f7 course note by mezbah uddin

7/30/2019 F7 Course Note by Mezbah Uddin

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F7 FINANCIALCourse Note

REPORTING (INT)

Primary objective of this document is to help students with

regular revision. Students are strongly advised to study full Prepared by:

text book chapters, regularly attend class lectures and Mezbah Uddin Ahmed,

participate in discussion sessions for better understanding. ACCA


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F7 Financial Reporting (INT)

ContentsExam structure ...........................................................................................................................2

Examiner....................................................................................................................................2

Past question analysis ...............................................................................................................3

Course plan................................................................................................................................5

IAS 1 Presentation of Financial Statements..............................................................................7

IAS 16 Property, plant and equipment ....................................................................................13

IAS 23 Borrowing costs ...........................................................................................................17

IAS 40 Investment property .....................................................................................................20

IAS 20 Government grants ......................................................................................................23

IAS 38 Intangible assets ..........................................................................................................26

IAS 36 Impairment of assets ...................................................................................................29

IAS 8 Accounting policies, changes in accounting estimates and errors ...............................32

IAS 17 Leases..........................................................................................................................35

IAS 18 Revenue.......................................................................................................................40

IAS 2 Inventories......................................................................................................................42

IAS 37 Provisions, contingent liabilities and contingent assets ..............................................44

IFRS 5 Non-current assets held for sale and discontinued operations ..................................48

IAS 11 Construction contracts .................................................................................................51IAS 12 Income taxes................................................................................................................53

Financial instruments ...............................................................................................................61

Consolidated statement of financial position...........................................................................65

Consolidated statement of comprehensive income ................................................................69

IAS 7 Statement of cash flows.................................................................................................71

Ratio analysis...........................................................................................................................77

IAS 33 Earnings per share ......................................................................................................87

Receivables factoring ..............................................................................................................94

IAS 10 Events after reporting period .......................................................................................99

Important definitions ..............................................................................................................101

[email protected] Page 1


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Exam structure

5 Questions

Question No. Topic Marks1 Consolidated financial statements 25 Marks2 Single company financial statements 25 Marks3 Cash flow statement &/ Ratios & interpretation of financial 25 Marks

statements4 IFRS individual topic (one or two) 15 Marks5 IFRS individual topic (one or two) 10 Marks

Examiner

The examiner is Steve Scott. Steve has many years experience in accounting lecturing at aleading UK university. He qualified as an accountant with Stott and Golland and his background isin Audit and Financial Reporting. He has been an ACCA examiner since 1998.



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Past question analysis

FRMRK IAS 2 IAS 7 Ratios IAS 8 IAS 10 IAS 11 IAS 12

Dec '07 4 (a), 5 (a) 3 5 (b) 2 (ii)

Jun '08 4 (a) 4 (b) 3 2 (iv) 2 (v, vi)

Dec '08 3 2 (v)

Jun '09 3 3 4 2 (ii) 2 (v)

Dec '09 4 (a) 3 (a-ii) 3 (b) 2 (v)

Jun '10 4 (a) 3 3 2 (vi) 2 (v)

Dec '10 34 (a), 4

2 (v)(b-ii)

Jun '11 4 (a)3 5 2 (iv),

Dec '11 3 2 (iii) 2 (vi)

Jun '12 5 3 2 (a-iii) 2 (a-iv)

IAS 16 IAS 17 IAS 18 IAS 20 IAS 23 IAS 32 IAS 33 IAS 36

Dec '07 2 (i) 4 (b) 2 (iii)

Jun '08 2 (ii) 2 (i) 2 (iii), 3 (ii), 5

Dec '08 2 (i), 5 2 (iv) 2 (ii),

Jun '09 2 (i) 2 (i) 2 (iii) 2 (iv) 5

Dec '092 (iii), (iv), 3 2 (vi),

2 (vi), 3 (i) 3 (i) 2 (i) 5 3(ii), 4(iii)

(b-iii)

Jun '10 2 (ii), 3 (i) 3 (i) 4 (b) 5 2 (i)

