FINANCIAL REPPORTING

LECTURE TWO (2)

• IAS 20 - Accounting for GOVERNMENT GRANTS

• IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations

• IAS 36 - Impairment of Assets

• IAS 38 - Intangible assets

• IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

1

• IAS 10 - Events after the Reporting Period

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Objective: To prescribe the accounting for, and disclosure of, government grants
and other forms of government assistance.
• Definitions:
• Government assistance is provision of economic benefits by government to a
specific entity or range of entities which meet specific criteria.
• Government grants are transfer of resources to an entity, from government, in
return for compliance with certain conditions.
Accounting treatment:
• Recognition
• A government grant is recognized only when there is reasonable assurance
that
• The entity will comply with any conditions attached to the grant
• The grant will be received
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 IAS 20 - Accounting for Government Grants

• Grant related to income are recognized over the

period and matched with the related expenses.
• Grant related to depreciable assets are recognized
over the useful life of the assets in the proportion
of depreciation charge.
• Grant related to non-depreciable assets are also
recognized over the period in which related
expenses are made.
• Non-monetary grants are recognized at fair value.
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 IAS 20 - Accounting for Government Grants

Presentation:
• A grant relating to assets may be presented in one or two ways:
• As deferred income, or
• By deducting the grant from the asset's carrying amount.
A grant relating to income may be reported separately as 'other
income' or deducted from the related expense.

• Repayment: This is a very important area of your exam

• A government grant that becomes repayable shall be accounted for

as a revision to an accounting estimate (IAS –8).
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 IAS 20 - Accounting for Government Grants

• Repayment of a grant related to income shall be applied first against any

un-amortized deferred credit and if repayment exceeds the deferred
credit the rest will be recognized immediately as expense.

• Repayment of grants related to assets shall be recorded by increasing

the carrying amount of the asset or reducing the deferred income
balance by the amount payable. The cumulative additional depreciation
that would have been recognized to date as an expense in the absence of
the grant shall be recognized immediately as an expense
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 IAS 20 - Accounting for Government Grants
• If the conditions of a grant are breached, it may need to be repaid.
• In case of Revenue grants recognize repayment immediately as an expense.
• In case of Capital grant increase the carrying value of the asset by the amount
of the repayment, or reduce deferred income by the amount of the repayment.
Disclosure:
• The following must be disclosed:
• Accounting policy adopted for grants, including method of statement of
financial position presentation
• Nature and extent of grants recognized in the financial statements
• Unfulfilled conditions and contingencies attaching to recognized grant
• Technical, Operational and Management Advice should not be recognised but
must be disclosed
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

• OBJECTIVE -The objective of this standard is to specify

the accounting for Non-current assets held for sale, and
presentation and disclosure of discontinued operations.
Non-Current Assets Held For Sale
• HELD FOR SALE
• This term refers to a non-current asset whose carrying
amount will be recovered principally through a Sale
transaction rather than through continuing use.
• DISCONTINUED OPERATION
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

•A discontinued operation includes the

following criteria:
• is a separately identifiable components
• must represent a major line of the entity’s
business
•is part of a plan to dispose of a major line of
business or a geographical area
•is a subsidiary acquired with a view to resell
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED
• DISPOSAL GROUPOPERATIONS
• This is a group of assets and possibly some liabilities that an
entity intends to dispose of in a single transaction.
ACCOUNTING TREATMENT:
• Non-current assets that meet the criteria are presented
separately on the Statement of Financial Position within current
assets.
• If the held for sale item is a disposal group then related liabilities
are also reported separately within current liabilities.
• Discontinued operations and operations held for sale must be
disclosed separately in the statement of financial position at the
lower of their carrying value less costs to sell.
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

CLASSIFICATION OF NON-CURRENT ASSETS AS HELD FOR SALE

For an asset to be classified as held for sale:
a) It must be available for immediate sale in its
present condition allowing for terms that are usual
or customary;
b) Its sale must be highly probable (expected
within 1 year of reclassification);
c) It must be genuinely sold, not abandoned
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
• For a sale to be highly probable it must be significantly more
likely than probable. In addition the standard sets out the
following criteria to be satisfied:
• Management, at a level that has the authority to sell the
assets or disposal group, is committed to a plan to sell;
• An active program to locate a buyer and complete the sale
must have begun.
• The asset or disposal group must be actively marketed at a
price that is reasonable compared to its current fair value.
• The sale of the asset is expected to be recorded as completed
within time a year from the date of classification.
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IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
• The actions required to complete the plan should
indicate that it is not likely that there will be
significant changes made to the plan or that the
plan will be withdrawn.
MEASUREMENT
• They are measured at the lower of:
• Fair value less costs to sell; and
• Carrying amount (in accordance with the relevant
Standard).
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

• Any impairment loss on initial or subsequent write-down of the asset

or disposal group to fair value less cost to sell is to be recognised in
the statement of profit or loss.

