting treatment of such expenditure.

 An entity’s own web site that arises from development and is for internal or external access is
an internally generated intangible asset that is subject to the requirements of IAS 38.
 If a web site is developed solely (or primarily) for
then an entity will not be able to demonstrate how it will generate
probable future economic benefits. All expenditure
on developing such a web site should be recognised
as an .
 The best estimate of a website’s useful life
should be short.

A web site designed for external access A web site designed for internal access
may be used for various purposes such as may be used to:
to:  store company policies / customer
 promote and advertise products and details, and
services,  search relevant information.
 provide electronic services, and
 sell products and services

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 Undertaking feasibility studies

 Defining hardware & software specifications This stage is similar in nature to the research phase and expenditure
incurred in this stage shall be recognised as an
 Evaluating alternative products & suppliers .
 Selecting preferences

 Obtaining a domain name This stage is similar in nature to the development phase.
 Purchasing or Developing operating software as an intangible assets if expenditure:
(e.g. operating system & server software)
 Meets the following recognition criteria as per IAS 38:
 Developing code for the application
i. the of completing the website
 Installing developed applications on web
ii. its the website and use it
server
iii. its website
 Stress testing
iv. how the website asset will generate

 Designing the appearance of web pages v. availability of

to complete the development & to use the website
 Creating, purchasing, preparing and vi. ability to attributable to the
uploading information, either textual or website during its development
graphical in nature, on the web site before
 Is not for promoting / advertising entity’s own product or
the completion of the web site’s
service.
development.

 Updating graphics and revising content

Operating stage begins once development of a web site has been
 Adding new functions, features and content completed. During this stage, an entity maintains and enhances the
 Registering the web site with search engines applications, infrastructure, graphical design and content of the
 Backing up data web site. Expenditure incurred in this stage shall be recognised as
 Reviewing security access an unless it meets the recognition
criteria in IAS 38. (only in rare circumstances).
 Analyzing usage of the web site

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

IAS 38: Intangible Asset or Expense?

By Silvia [CPD Box]
Recently I had an argument with auditors of one company related to the customer list they bought.
The company paid significant amount of cash for the list of customers of telecommunications.
The list contained the names, addresses and phone numbers of all the clients.
And, the buyer intended to use the list to contact the potential customers and offer them their own
services.
Well, if it’s ethical or not – I leave that up to you, but the auditors of the buyer said that the price paid
for the customer list is an expense in profit or loss.
Is it???
I was not so sure.
To me, the customer list perfectly meets the definition of the intangible asset and in this case after
asking few more questions I was sure that the buyer acquired an asset instead of expense in profit or
loss.
In today’s article we will look at how to distinguish between intangible assets and expenses and you
can find practical illustration in the end.
Including the customer list.

What is an intangible asset?

When I am unsure whether certain item is intangible asset or just an expense, I always look to the basic
definition of an asset in IAS 38 and in Conceptual Framework, too:
An asset is a resource controlled by an entity as a result of past events, from which future economic
benefits are expected to flow to the entity. (Framework, par. 4.4 (a))
And, IAS 38 expands this definition for intangible assets by specifying that on top of basic definition, an
intangible asset is an identifiable non-monetary asset without physical substance.
To sum up, each intangible asset has 3 main characteristics:
1. It is controlled by the entity
2. No physical substance
3. It is identifiable.
Just warning: it can happen that an asset has all 3 characteristics, but you cannot recognize it in your
statement of financial position.
The reason is that it still may not meet the recognition criteria.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

For example, let’s say you are a telecom company and you have millions of customers.
In this case, you have a customer list that is an intangible asset (please see below for reasoning), but you
can’t show it in your balance sheet, because you cannot measure its cost.
Just be aware of these situations.
Now, let me explain shortly what each characteristic means.

1. Controlled by the entity

If you are able to get the future economic benefits from the use of the asset and at the same time, you
can prevent others to get these benefits, then you control the asset.
In most cases, you control intangible asset when you have the legal rights to it.
For example, you may have bought the licenses or signed some contract.
Sometimes, control is achieved in a different way.
For example, you may develop some great software internally and you control its sales.
In some cases, you can’t really demonstrate sufficient control of asset and thus you can’t recognize it.
Typical example of such situation is qualified employee – human resources are rarely intangible assets,
because you can’t demonstrate control.

2. No physical substance
This one is clear – if some asset has physical substance, then it’s tangible and not intangible.
However, there’s a small exception.
Sometimes, intangible asset is attached to something physical in order to carry it or store it.
In this case, the asset is still intangible because the value of the related physical asset is very small when
compared to the value of intangible asset.

3. It is identifiable
This one is crucial, I think.
The asset is identifiable in one of these 2 cases:
1. It is separable – so, you can actually separate the asset and sell it, transfer it, license it or do any
other action. Hypothetically.
2. Arises from the legal rights – either from contract, legislation etc. In this case, the asset does not
need to be separable.
For example, imagine you worked hard and you created a famous brand.
Is it identifiable?
Yes, it is, because you can (hypothetically) license it or sell it.
So, you know what the intangibles are.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

From now on, always focus on these 3 characteristics to answer whether you deal with an intangible
asset or not.

Can we capitalize the intangible asset?

If it is an intangible asset, then you still have 2 more questions to answer before you capitalize it:

1. Can you measure its cost reliably?

This one is straightforward.
If you can’t measure the cost, then you cannot capitalize even when it is an intangible asset.
I described the example above: you cannot capitalize internally generated customer list because you
can’t really determine your cost to develop it.

2. Are the future economic benefits of the asset expected to flow to the entity?
Oh, I love this one.
Future economic benefits can be either increase in revenues or reduction in expenses.
Either way you look at them, the future economic benefits are the potential to increase your profits.
However, many people believe that you must be able to measure them – otherwise they are not the
future economic benefits.
No, not at all.
In fact, it is almost impossible.
Imagine you invest in the nicer office, you buy artwork, nice furniture… can you really measure the
increase of your revenues as a result of these assets?
No, you cannot, but you are quite sure that nicer office has the potential to pull more money out of the
pockets of your clients.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

On top of these requirements, there are still some intangible assets that are not intangible assets under
IAS 38, but something else.
Important note: The above applies fully to the intangible assets that are NOT under development. If
you are developing intangible assets, then you have to meet further 6 conditions to capitalize the
expenditures, but let’s touch it in some of my next articles.
Let’s me show you some specific examples.

Examples of intangible assets

Licenses to trade
Imagine you own a taxi company.
You operate a taxi service, but you also act a s an intermediary for single private
taxi drivers to get their own license.
So, as a part of your business you acquire transferrable taxi licenses from the
government and you sell some of them to the private drivers who buy from you
as it’s easier to get the license this way.
You acquired 1 000 number of taxi licenses.
You employ 400 taxi drivers and you plan to sell another 600 taxi licenses to
private drivers.
In this case, all 1 000 taxi licenses are indeed intangible assets, because they satisfy all requirements.
However, you won’t account for all of them as for intangible assets under IAS 38.
Instead:
1. 400 licenses used by your own employees are intangible assets; and
2. 600 licenses to be sold are your inventories under IAS 2, because you hold them for sale in the
ordinary course of business.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

Internet websites
Let’s say that your company operates an e-shop via its branded
website.
The e-shop is famous and attracts a lot of customers. There’s also a
section with a company’s blog with articles about the newest
fashion trends.
This website is an intangible asset, because yes, the company
controls it, it has no physical substance and it is identifiable (i.e.
company can sell it).
However, can you recognize it as an asset?
Yes, it brings the future economic benefits, so this one is met.
But, can you measure its cost reliably?
If it was developed externally by the third parties, then yes, you can.
If it was developed internally, then well, you have to apply the rules in IAS 38 and especially in SIC 32
Intangible assets – website costs to determine the capitalization.

Hockey team
Imagine you purchase a hockey team (lucky you!).
The price you paid was derived from the quality and fame of the specific hockey
players in that team.
Now, is this hockey team – or better said – contracts with players an intangible
asset?
Well, I always say that no, normally you do not capitalize contracts with
employees or any other expenses related to employees, because you can’t
control them.
In this case, the situation can be different.
For example, hockey players might be prohibited to play in another teams by the legal rules placed by
some hockey authority.
Also, the contracts with individual players might legally bind the player to stay with the same team for a
number of years.
In this case, you would be able to demonstrate control and yes, recognize hockey team as your
intangible asset.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

Software licenses
You purchased a number of computers for your employees.
When the computers arrived, you made an online purchase of
corresponding number of licenses for Windows XY operating
system to run the computers.
Also, you purchased a license to use the specific accounting
software.
On top of the purchase cost you are required to pay the annual fee for upgrades of the software. You
can continue using the license for accounting software also without annual upgrade fees, but you won’t
receive any updates.
Here, we have 3 items:

1. Operating system Windows XY

Yes, it is an intangible asset because it meets all the criteria.
However, operating system is an integral part of the computers, because the computers can’t run
without the system.
Therefore, you would recognize computers together with operating system as property, plant and
equipment, so no separate intangible asset.
For further reference, look to par. 4 of IAS 38.

2. Accounting software license

This is an intangible asset, too.
In this case, you need to recognize the license as an intangible asset, because accounting software is
NOT essential to run the computer.

3. Annual upgrades
Annual upgrades do not meet the definition of an intangible asset, because they are not separable.
They are expensed in profit or loss when incurred.
You can see them as something similar to maintenance and repair costs of property, plant and
equipment.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

Customer lists
Imagine you bought a customer list from telecom company
with names of their clients, addresses and phone numbers.
Is this an intangible asset?
In most cases yes, because:
▪ It has no physical substance,
▪ It is identifiable (yes, it is because you were able to buy it),
▪ You control it,
▪ You can measure its cost reliably (you paid for it) and,
▪ You expect the future economic benefits (increased sales as a result of new list of potential
customers).
I spoke more about it in this IFRS Q&A podcast episode.
Warning: in some countries and at some circumstances such a customer list is not an intangible asset.
The reason is that some countries have legislation in place that prevents you from random contacting
the potential customers on the list.
In this case you would not be able to get the future economic benefits from the list because you cannot
use it (so why would you buy it anyway?). Thus you do not control the asset fully.
However, telecoms often ask their customers to agree with passing their data to third parties for
advertising purposes, so in this case you would be able to use the list (hint – read the small letters in the
contracts to know what you agree to!).
You have to assess all of these things to conclude whether the customer list is an asset or not.

Advertising campaign
The last but not least.
Some companies invest heavy cash into their advertising campaigns.
Literally millions.
Imagine you plan to invest 1 mil. EUR into the advertising campaign over the next year.
Your advertising agency told you that this campaign would build and strengthen your brand and position
in many years to come.
So, some people believe that yes, they should capitalize advertising campaign as it brings the future
economic benefits.
No dispute on this.
The only thing is that the advertising campaign is NOT identifiable – you can’t separate it and sell it to
someone else.
Therefore, you should recognize the expenditures for advertising campaign in profit or loss.
Of course, when you prepay the campaign for let’s say 2 years, then you should recognize the expenses
over 2 years as the services are consumed.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

How to account for Intangible Assets under IAS 38

By Silvia [CPD Box]
Many companies incur huge costs from which they expect to benefit in the future.
For example, companies pay salaries to software engineers who develop some game or an application.
Well, how would you treat these costs?
It does not feel OK to put all salaries of these engineers in profit or loss when they are incurred, because
the company will benefit from these expenses in the future.
Or, in other words, how my readers love to say it: the costs incurred now will be matched with revenues
in the future.
In this article, you’ll find the short summary of the main rules in IAS 38 Intangible assets and the video is
in the end.

What assets are covered by IAS 38?

The standard IAS 38 prescribes the rules for accounting for all intangible assets except for the intangible
assets covered by another standard.
What is excluded? Here you go:
▪ Deferred tax assets – covered by IAS 12 Income Taxes,
▪ Goodwill – covered by IFRS 3 Business Combinations,
▪ Intangible assets held for sale – covered by IFRS 5 Non-Current Assets Held For Sale and
Discontinued Operations,
▪ Financial assets – covered by IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments,
▪ Exploration and evaluation assets – covered by IFRS 6 Exploration for and Evaluation of Mineral
Assets,
▪ Expenditures for development and extraction of minerals, oils, natural gas and other non-
regenerative resources, etc.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

What is an intangible asset?

An intangible asset is an identifiable non-monetary asset without physical substance.
That’s the definition from IAS 38, par. 8.
People can interpret this definition in many different ways, just as they need and therefore, IAS 38
contains a good guidance on how to apply it.

When can we recognize an intangible asset?

Sometimes it can happen that your item meets all the criteria and has all characteristics of an intangible
asset, but you still cannot recognize it in your financial statements.
The reason for this situation could be that your item does not meet the recognition criteria.
You can recognize an intangible asset only when:
▪ Future economic benefits from the asset are probable;
▪ Cost can be measured reliably.
Again, I strongly recommend checking this article to learn more about the recognition criteria.

When you generate the asset internally…

When you actually purchase some item from someone else, it’s relatively easy to decide whether it’s an
intangible asset or an expense.
Also, it’s more probable that the recognition criteria are met.
But, what about the situation when you actually develop intangible assets yourself?
Well, this area is really very complex and tricky and that’s why IAS 38 offers specific guidance for
internally generated intangible assets.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

Research
Research is investigation that you undertake to acquire some information knowledge or understanding.
For example, you are evaluating different alternatives for your new software product.
Or, you are examining the competing products on the market, studying their features and trying to find
their weaknesses in order to design better product.
You CANNOT capitalize any expenditure for research.
You need to expense it in profit or loss as incurred.
And, let me warn you, that yes, all feasibility studies, evaluating whether the project is viable or not,
ARE research and need to be EXPENSED in profit or loss.
Yes, also when you paid huge money for it.
This applies to both internal research and research conducted by the external provider, too.

Development
Development usually happens after the research phase.
At the development stage, you actually plan or design the new products, materials, processes, etc. –
BEFORE the start of commercial production or use.
It is critical to distinguish development and research, because yes, you CAN CAPITALIZE the expenditures
for the development.
But it’s not a free ride.
You have to meet 6 criteria before you can capitalize these expenditures.
If you are preparing yourself for exam, then the great mnemonic to remember these 6 criteria is PIRATE:
▪ Probable future economic benefits,
▪ Intention to complete and use or sell the asset,
▪ Resources adequate and available to complete and use or sell the asset,
▪ Ability to use or sell the asset,
▪ Technical feasibility,
▪ Expenditures can be reliably measured.
Thank you, unknown genius, to inventing this pirate mnemonic, I used it at my own exam & it worked
well!
You can capitalize the expenditures for development only when all 6 criteria are met – not before. Also,
you cannot capitalize it retrospectively.
Just as an example, let’s say that you incurred Rs. 5,000 for development in May 20X1 and further Rs.
10,000 in September 20X1.
If you met all the 6 conditions in August 20X1, you can capitalize only CU 10 000 incurred in September.
Expenditure of CU 5 000 from May must be expensed in profit or loss.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

Goodwill
Never ever capitalize internally generated goodwill.
You can only recognize the goodwill acquired at business combination, but that’s the different story
(IFRS 3).

Other internally generated assets

Maybe you have created some other intangible assets, like brands, customer lists, publishing titles,
mastheads or similar.
IAS 38 prohibits capitalizing these assets if created internally, because it’s hard if not impossible to
measure their cost reliably.

How to measure intangible assets initially?

The initial measurement of an intangible asset depends on how you acquired the asset.
I have summarized it in the following table:

How acquired? How initially measured?

Separate purchase Cost – see below

Directly attributable costs incurred after the asset

Internally generated
first meet 6 PIRATE criteria – see above

As a part of business combination Fair value at the acquisition date

Fair value or nominal amount + directly

By a government grant
attributable expenditure

Fair value; if not possible, then carrying amount

Within exchange of assets
of asset given up

Cost of intangible asset

Cost of a separately acquired intangible asset comprises (IAS 38.27):
▪ Its purchase price, plus import duties and non-refundable taxes, less discounts and rebates,
▪ Any directly attributable costs of preparing the asset for its intended use.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

What about the subsequent measurement?

Intangible assets are subsequently measured in a very similar way as property, plant and equipment.
You can chose from 2 models:
1. Cost model: The intangible asset is carried at its cost less accumulated amortization (similar as
depreciation) less any accumulated impairment loss.
2. Revaluation model: The intangible asset is carried at its fair value at the revaluation date less
accumulated amortization less any accumulated impairment loss.
Let me just add that the revaluation model is not applied very frequently for intangible assets because
there must be an active market – which is rare.
And, you cannot apply the revaluation model for brands, mastheads, patents, trademarks and similar
assets.
The reason is that these assets are very specific and unique and there’s no active market.
I will not deal with journal entries of amortization and revaluations, because they are almost the same
as with property, plant and equipment, so please check them out in this article.
Journal entries for revaluations are covered also in the video – just scroll down and watch!

Amortization and useful life

Similarly as with property, plant and equipment, amortization is the allocation of depreciable amount
of an intangible asset over its useful life.
Here, you need to decide about:
1. How much to amortize, or what the depreciable amount is (cost – residual value),
2. How long to amortize, or what’s the asset’s useful life, and
3. How to amortize, or what amortization method you apply.
However, there’s one specific about the amortization – it is the useful life of intangible assets.
Intangibles can have:
▪ Finite useful life: In this case you can estimate the life of the asset up front, for example some
software, or
▪ Indefinite useful life: There is no foreseeable limit to period over which the asset will generate cash
flows, for example brands.
When you have an asset with indefinite useful life, you do NOT amortize it.
Instead, you should revise the asset’s useful life at the end of each financial year and seek for the
indicators of impairment.

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How to account for Intangible Assets under IAS 38 By Silvia [CPD Box]

When to derecognize intangible assets?

You should derecognize the intangible asset either:
▪ When you dispose it of, or
▪ When no more future economic benefits are expected from the asset
The gain or loss on derecognition of intangibles is calculated as:
▪ Net disposal proceeds, less
▪ Asset’s carrying amount
Gain or loss are recognized in profit or loss.

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IAS 38:
INTANGIBLE ASSETS
(Practice Questions)
COMPILED BY: MURTAZA QUAID, ACA

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IAS 38: Intangible Assets Compiled by: Murtaza Quaid

IAS 38: INTANGIBLE ASSETS – PRACTICE QUESTIONS

Question 1. [ICAP CAF 5 Study Support Material]
Ateeq Limited acquires new technology that will significantly reduce its energy costs for manufacturing.
Costs incurred include:

Required: Calculate the cost that can be capitalised.

Question 2. [ICAP CAF 5 Study Support Material]

On 30 June 20X4, Habib Limited (HL) discovered that it had been manufacturing a product illegally since
this product happened to be a patented product for which it did not have the necessary rights. HL
immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of
the necessary rights to manufacture this patented product.

Legal fees of Rs.50,000 were incurred during July 20X4.

The legal process was finalized on 31 July 20X4, HL was then required to pay Rs.800,000 to purchase the
rights, including Rs.80,000 as refundable taxes.

During the month of July 20X4, factory was shut-down:

▪ Overhead costs of Rs.40,000 were incurred;

▪ Significant market share was lost due to shut-down. HL’s total sales over August and September was
Rs.20,000 but its expenses were Rs.50,000, resulting in a loss of Rs.30,000.

To increase market share, HL spent an extra Rs.25,000 aggressively marketing its product. This
marketing campaign was successful, resulting in sales returning to profitable levels in October.
Required: Discuss which of the above costs relating to acquisition of patent can be capitalised.
Solution:
▪ Purchase price: The purchase price should be capitalized, but this must exclude refundable taxes.
Rs. 720,000 (800,000 – 80,000).
▪ Legal costs: This is a directly attributable cost. Directly attributable costs must be capitalized i.e. Rs.
50,000.
▪ Overhead costs: This is not an incidental cost that is necessary to the acquisition of the rights (the
shut-down was only necessary because HL had been operating illegally).

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▪ Operating loss: The operating loss incurred while demand for the product increased to its normal
level is an example of a cost that was incurred after the rights were acquired. Costs incurred after
the Intangible Asset is available for use will not be capitalized.
▪ Advertising campaign: The extra advertising incurred in order to recover market share is an example
of a cost that was incurred after the rights were acquired. Furthermore, advertising costs are listed
in IAS 38 as one of the costs that should be expensed out.

Question 3. [ICAP CAF 5 Study Support Material]

Company Q has undertaken the development of a new product. Total costs to date have been Rs.
800,000. All of the conditions for recognising the development costs as an intangible asset have now
been met.
However, Rs. 200,000 of the Rs. 800,000 was spent before it became clear that the project was
technically feasible, could be resourced and the developed product would be saleable and profitable.
Required: Discuss the accounting treatment.
Solution: The Rs. 200,000 incurred before all of the conditions for recognising the development costs as
an intangible asset were met must be written off as a research costs (expense). The remaining Rs.
600,000 should be capitalised and recognised as an intangible asset (development costs).

Question 4. [ICAP CAF 5 Study Support Material]

Sino Care Limited (SCL) started a R&D project for developing new product on 1st January 20X1. The
following expenditure was incurred during 20X1. Year-end is 31 December 20X1.

▪ Research phase (1 January to 31 March): Rs. 1 million per month

▪ Development phase (1 April to 31 October): Rs. 1.5 million per month.
The project become technically feasible on 31 August 20X1 when initial patent was also submitted for
registration.
Required: Discuss the accounting treatment.
Solution:
Expenditure incurred in research phase from 1 January to 31 March of Rs. 3 million (i.e. Rs. 1 million x 3
months) shall be charged to profit or loss.
Expenditure incurred in development phase from 1 April to 31 August of Rs. 7.5 million (i.e. Rs. 1.5
million x 5 months) shall be charged to profit or loss since in this period the capitalisation criteria was
not met. Even after the criteria for capitalisation has been met subsequently, this expenditure shall not
be reinstated as an asset.
Expenditure incurred in development phase after capitalisation criteria has been met from 1 September
to 31 October of Rs. 3 million (i.e. Rs. 1.5 million x 2 months) shall be capitalised as intangible asset.

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Question 5. [ICAP CAF 5 Study Support Material]

Saqib Limited began researching and developing an intangible asset. The following is a summary of the
costs that the R&D Department incurred each year:
20X1: Rs.180,000
20X2: Rs.100,000
20X3: Rs.80,000
Additional information:
▪ The costs listed above were incurred evenly throughout each year.
▪ Included in the costs incurred in 20X1 are administrative costs of Rs. 60,000 that are not considered
to be directly attributed to the research and development process. The first two months of the year
were dedicated to research. Then development began from 1 March 20X1 but it was unable to
measure reliably the expenditure on development till 31 March 20X1.
▪ Included in the costs incurred in 20X2 are administrative costs of Rs. 20,000 that are considered to
be directly attributed to the research and development process.
▪ Included in the costs incurred in 20X3 are training costs of Rs. 30,000 that are considered to be
directly attributed to the research and development process as in preparation for the completion of
the development process, certain employees were trained on how to operate the asset.
Required: Prepare journal entries related to the costs incurred for each of the years ended 31 December
20X1 to 20X3 and briefly comment on accounting treatment. .

Question 6. [ICAP CAF 5 Study Support Material]

During 20X5 Henry has the following research and development projects in progress:
Project A was completed at the end of 20X4. Development expenditure brought forward at the
beginning of 20X5 was Rs. 412,500 on this project. Savings in production costs arising from this project
are first expected to arise in 20X5. In 20X5 savings are expected to be Rs. 100,000, followed by savings
of Rs. 300,000 in 20X6 and Rs. 200,000 in 20X7.
Project B commenced on 1 April 20X5. Costs incurred during the year were Rs. 56,000. In addition to
these costs a machine was purchased on 1 April 20X5 for Rs. 30,000 for use on the project. This machine
has a useful life of five years. At the end of 20X5 there were still some uncertainties surrounding the
completion of the project.
Project C had been started in 20X4. In 20X4 the costs relating to this project of Rs. 36,700 had been
written off, as at the end of 20X4 there were still some uncertainties surrounding the completion of the
project. Those uncertainties have now been resolved before a further Rs. 45,000 costs incurred during
the year.
Required: Show movement and balance of non-current assets of Henry for the year to 31 December
20X5.

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Question 7. [ICAP CAF 5 Study Support Material]

Company X buys 100% of Company Y. Company Y owns a famous brand that it launched several years
ago. The fair value of the brand has been estimated at Rs. 6 million at acquisition date.
Required: Discuss the recognition of brand in financial statements.
Solution: The brand is not recognised in Company Y’s financial statements (IAS 38 prohibits the
recognition of internally generated brands).
From the Company X group viewpoint the brand is a purchased asset. Part of the consideration paid by
Company X to buy Company Y was to buy the brand and it should be recognised in the consolidated
financial statements at its fair value of Rs. 6 million.

Question 8. [ICAP CAF 5 Study Support Material]

Company X buys 100% of Company Y. Company Y has spent Rs. 600,000 on a research and development
project. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met. Company Y has knowhow as the result of the
project.
Company X estimates the fair value of Company Y’s knowhow which has arisen as a result of this project
to be Rs. 500,000.
Required: Discuss the accounting treatment.
Solution: The in-process research and development is not recognised in Company Y’s financial
statements (IAS 38 prohibits the recognition of internally generated brands).
From the Company X group viewpoint the in-process research and development is a purchased asset.
Part of the consideration paid by Company X to buy Company Y was to buy the knowhow resulting from
the project and it should be recognised in the consolidated financial statements at its fair value of Rs.
500,000.

Question 8. [Continued] [ICAP CAF 5 Study Support Material]

Continuing the previous example, Company X owns 100% of Company Y and has recognised an
intangible asset of Rs. 500,000 as a result of the acquisition of the company Y.
Company Y has spent a further Rs. 150,000 on the research and development project since the date of
acquisition. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met.
Required: Discuss the accounting treatment.
Solution: The Rs. 150,000 expenditure is not recognised in Company Y’s financial statements (IAS 38
prohibits the recognition of internally generated brands).
From the Company X group viewpoint, further work on the in-process research and development
project is research and the expenditure of Rs. 150,000 must be expensed.

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Question 9. [ICAP CAF 5 Study Support Material]

Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it
purchased a 90% share of a locally incorporated company, Momin Limited. Following are the brief
details of the acquisition:

Momin Limited has an established line of products under the brand name of “Badar”. On behalf of Zouq
Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of 10
years at January 1, 20X4. It is expected that the benefits will be spread equally over the brand’s useful
life.
An impairment test of goodwill and brand was carried out on December 31, 20X4 which indicated an
impairment of Rs. 50 million in the value of goodwill.
An impairment test carried out on December 31, 20X5 indicated a decrease of Rs. 13.5 million in the
carrying value of the brand.
Required: Prepare the ledger accounts for goodwill and the brand, showing initial recognition and all
subsequent adjustments.

Question 10. [ICAP CAF 5 Study Support Material]

During the year ended 31 December 20X7, following transactions were made by Zebra Limited (ZL):
On 1 April 20X7 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which Rs. 50
million was paid immediately. The balance amount is payable on 1 April 20X9. A mega social media and
print media campaign was launched to promote the channel at a cost of Rs. 10 million. The transmission
of the channel started on 1 August 20X7.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end
of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required: Discuss how these transactions should be recorded in ZL’s books of accounts for the year
ended 31 December 20X7.
Solution: These transactions should be recorded in ZL’s books of accounts for the year ended 31
December 20X7 as follows:
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus Rs. 30 million
(i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)

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The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5
years only.
The residual value of the license will be assumed to be zero since there is no active market for the
license and there is no commitment by third party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April 20X7
when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing the
liability of payable for license with same amount.

Question 11. [Change from indefinite to finite life] [AAFR Past Paper – Summer 2010, Q6, 12 marks]
In 2001, the management of Comfort Shoes Limited planned to acquire an international trademark to
boost its sales and enter into the international market. In this respect, the management carried out a
market survey and analysed the information obtained to initiate the process. The relevant information is
as follows:
(i) The cost incurred on the survey and related activities during the year 2001 amounted to
Rs. 1 million.
(ii) An agreement was finalised and the company acquired the trademark effective Jan 1, 2002.
According to the agreement Rs. 5 million were paid on signing of the agreement & Comfort Shoes
was required to pay 1% of sale proceeds of the related products on yearly basis. The analysis
carried out at that time indicated that the trademark would have an indefinite useful life.
(iii) The company has developed many new models under this trademark and successfully marketed
them in the country as well as in international markets. However, in 2008 the company faced
unexpected competition and had to discontinue the exports. It was estimated that due to
discontinuation of exports, net cash inflows for the foreseeable future, would reduce by 30%. As
a result the management was of the view that as of December 31, 2008 the carrying value of the
trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low-priced shoes, it was decided in
Dec 2009 that use of the trademark would be discontinued with effect from Jan 1, 2011.
Required:
(a) Explain how the above transactions should have been accounted for in the years 2001 to 2007
according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2009 in accordance
with the requirements of IFRSs. Show comparative figures.

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Solution:
In accordance with the IAS transactions related to the trademark as given in the question should be
accounted for as explained below:
(i) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even decided
at that time to buy the trademark, the cost of Rs. 1 million incurred in 2001 to carry out market survey
should have been expensed out in the year 2001.
(ii) In 2002, the rights to use the trademark for the company’s products have been obtained and costs
and benefits of the trademark were measured reliably. Therefore, initially the trademark should have
been accounted for as an intangible asset at a cost of Rs. 5 million.
At that time the trademark was estimated to have indefinite useful life as there was an expectation that
it will contribute to net cash inflows indefinitely. Therefore, the trademark should not have been
amortised.
However, the trademark should have been tested for impairment and the cost should have been
reduced, if required.
Trademark fee payable at 1% of annual sales should have been treated as a periodical cost and charged
to expense in the year of sales.

Question 12. [ICAP CAF 5 Study Support Material]

Toby entered into the following transactions during the year ended 31 December 2015. The directors of
Toby wish to capitalise all assets wherever possible.

On 1 January Toby acquired the net assets of George for Rs. 105,000. The assets acquired had the
following book and fair values.

(i) The patent expires at the end of 2022. The goodwill arising from the above had a recoverable
value at the end of 2015 of Rs. 7,000.
(ii) On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The directors of Toby have
assessed the useful life of the brand as five years.
(iii) During the year Toby spent Rs. 40,000 on developing a new brand name. The development was
completed on 30 June. The useful life of this brand has been assessed as eight years.
(iv) The directors of Toby believe that there is total goodwill of Rs. 2 million within Toby and that
this has an indefinite useful life.

Required: Prepare the note to the financial statements for intangible assets as at 31 December 2015.

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Question 13. [SIC 32: Website Costs] [CAF 5 Past Paper, Autumn 2021, Q1, 7 marks]
Ajwa Limited (AL) is engaged in the business of manufacturing and trading of consumer goods. On 1 July
2021, AL launched its own website for online sale of its products. The website was developed internally
which met the criteria for recognition as an intangible asset on 1 May 2021. Directly attributable costs
incurred for the website are as follows:

*All costs were incurred evenly throughout the mentioned period.

Required: Compute the cost of the website for initial measurement. Also discuss the reason(s) for not
inclusion of any of the above costs in the computation.

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Question No. 6 of Summer 2008, 12 marks

During the year 2007, SKY Limited developed two inter-linked websites in house. One of them is for
external users and provides information about the company’s products, operations and financials. It can
also be used for electronic order processing and accepting payments through credit cards. The second
website is for internal use like intra-net, providing and sharing company’s policies, customer details,
employees’ information, etc.
Both the websites were launched on September 30, 2007 and are now fully operational. The company has
received a few online orders which it believes will increase over time. On the other hand, use of internal
website has resulted in minor reduction in costs of communication and certain other administrative costs.
The management is optimistic that its utility will increase significantly. However, it is not in a position to
estimate the amount of economic inflows that this website can generate.
During the year ended December 31, 2007, the company incurred the following expenditure in the
development of websites:
(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining
hardware/software specifications for the websites.
(ii) Rs. 4 million were incurred on the development of internal website while an expenditure of Rs.
11 million has been made on development of external website. The expenditure on external
website includes an amount of Rs. 6 million paid for linking it with the credit card clearing facilities
and installation of security tools.
(iii) The company acquired two dedicated servers and one backup server costing Rs. 3 million in total.
Operating software for the server was acquired for Rs. 2.0 million whereas software related to
data processing and front-end development costed Rs. 3 million. The management is of the view
that these costs would not have been incurred if the website project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one year contract for website
maintenance at a cost of Rs. 2.0 million.
(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million.
(vi) Rs. 0.4 million were incurred on the promotion of its external website. The company believes that
this advertising will boost the company’s online sales.
Required: Comment on the accounting treatment of each of the above mentioned costs in the light of
relevant International Accounting Standards.

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Solution:
(i) Cost incurred in the planning stage should be expensed out as research.
(ii) (a) Cost incurred on development of internal website should be charged off because the benefits
(if any) can not be estimated reliably.
(b) Cost of External Website
▪ Cost incurred on development of external website including the cost of linking it to credit card
facilities should be capitalized because it can be established that external revenue is
generated directly with the use of such website through external orders.
▪ However, a reasonable estimate of future revenues should be made for impairment testing.
(iii) (a) Cost of purchase of servers plus cost of their operating software should be capitalized as
tangible assets in line with the requirements of IAS 16 and depreciated according to their expected
useful economic life.
(b) Cost of purchase of software licenses other than operating software should be capitalized as
intangible assets because economic benefit is accruing to the company.
(iv) Cost of maintenance of websites is a recurring expenditure and should be expensed out.
(v) IAS-38 does not allow capitalizing the training costs. Therefore, these should be expensed out.
(vi) Cost of advertising should be expensed out, as and when incurred.