Dec '10 2 (iii), 4 (b-i) 2 (ii)

Jun '11 2 (iii) 2 (ii), (vi) 4

Dec '11 2 (ii) 2 (i) 2 (v)

Jun '12 2 (a-ii) 2 (a-ii) 2 (b) 4

IAS 37 IAS 38 IAS 40 IFRS 5PASSRATE

Dec '07 5 (b) 40%

Jun '08 3 (iv) 3 (i) 33%

Dec '08 2 (iii), 4 42%Jun '09 30%

1 (i), 3Dec '09 (ii), 4 39%

(b)

Jun '10 2 (ii) 28%

Dec '10 2 (iii), 5 47%

Jun '11 38%

Dec '11 56%

Jun '12 48%



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The secret of getting ahead is getting started. - Agatha

Christie (British Novelist)



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Course plan

ClassDate Syllabus Area

BPP TextQuestions to Practice

No. Book Ref.

Introduction to F7IAS 1 Presentation of financial

1 statements Chapter 3IAS 16 Property, plant andequipment Chapter 4 17-Broadoak-a, c(i), 19-Dearing

2 IAS 16 Property, plant andequipment Chapter 4 18-Elite Leisure

3IAS 16 Property, plant andequipment Chapter 4 17-Broadoak-b, c(ii), 55-Jedders (a)

4IAS 23 Borrowing costs Chapter 4 21-Apex

IAS 40 Investment properties Chapter 4

5 IAS 20 Government grants Chapter 4 16-Derringdo II, 96-Errsea

IAS 38 Intangible assets 23-Dexterity, 24-Darby (except b-6 (IFRS 3 Business combinations Chapter 5 iii), 54-Peterlee II (a), 90-Shiplake

(c)will cover later)20-Flightline, 25-Advent, 26-

7 IAS 36 Impairment of assets Chapter 6 Wilderness, 24-Derby (b-iii), Jun'12-Q4-Telepath90-Shiplake (b, d), BPP text Q-8-

IAS 36 Impairment of assets Chapter 6 Multiplex8 IAS 8 Accounting policies,

100-Tunshill, 22-Emerald, 30-changes in accounting estimates Chapter 7

Partway (b-i), 57-Triangle (ii)and errors

9 IAS 17 Leases Chapter 16 60-Branch, 61-Evans,

IAS 17 Leases Chapter 16 62-Bowtock, 63-Fino

10IAS 18 Revenue Chapter 15 27-Derringdo III, 30-Partway (b-ii),

57-Triangle (iv), 59-Wardle

IAS 2 Inventories Chapter 12

11 IAS 37 Provisions, Contingent51-Bodyline (a, b, d), 53-Promoil,

Chapter 13 54-Peterlee II (b), 57-Triangle (i, ii,Liabilities and Contingent Assets

iii), 58-Angelino (iii), 95-AtomicPower, Dec '11-Q4-Borough (a, b-i)

IAS 37 Provisions, ContingentChapter 13 30-Partway (a)

Liabilities and Contingent Assets12 IFRS 5 Non-current assets held

for sale and discontinued Chapter 7 101-Mancooperations

13 IAS 11 Construction contracts Chapter 12 48-Preparation question; 49-Linnet,

50-Beetie, June '11-Q5-Mocca14 IAS 12 Income taxes Chapter 17 66-Bowtock II;



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IAS 12 Income taxes Chapter 17 64-Julian; 65-Deferred taxationIAS 32 Financial instruments:presentation

15IAS 39, IFRS 9 Financial

54-Peterlee II, 55-Jedders (c), 56-instruments: recognition and Chapter 14

Pingway, Dec '11-Q5-BertrandmeasurementIFRS 7 Financial instruments:disclosures

16 6-Winger (IAS 18, 17, 16, 36, 38,12), 7-Harrington (IAS 12, 16, Fin.Inst), 8-Llama (IAS 12, 16, Fin.Inst), 9-Tadeon (12, 17, Fin. Inst.),10-Wellmay (IAS 18, 10, 37, 16, 40,12, Fin. Inst), 11-Dexton (IAS 18,16, 8, 12, Fin. Inst), 12-Candel (IAS

