Part one Group Accounts

1. Basic knowledge for group accounting

Major workings

W1 group structure

Subsidiary –IAS 27 Acquisition method “control”

Associate –IAS 28 Equity method “significant influence”

Joint Venture –IAS 31 Proportion or Equity method “joint control”

W 2 FV of net assets of the subsidiary

DOA DOC Movement (post

acquisition)

OSC × ×

Reserves × × ×

Fair value

adjustments

×* ×**

Additional

depreciation

(×) (×)

URP (S to H) (×) (×)

Policy Adjustments

Total a b c

*sometimes the question will state this figure in which case the fair value adjustment will

become the balancing figure

**only relevant to include this here if the asset subject to the fair value adjustment remains at

the reporting date i.e. it will not be relevant if it relates to inventory.

W3 goodwill calculation

There are two methods in which goodwill may be calculated following the update to IFRS 3

(1) Partial goodwill (old method)

Cost of investment ×

Less: S% FV of NA at DOA (S%×aW2) (×)

Goodwill on DOA ×

Less: impairment to date (×)

Goodwill on DOC ×

(2) Full goodwill (new method)

Cost of investment ×

Fair value of NCI at DOA ×

FV of NA at DOA W2 (a)

Goodwill on DOA ×

Less: impairment to date (×)

Goodwill on DOC ×

Or, this can be presented by:

Cost of investment ×

Less: S% FV of NA at DOA (×)

Goodwill on DOA (P’s share) ×

Fair value of NCI at DOA ×

NCI share of FV of NA at DOA (×)

Goodwill on DOA (NCI share) ×

Total goodwill ×

IFRS 3 requires that goodwill be subject to an impairment review. The subsidiary is regarded

as the cash –generating unit.

Net assets of the subsidiary at the balance sheet date ×

Plus the unimpaired goodwill (gross up) ×

Carrying value ×

Recoverable amount ×

Impairment loss (total) ×

Cost of investment

Cash

Deferred cash –PV and finance cost

Share for share –MV

Financial instruments –MV

Contingent consideration –FV at the DOA with adjustment for subsequent changes.

a) If the change is due to additional information obtained after the acquisition date

that affects the facts or circumstances as they existed at DOA, this is treated as a

‘measurement period adjustment’ and the cost of investment and goodwill are

remeasured.

b) If changes due to events after the acquisition date

Contingent consideration classified as equity shall not be remeasured, and its

subsequent settlement shall be accounted for within equity.

Contingent consideration classified as an asset or a liability that :

Is a financial instrument and is within the scope of IAS 39 shall be measured at

fair value, with any resulting gain or loss recognized either in profit or loss, or in

other comprehensive income.

Is not within the scope of IAS 39 shall be accounted for in accordance with IAS

37, Provisions, Contingent Liabilities and Contingent Assets, or other IFRSs as

appropriate.

Issue cost should be deducted from proceeds of issue. (i.e. share premium) not included in

the cost of the acquisition.

Professional fees and similar incremental costs –expense in the I/S

W 4 Non-controlling interest

(1) Old method

NCI % of FV of NA at DOC NCI%×b W2

(2) New method

FV of net assets of S at DOC (1 –S %) ×b ×NCI share of goodwill ×NCI share of impairment loss (×) ×Total non-controlling interest ×

NCI in income statement

NCI% × (PAT –URP –DEPR)

W 5 consolidated reserves (RE + other) calculation

The group reserves comprises as follows:

1 Parent company ×

Adjustment, corrections (if any) e.g. URP where the parent is the

seller or transactions the parent company has not yet recorded

×/(×)

2 Less cumulative goodwill impairment losses (P share) (×)

3 Plus the group share of the (adjusted) post acquisition profits of the

subsidiary and associate

×

Total ×

Brief recap on accounting for associates

Significant influence

20% -50%

Board representation

Associates are equity accounted for in the group accounts.

Group balance sheet –extract

Investment in associate

A% of net assets (as adjusted for any depreciation and URP) ×

Plus the goodwill not yet written off ×

×

Group income statement –extract

Income from associate undertakings

A% of the profit after tax (as adjusted for any depreciation and URP) ×

Less goodwill impairment loss (×)

×

Balances, transactions between the associate and the group companies are not eliminated.