• Any subsequent increase in fair value less cost to sell can be

recognised in the statement of profit or loss to the extent that it is not
in excess of the cumulative impairment loss that has been recognised
in accordance with the IFRS 5 or previously in accordance with IAS 36.
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 IFRS 5-NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

• SUBSEQUENT REMEASUREMENT

• Whilst a non-current asset/disposal group is classified as held for sale it

should not be depreciated or amortized. At each reporting date where a
non-current asset or disposal group continues to be classified as held for
sale it should be re-measured at fair value less costs to sell at that date.

• This may give rise to further impairments or a reversal of previous

impairment losses. In either case recognise in the income statement.
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 IAS 36 - Impairment of Assets

• OBJECTIVE :the objective of this IAS is to set rules to ensure that the assets
of an enterprise are carried at no more than their recoverable amount.
• DEFINITIONS
• Recoverable amount is the higher of an asset’s net selling price and its value
in use.
• Value in use is the present value of estimated future cash flows expected to
arise from the continuing use of an asset and from its disposal at the end of
its useful life.
• Net selling price the amount obtainable from the sale of an asset in an arm’s
length transaction between knowledgeable, willing parties, less the costs of
disposal.
• An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
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 IAS 36 - Impairment of Assets

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

generates cash inflows from continuing use that are largely independent
of the cash inflows from other assets or groups of assets.
• Corporate assets are assets other than goodwill that contribute to the
future cash flows of both the cash-generating unit under review and other
cash-generating units.
IMPAIRMENT ASSESSMENT -An enterprise should assess at each reporting
date: -
• a) Whether there is any indication that an asset may be impaired;
• b) Irrespective of any indication of impairment, an entity shall also: -
• Test in case of intangible assets having indefinite life or under
development; and
• Test goodwill acquired in business combination for impairment annually
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 IAS 36 - Impairment of Assets

External sources of information include:

• Decline in asset’s market value
• Adverse effect in the technological, market, economic or legal
environment in which the enterprise operates;
• Increase in market interest rates ( Cost of capital or discount rate)
• Internal sources of information include:
• Obsolescence or physical damage
• Significant changes with an adverse effect on an asset is used or is
expected to be used
• Economic performance and expected net cashflows of an asset are
worse than expected
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 IAS 36 - Impairment of Assets

MEASURING RECOVERABLE AMOUNT -Net selling price is the price in Binding Sale
Agreement less Disposal Cost Value in Use is the present value of estimated the
future cash inflows and outflows to be derived from continuing use of the asset and
from its ultimate disposal (The discount rate should be a pre-tax rate)

RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS

• An impairment loss should be recognized as an expense in the statement of profit

or loss immediately, unless the asset is carried at revalued amount (Recognized
directly against any revaluation surplus. Any over and above amount as expense in
Income Statement)
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 IAS 36 - Impairment of Assets
• CASH GENERATING UNIT
• A cash generating unit (CGU) is the smallest identifiable group of
assets for which independent cash flows can be identified and
measured. For example, for a restaurant chain a CGU might be
each individual restaurant.
• As goodwill acquired in a business combination does not generate
cash flows independently of other assets, it must be allocated to
each of the acquirer’s cash generating units
• A CGU to which goodwill has been allocated is tested for
impairment annually. The carrying amount of the CGU including
the goodwill is compared with its recoverable amount.
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 IAS 36 - Impairment of Assets

The impairment loss on a CGU is allocated in the

following order:
• first to any asset that is impaired (e.g. if an asset was
specifically damaged)
• second, to goodwill in the cash generating unit
• third, to all other assets in the CGU on a pro rata basis
based on carrying value
• When allocating an impairment loss the carrying amount
of an asset should not be reduced below the higher of its
fair value less costs to sell, value in use or zero.
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 IAS 36 - Impairment of Assets