Preparing single company 16, 38, 37, 12, Fin. Inst), 14-

Sandown (IAS 18, 12, 16, 36, 38,17 accountants Fin. Inst), 29-Tourmalet (IAS 2, 12,

17, 16, 40, IFRS 5), 88-Tintagel(IAS 17, 16, 40, 18, 37, 12, Fin.Inst), 93-Kala (IAS 2, 12, 16, 40,17), 98-Cavern (IAS 12, 16, 37, Fin.Inst.), 13-Pricewell (IAS 11, 16, 17,18, 12, Fin. Inst), 15-Dune (IAS 16,18, 12, 11, Fin. Inst, IFRS 5)

18 Consolidated Statement ofFinancial Position; Consolidated19Statement of ComprehensiveIncome, IFRS 3 Business Chapter 5, All questions from Part-8, 9, 10 &11combinations, IAS 27 8, 9, 10, 11 of the BPP question bank

20 Consolidated and separate

financial statements, IAS 28Investment in associates

21IAS 7 Statement of cash flows Chapter 21

All question from BPP question22 bank Part-21

70-Reactive, 71-Victular, 72-

23 Ratios Chapter 19Crosswire, 73-Harbin, 74-Breadline,94-Greenwood, 99-Hardy, J-11-Bengal,

24IAS 33 Earnings per share Chapter 18

67-Fenton, 68-Savoir, 69-Barstead,25 J-11-Q4-Rebound

Receivables factoring Chapter 1555-Jedders (b), 58-Angelino (b-i),28-Telenorth (note-c)

26 IAS 10 Events after reportingChapter 20

period

FINAL MOCK - I

FINAL MOCK - II

* Financial reporting is a core area of ACCA study. Experience shows that students with poor F7performance struggle in P2 & P7, and also working as professional accountant.

* Cherry picking of the syllabus areas shall never be a study strategy for ACCA.

* In most cases overlapping IAS/IFRS knowledge required to solve a problem. So, frequent revision ofpreviously learned IASs/IFRSs is mandatory.



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Optimism is the faith that leads to achievement. Nothing

can be done without hope and confidence. - Helen

Keller (author, political activist, lecturer, and first deaf-blind

person to earn a Bachelor of Arts degree)



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IAS 1 Presentation of Financial Statements

XYZ plc

Statement of Comprehensive Income for the year ended 31 December 20X9

Income Statement for the year ended 31 December 20X9$000

Revenue XCost of sales (X)

Gross profit XOther income XDistribution costs (X)

Administrative expenses (X)Other expenses (X)

Profit/ (loss) from operations X/(X)Finance costs (X)

Profit/ (loss) before tax XTax expense: Current + Deferred (X)

Profit/ (loss) for the year from continuing operations X/(X)Profit/ (loss) for the year form discontinued operations (single amount) X/(X)Profit/ (loss) for the year X/(X)

Earnings per share:Basic $XDiluted $X

$000 $000

Profit/ (loss) for the year X/(X)Other comprehensive income:

Changes on revaluation X/(X)Gain/ (loss) on re-measuring available for sale financial assets X/(X)Tax relating to components of other comprehensive income X/(X)

Other comprehensive income for the year, net of tax X/(X)Total comprehensive income for the year X/(X)

IAS 1 allows Comprehensive Income to be presented in two ways: [IAS 1: 81]

i. A single Statement of Comprehensive Income

ii. Two separate statements as shown above

IFRS do not specify whether revenue can be presented only as a single line item in the statementof comprehensive income, or whether an entity also may include the individual components ofrevenue (for example: various sub-totals for banks).

Expenses can be classified by: [IAS 1: 99]

- Function: more common in practice (as the above statement)

- Nature (e.g. purchase of materials, depreciation, wages and salaries, transport costs)

Finance income cannot be netted against finance costs; it is included in Other income or showseparately in the income statement.