URP is eliminated to the extent of group share.

IAS 31 Interest in joint ventures

Joint venture: a contractual arrangement whereby two or more parties undertake an economic

activity that is subject to joint control.

Jointly controlled operations

Each venture uses its own assets, incurs its own expenses and liabilities, and raises its

own finance.

IAS 31 requires that the venture should recognise in its financial statements the assets that

it controls, the liabilities that it incurs, the expenses that it incurs, and its share of the

income from the sale of goods or services by the joint venture.

Jointly controlled assets

Jointly controlled assets involve the joint control, and often the joint ownership, of assets

dedicated to the joint venture.

Each venture may take a share of the output from the assets and each bears a share of the

expenses incurred.

IAS 31 requires that the venture should recognise in its financial statements it share of the

joint assets, any liabilities incurred, income and expenses in the joint venture.

Jointly controlled entities

A jointly controlled entity is a corporation, partnership, or other entity in which two or

more venturers have an interest, under a contractual arrangement that establishes joint

control over the entity.

Each venture usually contributes cash or other resources to the jointly controlled entity.

Those contributions are included in the accounting records of the venture and recognised

in the venturer’s financial statements as an investment in the jointly controlled entity.

IAS 31 allows two treatments of accounting for an investment in jointly controlled

entities –except as noted below:

Method 1: proportionate consolidation

Under proportionate consolidation, the balance sheet of the venture includes its share of the

assets and its share of the liabilities. The income statement of the venture includes its share of

the income and expenses of the jointly controlled entity.

Method 2: equity method of accounting

Procedures for applying the equity method are the same as those described in IAS 28

investments in associates.

Transactions between a venture and a joint venture

Balances, transactions between the JV and the group companies are not eliminated. URP is

eliminated to the extent of group share.

2. Complex group structures

A vertical group

A

60%

B

70%

C

In this illustration:

A controls B and B controls C.

As A controls B, it also controls B’s holdings in other companies.

Hence, B and C are subsidiaries of A as they are controlled by A.

Company C is often called a sub-subsidiary.

In a vertical group, use the group structure to determine the status of investments.

The key is to identify control relationships

The parent controls its subsidiaries’ holdings in other companies but does not control

associate holdings.

The date of acquisition by A is the date on which A gains control. If B already held C, treat B

and C as being acquired on the same day.

The group structure is vital –always identify this first and determine the status of investment.

Also look carefully at dates to identify when the parent obtained control.

Effective group interest

Using the earlier group structure:

A owns 60% if B and B owns 70% of C

So A has an effective group interest in C of 60%*70% = 42%

NCI own 58% of C

Mixed group

The group is structure in manner where both the ultimate parent and a subsidiary have an

interest on another entity.

For example

H

60% 30%

S T

30%

T is a subsidiary of H controls 30% directly and 30% indirectly via its interest in S. thus 60%

is controlled. Consolidation is performed in a single stage using the consolidation

percentages.

S group share 60%

Minority share 40%

T group share

Direct 30%

Indirect 60%of 30% 18% 48%

Minority share 52%

Step acquisition

a. control is achieved through two or more transactions

The principles to be applied are:

A business combination occurs only in respect of the transaction that gives one entity

control of anther

The identifiable net assets of the acquire are remeasured to their fair value on the date of

acquisition

Non-controlling interests are measured on the date of acquisition under one of the two

options permitted by IFRS 3

Goodwill is measured as:

Consideration transferred to obtain control

Plus

Amount of non-controlling interest (using either option)

Plus

Fair value of previously-held equity interest

Less

Fair value of the identifiable net assets of the acquire

b. transactions between parent and non-controlling interests

Once control has been achieved, further transactions whereby the parent entity acquires

further equity interests from non-controlling interests, or disposes of equity interests but

without losing control, are accounted for as equity transactions (i.e. transactions with owners

in their capacity as owners) it follows that:

The carrying amount of the controlling and non-controlling interests are adjusted to

reflect the changes in their relative interests in the subsidiary;

Any difference between the amount by which the non-controlling interests is adjusted and

the fair value of the consideration paid or received is recognised directly in equity and

attributed to the owners of the parent and;

There is no consequential adjustment to the carrying amount of goodwill, and no gain or

loss is recognised in profit or loss.