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Question No. 6 of Summer 2010, 12 marks

In 2001, the management of Comfort Shoes Limited planned to acquire an international trademark to
boost its sales and enter into the international market. In this respect, the management carried out a
market survey and analysed the information obtained to initiate the process. The relevant information is
as follows:
(i) The cost incurred on the survey and related activities during the year 2001 amounted to
Rs. 1 million.
(ii) An agreement was finalised and the company acquired the trademark effective Jan 1, 2002.
According to the agreement Rs. 5 million were paid on signing of the agreement & Comfort Shoes
was required to pay 1% of sale proceeds of the related products on yearly basis. The analysis
carried out at that time indicated that the trademark would have an indefinite useful life.
(iii) The company has developed many new models under this trademark and successfully marketed
them in the country as well as in international markets. However, in 2008 the company faced
unexpected competition and had to discontinue the exports. It was estimated that due to
discontinuation of exports, net cash inflows for the foreseeable future, would reduce by 30%. As
a result the management was of the view that as of December 31, 2008 the carrying value of the
trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low-priced shoes, it was decided in
Dec 2009 that use of the trademark would be discontinued with effect from Jan 1, 2011.
Required:
(a) Explain how the above transactions should have been accounted for in the years 2001 to 2007
according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2009 in accordance
with the requirements of IFRSs. Show comparative figures.
Solution:
(a) In accordance with the IAS transactions related to the trademark as given in the question should be
accounted for as explained below:
(i) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even
decided at that time to buy the trademark, the cost of Rs. 1 million incurred in 2001 to carry out
market survey should have been expensed out in the year 2001.
(ii) In 2002, the rights to use the trademark for the company’s products have been obtained and costs
and benefits of the trademark were measured reliably. Therefore, initially the trademark should
have been accounted for as an intangible asset at a cost of Rs. 5 million.
At that time the trademark was estimated to have indefinite useful life as there was an expectation that
it will contribute to net cash inflows indefinitely. Therefore, the trademark should not have been
amortised.
However, the trademark should have been tested for impairment and the cost should have been reduced,
if required.
Trademark fee payable at 1% of annual sales should have been treated as a periodical cost and charged
to expense in the year of sales.

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Question No. 3(b) of Winter 2012, 6 marks

In order to pursue expansion of its business, Parrot Limited (PL) has made the following investments
during the year ended 30 June 2012:

Rupees
(i) Research on size of potential market 800,000
(ii) Products designing 1,500,000
(iii) Labour costs in refinement of products 950,000
(iv) Development work undertaken to finalize the product design 11,000,000
(v) Cost of upgrading the machine 18,000,000
(vi) Staff training costs 600,000
(vii) Advertisement costs 3,400,000

Required: Discuss how the above investments/costs would be accounted for in the consolidated financial
statement for the year ended 30 June 2012.
Solution:
The invested amount in Brand should be accounted for as follows:

(a)
38 does not allow capitalization of research cost, staff training costs and advertisement costs. Therefore
these expenditures should be expensed out.
(b)
Development expenditure is capitalized when CTML demonstrates all the following:
▪ The technical feasibility of completing the intangible asset so that it will be available for use or sale.
▪ CTML’s intention to complete the intangible asset and use or sell it.
▪ CTML’s ability to use or sell the intangible asset.
▪ That the intangible asset will generate probable future economic benefits.
▪ The availability of adequate technical, financial and other resources to complete the development
and to use or sell it.
▪ CTML’s ability to measure reliably the expenditure attributable to the intangible asset during its
development.

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Question No. 7 of Summer 2014, 7.5 marks

Fine Woods Limited (FWL) markets quality wood furniture through its sales offices located in major cities
of Pakistan. In March 2012, the management of FWL decided to introduce online sales through its website.
The expenses incurred in this regard during the year ended 31 December 2012 were as follows:
▪ Feasibility was prepared by a consulting firm for upgrading the existing website to facilitate online
sales, at a cost of Rs. 3.5 million.
▪ Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million respectively.
▪ Website was upgraded by FWL’s IT team. The directly attributable costs amounted to Rs. 5 million.
▪ Online payment system was developed by external experts at a cost of Rs. 3 million.
▪ IT personnel were trained to deal with security issues relating to online transactions at a cost of Rs.
1.5 million.
In the financial statements for the year ended 31 December, 2012 the above expenses were classified as
capital work in progress.
In January 2013, after successful testing of online sales, FWL launched a campaign for online sales and
incurred an expenditure of Rs. 2.5 million in this respect.
Required: Discuss the accounting treatment in respect of the above, in the financial statements of FWL
for the year ended 31 December 2013 in accordance with the requirements of International Financial
Reporting Standards.

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Solution:
Upgrading of website and introduction of online sales (IAS 38 and SIC 32):
In accordance with IAS 38, accounting treatment of the costs incurred to introduce online sales through
its website by FWL is as under:
Costs incurred in 2012 and classified as capital work in progress:
(i) Costs incurred in respect of feasibility and training of IT personnel should be expensed out when
incurred.
As these costs were incorrectly recognized in 2012 as capital work in progress, therefore, in
2013, these should be treated as prior period errors in accordance with IAS 8.42. The correction
shall be made retrospectively by restating the comparative amounts for 2012 in respect of:
▪ Capital work in progress
▪ Retained earnings
▪ Relevant expenses
(ii) Cost of hardware and its operating software should be capitalized in January 2013 as tangible
asset in line with the requirements of IAS 16 and depreciated over their estimated useful
economic life.
(iii) Directly attributable costs of IT staff and experts hired externally for development of online
payment system shall be recognized as an intangible asset in January 2013 as the following
required conditions are met by FWL:
▪ It is probable that the expected future economic benefits that are attributable to the asset
will flow to FWL; and
▪ The cost of the asset can be measured reliably.
Costs incurred in 2013:
Cost incurred on online sales campaign should be expensed out when incurred.

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Question No. 2 of Winter 2014, 10 marks

Sky Link Limited (SLL) was incorporated as a public limited company on 1 July 2013. On 1 August 2013, SLL
acquired an operating license from the telecommunication authority for a mobile phone network for Rs.
50 million for twenty years. For obtaining the license, SLL paid a professional fee of Rs. 6 million and
incurred other indirect cost amounting to Rs. 4 million. SLL’s financial year ends on 30 June each year.
SLL signed an agreement with a media house for carrying out a marketing campaign at a cost of Rs. 25
million for the period up to 30 September 2014. The media house billed Rs. 20 million for the activities
carried out upto 30 June 2014.
The network was completed on 31 December 2013 at a cost of Rs. 1,350 million. SLL commenced
commercial operations on 1 January 2014 by announcing a normal call rate of Rs. 2.00 per minute and
introducing a package comprising of free mobile phone and 1200 free minutes per month.
According to the business plan, SLL expected to sign 80,000 subscribers and earn net profit of Rs. 30 million
by the end of 30 June 2014. However, only 50,000 subscribers were signed upto 30 June 2014. Average
unexpired term of 50,000 contracts is 8 months. A further 20,000 subscribers were signed in July and
August 2014. During the period upto 30 June 2014, SLL incurred a loss of Rs. 15 million. However, during
the months of July and August 2014 it earned a marginal profit of Rs. 5 million.
In a recent development, a foreign company intending to enter into Pakistan telecom market has offered
SLL a sum equivalent to Rs. 45 million for the operating license and to buy net assets at their carrying
value.
SLL’s financing cost is 12% per annum.
Required: In accordance with the requirements of the International Financial Reporting Standards, discuss
the accounting treatment for the year ended 30 June 2014 in respect of the following:
(a) Initial recognition and subsequent measurement of operating license (09)
(b) Marketing campaign cost (01)

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Solution:
Sky Link Limited
Accounting treatment in the financial statements for the year ended 30 June 2014
Treatment in accordance with the requirements of the international financial reporting standards for the
matters pertaining to the financial statements for the year ended 30 June 2014 is discussed as under:
(a) Operating license – measurement and recognized
The operating license shall be measured initially at cost of Rs. 50 million plus Rs. 6 million of other
directly attributable cost for preparing the asset for its intended use.
For subsequent measurement, IAS allows either the cost or revaluation model. However,
revaluation model can only be used when an active market of the intangible asset exists.
In this case, the operating license shall be carried at cost less accumulated amortisations.
However, carrying value should be reviewed annually to identify any impairment.
The license has finite useful life of twenty years. The cost should therefore be amortised on a
systematic basis over its useful life. Amortisation shall begin when the asset is available for use.
In this case, the license was acquired on 1 August 2013 but it is operative from 1 January 2014.
Therefore, amortisation should commence from 1 January 2014 and it would amount to Rs. 1.43
million (56÷19.583×6÷12) for the period from 1 January to 30 June 2014.
Operating license – impairment
Significant lower number of subscribers and loss of Rs. 15 million during the first six months as
against the budgeted profit of Rs. 30 million are indicators for review of impairment.
The license itself does not generate cash flow independently of the other assets. Therefore, SLL
would be treated as a cash generating unit (CGU).
To determine impairment, recoverable amount is to be worked out by analyzing value in use
(VIU)and market value of operating license and tangible assets.
The loss for the first six months seems to be mainly because of significant marketing campaign
cost as excluding this cost loss for the first six months would be reduced to Rs. 10 million (30-20).
Earning profit of Rs. 5 million during the months of July and August 2014 and signing of further
20,000 customers are indicative of improving operating results. Therefore, VIU of CGU is expected
to exceed the carrying value of the net assets.
In view of the above, it may be concluded that there is no impairment of CGU.
(b) Cost incurred on launching of marketing campaign:
Cost incurred for launching of marketing campaign to introduce the network and sales promotion
of package offered should be expensed out when incurred. Therefore, invoices totaling to Rs. 20
million should be charged to cost for the year ended 30 June 2014.

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IAS 38 and SIC 32 – ICAP Past Papers Compiled by: Murtaza Quaid

Question No. 2 of Winter 2015, 16 marks

Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for the year ended 30 June
2015. Following information pertains to BFL’s intangible assets.

(i) Value of intangible assets as at 30 June 2013:

Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160

(ii) On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE) for Rs. 5,400 million.
The value of patents, development expenditure and other net assets of GE on the date of acquisition was
Rs. 2,100 million, Rs. 48 million and Rs. 1,430 million respectively.

The break-up of development expenditure was as follows:

Products Rs. in million

A – 214 25
B - 917 23
Total 48

(iii) Research and development expenditure during the year ended 30 June 2014 and 2015 was as follows:

Research Development
Year Product Name
Rs. in million
A – 214* - 8
2014
B – 917 10 45
2015 B – 917 - 50
*because of certain reasons the management had decided to abandon this project in May 2014.
(iv) Trial production of B-917 commenced in March 2015. Net cost of trial production up to 30 June 2015
amounted to Rs. 22 million.
(v) Patents are amortized over their remaining useful life of 10 years on straight line method.
(vi) Recoverable amounts of assets having indefinite life, determined as a result of impairment testing, were
as follows:

2015 2014
Rs. in million
Goodwill 2,800 2,550
Product B-917 160 65

Required: Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements for the year
ended 30 June 2015 in accordance with the requirements of International Financial Reporting Standards.

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IAS 38 and SIC 32 – ICAP Past Papers Compiled by: Murtaza Quaid

Question No. 6(ii) of Summer 2018, 5 marks

During the year ended 31 December 2017, following transactions were made by Zebra Limited (ZL):
(ii) On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which
Rs. 50 million was paid immediately. The balance amount is payable on 1 April 2019. A mega social
media and print media campaign was launched to promote the channel at a cost of Rs. 10 million.
The transmission of the channel started on 1 August 2017.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since
the renewal cost is significant, the management intends to renew the license only once and sell it
at the end of 8 years.
In the absence of any active market, the management has estimated that residual value of the
license would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a. (05)
Required: Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended
31 December 2017.
Solution:
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus Rs. 30 million
(i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5 years
only.
The residual value of the license will be assumed to be zero since there is no active market for the license
and there is no commitment by 3rd party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April 2017
when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing the
liability of payable for license with same amount.

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IAS 38 and SIC 32 – ICAP Past Papers Compiled by: Murtaza Quaid

Question No. 2(i) of Summer 2019, 8 marks

Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transactions/events have occurred during 2018.
(i) On 1 October 2018, FL launched its own website for online sale of its products. The website’s
content is also used to advertise and promote FL’s products. The website was developed internally
and met the criteria for recognition as an intangible asset.
Directly attributable costs incurred for the website are as follows:
Rs. in million
Planning of the website 2.5
Web servers 10.5
Operating system of web servers 5.5
Developing code for the website application and its
6.0
installation on web servers
Designing the appearance of web pages 3.5
Content development 12.5
Post launch operating cost 2.8
Currently, all the above costs are included in ‘intangible assets under development’.
Required: Discuss how the above transactions/events should be dealt with in FL’s books for the year
ended 31 December 2018. (Show all calculations wherever possible. Also mention any additional
information needed to account for the above transactions/events).

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Solution:
Each cost would be transferred from ‘intangible assets under development’ and would be treated as:

Planning of the website an expense

a tangible asset as per IAS 16 and depreciates over

Web servers
their useful life.

an intangible asset and made part of the cost of

Operating system of web servers
servers as it is integral part of the servers.

Developing code for the website application an intangible asset and made part of the cost of the
and its installation on web servers website.

Designing the appearance of web pages / an intangible asset and made part of the cost of the
Graphical design development website.

as an expense to the extent that content is developed

to advertise and promote FL’s products. Remaining
Content development
cost would be capitalised as an intangible asset and
made part of the cost of the website.

an expense when incurred unless it meet recognition

Post launch operating cost
criteria of IAS 38

Additional information needed:

▪ Life of server and website, data for calculating depreciation and amortization, method of
depreciation and amortization.
▪ Amount of content development attributable to advertisement
▪ Any post launch cost that meets criteria for recognition as intangible asset

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IAS-38
INTANGIBLE ASSETS
DEFINITION - INTANGIBLE ASSETS

An intangible asset is an identifiable, non-monetary asset without physical substance.

Identifiable Non-monetary asset Without physical substance

An asset is identifiable if it is either: An intangible asset must meet Some intangible assets may be
is separable (can be the definition of “Asset” i.e. control contained in or on a physical
exchanged, rented, sold or over a resource and existence of substance such as a
transferred separately); or future economic benefits. ompact disc (in case of
arises from contractual or other An entity controls an asset if the computer software),
legal rights, either from contract, entity has the power to obtain the legal documentation (in case
legislation etc. In this case, the future economic benefits flowing of a licence or patent) or
asset does not need to be from the underlying resource and film.
separable. to restrict the access of others to
Intangible assets may have
those benefits.
secondary physical element.
Examples of intangibles But, the physical element of the
asset is secondary to its intangible
Computer software. Copyright. License. Marketing right. component, i.e. the knowledge
Patent. Customer list. Franchise. Customer/supplier relationship. embodied in it.

RECOGNITION CRITERIA INITIAL MEASUREMENT OF INTANGIBLE ASSETS

An intangible should be recognized if: The initial measurement of an intangible asset depends on how you
acquired the asset. An intangible asset may be acquired in following
ways:
It is probable that future economic Acquired or Purchased Separately
benefits attributable to the asset Acquired in Exchange of Another Asset
will flow to the entity; and Acquired by way of Government Grant
Internally Generated Intangibles (Other than Goodwill)
The cost of the asset can be Internally Generated Goodwill
measured reliably. Acquired in Business Combination

(1) INTANGIBLE ASSET ACQUIRED OR PURCHASED SEPARATELY

COST = Purchase Price + Directly Attributable Costs

Purchase price Examples of directly attributable costs:

plus import duties & Costs of employee benefits arising directly
non-refundable taxes, from bringing the asset to its working condition;
after deducting trade Professional fees (e.g. legal or consulting fees)
discounts & rebates arising directly from bringing the asset to its
working condition;
Posts of testing whether the asset is functioning
Deferred Payment properly.
Examples of costs that are NOT directly
If payment for an intangible asset is attributable costs:
deferred beyond normal credit terms, its
cost is the cash price equivalent. Costs of introducing a new product/service
(including advertising/promotional activities);
The difference between the cash price
Costs of conducting business in a new location
equivalent and the total payment is
or with a new class of customer (including costs
recognized as interest over the period of
of staff training);
credit
Administration and other general overhead
costs.
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IAS-38
INTANGIBLE ASSETS
INITIAL MEASUREMENT OF INTANGIBLE ASSETS

(2) INTERNALLY GENERATED INTANGIBLES (OTHER THAN GOODWILL)

In case of internally generated intangible, assess the generation of the asset into:

Research Phase Development Phase

Research is original and planned investigation Development is the application of research findings
undertaken with the prospect of gaining new or other knowledge to a plan or design for the
scientific or technical knowledge and production of new or substantially improved
understanding. materials, devices, products, processes, systems or
Examples of research activities are: services before the start of commercial production
or use.
- activities aimed at obtaining new
knowledge; Examples of development activities are:
- Design, construction & testing of pre-production
- the search for, evaluation and final selection
or pre-use prototypes & models;
of, applications of research findings or other
knowledge; - Design of tools, jigs, moulds & dies involving
new technology;
- the search for alternatives for materials, devices,
products, processes, systems or services; and - Design, construction & operation of a pilot plant
that is not of a scale economically feasible for
- the formulation, design, evaluation and final
commercial production; and
selection of possible alternatives for new or
improved materials, devices, products, - Design, construction & testing of a chosen
processes, systems or services. alternative for new or improved materials,
devices, products, processes, systems or services.
In the research phase, an entity cannot
demonstrate that an intangible asset exists that In development phase, an entity can identify
will generate probable future economic benefits. an intangible asset & demonstrate that the
Therefore, expenditure on research phase is asset will generate future economic benefits.
expense out. Therefore, expenditure on development phase
is capitalised if it meets the capitalization
criteria.
Past expenses not to be recognised Otherwise, this expenditure is expensed out.
as an asset
Expenditure incurred prior to the criteria being
met can not be capitalized retrospectively. Capitalization Criteria for Expenditure
in Development Phase

Acquired R&D project An intangible asset arising from development

Acquired research and development project shall be recognised if all criteria are met:
(in-process) would be recognized as intangible a. Technical feasibility of completing the
if the project meets the definition of an intangible asset
intangible asset. b. Intention to complete the intangible asset
and use/sell it.
Subsequent Expenditure on acquired R&D c. Ability to use/sell the intangible asset.
Research or development expenditure incurred d. Intangible asset will generate probable
after the acquisition of in-process R&D project future economic benefits.
acquired separately, shall be accounted for in e. Availability of adequate technical, financial
accordance with IAS 38 rules on research and and other resources to complete and to
development expenditure as explained earlier. use/sell the intangible asset.
f. Ability to reliably measure the expenditure
during the development phase.

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IAS-38
INTANGIBLE ASSETS

INITIAL MEASUREMENT OF INTANGIBLE ASSETS

(3) INTANGIBLE ASSET ACQUIRED IN EXCHANGE OF ANOTHER ASSET

Intangible asset may be acquired in exchange for another asset. The cost of the intangible asset
acquired will be:
Fair value of the asset given up ± Cash paid (received);
Fair value of the acquired asset, if it is more clearly evident;
Carrying amount of the asset given up ± Cash paid (received), if:
- Exchange transaction lacks commercial substance or
- Fair value of neither the asset received nor the asset given up is reliably measurable.

(4) INTANGIBLE ASSET ACQUIRED BY WAY OF GOVERNMENT GRANT

An intangible asset may be acquired free of charge, or for nominal consideration, by way of a
government grant. For example, a government may grant;
- airport landing rights,
- licences to operate radio or television stations,
- import licences or quotas or
- rights to access other restricted resources.
Both the intangible asset and the grant may be initially recognized at fair value.
Alternatively, intangible asset may be initially recognized at a nominal amount plus any expenditure
that is directly attributable to preparing the asset for its intended use.

(5) INTANGIBLE ASSET ACQUIRED IN BUSINESS COMBINATION

An intangible asset acquired in a business combination is recognized at its fair value at the
acquisition date.
Such intangible is recognizedseparately from goodwill (even if acquiree had not recognized it).

(6) INTERNALLY GENERATED GOODWILL

Internally generated brands, mastheads, publishing titles, customer lists and similar items shall
not be recognised as intangible assets.
Expenditure on above items cannot be distinguished from the cost of developing the business
as a whole.
Therefore, such items are not recognised as intangible assets.
Internally generated goodwill is not recognised as an asset because it is not an identifiable resource
(i.e. it is not separable nor does it arise from contractual or other legal rights) controlled by the entity
that can be measured reliably at cost.

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IAS-38
INTANGIBLE ASSETS

USEFUL LIFE OF INTANGIBLE ASSETS

Finite Life Indefinite Life

An intangible asset with a finite useful Intangible asset with an indefinite useful life is not
life shall be amortized on a systematic amortised (rather tested for impairment annually or when
basis over its useful life. there is indication for impairment).
Residual value of an intangible asset There must also be annual review of whether the indefinite
shall be assumed to be zero unless: life assessment is still appropriate, and if no longer
a. there is a commitment by a 3rd indefinite change to finite useful life.
party to purchase the asset at Intangible assets with indefinite useful life shall be reviewed
the end of useful life; or annually to determine whether useful life continues to be
b. there is an active market for the indefinite.
asset and residual value can be Change in the useful life from indefinite to finite shall be
determined by reference to that accounted for as a change in an accounting estimate (IAS 8).
market and it is probable that Change in useful life from indefinite to finite is an indicator
such a market will exist at the of impairment.
end of the asset’s useful life.

Assessment of useful life of Amortization of Intangible Assets (with Finite Life)

intangible assets

The contractual period and/or An intangible asset with a finite useful life shall be
renewal options may also impact the amortized on a systematic basis over its useful life.
assessment of useful life of intangible Amortisation shall begin when the asset is available for
assets. use.
If the contractual or other legal rights Amortisation shall cease at the earlier of the date that the
are conveyed for a limited term that asset is classified as held for sale (IFRS 5) and the date
can be renewed, the useful life of the that the asset is derecognised.
intangible asset shall include the
renewal period(s) only if there is The amortisation method used shall reflect the pattern in
evidence to support renewal by the which the asset’s future economic benefits are expected
entity without significant cost. to be consumed by the entity. If that pattern cannot be
determined reliably, the straight-line method shall be
In short, amortization should be worked used. There is a rebuttable presumption that an
out at lower of: amortisation method that is based on the revenue
- Useful life for which entity expects generated by an activity that includes the use of an
to use the intangible asset; or intangible asset is inappropriate.
- Contractual or legal life (plus A variety of amortisation methods can be used;
renewal period if renewal cost is - Straight line method,
not significant).
- Diminishing balance method;
- The units of production method.
Amortisation charge for each period shall be recognised
in P/L unless IAS 38 or another Standard permits or requires
it to be included in the carrying amount of another asset.
The amortisation period and the amortisation method for
an intangible asset with a finite useful life shall be
reviewed at least at each financial year-end.

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IAS-38
INTANGIBLE ASSETS
SUBSEQUENT MEASUREMENT OF INTANGIBLE ASSETS

An entity shall choose either the cost model or the revaluation model as its accounting policy:

REVALUATION MODEL COST MODEL

Fair value xxxx Fair value xxxx

Less. Accumulated Amortization (xxxx) Less. Accumulated Amortization (xxxx)
Less. Accumulated Impairment (xxxx) Less. Accumulated Impairment (xxxx)
Carrying Amount xxxx Carrying Amount xxxx

Revaluation of Intangible Asset Lower of:

Historical Cost; or
Revaluation Surplus – OCI Recoverable Amount
Historical
Cost
Revaluation Gain / (Loss) – P/L Historical Cost
Carrying Amount of an asset (After amortization)
as if it had never been revalued / impaired.
Recoverable Amount

Revaluation Model for Intangible Assets Higher of : (i) Value in Use; or

(ii) Fair Value less Cost to sell
For revaluation under IAS 38, fair value shall be
measured by reference to an active market. Active market valuation
If an intangible is carried under revaluation
model, all other assets in its class shall also be It is uncommon for an active market to
accounted for using the same model, unless exist for an intangible, but this may happen.
there is no active market for those assets. An active market may exist for freely
An active market is a market in which transferable taxi licences, fishing licences or
transactions for the asset or liability take place production quotas.
with sufficient frequency & volume to provide
However, an active market cannot exist for
pricing information on an ongoing basis.
brands, newspaper mastheads, music and
If an intangible in a class of revalued intangibles,
film publishing rights, patents or
cannot be revalued because there is no active
trademarks, because such asset is unique.
market for this asset, the asset shall be carried
at cost model. If FV of a revalued intangible can no longer
be measured by reference to an active
Revaluations shall be made with such regularity
market, the CA of the asset shall be its
that the carrying amount of the asset does not
revalued amount at the date of the last
differ materially from its FV.
revaluation less any subsequent acc.
Frequency of revaluations depends on the
amortisation & impairment losses.
volatility of the FV of the intangible assets.
If an active market no longer exists for an
Measurement under Revaluation Model
intangible, it is an indicator of impairment.
The revaluation model does not allow
If FV of intangible is measured by reference
revaluation of intangible that have not
to an active market at a subsequent date,
previously been recognised as assets e.g.
the revaluation model is applied from that
internally generated brand.
date.
The revaluation model is applied after an asset
has been initially recognised at cost.
Also, revaluation model may be applied to an
asset that was received by way of a government
grant and recognised at a nominal amount.
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SIC-32 INTANGIBLE ASSETS: WEBSITE COSTS

Compiled by: Murtaza Quaid

ISSUE CONSENSUS

When accounting for internal expenditure on the development and  An entity’s own web site that arises from development and is for
operation of an entity’s own web site for internal or external access, internal or external access is an internally generated intangible
the issues are: asset that is subject to the requirements of IAS 38
 Whether the web site is an internally generated intangible asset  If a web site is developed solely (or primarily) for promoting and
that is subject to the requirements of IAS 38 Intangible Assets advertising its own products and services then an entity will not
 The appropriate accounting treatment of such expenditure. be able to demonstrate how it will generate probable future
economic benefits. All expenditure on developing such a web
site should be recognised as an expense when incurred.
 The best estimate of a website’s useful life should be short.
SCOPE

SIC-32 does not apply to expenditure on

 purchasing, developing and operating hardware of a website. The USE OF WEBSITE
cost of purchasing, developing, and operating hardware (e.g.
servers and Internet connections) of a web site are accounted for A web site designed for A web site designed for
as property, plant and equipment (IAS 16). external access may be used for internal access may be used to:
 an internet service provider hosting the entity’s web site. (This various purposes such as to:  store company policies /
expenditure is recognised as an expense as and when the services  advertise products and customer details, and
are received) services,  search relevant
 the development or operation of a web site for sale to another  provide electronic services, information.
entity. and
 sell products and services

STAGES OF WEBSITE DEVELOPMENT AND ACCOUNTING TREATMENT:

STAGE ACTIVITIES ACCOUNTING TREATMENT

Planning (This stage  Undertaking feasibility studies Expense when incurred.

is similar in nature to  Defining hardware and software specifications
the research phase)  Evaluating alternative products and suppliers
 Selecting preferences

Application and  Obtaining a domain name Capitalize as an intangible assets if expenditure:

infrastructure  Purchasing or Developing operating software (e.g.  Meets the following recognition criteria as per IAS 38:
development* (This operating system and server software) i. the technical feasibility of completing the website
stage is similar in  Developing code for the application ii. its intention to complete the website and use it
nature to the  Installing developed applications on the web server iii. its ability to use website
development phase)  Stress testing iv. how the website asset will generate probable future
economic benefits
Graphical design  Designing the appearance of web pages v. the availability of adequate technical, financial and
development* other resources to complete the development and to
use the website
Content  Creating, purchasing, preparing and uploading
vi. ability to measure the expenditure attributable to the
development* information, either textual or graphical in nature,
website during its development
on the web site before the completion of the web
 Is not for promoting or advertising entity’s own product or
site’s development.
service.

Operating  Updating graphics and revising content Expense when incurred, unless it meets the IAS 38 criteria for
 Adding new functions, features and content the capitalisation of subsequent expenditure (this will only
 Registering the web site with search engines occur in rare circumstances).
 Backing up data
 Reviewing security access
 Analyzing usage of the web site

IQ School of Finance For your valuable feedback, any update, error or

query, kindly let me know at [email protected]

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



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 To prescribe the criteria and accounting treatment of

And their changes And their changes And their correction

 
 

are the specific principles, bases, conventions, rules and practices

applied by an entity in preparing and presenting financial statements.
An accounting policy may relate to:
 Recognition criteria (e.g. capitalising borrowing costs in the cost of qualifying
asset rather than charging it as an expense);
 Measurement basis (e.g. measuring investment property applying either cost
model or fair value model); or
 Presentation (e.g. presenting deferred government grant related to asset either
separately or by deducting from carrying amount of related asset).

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1. When an IFRS specifically applies to a transaction, event or

condition, the accounting policies applied to that item shall
be determined by applying the IFRS.
2. In absence of an IFRS that is applicable specifically, the management shall
use its judgement in developing and applying an accounting policy.
In making such judgement, the management should consider following
sources:
a) IFRS dealing with similar and related issues; and
b) Conceptual Framework for Financial Reporting; and
c) Recent pronouncement of other standard-setting bodies (to the extent
not in conflict with afore-mentioned sources).

Accounting policies should be applied consistently

for similar transactions unless required or permitted
by IFRSs.

New policy results in more

Required by new IFRS reliable & relevant information
to users of financial statements
(voluntary change)

Transition provision in
new IFRS
If the new IFRS does not
include any transitional
provisions

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The initial application

Change in accounting policy shall be applied
of revaluation model under IAS 16 or
retrospectively (as if the new accounting policy had always IAS 38 shall be dealt in accordance
been applied) except to the extent that it is impracticable with IAS 16 or IAS 38 respectively, and
to determine either period specific effects or cumulative not in accordance with IAS 8.
effect of change.
Retrospective application has three steps:
a) Apply new policy in current period (e.g., year 2023 is current period).
b) Apply new policy in comparative period as if the new accounting policy had always been
applied (e.g., year 2022 is comparative period presented).
c) For periods before the comparative period, adjust the opening balances of earliest comparative
period of each affected component of equity and related asset or liability as if the new
accounting policy had always been applied (e.g., opening balances of year 2022 shall be
adjusted).

When it is impracticable to determine the period specific effects, the entity shall apply the new
accounting policy retrospectively from the earliest date practicable.
When it is impracticable to determine the cumulative effect, (at the beginning of the current
period), of applying a new accounting policy to all prior periods, the entity shall adjust the
comparative information to apply the new accounting policy prospectively from the earliest date
practicable.

are monetary amounts in

financial statements that are subject to
measurement uncertainty.  Provision for bad debts
 Provision for warranty
Some items in financial statements are measured repairs
in a way that involves measurement uncertainty
i.e. monetary amounts that cannot be observed  Method of depreciation
directly and must instead be estimated. The use  Useful Life
of reasonable estimates is an essential part of  Residual Value
preparation of financial statements and does not
undermine their reliability.

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 An accounting estimate may need revision if changes occur in the

circumstances on which the accounting estimate was based or as a result
of new information or more experience. A change in accounting
estimate does not relate to prior periods is not correction of prior
period error.
 When it is difficult to distinguish a change in an accounting policy from a
change in an accounting estimate, the change is treated as a change in
accounting estimate.

 In the current reporting period Recognising the effect of the change in the
 In the current and future reporting accounting estimate in the current and future
periods periods affected by the change.

The effect of change in an accounting estimate relating to profit or loss

shall be recognised prospectively by including it in profit or loss in:
a) The period of change if the change affects that period only; or
b) The period of change and future periods if the change affects
both.

To the extent that a change in an accounting estimate gives rise to

changes in assets and liabilities, or relates to an item of equity, it shall
be recognised by adjusting the carrying amount of the related asset,
liability or equity item in the period of change.

The nature and amount of a change in an accounting estimate that has

an effect in the current period or is expected to have an effect in
future periods, except for the effect on future periods when it is
impracticable (disclose this fact if this is the case) to estimate that
effect.

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An entity shall include comparative information for narrative and descriptive information
if it is relevant to understanding the current period’s financial statements.
An entity shall present, as a minimum,
 two statements of financial position,
 two statements of profit or loss and other comprehensive income,
 two statements of cash flows and
 two statements of changes in equity, and related notes.

An additional (third) statement of financial position as at the beginning of the preceding

period is also required when an entity:
a) applies an accounting policy retrospectively (IAS 8); or
b) makes a retrospective restatement of items in its financial statements (IAS 8); or
c) reclassifies items in its financial statements (IAS 1).

Rules / Principles / Bases Amount determined based on selected basis

or some pattern of future consumption

 FIFO to Weighted Average  Provision for bad debts

 Cost model to Fair value model (IAS 40)  Method of depreciation
 Useful Life

Retrospectively Prospectively

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 Prior period errors are omissions from, and

misstatements in, the entity’s financial
statements for one or more prior periods
arising from a failure to use, or misuse of,
reliable information that:
 was available when financial statements for
those periods were authorised for issue;
and
 could reasonably be expected to have been
obtained and taken into account in the
preparation and presentation of those
financial statements.
 Such errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts,
and fraud.

Information is if omitting, misstating or obscuring it could reasonably be

expected to influence decisions that the primary users of financial statements make on
the basis of those financial statements, which provide financial information about a
reporting entity.

Yes No

an entity shall correct material prior period

In the
errors in the first set of financial statements authorised current
for issue after their discovery by: reporting
 restating the comparative amounts for the prior period(s) period
presented in which the error occurred; or
 if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.

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When it is impracticable to determine the period-specific effects of an error

on comparative information for one or more prior periods presented, the
entity shall restate the opening balances of assets, liabilities and equity for
the earliest period for which retrospective restatement is practicable (which
may be the current period).

When it is impracticable to determine the cumulative effect, at the

beginning of the current period, of an error on all prior periods, the entity
shall restate the comparative information to correct the error prospectively
from the earliest date practicable.

An entity shall disclose the following:

a) the nature of the prior period error;
b) for each prior period presented, to the extent practicable, the amount of the
correction for each financial statement line item and EPS (if IAS 33 is applicable);
c) the amount of the correction at the beginning of earliest prior period presented;
and
d) if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of
how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.