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- Where finance income is an incidental income, it is acceptable to present finance incomeimmediately before finance costs and include a sub- total of Net finance costs in the incomestatement.

- Where earning interest income is one of the entitys main line of business, it is presented asrevenue.

Entities must prominently display: [IAS 1: 51]

- name of the reporting entity

- whether the statements are for a single entity or a group of entities

- date of the end of the reporting period, or the period covered

- presentation currency

- the level of rounding used in the preparation of the statements

XYZ plcStatement of Changes in Equity for the year ended 31 December 20X9

Opening balance

Right issue or market

price issue of

ordinary share capital

Bonus issue of ordinary

share capital (if from

SP) Bonus issue of

ordinary share capital (if

from RE)

Dividend

Profit/ (loss) after taxfor the year

Revaluation gain/(loss) (IAS 16)

Transfer of excess

depreciation from RR

to RE (IAS 16)

Gain/(loss) from Y/end

re-measurement of

financial assetsthrough other

comprehensive income

Closing balance(in SFP)

Ordinary IrredeemableShare Retained

Revaluatishare preference on

premium earningscapital share capital reserve

X X X X X

X X

X (X)

X (X)

(X)

X/(X)

X/(X)

X (X)

X X X X/(X) X

Surplus from

financial

assetsthrough OCI

X

X/(X)

X/(X)

IAS 16 (PPE) permits and it is best practice to make a transfer between reserves of the excessdepreciation arising as a result of revaluation. [IAS 1: 41]

When an asset carrying using revaluation model is disposed, any remaining revaluation reserverelating to that asset is transferred directly to retained earnings. [IAS 1: 41]

An entity can present components of changes in equity either in the Statement of Changes in

Equity or in the notes to the financial statements. [IAS 1: 106]



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XYZ plc Statement of Financial Position as at 31 December 20X9$000 $000

ASSETSNon-current assetsProperty, plan and equipment X

Intangibles XDeferred tax asset XLong-term investments X

XCurrent assetsInventories XTrade and other receivables XShort-term investments XCurrent tax asset XCash and cash equivalents X

XHeld-for-sale non-current assets X

XTotal assets X

EQUITY AND LIABILITIESEquity attributable to owners of the parentOrdinary share capital XPreference share capital (irredeemable) XShare premium account XRevaluation surplus XRetained earnings X

X

Non-current liabilitiesPreference share capital (redeemable) XFinance lease liabilities (non-current portion) XDeferred tax liability XLong-term borrowings X

XCurrent liabilitiesTrade and other payables XDividends payable XCurrent tax liability X

Provisions XShort-term borrowings XFinance lease liabilities (current portion) X

XTotal equity and liabilities X

Reserves other than share capital and retained earnings may be grouped as other componentsof equity.

Entities must present a set of previous years statements for comparison purposes.



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An entity shall classify an asset as current when: [IAS 1: 66]

(a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;

(b) It holds the asset primarily for the purpose of trading;

(c) It expects to realise the asset within twelve months after the reporting period; or

(d) The asset is cash or cash equivalents unless the asset is restricted from being exchanged or

used to settle a liability for at least twelve months after the reporting period.

An entity shall classify a liability as current when: [IAS 1: 69]

(a) It expects to settle the liability in its normal operating cycle;

(b) It holds the liability primarily for the purpose of trading;

(c) The liability is due to be settled within twelve months after the reporting period; or

(d) It does not have unconditional right to defer settlement of the liability for at least twelvemonths after the reporting period.



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Believe in yourself! Have faith in your abilities! Without a

humble but reasonable confidence in your own powers

you cannot be successful or happy. - Norman Vincent

Peale (Author)



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IAS 16 Property, plant and equipment

An asset is a resource controlled by the entity as a result of past events and from which futureeconomic benefits are expected flow to the entity.

Property, plant and equipment are tangible assets that:

- are held for use in the production or supply of goods or services, for rental to others, or foradministrative purposes; and

- are expected to be used during more than one period.