3. Disposal

a. loss of control

IAS 27 details the adjustments made when a parent losses control of a subsidiary, based on

the date when control is lost:

Derecognise the carrying amount of assets (including goodwill), liabilities and non-

controlling interests;

Recognise the fair value of consideration received;

Recognise any distribution of shares to owners;

Recognise the fair value of any residual interest;

Reclassify to profit or loss any amounts (i.e. the entire amount, not a proportion) relating

to the subsidiary’s assets and liabilities previously recognised in other comprehensive

income as if the assets and liabilities had been disposed of directly; and

Recognise any resulting difference as a gain or loss in profit or loss attributable to the

parent

b. Transactions between parent and NCI

Same principle as step acquisition (equity transaction)

c. Full disposal

Calculate gain or loss by comparing FV of consideration received, and FV of NA at date of

disposal plus unimpaired goodwill

4. Foreign currency

Individual company stage

Functional and presentational currencies

The functional currency is the currency of the primary economic environment where the

entity operates, in many cases this will be the local currency.

An entity should consider the following factors in determining its functional currency:

The currency than mainly influences sales prices for goods and services

The currency of the country whose competitive forces and regulations mainly determine

the sales price of goods and services

The currency that mainly influences labour, material and other costs of providing goods

and services.

The presentation currency is the currency in which the entity presents its financial statements

and this can be different from the functional currency, particularly if the entity in question is a

foreign owned subsidiary. It may have to present its financial statements in the currency of

the parent company. Even though that is different from their every day trading currency.

Individual transactions in a foreign currency

At transaction date:

At the spot exchange rate on the date the transaction occurred; or

Using an average rate over a period of time providing the exchange rate has not fluctuated

significantly.

At subsequent balance sheet dates:

Foreign currency monetary items (debtors, creditors, cash, loans) must be translated using

the closing rate.

Foreign currency non-monetary items (fixed assets, investments, stock) are not

retranslated

Exchange differences are recognized in income.

Group stage

Where there is an overseas subsidiary that has a functional currency which is a local currency,

prior to consolidation it will need to be translated into using the closing rate method.

Closing rate method

The balance sheet of the overseas entity is translated using the closing rate.

The income statement items are translated at the average rate for the period.

Exchange differences in the group accounts

With the closing rate method the group percentage of the exchange difference is dealt with in

reserves.

6. Cash Flow statement

Details see book

Part two summary of IAS and IFRS

1. IAS 10 events after the balance sheet date

Post balance sheet events: an event which occurs after the year end but before the FS are

approved. If it gives the new evidence on condition which existed at the year end, then

adjusting PBSE –apply relevant accounting treatment. If it gives new evidence on condition

which did not exist at the year end, but impacts going concern assumption, then adjust. If it

does not impact the going concern, then disclose in nature and estimate of financial effect.

2. IAS 37 provisions, contingent liabilities and contingent assets

Provisions: only provide if obligation legal or constructive; probable transfer of economic

benefit resulting from a past event; can be reliably measured

Contingent liability: potential liability, assess likelihood of liability, remote –ignore, possible

–disclose, probable –disclose/provide

Contingent asset: potential asset, assess likelihood of asset, remote –ignore, possible –ignore,

probable –disclose

Provision: A liability of uncertain timing or amount

Measurement of provisions

Best estimate –this means:

Provisions for one-off events (restructuring, environmental clean-up, settlement of a

lawsuit) are measured at the most likely amount

Provisions for large populations of events (warranties, customer refunds) are measured at

a probability-weighted expected value.

Both measurements are at discounted present value using a pre-tax discount rate that reflects

the current market assessments of the time value of money and the risks specific to the

liability.

Remeasurement

They should be reviewed at each balance sheet date and adjusted to reflect the current

best estimate

If it is no longer probable that an outflow of resources will be required to settle the

obligation, the provision should be reversed.