REVERSAL OF IMPAIRMENT LOSS

• The increased carrying amount of an asset due to a reversal on impairment
loss should not exceed the carrying amount that would have determined
had no impairment loss been recognized for the asset in prior years. It is
recognized as income immediately in statement of profit or loss
• Any reversal of an impairment loss on a revalued asset should be treated
as a revaluation increase under that other International Accounting
Standard.
• Considerations on reversal of an Impairment Loss for a cash generating
unit:
• First, asset other than goodwill on a pro-rata basis based on the carrying
amount of each asset in the unit; and An impairment loss recognized for
goodwill shall not be reversed in a subsequent period.
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 IAS 38 - INTANGIBLE ASSETS

• OBJECTIVE -The objective of this IAS is to prescribe accounting treatment for

intangible assets.
• DEFINITIONS
An intangible asset is an identifiable nonmonetary asset without physical substance
held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
• IDENTIFIABILITY:
An intangible asset can be termed identifiable if it:
• is separable or Arises from contractual or other legal rights
Research is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.
Development is the application research findings or other knowledge to a plan or design
for the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.
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 IAS 38 - INTANGIBLE ASSETS

• RECOGNITION AND MEASUREMENT

The recognition of an intangible asset requires an entity to
demonstrate that the item meets:-
• a) The definition of an intangible asset
• b) The recognition criterion that:-
• It is probable that the expected economic benefits that are
attributable to the asset will flow to the entity; and
• The cost of the asset can be measured reliably
An intangible asset shall be measured initially at cost.

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 IAS 38 - INTANGIBLE ASSETS
Separate rules for recognition and initial measurement
exist for intangible assets depending on whether they
were:
• Acquired separately:
• At cost
• Acquired as part of a business combination: At fair value
• Acquired by way of a government grant: As per IAS 20
• Obtained in an exchange of assets: At fair value
• Generated internally
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 IAS 38 - INTANGIBLE ASSETS
INTERNALLY GENERATED INTANGIBLE ASSETS
• To assess whether an internally generated intangible assets meets the criteria
for recognition, an enterprise classifies the generation of the asset into:
• RESEARCH PHASE
• Recognized as expense in statement of profit or loss
• DEVELOPMENT PHASE
An intangible asset arising from development (or from the development phase
of an internal project) should be recognized as asset if, and only if, an enterprise
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;
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 IAS 38 - INTANGIBLE ASSETS
(d) How the intangible asset will generate probable future economic benefits. Among other
things, the enterprise should 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; and
(f) Its ability to measure the expenditure attributable to the intangible asset during its
development reliably.
Internally generated brands, mastheads, publishing titles, customer lists and similar items
should not be recognised as intangible assets.
• MEASUREMENT AFTER RECOGNITION
COST MODEL
After initial recognition, an intangible asset shall be carried at its cost less any accumulated
amortization and any accumulated impairment loss.

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 IAS 38 - INTANGIBLE ASSETS

REVALUATION MODEL

After initial recognition an intangible asset whose fair value can be determined with
reference to the active market shall be carried at revalued amount, less subsequent
accumulated amortization and subsequent accumulated impairment losses.
• The depreciable amount of an intangible asset with a finite useful life shall be
allocated on a systematic basis over its useful life
• The amortization period and the amortization method for an intangible asset with
a finite useful life shall be reviewed at least at each financial year end.
• An intangible asset with an indefinite useful life shall not be amortized but will be
tested for impairment at every reporting date.
• The useful life of an intangible asset that is not being amortized shall be reviewed
each period
• The recoverable amount of the asset should be determined at least at each
financial year end and any impairment loss should be accounted for in accordance
with IAS 36.
• Remove from statement of financial position when disposed of or abandoned.
Recognize any gain or loss in the
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statement of profit or loss.
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 IAS 38 - INTANGIBLE ASSETS
GOODWILL
• Goodwill is not normally recognised in the accounts of a business at all. The
reason for this is that goodwill is considered inherent in a business and it does
not have any objective value.
PURCHASED GOODWILL
• There is one exception to the principle that goodwill has no objective value,
this is when a business is sold.
• Purchased goodwill is shown in the statement of financial position because it
has been paid for. It has no tangible substance, and so it is an intangible non-
current asset.
• NEGATIVE GOODWILL – It arises when the fair value of the subsidiary’s
identifiable net asset is greater than the combined value of purchase
consideration and Non-Controlling Interest. Negative Goodwill should be
credited to the Income Statement
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 IAS 10 - EVENTS AFTER REPORTING DATE
Objective:
To prescribe: When an entity should adjust its financial statements for events after the reporting period;
The disclosures that an entity should give about the date when the financial statements were authorized for
issue and about events after the reporting period.
Definitions:
Event after the reporting period occurs between the end of the reporting period and the date that the financial
statements are authorized for issue. These include:
Adjusting events provide evidence of conditions that existed at the end of the reporting period.
Non-adjusting events are those that are indicative of conditions that arose after the reporting period.
Accounting treatment:
• Adjust financial statements for adjusting events
• Do not adjust for non-adjusting events
• If an entity declares dividends after the reporting period, the entity shall not recognize those dividends as a
liability at the end of the reporting period. That is a non-adjusting event.
• An entity shall not prepare its financial statements on a going concern basis if management determines after
the reporting period either that it intends to liquidate the entity or to cease trading
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 IAS 10 - EVENTS AFTER REPORTING DATE
Adjusting events – examples
Adjusting events, as is evident by the name, require adjustments in the financial statements.
Following are some examples:
• Invoices received in respect of goods or services received before the year end
• The resolution after the reporting date of a court case giving rise to a liability
• Evidence of impairment of assets, such as news that a major customer is going into liquidation or
the sale of inventories below cost
• Discovery of fraud or errors showing that financial statements were incorrect
• Determination of employee bonuses/profit shares
• The tax rates applicable to the financial year are announced
• The auditors submit their fee
• The sale of a non-current asset at a loss indicates that it was impaired at the reporting date
• The bankruptcy of a customer indicates that their debt was irrecoverable at the reporting date
• The sale of inventory at less than cost indicates that it should have been valued at NRV in the
accounts
• The determination of cost or proceeds of assets bought/sold during the accounting period indicates
at what amount they should be recorded in the accounts
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 IAS 10 - EVENTS AFTER REPORTING DATE
Non-adjusting events – examples