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IAS 8 – ACCOUNTING POLICIES,

CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
Practice Questions
COMPILED BY: MURTAZA QUAID

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IAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

AND ERRORS (PRACTICE QUESTIONS)

Question 1. [Change in Accounting Policy] [CAF 1: FAR 1 – ICAP Study Text]

Following information have been extracted from the financial statements of Kashif Engineering Limited
(KEL) for the year ended 31 December 2024:

*Relates to property, plant and equipment and investment property

To provide more relevant and reliable information about investment property, it has been decided to
change the measurement basis for investment property from cost model to fair value model.
The only investment property of KEL is a building purchased on 1 January 2021 at a cost of Rs. 150 million.
60% of the cost represents building component having estimated useful life of 20 years and residual value
of Rs. 10 million. The depreciation is included in the above draft financial statements. The fair value of the
investment property has increased by 6% in each year since acquisition.
Required: Prepare the extracts (including comparative amounts) of:
(a) Statement of financial position of KEL as at 31 December 2024.
(b) Statement of profit or loss of KEL for the year ended 31 December 2024.
(c) Statement of changes in equity (retained earnings column) of KEL for the year ended 31 December
2024.
(d) Disclosure note relating to the change in accounting policy in the financial statements of KEL for the
year ended 31 December 2024

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Question 2. [Correction of Error] [Illustrative example 1 of IAS 8]

During 2002, Beta Co discovered that some products that had been sold during 2001 were incorrectly
included in inventory at 31 December 2001 at Rs. 6,500.
The draft profit and loss (before rectification) is as follow:
2002 (Draft) 2001 (Reported)
Amount in Rs.
Sales 104,000 73,500
Cost of sales (86,500) (53,500)
Profit before tax 17,500 20,000
Tax (5,250) (6,000)
Profit after tax 12,250 14,000

Share capital at year end 5,000 5,000

Retaining earning at start of the year 34,000 20,000
Profit after tax 12,250 14,000
Retaining earning at end of the year 46,250 34,000
Required: Prepare the following:
(i) Profit and loss account
(ii) Statement of changes in equity
(iii) Note for restatement of error

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Question 3. [Autumn 2012, Q4, 20 marks]

Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery. Following are the
draft extracts of the statement of financial position and the income statement for the year ended 30
June 2012:

Following additional information has not been taken into account in the preparation of the above
financial statements:
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the machinery account
on 1 October 2010. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2011, WL reviewed the estimated useful life of its plant and revised it from 5 years to 8
years. The plant was purchased on 1 July 2010 at a cost of Rs. 70 million.
Depreciation is provided under the straight line method. Applicable tax rate is 30%.
Required: Prepare relevant extracts (including comparative figures) for the year ended 30 June 2012
related to the following:
(a) Statement of financial position
(b) Income statement
(c) Statement of changes in equity
(d) Correction of error note

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Question No. 2 of Winter 2018, 25 marks

You are the Finance Manager of Mehran Limited (ML). Your staff has prepared draft financial statements
of ML for the year ended 31 December 2017 except statement of changes in equity.

For the purpose of preparation of statement of changes in equity you have gathered the following
information:

(i) Share capital and reserves as at 1 January:

2016 2015
------------ Rs. in million ------------
Share capital (Rs. 10 each) 600 600
Share premium 250 250
Retained earnings 930 702

(ii) Net profit for 2017 (draft), 2016 (audited) and 2015 (audited) was Rs. 355 million, Rs. 281 million
and Rs. 228 million respectively. There was no item of other comprehensive income.
(iii) A bonus issue of 15% was made on 1 April 2016 as final dividend for 2015.
(iv) An interim cash dividend of 10% was declared on 1 December 2017 which was paid on 5 January
2018.
(v) The draft statement of financial position as on 31 December 2017 shows total assets and total
liabilities of Rs. 2,627 million and Rs. 440 million respectively.
Details of outstanding issues:

(i) At the beginning of 2017, ML relocated one of its manufacturing plants from Sukkur to Karachi.
The relocation resulted in repayment of related government grant. The repayment of the grant
has been debited directly to retained earnings. Further, depreciation on the plant for 2017 has
not been charged and cost of relocation of the plant amounting to Rs. 12 million has been
capitalised.

The plant was installed in Sukkur at a total cost of Rs. 400 million and had a useful life of 8 years.
The plant was available for use on 1 January 2015 and was immediately put into use.

ML received the grant of Rs. 160 million towards cost of the plant in Sukkur. The sanction letter
states that if ML ceases to use the plant in Sukkur before 31 December 2019, it is required to
repay the grant in full. The grant was recorded as deferred income upon receipt and it has partly
been transferred to profit or loss in 2015 and 2016.

(ii) Assets include an amount of Rs. 0.3 million paid on 1 October 2017 for entering into a forward
contract to buy USD 4 million on 1 March 2018.

The forward was acquired to specifically hedge the risk of any future changes in the exchange rate
related to highly probable acquisition of an equipment in March 2018 at an estimated cost of USD
4 million. No further adjustment has been made in this respect. Following information is also
available:

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1-Oct-2017 31-Dec-2017
Conversion rates per USD:
- Spot rate Rs. 115.00 Rs. 117.00
- Forward contract (delivery date: 1 March 2018) Rs. 117.25 Rs. 119.50

(iii) Liabilities include entire proceeds of Rs. 150 million received on 1 January 2017 on issuance of 1.5
million convertible debentures of Rs. 100 each. The related transaction cost on issuance and
interest paid at year end has been charged to profit or loss.
Each debenture is convertible into 2 ordinary shares of Rs. 10 each on 31 December 2020. Interest
is payable at 8% per annum on 31 December each year. On the date of issue, market interest rate
for similar debt without conversion option was 11% per annum. However, on account of
transaction cost of Rs. 4 million, incurred on issuance of debentures, the effective interest rate
has increased to 11.85% per annum.

(iv) ML’s obligation to incur decommissioning cost relating to a plant located in Khairpur has not been
recognised.

The plant was acquired on 1 January 2015 and had an estimated useful life of four years. The
expected cost of decommissioning at the end of its useful life is Rs. 60 million. Applicable discount
rate is 11%.

(v) Property, plant and equipment include a warehouse which was given on rent in January 2017 for
two years. Previously, the warehouse was in use of ML.

ML carries its property, plant and equipment at cost model whereas investment property is
carried at fair value model. Carrying value and remaining useful life of the warehouse on 1 January
2017 was Rs. 55 million and 11 years respectively. Fair values of the warehouse on 1 January 2017
and 31 December 2017 were Rs. 80 million and Rs. 75 million respectively. Depreciation for 2017
has not yet been charged.

Required:
(a) Determine the revised amounts of total assets and total liabilities after incorporating effects of
the above corrections. (15)
(b) Prepare ML’s statement of changes in equity for the year ended 31 December 2017 along with
comparative figures after incorporating effects of the above corrections, if any. (Ignore taxation.
‘Total’ column is not required) (10)

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Question No. 2 of Winter 2019, 25 marks

You are the Finance Manager of Dirham Limited (DL). Your assistant has prepared draft financial
statements of DL for the year ended 31 December 2018. However, he could not prepare statement of
changes in equity due to certain outstanding issues.

For the purpose of preparation of statement of changes in equity, the following information is available:

(i) Share capital and reserves as on 31 December:

2017 2016 2015

------------ Rs. in million ------------
Share capital (Rs. 10 each) 700 700 700
Retained earnings 1,013 702 530
Revaluation surplus 281 172 151

(ii) Net profit for 2018 (draft), 2017 (audited) and 2016 (audited) were Rs. 198 million, Rs. 311 million
and Rs. 242 million respectively.
(iii) The draft statement of financial position as on 31 December 2018 shows total assets and total
liabilities of Rs. 2,977 million and Rs. 785 million respectively.
Details of outstanding issues:

(i) In 2018, it was discovered that a senior executive was granted share options on 1 January 2016
but nothing was recorded in the books in 2016 as well as in subsequent years.

DL had granted 120,000 share options to the senior executive, conditional upon the executive
remaining in DL’s employment till 31 December 2019. The exercise price per option is Rs. 90.
However, the exercise price drops to Rs. 50 if DL’s net profit increases by at least 8% in each year.

Estimated fair values of share option are as under:

On grant date On 31-Dec-2018

--------- Rs. per option ---------
Exercise price of Rs. 90 150 190
Exercise price of Rs. 50 175 225

The increase in net profit by more than 8% was always expected. However, due to unexpected
economic conditions, DL could not achieve 8% increase in profits in 2018.

(ii) In view of significant changes in the technology, it has been decided to reduce the remaining
useful life of a plant by 5 years. No entry has been made for depreciation on the plant and
adjustments in related decommissioning cost for 2018.

As at 1 January 2018, the plant had a carrying value of Rs. 150 million and a remaining useful life
of 11 years. Further, in respect of this plant, revaluation surplus of Rs. 24 million and provision for
decommissioning cost of Rs. 40 million were also appearing in the books as at that date. There is

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no change in expected decommissioning cost except for the timing due to change in useful life.
Applicable discount rate is 11% per annum.

It is the policy of DL to transfer revaluation surplus to retained earnings only upon disposal.

(iii) It was noted that investment in debentures has not been accounted for correctly.

On 1 January 2018, DL purchased 2.5 million debentures (having face value of Rs. 100 each) issued
by Peso Limited. Debentures were purchased at Rs. 103 each. However, the fair value of each
debenture as on the date of purchase was Rs. 105 in the quoted market. Transaction cost of Rs.
1.5 million was also incurred on purchase of debentures.

Coupon rate of debentures is 12% which is payable annually on 31 December. DL has classified
the investment in debentures as financial asset at fair value through other comprehensive
income. At initial recognition, DL determined that debenture was not credit impaired.

DL estimated that 12 months expected credit losses in respect of the investment in debentures at
1 January 2018 and 31 December 2018 amounted to Rs. 8 million and Rs. 6 million respectively.
As on 31 December 2018, the debentures were quoted on Pakistan Stock Exchange at Rs. 109
each.

Upon purchase, transaction price was recorded as financial asset whereas the transaction cost
was charged to profit or loss. Interest has been received and taken to profit or loss. No further
entries have been made in the books.

(iv) The following information has been received from actuary in respect of DL’s pension fund for the
year ended 31 December 2018:
Rs. in million
Contribution paid 40
Benefits paid 32
Current service cost 45
Re-measurement gain 18*
*Re-measurements were nil in 2017 and 2016.

Applicable annual discount rate and net pension liability as on 1 January 2018 were 10% and Rs.
85 million respectively.

During the year, payments made by DL were charged to profit or loss. No further adjustment has
been made.

Required:

(a) Determine the revised amounts of total assets and total liabilities after incorporating effects of
the above corrections. (15)
(b) Prepare DL’s statement of changes in equity for the year ended 31 December 2018 along with
comparative figures after incorporating effects of the above corrections, if any. (Ignore taxation.
‘Total’ column is not required) (10)

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Assurance | Tax | Advisory | Outsourcing

IAS-8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

OBJECTIVE

To prescribe the criteria and accounting treatment of

Accounting policies Accounting estimates Errors and

and their changes and their changes their correction

ACCOUNTING POLICIES

Principles
Accounting policies are the specific BALANCE
SHEET
INCOME
STATEMENT

principles, bases, conventions, rules and Bases To Prepare

practices applied by an entity in preparing Conventions Financial
and presenting financial statements.
Rules Statements

HOW TO SELECT AND APPLY ACCOUNTING POLICIES CHANGE IN ACCOUNTING POLICY

If there is a standard or interpretation to deals with

Required by a standard or
transaction, use that standard or interpretation
interpretation
If there is no standard or interpretation to deal with a
Apply the transition provision
transaction, apply judgment to develop your own policy.
in new IFRS
Following sources should be referred to make the judgement:
Requirements & guidance in other standards /
interpretations dealing with similar Issues New policy results in
more reliable & relevant
Definitions, recognition criteria in framework information to users of
May use other GAAP that use a similar framework and/or financial statements
may consult other industry practice / accounting literature Retrospectively
that is not in conflict with standards / interpretations.
(Restate comparative amounts
and/or restate the opening
Policies should be consistent for similar balances of assets, liabilities
Apply consistently transactions, events or conditions. and equity for the earlier prior
period presented. as if the
DISCLOSURE new policy had always been
in place)
Title of the standard / interpretation that caused the change
Nature of the change in policy
Description of the transitional provisions
If it is impractical to determine
For the current period and each prior period presented, the period specific effects or
amount of the adjustment to: cumulative effects of the
- Each line item affected change, then apply new policy
- Earnings per share. as at the beginning of the
Amount of adjustment relating to prior periods not presented earliest period for which
retrospective application is
If retrospective application is impracticable, explain and
practicable
describe how the change in policy was applied
Subsequent periods need not repeat these disclosures
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Assurance | Tax | Advisory | Outsourcing

IAS-8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

ACCOUNTING ESTIMATES

EXAMPLES
Accounting Estimates are monetary amounts in financial
statements that are subject to measurement uncertainty
Provision for bad debts
Provision for warranty repairs
CHANGE IN ACCOUNTING ESTIMATES
Method of depreciation
Adjustment of the carrying amount of an asset or liability, or
related expense, resulting from reassessing the expected future Useful Life
benefits and obligations associated with that asset or liability. Residual Value

HOW TO ACCOUNT FOR CHANGE IN ACCOUNTING ESTIMATES DISCLOSURE

The effect of a change in an accounting estimate shall be recognised Nature and amount of
prospectively by including it in profit or loss in change in accounting
the period of the change, if the change affects that period only, or estimate that has an effect
in the current period (or
the period of the change and future periods, if the change affects both. expected to have in future
However, to the extent that a change in an accounting estimate periods)
gives rise to changes in assets and liabilities, or relates to an item of
Fact that the effect of future
equity, it is recognised by adjusting the carrying amount of the
periods is not disclosed
related asset, liability, or equity item in the period of the change.
because of impracticality (if)

PRIOR PERIOD ERRORS

Omissions from, and misstatements in the financial Such errors result from:
statements for prior periods arising from a failure to
Mathematical mistakes,
use, or misuse of, reliable information that:
Mistakes in applying accounting policies,
was available when those F/S were prepared; or
Oversights or misinterpretations of facts,
could reasonably be expected to have been obtained
& taken into account in preparing those F/S. Fraud

CORRECTION OF ERROS DISCLOSURE

Is the prior period error material? Nature of the prior period error
For each prior period presented, if
YES NO practicable, disclose the correction to:
- Each line item affected
Correct retrospectively (unless - Earnings per share (EPS).
In the current
impracticable) by Amount of the correction at the
reporting
restating the comparative amounts for period beginning of earliest period presented
the prior period(s) presented in which If retrospective application is
the error occurred; or
impracticable, explain and describe
if the error occurred before the earliest how the error was corrected
prior period presented, restating the
opening balances of assets, liabilities & Subsequent periods need not to repeat
equity for the earliest prior period these disclosures
presented.
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IAS 33:
EARNINGS PER SHARE
Compiled by: Murtaza Quaid, ACA

IAS 33: EARNINGS PER SHARE

In this Part:
 Objective

 Why IAS 33 Earnings per Share?

 Requirement to present EPS

 Basic Earnings Per Share

 Dilute Earnings Per Share

 Other Considerations
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

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IAS 33: EARNINGS PER SHARE

Objective

To prescribe principles for the determination and presentation of

earning per share to improve performance comparison:

Over time Between different companies

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Why IAS 33 Earnings per Share?

If an investor wants to purchase some shares on the stock exchange, then he probably
performs some analysis in order to select the right stock. Well, this is at least one should do.
In most cases, the investors, whether institutional or individual like you, look to a few
measures and one of them is P/E ratio.
The price-earnings ratio tells how many years of the same earnings an investor needs to
wait until he gets the price he paid for the shares back. When PE is 10, then investment into
certain share will theoretically return back in 10 years.
The formula for P/E Ratio = Market value per share / Earnings per Share (EPS)
Actually, the market value per share is available from the data on the stock exchange – not a
problem.
But what about the denominator – earnings per share?
The earnings per share usually come from the company’s financial statements. And, in order Investor
to make this amount reliable and comparable, we have the standard IAS 33 Earnings per
Share giving the guidance about how to present EPS.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

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Requirement to present EPS

 The following companies must present (1) Basic EPS and (2) Diluted EPS:
 Whose ordinary shares (or potential ordinary shares) are traded in a
public market (stock exchange), or
 Whose financial statements are filed or in the process of filing with a
securities commission or similar regulatory body for the purpose of
issuing the shares in a public market.

 Basic and diluted EPS must be presented even if the amounts are
negative (that is, a loss per share).

 If an entity reports a discontinued operation, basic and diluted amounts

per share must be disclosed for the discontinued operation either on the
face of the income statement or in the notes to the financial statements.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Basic Earnings per Share

Basic earnings per share is calculated simply as the
 Net profit or loss for the period attributable to ordinary shareholders, divided by
 Weighted average number of ordinary shares outstanding during the period.

Net profit / (loss) attributable to ordinary shareholders

Basic EPS =
Weighted average number of ordinary shares
outstanding during the period

An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. The
ordinary shares used in the EPS calculation are those entitled to the residual profits of the entity, after
dividends relating to all other types of shares have been deducted.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

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Basic Earnings per Share

Net profit / (loss) attributable to ordinary shareholders

 Earnings attributable to ordinary shareholders usually means profit after tax LESS preference
dividend. The following guidance is relevant:
Preference shares Impact on calculation
 These shares are classified as liabilities.
Redeemable
 Any dividend relating to such shares is recognised as a finance cost in the statement of profit or loss.
preference shares  It is already deducted from the profit or loss and no further adjustment is required.
 These shares are classified as equity and the dividend relating to such shares is presented in the statement of
Irredeemable changes in equity.
preference shares  This dividend must be deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders.
 These are preference shares on which dividend, if not declared, shall be accumulated and be payable in
Cumulative subsequent period.
preference shares  The dividend on such shares is deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders, regardless that dividend is actually declared or not.
 These are preference shares on which dividend, if not declared, shall not be accumulated and shall not be
Non-Cumulative
payable in subsequent period.
preference shares  The dividend on such shares is deducted from profit only if declared during the year.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Preference Shares & Its Types

 Preference shares or in other words

preferred stock get preference over ordinary
shares. Like, company issuing preference
shares is required to pay dividend on such
shares before they offer even a penny to
ordinary shareholder before stock dividends
are issued.

 If the company bears bankruptcy, preference shareholders are entitled to be

paid from assets of the company before ordinary shareholders.

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Types of Preference Shares

Participating and Non-participating Cumulative and Non-cumulative

 Participating preference share has an additional benefit  Cumulative preference share – The dividends are
accumulated and therefore paid before anything paid to
of participating in profits of the company apart from the
equity shareholders.
fixed dividend.
 Non-participating preference share do not participate in  Non-cumulative preference share – If company does not
pay dividend in current year, claim of preference share is
profits of the company apart from the fixed dividend.
lost to that extent.

Redeemable and Irredeemable Convertible and Non-convertible

 Redeemable preference share has a maturity date on  Convertible preference share posses an option or right
which date the company will repay the capital amount to whereby they can be converted into ordinary equity
the preference shareholder and discontinue the dividend shares at some agreed terms and conditions.
payment.  Non-convertible preference share simply does not have
 Irredeemable preference share does not have any this option but has all other normal characteristics of a
maturity date. The dividend of these shares is fixed. preference share.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Basic Earnings per Share

Weighted average number of ordinary shares outstanding during the period

 For the purpose of calculating basic EPS, the number of ordinary shares shall be weighted average number of
ordinary shares outstanding during the period.
 The time-weighting factor is the number of days the shares were outstanding compared with the total
number of days in the period; a reasonable approximation is usually adequate. The weighted average
ordinary shares can be calculated as:
Number of ordinary shares outstanding × Time weighting factor × Adjustment factor (if any)
 The number of shares may increase or decrease during the year due to various reasons, including:
a) Issue of shares at full market price
b) Issue of shares for no consideration (bonus issue)
c) Share split (where one share is divided into several shares of smaller denomination)
d) Share consolidation (where two or more shares are consolidated into one share of larger denomination)
e) Right issue (with bonus element i.e. issue at below market price)

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

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Basic Earnings per Share

Weighted average number of ordinary shares outstanding during the period

Issue of shares at full market price

 The weighted average ordinary shares are to be considered taking into account of the date any
new shares are issued during the year.
 Since the shares issued during the year and additional resources are provided only for part of
the year, therefore, new shares issued during the period are taken into account by applying a
time weighting factor.
 When shares are issued at full price, there is no adjustment required for previously held shares
or shares held during comparative periods.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Weighted average number of ordinary shares outstanding during the period

Bonus Issue - Issue of shares for no consideration

 A bonus issue of shares (also called a scrip issue, scrip dividend, specie dividend or a capitalisation issue) is an issue of new shares (instead of
cash) to existing shareholders, in proportion to their existing shareholding, for no consideration.
 The new shares are issued by converting equity reserves (e.g. share premium, retained earnings, etc.) into ordinary share capital.
 As no cash is raised from a bonus issue, the resources of the entity remain same. Thus, the bonus issue does not contribute to an entity’s
ability to earn additional earnings. However, as the number of shares is increased it reduces the per share earnings compared to when such
bonus shares were not issued. This might create a misleading impression as if the performance of the business has worsened, which might not
be the actual case.
 To avoid such misleading impression and to make EPS correctly comparable, bonus issue of shares are treated as if they have always been in
issue (i.e. in all previous years as well). This is achieved by applying an ‘adjustment factor’ to ordinary shares already in issue while
calculating weighted average number of shares outstanding.
Adjustment Factor = Number of shares after bonus issue .
Number of shares before bonus issue

For current year EPS For prior year EPS

 To calculate weighted average number of ordinary  The EPS of comparative periods is restated by either:
shares for current year EPS, multiply the number of  Multiply WANS in comparative period by the adjustment factor: or
shares before the bonus issue by adjustment factor
 Divide reported EPS in comparative period with the adjustment factor

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Weighted average number of ordinary shares outstanding during the period

Share Split
 Share split is the division of the existing issued share capital of a company into a larger number of shares but with smaller
denominations. The overall amount of capital remains the same.
 For example, a shareholder had 100 ordinary shares of Rs. 50 par value per share, that is total Rs. 5,000. The company
made a 5 for 1 share split. Now the shareholder would have 500 shares of Rs. 10 par value per share, that is same total of
Rs. 5,000.
 Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share split .
Number of shares before share split

For current year EPS For prior year EPS

 To calculate weighted average number of  The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply  Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
 Divide reported EPS in comparative period with the
adjustment factor
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Weighted average number of ordinary shares outstanding during the period

Share Consolidation
 Consolidation of shares, also known as reverse share split, results in smaller number of shares with larger denominations
affecting the total value of share capital.
 For example, a shareholder had 500 ordinary shares of Rs. 10 par value per share, that is total Rs. 5,000. The company
made a 1 for 5 share consolidation. Now the shareholder would have 100 shares of Rs. 50 par value per share, that is
same total of Rs. 5,000.
 Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share consolidation .
Number of shares before share consolidation

For current year EPS For prior year EPS

 To calculate weighted average number of  The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply  Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
 Divide reported EPS in comparative period with the
adjustment factor
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Weighted average number of ordinary shares outstanding during the period

Right Issue
 A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market
value. The offer of new share at a price below the current market value means that there is a bonus element
included.
 For example, a company ABC offers all its ordinary shareholders the right to purchase ONE ordinary share
for every FOUR ordinary shares that they hold, at 30% discount to the fair value (market price).
So imagine you have 1,000 shares in ABC and one share trades for Rs. 10 at the stock exchange. With this
offer, you can purchase additional 250 shares (ONE new for your FOUR existing; that is 1,000/4 = 250) at
30% discount – that is, at Rs. 7 per share.
Isn’t this nice? On the stock exchange, you would have to pay Rs. 10 x 250 = 2,500 for your 250 new
shares, but now, with the rights issue, you pay only Rs. 7 x 250 = 1,750.
From the ABC’s point of view, the increase in shares by 250 does NOT correspond to increase in resources –
these increase by Rs. 1,750 only, not by Rs. 2,500.
This is a bonus element and we must take this into account in our EPS calculation.
Note – if the offer was to purchase one for four shares at the market price, there is no complication as there
is no bonus element.
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Weighted average number of ordinary shares outstanding during the period

Right Issue
 The issue price of the new shares in a rights issue is usually below the current market price and, in such a case, a bonus element exists in such
issue which must be adjusted i.e. an ‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average
number of shares outstanding.
Adjustment Factor = Fair value per share immediately before the exercise of rights (also called cum-rights price) .
Theoretical ex-rights price per share
 The two parameters of this formula:
 Fair value per share immediately before the exercise of rights – This is typically the market price per share immediately before it
becomes “ex-rights” – or, at the last day when the shares are traded together with the rights (“also called cum-rights”).
 Theoretical ex-rights price per share – This the expected price (in theory) at which the shares ought to be, in theory, after the rights
issue. It is computed as under:

Theoretical ex-rights price = (Shares before right issue x Cum-rights price) + (Right issue shares x Exercise price) .
Shares before right issue + Right issue shares

For current year EPS For prior year EPS

 To calculate weighted average number of ordinary  The EPS of comparative periods is restated by either:
shares for current year EPS, multiply the number of  Multiply WANS in comparative period by the adjustment factor: or
shares before the right issue by adjustment factor
 Divide reported EPS in comparative period with the adjustment factor

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Weighted average number of ordinary shares outstanding during the period

 There might be various events affecting the number of shares outstanding during the year and we would classify them in
two groups:
Change in the number of ordinary shares

With corresponding change in resources Without corresponding change in resources

 When there has been an issue of new shares or a buy-  There are events in which there is a change in the
back of shares, the corresponding figures for EPS for number of ordinary shares without a corresponding
the previous year will be comparable with the current change in resources.
year because, as the weighted average of shares has  In these circumstances, it is necessary to make
risen or fallen, there has also been a corresponding adjustments to EPS reported in prior years so that the
increase or decrease in resources. current and prior period’s EPS figures become
 Money has been received when shares were issued, comparable.
and money has been paid out on the repurchased  The is achieved by adjusting the number of ordinary
shares. It is assumed that the sale or purchase has been shares outstanding before the event for the
made at full market price. proportionate change in the number of shares
outstanding as if the event had occurred at the
beginning of the earliest period reported.

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Basic Earnings per Share

Retrospective adjustments

Earnings Number of Ordinary Shares

 The basic (and diluted) EPS of all periods  The calculation of basic (and diluted) EPS for all
presented shall be adjusted for the effects of periods presented shall be adjusted retrospectively
errors and adjustments resulting from changes in (including the restatement of comparatives) as a result
accounting policies accounted for retrospectively of:
(in accordance with IAS 8).  Bonus issue
 Share split
 Share Consolidation (Reverse share split); or
 Right issue with bonus element
 IAS 33 requires this retrospective adjustment to the
number of ordinary shares even if changes in
shareholding structure occur after the reporting period
but before the financial statements are authorized for
issue. The fact that per share calculations reflect such
changes in the number of shares shall be disclosed.
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Diluted Earnings per Share

Except for basic EPS, an entity must also disclose diluted EPS.
Why diluted EPS?
The reason is that the company might have issued some contracts or securities that are NOT the ordinary shares right now, but
CAN convert to them in the future, for example:
 Loans convertible into ordinary shares
 Convertible preference shares
 Share warrants and options
These instruments are called “Potential Ordinary Shares” & they can have two-fold impact on EPS:
 Earnings: They could be affected by saving some expenses on potential ordinary shares, for example, when some loan
converts to the shares, you stop paying the interest on that loan.
 Shares: Naturally, when the potential ordinary shares convert to ordinary shares, the number of shares goes up and it dilutes
the EPS.
In such circumstances, the future number of ordinary shares ranking for dividend might increase, which in turn results in a fall in the
EPS. In other words, a future increase in the number of ordinary shares will cause a dilution or 'watering down' of their earning,
and it is therefore, appropriate to calculate a diluted earnings per share i.e. the EPS that would have been obtained during the
financial period if the dilution had already taken place. This will indicate to investors the possible effects of a future dilution.

A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares (at some time
in the future). Potential ordinary shares do not impact calculation of basic EPS.
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Diluted Earnings per Share

 Before you start calculating the diluted EPS, you need to determine whether the potential ordinary share is
dilutive or not:

Dilutive or Anti-dilutive Potential Ordinary Shares

Yes No
Dilutive Anti-dilutive

Include in diluted EPS Ignore

 They are considered in the calculation of diluted EPS.  They are disregarded in the calculation of diluted EPS.
 Dilution is a reduction in earnings per share or an  Anti-dilution is an increase in earnings per share or a
increase in loss per share resulting from the assumption reduction in loss per share resulting from the assumption
 That convertible instruments are converted;  That convertible instruments are converted;
 That options or warrants are exercised; or  That options or warrants are exercised; or
 That ordinary shares are issued upon the  That ordinary shares are issued upon the
satisfaction of specified conditions. satisfaction of specified conditions.
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Diluted Earnings per Share

Diluted earnings per share is calculated simply as the

 Adjusted Net profit or loss for the

period attributable to ordinary
shareholders,
For the effects of all
divided by dilutive potential
ordinary shares
 Adjusted Weighted average
number of ordinary shares
outstanding during the period.

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Diluted Earnings per Share

Post
Tax

Adjusted for
Net profit / (loss)  Dividend on convertible
preference shares.
attributable to ordinary
 Interest on convertible loan
shareholders / bonds etc.
Diluted
EPS = Adjusted for
Weighted average Number of  No of ordinary shares
ordinary shares outstanding issued on conversion of all
during the period dilutive potential ordinary
shares

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Diluted Earnings per Share

 IAS 33 requires ignoring antidilutive shares – you just present the effect of dilutive shares.
How to measure diluted EPS?
 The formula for measuring diluted EPS is exactly the same as for basic EPS, but both earnings and
number of shares must be adjusted for the effect of dilutive potential ordinary shares.

Earnings Per Share

The effects of dilutive potential ordinary shares on earnings The number of ordinary shares is
could be: the weighted average number of
 Dividends on dilutive potential ordinary shares (e.g. ordinary shares calculated for
convertible preference share) basic EPS plus the weighted
 Interest on dilutive potential ordinary shares (e.g. average number of ordinary
convertible loan) – Net of tax; shares that would be issued on
 Any other changes in income on expenses resulting from the conversion of all the dilutive
the conversion of the dilutive potential ordinary shares potential ordinary shares into
ordinary shares.
You need to adjust these items post-tax.
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Diluted Earnings per Share

Potential Ordinary Shares

Following points need to be considered in connection with diluted EPS
1. Potential ordinary shares are weighted for the period they were outstanding.
2. If potential ordinary shares are issued during the reporting period, they are included in the computation of diluted EPS
only for the portion of the period during which they were outstanding i.e.
 from the actual date of issue of potential ordinary shares
 to the end of the reporting period
3. If potential ordinary shares are cancelled / lapsed / converted in ordinary shares during the reporting period, they are
included in the computation of diluted EPS only for the portion of the period during which they were outstanding i.e.
 from the beginning of the reporting period
 to the date of conversion; from the date of conversion,
4. The resulting ordinary shares are included in both basic and diluted EPS.
5. IAS 33 provides for use of most dilutive option when multiple conversion options are available. The computation
assumes the most advantageous conversion from the standpoint of the holder of the potential ordinary shares.

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Diluted Earnings per Share

Order of Dilution

 In determining whether potential ordinary shares are dilutive or antidilutive, each issue or
series of potential ordinary shares is considered separately rather than in aggregate.
 The sequence in which potential ordinary shares are considered may affect whether they are dilutive.
Therefore, to maximise the dilution of basic earnings per share, each issue or series of potential ordinary
shares is considered in sequence from the most dilutive to the least dilutive, i.e. dilutive potential ordinary
shares with the lowest ‘earnings per incremental share’ are included in the diluted earnings per share
calculation before those with a higher earnings per incremental share.
 Options and warrants are generally included first because they do not affect the numerator (i.e. earnings) of
the calculation.
 The net profit from continuing ordinary activities is 'the control number', used to establish whether potential
ordinary shares are dilutive or anti-dilutive. The net profit from continuing ordinary activities is the net profit
from ordinary activities after deducting preference dividends and after excluding items relating to
discontinued operations;

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Diluted Earnings per Share

Share Options or Warrants

1. Share options or warrants are financial instruments that give its holder, the right
to purchase ordinary shares.
2. Share options issued by an entity are also potential ordinary shares, and exercise
of such options will bring some resources to the business which may not dilute
the earnings.
3. However, if the option’s exercise price is less than average market price of the
period (i.e. the option is ‘in the money’), the option holders will get extra shares
for which entity’s resources will not be increased. These extra (or free) shares are
treated as dilutive because they will not contribute towards earnings but number of shares will be increased.
4. Free shares can be calculated as follows:
Free shares = Number of share options in issue x (Average market price during the period – Exercise price)
Average market price during the period
5. Diluted EPS will be calculated by adding these free shares in weighted average number of shares used in basic EPS calculation.
However, these will not impact earnings.

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Diluted Earnings per Share

Share Options or Warrants

6. For share options and other share-based payment arrangements to which IFRS 2
Share-based Payment applies, the issue price shall include the fair value of any
goods or services to be supplied to the entity in the future under the share
option or other share-based payment arrangement.
7. Employee share options with fixed or determinable terms and non-vested
ordinary shares are treated as options in the calculation of diluted earnings per
share, even though they may be contingent on vesting. They are treated as
outstanding on the grant date.
8. Performance-based employee share options are treated as contingently issuable shares because their issue is contingent upon
satisfying specified conditions in addition to the passage of time.

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Diluted Earnings per Share

Contingently issuable  Contingently issuable ordinary shares are ordinary shares issue-able
for little or no cash or other consideration upon the satisfaction of
shares specified conditions in a contingent share agreement.

Treatment of contingently issuable shares

For calculation of Basic EPS For calculation of Diluted EPS

 No impact on calculation of Basic EPS until the  Treat the end of reporting period as the end of
shares re actually issued. contingency period.
 If condition(s) are met, take into account
such shares in determining Diluted EPS.
 If condition(s) are not met. take into account
such shares in determining Diluted EPS.
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Diluted Earnings per Share

Treatment of contingently issuable shares  For calculation of Diluted EPS

Condition related to earnings Condition related to market price of shares Any other condition

If attainment or maintenance of a If achievement of target market price of shares If contingently issuable shares
specified amount of earnings for a is the condition for contingent issue, depends on a condition other
period is the condition for than earnings or market price
contingent issue,  the calculation of diluted EPS is based on (for example, the opening of a
the number of ordinary shares that would specific number of retail stores).
 the calculation of Diluted EPS is be issued if the market price at the end of
based on the number of the reporting period were the market price  the contingently issuable
ordinary shares that would be at the end of the contingency period. ordinary shares are included
issued if the amount of in the calculation of diluted
earnings at the end of the  If the condition is based on an average of EPS according to the status
reporting period were the market prices over a period of time that at the end of the reporting
amount of earnings at the end extends beyond the end of the reporting period.
of the contingency period. period, the average for the period of time
that has lapsed is used.

Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE

Earnings per Share

Other Consideration Partly Paid Shares

 Where ordinary shares are issued but not fully paid, they are treated in the calculation of
basic earnings per share as a fraction of an ordinary share to the extent that they were
entitled to participate in dividends during the period relative to a fully paid ordinary share.