Restructurings

Restructuring provisions should be accrued as follows:

Sale of operation: accrue provision only after a binding sale agreement

Closure or reorganisation: accrue only after a detailed formal plan is adopted and

announced publicly. A board decision is not enough.

Future operating losses: provisions should not be recognised for future operating losses,

even in a restructuring

Restructuring provision on acquisition (merger): accrue provision for terminating

employees, closing facilities, and eliminating product lines only if announced at

acquisition and, then only if a detailed formal plan is adopted 3 months after acquisition.

Restructuring provisions should include only direct expenditures caused by the restructuring,

not costs that associated with the ongoing activities of the enterprise.

Onerous contracts

The least net cost should be recognised as a provision. The least net cost is lower of the cost

of fulfilling the contract or of terminating it and suffering any penalty payments.

Debit entry

When a provision (liability) is recognised, the debit entry for a provision is not always an

expense. Sometimes the provision may form part of the cost of the asset. Examples:

obligation for environmental cleanup when a new mine is opened or an offshore oil rig is

installed.

Contingent liabilities

It requires that enterprises should not recognise contigent liabilities – but should disclose

them, unless the possibility of an outflow of economic resources is remote.

Contingent assets

Contingent assets should not be recognised –but should be disclosed where an inflow of

economic benefits is probable.

Non-current assets

3. IAS 16 Property, plant and equipment

Recognition

Meet definition of asset

Owner occupied asset with physical existence

Major inspection or overhaul costs

They can be treated as a separate component of the asset, they will be depreciated over the

period up until the next overhaul date

Initial measurement

They should be initially recorded at cost. Cost includes all costs necessary to bring the asset

to working condition for its intended use.

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

Cost model

Revaluation model

The revaluation model

Upwards –revaluation reserves unless reverses previous decrease

Downwards –income statements unless reverses previous increase

May transfer differences between new and old depreciation from RR to RE

On disposal, transfer remaining balance of RR to RE. The transfer to retained earnings

should not be made through the income statement.

4. IAS 36 impairment of assets

Impairment. An asset is impaired when its carrying amount exceeds its recoverable amount.

Recoverable amount. The higher of an asset’s fair value less costs to sell (sometimes called

net selling price) and its value in use.

Value in use. The discounted present value of estimated future cash flows expected to arise

from the use of the asset.

Asset are tested for impairment annually

An intangible asset with an indefinite useful life

An intangible asset not yet available for use

Goodwill acquired in a business combination

Indications of impairment

External sources

Market value declines

Negative changes in technology, markets, economy, or laws

Increases in market interest rates

Company stock price is below book value

Internal sources

Obsolescence or physical damage

Asset is part of a restructuring or held for disposal

Worse economic performance than expected

Recognition of an impairment loss

The impairment loss is an expense in the income statement (unless it relates to a revalued

asset where the value changes are recognised directly in equity).

Adjust depreciation for future periods

Cash-generating units

The impairment loss is allocated to reduce the carrying amount of the assets of the unit

(group of units) in the following order:

Specifically impaired assets

Goodwill

Reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the

basis

The carrying amount of an asset should not be reduced below the highest of:

Its fair value less costs to sell (if determinable);

Its value in use (if determinable);

Zero

Reversal of an impairment loss

The increased carrying amount due to reversal should not be more than what the

depreciated historical cost would have been if the impairment had never been recorded.

Reversal of an impairment loss is recognised as income in the income statement.

Adjust depreciation for future periods

Reversal of an impairment loss for goodwill is prohibited

5. IAS 40 investment property

Investment property is property (land or a building or part of a building or both) held (by

the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or

both.

Initial measurement

Investment property is initially measured at cost, including transaction costs.

Measurement subsequent to initial recognition

IAS 40 permits enterprises to choose between:

A fair value model

A cost model

IAS 40 notes that this highly unlikely for a change from a fair value model to a cost model.

Fair value model

Investment property is remeasured at fair value at each year end with gains or losses are taken

to I/S.