Usually non-adjusting events do not require adjustments. However, if the event is of such importance that

its nondisclosure will affect the economic decision making of users it should be disclosed in the notes to

the accounts. Some examples of non-adjusting events are as follows:

• Business combinations
• Discontinuance of an operation
• Major sale/purchase of assets
• Destruction of major assets in natural disasters
• Major restructuring
• Major share transactions
• Unusual changes in asset prices/foreign exchange rates
• Commencing major litigation
• A purchase or sale of a non-current asset
• The destruction of assets due to fire or flood
• The announcement of plans to discontinue an operation
• AnTutor:
issueM.SANNOH
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 IAS 10 - EVENTS AFTER REPORTING DATE
Disclosure:

Non-adjusting events should disclose the nature and financial effect of

the event if its non-disclosure would affect the judgment of users in
making decisions.
Companies must disclose the following
• When the financial statements were authorized for issue
• Who gave that authorization
• Who has the power to amend the financial statements after issuance
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IAS 8- ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES AND ERRORS
Objective: The objective of this Standard is to prescribe the criteria for selecting and changing
accounting policies, the accounting treatment and disclosure of changes in accounting policies,
accounting estimates and corrections of errors.
Definitions:
Accounting policies are the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability.
Material Omissions or misstatements of items are material if they could, influence the
economic decisions that users make on the basis of the financial statements.
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 authorized for issue; and
• Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation ofEmail:
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IAS 8- ACCOUNTING POLICIES, CHANGE IN ACCOUNTING
ESTIMATES AND ERRORS
Selection and application of accounting policies:
• The accounting policy applied to the item shall be
determined by the IFRS.
• In the absence of an IFRS, management shall use its
judgment in applying an accounting policy that results
in information that is relevant and reliable.
An entity shall select and apply its accounting policies
consistently for similar transactions

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 IAS 8- ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES AND
ERRORS
Changes in accounting policies:
• A change in accounting policy is permitted only if
• Required by an IFRS or revised IAS
• If a change in accounting polity results in the financial statements providing
reliable and more relevant financial information.
• When a change in accounting policy is required by a new Standard, the Standard
will often include specific 'transitional provisions’.
• If transitional provision is not present applying to change required by standard, or
the entity changes the policy voluntarily then, it shall apply the change
retrospectively. i.e.
• The entity shall adjust the opening balance of each affected component of equity
for the earliest prior period presented and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy had
always been
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 IAS 8- ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES AND
ERRORS
Changes in accounting estimates:
The effect of a change in an accounting estimate shall be recognized prospectively by including it
in profit or loss in:
• The period of the change, if the change affects that period only; or
• The period of the 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 recognized by adjusting the carrying amount of the
related asset, liability or equity item in the period of the change.
Errors:
An entity shall correct material prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:
• restating the comparative amounts for the prior period(s) presented in which the error occurred;
and such errors should be disclosed 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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