 To the extent that partly paid shares are not entitled to participate in dividends during the
period they are treated as the equivalent of warrants or options in the calculation
of diluted earnings per share. The unpaid balance is assumed to represent
proceeds used to purchase ordinary shares. The number of shares included
in diluted earnings per share is the difference between the number of
shares subscribed and the number of shares assumed to be purchased.

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Earnings per Share

Other Consideration Participating securities

 Participating securities are instruments that participate in dividends

with ordinary shares according to a predetermined formula (for
example, two for one) with, at times, an upper limit on the
extent of participation (for example, up to, but not beyond, a
specified amount per share).

 In calculation of basic earning per shares, profit or loss attributable

to ordinary equity holders is adjusted for share of participating equity instruments in the remaining
profit or loss as if all of the profit or loss for the period had been distributed.

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Earnings per Share

Other Consideration Increasing rate preference shares

 Preference shares that provide for a low initial dividend to

compensate an entity for selling the preference shares at a discount, or
an above-market dividend in later periods to compensate investors for
purchasing preference shares at a premium, are sometimes referred to
as increasing rate preference shares.

 Any original issue discount or premium on increasing rate preference

shares is amortized to retained earnings using the effective interest
method and treated as a preference dividend for the purposes of
calculating earnings per share.

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PRACTICE QUESTIONS
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IAS 33: Earnings per share (Practice Questions) Compiled by: Murtaza Quaid, ACA

IAS 33: EARNINGS PER SHARE (PRACTICE QUESTIONS)

Question 1. Basic EPS – Redeemable Preference Shares [ICAP Study Support Material]
▪ In the year ended 31 December 20X1, Ghalib Limited (GL) made profit after tax of Rs. 3,500,000.
▪ GL paid ordinary dividends of Rs. 150,000 and preference dividends of Rs. 65,000 on redeemable
preference shares.
▪ The preference shares were correctly classified as liabilities and accounted for in accordance with
relevant IFRS.
▪ GL had 1 million ordinary shares of Rs. 10 each in issue throughout the year.
Required: Calculate basic EPS for the year ended 31 December 20X1.

Question 2. Basic EPS – Irredeemable Preference Shares [ICAP Study Support Material]
▪ In the year ended 31 December 20X1, Jazib Limited (JL) made profit after tax of Rs. 3,000,000.
▪ JL paid ordinary dividends of Rs. 150,000 and preference dividends of Rs. 65,000 on irredeemable
preference shares. The preference shares were correctly classified as equity in accordance with
relevant IFRS.
▪ JL had 1 million ordinary shares of Rs. 10 each in issue throughout the year.
Required: Calculate basic EPS for the year ended 31 December 20X1.

Question 3. Basic EPS - Cumulative preference shares [ICAP Study Support Material]
▪ In the year ended 31 December 20X1, Aqeel Limited (AL) made profit after tax of Rs. 3,500,000.
▪ AL has Rs. 1,000,000 10% cumulative preference shares (classified as equity) in issue. This would
entitle the investors to receive a dividend of Rs. 100,000 (10% of Rs. 1,000,000) whether declared or
not.
▪ AL had 1 million ordinary shares of Rs. 10 each in issue throughout the year.
Required: Calculate basic EPS for the year ended 31 December 20X1

Question 4. Basic EPS – Non-cumulative preference shares [ICAP Study Support Material]
▪ In the year ended 31 December 20X1, Adeel Limited (AL) made profit after tax of Rs. 3,500,000.
▪ AL has Rs. 1,000,000 10% non-cumulative preference shares (classified as equity) in issue. This
would entitle the investors to receive a dividend of Rs. 100,000 (10% of Rs. 1,000,000) if declared).
The preference dividend was declared during the year ended 31 December 20X1.
▪ AL had 1 million ordinary shares of Rs. 10 each in issue throughout the year.
Required: Calculate basic EPS for the year ended 31 December 20X1.

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Question 5. Basic EPS – Non-cumulative preference shares [ICAP Study Support Material]
▪ In the year ended 31 December 20X1, Kashif Limited (KL) made profit after tax of Rs. 3,500,000.
▪ KL has Rs. 1,000,000 10% non-cumulative preference shares (classified as equity) in issue. This would
entitle the investors to receive a dividend of Rs. 100,000 (10% of Rs. 1,000,000) if declared). The
preference dividend was not declared during the year ended 31 December 20X1.
▪ KL had 1 million ordinary shares of Rs. 10 each in issue throughout the year.
Required: Calculate basic EPS for the year ended 31 December 20X1.

Question 6. Basic EPS – Issue of shares at full market price [ICAP Study Support Material]
▪ Friday Limited (FL) has a financial year ending 31 December.
▪ On 1 January 20X1, there were 6,000,000 ordinary shares (Rs. 10 each) in issue. On 1 April 20X1, it
issued 1,000,000 new shares at full market price.
▪ Total earnings for the year ended 31 December 20X1 were Rs. 27,000,000.
Required: Calculate basic EPS for the year ended 31 December 20X1.

Question 7. Basic EPS – Issue of shares at full market price [ICAP Study Support Material]
▪ Sunday Limited (SL) has a financial year ending 31 December.
▪ On 1 January 20X3, there were 9,000,000 ordinary shares in issue. On 1 May 20X3, SL issued
1,200,000 new shares at full market price. On 1 October 20X3, SL issued a further 1,800,000 shares,
also at full market price.
▪ Total earnings in 20X3 were Rs.36,900,000.
Required: Calculate basic EPS for the year ended 31 December 20X3.

Question 8. Basic EPS – Bonus Issue [ICAP Study Support Material]

▪ Pink Limited (PL) has a 31 December financial year end.
▪ On 1 January 20X4 it has 4,000,000 shares in issue. There were no share issues in Year 20X4. On 1
July 20X5 it made a 1 for 4 bonus issue.
▪ Basic EPS reported in 20X4 was: Rs. 20,000,000/4,000,000 shares = Rs. 5 per share
▪ Earning attributable to ordinary shareholders for the year 20X5 are Rs. 24,000,000
Required: Calculate basic EPS for the year ended 31 December 20X5 (including comparative for 20X4).

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IAS 33: Earnings per share (Practice Questions) Compiled by: Murtaza Quaid, ACA

Question 9. Basic EPS – Bonus Issue [ICAP Study Support Material]

▪ Red Limited (RL) has a 31 December financial year-end and had 2,000,000 ordinary shares in issue
on 1 January 20X2.
▪ On 31 March 20X2, it issued 500,000 ordinary shares, at full market price.
▪ On 1 July 20X2, RL made a 1 for 2 bonus issue.
▪ In Year 20X1, the EPS had been calculated as Rs. 30 per share.
▪ In Year 20X2, total earnings were Rs. 85,500,000.
Required: Calculate the EPS for the year to 31 December 20X2, and the comparative EPS figure for 20X1.

Question 10. Basic EPS – Share Split [ICAP Study Support Material]
▪ Pacific Limited (PL) has a 31 December financial year end.
▪ On 1 January 20X4 it has 4,000,000 shares in issue. There were no share issues or other changes in
Year 20X4. On 1 July 20X5 it made a 5 for 2 share split.
▪ Basic EPS reported in 20X4 was: Rs. 20,000,000/4,000,000 shares = Rs. 5 per share
▪ Earning attributable to ordinary shareholders for the year 20X5 are Rs. 24,000,000
Required: Calculate basic EPS for the year ended 31 December 20X5 (including comparative for 20X4).

Question 11. Basic EPS – Share Consolidation [ICAP Study Support Material]
▪ Atlantic Limited (AL) has a 31 December financial year end.
▪ On 1 January 20X4 it has 4,000,000 shares in issue. There were no share issues or other changes in
Year 20X4. On 1 July 20X5 it made a 2 for 5 share consolidation.
▪ Basic EPS reported in 20X4 was: Rs. 20,000,000/4,000,000 shares = Rs. 5 per share
▪ Earning attributable to ordinary shareholders for the year 20X5 are Rs. 24,000,000
Required: Calculate basic EPS for the year ended 31 December 20X5 (including comparative for 20X4).

Question 12. Basic EPS – Right Issue [ICAP Study Support Material]
▪ Peach Limited (PL) has a 31 December financial year-end.
▪ PL had 3,600,000 shares in issue on 1 January 20X2.
▪ It made a 1 for 4 rights issue on 1 June 20X2, at a price of Rs. 40 per share. (After the rights issue,
there will be 1 new share for every 4 shares previously in issue). The share price just before the
rights issue was Rs. 50.
▪ Total earnings in the financial year to 31 December 20X2 were Rs. 25,125,000.
▪ The reported EPS in Year 20X1 was Rs. 6.4 per share.
Required: Calculate the EPS for the year to 31 December 20X2, and the comparative EPS figure for 20X1.

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IAS 33: Earnings per share (Practice Questions) Compiled by: Murtaza Quaid, ACA

Question 13. Basic EPS – Right Issue [ICAP Study Support Material]
▪ Grapes Limited (GL) has a 31 December financial year-end.
▪ GL had 3 million ordinary shares in issue on 1 January 20X7.
▪ On 1 April 20X7, it made a 1 for 2 rights issue of 1,500,000 ordinary shares at Rs. 20 per share. The
market price of the shares prior to the rights issue was Rs. 50.
▪ An issue of 400,000 shares at full market price was then made on 1 August 20X7.
▪ In the year to 31 December 20X7, total earnings were Rs. 17,468,750.
▪ In Year 20X6, EPS had been reported as Rs. 3.5 per share
Required: Calculate the EPS for the year to 31 December 20X7, and the adjusted EPS for 20X6 for
comparative purposes.

Question 14. Basic EPS – Retrospective adjustment: earnings [ICAP Study Support Material]
▪ Nawabpur Limited (NL) has a 31 December financial year end. On 1 January 20X4 it has 4,000,000
shares in issue. There were no share issues or other changes.
▪ Basic EPS reported in 20X4 was:
▪ Rs. 20,000,000/4,000,000 shares = Rs. 5 per share
▪ In October 20X5, it was discovered that registry cost of Rs. 1,000,000 had been incorrectly charged
as expense in year 20X4 (i.e. the profit of 20X4 should have been Rs. 21,000,000)
▪ Earning attributable to ordinary shareholders for the year 20X5 are Rs. 24,000,000.
Required: Calculate basic EPS for the year ended 31 December 20X5 (including comparative for 20X4).

Question 15. Basic EPS – Retrospective adjustments: number of ordinary shares

[ICAP Study Support Material]
▪ Multan Limited (ML) has a 31 December financial year end.
▪ On 1 January 20X4 it has 4,000,000 shares in issue. Basic EPS reported in 20X4 was:
▪ Rs. 20,000,000/4,000,000 shares = Rs. 5 per share
▪ Earning attributable to ordinary shareholders for the year 20X5 are Rs. 24,000,000
▪ There were no share issues or other changes during Year 20X4 or 20X5. However, ML made a bonus
issue of 25% (i.e. 1,000,000 shares) on 15th February 20X6 before finalization of financial
statements.
Required: Calculate basic EPS for the year ended 31 December 20X5 (including comparative for 20X4).

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Question 16. Basic EPS – Comprehensive Example [ICAP Study Support Material]
Daffodil Limited (DL) had share capital of Rs. 1,600 million (ordinary share of Rs. 10 each) as at 31
December 2015.
2017 2016
Rs. in million
Net profit for the year 660.25 331.67
Details of share issues:
▪ 25% right shares were issued on 1 May 2016 at Rs. 18 per share.
▪ A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
▪ 50 million right shares were issued on 1 July 2017 at Rs. 15 per share.
▪ A bonus issue of 15% was made on 1 September 2017 as interim dividend.
Required: Calculate the basic EPS for the year ended 31 December 2017 (including the comparative).

Question 17. Basic EPS – Comprehensive Example [ICAP Study Support Material]
Durable Electronics Limited (DEL) is a manufacturing concern specializing in the manufacturing and
marketing of home appliances. The profit after tax is Rs. 48 million for the year ended December 31,
2005.
The details of movement in the share capital of the company during the year are as follows:
(i) As on January 1, 2005, 10 million ordinary shares of Rs. 10 each were outstanding having a
market value of Rs. 350 million.
(ii) The board of directors of the company announced an issue of right share in the proportion of 1
for 5 at Rs. 40 per share. The entitlement date of right shares was April 30, 2005. The market
price of the shares immediately before the entitlement date was Rs. 40 per share.
(iii) The company announced 2 million bonus shares for its shareholders on June 1, 2005. The
entitlement date was June 30, 2005. The ex-bonus market value per share was Rs. 32.
(iv) A further right issue was made in the proportion of 1 for 4 on October 31, 2005 at a premium of
Rs. 15 per share. The market value of the shares before the right entitlement was Rs. 33 per
share.
Required: Calculate the basic earnings per share for the year ended December 31, 2005 in accordance
with IAS 33 (comparative are not required).

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Question 18. Basic EPS – Comprehensive Example [ICAP Study Support Material]
The following information pertains to the financial statements of Home Dynamics Limited (HDL), a listed
company, for the year ended 31 December 20X6:
(i) Profit after tax for the year is Rs. 765 million.
(ii) Shareholders’ equity as on 1 January 20X6 comprised of:
▪ 10 million ordinary shares of Rs. 10 each, having market value of Rs. 25 each.
▪ 4 million cumulative preference shares of Rs. 10 each entitled to a cumulative dividend at
10%.
(iii) On 31 March 20X6, HDL announced 40% right shares to its ordinary shareholders at Rs. 25 per
share. The entitlement date of right shares was 31 May 20X6. The market price per share
immediately before the announcement date and entitlement date was Rs. 28 and Rs. 32
respectively.
(iv) On 2 August 20X6, HDL announced 20% bonus issue. The entitlement date of bonus shares was
31 August 20X6.
(v) On 1 February 20X7, the board of directors announced 20% cash dividend and 10% bonus issue
being the final dividend to the ordinary shareholders and 10% cash dividend for preference
shareholders.
Required: Calculate basic earnings per share for inclusion in HDL’s financial statements for the year
ended 31 December 20X6. Show all relevant calculations.

Question 19. Diluted EPS – Cumulative Preference Share [ICAP Study Support Material]
Ben Limited (BL) had profit after tax of Rs. 200 million. The following shares are in issue since
incorporation of BL on 1 January 2021:
▪ 100 million ordinary shares of Rs. 10 each
▪ 20 million 8% cumulative preference shares of Rs. 20 each. One preference share is convertible into
two ordinary shares on 31 December 2025.
Required: Calculate basic and diluted EPS for the year ended 31 December 2022.

Question 20. Diluted EPS – Cumulative Preference Share [ICAP Study Support Material]
Stokes Limited (SL) had profit after tax of Rs. 200 million. The following shares are in issue since
incorporation of SL on 1 January 2021:
▪ 100 million ordinary shares of Rs. 10 each
▪ 20 million 8% cumulative preference shares of Rs. 20 each. Two preference shares are convertible
into one ordinary share on 31 December 2025.
Required: Calculate basic and diluted EPS for the year ended 31 December 2022.

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Question 21. Diluted EPS - Convertible Bonds [ICAEW Corporate Reporting – Study Manual]
On 1 January 2005, entity A had an issue:
▪ 24 million ordinary shares of Rs. 10 nominal value each.
▪ Rs. 8 million of 8% convertible loan stock. These were issued on 1 January 2005 and are convertible
at any time from 1 January 2008. The conversion terms are one ordinary share for each Rs. 2
nominal value of loan stock.
After charging income tax at the rate of 20%, the entity reported profit attributable to ordinary equity
holders of Rs. 15 million for its year ended 31 December 2005.
Required: Calculate basic and diluted EPS for the year ended 31 December 2005.

Question 22. Diluted EPS – Convertible Bonds [ICAP Study Support Material]
▪ Gold Limited (GL) has 12,000,000 ordinary shares and Rs. 4,000,000 5% convertible bonds in issue as
at 31 December 20X2, there have been no new issues of shares or bonds for several years.
▪ The bonds are convertible into ordinary shares in 20X3 or 20X4, at the following rates:
- At 30 shares for every Rs. 100 of bonds if converted at 31 December 20X3
- At 25 shares for every Rs. 100 of bonds if converted at 31 December 20X4
▪ Total earnings for the year to 31 December 20X2 were Rs. 36,000,000. Tax is payable at a rate of
30% on profits.
Required: Calculate basic EPS and diluted EPS for the year ended 31 December 20X2.

Question 23. Diluted EPS - New issue of Convertible Bonds [ICAP Study Support Material]
▪ Silver Limited (SL) has 10,000,000 ordinary shares in issue on 1 January 20X5.
▪ There has been no new issue of shares for several years. However, SL issued Rs. 2,000,000 of
convertible 6% bonds on 1 April 20X5.
▪ These are convertible into ordinary shares at the following rates:
- On 31 March 20X8 25 shares for every Rs. 100 of bonds
- On 31 March 20X9 20 shares for every Rs. 100 of bonds
▪ Tax is at the rate of 30%. However, preference dividend is not deductible for tax purposes.
▪ In the financial year to 31 December 20X5 total earnings were Rs. 40,870,000.
Required: Calculate basic EPS and diluted EPS for the year ended 31 December 20X5.

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Question 24. Diluted EPS - Conversion right exercised [ICAP Study Support Material]
▪ Company N has 10,000,000 ordinary shares and Rs. 2,000,000 of convertible 6% bonds in issue at
the start of 20X1.
▪ The conversion right was exercised on 1 April 20X1 resulting in the issue 500,000 new shares.
▪ Tax is at the rate of 30%.
▪ In the financial year 20X1, total earnings were Rs. 40,870,000.
Required: Calculate basic and diluted EPS for the year ended 31 December 20X1.

Question 25. Diluted EPS – Share Options [ICAP Study Support Material]
▪ Bronze Limited (BL) had total earnings during Year 20X3 of Rs. 25,000,000. It has 5,000,000 ordinary
shares in issue.
▪ There are outstanding share options on 400,000 shares, which can be exercised at a future date, at
an exercise price of Rs. 25 per share.
▪ The average market price of shares in BL during Year 20X3 was Rs. 40.
Required: Calculate basic EPS and diluted EPS for the year ended 31 December 20X3.

Question 26. Diluted EPS – Share Options [ICAEW Corporate Reporting – Study Manual]
[Similar to illustrative example 5 of IAS 33]
The following information is provided about a company.

▪ Profit attributable to ordinary equity holders of the company for the year 2006 Rs. 1,200,000
▪ Weighted average number of ordinary shares outstanding during the year 2006 500,000
▪ Average market price of one ordinary share during the year 2006 Rs. 20
▪ Weighted average number of shares options during the year 2006 100,000
▪ Exercise price for shares under option during the year 2006 Rs. 15

Required: Calculate basic and diluted EPS.

Question 27. Diluted EPS – Share Options [ICAEW Corporate Reporting – Study Manual]
The profit attributable to ordinary shareholders of an entity for the year ended 31 December 2005 was
Rs. 30,000,000 and the weighted number of its ordinary shares in issue was 60 million.
In addition, there was a weighted average of 5 million shares under options. The exercise price for the
option was Rs. 21 and the average market price per share over the year was Rs. 30.
Required: Calculate basic and diluted EPS

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Question 28. [Employee share options – Vested options] [ICAEW Corporate Reporting – Study Manual]

The profit attributable to ordinary shareholders of an entity for the year ended 31 December 2005 was
Rs. 30,000,000 and the weighted number of its ordinary shares in issue was 60 million.

In addition, there was a weighted average of 5 million shares under options which had vested (i.e. were
able to be exercised). The exercise price for the option was Rs. 21 and the average market price per
share over the year was Rs. 30.

Required: Calculate basic and diluted EPS

Question 29. [Employee share options – Unvested options] [AAFR Study Support Material]

▪ Company K had total earnings during Year 5 of Rs. 30,000,000.

▪ It has 6,000,000 ordinary shares in issue.
▪ There are unvested employee share options on 500,000 shares, which can be exercised at a future
date, at an exercise price of Rs. 210 per share.
▪ The future expense that the company expects to recognise in respect of these options up to the
vesting date is Rs. 15,000,000.
▪ The average market price of shares in Company J during Year 5 was Rs. 300.

Required: Calculate basic and diluted EPS.

Question 30. Diluted EPS – Order of Dilution [ICAEW Corporate Reporting – Study Manual]
On 1 January 2005, entity A had in issue 20 million ordinary shares and the following convertible loans:
▪ Rs. 11 million of 6.5% convertible loan stock, convertible at any time from 1 January 2007. The
conversion terms are one ordinary share for each Rs. 2 nominal value of loan stock.
▪ Rs. 9 million of 6.75% convertible loan stock, convertible at any time from 1 January 2008. The
conversion terms are one ordinary share for each Rs. 2 nominal value of loan stock.
▪ Rs. 12.6 million of 9% convertible loan stock, convertible at any time from 1 January 2009. The
conversion terms are one ordinary share for each Rs. 6 nominal value of loan stock.
The entity reported profit attributable to the ordinary equity holders of Rs. 4 million for its year ended
31 December 2005.
Required: Ignoring tax, calculate the diluted EPS.

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Question 31. Diluted EPS - Order of Dilution [ICAP Study Support Material]
The following information relates to Olympics Limited (OL) for the year ended 31 December 20X5.
▪ Number of ordinary shares in issue 2,000,000
▪ Reported earnings in the year Rs. 6,000,000
▪ Average market price of shares during the year Rs. 80
Potential ordinary shares:
- Options 600,000 options, with an exercise price of Rs. 60
- 1,000,000 7% convertible Each preference share is convertible in 20X8 into ordinary shares
preference shares of Rs. 10 each at the rate of 3 ordinary share for every 10 preference shares
- 4% convertible bond: Each bond is convertible in 20X9 into ordinary shares at the rate
Rs. 5,000,000 of 20 new shares for every Rs. 100 of bonds
Tax rate = 30%
Required: Calculate basic EPS and diluted EPS for the year ended 31 December 20X5.

Question 32. Presentation and Disclosure of EPS [ICAP Study Support Material]
Abrar Limited (AL) had profit after tax of Rs. 200 million and Rs. 156 million for the year ended 31
December 2022 and 2021 respectively.
The details of shares including potential ordinary shares are as follows:
▪ 100 million ordinary shares of Rs. 10 each. These shares are in issue since incorporation.
▪ 20 million 8% cumulative preference shares of Rs. 20 each are also in issue since incorporation. One
preference share is convertible into two ordinary shares on 31 December 2025.
▪ 4 million share options were issued on 1 Jan 2022 which can be exercised at a future date, at an
exercise price of Rs. 20 per share. Average market price of shares in AL during the year was Rs. 40.
Required: Show presentation of basic and dilutes EPS and prepare disclosure note for EPS in accordance
with IAS 33 for the year ended on 31 December 2022 (including the comparative).

Question 33. [Cumulative targets] [ICAEW Corporate Reporting – Study Manual]

A manufacturing company has in issue 3,000,000 ordinary shares at 1 January 2007. It agreed to issue
500,000 shares to its staff if factory output average 100,000 units per annum over the period from 1
January 2007 to 31 December 2009. The shares are to be issued on 1 January 2010.

Result of the three years are as follow:

Years Units produced Net profits

2007 120,000 Rs. 780,000
2008 99,000 Rs. 655,000
2009 105,000 Rs 745,000

Required: What are basic and diluted EPS in each of the year 2007 – 2009.

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Question 34. [Contingently issuable shares] [AAFR Study Support Material]

▪ Company M has 12,000,000 ordinary shares in issue.
▪ As at 31 December Year 2, there have been no new issues of shares or bonds for several years.
▪ Company M acquired a new business during Year 1. As part of the purchase agreement Company M
would issue a further 1,000,000 shares to the vendor on 30 June Year 3 if the share price was Rs.
500 at that date.
▪ The share price was Rs. 600 on 31 December Year 2.
▪ Earnings for the year to 31 December Year 2 were Rs. 100,000,000.
Required: Calculate basic and diluted EPS

Question 35. [Contingently issuable shares] [Illustrative example 7 of IAS 33]

▪ Ordinary shares outstanding during 20X1 = 1,000,000 (there were no options, warrants or
convertible instruments outstanding during the period)
▪ An agreement related to a recent business combination provides for the issue of additional ordinary
shares based on the following conditions:
- 5,000 additional ordinary shares for each new retail site opened during 20X1
- 1,000 additional ordinary shares for each CU1,000 of consolidated profit in excess of
CU2,000,000 for the year ended 31 December 20X1
▪ Retail sites opened during the year:
- One on 1 May 20X1
- One on 1 September 20X1
▪ Consolidated year-to-date profit attributable to ordinary equity holders of the parent entity:
- CU1,100,000 as of 31 March 20X1
- CU2,300,000 as of 30 June 20X1
- CU1,900,000 as of 30 September 20X1 (including a CU450,000 loss from a discontinued
operation)
- CU2,900,000 as of 31 December 20X1
Required: Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for
the following periods:
(a) Each quarter end during the year 31 December 20X1
(b) Year ended 31 December 20X1

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Question 36. Partly paid shares [AAFR Study Support Material]

At 1 January 20X5, an entity had 900 ordinary shares in issue. It Issued 600 new shares at 1 September
20X5, at a subscription price of Rs. 4 per share. At the date of issue, each shareholder paid Rs. 2. The
balance of Rs. 2 per share will be paid during 20X6. Each part-paid share will be entitled to dividends in
proportion to the percentage of the issue price paid up on the share. Total earnings in 20X5 were Rs.
24,750,000.
Required: Calculate basic EPS.

Question 37. Participating securities [ICAEW Corporate Reporting – Study Manual]

X Limited has non-convertible preference shares in issue.
These have the right to participate in any additional dividends after ordinary shares have been paid at a
dividend of Rs. 2.10 per share in a 20:80 ratio with ordinary shares
The following information relates to the financial year just ended.
- Profit attributable to equity shareholders Rs. 100,000
- Number of ordinary shares 10,000
- Number of non-convertible preference shares 6,000
- Non-cumulative annual dividend on preference shares
(before any dividend is paid on ordinary shares) Rs. 5.50 per share
Required: Calculate basic EPS.

Question 38. Increasing rate preference shares [ICAEW Corporate Reporting – Study Manual]
[Similar to illustrative example 1 of IAS 33]
▪ Entity D issued non-convertible, non-redeemable class A cumulative preference shares of Rs. 100 par
value on Year 1.
▪ Class A preference shares are entitled to a cumulative annual dividend of Rs. 7 per share starting in
Year 4.
▪ At the time of issue, the market rate dividend yield on class A preference shares was 7% per annum.
▪ Thus, Entity D could have expected to receive proceeds of approximately Rs. 100 per class A
preference share if the dividend rate of Rs. 7 per share had been in effect at the date of issue.
▪ There was, however, to be no dividend paid for the first three years after issue.
▪ In consideration of these dividend payment terms, the class A preference shares were issued at Rs.
81.63 per share, i.e. at a discount of Rs. 18.37 per share.
▪ The issue price can be calculated by taking the present value of Rs. 100, discounted at 7% over a three-
year period.
Required: Calculate the imputed dividend attributable to preference shares holders that need to be
deducted from earnings to determine the profit or loss attributable to ordinary equity holders.

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Question 39. [Instruments of a subsidiary] [Illustrative example 10 of IAS 33]

Parent:
Profit attributable to ordinary equity holders of CU 12,000 (excluding any earnings of, or
the parent entity dividends paid by, the subsidiary)
Ordinary shares outstanding 10,000
Instruments of subsidiary owned by the parent - 800 ordinary shares
- 30 warrants exercisable to purchase
ordinary shares of subsidiary
- 300 convertible preference shares
Subsidiary:
Profit CU 5,400
Ordinary shares outstanding 1,000
Warrants 150, exercisable to purchase ordinary shares of
the subsidiary
Exercise price CU 10
Average market price of one ordinary share CU 20
Convertible preference shares 400, each convertible into one ordinary share

Required: Compute basic and diluted earnings per share to be disclosed in statement of profit or loss

Question 40. [Comprehensive example] [Illustrative example 12 of IAS 33]

This example illustrates the quarterly and annual calculations of basic and diluted earnings per share in
the year 20X1 for Company A, which has a complex capital structure. The control number is profit or loss
from continuing operations attributable to the parent entity. Other facts assumed are as follows:

▪ Average market price of ordinary shares: The average market prices of ordinary shares for the
calendar year 20X1 were as follows:
CU
First quarter 49
Second quarter 60
Third quarter 67
Fourth quarter 67
The average market price of ordinary shares from 1 July to 1 September 20X1 was CU65.
▪ Ordinary shares: The number of ordinary shares outstanding at the beginning of 20X1 was
5,000,000. On 1 March 20X1, 200,000 ordinary shares were issued for cash.
▪ Convertible bonds: In the last quarter of 20X0, 5 per cent convertible bonds with a principal amount
of CU12,000,000 due in 20 years were sold for cash at CU1,000 (par). Interest is payable twice a year,
on 1 November and 1 May. Each CU1,000 bond is convertible into 40 ordinary shares. No bonds were

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converted in 20X0. The entire issue was converted on 1 April 20X1 because the issue was called by
Company A.
▪ Convertible preference shares: In the second quarter of 20X0, 800,000 convertible preference shares
were issued for assets in a purchase transaction. The quarterly dividend on each convertible
preference share is CU0.05, payable at the end of the quarter for shares outstanding at that date.
Each share is convertible into one ordinary share. Holders of 600,000 convertible preference shares
converted their preference shares into ordinary shares on 1 June 20X1.
▪ Warrants: Warrants to buy 600,000 ordinary shares at CU55 per share for a period of five years were
issued on 1 January 20X1. All outstanding warrants were exercised on 1 September 20X1.
▪ Options: Options to buy 1,500,000 ordinary shares at CU75 per share for a period of 10 years were
issued on 1 July 20X1. No options were exercised during 20X1 because the exercise price of the
options exceeded the market price of the ordinary shares.
▪ Tax rate: The tax rate was 40 per cent for 20X1.
Profit (loss)
from continuing Profit (loss)
Operations attributable to
attributable to the parent
the parent entity
entity
CU
First quarter 5,000,000 5,000,000
Second quarter 6,500,000 6,500,000
Third quarter 1,000,000 (1,000,000)(b)
Fourth quarter (700,000) (700,000)
Full year 11,800,000 9,800,000
(b) Company A had a CU 2,000,000 loss (net of tax) from discontinued operations in the third quarter.

Required: Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for
the following periods:
(a) Each quarter end during the year 31 December 20X1
(b) Year ended 31 December 20X1

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ICAP Past Papers
COMPILED BY: MURTAZA QUAID, ACA

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IAS 33: EARNINGS PER SHARE (PRACTICE QUESTIONS)

Question No. 4 of Summer 2008, 18 marks
The profit after tax earned by AAZ Limited during the year ended December 31, 2007 amounted to Rs.
127.83 million. The weighted average number of shares outstanding during the year were 85.22 million.
Details of potential ordinary shares as at December 31, 2007 are as follows:
▪ The company had issued debentures which are convertible into 3 million ordinary shares. The
debenture holders can exercise the option on December 31, 2009. If the debentures are not converted
into ordinary shares they shall be redeemed on December 31, 2009. The interest on debentures for
the year 2007 amounted to Rs. 7.5 million.
▪ Preference shares issued in 2004 are convertible into 4 million ordinary shares at the option of the
preference shareholders. The conversion option is exercisable on December 31, 2010. The dividend
paid on preference shares during the year 2007 amounted to Rs. 2.45 million.
▪ The company has issued options carrying the right to acquire 1.5 million ordinary shares of the
company on or after December 31, 2007 at a strike price of Rs. 9.90 per share. During the year 2007,
the average market price of the shares was Rs. 11 per share.
The company is subject to income tax at the rate of 30%.
Required:
a) Compute basic and diluted earnings per share.
b) Prepare a note for inclusion in the company’s financial statements for the year ended December 31,
2007 in accordance with the requirements of International Accounting Standards.

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Question No. 6 of Summer 2009, 15 marks

The following information relates to Afridi Industries Limited (AIL) for the year ended December 31, 2008:
(i) The share capital of the company as on January 1, 2008 was Rs. 400 million of Rs. 10 each.
(ii) On March 1, 2008, AIL entered into a financing arrangement with a local bank. Under the
arrangement, all the current and long-term debts of AIL, other than trade payables, were paid by
the bank. In lieu thereof, AIL issued 4 million Convertible Term Finance Certificates (TFCs) having
a face value of Rs. 100, to the bank. These TFCs are redeemable in five years and carry mark up at
the rate of 8% per annum. The bank has been allowed the option to convert these TFCs on the
date of redemption, in the ratio of 10 TFCs to 35 ordinary shares.
(iii) On April 1, 2008, AIL issued 30% right shares to its existing shareholders at a price which did not
contain any bonus element.
(iv) During the year, AIL earned profit before tax amounting to Rs. 120 million. This profit includes a
loss before tax from a discontinued operation, amounting to Rs. 20 million.
(v) The applicable tax rate is 35%.
Required: Prepare extracts from the financial statements of Afridi Industries Limited for the year ended
December 31, 2008 showing all necessary disclosures related to earnings per share and diluted earnings
per share. (Ignore corresponding figures)

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Question No. 2 of Summer 2010, 17 marks

The following information pertains to ABC Limited, in respect of year ended March 31, 2010.

Rs. in ‘000
Consolidated profit for the year (including minority interest) 15,000
Profit attributable to minority interest 2,000
Dividend paid during the year to ordinary shareholders 4,000
Dividend paid on 10% Cumulative Preference shares for the year 2009 2,000
Dividend paid on 10% Cumulative Preference shares for the year 2010 2,000
Dividend declared on 12% Non Cumulative Preference shares for the year 2010 2,400

(i) The dividend declared on the non-cumulative preference shares, as referred above, was paid in
April 2010.
(ii) The cumulative preference shares were issued at the time of inception of the company.
(iii) The company had 10 million ordinary shares at March 31, 2009.
(iv) The 12% non-cumulative preference shares are convertible into ordinary shares, on or before
December 31, 2011 at a premium of Rs. 2 per share. 0.50 million non cumulative preference shares
were converted into ordinary shares on July 1, 2009.
(v) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share on October
1, 2009. The market price on the date of issue was Rs. 12.50 per share.
(vi) 20% bonus shares were issued on January 1, 2010.
(vii) Due to insufficient profit no dividend was declared during the year ended March 31, 2009.
(viii) The average market price for the year ended March 31, 2010 was Rs. 15 per share.
Required: Compute basic and diluted earnings per share and prepare a note for inclusion in the
consolidated financial statements for the year ended March 31, 2010.