6. IFRS 5 non-current assets held for sale and discontinued operation

Held-for-sale classification. In general, the following conditions must be net for an asset

(disposal group) to be classified as held for sale:

Management is committed to a plan to sell

The asset is available for immediate sale

An active program to locate a buyer is initiated

The sale is highly probable, within 12 months of classification as held for sale (subject to

limited expectations)

The asset is being actively marketed for sale at a sales price reasonable in relation to its

fair value

Actions required to complete the plan indicate that it is unlikely that plan will be

significantly changed or withdrawn

A decision made after the year-end but before the accounts are approved that a non-current

asset or disposal group is held for sale is a non-adjusting event.

Measurement

Non-current assets or disposal groups that are classified as held for sale are measured at the

lower of carrying amount and fair value less costs to sell. Assts should be presented as a

current asset in the balance sheet.

Non-depreciation. Non-current assets or disposal groups that are classified as held for sale

shall not be depreciated.

Key provisions of IFRS 5 relating to discontinued operations:

Classification as discontinuing. A discontinued operation is a component of an entity that

either has been disposed of or is classified as held for sale, and:

Represents a separate major line of business or geographical area of operations,

Is part of a single co-ordinated plan to dispose of a separate major line of business or

geographical area of operations, or

Is a subsidiary acquired exclusively with a view to resale

Income statement presentation

The sum of the post-tax profit or loss of the discontinued operation and

The post-tax gain or loss on the disposal of the assets (or disposal group)

Detailed disclosure of revenue, expenses, pre-tax profit or loss, and related income taxed

is required either in the notes or on the face of the income statement in a section distinct

from continuing operations.

No retroactive classification. IFRS 5 prohibits the retroactive classification as a

discontinued operation, when the discontinued criteria are met after the balance sheet date.

7. IAS 38 intangible assets

Recognition –meet definition

Purchased separately

License

Quota

Franchise

Should be measured at cost

Purchased as part of business combination

Goodwill=consolidation –fair value of net assets at date of acquisition other identifiable

assets and liabilities –separately account for (see group account)

Internally generated intangibles

Internally generated goodwill –no recognition

Development of brands, mastheads, publishing titles and customer lists –costs incurred on

these items should be written off.

Research and development

Research –income statements as an expense

Development should be recognised if, and only if, an enterprise can demonstrate all of the

following:

The technical feasibility

Its intention to complete and use or sell it

Its ability to use or sell the intangible asset

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 the intangible asset

Measured reliably

Amortisation

Finite useful life –amortise over that life. Normally the straight-line method should be

used with a zero residual value

Indefinite useful life –not be amortised, but tested for impairment annually

8. leases

Classification of leases

A leases is classified as a finance lease if it transfers substantially all the risks and rewards

incident to ownership. All other leases are classified as operating leases. Classification is

subjective and is made at the inception of the lease.

Whether a lease is a finance lease or an operating lease depends on the substance of the

transaction rather than the form. Indicators may be:

The lease transfers ownership of the asset to the lessee by the end of the lease term

The lessee has the option to purchase the asset at nominal value

The lease term is for the major part of the economic life of the asset

At the inception of the lease, PVMLP/FV > 90%

The lease assets are of a specialised nature such that only the lessee can use them without

major modifications being made

The lessee has the ability to continue to lease for a secondary period at a rent that is

substantially lower than market rent

In classifying a lease of land and buildings, land and buildings elements would normally be

separately. The land element is normally classified as an operating lease unless title passes to

the lessee at the end of the lease term. The building element is classified as an operating or

finance lease by applying the classification criteria in IAS 17.

Accounting by lessees

The following principles should be applied in the financial statements of lessees:

Finance lease

Step 1

Capitalise using lower of PVMLP and fair value

Dr Non current assets

Cr Finance lease obligation

Step 2

Depreciate over shorter of lease term and useful economic life

Step 3

Calculate interest charges and outstanding liability

Rentals in advance

Period b/f Interest 10% rent c/f

Yr 1 1000 100 (200) 900

Yr 2 900 90 (200) 790

I/S depr *

Finance charge 100

B/S NCA *

NCL –finance lease obligation 790

CL –finance lease obligation 110

Operating lease, the lease payments should be recognised as an expense in the income

statement over the lease term on a straight-line basis, unless another systematic basis is more

representative of the time pattern of the user’s benefit.