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Question No. 4 of Summer 2011, 16 marks

Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended March 31,
2011 are as under:

2011 2010
Rs. in ‘000
Profit after taxation 150,000 110,000
Exchange gain on foreign operations, net of tax 10,000 8,000
Total comprehensive income 160,000 118,000

Following further information is available:

(i) As of April 1, 2010 share capital of the company consisted of:
▪ 5 million ordinary shares of Rs. 10 each.
▪ 0.2 million convertible 15% cumulative preference shares of Rs. 100 each.
(ii) Each preference share is convertible into 7 ordinary shares at the option of the shareholders. 10,000
preference shares were converted into ordinary shares on July 1, 2010.
(iii) On September 10, 2010 a right issue of one million ordinary shares had been announced at an
exercise price of Rs. 12 per share. By October 1, 2010 which was the last date to exercise the right,
all the shares had been subscribed and paid. The market price of an ordinary share on September
10 and October 1, 2010 was Rs. 15.50 and Rs. 15 respectively.
(iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20% (2010:18%) for
the year ended March 31, 2011.
(v) There was no movement in share capital during the previous year.
Required: Prepare a note related to earnings per share, for inclusion in the company’s financial
statements for the year ended March 31, 2011 in accordance with International Financial Reporting
Standards. (Show comparative figures)

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Question No. 3 of Summer 2012, 17 marks

The following information relates to Que Limited (QL) for the year ended 31 December 2011:
(i) Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10 each.
(ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinued
operation, amounting to Rs. 40 million.
(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The market value
of the shares immediately before the right issue was Rs. 12.50 per share.
(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120 shares at
a strike price of Rs. 10 per share. The options have already vested and will expire on 30 June 2013.
The average market price of ordinary shares in 2011 was Rs. 12 per share.
(v) QL had issued debentures in 2008 which are convertible into 6 million ordinary shares. The
debentures shall be redeemed on 31 December 2012. The conversion option is exercisable during
the last six months prior to redemption. The interest on debentures for the year 2011 amounted to
Rs. 11 million.
(vi) Preference shares issued in 2009 are convertible (at the option of the preference shareholders) into
4 million ordinary shares on 31 December 2013. The dividend paid on preference shares during 2011
amounted to Rs. 5.75 million.
(vii) The company is subject to income tax at the rate of 35%.
Required: Prepare extracts from the financial statements of Que Limited for the year ended 31 December
2011 showing all necessary disclosures related to earnings per share. (Ignore comparative figures)

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Question No. 3 of Summer 2013, 15 marks

The following information pertaining to Krishna Limited (KL) has been extracted from its financial
statements for the year ended 31 December 2012.
(i) Total comprehensive income for the year:
Rs. in ‘000
Profit from continuing operations - net of tax 200,000
Profit from discontinued operations - net of tax 10,000
Fair value gain on investments available for sale - net of tax 16,000
Total comprehensive income 226,000

(ii) Share capital as on 1 January 2012:

▪ 8,000,000 Ordinary shares of Rs. 10 each.
▪ 500,000 Convertible preference shares of Rs. 100 each entitled to a cumulative dividend at 12%.
Each share is convertible into two ordinary shares and the dividend is paid on 28 February, every
year.
(iii) 20% bonus shares being the final dividend for the year ended 31 December 2011 were issued on 31
March 2012.
(iv) On 30 April 2012, holders of 80% convertible preference shares converted their shares into ordinary
shares.
(v) On 1 July 2012, KL issued 20% right shares to its ordinary shareholders at Rs. 70 per share. The
market price prevailing on the exercise date was Rs. 80 per share.
(vi) On 1 August 2011, KL granted 2,500 share options to each of its twenty technical managers. The
managers would become eligible to exercise these options on completion of five years of service
with KL.
The fair value of each share option on 1 August 2011 was Rs. 40.
Required: Prepare a note relating to basic and diluted earnings per share for inclusion in KL’s financial
statements for the year ended 31 December 2012, in accordance with International Financial Reporting
Standards.

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Question No. 6 of Summer 2014, 15 marks

Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on 1 July 2010. The following
information has been extracted from their draft financial statements:

AL ZL
Balance as at 1 January 2013: ----- Rs. in '000 -----
Share capital (Rs. 100 each) 80,000 35,000
12% Convertible bonds (Rs. 100 each) 30,000 -
Profit for the year ended 31 December 2013 (after tax) 60,000 25,000

The following information is also available:

(i) The bonds were issued at par on 1 January 2011 and are convertible at any time before the redemption
date of 31 December 2015, at the rate of five ordinary shares for every four bonds.
(ii) Cost and fair value information of ZL’s investment property is as under:

31-Dec-2013 31-Dec-2012
-------- Rs. in '000 --------
Cost 65,000 60,000
Fair value 67,000 59,000

ZL uses cost model while the group policy is to use the fair value model to account for investment
property.
(iii) AL operates a defined benefit gratuity scheme for its employees. The actuary’s report has been received
after the preparation of draft financial statements and provides the following information pertaining to the
year ended 31 December 2013:

Rs. in '000
Actuarial losses 150
Current service costs 8,000
Net interest income 3,000

(iv) On 1 August 2013, under employees’ share option scheme, 60,000 shares were issued by AL to its
employees at Rs. 150 per share against the average market price of Rs. 250 per share.
(v) Dividend details are as under:

AL ZL
2013 (Interim) 2012 (Final) 2013 (Interim) 2012 (Final)
Cash 18% 10% 12% 15%
Bonus shares - 20% - 16%

At the time of payment of dividend, income tax at 10% was deducted by AL and ZL.
(vi) Applicable tax rate for business income is 35%.

Required: Extracts from the consolidated profit and loss account of Alpha Limited (including earnings per share) for
the year ended 31 December 2013 in accordance with the International Financial Reporting Standards. (Note:
Comparative figures and information for notes to the financial statements are not required)

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Question No. 6 of Summer 2015, 15 marks

The following information has been extracted from draft statement of financial position of Ittehad
Industries Limited (IIL), as on 31 December 2014:

2014 2013
---- Rs. in million ----
Share capital (Rs.10 each) 1,800 1,200
Share premium 380 230
Accumulated profit 3,756 3,556
11.5% Term finance certificates (TFCs) 250 -

The following information is also available:

(vii) The profit after tax earned by IIL during the year ended 31 December 2014 amounted to Rs. 225
million.
(viii) On 1 April 2014, IIL issued 25% right shares to its existing shareholders at Rs. 15 per share. Market
value of the shares prior to the issue of right shares was Rs. 25 per share.
(ix) 20% bonus shares for the year ended 31 December 2013 were issued on 1 May 2014. The right
shares issued on 1 April 2014 were also entitled for the bonus.
(x) On 31 December 2014, 5 million shares were not yet vested under the employee share option
scheme. The exercise price of the option was Rs. 12 per share and average market price per share
during 2014 was Rs. 15 per share. The amount to be recognized in relation to employee share
option in profit and loss account over future accounting periods up to vesting date is Rs. 10 million.
(xi) On 1 July 2014, IIL issued TFCs which are convertible into 20 million ordinary shares on 31
December 2018.
(xii) IIL is subject to income tax at the rate of 35%.
Required: Prepare relevant extracts to be reflected in the financial statements of Ittehad Industries
Limited for the year ended 31 December 2014 showing all necessary disclosures relating to earnings per
share. (Comparative figures are not required)

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Question No. 2(a) of Summer 2017, 8 marks

Following information pertains to Sajjad Limited (SL) for the year ended 31 December 2016:
(i) The share capital of SL comprises of:
Rs. in million
Ordinary share capital (Rs. 100 each) 1,000
9% Class A preference shares (Rs. 100 each) 200
6% Class B preference shares (Rs. 100 each) 300

(ii) Class A preference shares which were issued on 1 January 2014 are cumulative, non-convertible
and non-redeemable. These shares were issued at Rs. 77.22 per share i.e. at a discount of Rs. 22.78
per share. These shareholders are entitled to annual dividend of 9% with effect from 1 January
2017. At the time of issue, the market dividend yield on such type of preference shares was 9% per
annum.
(iii) Class B preference shares which were issued on 1 January 2016 are non-cumulative, non-
convertible and non-redeemable. The payment of dividend of these shares was made on 29
December 2016. These shareholders are also entitled to participate in any remaining profits after
adjusting dividend to ordinary and preference shareholders. Such remaining profits are allocated
between the Class B shareholders and the ordinary shareholders in such a manner that the profit
per share of ordinary shareholders is twice the profit per share of Class B shareholders.
(iv) SL earned profit after tax of Rs. 150 million during the year ended 31 December 2016 and paid
interim dividend of Rs. 2.50 per share to ordinary shareholders.
Required: Compute basic earnings per share for the ordinary shareholders for the year ended 31
December 2016.

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Question No. 7 of Summer 2018, 13 marks

Following information pertains to Tiger Limited (TL):

Quarter ended Half year ended

31-Dec-2017 31-Dec-2017
Profit after tax (Rs. in million) 140 239
Average market price per share (Rs.) 330 360

Ordinary shares
▪ 20 million shares of Rs. 100 each were outstanding as at 1 July 2017.
▪ 4 million shares were issued on 1 August 2017 at market price of Rs. 355 per share.
Convertible bonds
▪ On 1 November 2016 TL issued 0.8 million 7% convertible bonds at par value of Rs. 1,000 each. Each
bond is convertible into 3 ordinary shares at any time prior to maturity date of 31 October 2019. On
inception the liability component was calculated as Rs. 760 million. On the date of issue, the prevailing
interest rate for similar debt without conversion option was 9% per annum.
▪ 50% of these bonds were converted into ordinary shares on 1 November 2017.
Warrants
On 1 January 2016, TL issued share warrants giving the holders right to buy 6 million ordinary shares at
Rs. 340 per share. The warrants are exercisable within a period of 2 years.
Applicable tax rate is 30%.
Required: Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for
the following periods:
(a) Quarter ended 31 December 2017 (06)
(b) Half year ended 31 December 2017 (07)
(Show all relevant workings)

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IAS 23:
BORROWING COSTS
Compiled by: Murtaza Quaid, ACA

IAS 23: BORROWING COSTS

In this Part:
 Introduction

 Borrowing Costs eligible for Capitalization

 Period of Capitalization

 Disclosures

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INTRODUCTION

 The core principle of IAS 23 Borrowing Costs is that you should capitalize borrowing
Objective costs if they are directly attributable to the acquisition, construction or production of
a qualifying asset.

Borrowing  Borrowing costs are interest and other costs that an entity
Costs incurs in connection with the borrowing of funds.

 A qualifying asset is an asset that necessarily takes a substantial period of

time to get ready for its intended use or sale.

 Note here that IAS 23 does not say it must necessarily be an item of a
Qualifying
property, plant and equipment under IAS 16. It can also include some
Asset inventories or intangibles, too!

 But what is a “substantial period of time”? Well, that’s not defined in IAS
23, so here you need to apply some judgment. Normally, if an asset
takes more than 1 year to be ready, then it would be qualifying.
Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS

BORROWING COSTS ELIGIBLE FOR CAPITALISATION

 Borrowing costs that are directly attributable to the

acquisition, construction or
production of a qualifying asset must be capitalised as
part of the cost of that asset.
All other borrowing costs are recognized as an expense in
the period in which they are incurred.
 Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset are those that would have been avoided if the
expenditure on the qualifying asset had not been made.
 This includes the costs associated with specific loans taken
to fund the production or purchase of an asset and
general borrowings. General borrowings are included
because if an asset was not being constructed it stands to
reason that there would have been a lower need for
cash.
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BORROWING COSTS ELIGIBLE FOR CAPITALISATION

SPECIFIC BORROWINGS GENERAL BORROWINGS

 When a specific loan is taken in order to  General borrowings are those funds that are obtained for
obtain a qualifying asset, the borrowing costs various purposes and they are used (apart from these other
purposes) also for the acquisition of a qualifying asset.
eligible for capitalization are the actual
borrowing costs incurred on that borrowing  When general borrowings are used, the amount of
during the period less any investment borrowing costs eligible for capitalisation is obtained by
applying a capitalisation rate to the expenditures on that
income on the temporary investment of
asset.
those borrowings.
 The capitalisation rate is the weighted average of the
borrowing costs applicable to the borrowings that are
outstanding during the period.
 The amount of borrowing costs capitalised cannot exceed
the amount of borrowing costs it incurred during a period.
 The capitalisation rate is applied from the time expenditure
on the asset is incurred.

Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS

PERIOD OF CAPITALISATION

Commencement of Suspension of Cessation of

Capitalisation Capitalisation Capitalisation

 Capitalisation of borrowing  Capitalisation of borrowing  Capitalisation of borrowing

costs should start only when: costs should be suspended if costs should cease when the
 Expenditures for the asset development of the asset is asset is substantially complete.
are being incurred; and suspended for an extended The costs that have already
period of time. been capitalised remain as a
 Borrowing costs are being
part of the asset’s cost, but no
incurred, and
additional borrowing costs
 Activities necessary to may be capitalised.
prepare the asset have
started.
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DISCLOSURE

IAS 23 requires disclosure of the following:

(a) The amount of borrowing costs capitalised
during the period; and
(b) The capitalisation rate used to determine the
amount of borrowing costs eligible for
capitalisation.

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IAS 23: BORROWING COSTS

Practice Questions
COMPILED BY: MURTAZA QUAID, ACA

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IAS 23 – BORROWING COSTS (PRACTICE QUESTIONS)

Question 1. [Specific Borrowing] [CAF 1 – ICAP Study Text]

Shayan Limited (SL) started the construction of its new factory on 1 January 2018 with a specific loan of
Rs. 50,000,000 borrowed at an interest rate of 8% per annum.
The loan was used on the factory as follows:

Date of Payment Rs. in million

Jan 1, 2018 25
May 1, 2018 15
Oct 1, 2018 10

The construction of the asset was completed on 31 December 2018. However, during the accounting
period SL invested the surplus funds at an interest rate of 3%.
Required: How much the amount of borrowing cost eligible for capitalization at 31 December 2018?

Question 2. [Specific Borrowing] [Gripping IFRS: Graded Questions]

Money Limited began the construction of a new building on the 1 February 2015. Construction costs
incurred in 2015 were paid for as follows:

Amount in Rs.
On 1 February 500,000
On 1 July 600,000
On 1 November 800,000

The construction of the building ended on the 1 December 2015 when the building was complete and
ready for its intended use. This building is to be depreciated over 10 years to a nil residual value using
the straight-line method.
The construction was financed by a loan of Rs. 1,900,000 from Cash Limited. The loan was raised on 1
January 2015 specifically to facilitate the construction of the building. The interest rate is 25% per
annum. There were no capital repayments during the year. Surplus funds were invested at 20% per
annum. The interest is compounded annually.
The building is a qualifying asset for the purposes of IAS 23.
Required:
a) Calculate the amount of borrowing costs that are eligible for capitalization during the year ended 31
December 2015.
b) Calculate the depreciation for the year ended 31 December 2015.
c) Calculate the carrying amount of the buildings as at 31 December 2015.

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Question 3. [Specific Borrowing] [CAF 1 – ICAP Study Text]

Company A borrowed Rs. 9,000 @ 15% per annum to fund a project on 1st Jan 2016. The following
expenditures were made on the project during the year ending 31 December 2016
▪ Date: 1st March 2016: Rs. 2,500
▪ Date: 1st Oct 2016: Rs. 4,200
▪ Date: 1st Dec 2016: Rs. 2,300
Surplus funds were invested @10% whenever available. The project commenced on 1st March 2016.
Work on the project was suspended during the whole month of August and resumed on 1st September.
Construction was completed on 31 December 2016.
Required: Calculate the amount of borrowing costs that are eligible for capitalization and that are to be
charged as expense during the year ended 31 December 2016.

Question 4. [Specific Borrowings] [CAF 1 – ICAP Study Text]

On 1 Jan 20X6 Googly Industries Limited (GIL) borrowed Rs. 15 million to finance the production of two
assets, both of which were expected to take a year to build. Work started during 20X6. The loan facility
was drawn down and incurred on 1 Jan 20X6, and was utilised as follows:
Asset A Asset B
------- Rs. in million ------
1 January 20X6 2.5 5
1 July 20X6 2.5 5
The loan rate was 9% and GIL can temporarily invest the surplus funds at 7%.
Required: Calculate the borrowing costs which may be capitalised for each of the assets and
consequently the cost of each asset as at 31 December 20X6.

Question 5. [General Borrowing] [CAF 1 – ICAP Study Text]

On January 1, 2018 Sara Limited (SL) started the construction of an asset. To meet the financing
requirements, borrowing was made from three different banks at the start of the year as follows:
Banks Amount (Rs.) Interest Rate per annum
A 70,000 10%
B 60,000 8%
C 50,000 12%

The funds were used on the assets as follows:

Date of Payment Amount (Rs.)
Jan 1, 2018 30,000
May 1, 2018 20,000
Oct 1, 2018 15,000

The construction of asset was completed on 31 December 2018.

Required: Calculate the general weighted average borrowing rate and eligible borrowing cost.

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Question 6. [General Borrowings] [Gripping IFRS: Graded Questions]

Yipdeedoo Limited began construction on a building, a qualifying asset on 1 March 20X1. The
construction was complete on 30 November 20X1 and brought into use from 1 January 20X2.
Depreciation is provided at 10% per annum to a Rs. 100,000 residual value.

The company had the following general loans outstanding during the year:

Bank Loan amount Interest rate Date loan raised Date loan repaid
Bank - A Rs. 300,000 15% 1 January 20X1 N/A
Bank – B Rs. 200,000 10% 1 April 20X1 30 September 20X1
Bank – C Rs. 100,000 12% 1 June 20X1 31 December 20X1

The interest on the loans is compounded annually. Construction costs:

Details Date incurred Amount Comments

Laying a slab 1 Mar 20X1 Rs. 60,000 -
Waiting for slab to cure 1 Mar – 31 Mar Nil This is a normal process
Purchase of materials 1 Apr 20X1 Rs. 120,000 -
Incurred evenly over the
Labor costs 1 Apr – 30 Nov 20X1 Rs. 330,000 months but paid at the
beginning of each month

Interest income of Rs. 30,000 was earned during the year. The building is a qualifying asset for the
purposes of IAS 23.
Required:
a) Calculate the amount of borrowing costs that are eligible for capitalization during the year ended 31
December 20X1.
b) Calculate the depreciation for the year ended 31 December 20X1.
c) Calculate the carrying amount of the buildings as at 31 December20X1.

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Question 7. [CAF 1 – ICAP Study Text]

On September 1, 2015, Spin Industries Limited (SIL) started construction of its new office building and
completed it on May 31, 2016. The payments made to the contractor were as follows:

Date of Payment Amount in Rs.

September 1, 2015 10,000,000
December 1, 2015 15,000,000
February 1, 2016 12,000,000
June 1, 2016 9,000,000

In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2015 for obtaining a
permit allowing the construction of the building.

The project was financed through the following sources:

(i) On August 1, 2015 a medium-term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-annually.
A commitment fee @ 0.5% of the amount of loan was charged by the bank.

Surplus funds were invested in savings account @ 8% per annum. On February 1, 2016 SIL paid
the six-monthly interest plus Rs. 5 million towards the principal.

(ii) Existing running finance facilities of SIL

▪ Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable
annually. The average outstanding balance during the period of construction was Rs. 25
million.
▪ Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the
period of construction was Rs. 3 million and the average running finance balance during that
period was Rs. 20 million.
Required: Calculate the amount of borrowing costs to be capitalized on June 30, 2016 in accordance
with the requirements of International Accounting Standards. (Borrowing cost calculations should be
based on number of months).

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Question 8. [CFAP 01 – Question bank]

On July 1, 2015, Qureshi Steel Limited (QSL) signed an agreement with Pak Construction Limited for
construction of a factory building at a cost of Rs. 100 million. It was agreed that the factory would be
ready for use from January 1, 2017. The terms of payments were agreed as under:

(i) 10% advance payment would be made on signing of the agreement. The advance paid would be
adjusted at 10% of the quarterly progress bills.
(ii) 5% retention money would also be deducted from the progress bills. Retention money will be
refunded one year after completion of the factory building.
(iii) Progress bills will be raised on last day of each quarter and settled on 15th of the next month.
The under mentioned progress bills were received and settled by QSL as per the agreement:

Invoice date Amount in Rs.

September 30, 2015 30 million
December 31, 2015 20 million
March 31, 2016 10 million
June 30, 2016 15 million

On April 30, 2016 an invoice of Rs. 1.5 million was raised by the contractor for damages sustained at the
site, on account of rains. After negotiations, QSL finally agreed to make additional payment of Rs. 1.0
million to compensate the contractor. The amount was paid on May 15, 2016. It is expected that 75% of
the payment would be recovered from the insurance company.

The cost of the project has been financed through the following sources:

(i) Issue of right shares amounting to Rs. 15 million, on September 1, 2015. The company has been
following a policy of paying dividend of 20% for the past many years.
(ii) Bank loan of Rs. 25 million obtained on December 1, 2015. The loan carries a markup of 13% per
annum. The principal is repayable in 5 half yearly equal instalments of Rs. 5 million each along
with the interest, commencing from May 31, 2016. Loan processing charges of Rs.0.5 million
were deducted by the bank at the time of disbursement of loan. Surplus funds, when available,
were invested in short term deposits at 8% per annum.
(iii) Cash withdrawals from the existing running finance facility provided by a bank. Average running
finance balance for the year was Rs. 60 million. Markup charged by the bank for the year was Rs.
9 million.
Required: Compute cost of capital work in progress for the factory building as of June 30, 2016 in
accordance with the requirements of relevant IFRSs. (Borrowing costs calculations should be based on
number of months)

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Question 9. [CFAP 01 – Question bank]

On January 1, 2016, Imran Limited started the construction of its new factory. The construction period is
approximately 15 months and the cost is estimated at Rs. 80 million. The work has been divided into 5
phases and payment to contractor shall be made on completion of each phase.

In the year the company had the following sources of finance available.

(i) Rights issue of shares amounting to Rs. 15 million on January 1, 2016. The company usually pays
a dividend of 10% each year.
(ii) Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2016. (This loan
was outstanding for 306 days in the year).
(iii) On August 1, 2016, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at
the rate of 11%. (This loan was outstanding for 153 days in the year).
Investment income on temporary investment of the borrowings amounted to Rs.0.5 million.

The details of bills submitted by the contractor, during the year are as follows:

Particulars Date of payment Amount in Rs.

On completion of 1st phase March 1, 2016 20,000,000
On completion of 2nd phase April 1, 2016 18,000,000
rd
On completion of 3 phase October 1, 2016 16,000,000
On completion of 4th phase Payment not yet made 17,000,000

On June 1, 2016, the Building Control Authority issued instructions for stoppage of work on account of
certain discrepancies in the completion plan. The company filed a petition in the Court and the matter
was decided in the company’s favor on July 31, 2016. Work recommenced after a delay of 61 days.

The following periods may be relevant:

Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
Required:

a) Assuming that the loans were taken specifically for the project, calculate the amount of borrowing
costs that should be capitalized in the period ending December 31, 2016 in accordance with the
requirements of IAS 23 Borrowing Costs.
b) Assuming that the loans constituted general finance, calculate the amount of borrowing costs that
should be capitalized in the period ending December 31, 2016 in accordance with the requirements
of IAS 23 Borrowing Costs.

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Question 10.
On January 1, 2012, ABC Limited started the construction of its new factory. The construction period is
approximately 11 months and the cost is estimated at Rs. 7,000 million.

In the year the company had the following sources of finance available.

(i) Rights shares subscription money received on 1st November 20112 of Rs. 5,000 million. The
company usually pays a dividend of 20% each year.
(ii) Bank loan of Rs. 5,000 million carrying a mark-up of 15% was raised on 1st January 2012. (40% of
the loan together with interest has to be repaid on 1st October 2012).
(iii) Band overdraft at the rate of 20% with the limit of Rs. 10,000 million. Apart from this qualifying
asset, average outstanding utilized amount of this facility is Rs. 1,600 million.
Return on temporary investment is 8% but surplus fund, as per the policy of the company, should first
be invested in utilized portion of bank overdraft.

The details of expenditure paid during the year are as follows:

Date of payment Rs. in million

January 1, 2016 2,000
April 1, 2016 3,000
October 1, 2016 2,000

Required: Calculate the amount of borrowing costs that should be capitalized in the period ending
December 31, 2012 in accordance with the requirements of IAS 23 Borrowing Costs.

Question 11. [CAF 1 Past Paper, Q7(iii) of Spring 2021, 5 marks]

You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted
the following:

(iii) CL is constructing a power generation plant for its factory. The project started on 1 February 2020
and would complete on 30 November 2021. The work remained suspended for 3 months. The project is
financed through long term loan, acquired specifically on 1 January 2020. The unutilised amount of loan
is kept in a separate saving account.

The accountant has deducted income of separate saving account from full year’s interest on loan and
presented the net amount as finance cost in the statement of profit or loss.

Required: Discuss how the above issues should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.

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Question 12. [CAF 1 Past Paper, Q1 of Spring 2022, 8 marks]

Bulan Pakistan Limited (BPL) is planning to commence construction of a warehouse on 1 January 2023
and is expecting to complete it by 30 November 2023. The management wants to ascertain the
borrowing costs that can be included in the cost of warehouse. Relevant details in this respect are as
follows:
(i) Expected payments related to the construction of the warehouse will be as follows:

(ii) The project can be financed through the following sources:

▪ Specific loan of Rs. 350 million at the rate of 16% per annum to be obtained on 1 January
2023. The principal will be payable in 5 equal annual instalments along with interest, from 1
January 2024.
▪ Withdrawals to be made from existing running finance facilities. These facilities will also be
used to finance other needs of BPL. Details of these facilities are as follows:

(iii) The surplus funds available from the loan will be invested in a saving account at 10% per annum.
(iv) The construction work is expected to be suspended for the entire month of June 2023 due to
usual monsoon rains.
Required: Calculate the borrowing costs to be capitalised in the cost of warehouse in each of the
following independent cases:
a) if all the payments will be made from the specific loan only. (04)
b) if all the payments will be made from running finance facilities only. (04)

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IAS-23
BORROWING COSTS

OBJECTIVE
The core principle of IAS 23: Borrowing Costs is that you should capitalize borrowing costs if they
are directly attributable to the acquisition, construction or production of a qualifying asset.

DEFINITIONS

BORROWING COSTS QUALIFYING ASSET

Borrowing costs are interest and other costs A qualifying asset is an asset that necessarily
incurred by an entity in connection with the takes a substantial period of time to get ready
borrowing of funds. for its intended use or sale
Borrowing costs may include: Examples include:
Inventories (that are not produced over a
Interest on bank overdrafts and short-term
short period of time)
and long-term borrowings (including
Property, plant and equipment
intercompany borrowings)
Power generation facilities
Amortisation of discounts or premiums Intangible assets
relating to borrowings Investment properties.
Amortisation of ancillary costs incurred in “Substantial period of time” is not defined in
connection with the arrangement of IAS 23, so here entity need to apply some
borrowings judgment. Normally, if an asset takes more
Finance charges on finance leases than 1 year to be ready, then it would be
Exchange differences arising from foreign qualifying asset.
currency borrowings to the extent that Assets that are ready for their intended use or
they are regarded as an adjustment to sale when acquired are not qualifying assets.
interest costs. Qualifying assets are usually self-constructed
non-current assets.

SPECIFIC BORROWING GENERAL BORROWING

Specific borrowings are funds General borrowings are funds borrowed generally and
borrowed specifically for the purpose use them for the purpose of obtaining / construction
of obtaining a qualifying asset. of a qualifying asset or for other operating needs.

RECOGNITION

Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset are required to be capitalised as part of the cost of that asset
Such borrowing costs are capitalised as part of the cost of the asset when:
It is probable that they will result in future economic benefits to the entity; and
The costs can be measured reliably.
Other borrowing costs are recognised as an expense when incurred.

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IAS-23
BORROWING COSTS

RECOGNITION

If funds are borrowed specifically, borrowing costs eligible for capitalisation are the
actual borrowing costs incurred on that borrowing less any investment income on
the temporary investment of any excess borrowings not yet used.

Borrowing costs eligible for capitalisation

SPECIFIC Actual borrowing costs incurred on that borrowing xxx
BORROWING Less: Temporary investment income (xxx)
xxx

If funds are borrowed generally, the amount of borrowing costs eligible for
capitalisation are determined by applying a weighted average capitalisation rate
to the expenditures on that asset
The capitalisation rate is the weighted average of the borrowing costs applicable
to the borrowings that are outstanding during the period.
Capitalization Rate = Borrowing costs incurred on General Borrowings
GENERAL Weighted Average General Borrowings
BORROWING The amount of the borrowing costs capitalised during the period cannot exceed
the amount of borrowing costs incurred during the period.
Capitalisation rate is applied from the time expenditure on the asset is incurred.

PERIOD OF CAPITALIZATION

Capitalisation of borrowing costs commences when:

Expenditures for the asset are being incurred;
COMMENCEMENT
Borrowing costs are being incurred; and
Activities necessary to prepare the asset are in progress.

Capitalisation of borrowing costs is suspended if development of the asset is

SUSPENSION
suspended for an extended period of time.

Capitalisation of borrowing costs ceases when substantially all the activities

necessary to prepare the qualifying asset for its intended use or sale are
complete.
CESSATION When the construction of a qualifying asset is completed in parts and each
part is capable of being used while construction continues on other parts,
capitalisation of borrowing costs ceases when substantially all the activities
necessary to prepare that part for its intended use or sale are completed.

DISCLOSURE

Amount of borrowing cost capitalised during the period

Capitalisation rate used to determine borrowing costs eligible for capitalisation.

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IAS 40
INVESTMENT PROPERTY
Compiled by: Murtaza Quaid, ACA

IAS 40: INVESTMENT PROPERTY

In this Part:
 Objective of IAS 40

 Definition of Investment Property

 Recognition of Investment Property

 Initial Measurement of Investment Property

 Subsequent Measurement of Investment Property

 Derecognition of Investment Property

 Change of Use / Transfer to and from Investment

Property

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INVESTMENT PROPERTY

 To prescribe the accounting treatment and disclosures for

Objective
INVESTMENT PROPERTY

 Investment property is held to earn rentals or for capital appreciation or both. Therefore,
an investment property generates cash flows largely independently of the other assets held
by an entity. This distinguishes investment property from owner-occupied property.
Why  The production or supply of goods or services (or the use of property for administrative
IAS 40? purposes) generates cash flows that are attributable not only to property, but also to other
assets used in the production or supply process. IAS 16 applies to owned owner-occupied
property.

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

INVESTMENT PROPERTY
Land or building (or a part of it) or both:

 that is held (by the owner or by the lessee as a right-of-use asset);

 to earn rentals or for capital appreciation or both.

INCLUDES EXCLUDES
 Land held for long-term capital appreciation rather than for  Property intended for sale in the ordinary course of business;
short-term sale in the ordinary course of business.  Property in the process of construction or development for sale in
 Land held for a currently undetermined future use i.e., if an the ordinary course of business;
entity has not determined that it will use the land as  Property acquired exclusively with a view to subsequent disposal in
owner-occupied property or for short-term sale in the the near future;
ordinary course of business, the land is regarded as held for
capital appreciation.  Property acquired exclusively for development and resale;
 A building owned by the entity and leased out under one or  Owner-occupied property;
more operating leases (rental arrangement).  Property held for future use as owner-occupied property;
 A building that is vacant but is held to be leased out under  Property held for future development and subsequent use as
one or more operating leases. owner-occupied property;
 Property that is being constructed or developed for future use  Property occupied by employees (whether or not the employees pay
as investment property. rent at market rates); and
 Owner-occupied property awaiting disposal.
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RECOGNITION OF INVESTMENT PROPERTY

 The recognition principle is similar to that of property, plant and equipment. An owned investment
property shall be recognized as an asset when, and only when:

It is probable that future economic benefits The cost of the asset can be reliably
associated with the asset will flow to the entity
AND measured

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

INITIAL MEASURMENT OF INVESTMENT PROPERTY

COST = Purchase Price + Directly Attributable Costs

[including the transaction cost]

Such as
Deferred Payment  legal fees or
 professional fees,
When payment for investment property
 property transfer
is deferred, discount it to its present
taxes, etc.
value to set cash price equivalent.

XXX Such cost does NOT include:

 Start-up expenses;
 Operating losses incurred before
 The accounting treatment for exchange of assets is investment property achieves the
same as those applied under IAS 16. planned occupancy level; &
 Abnormal waste incurred in
constructing or developing the
property.
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SUBSEQUEMENT MEASUREMENT OF INVESTMENT PROPERTY

The accounting policy choice must be applied to all investment property

COST MODEL FAIR VALUE MODEL

 Investment property is measured in accordance with  Investment Property is remeasured to FAIR VALUE,
requirements set out for that model in IAS 16: at each reporting date.
Cost XXXX  Gain or loss from changes in fair value of
Less. Accumulated Depreciation (XXX) investment property is recognized in profit or loss.
Less. Accumulated Impairment (XXX)  Depreciation is NOT charged on investment
property kept at fair value model
Carrying Amount XXXX

SWITCHING THE MODELS – CHANGE IN ACCOUNTING POLICY

• Switching from cost model to fair value or vice versa is allowed but only if the change results in the financial statements
providing reliable and more relevant information, and such change shall be retrospectively adjusted in accordance with the
requirements of IAS 8.
• Switching from cost model to fair value model would probably meet the condition and is therefore allowed.

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

SUBSEQUEMENT MEASUREMENT OF INVESTMENT PROPERTY

FAIR VALUE MODEL - INABILITY TO MEASURE FAIR VALUE RELIABLY

Is Investment Property under Construction?

YES NO
 Measure that investment property at cost until either  In exceptional cases, if there is clear evidence that fair value of
 its fair value becomes reliably measurable or investment property is not reliably measurable on a continuing basis. This
 construction is completed arises only when the market for comparable properties is inactive and
(whichever is earlier) alternative reliable measurements of fair value are not available.
 When an entity completes the construction or development  In such case, the entity shall measure that investment property using cost
of a self-constructed investment property that will be carried model in IAS 16.
at fair value, any difference between:  Residual value of such property shall be assumed to be zero.
 the fair value of the property at that date; and
 The entity shall apply IAS 16 until disposal of such property.
 its previous carrying amount
shall be recognized in profit or loss.