Incentives for the agreement of a new or renewed operating lease should be recognised by the

lessee as a reduction of the rental expense over the lease term, irrespective of the incentive’s

nature or form, or the timing of payments.

Accounting by lessors

The following principles should be applied in the financial statements of lessors:

Finance lease

The lessor should record a finance lease in the balance sheet as a receivable, at an amount

equal to the net investment in the lease, normally no sale is recognised

The lessor should recognised finance income and

If the lessor is a manufacturer or dealer, there is a sale should be recognised

Operating lease

Should be presented in the balance sheet of the lessor according to the nature of the asset.

Lease income should be recognised over the lease term on a straight-line basis

Incentives for the agreement of a new or renewed operating lease should be recognised by the

lessor as a reduction of the rental income over the lease term, irrespective of the incentive’s

nature or form, or the timing of payments.

Initial direct costs

Initial direct costs are costs that are directly attributable to negotiating and arranging a lease,

for example, commissions, legal fees and premiums. Both lessees and lessors may incur these

costs.

Costs incurred by lessee Costs incurred by lessor

Finance lease Add to amount recognised as

an asset; depreciate over

asset’s useful life

Include in initial

measurement of receivable;

reduce income receivable

over lease term

Operating lease Treat as part of lease rentals,

expense over lease term on

straight line basis

Add to carrying amount of

leased asset; expense over

lease term on same basis as

lease income

Sale and leaseback transactions

For a sale and leaseback transaction that result in a finance lease, the asset is recognised as a

non-current asset before and after the sale, so no sale can have taken place. it is treated as a

secured loan under framework. So :

Continue to recognise the original asset at its original cost (less depreciation)

Credit the proceeds of the sale to a finance lease liability account.

However, under IAS 17, this can be recognised as a sale with gain deferred over lease term

and loss recognised in I/S, and then a finance lease.

For a transaction that results in an operating lease treat as a sale

NBV= 1000 FV = 1500

Selling

price

=FV 1500 Recognise gain of 500

<FV 1200 Recognise gain of 200

<FV 900 Loss of 100 is amortised over lease term to increase future

lease expense if the rent is lower than market price.

Otherwise, recognise 100 loss immediately in IS

>FV 1700 Recognise 500 gain in IS immediately excess above FV of

200 is amortised over lease term to decrease future lease

expense

If the fair value at the time of the transaction is less than the carrying amount –a loss equal to

the difference should be recognised immediately.

9. IAS 12 income taxes

Temporary difference. A difference between the carrying amount of an asset or liability and

its tax base. The tax base is the amount attributed to an asset or liability for tax purpose.

Taxable temporary difference. A temporary difference that result in amounts that are tax

deductible in the future when the carrying amount of the asset if recovered or the liability is

settled. ( carrying value > tax base)

Deductible temporary difference. A temporary difference that will result in amounts that are

tax deductible in the future when the carrying amount of the asset is recovered or the liability

is settled. ( carrying value < tax base)

Permanent difference. Expense in the income statements are not allowable expenditure for

tax purposes, so the increase in tax charge has to be accepted. Such as fines and penalty,

entertainment to customers.

Recognition of deferred tax

The general principle in IAS 12 is that deferred tax liabilities should be recognised for all

taxable temporary differences unless the deferred tax liability arises from goodwill for

which amortizations not tax deductible

A deferred tax asset should be recognised for all deductible temporary differences unless

exceptions above also apply

The carrying amount of deferred tax assets/liabilities should be reviewed at each balance

sheet date with difference to FS

Deferred tax should be provided for on revaluation in equity because revaluation is

accounted in equity

Temporary differences may arise on a business combination because carrying value will

be increased/decreased to fair value and tax base remains same

Full provision rather than nil or partial provision is made for deferred tax

Deferred tax assets and liabilities should not be discounted

IAS 12 allows a deferred tax asset to be recognised for the carry forward of unused tax

losses to the extent that it is probable that there will be sufficient future taxable profits to

enable the loss relief to be used.

Deferred tax calculation

General

Carrying value Tax base Temporary difference

(NBV)

Asset × ×/nil ×/(×)

liability (×) (×)/nil ×/(×)

Deferred tax liability: CV> tax base with taxable temporary differences

Deferred tax asset: CV< tax base with deductible temporary differences

Closing deferred tax = temporary difference * tax rate ( go to B/S)

Change in deferred tax = closing deferred tax –opening deferred tax (go to I/S)

Relates to equity if the related items are recognised in the equity

For asset –tax base is the future tax relief

For liability –tax base is CV less future tax relief

10. IAS 33 earning per share

EPS = profit after tax and preference dividend/ weighted average number of shares

Basic EPS Current year Previous year

Fresh issue/issue at full

market price

Time apportion the number

of shares

No restatement required

Bonus issue No time apportionment

required for number of shares

Restate:

Last year’s EPS

*no. of shares before

bonus/no. of shares after

bonus

Right issue Time apportion the number

of shares.

Share before the rights also

multiply by:

*CRP/TERP (CRP is the cum

rights price which will be

given in the question. TERP

is the theoretical ex-rights

price, this will have to be

calculated)

Restated

Last year’s EPS* TERP/CRP

Fully diluted EPS

This calculation takes into account all the potential shares that will arise in the future. This

calculation is done to warn the shareholders of the impact on the EPS due to these shares.

Most dilutive basis

No comparative figure adjustment

Convertible bonds/loan notes

The fully diluted EPS will be affected by:

Earnings –this will increase due to the post tax savings in interes

WANS –this will increase due to the conversion factor

Share options

The fully diluted EPS will be affected by the increase in the number of shares.

The extra number of shares= number of options * FV- OP/FV

FV = fair value of the share price

OP= option price/exercise price of the shares

Retrospective adjustments

If a bonus share issues after year end but before date of approval of financial statements.

EPS should be based on the new number of shares issues. (as well as bonus factor of

rights issue) i.e. EPS is restated for current and previous year.

Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting

from changes in accounting policies, accounted for retrospectively.

11. IAS 19 Employee benefits

Defined contribution plans

Company pays fixed contributions into the fund

Company has no legal or constructive obligation to make further payment if the fund

suffers under-performance

Investment risk is borne by employees

No further risk for employer

Accounting treatment for DCS

Recognise contribution payable in IS as incurred

Normally base on employees’ compensation level

Defined benefit plans

Company creates a constructive obligation to provide the agreed amount of benefits to

current and retired employees at retirement

Ultimate benefits/pension are defined and contribution payable is variable (link to final

salary)

Investment risk is borne by employer and no risk for employees

Accounting for defined benefit scheme

Scheme assets –FV with investment returen

Scheme liabilities –PV with interest cost

Actuarial assumptions

Wages inflation (final salary)

Average working life

Investment return

Interest cost

Recognition of actuarial gains and losses

Arises on the revaluation of the pension fund’s assets and liabilities (effects of changes in

actuarial assumption)

Recognise in OCI

Recognise in IS

Corridor approach –if accumulated unrecognised actuarial G/L B/F exceeds greater

of 10%:

-FV of scheme assets –b/f

-PV of scheme liabilities – b/f

The excess will be spread over the expected average remaining working life to I/S

explanation Accounting

treatment

Double entry

Current service cost The increase in the

actuarial liability

expected to arise

from employee

service in the current

period

Operating cost Dr IS

Cr liability

Interest cost The increase in the

actuarial liability

arising from the

unwinding of the

discount

Financial item

adjacent to interest

Dr IS

Cr liability

Expected return on

assets

Expected increase in

the market value of

Financial item

adjacent to interest

Dr asset

Cr IS

the scheme’s assets

Past service costs (if

any)

The increases in the

actuarial liability

related to employees

service in the prior

period but arising in

the current period as

a result of the

introduction of, or

improvement to,

retirement benefits

Operating cost Dr IS

Cr liability

Format of employment benefits calculation

Scheme assets Scheme liability IS

Opening balance × ×

Prior yr adjustment ×/(×) ×/(×)