If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value
until disposal (or transfer to owner-occupied or Inventory) even if comparable market transactions become less frequent or
market prices become less readily available.

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DERECOGNITION OF INVESTMENT PROPERTY

 An investment property shall be derecognized:

 on disposal; or
 when the investment property is permanently
withdrawn from use and no future economic
benefits are expected from its disposal.
 Gains or losses arising from the retirement or
disposal of investment property shall be determined
as the difference between the net disposal proceeds
and the carrying amount of the asset and shall be
recognised in profit or loss in the period of the
retirement or disposal.

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

CHANGE OF USE - TRANSFER TO / FROM INVESTMENT PROPERTY

 An entity shall transfer a property to, or from, investment property when, and only when, there is a change in
use.
 A change in use occurs when the property meets, or ceases to meet, the definition of investment property and
there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a
property does not provide evidence of a change in use.

Examples of evidence of a change is use Transfer from Transfer to

Commencement of owner-occupation, or of development with a view

Investment property Owner-occupied property
to owner-occupation.

Commencement of development with a view to sale. Investment property Inventories

End of owner-occupation. Owner-occupied property Investment property

Inception of an operating lease (rental arrangement) to another party. Inventories Investment property

 When an entity decides to dispose of an investment property without development, it continues to treat the
property as an investment property until it is derecognised (eliminated from the statement of financial position)
and does not reclassify it as inventory.

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CHANGE OF USE - TRANSFER TO / FROM INVESTMENT PROPERTY

FOR INVESTMENT PROPERTY AT COST MODEL

Transfers between investment property, owner-occupied property and inventories

do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes.

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

CHANGE OF USE - TRANSFER TO / FROM INVESTMENT PROPERTY

FOR INVESTMENT PROPERTY AT FAIR VALUE MODEL

Circumstance Transfer Accounting treatment

 Revalue the property as per IAS 40 and then transfer it to IAS 16

Commencement of owner From IAS 40
 Fair value at the date of transfer becomes the deemed cost for future
occupation to IAS 16
accounting purposes.

Commencement of  Revalue the property as per IAS 40 and then transfer it to IAS 2
From IAS 40
development  Fair value at the date of transfer becomes the deemed cost for future
to IAS 2
with a view to sale accounting purposes.

 Revalue the property to its fair value as per the rules of IAS 16 (even if policy
End of owner occupation
From IAS 16 is cost model) and then transfer it to IAS 40.
& commencement of
to IAS 40  On subsequent disposal of the investment property, the revaluation surplus
operating lease
included in equity may be transferred to retained earnings.

End of inventory &  Transfer the property at carrying amount and then revalue it as per IAS 40
From IAS 2 to
commencement of  Fair value at the date of transfer and any difference between previous
IAS 40
operating lease carrying amount is recognized in P/L

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PRESENATION AND DISCLOSURE – GENERAL DISCLOSURE

General disclosure (both models)
An entity shall disclose:
a) whether it applies the fair value model or the cost model;
b) when classification is difficult, the criteria it uses to distinguish investment property from owner-occupied property or
inventory;
c) the extent to which the fair value (as measured or disclosed in the financial statements) of investment property is based on a
valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience
in the location and category of the investment property being valued. If there has been no such valuation, that fact shall be
disclosed;
d) the existence and amounts of restrictions on the realisability of investment property or the remittance of income and
proceeds of disposal; and
e) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.
An entity shall also disclose the amounts recognised in profit or loss for:
a) rental income from investment property; and
b) direct operating expenses (including repairs and maintenance) arising from investment property:
 that generated rental income during the period; and
 that did not generate rental income during the period.

Compiled by: Murtaza Quaid, ACA IAS 16: PROPERTY, PLANT AND EQUIPMENT

PRESENATION AND DISCLOSURE – ADDITIONAL DISCLOSURE

For Fair Value Model only For Cost Model only
An entity shall disclose a reconciliation between the carrying An entity shall disclose:
amounts of investment property at the beginning and end of the  the depreciation methods used;
period, showing the following:
 the useful lives or depreciation rates used; and
a) additions (acquisitions & subsequent expenditure separately);
 gross carrying amounts and accumulated depreciation at the
b) disposals; beginning and at the end of the period.
c) net gains or losses from fair value adjustments; A reconciliation between opening and closing values showing:
d) transfers; and  additions (acquisitions & subsequent expenditure separately);
e) other changes.  depreciation;
For investment properties included at cost model because fair  disposals;
value cannot be measured reliably, in addition, an entity shall
disclose:  impairment losses and reversal thereof;
 a description of the investment property;  transfers; and
 an explanation of why fair value cannot be measured reliably;  other changes.
 if possible, the range of estimates within which fair value is When the cost model is used, the fair value of investment property
highly likely to lie; and shall be disclosed. If the fair value cannot be estimated reliably, the
same additional disclosures should be made as are disclosed under
 the fact of disposal of such investment property, its carrying the fair value model for investment properties included at cost
amount and gain or loss on disposal. model because fair value cannot be measured reliably.

Compiled by: Murtaza Quaid, ACA IAS 16: PROPERTY, PLANT AND EQUIPMENT

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PRESENATION AND DISCLOSURE - FORMAT

Investment Property COST MODEL FAIR VALUE TOTAL
At the start of the year
Cost XXXX - XXXX
Accumulated Depreciation / Impairment (XXX) - (XXX)
Carrying Amount / Fair value XXXX XXXX XXXX

Addition during the year XXXX XXXX XXXX

Transfer to Investment property XXXX XXXX XXXX
Transfer from Investment property (XXX) (XXX) (XXX)
Disposal / Deletion (XXX) (XXX) (XXX)
Depreciation (XXX) - (XXX)
Fair valuation - XXXX XXXX

At the end of the year

Cost XXXX - XXXX
Accumulated Depreciation / Impairment (XXX) - (XXX)
Carrying Amount / Fair value XXXX XXXX XXXX

Compiled by: Murtaza Quaid, ACA IAS 40: INVESTMENT PROPERTY

PARTIAL OWN USE

Some properties comprise a portion that is held to earn rentals or for capital appreciation
and another portion that is held for use in the production or supply of goods or services or
for administrative purposes.

Whether these portions could be sold separately?

YES NO
Portions are accounted for the portions Whether the portion that is held for use in the
separately in accordance with applicable production or supply of goods or services or for
standards administrative purposes, is insignificant?
YES NO

Account for the entire Account for the entire

property under IAS 40 property under IAS 16

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PROVISION OF ANCILLARY SERVICES TO OCCUPANTS

In some cases, an entity provides ancillary services to the occupants of a property it holds.

Classification: Investment Property

If the Services are Insignificant
Example: The owner of an office building provides
to the arrangement as a whole security and maintenance services to the tenants
who occupy the building.

Classification: Property, Plant & Equipment

If the Services are Significant
Example: An entity owns and manages a hotel and
to the arrangement as a whole services provided to guests are significant to the
arrangement as a whole.

It may be difficult to determine whether ancillary services are significant to the arrangement as a whole and judgement is
needed to determine whether a property qualifies as investment property. Therefore, an entity is required to develop (and
disclose) criteria for investment property classification so that it can exercise that judgement consistently.

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IAS 40 – INVESTMENT PROPERTY

Practice Questions
COMPILED BY: MURTAZA QUAID, ACA

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PRACTICE QUESTIONS
Question 1. [Initial and subsequent measurement] [ICAP CAF 1 Study Text]
▪ On 1 January Year 1 Entity P purchased a building for its investment potential.
▪ The building cost Rs. 1,000,000 with transaction costs of Rs. 10,000.
▪ The depreciable amount of the building component of the property at this date was Rs. 300,000.
▪ The property has a useful life of 50 years.
▪ At the end of Year 1 the property’s fair value had risen to Rs. 1,300,000.
▪ The investment property was sold in early Year 2 for Rs. 1,550,000, selling costs were Rs. 50,000.
Required:
(i) Journalize the above.
(ii) How the above property shall be presented at the end of Year 1.

Question 2. [Initial and subsequent measurement] [ICAEW Corporate Reporting – Study Manual]
▪ The Boron company is an investment property company.
▪ On 1 January 20X7, it purchased a retirement home as an investment at a cost of Rs. 600,000.
▪ Legal costs associated with the acquisition of this property were a further Rs. 50,000.
▪ Boron adopted fair value model for investment properties.
▪ At 31 December 20X7, the fair value of the retirement home was Rs. 700,000 and the cost to sell
was estimated at Rs. 40,000.
Required: What amount should appear in the statement of financial position and profit and loss in the
year ended on 31 December 20X7?

Question 3. [Disposal of investment property] [ICAEW Corporate Reporting – Study Manual]

▪ An entity purchased an investment property on 1 January 20X3 for a cost of Rs. 5.5 million.
▪ The property has a useful life of 50 years, with no residual value.
▪ The property had a fair value of Rs. 6.2 million at 31 December 20X5.
▪ On 1 January 20X6, the property was sold for net proceeds of Rs. 6 million.
Required: Calculate the profit and loss on disposal under both the cost and fair value model,

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Question 4. [Reclassification from IAS 40 to IAS 16] [ICAP CAF 1 Study Text]
Entity A has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019 with
remaining useful life of 10 years. Entity A uses fair value model under IAS 40.
On 30 June 2019, it was decided to use the building for administration rather than keeping it for
investment potential. At this date the fair value was Rs. 1,200,000.
Entity A uses cost model under IAS 16. On 31 December 2019 (year-end), the value of property has
increased to Rs. 1,300,000.
Required: Journal entries for the year ended 31 December 2019.

Question 5. [Reclassification from IAS 40 to IAS 2] [ICAP CAF 1 Study Text]

Entity B has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019 with
remaining useful life of 10 years. Entity B uses fair value model under IAS 40.
On 30 June 2019, board of directors decided to develop the property and use it for sale of plots. At this
date the fair value was Rs. 1,200,000. On 31 December 2019 (year-end), the value of property has
increased to Rs. 1,300,000.
Required: Journal entries for the year ended 31 December 2019.

Question 6. [Reclassification from IAS 16 to IAS 40] [ICAP CAF 1 Study Text]
Entity C has property being used as warehouse carried at Rs. 1,000,000 on 1 January 2019 with
remaining useful life of 10 years. Entity C uses cost model under IAS 16 for its properties.
On 30 June 2019, property was vacated, and management decided to keep it for investment potential.
At this date the fair value was Rs. 1,200,000. Entity C uses fair value model under IAS 40.
On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000. Transfer from
revaluation surplus to retained earnings is made at the time of disposal only.
Required: Journal entries for the year ended 31 December 2019.

Question 7. [Reclassification from IAS 2 to IAS 40] [ICAP CAF 1 Study Text]
Entity D has commercial shop held for resale in its ordinary course of property business carried at Rs.
1,000,000 on 1 January 2019.
On 30 June 2019, it was given on rent to a local business rather than keeping it for resale. At this date
the fair value was Rs. 1,200,000. On 31 December 2019 (year-end), the value of property has increased
to Rs. 1,300,000. Entity D uses fair value model under IAS 40.
Required: Journal entries for the year ended 31 December 2019.

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Question 8. [Reclassification from IAS 40 to IAS 16] [Gripping IFRS: Graded Questions]
Owlface Limited owns two buildings:
▪ A head office building located in Quetta; and
▪ Another office building located in Karachi.
The office building located in Quetta is used as Owlface Limited’s head office. A minor earthquake, on 30
June 20X5, destroyed this building. The building in Quetta was purchased on the 1 January 20X5 for Rs.
1,200,000 (total useful life: 10 years and residual value: nil).
The property in Karachi was leased to a tenant, Spider Limited. After the earthquake, Owlface Limited
urgently needed new premises for its head office. Since Spider Limited was always late in paying their
lease rentals, Owlface Limited decided to immediately evict them and move their head office to this
building situated in Karachi.
The building in Karachi was purchased on the 1 January 20X5 for Rs. 500,000. On the 30 June 20X5, the
fair value of the building in Karachi was Rs. 950,000. The total useful life was estimated to be 10 years
from date of purchase and the residual value was estimated to be nil.
Owlface Limited uses:
▪ The cost model to measures its property, plant and equipment; and
▪ The fair value model for its investment properties.
Required: journalize the above transactions in the books of Owlface Limited for the year ended 31
December 20X5.

Question 9. [Reclassification from IAS 16 to IAS 40] [Gripping IFRS: Graded Questions]
Chattels Chief Limited owns an office block.
▪ Chattels Chief Limited had occupied the office block from date of purchase until 30 June 20X5.
▪ The office block had cost Rs. 1,000,000 on 1 January 20X4.
▪ Its residual value is estimated to be nil and total useful life is estimated to be 10 years respectively
(both estimates have remained unchanged).
▪ On 30 June 20X5, Chattels Chief Limited moved out of the office block and thereafter rented it to
tenants under short-term operating leases.
▪ On 30 June 20X5, the fair value of the office block was Rs. 1,200,000.
▪ The fair value of the office block was Rs. 800,000 on 31 December 20X4 and Rs. 1,500,000 on 31
December 20X5.
Chattels Chief Limited measures owner-occupied property using the cost model and investment
property using the fair value model.
Required: Show all journals relating to the office block in the books of Chattels Chief Limited for the year
ended 31 December 20X5. Ignore tax.

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Question 10. [Change of use] [Gripping IFRS: Graded Questions]

Snake Limited is in the construction industry. It constructs buildings for resale, for leasing and for private
use.
▪ A building that Snake Limited had constructed in Islamabad (at a cost of Rs. 1,000,000) had been on
the market for 2 years and was still not sold. On 1 March 20X5 Snake Limited took it off the market
and leased it instead. It was leased on 1 March 20X5. Its fair value was Rs. 1,500,000 on 31
December 20X5 and Rs. 1,000,000 on 31 December 20X4.
▪ The fair value of a building in Baluchistan (rented out to tenants) has never been determinable. This
building was completed on J January 20X2 at a cost of Rs. 5,000,000. Its total estimated useful life is
10 years and its residual value is Rs. 1,000,000. Both estimates have remained unchanged.
▪ On 30 September 20X5, Snake Limited evicted the tenants from a building in Karachi and moved its
head office into the building instead. On this day, the fair value was Rs. 4,000,000, the remaining
useful life was 5 years and the residual value was Rs. 500,000. The fair value of this building was Rs.
3,000,000 on 31 December 20X4.
▪ On 30 September 20X5, Snake Limited leased out the old head office building in Lahore. The original
cost was Rs. 4,000,000 (acquired on 30 September 20X3), on which date the total useful life was 10
years and its residual value was nil. The fair value was Rs. 3,700,000 on 31 December 20X5. The fair
value on 30 September 20X5 was equal to its carrying amount.
▪ Rentals earned from the investment properties totaled Rs. 2,000,000.
▪ Rates paid totaled Rs. 1,000,000.
▪ Snake Limited applies the fair value model to its investment properties and the cost model to its
property, plant and equipment.
Required: Show the investment property note and the profit before tax note in Snake Limited's financial
statements for the year ended 31 December 20X5.

Question 11. [Change of use] [ICAEW Corporate Reporting – Study Manual]

An entity with the 31 December year end purchased an office building, with a useful life of 50 years, for
Rs. 5.5 million on 1 January 20X1. The amount attributable to the land was negligible. The entity used
the head office for five the years until 31 December 20X5 when the entity moved its head office to
larger premises. The building was reclassified as an investment property and leased out under a five
year operating lease.
Owing to a change in circumstances, the entity took possession of the building five year later on 31
December 20Y0, to use it as its head office once more. At that date, the remaining useful life of the
building was 40 years.
The fair value of the head office was as follow:
▪ At 31 December 20X5 = Rs. 6 million
▪ At 31 December 20Y0 = Rs. 7.5 million

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Required: How should the change of use be reflected in the financial statements if:
a) The entity uses the cost model for investment properties.
b) The entity uses the cost model for investment properties.

Question 12. [Partial Own Use] [ICAP CAF 1 Study Text]

You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted
that CL acquired a three-story building on 1 March 2020. CL uses the ground floor for its marketing
department while remaining two floors were in excess of CL’s need and therefore were rented out. The
first floor was rented out on 1 June 2020 and the second floor was rented out on 1 December 2020.
The accountant has recorded the building as property, plant and equipment. The depreciation on
ground, first and second floors has been computed from 1 March 2020, 1 June 2020 and 1 December
2020 respectively.
The accounting policy of CL is to carry land and building at fair value (wherever permitted by IFRS).
Required: Discuss how the above issue should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.

Solution:
The accounting treatment adopted by accountant to record complete building under PPE head is
incorrect. Two floors which have been leased/rented out separately should be accounted for as
investment property. While ground floor used by marketing department should be recorded as
property, plant and equipment under IAS 16 and depreciated over its useful life.
As per CL policy, investment property should be recorded at fair value and changes in fair value should
be taken to statement of profit or loss. Any depreciation already charged on these floors should be
reversed.

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Question 13. [Identification of investment property] [ICAEW Corporate Reporting – Study Manual]
Do the building referred in (a) – (d) below meet the definition of Investment Property?
(a) An entity has a factory that has been shut down due to chemical contamination, worker unrest and
strike. The entity plans to sell the factory.
(b) An entity has purchased a building that it intends to lease out under an operating lease.
(c) An entity has acquired a large scale office building, with the intention of enjoying its capital
appreciation. Rather than holding it empty, the entity has decided to try to recover its running costs
by renting the space. To make the building attractive to potential customers, the entity has fitted
the space out as small office units, complete with full scale telecommunication facilities, and offer
reception, cleaning, a loud speaker system and secretarial services. The expenditure incurred in
fitting out the offices has been a substantial proportion of the value of the building.
(d) An entity acquired a site on 30 April 20X4 with the intention of building office blocks to let. After
receiving planning permission, construction started on 1 September 20X4 and was completed at a
cost of Rs. 10 million on 30 March 20X5 at which point the building was ready for occupation,
The building remain vacant for several months and the entity incurred significant operating losses
during this period.
The first leases were signed in July 20X5 and the building was not fully let until 1 September 20X6.
Solution:
(a) The factory is not an investment property. It should be classified as property held for sale and
accounted for under IFRS 5.
(b) The building would qualify as an investment property under IAS 40 as the entity intends to earn
rental from under an operating lease.
(c) The provisions offered over and above the office space itself, fall within IAS 40 describes as
“ancillary services”. Considering the nature and extent of these services, it would be unlikely that
they could be described as “insignificant” in relation to the arrangements as a whole. The building is,
in essence, being used for the provision of serviced offices and therefore does not meet the
definition of an investment property.
Although, the entity’s main objective in acquiring the building is its potential capital appreciation,
the building should be recognized and measured in accordance with IAS 16 rather than IAS 40.
(d) The property should be recognized as an investment property on 30 March 20X5 when the offices
were ready to be occupied. Costs incurred, and consequently operating losses, after this date should
be expensed even though the entity did not start to receive rentals until later in 20X5.
Losses incurred during this ‘empty’ period are part of the entity’s normal business operations and do
not form part of the cost of the investment property.

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Question 14. [Identification of investment property] [IFRS Box – IFRS Kit]

How would you classify the following properties?
1. You own a small apartment to rent out, but your tenant goes bankrupt. You are looking for another
tenant and during your search, you use the apartment as your office. Investment or owner-
occupied?
2. You enter into a 30-year finance lease for a part of a building that you plan to let to your tenants.
3. You run a hotel. Its main activity is to rent apartments and rooms on the short-term basis.
4. A big investment company purchased a land deep under its fair value. As it was such a great bargain,
the company is undecided what to do with the land – either to sell it later or to develop some
property on it. The decision will be taken in the later accounting period.
5. You acquired a building under 30-year finance lease. You refurbished the offices and plan to sublet
these offices, but you are awaiting approvals from the local authorities.
6. You own an office building with 50 offices. You use 30 offices for your own consulting business and
you sublet 20 offices to tenants.
7. A subsidiary owns a building that fully leases out to its parent company. A parent company uses this
building for own office space.

Solution:
1. During the time you occupy it, it’s an owner-occupied property under IAS 16. When you find a new
tenant, it will be investment property.
2. This is a typical investment property.
3. It depends on the ancillary services you provide. If the rooms and apartments are serviced, there’s a
room maid cleaning the rooms, towels are changed, breakfast is served etc. – then it would be
classified as owner occupied property, as these services are significant in providing the overall
service to customers.
4. This land is classified as inventory, because it is held either for sale or for further development and
sale in the ordinary course of business. If the company decides to hold the land for long-term capital
appreciation, then it is reclassified to investment property.
5. This is an investment property, also during the waiting time. IAS 40 specifies that the building that is
vacant, but is held to be leased out via one or more operating leases, is investment property.
6. 3/5 of a building is investment property and 2/5 is an owner-occupied property. These portions are
accounted for separately.
7. In subsidiary’s accounts, the building is investment property. In group’s account, the building is
reclassified to owner-occupied property.

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IAS 40 - Investment Property Compiled by: Murtaza Quaid

Question No. 6 of Summer 2012, 16 marks

Gee Investment Company Limited (GICL) acquires properties and develops them for diversified purposes,
i.e. resale, leasing and its own use. GICL applies the fair value model for investment properties and cost
model for property, plant and equipment.
The details of the buildings owned are as follows:
Residual Fair value as on 31 December
Date of Useful Life Cost
Property value 2011 2010
acquisition (years)
-------------------Rs. in million-----------------
A 1 August 2006 20 130 14 100 150
B 1 January 2009 15 240 24 240 210
C 1 July 2009 10 160 20 150 120
D 1 July 2008 10 10 1 Not available
E 1 August 2011 20 48 4 51 -
The following information is also available:
Property A GICL had been trying to sell this property for the last two years. However, due to weak
market, the directors finally decided to lease it with effect from 1 October 2011 when its
fair value was Rs. 120 million.
Property B The possession of this property was acquired from the tenants on 30 June 2010 when the
company shifted its head office from Property C to Property B. The fair value on the above
date was Rs. 195 million.
Property C When the head office was shifted from this property, it was leased to a subsidiary at
market rate. On the date of lease, the fair value was equal to its carrying amount.
Property D This property is situated outside the main city and its fair value cannot be determined. It
was rented to a government organization soon after the acquisition.
Property E This property is an office building comprising of three floors. After acquisition, two floors
were rented out. On 1 November 2011, GICL established a branch office on the third floor.
Details of costs incurred on acquisition are as follows:
Rs. in million
Purchase price 42.50
Agent’s commission 0.50
Registration fees and taxes 2.00
Administrative costs allocated 3.00
48.00
Required:
(a) Prepare a note on investment property, for inclusion in GICL’s separate financial statements for the
year ended 31 December 2011. (Ignore comparative figures) (16 marks)
(b) Explain how Property C would be accounted for in the consolidated financial statements for the year
ended 31 December 2011. (03 marks)

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IAS 40 - Investment Property Compiled by: Murtaza Quaid

Question No. 3(iii) of Winter 2013, 6 marks

The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are under
finalisation and the following matters are under consideration:
(iii) On 1 April 2013, BL shifted to a newly acquired building in the city centre. The vacated building was
leased as follows:
Date of commencement of the lease 1 April 2013
Lease period 3 years
Six semi-annual installments payable in advance Rs. 3 million
(to be increased by 5% annually)
On 1 April 2013, the carrying value and fair value of the vacated building was Rs. 55 million and Rs. 70
million respectively. As at 30 September 2013 the fair value of the vacated building was reduced to Rs. 66
million. BL uses fair value model to account for investment properties. BL’s discount rate is 10%.
Required: For each of the above matters, compute the related amounts as they would appear in the
statements of financial position and comprehensive income of Bravo Limited for the year ended 30
September 2013 in accordance with IFRS. (Ignore corresponding figures)

Question No. 2(b) of Summer 2015, 4 marks

The financial statements of Integrity Steel Limited (ISL) for the year ended 31 March 2015 are in the final
stage of their preparation and the following matters are under consideration:
(b) On 1 October 2014, ISL shifted its corporate head office to a three storey building. The fair value of
building on the shifting date and as on 31 March 2014 was Rs. 325 million and Rs. 310 million respectively.
This building was acquired five years ago at a cost of Rs. 240 million. Immediately thereafter it was leased
out to a subsidiary. Its remaining useful life is 10 years. Depreciation on ISL’s buildings is charged on
straight line basis over their useful lives.
Required: Prepare journal entries to record the above transaction.

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IAS-40
INVESTMENT PROPERTY
OBJECTIVE

To prescribe the accounting treatment and disclosures for Investment Property.

DEFINITION OF INVESTMENT PROPERTY EXCLUDES

Investment property is;
Property held for sale in the ordinary course
a land or building (or a part of it) or both;
of business or in the process of construction
that is held (by the owner or by the lessee as a or development for such sale (IAS 2);
right-of-use asset);
Owner-occupied property (IAS 16 & IFRS 16)
to earn rentals / for capital appreciation or both.
Property held for future use as owner-
occupied property

INCLUDES Property held for future development and

subsequent use as owner-occupied property
Land held for long-term capital appreciation
Property occupied by employees (whether
Land held for undetermined future use
or not the employees pay rent at market
Building leased out under operating lease. rates)
Vacant building held to be leased out under Owner-occupied property awaiting disposal.
operating lease
Property that is leased to another entity
Property being constructed/developed for future
under a finance lease.
use as investment property

RECOGNITION OF INVESTMENT PROPERTY

Investment property is recognized as an asset when:

It is probable that future economic benefits Cost of the property can be reliably
associated with the property will flow to the entity
AND measured.

INITIAL MEASURMENT OF INVESTMENT PROPERTY

COST
[including transaction cost] = Purchase Price + Directly Attributable
Costs

Such as
XXX Such cost does NOT include: Deferred Payment legal fees or
When payment for professional fees,
Start-up costs;
investment property is property transfer
Operating losses incurred before deferred, discount it to taxes, etc.
investment property achieves the its present value to set
planned occupancy level; & cash price equivalent.
Abnormal amounts of wasted
material, labour or other resources Exchange of Assets
incurred in constructing or
The accounting treatment for exchange of assets Compiled by:
developing the property.
isPage
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IAS-40
INVESTMENT PROPERTY

SUBSEQUENT MEASUREMENT OF PPE

After initial recognition, an entity can choose between fair value and cost model.
The accounting policy choice must be applied to all investment property.

FAIR VALUE MODEL Inability to measure fair value reliably

Under Fair Value Model, measure all of the

Is Investment Property under Construction?
investment property at fair value, except in
the extremely rare cases where this cannot
be measured reliably.
YES
Gain or loss from changes in FV of IP is
recognized in P/L. Measure that investment property at
Depreciation is NOT charged on IP kept at fair cost until either (whichever is earlier)
value model. its:
- Fair value becomes reliably
If IP is measured at FV, it shall continue to be measurable or
measured that IP at FV until disposal even if - Construction is completed
comparable market transactions become less
frequent or market prices become less readily When an entity completes the
available. construction or development of a
self-constructed investment property
that will be carried at fair value, any
difference between:
COST MODEL
- Fair value of the property at that
Under Cost Model, Investment Property is date; and
measured in accordance with requirements set - Its previous carrying amount
out for that model in IAS 16: shall be recognized in profit or loss.
Cost xxxx
Less. Accumulated Depreciation (xxxx)
Less. Accumulated Impairment (xxxx) NO
Carrying Amount xxxx
In exceptional cases, if there is clear
evidence that FV of IP is not reliably
measurable on a continuing basis,
SWITCHING THE MODELS the entity shall measure that IP using
CHANGE IN ACCOUNTING POLICY cost model in IAS 16.

This arises only when the market for

Switching from cost model to fair value or vice comparable properties is inactive
versa is allowed but only if the change results in & alternative reliable measurements
the financial statements providing reliable and of fair value are not available.
more relevant information, and such change shall
be retrospectively adjusted in accordance with the In such case, Residual value of such
requirements of IAS 8. property shall be assumed to be zero.

Switching from cost model to fair value model The entity shall apply IAS 16 until
would probably meet the condition and is disposal of such property
therefore allowed.

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IAS-40
INVESTMENT PROPERTY

TRANSFER TO / FROM INVESTMENT PROPERTY

Transfers to / from investment property can be made only when there is a change in the
use of the property.

FOR INVESTMENT PROPERTY AT COST MODEL

Transfers between investment property, owner-occupied property and inventories

do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes.

FOR INVESTMENT PROPERTY AT FAIR VALUE MODEL

Circumstance Transfer Accounting treatment

Revalue the property as per IAS 40 and then

Commencement of transfer it to IAS 16
From IAS 40
owner occupation to IAS 16 Fair value at the date of transfer becomes the
deemed cost for future accounting purposes.

Commencement of Revalue the property as per IAS 40 and then

From IAS 40 transfer it to IAS 2
development with a
to IAS 2 Fair value at the date of transfer becomes the
view to sale
deemed cost for future accounting purposes.

Revalue the property to its fair value as per the

End of owner rules of IAS 16 (even if policy is cost model) and
occupation & then transfer it to IAS 40.
From IAS 16
commencement of to IAS 40 On subsequent disposal of the investment
operating lease property, the revaluation surplus included in
equity may be transferred to retained earnings.

Transfer the property at carrying amount and

End of inventory & then revalue it as per IAS 40
From IAS 2
commencement of
to IAS 40 Fair value at the date of transfer and any
operating lease difference between previous carrying amount
is recognized in P/L.

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IAS-40
INVESTMENT PROPERTY

CLASSIFICATION OF INVESTMENT PROPERTY - CONECCTED CONCEPTS

Partial Own Use Provision Of Ancillary Services

Some properties comprise a portion that is held In some cases, an entity provides ancillary
to earn rentals or capital appreciation and a services to the occupants of a property it
nother portion that is held for use in the holds.
production or supply of goods/services
or for administrative purposes.
If the Services are Significant to the
arrangement as a whole
Whether these portions could be sold separately?
Classification: Property, Plant & Equipment

Portions are accounted for the

Example: An entity owns and manages a
hotel and services provided to guests are
Yes portions separately in accordance
significant to the arrangement as a whole.
with applicable standards

Whether the portion that is held for If the Services are Insignificant to the
use in the production or supply of arrangement as a whole
No goods or services or for administrative
purposes, is insignificant?
Classification: Investment Property

Example: The owner of an office building

Yes No provides security and maintenance services
to the tenants who occupy the building.
Account for the entire Account for the entire
property under IAS 40 property under IAS 16

Inter-company Rentals

Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated
financial statements that include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.

However, such property will be investment property in the separate financial statements of the lessor,
if it meets the definition of investment property.

SOLD

DERECOGNITION OF INVESTMENT PROPERTY

When an investment property is derecognized, a gain or loss on disposal should be recognized in P/L.

This gain or loss should normally be determined as the difference between the net disposal proceeds
and the carrying amount of the asset.

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IAS-40
INVESTMENT PROPERTY

PRESENATION AND DISCLOSURE

General disclosure (for both models)

An entity shall disclose:

Whether it applies the fair value model or the cost model;
When classification is difficult, the criteria used to distinguish IP from PPE and Inventory.
The extent to which the FV of IP (as measured or disclosed in F/S) is based on a valuation by an
independent valuer. If there has been no such valuation, that fact shall be disclosed.
The existence and amounts of restrictions on the realisability of IP or the remittance of income
and proceeds of disposal.
Contractual obligations to purchase, construct or develop investment property or for repairs,
maintenance (R&M) or enhancements.
Amounts recognised in P/L for:
- Rental income from investment property;
- Direct operating expenses (including R&M) arising from IP that generated rental income
during the period;
- Direct operating expenses (including R&M) arising from IP that did not generate rental
income during the period; and
- The cumulative change in FV recognised in P/L on a sale of IP from a pool of assets in which
the cost model is used into a pool in which the fair value model is used.

For Cost Model only For Fair Value Model only

An entity shall disclose: An entity shall disclose a reconciliation

- Depreciation methods used; between the carrying amounts of IP at the
- Useful lives or depreciation rates used; and beginning and end of the period, showing:
- Gross carrying amounts and accumulated - additions (acquisitions & subsequent
depreciation at the beginning and end of expenditure separately);
period. - disposals;
A reconciliation between opening and closing - net gains or losses from fair value
values showing: adjustments;
- additions (acquisitions & subsequent - transfers; and
expenditure separately); - other changes.
- depreciation;
- disposals; For IPs included at cost model because FV
- impairment losses and reversal thereof; cannot be measured reliably, an entity shall
- transfers; and also disclose:
- other changes. - Description of the IP;
- Explanation of why FV cannot be measured
When the cost model is used, the FV of reliably;
investment property shall also be disclosed.
- If possible, the range of estimates within which
If FV cannot be estimated reliably, the same FV is highly likely to lie; and
additional disclosures should be made as are - Fact of disposal of such IP, its carrying amount
disclosed under the fair value model for and gain or loss on disposal.
investment properties whose FV cannot be
measured reliably

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IAS-40
INVESTMENT PROPERTY

PRESENATION AND DISCLOSURE (Sample)

ABC Company
Notes to the Financial Statements
For the year ended 31 December 20X1

40. Investment Property Cost Model FV Model Total

At the start of the year

Cost xxxx - xxxx

Accumulated Depreciation / Impairment (xxxx) - (xxxx)

Carrying Amount / Fair value xxxx xxxx xxxx

Addition during the year xxxx xxxx xxxx

Transfer to Investment property xxxx xxxx xxxx

Transfer from Investment property (xxxx) (xxxx) (xxxx)

Disposal / Deletion (xxxx) (xxxx) (xxxx)

Depreciation (xxxx) - (xxxx)

Impairment / (Reversal) (xxxx) - (xxxx)

Fair valuation - xxxx xxxx

At the end of the year

Cost xxxx - xxxx

Accumulated Depreciation / Impairment (xxxx) - (xxxx)

Carrying Amount / Fair value xxxx xxxx xxxx

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IAS 20
Accounting for Government Grants and
Disclosure of Government Assistance
Compiled by: Murtaza Quaid, ACA

IAS 20: Government Grants & Government Assistance

In this Part:
 Introduction

 Government Grants & Government Assistance

 Government Grants - Recognition Criteria

 Government Grants - Period of Recognition

 Government Grants - Presentation & Disclosure

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INTRODUCTION
 Across the globe, the governments provide various types of assistance to businesses in
order to achieve various economic objectives such as to promote a specific type of
business (say, electric vehicles) or to create employment opportunities. The assistance
may be mere an aid by creating ease of doing business or it may be in the form of a
Objective financial assistance. The most common form of such assistance is a grant of cash or land
to the business entity from local or national government.
 IAS 20 is applied in accounting for, and in the disclosure of, government grants and in
the disclosure of other forms of government assistance.

 Government refers to government,

government agencies and similar
Government
bodies whether local, national or
international.

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

GOVERNMENT GRANTS & GOVERNMENT ASSISTANCE

GOVERNMENT GRANTS GOVERNMENT ASSISTANCE

 Government grants are assistance by government in  Government assistance is action by government
the form of transfers of resources to an entity in designed to provide an economic benefit specific to
return for past or future compliance with certain an entity or range of entities qualifying under certain
conditions relating to the operating activities of the criteria.
entity  However, Government assistance does not include
 However, they exclude those forms of government benefits provided only indirectly through action
assistance which cannot reasonably have a value affecting general trading conditions, such as the
placed upon them and transactions with government provision of infrastructure in development areas or
which cannot be distinguished from the normal the imposition of trading constraints on competitors.
trading transactions of the entity.
 Government grants are sometimes called by other
names such as subsidies, subventions, or premiums.

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GOVERNMENT GRANTS & ITS RECOGNITION CRITERIA

GRANTS RELATED TO ASSETS GRANTS RELATED TO INCOME

 Grants related to assets are government grants whose  Grants related to income are government grants other than
primary condition is that an entity qualifying for them those related to assets.
should purchase, construct or otherwise acquire long-term
assets.
 Subsidiary conditions may also be attached restricting the
type or location of the assets or the periods during which
they are to be acquired or held.

 Government grants, including non-monetary grants at fair value, shall not be recognized until
there is reasonable assurance that:
Recognition a) a) the entity will comply with the conditions attaching to them; and
criteria b) b) the grants will be received.
 Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

GOVERNMENT GRANTS - PERIOD OF RECOGNITION

 Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as
expenses the related costs for which the grants are intended to compensate.
 The application of above principle may be summarised as follows:

Grants related to Assets Grants related to Income

Compensation of
Grants related to Grants related to Expenses already Grants in recognition of
Depreciable Assets Non-depreciable Assets incurred or immediate Specific Expenses
Financial Support
These are usually recognised in These may also require the A government grant that These are recognised in profit or
profit or loss over the periods fulfilment of certain obligations becomes receivable as loss in the same period as the
and in the proportions in which and would then be recognised in compensation for expenses or relevant expenses.
depreciation expense on those profit or loss over the periods losses already incurred or for the
assets is recognised. that bear the cost of meeting the purpose of giving immediate
obligations. For example, a grant financial support to the entity
of land may be conditional upon with no future related costs shall
the erection of a building on the be recognised in profit or loss of
site and it may be appropriate to the period in which it becomes
recognise the grant in profit or receivable.
loss over the life of the building.
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GOVERNMENT GRANTS - PRESENTATION

Presentation: Grants related to Income
Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘other income’;
alternatively, they are deducted in reporting the related expense.

Presentation Method

(1) Present the grant as other income (2) Present the grant as deduction from related expense

On receipt/accrual of grant On receipt/accrual of grant

Debit Cash / Grant Receivable XXXX Debit Cash / Grant Receivable XXXX
Credit Deferred Grant XXXX Credit Deferred Grant XXXX
On recognition of grant as income in profit or loss On recognition of grant as income in profit or loss
Debit Deferred Grant XXXX Debit Deferred Grant XXXX
Credit Other Income – P/L XXXX Credit Expenses – P/L XXXX

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

GOVERNMENT GRANTS - PRESENTATION

Presentation: Grants related to Assets
Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial
position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.

Presentation Method

(1) Setting up the grant as deferred income (2) Deducting the grant from carrying amount of an asset

On acquisition of asset
Debit Non-current asset (PPE, etc.) XXXX
Credit Bank / Cash XXXX On acquisition of asset
Debit Non-current asset (PPE, etc.) XXXX
On receipt/accrual of grant Credit Cash / Bank XXXX
Debit Cash / Grant Receivable XXXX
Credit Deferred grant XXXX On receipt/accrual of grant
Debit Cash / Grant Receivable XXXX
Period end depreciation expense Credit Non-current asset (PPE, etc.) XXXX
Debit Depreciation expense – P/L XXXX
Credit Accumulated depreciation (PPE, etc.) XXXX Period end depreciation expense (reduced)
Debit Depreciation expense – P/L XXXX
Period end amortisation of deferred grant Credit Accumulated depreciation (PPE, etc.) XXXX
Debit Deferred grant XXXX
Credit Profit or loss XXXX

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PRESENTATION & DISCLOSURE

 The following matters shall be disclosed:

a) the accounting policy adopted for government grants,
including the methods of presentation adopted in the
financial statements;
b) the nature and extent of government grants recognised in
the financial statements and an indication of other forms
of government assistance from which the entity has
directly benefited; and
c) unfulfilled conditions and other contingencies attaching to
government assistance that has been recognised.
 Government assistance may be significant so that disclosure of
the nature, extent and duration of the assistance is necessary in
order that the financial statements may not be misleading.

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

REPAYMENT OF GOVERNMENT GRANT

Change in accounting estimate
A government grant that becomes repayable shall be accounted for as a change in accounting estimate. It means that repayment is
to be recorded in the year the grant becomes repayable and prior period adjustments are not made.

Repayment of a grant related to income Repayment of grant related to asset

Repayment of a grant related to an asset shall be recognised by increasing the carrying

amount of the asset or reducing the deferred income by the amount repayable.

The cumulative additional depreciation that would have been recognised in profit or loss
to date in the absence of the grant shall be recognised immediately in profit or loss.
First, debit unamortised balance of deferred grant, and
Presentation Method 1: Setting up the grant as deferred income
any excess is recognised as expense in profit or loss.
Debit Deferred grant (balancing figure) XXXX
Debit Deferred grant XXXX
Debit Profit or loss (cumulative additional depreciation) XXXX
Debit Profit or loss (excess, if any) XXXX
Credit Bank XXXX
Credit Bank XXXX
Presentation Method 2: Deducting the grant in arriving at the carrying amount of an asset

Debit Non-current asset (balancing figure) XXXX

Debit Profit or loss (cumulative additional depreciation) XXXX
Credit Bank XXXX

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NON-MONETARY GRANT

 A government grant may take the form of a transfer of a

non-monetary asset, such as land or other resources, for the
use of the entity.

Accounting Treatment
 The usual treatment is to record both grant and non-
monetary asset at that fair value. The alternative treatment is
to record both asset and grant at a nominal amount.

Fair Value
 Fair value is 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.

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

Forgivable Loan and Concessional Loan

Forgivable Loan Concessional Loan

 Forgivable loans are loans which the  The benefit of a government loan at a below market
lender undertakes to waive repayment rate of interest is treated as a government grant.
of under certain prescribed conditions.
 The benefit of below market rate of interest shall be
 A forgivable loan from government is measured as the difference between the cash receipt
treated as a government grant when under the government loan and the initial carrying
there is reasonable assurance that the amount of the loan measured and recognised in
entity will meet the terms for accordance with IFRS 9.
forgiveness of the loan. Until then, such
a loan is treated as a liability in  The entity shall consider the conditions and
accordance with IFRS 9. obligations that have been, or must be, met when
identifying the costs for which the benefit of the loan
is intended to compensate.

Compiled by: Murtaza Quaid, ACA IAS 20: Government Grants & Government Assistance

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IAS 20 – ACCOUNTING FOR

GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT
ASSISTANCE
Practice Questions
COMPILED BY: MURTAZA QUAID, ACA

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IAS 20 – ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE

OF GOVERNMENT ASSISTANCE (PRACTICE QUESTIONS)

Question 1. [Government Grant] [CAF 1 – ICAP Study Text]

Identify the following government grants as either “related to assets” or “related to income”.
(i) Grant by Federal Government on condition to import and install new power generation plant in
Pakistan.
(ii) Grant by Provincial Government on condition of construction and operation of factory in a
specific rural area.
(iii) Grant by sports ministry for conducting a Football League for next three years.
(iv) Grant by ministry of manpower for maintaining low labour turnover in last five years.

Question 2. [Government Grant - Period of Recognition] [CAF 1 – ICAP Study Text]

State the time of recognition of income related to following government grants:
a) The grant was received for maintaining good working conditions in the past.
b) The grant was received for maintaining certain working conditions for next three years.
c) The grant was received for installation of a plant that has useful life of 15 years and being
depreciated using 30% reducing balance method.
d) The grant was awarded to facilitate the acquisition of land subject to condition of building a factory
thereon.
e) The grant was awarded to facilitate the acquisition of land for dairy farming subject to condition of
maintaining minimum 70% local employment for next 10 years.

Question 3. [Grant related to income] [CAF 1 – ICAP Study Text]

On 31 December 2020, JKL Limited received grant of Rs. 50,000 towards the cost of training young
apprentices. The training program is expected to last for two years.
Actual total cost of training was Rs. 200,000 (70% incurred in year 2021 and 30% incurred in year 2022
as originally planned).
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 4. [Grant related to income] [Gripping IFRS: Graded Questions]

Tukumu Limited is a company that manufactures curios. Tukumu Limited operates in the Natal Midlands
and employs the local population to manufacture the curios.
As a result of the positive effect that Tukumu Limited has had on an otherwise impoverished area, it was
awarded a government grant of Rs. 150,000 on 1 January 20X6. This grant was given to Tukumu Limited
to subsidise 20% of future wages.

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Tukumu Limited had complied with all the conditions laid out to obtain the grant during the previous
financial year (20X5). The only condition that remained on 1 January 20X6 is to incur future wages.

Wages incurred and paid: Amount in Rs.

31 December 20X6 200,000
31 December 20X7 250,000
31 December 20X8 400,000
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 5. [Grant related to assets] [CAF 1 – ICAP Study Text]

On 1 January, 2021 ABC Limited acquired a plant at a cost of Rs. 600 million and received a grant of Rs.
60 million on the same date.
The plant is to be depreciated on straight line basis over its useful life of 3 years and Rs. 120 million
residual value. There is reasonable assurance that conditions of the grant shall be complied with.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 6. [Grant related to assets] [Gripping IFRS: Graded Questions]

Dozey Limited manufactures and sells toys for babies. They have been operating a profitable business
for many years in the Amakanda area.
Due to a recent baby boom, Dozey Limited found it needed to purchase new equipment. At the time,
the directors discovered that the government was allocating grants to manufacturing companies
operating in the Amakanda area. Dozey Limited’s directors applied for a grant.
On 1 January 20X5, Dozey Limited was awarded a grant of Rs. 400 000 to purchase the much needed
equipment. Dozey Limited had met all the conditions of the grant by 31 December 20X4, apart from the
actual acquisition of the equipment. Dozey Limited purchased the equipment immediately on receipt of
the grant (1 January 20X5).
The cost of acquiring the equipment was Rs. 1,500,000. The useful life is expected to be 4 years. Dozey
Limited does not expect to receive any amount for the equipment at the end of its useful life.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

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Question 7. [Grant related to expense and asset] [Gripping IFRS: Graded Questions]
Potato Limited is a company that farms com. Potato Limited is a relatively new company in the corn
industry, having previously been in the gun manufacturing industry.
Potato Limited was awarded a government grant of Rs. 500,000 on 1 January 20X5, the details of which
are as follows:
▪ Rs. 300,000 is to assist with the purchase of a new harvester;
▪ Rs. 200,000 is for immediate financial support and is not associated with any future costs;
▪ All conditions attaching to the grant have been met.
Later that day, the harvester was acquired for Rs. 900,000. The harvester has a useful life of 5 years and,
at the end of its useful life, Potato Limited expects to sell it for Rs. 50,000 as scrap metal.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 8. [Repayment of grant related to income] [CAF 1 – ICAP Study Text]

On 1 January 2021 Jam Limited (JL) received a cash grant of Rs. 1.5 million towards the cost of
employing a blockchain analyst on a new project for a 5 years’ period.
The grant is repayable in full if the project is not completed. The analyst was employed and the project
commenced from the 1 January 2021.
On 20th January 2023, the project was cancelled and the grant had to be repaid in full.
Required: Journal entries from 1 January 2021 till the date of repayment.

Question 9. [Repayment of grant related to asset] [CAF 1 – ICAP Study Text]

On 1st January 2020, Deep Water Limited installed a non-current asset with a cost of Rs. 500,000 and
received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated on a straight-line
basis over five years.
Grant was repaid on 1st January 2022 in full on failing to meet the conditions.
Required: Journal entries for the year 2020 to 2022 (under both methods of presentation).

Question 10. [Repayment of grant related to asset] [CAF 1 – ICAP Study Text]
On 1st January 2020, Deep Sea Limited installed a non-current asset with a cost of Rs. 500,000 and
received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated on a straight-line
basis over five years.
Grant of Rs. 90,000 was repaid on 1st January 2022 on failing to meet the few conditions of grant.
Required: Journal entries for the year 2020 to 2022 (under both methods of presentation).

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Question 11. [Repayment of grant related to asset] [Gripping IFRS: Graded Questions]
Blot Limited is a newly fanned company that is considering entering the ink business. Blot plans to
manufacture ink and sell it to printers.
Due to the scarcity of businesses in the sector, Blot Limited was awarded a government grant to
purchase the machinery it needed to start operations.
The grant was awarded to Blot Limited on 1 January 20X6 for an amount of Rs. 250,000 and is
conditional upon Blot manufacturing ink for an unbroken period of 3 years. Should Blot stop
manufacturing before the end of the 3 year period, the grant will have to be repaid in full.
Blot Limited purchased the requisite machinery on 1 January 20X6 for Rs. 500 000. The machinery is
expected to have a useful life of 4 years and a nil residual value.
Due to unforeseen circumstances, Blot Limited had to stop manufacturing ink on 1 January 20X8, but
intends to continue on 1 January 20X9.
Required: Journal entries for the year 20X6 to 20X8 (under both methods of presentation).

Question 12. [Forgivable loan] [CAF 1 – ICAP Study Text]

ABC Pharmaceutical Company received cash from government for a research and development project
of a children vaccine. As per the terms of the loan, the cash received from the government shall be
waived, if the entity is able to develop the vaccine within 3 years and sell it free of cost for 5 years.
Required: Briefly explain the accounting treatment of the above loan?
Solution: This is forgivable loan as the repayment shall be waived, under prescribed conditions i.e.
ability to develop vaccine within 3 years and sell it free of cost for 5 years.
If there is reasonable assurance to meet the conditions of waiver, this forgivable loan shall be
recognised as government grant.
However, if there is expectation that it will take more time than three years in the development or there
is expectation of selling the vaccine for a price before 5 years, the loan shall be recognised as a liability in
accordance with IFRS 9.

Question 13. [Forgivable loan] [CAF 1 – ICAP Study Text]

ABC Pharmaceutical Company received cash from government for a research and development project
of a children vaccine. As per the terms of the loan, the cash received from the government is repayable
in cash only if the entity decides to commercialize the results of the research phase of the project. If the
entity decides not to commercialize the results of the research phase, the cash received is not repayable
in cash, but instead the entity must transfer to the government the rights to the research.
Required: Explain whether the loan will be considered a forgivable loan?
Solution: In this scenario, cash received from the government does not meet the definition of a
forgivable loan in IAS 20.
This is because, in this arrangement, the government does not undertake to waive repayment of the
loan, but rather to require settlement in cash or by transfer of the rights to the research. The cash
received from government shall be recognised as liability in accordance with IFRS 9.

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Question 14. [Concessional Loan] [CAF 1 – ICAP Study Text]

On 1 January 2023, MZ Limited received a loan under government support scheme whereby the loan of
Rs. 100,000 is provided at a mark-up rate of 5% per annum whereas market rate of interest for similar
loan is 12% annum. The loan is for immediate financial support and is repayable on 31 December 2023.
MZ Limited has determined the initial carrying amount of loan in accordance with IFRS 9 at Rs. 93,750
(i.e. Rs. 100,000 + 5% x 100,000 = Rs. 105,000 x 1.12-1)
Required: Prepare the journal entry on 1 January 2023 on receipt of the above loan.

Question 15. [Government assistance] [CAF 1 – ICAP Study Text]

JK Limited constructed its factory few years ago in Gwadar. Since then the government has provided
infrastructure by improvement to the general transport and communication network and the supply of
improved facilities including water reticulation which is available on an ongoing indeterminate basis for
the benefit of an entire local community including JK Limited factory. The business of JK Limited has
become much more profitable since provision of these facilities.
Required: State whether the actions by government in above circumstances are considered government
assistance in accordance with IAS 20.
Solution: The above actions affecting general trading conditions are not government assistance as per
IAS 20.

Question 16. [Government assistance] [CAF 1 – ICAP Study Text]

The government provided following to XYZ Limited:
(i) Free technical advice
(ii) Free marketing advice for export to Central Europe
(iii) Free provision of guarantees for export trade with European Countries.
(iv) Supportive government procurement policy that is responsible for significant sales by XYZ
Limited.
Required: Briefly explain whether the above benefits provided by government will be considered as
government grant.
Solution: Items (i) to (iii) are not government grants as these are government assistance that cannot
reasonably have a value placed upon them.
Item (iv) is not government grant as it cannot be distinguished from general trading conditions.

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Question 17. [Non-monetary grant and government assistance] [Gripping IFRS: Graded Questions]
Anthony Limited wanted to start manufacturing guns and weapons. To do this they were required to
obtain a license from the government. The company applied for a license and was awarded one on the
30 June 20X8. The fair value of the grant is reliably determined to be worth Rs. 900,000 and has to be
renewed for this amount in 5 years’ time. The company had to pay the government Rs. 50,000 to obtain
the licence.
The company was also given free technical advice by government experts on the manufacturing of
weapons as well as on the marketing thereof This assistance was given because of the company's
excellent BEE rating (a government imposed set of criteria that companies in that country should abide
by) in its other operations.
The company has a 31 December financial year end.
Required:
a) Journal entries for the year 20X8 (under both methods of presentation).
b) Disclosure necessary for the government assistance not recognised in Anthony Limited’s accounting
records.

Question 18. [Comprehensive Example] [CAF 1 – ICAP Study Text]

Adeel Limited (AL) imported and installed a plant at total cost of Rs. 250 million on 1 January 2021. The
plant has useful life of 3 years. The residual value of plant at the end of useful life has been estimated at
Rs. 128 million. Based on this AL has correctly determined depreciation rate of 20% under reducing
balance method that it uses for depreciating plant and machineries.
On the same date, AL also received a government grant of Rs. 60 million towards this plant. It is
reasonably certain that AL will comply with the conditions of this grant. AL has policy to present the
plant and grant separately in its financial statements.
AL year-ends on 31 December.
Required: Prepare journal entries in the books of AL in respect of above plant from 1 January 2021 to 31
December 2023 (Journal entry for disposal of plant is not required).

Question 19. [Comprehensive Example] [CAF 1 – ICAP Study Text]

Kashif Limited (KL) imported and installed a plant at total cost of Rs. 250 million on 1 January 2021. The
plant has useful life of 3 years. The residual value of plant at the end of useful life has been estimated at
Rs. 128 million. Based on this KL has correctly determined depreciation rate of 20% under reducing
balance method that it uses for depreciating plant and machineries.
On the same date, KL also received a government grant of Rs. 60 million towards this plant. It is
reasonably certain that KL will comply with the conditions of this grant. KL has policy to present the
grant as deduction from the carrying amount of the plant in its financial statements.
KL year-ends on 31 December.
Required: Prepare journal entries in the books of KL in respect of above plant from 1 January 2021 to 31
December 2023 (Journal entry for disposal of plant is not required).

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Question 20. [Comprehensive Example] [Gripping IFRS: Graded Questions]

Brightspark Limited a manufacturer of light bulbs recently received a government grant of C 300 000 to
assist with the company cash flows pursuant to the purchase of a glass blower for C 500 000 on
1/1/20X8. A condition placed on this grant required Brightspark to produce 10,000 light bulbs for the
new parliament buildings by 31/12/20X9. Failure to comply with part or this entire requirement would
cause a proportionate amount of the grant to be repayable.
▪ For the 20X8 financial year Brightspark produced and installed 6,000 light bulbs in the new
parliament building. However due to frequent power cuts during 20X9 only 2,000 of the government
light bulbs were produced and installed in 20X9.
▪ The useful life of the glass blower was 5 years
Required:
a) Prepare journal entries for the years ended 31 December 20X8 & 20X9, accounting for the grant and
the glass blower assuming Brightspark has a policy of accounting for the grant as deferred income.
b) Prepare journal entries for the years ended 31 December 20X8 and 20X9, accounting for the grant
and the glass blower assuming Brightspark has a policy of writing off the grant against the asset.

Question 21. [Comprehensive Example] [CAF 1 – ICAP Study Text]

During the year ended 30 June 2023, Katie received three grants, the details of which are set out below:
a) On 1 September 2022, a grant of Rs. 40,000 from local government. This grant was in respect of
training costs of Rs. 70,000 which Katie had incurred.
b) On 1 November 2022 Katie bought a machine for Rs. 350,000. A grant of Rs. 100,000 was received
from central government in respect of this purchase. The machine, which has a residual value of Rs.
50,000, is depreciated on a straight-line basis over its useful life of five years.
c) On 1 June 2023, a grant of Rs. 100,000 from local government. This grant was in respect of
relocation costs that Katie had incurred moving part of its business from outside the local area. The
grant is repayable in full unless Katie recruits ten employees locally by the end of 30 June 2023.
Katie is finding it difficult to recruit as the local skill base does not match the needs of this part of
the business.
Required: Show how the above transactions should be reflected in the financial statements of Katie for
the year ended 30 June 2023. Where any accounting standards allow a choice you should show all
possible options.

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IAS 20 – Accounting for Government Grants and Disclosure of

Government Assistance – ICAP Past Papers

Question 1. [CAF 1 Past Paper, Q2 of Autumn 2019, 5 marks]

Discuss how the following should be dealt with in the financial statements of relevant entities according
to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance:
(a) The government makes a grant to an entity which is planning to develop teaching software for
children with learning difficulties. The purpose of the grant is to help the entity to meet its general
financing requirement in the initial phase. No further conditions attached to the grant. (01)
(b) A manufacturing entity sets up a plant in an area of high unemployment. A government grant of
Rs. 4 million is received with a condition that the grant is repayable in full if the number of its
employees fell below 100 at any time during the next four years. It is highly probable that the
entity will comply with the condition attached to the grant. (03)
(c) Free technical advice has been provided by the government’s export promotion department to
help an exporter to market his new technology in North America. (01)
Solution:
Part (a)
The grant has been provided for the purpose of giving immediate financial support to the entity with no
further conditions, so this grant should be immediately recognised in profit or loss in full in the period in
which the entity qualifies to receive it (when it is receivable) with disclosure to ensure that its effect is
clearly understood.
Part (b)
Since there is reasonable assurance that conditions attaching to the grant will be met, the grant is
recognised in statement of profit or loss over the four year period in which the entity incurs the costs of
employing 100 people. Amount taken to statement of profit or loss may be either be presented as other
income or shown as deduction from the related expense. The remaining amount of grant will be
presented as deferred income under liabilities in the balance sheet.
Part (c)
Free technical advice is government assistance that cannot reasonably have a value placed upon it and
therefore should not be recognised. However, an indication of such assistance should be disclosed in
financial statements.

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Question 2. [CAF 1 Past Paper, Q3 of Autumn 2020, 8 marks]

On 1 July 2014, Indus Pharma Limited (IPL) received a government grant of Rs. 280 million to setup a
plant in an under-developed rural area. The grant is repayable in full if the conditions attached to the
grant are not met for a period of five years from the date of commencement of the production. At the
inception, it was highly probable that IPL would comply with the conditions for the required period.
IPL incurred total cost of Rs. 630 million on plant and it started production on 1 January 2015. Useful life
of the plant was estimated at 7 years. IPL deducted government grant in arriving at the carrying amount
of the asset.
In January 2019, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant was
repaid by IPL.
In view of repayment of the grant, IPL carried out an impairment review of the plant on 31 December
2019. Net annual cash inflows for the remaining life of the plant have been estimated at Rs. 90 million
and Rs. 80 million for 2020 and 2021 respectively. These cash inflows are net of annual interest and
maintenance cost of Rs. 10 million and Rs. 6 million respectively for both years. Applicable discount rate
is 12%.
On the date of impairment review, the existing plant can be sold in the local market for Rs. 160 million.
Estimated cost of disposal would be Rs. 5 million.
Required: Prepare journal entries for the year ended 31 December 2019 in respect of the above
information. (Show all necessary workings. Narrations are not required)

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Question 3. [CAF 1 Past Paper, Q7(i) of Spring 2021, 6 marks]

You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted
that in January 2020, Government allotted an industrial plot to CL at a prime location subject to the
condition that CL will establish a factory. CL constructed the factory building which was available for use
on 1 October 2020. Due to delay in recruitment of key factory employees, the production activities will
commence on 15 March 2021.
The accountant has not recorded the land as it was given free of cost. While the factory building is still
appearing in capital work in progress as production activities will commence on 15 March 2021.
The accounting policy of CL is to carry land and building at fair value (wherever permitted by IFRS).
Required: Discuss how the above issues should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.
Solution:
The accounting treatment adopted by accountant for not recording land is incorrect. Allotment of land
by Government is a transfer of a non-monetary asset and should be considered as a government grant.
Such non-monetary grant may be recorded at fair value or at a nominal value. As per CL’s policy, fair
value of the land should be assessed and reported in the financial statements under the head property,
plant and equipment (PPE). The grant was made subject to construction of factory so the resulting
deferred income should be recognized in income on a systematic basis over the useful life of the factory
building.
The factory building should also be transferred from capital work in progress to PPE account as the
building is available for use on 1 October 2020. Further depreciation on building should also be charged
from same date i.e. 1 October 2020.

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Question 4. [CAF 1 Past Paper, Q2 of Autumn 2022, 7 marks]

Discuss how the following should be dealt with in the current year’s financial statements of relevant
entities in accordance with IAS 20.
(a) Xero Limited (XL) received a government grant to setup a plant in an under-developed rural area
three years ago. One of the conditions of the grant was that XL will maintain a minimum of 200
employees during the next five years. However, due to worsening economic conditions, XL failed
to maintain 200 employees and the full grant became repayable immediately in the current year.
XL has been presenting the grant in statement of financial position by deducting the grant in
arriving at the carrying value of the plant. (04)
(b) One Limited received a loan from government in the current year at an interest rate of 5% per
annum. The prevailing market interest rate is 12% per annum. The only condition attached to the
loan is that it should be used for acquisition of textile machinery. (03)
Solution:
Part (a)
▪ When a government grant becomes repayable it is accounted for as a change in accounting
estimate.
▪ As the grant was presented as deduction from related plant, its repayment would be recognized by
increasing the carrying value of the plant
▪ The cumulative additional depreciation that would have been recognized in profit or loss to date in
the absence of the grant must be recognized immediately in profit or loss.
▪ Also the circumstances giving rise to repayment of the grant might indicate the possible impairment
of the new carrying amount of the plant.
Part (b)
▪ The benefit of the government loan at a below market rate of interest is treated as a government
grant. The loan shall be recognised and measured as per IFRS 9.
▪ Government grant should be recorded as the difference between the initial carrying amount of the
loan and the proceeds received.
▪ As the primary condition for the loan is acquisition of textile machinery, the grant should be
considered as grant related to asset and should be recognized in profit or loss over the life of the
machinery.
▪ The grant may be presented in the statement of financial position by setting up the grant as
deferred income or by deducting the grant in arriving at the carrying value of the machinery.

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IAS-20
Government Grants & Government Assistance

OBJECTIVE SCOPE

IAS 20 deals with all types of government grant except:

IAS 20 is applied in accounting for, and in
the disclosure of, government grants and
Government assistance in the form of tax reliefs (tax
in the disclosure of other forms of holidays, tax credits etc.)
government assistance. Government participation in the ownership of an entity
Government grants covered by IAS 41 Agriculture.

GOVERNMENT GRANTS
Grants related to Assets
Assistance by government in the form of
Government grants whose primary condition
transfers of resources to an entity in return for
is that an entity qualifying for them should
past or future compliance with certain purchase, construct or otherwise acquire
conditions relating to the long-term assets.
operating activities of the entity.
Subsidiary conditions may also be attached
However, they exclude those forms of restricting the type or location of the assets or
government assistance which cannot the periods during which they are to be
reasonably have a value placed upon them & acquired or held.
transactions with government which cannot be
distinguished from normal trading transactions
of the entity. Grants related To income
Government grants are also called as Govt. Grants other than those related to assets.
subsidies, subventions, or premiums.

GOVERNMENT GRANTS - PERIOD OF RECOGNITION RECOGNITION

Government grants shall be recognised in P/L on a systematic Government grants shall be recognized
basis over the periods in which the entity recognises the when there is reasonable assurance
related costs as expenses, for which the grants are intended that:
to compensate. the entity will comply with the
conditions attaching to them; &
The application of above principle may be summarised as
follows: the grants will be received.

Grants related to Assets Grants related to Income

Grants related to Depreciable Assets Compensation of Expenses already

incurred or immediate Financial Support
Recognised in P/L over the periods and in the
proportions in which depreciation expense on A government grant that becomes receivable
those assets is recognised. as compensation
for expenses or losses already incurred or
Grants related to Non-depreciable Assets for giving immediate financial support to
the entity with no future related costs
Such grant may require the fulfilment of shall be recognised in P/L of the period in
certain obligations and would then be which it becomes receivable.
recognised in P/L over the periods that bear
the cost of meeting the obligations.
For example, a grant of land may be Grants in recognition of Future Expenses
conditional upon construction of a building
on the site and therefore it should be Recognised in P/L in the same period as the
recognised in P/L over the life of the building. relevant expenses.

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IAS-20 Government Grants & Government Assistance

GOVERNMENT GRANTS - PRESENTATION

Presentation: Grants related to Income

Grants related to income are presented as part of profit or loss, either separately or under a general
heading such as ‘other income’; alternatively, they are deducted in reporting the related expense.

(1) Present the grant as other income (2) Present the grant as deduction from related expense

On receipt/accrual of grant On receipt/accrual of grant

Cash / Grant Receivable xxxx Cash / Grant Receivable xxxx
Deferred Grant xxxx Deferred Grant xxxx
On recognition of grant as income in P/L On recognition of grant as income in P/L
Deferred Grant xxxx Deferred Grant xxxx
Other Income – P/L xxxx Expenses – P/L xxxx

Presentation: Grants related to Assets

Government grants related to assets, including non-monetary grants at fair value, shall be presented in
the statement of financial position either by setting up the grant as deferred income or by deducting the
grant in arriving at the carrying amount of the asset.

(1) Setting up the grant as deferred income (2) Deducting the grant from carrying
amount of an asset
On acquisition of asset
On acquisition of asset
Non-current asset (PPE, etc.) xxxx
Non-current asset (PPE, etc.) xxxx
Bank / Cash xxxx
Bank / Cash xxxx
On receipt/accrual of grant
On receipt/accrual of grant
Cash / Grant Receivable xxxx
Cash / Grant Receivable xxxx
Deferred grant xxxx
Deferred grant xxxx
Period end depreciation expense
Period end depreciation expense (reduced)
Depreciation expense – P/L xxxx
Depreciation expense – P/L xxxx
Acc. dep (PPE, etc.) xxxx
Acc. dep (PPE, etc.) xxxx
Period end amortisation of deferred grant
Deferred grant xxxx
Profit or loss xxxx

OTHER GOVERNMENTS GRANTS

(1) Non-monetary grants (2) Forgivable loans (3) Loans at below market
rates of interest
A government grant may take
Forgivable loans are loans which The benefit of a government
the form of a transfer of a
the lender undertakes to waive loan at a below-market rate
non-monetary asset, such as
repayment of under certain of interest is treated as a
land or other resources, for the
prescribed conditions. government grant
use of the entity
Accounting Treatment Accounting Treatment Accounting Treatment
Usually, both grant and non-monetary A forgivable loan from government The benefit of below market rate
asset are recognized at fair value. is treated as a government grant when of interest is measured as the
there is reasonable assurance that the difference between the cash
The alternative treatment is to record
entity will meet the terms for forgiveness receipt under government loan &
both asset and grant at a nominal of the loan. Until then, such a loan the initial carrying amount of the
amount is treated as a liability in accordance loan measured and recognised in\
PageIFRS
with 417 9. accordance with IFRS 9
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IAS-20
Government Grants & Government Assistance

REPAYMENT OF GOVERNMENT GRANT

A government grant that becomes repayable shall be accounted for as a change in accounting estimate.
It means that repayment is to be recorded in the year the grant becomes repayable and prior period
adjustments are not made.

Repayment of a grant related to income Repayment of grant related to asset

First, debit unamortised balance of deferred Repayment of a grant related to an asset shall
grant, and any excess is recognised as expense in be recognised by increasing the carrying
profit or loss. amount of the asset or reducing the deferred
income by the amount repayable.
Deferred grant xxxx
Profit or loss (excess, if any) xxxx The cumulative additional depreciation that
Bank xxxx would have been recognised in profit or loss
to date in the absence of the grant shall be
recognised immediately in profit or loss.

Presentation Method 1: Setting up the Presentation Method 2: Deducting the grant in

grant as deferred income arriving at the carrying amount of an asset

Deferred grant (bal.) xxxx Non-current asset (bal.) xxxx

Cumulative additional Dep – P/L xxxx Cumulative additional Dep – P/L xxxx
Bank xxxx Bank xxxx

GOVERNMENT ASSISTANCE PRESENTATION & DISCLOSURE

Action by government designed to provide an Accounting policy adopted for government

economic benefit specific to an entity or range grants, including the methods of presentation
of entities qualifying under certain criteria. adopted in the financial statements;
However, Government Assistance does not Nature and extent of government grants
include benefits provided only indirectly through recognised in the financial statements and an
action affecting general trading conditions, indication of other forms of government
such as the provision of infrastructure in assistance from which the entity has directly
development areas or the imposition of trading benefited; and
constraints on competitors. Unfulfilled conditions and other contingencies
attaching to government assistance that has
been recognised.
Government assistance may be significant so
that disclosure of the nature, extent and duration
of the assistance is necessary in order that the
financial statements may not be misleading.

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IFRS 8
OPERATING SEGMENTS
Compiled by: Murtaza Quaid, ACA

IFRS 8: OPERATING SEGMENTS

In this Part:
 Core principle of IFRS 8

 Who needs to apply IFRS 8?