Restated balance × ×

Expected return × (×)

Interest cost × ×

Current service cost × ×

Past service cost × ×

Contribution ×

Benefit paid × ×

Actuarial G/L ×/(×) ×/(×)

Closing balance × × ×/(×)

Presentation in SFP

Scheme assets –c/f ×

Scheme liabilities –c/f ×

Net assets/liabilities ×/(×)

Unrecognised actuarial G/L-

b/f

×

Recognised in I/S (×)

Occurred in the year ×

Unrecognised actuarial G/L-

c/f

×

Net pension ×

Cash flow statement

Reconciliation of operating profit to cash generated from operating activities

Add back: net pension cost ×

Less: pension cash contribution (×)

12. IFRS 2 share-based payment

Definition of share-based payment

A share-based payment is a transaction in which the entity receives or acquires goods or

services either as

Consideration for its equity instruments or

By incurring liabilities for amounts based on the price of the entity’s shares or other

equity instruments of the entity.

The accounting requirements for the share-based payment depend on how the transaction

will be settled, that is, by the issuance of equity, cash, equity or cash.

13. Financial instruments

There are four categories of financial assets

Financial assets at

fair value through

profit or loss

Held to maturity

investments

Loans and

receivables

Available for sale

assets

These are held for

trading or elected to

be classified in this

These are quoted

company investments

in redeemable debt

These are loans that

the company has

made and do not

This category is the

default category

category. Derivatives

are always classified

as held for trading

unless they are

effective hedges

instruments that the

company will not be

selling before

maturity.

have a quoted price.

There are two categories of financial liabilities

At fair value through the profit and loss Measured at amortised cost

These are held for trading and derivatives

unless they are effective hedges.

This category is the default category and

includes trade creditors, debt instruments

issued and deposits from customers

Initial measurement

A financial asset or liability should initially be recognised at cost, the fair value of the

consideration given or received for it.

Transaction costs when buying assets are capitalised (except for financial assets at fair value

with through the profit and loss)

How are financial assets subsequently measured on the balance

sheet?

Assets Liabilities

Financial

assets at fair

value

through

profit or loss

Held to

maturity

investments

Loans and

receivables

Available for

sale assets

At fair value

through the

profit and

loss

Measured at

amortised

cost

On the

balance sheet

at fair value

with gains

and losses

Amortised

cost

Amortised

cost

On the

balance sheet

at fair value

with gains

and losses

On the

balance sheet

at fair value

with gains

and losses

Amortised

cost

immediately

recognised

through the

profit and

loss account.

being

recognised in

reserves, but

recycled to

income on

disposal

immediately

recognised

through the

profit and

loss account

Impairment

The impairment requirements apply to the following financial assets:

Loans and receivables

Held-to-maturity investments

Available-for-sale financial assets

Investments in unquoted equity instruments whose fair value cannot be reliable measured.

The only category of financial asset that is not subject to testing for impairment is financial

assets at fair value through profit and loss. Since any decline in value for such assets is

recognised immediately in profit and loss. For loans, receivables, and held-to-maturity

investments, impaired assets are measured at the present value of estimated future cash flows,

discounted using the original effective interest rate of the financial asset.

14. IAS 18 revenue recognition

Recognition of revenue when selling goods

The seller has transferred to the buyer the significant risks and rewards of ownership

The seller retains neither continuing managerial involvement to the degree usually

associated with ownership nor effective control over the goods sold

The amount of revenue can be measured reliably

It is probable that the economic benefits associated with the transaction will flow to the

seller

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Recognition of revenue when rendering of service

The amount of revenue can be measured reliably

It is probable that the economic benefits will flow to the seller

The stage of completion at the balance sheet date can be measured reliably

The costs incurred, or to be incurred, in respect of the transaction can be measured

reliably

Recognition of revenue for interest, royalties, and dividends

Interest on a time proportion basis

Royalties on an accruals basis with the substance of the relevant agreement

Dividends when the shareholder’s right to receive payment is established.