 Why IFRS 8?

 What is operating segment?

 Example: Identify operating segments

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IFRS 8 Operating Segments

In 2006, from 1 January 2009

 Entity shall disclose information to enable users of its financial statements to

Core Principle evaluate the nature and financial effects of the business activities in which it engages
and the economic environments in which it operates.

Who needs to apply IFRS 8

 Whose debt or equity instruments are
 Separate Financial Statements traded in a public market
 Files or is in the process of filing its
 Consolidated Financial Statements financial statements for the purpose of
public trading

Compiled by: Murtaza Quaid, ACA IFRS 8: OPERATING SEGMENTS

Why Operating Segments?

Segment reporting
Management Report (IFRS 8)
Financial Statements

 Monthly / quarterly  Monthly / quarterly

 Which segment perform
 Cash / accrual basis  Accrual basis
well
 Info about divisions,  Identify combined effect of  Info in line with IFRSs
products, locations . . . segments
 Reconciliation between
reportable segments and
financial statements

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Operating Segments

COMPONENT OF THE ENTITY

 May earn revenues / incur expenses from business activities
 Whose operating results are regularly reviewed by entity’s
Chief Operating Decision Maker to access performances /
allocate resources
 For which discrete financial information is available

Startup Headquarters Internal products / services

Compiled by: Murtaza Quaid, ACA IFRS 8: OPERATING SEGMENTS

Operating Segments
Q: ABC Co. operates in Pakistan and it has 3 branches: Karachi, Islamabad and Lahore.

 Each branch has 3 divisions: Luxury, sports, stationary.

 Head office and R&D department are located in Karachi.

 Each branch has its operational manager who reports branch’s result to the Board of Directors.

 BoD makes all the decisions related to operations.

What are operating segments?

Step 1  Identify CODM

Board of Directors

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Operating Segments
Q: ABC Co. operates in Pakistan and it has 3 branches: Karachi, Islamabad and Lahore.

 Each branch has 3 divisions: Luxury, sports, stationary.

 Head office and R&D department are located in Karachi.

 Each branch has its operational manager who reports branch’s result to the Board of Directors.

 BoD makes all the decisions related to operations.

What are operating segments?

Step 2  May the component earn revenues / incur expenses from its business activities

ABC Co.

Karachi Islamabad Lahore Head office R&D

 Luxury  Luxury  Luxury
 Sports  Sports  Sports No revenue from business activities
(Only incidental)
 Stationary  Stationary  Stationary
IFRS 8: OPERATING SEGMENTS

Operating Segments
Q: ABC Co. operates in Pakistan and it has 3 branches: Karachi, Islamabad and Lahore.

 Each branch has 3 divisions: Luxury, sports, stationary.

 Head office and R&D department are located in Karachi.

 Each branch has its operational manager who reports branch’s result to the Board of Directors.

 BoD makes all the decisions related to operations.

What are operating segments?

 Are component’s results reviewed by CODM as a basis for resource

Step 3 allocation and assessing performance?
Components of ABC Co. What reports are reviewed by CODM?
- Per branch?
Karachi Islamabad Lahore
- Per division?
 Luxury  Luxury  Luxury Judgements necessary (matrix structure, more
 Sports  Sports  Sports reports available)
 Stationary  Stationary  Stationary IFRS 8: OPERATING SEGMENTS

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Operating Segments
Q: ABC Co. operates in Pakistan and it has 3 branches: Karachi, Islamabad and Lahore.

 Each branch has 3 divisions: Luxury, sports, stationary.

 Head office and R&D department are located in Karachi.

 Each branch has its operational manager who reports branch’s result to the Board of Directors.

 BoD makes all the decisions related to operations.

What are operating segments?

Step 4  Is discrete financial information for the component available?

If ABC Co. BOD revises financial information

about branches and makes decision related to
Operating results branches
of a component
Branches  Operating segment under IFRS 8

IFRS 8: OPERATING SEGMENTS

IFRS 8: OPERATING SEGMENTS

In this Part:
 What is reportable segment?

 Example: Reportable segments

 Rules related to reportable segments

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Reportable Segments

Is identified as a Segment AND Exceeds

OR
Quantitative thresholds
Results from aggregating 2 or more segments

 Segment’s reported revenue ≥ 10% of the

Aggregation Criteria combined revenue
 Absolute amount of its reported profit / loss ≥
 Nature of product / services 10% of the greater (in absolute amounts):
 Nature of production process  Combined reported profit of all operating segments
 Type / class of customer for their product / services that did not report a loss

 Distribution methods for product / services  Combined reported loss of all operating segments
that reported a loss
 Its assets ≥ 10% of the combined assets
Compiled by: Murtaza Quaid, ACA IFRS 8: OPERATING SEGMENTS

Reportable Segments
If operating segment does not meet the thresholds to be reported separately

It can still be separately disclosed (management’s assessment)

If total external revenues reported by operating segments < 75% of total revenue

Additional operating segments can be identified  Max. 10 segments

Info about other activities and segments not meeting the criteria

Combine and disclose in “all other segments” category

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Reportable Segments
If the segment is newly identified as reportable (due to quantitative thresholds)

Report that segment separately in the previous period, too (restatement)

Segment I 17 17
Segment IV Segment I 18
become reportable Segment II 17
Segment II 15 15
Segment III 13 13 Segment III 15
Segment IV 5 Segment IV 10
All other segment 10 5 All other segment 10
Restate previous
Total Revenue 55 55 reporting period Total Revenue 70

Compiled by: Murtaza Quaid, ACA IFRS 8: OPERATING SEGMENTS

IFRS 8: OPERATING SEGMENTS

In this Part:
 Operating Segments: Disclosure

 Example II

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Operating Segments: Disclosure

1. General Information

2. Information about profit or loss, assets and liabilities

3. Reconciliations

4. Entity-wide disclosures

Compiled by: Murtaza Quaid, ACA IFRS 8: OPERATING SEGMENTS

Operating Segments: Disclosure

1. General Information

 Factors used to identify reportable segments

 Judgements in applying aggregation criteria

 Types of products / services generating revenues

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Operating Segments: Disclosure

2. Information about profit / loss, assets and liabilities

 Measurement of segment items = equal to measure reported to CODM
 If regularly provided to CODM  disclose  Explanation of measurement basis
 Revenue from external customers  Basis of accounting for transaction between reportable
segments
 Internal revenues
 Nature of differences between measurements of reportable
 Interest revenue segments’ P/L and entity’s P/L after income tax +
discontinued operations
 Interest expense
 Nature of difference between measurements of reportable
 Depreciation and amortization segments’ assets and entity’s assets
 Material items of income and expense  Nature of difference between measurements of reportable
segments’ liabilities and entity’s liabilities
 Interest in P/L of associate and JV
 Nature of any changes from prior periods in the
 Incomes tax expense / income measurement methods to determine segment’s P/L and
 Material items non-cash items their effect
 Nature & effect of asymmetrical allocations to reportable
Compiled by: Murtaza Quaid, ACA segments IFRS 8: OPERATING SEGMENTS

Operating Segments: Disclosure

3. Reconciliations

 Total of reportable segments’ revenue  to entity’s revenue

 Total of reportable segments’ profit or loss  to entity’s profit or loss before

and after tax and discontinued operations

 Total of reportable segments’ assets  to entity’s assets

 Total of reportable segments’ liabilities  to entity’s liabilities

 Total of reportable segments’ amount for every other material item of

information disclosed  to the corresponding amount of the entity
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Operating Segments: Disclosure

4. Entity-wide Disclosures

4.1 Info about products 4.2 Info about geographical 4.3 Info about major
and services areas customers

 Revenue from external customers  Report if revenue with

 Attributed to entity’s country single customer ≥ 10% of
of domicile total revenue
 Attributed to all foreign
countries

 Non-current assets
 Located in entity’s country of
domicile
 Located in all foreign countries

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IFRS 8: OPERATING SEGMENT

COMIPLED BY: MURTAZA QUAID, ACA

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IAS 8 (Practice questions) Compiled by: Murtaza Quaid

IFRS 8 – OPERATING SEGMENTS

CORE PRINCIPLE

IFRS 8’s core principle is that an entity should disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the types of business activities in which it
engages and the economic environments in which it operates.

SCOPE

IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated
financial statements of a group with a parent):

▪ Whose debt or equity instruments are traded in a public market; or

▪ That files, or is in the process of filing, its (consolidated) financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of instruments in a
public market.

However, when both separate and consolidated financial statements for the parent are presented in a
single financial report, segment information need be presented only on the basis of the consolidated
financial statements.

OPERATING SEGMENTS

An operating segment is a component of an entity:

▪ That engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity);
▪ Whose operating results are reviewed regularly by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance; and
▪ For which discrete financial information is available.

Not all operations of an entity will necessarily be an operating segment (nor part of one). For example,
the corporate headquarters or some functional departments may not earn revenues or they may earn
revenues that are only incidental to the activities of the entity. These would not be operating segments.
In addition, IFRS 8 states specifically that an entity’s post-retirement benefit plans are not operating
segments.

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REPORTABLE SEGMENTS

Aggregation Criteria

Operating segments often exhibit similar long-term financial performance if they have similar economic
characteristics. For example, similar long-term average gross margins for two operating segments would
be expected if their economic characteristics were similar. Two or more operating segments may be
aggregated into a single operating segment if aggregation is consistent with the core principle of this IFRS,
the segments have similar economic characteristics, and the segments are similar in each of the following
respects:

(a) the nature of the products and services;

(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public
utilities.

Quantitative thresholds and aggregation

Segment information is required to be disclosed about any operating segment that meets any of the
following quantitative thresholds:

▪ its reported revenue, from both external customers and inter segment sales or transfers, is 10 per
cent or more of the combined revenue, internal and external, of all operating segments; or
▪ the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute
amount, of
i. the combined reported profit of all operating segments that did not report a loss and
ii. the combined reported loss of all operating segments that reported a loss; or
▪ its assets are 10 per cent or more of the combined assets of all operating segments.

If the total external revenue reported by operating segments constitutes less than 75 per cent of the
entity’s revenue, additional operating segments must be identified as reportable segments even if they
do not meet the quantitative thresholds set out above) until at least 75 per cent of the entity’s revenue is
included in reportable segments.

IFRS 8 has detailed guidance about when operating segments may be combined to create a reportable
segment. This guidance is generally consistent with the aggregation criteria in IAS 14.

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DISCLOSURE

The disclosure principle in IFRS 8 is that an entity should disclose ‘information to enable users of its
financial statements to evaluate the nature and financial effects of the types of business activities in which
it engages and the economic environments in which it operates.’

In meeting this principle, an entity must disclose:

▪ General information about how the entity identified its operating segments and the types of products
and services from which each operating segment derives its revenues;
▪ Information about the reported segment profit or loss, including certain specified revenues and
expenses included in segment profit or loss, segment assets and segment liabilities and the basis of
measurement; and
▪ Reconciliation of the totals of segment revenues, reported segment profit or loss, segment assets,
segment liabilities and other material items to corresponding items in the entity’s financial
statements.

In addition, there are prescribed entity-wide disclosures that are required even when an entity has only
one reportable segment. These include information about each product and service or groups of products
and services.

Analyses of revenues and certain non-current assets by geographical area are required – with an expanded
requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the
identification of operating segments. If the information necessary for these analyses is not available, and
the cost to develop it would be excessive, that fact must be disclosed.

The Standard has also introduced a requirement to disclose information about transactions with major
customers. If revenues from transactions with a single external customer amount to 10 per cent or more
of the entity’s revenues, the total amount of revenue from each such customer and the segment or
segments in which those revenues are reported must be disclosed. The entity need not disclose the
identity of a major customer, nor the amount of revenues that each segment reports from that customer.
For this purpose, a group of entities known to the reporting entity to be under common control will be
considered a single customer, and a government and entities known to the reporting entity to be under
the control of that government will considered to be a single customer.

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IAS 8 (Practice questions) Compiled by: Murtaza Quaid

IFRS 8 – OPERATING SEGMENTS (PRACTICE QUESTIONS)

Question 1. [IFRS Box – IFRS Kit]

Assume that all segments meet the definition of operating segment and focus on assessment of
quantitative thresholds. All amounts are in Rs.

Segment Revenues Profit / (Loss) Assets

Segment I. 250,000 75,000 180,000
Segment II. 280,000 70,000 420,000
Segment III. 200,000 (75,000) 400,000
Segment IV. 1,300,000 655,000 300,000
Segment V. 700,000 (300,000) 600,000
Segment VI. 300,000 (150,000) 170,000
Combined 3,030,000 275,000 2,070,000

Total for the entity: 3,500,000 300,000 2,400,000

Required:
a) Based on the information below, identify which segments are reportable operating segments in line
with IFRS 8.
b) Identify which segments are reportable operating segments if Segment IV sells semi-finished goods
to all other segments and to external customers, too. The segment's revenue from the sale to all
other segments is Rs. 300,000.

Question 2. [CAF 5 Past paper, Autumn 2019, Q2, 7 marks]

Diamond Limited, a listed company, has six operating segments. These segments do not have similar
economic characteristics. Following segment wise information is available:

Required: Identify the reportable segments under IFRSs along with brief justification.

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Question 3. [CFAP 1 Past paper, Sum 2012, Q5, 9 marks]

(a) Specify the criteria for identification of operating segments, in accordance with the International
Financial Reporting Standards. (03 marks)
(b) Jay Limited is an integrated manufacturing company with five operating segments.

Internal External Total Profit /

Operating Assets Liabilities
Revenue Revenue Revenue (loss)
Segments
-----------------------Rs. in million-----------------------
A 38 705 743 194 200 130
B - 82 82 (22) 44 40
C - 300 300 81 206 125
D 35 - 35 10 75 60
E 38 90 128 (63) 50 25
Total 111 1,177 1,288 200 575 380

Required: In respect of each operating segment explain whether it is a reportable segment.

Question 4. [CFAP 1 Past paper, Sum 2015, Q5, 15 marks]

Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints and pharma
businesses. Results of each business segment for the year ended 31 March 2015 are as follows:

Gross Operating
Business Sales Assets Liabilities
profit expenses
Segments
-----------------------Rs. in million-----------------------
Chemicals 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98

Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10 million
respectively at a contribution margin of 30%.
Operating expenses include GL’s head office expenses amounting to Rs. 75 million which have not been
allocated to any segment. Furthermore, assets and liabilities amounting to Rs. 150 million and Rs. 27
million have not been reported in the assets and liabilities of any segment.
Required: In accordance with the requirements of International Financial Reporting Standards:
(a) Determine the reportable segments of Gohar Limited; and (07)
(b) Show how these reportable segments and the necessary reconciliation would be disclosed in GL’s
financial statements for the year ended 31 March 2015. (08)

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IAS 8 (Practice questions) Compiled by: Murtaza Quaid

Question 5. [CAF 5 Past paper, Autumn 2020, Q3, 8 marks]

Roshni Limited (RL) is a listed company and is engaged in manufacturing of textile products. RL generates
30% of its revenue from exports to Middle East, out of which 60% are made to only one customer i.e.
Hakeem Limited. RL has various operating segments. Apart from external sales, some of these segments
make internal sales as well.

Following amounts have been extracted from RL's draft financial statements for the year ended 30 June
2020:

Detailed financial information is reported internally to the chief operating decision maker of each
segment. However, following disclosure on operating segments is prepared for inclusion in notes to the
financial statements for the year ended 30 June 2020:

Required:
Prepare list of errors and omissions in the above disclosure. (Redrafting of disclosure is not required)

Solution:

List of errors/omissions

▪ Revenue from transactions with other operating segments have not been disclosed separately.
▪ Revenue from reportable segments is comprised of 62% of total revenue against the requirement of
75% so another segment needs to be disclosed separately.
▪ Interest income of spinning and weavings segments are reported on net basis. Rather, interest income
and expense needs to be disclosed separately.
▪ Total assets in disclosure does not match with total assets reported in financial statements.
▪ Segment wise liabilities have not been disclosed.
▪ Since export represents 30% of sales, geographical segment should also be disclosed.
▪ Sales to HL consist of 18% of total sales so it should also be disclosed separately.
▪ Depreciation and amortization should also be disclosed.
▪ Income tax expense should also be disclosed.
▪ Material items of income and expense should also be disclosed.

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Question 6. [CAF 5 Past paper, Autumn 2023, Q2, 8 marks]

Drigh Limited (DL), a listed company, has seven components. The following information is available about
the components:

Additional information:
(i) Operating results of all the above components are reviewed by DL’s CEO. He is of the view that all
components need to be presented separately in the DL’s financial statements as per IFRS 8.
(ii) Components A and G exhibit similar long-term financial performance because they have similar
economic characteristics while other components do not have similar economic characteristics.
(iii) Component F earns revenues that are only incidental to the activities of DL and supports
components C and D.
Required: Keeping in view the CEO’s point of view, discuss how the above components should be
presented in the note of ‘Operating Segments’ in accordance with IFRS 8. (Preparation of note is not
required)
Solution:
Quantitative thresholds for reportable segments:

*Higher of total profit i.e. 606(475+58+60+13) or total loss i.e. 925(300+45+580)

Contrary to the CEO’s point of view, DL’s components should be presented in the note of ‘operating
segments’ in the following manner:
▪ A & G may be presented as an aggregated segment because they have similar economic
characteristics and, when combined, meet all the quantitative thresholds.
▪ C will be presented as a separate segment because its loss of Rs. 580 million is greater than Rs. 92.5
million. Further, its revenue of Rs. 1,600 million is also greater than Rs. 793.8 million.

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IAS 8 (Practice questions) Compiled by: Murtaza Quaid

▪ D will be presented as a separate segment because it meets all the quantitative thresholds.
▪ Components B, E, and F will be presented as a combined category of ‘All other segments’ for the
following reasons:
- More than 75% i.e. 84.5%[(2600+1600+1550+125)/6950)] of the revenue is reported by operating
segments so additional reportable segments need not be identified.
- Segment B is an operating segment but fails to meet any quantitative threshold.
- Segment E is an operating segment but fails to meet any quantitative threshold.
- Segment F, despite having assets of Rs. 300 million which are greater than Rs. 221 million, fails to
meet the definition of operating segment. This is because its revenues are merely incidental to
the activities of the entity, and as a result, it does not meet the definition of an operating segment.

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Question 3. [CFAP 1 Past paper, Sum 2012, Q5, 12 marks]

A.5 (a)  An operating segment is a component of an entity:
o That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity);
o Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess the performance; and
o For which discrete financial information is available.

 A business activity which has yet to earn revenues, such as a start up, is an
operating segment if it is separately reported on to the chief operating decision
maker.
(b) As Jay Limited has both profit and loss making segments, the result of those in
profit and those in loss must be totaled to see which is the greater:

Profits (194+81+10) 285

Losses (22+63) (85)
200

So the 10% of profit or loss test must be applied by reference to Rs. 285 million.

Reportable
Segment Explanation
(Yes / No)
A Yes Because it generates more than 10% of revenue.
B No Because it fails to meet any of the criteria specified in
IFRS-8
C Yes Because it generates more than 10% of revenue.
D Yes Because it has more than 10% of assets.
E Yes Because its losses are more than 10% of absolute profit.

Check the 75% test is satisfied: (705+300+90)/1,177 = 93%

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Question 4. [CFAP 1 Past paper, Sum 2015, Q5, 15 marks]

Ans.5 (a) Determination of reportable segments

Chemicals Soda Ash Polyester Paint Pharma Total

-------------------------- Rs. in million --------------------------
Sales 1,790 216 227 247 252 2,732
Less: Inter-segment sales (38) - - - - (38)
Sales to external customers 1,752 216 227 247 252 2,694

Gross profit 1,101 117 48 26 31 1,323

Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152

Assets 637 444 115 127 132 1,455

Criteria for reporting segment Reporting segment External sales of

identification identified identifying segment
1. 10% of sales i.e. Rs. 273.2 million Chemicals 65.03%
2. 10% of PBT i.e. Rs. 115.2 million - -
3. 10% of assets i.e. Rs. 145.5 million Soda Ash 8.02%
73.05%

Further segment needs to be identified as reportable segment’s external sale is less than 75%

4. Highest in term of sales and % of assets

Pharma 9.22%
amount remaining segments
82.27%

(b) Disclosure in the financial statements of Gohar Limited

34 - OPERATING SEGMENT RESULTS

Chemicals Soda Ash Pharma Others Total
------------------------ Rs. in million ------------------------
Revenue from external customers 1,752 216 252 474 2,694
Inter segment revenue 38 - - - 38
Revenue from reportable segment 1,790 216 252 2,258

Other material information

Operating expenses 63 57 12 39 171
Segment profit before tax 1,038 60 19 35 1,152
Segment assets 637 444 132 242 1,455
Segment liabilities 442 355 98 202 1,097

34.1 - Reconciliation of reportable segment revenues, profit or loss, assets and liabilities
Other than Elimination
Reportable Gohar
reportable of inter- Other
segment Limited's
segment segment adjustments
total total
total transactions
------------------------------ Rs. in million ------------------------------
Revenues 2,258 474 (38) - 2,694
Operating expenses 132 39 - 75 246
Segment profit before tax 1,117 35 (11) (75) 1,066
Segment assets 1,213 242 - 150 1,605
Segment liabilities 895 202 - 27 1,124

The reconciling items represents amounts related to corporate headquarter which are not
included in segment information.

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RESTORATION AND SIMILAR LIABILITIES

IAS 16: Property, Plant & Equipment

Initial Measurement COST

Purchase Price -
Directly Attributable Costs -
IAS 37 Provision for Dismantling Costs -

Provision is recorded when

• Present Obligation as a result of Past Event;
At Year End,
• Outflow of Economic Resources is Probable; AND Provision must be based on
• Amount of Outflow is Reliably Measurable Management Best Estimate

Property, Plant and Equipment at COST MODEL

Decrease in Provision Debit: Provision for DC XXXX

for Dismantling Costs Credit: Property, Plant & Equipment XXXX
Credit: Profit and Loss (Excess, if any) XXXX

To the extend of carrying amount of PPE

Increase in Provision Debit: Property, Plant & Equipment XXXX

for Dismantling Costs Credit: Provision for DC XXXX

Subject to Impairment Testing

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Property, Plant and Equipment at REVALUATION MODEL

Decrease in Provision Debit: Provision for DC XXXX

for Dismantling Costs Credit: Profit and Loss XXXX
Credit: Revaluation Surplus - OCI XXXX
Credit: Profit and Loss (Excess, if any) XXXX
To the extend of revaluation loss previously
recorded in PnL (net of depreciation effect)

To the extend of carrying amount of PPE

Increase in Provision Debit: Profit and Loss (Excess, if any) XXXX

for Dismantling Costs Debit: Revaluation Surplus - OCI XXXX
Credit: Provision for DC XXXX

To the extend of credit balance in Revaluation

Surplus (net of incremental depreciation effect)

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DECOMMISSIONING,
RESTORATION AND SIMILAR
LIABILITIES
Practice Questions
COMPILED BY: MURTAZA QUAID, ACA

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IFRIC 1: CHANGES IN EXISTING DECOMMISSIONING, RESTORATION

AND SIMILAR LIABILITIES - PRACTICE QUESTIONS

Question 1.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 7,000.
▪ Provision for dismantling = Rs. 1,000.
▪ Recoverable amount = Rs. 8,200.
Due to change in estimate for dismantling cost, the provision for dismantling increases to Rs. 2,500. It is
the policy of the company to measure its property, plant and equipment at cost model.
Required: Journalize the change in estimate for dismantling cost.

Question 2.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,500.
▪ Provision for dismantling = Rs. 4,000.
Due to change in estimate for dismantling cost, the provision for dismantling decreases to Rs. 1,200. It is
the policy of the company to measure its property, plant and equipment at cost model.
Required: Journalize the change in estimate for dismantling cost.

Question 3.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,500.
▪ Fair value of the assets = Rs. 1,500.
▪ Revaluation surplus = Rs. 800.
▪ Provision for dismantling = Rs. 250.
Due to change in estimate for dismantling cost, the provision for dismantling increases to Rs. 600. It is
the policy of the company to measure its property, plant and equipment at revaluation model.
Required: Journalize the change in estimate for dismantling cost.

Question 4.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,500.
▪ Fair value of the assets = Rs. 1,500.
▪ Revaluation surplus = Rs. 200.
▪ Provision for dismantling = Rs. 150.
Due to change in estimate for dismantling cost, the provision for dismantling increases to Rs. 400. It is
the policy of the company to measure its property, plant and equipment at revaluation model.
Required: Journalize the chan5ge in estimate for dismantling cost.

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Question 5.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,200.
▪ Fair value of the assets = Rs. 1,200.
▪ Revaluation surplus = Rs. 900.
▪ Provision for dismantling = Rs. 600.
Due to change in estimate for dismantling cost, the provision for dismantling decreases to Rs. 150. It is
the policy of the company to measure its property, plant and equipment at revaluation model.
Required: Journalize the change in estimate for dismantling cost.

Question 6.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,200.
▪ Fair value of the assets = Rs. 1,200.
▪ Historical Cost = Rs. 1,500
▪ Provision for dismantling = Rs. 800.
Due to change in estimate for dismantling cost, the provision for dismantling decreases to Rs. 150. It is
the policy of the company to measure its property, plant and equipment at revaluation model.
Required: Journalize the change in estimate for dismantling cost.

Question 7.
Following information is available in respect of a plant owned by ABC Limited as at December 31, 2016:
▪ Carrying amount = Rs. 1,200.
▪ Fair value of the assets = Rs. 1,200.
▪ Historical Cost = Rs. 1,500
▪ Provision for dismantling = Rs. 3,000.
Due to change in estimate for dismantling cost, the provision for dismantling decreases to Rs. 600. It is
the policy of the company to measure its property, plant and equipment at revaluation model.
Required: Journalize the change in estimate for dismantling cost.

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Question 8. [CAF 5 ICAP Study Text]

On 1 January 20Y1, Adeel Limited (AL) installed a plant at a total cost of Rs. 100,000 with useful life of 5
years and nil residual value. There is legal requirement to dismantle the plant at the end of useful life. It
was estimated that dismantling would require cash outflows of Rs. 16,105 at the end of useful life.
Relevant pre-tax discount rate was estimated as 10%.
On 31 December 20Y1, the estimate of dismantling cash outflows and relevant pre-tax discount rate was
revised to Rs. 19,735 and 11%, respectively.
On 31 December 20Y2, the estimate of dismantling cash outflows and relevant pre-tax discount rate was
revised to Rs. 13,971 and 14%, respectively.
In later December 20Y3, the plant suffered a damage and its recoverable amount was determined to be
Rs. 5,000 only on 31 December 20Y3, following the impairment review.
On 31 December 20Y3, the estimate of dismantling cash outflows and relevant pre-tax discount rate was
revised to Rs. 5,382 and 16%, respectively.
AL has financial year end of December 31.
Required: Prepare movement of plant’s carrying amount and provision for dismantling, identifying the
amounts that will be charged to profit or loss from 1 January 20Y1 to 31 December 20Y3 for AL.

Question 9. [CAF 5 ICAP Study Text]

On 1 January 20Y1, Multan Limited (ML) installed at a total cost of Rs. 100,000 with useful life of 5 years
and nil residual value. There is legal requirement to dismantle the plant at the end of useful life. It was
estimated that dismantling would require cash outflows of Rs. 16,105 at the end of useful life. Relevant
pre-tax discount rate was estimated as 10%.
On 31 December 20Y1, plant was revalued to Rs. 87,500 and the estimate of dismantling cash outflows
and relevant pre-tax discount rate was revised to Rs. 19,735 and 11%, respectively.
On 31 December 20Y2, plant was revalued to Rs. 67,000 and the estimate of dismantling cash outflows
and relevant pre-tax discount rate was revised to Rs. 13,971 and 14%, respectively.
On 31 December 20Y3, the plant was revalued to Rs. 40,000 and the estimate of dismantling cash
outflows and relevant pre-tax discount rate was revised to Rs. 5,382 and 16%, respectively.
ML has financial year end of December 31.
Required: Prepare movement of plant’s carrying amount, provision for dismantling and revaluation
surplus, identifying the amounts that will be charged to profit or loss from 1 January 20Y1 to 31
December 20Y3 for ML.

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IFRIC 1: CHANGES IN EXISTING DECOMMISSIONING, RESTORATION

AND SIMILAR LIABILITIES – ICAP PAST PAPERS

Question No. 5 of Winter 2008, 8 marks

Violet Power Limited is running a coal based power project in Pakistan. The Company has built its plant in
an area which contains large reserves of coal. The company has signed a 20 year agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of
the plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:
i. The plant commenced its production on July 1, 20X5. It is the policy of the company to measure the
related assets using the cost model;
ii. Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing costs but does
not include any decommissioning cost;
iii. Residual value of the plant is estimated at Rs. 320 million;
iv. Initial estimate of amount required for dismantling of plant, at the time of installation of plant was
Rs. 780 million. However, such estimate was reviewed as of June 30, 20X6 and was revised to Rs.
1,021 million;
v. The Company follows straight line method of depreciation; and
vi. Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6% per
annum.
Required: Work out the carrying value of plant and decommissioning liability as of June 30, 20X6.

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Question No. 3 of Summer 2011, 17 marks

Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from garbage
collected by the civic agencies. WML had signed an agreement with the government for allotment of a
plot of land, free of cost, for 10 years. However, WML has agreed to restore the site, at the end of the
agreement.
Other relevant information is as under:
(i) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would
amount to Rs. 10 million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation model.
(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based
discount rate was 10%.
(iv) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
(v) On March 31, 2009 prevailing market based discount rate had increased to 12%.
(vi) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
(vii) Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(viii) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.
Required: Prepare accounting entries for the year ended March 31, 2011 based on the above information,
in accordance with International Financial Reporting Standards. (Ignore taxation.)

Question No. 5(a)(iv) of Winter 2017, 4 marks

Faraz is a chartered accountant and employed as Finance Manager of Gladiator Limited (GL). He has
recently returned after a long medical leave and has been provided with draft financial statements of GL
for the year ended 30 June 20X7. Following figures are reflected in the draft financial statements:
Rs. in million
Profit before tax 125
Total assets 1,420
Total liabilities 925
While reviewing the financial statements, he noted the following issues:
i. As at 30 June 20X7, dismantling cost relating to a plant has increased from initial estimate of Rs. 30
million to Rs. 40 million. Further, fair value of the plant on that date was assessed at Rs. 112 million
(net of dismantling cost). No accounting entries have been made in respect of increase in dismantling
liability and revaluation of the plant.
ii. The plant had a useful life of 5 years when it was purchased on 1 July 20X5. The carrying value of plant
and related revaluation surplus included in the financial statements are Rs. 135.4 million (after
depreciation for the year ended 30 June 20X7) and Rs. 3.15 million (after transferring incremental
depreciation for the year ended 30 June 20X7) respectively.
The appropriate discount rate is 8%.
Required: Determine the revised amounts of profit before tax, total assets and total liabilities after
incorporating the impact of above adjustments, if any.

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Question No. 5 of Summer 2016, 20 marks

On 1 January 2014, Zalay Limited (ZL) acquired a plant for Rs 3,000 million. ZL has a legal obligation to
dismantle the plant at the end of its four years useful life.
On the date of acquisition it was estimated that the cost of dismantling would amount to Rs. 400 million.
ZL uses the revaluation model for subsequent measurement of its property, plant and equipment and
accounts for revaluation on the net replacement method. Depreciation is provided on straight line basis.
The details of revaluation carried out by the Professional Valuer and the revision in the estimated cost of
dismantling as at 31 December 2014 and 2015 are as follows:

2015 2014
Rs. in million
Revalued amount of plant and machinery * 1,200 2,250
Revised estimate of decommissioning cost 300 550
*excluding decommissioning cost

Tax and discount rates applicable to ZL are 30% and 10% respectively. The tax authorities allow initial and
normal depreciation at the rate of 50% and 10% respectively under the reducing balance method.
Required: Prepare journal entries to record the above transactions for the year ended 31 December 2015,
in accordance with International Financial Reporting Standards.

IQ School of Finance

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IFRIC 1 - CHANGES IN EXISTING DECOMMISSIONING, RESTORATION AND SIMILAR LIABILITIES

Compiled by: Murtaza Quaid
ISSUE SCOPE

 Under IAS 16, the cost of property, plant and equipment includes the IFRIC 1 applies to changes in the measurement of any existing
initial estimate of the costs of dismantling and removing the item and decommissioning, restoration or similar liability that is both:
restoring the site on which it is located.  Recognised as part of the cost of property, plant and
 IAS 37 contains requirements on measurement of such equipment in accordance with IAS 16
decommissioning, restoration and similar liabilities. IAS 37 also requires  Recognised as a liability in accordance with IAS 37.
that such provisions are reviewed at each reporting date and adjusted
to reflect the best estimate of the expected outcome.
 This Interpretation provides guidance on how to account for the effect
of subsequent changes in the measurement of decommissioning, UNWINDING OF DISCOUNT
restoration provision.  The periodic unwinding of discount is recognised in P/L
 Carrying amount of a provision might need to change in order to reflect: account as a finance cost as it occurs.
o unwinding of the discount; and  Capitalisation under IAS 23 Borrowing Costs is not permitted.
o change in estimates including:
• timing of the cash flows;
• size of the cash flows; or For your valuable feedback, any update, error or
• discount rate. query, kindly let me know at [email protected]

CHANGE IN ESTIMATE MEASUREMENT MODEL

COST MODEL REVALUATION MODEL

Increase in provision Increases carrying amount of asset. Thereafter, Decreases revaluation surplus to the extend of credit balance in
for decommissioning the asset needs to be tested for impairment in revaluation surplus in respect of that asset. Further increase in
and restoration cost accordance with IAS 36. provision is debited to P/L.

Decrease in provision Decreases carrying amount of the asset to the Is credited to: (in following order)
for decommissioning extend of debit balance of such asset. Further i. P/L account to the extent of reversal of revaluation deficit on
and restoration cost decrease in provision is credited to P/L. the asset that was previously recognised in P/L account.
ii. Revaluation surplus to the extend that revaluation surplus does
not exceed the carrying amount of assets.
iii. P/L account.

Other concepts The adjusted depreciable amount of the asset  A change in the provision is an indication that the asset may have
is depreciated over its remaining useful life. to be revalued in order to ensure that the carrying amount does
not differ materially from the fair value of the assets at the end of
the reporting period
 The change in the revaluation surplus arising from a change in the
liability is separately identified and disclosed as such.

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