Initial recognition:

- PPE should initially be recognised in an entity's statement of financial position at cost.

Cost is the amount of cash and cash equivalents paid to acquire the asset at the time of its acquisitionor construction PLUS the fair value of any other consideration given.

Elements of Cost: Cost can include:

- Purchase price less any trade discount (not prompt payment discount) or rebate- Import duties and non-refundable purchase taxes

- Directly attributable costs of bringing the asset to working condition for its intended use.Examples:

- Costs of site preparation

- Initial delivery and handling costs

- Installation and assembly costs

- Professional fees such as legal fees, architects fees

- Initial costs of testing that asset is functioning correctly(after deducting the net proceeds from selling any itemsproduced)

Where these costs are

incurred over a period of

time, the period for which the

costs can be included in the

cost of PPE ends when the

asset isready for use, even

if notbrought into use.

- The initial estimate of dismantling and removing the item and restoring the site where it

is located if the entity is obliged to do so (to the extent it is recognised as a provision perIAS 37). Gains from the expected disposal of assets should not be taken into account inmeasuring a provision.

- In case of a land, if initial estimation of restoration cost is capitalised then this capitalisedrestoration cost shall be depreciated.

- Borrowing costs incurred in the construction of qualifying assets if in accordance with IA S23 Borrow ing costs.

Any abnormal costs incurred by the entity, for example those arising from design errors,wastage or industrial disputes, should be expensed as they are incurred and do not form partof the capitalised cost of the PPE asset.

Estimated economic life and residual value of asset should be reviewed at the end of eachreporting period. If either changes significantly, the change should be accounted for over theuseful economic life remaining.

The residual value of an asset is the estimated amount that an entity would currently obtainfrom disposal of the asset, after deducting the estimated costs of disposal, if the asset werealready of the age and in the condition expected at the end of its useful life. [IAS 16: 6]



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Subsequent expenditure only to be capitalised if enhances the life of the asset, or improvesquality or quantity of output, or reduces the cost. If not capitalised then recognise as expensein I/S.

Examples of subsequent expenditure to be capitalised can include:-

Modification of an item of plant to extend its useful life- Upgrade of machine parts to improve the quality of output

- Adoption of a new production process, leading to large reductions in operating costs

Where an asset is made up of many distinct (i.e. significant) parts (examples: aircraft, ship), theseshould be separately identified and depreciated.

Major inspections or overhauls should be recognised as part of (i.e. increase) carrying amount of theitem of PPE, assuming that this meets the recognition criteria.

- An example is where an aircraft is required to undergo a major inspection after so manyflying hours. Without the inspection the aircraft would not be permitted to continue flying.

- As a separate component of PPE, the capitalised overhaul cost shall be depreciated overthe period to next overhaul.

Measurement after initial recognition: After initially recognising an item of property,plant and equipment in its statement of financial position at cost, an entity has twochoices about how it accounts for that item going

Cost model:

Carrying asset at cost less accumulateddepreciation and impairment losses

Revaluation model:

Carrying asset at revalued amount lesssubsequent accumulated depreciation andimpairment losses

ASSET IS REVALUED

Upwards

Has the asset previously suffereda downward valuation?

No

Downwards

Has the asset previously

No suffered a upward valuation?

Recognise the increase as a

Yes revaluation surplus. (Othercomprehensive income)

Recognise the increase in profit or loss up to

the value of the downward valuation. Any

excess should be recognised as a revaluation

surplus. (Other comprehensive income)

Recognise the decreasedirectly in profit or loss

Yes

Recognise the decrease against the

revaluation surplus up to the value of the

upward valuation. Any excess should be

recognised directly in profit or loss.



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Revaluation model:

- An entity can, if it chooses, revalue assets to their fair value (only if the fair value of the itemcan be measured reliably)

- For land and buildings this is normally determined based on their market values asdetermined by an appraisal undertaken by professionally qualified valuers.

- If this model is applied to one asset, it must also be applied to all other assets in the sameclass.

- Note that when the revaluation model is used PPE must still be depreciated. The revaluedamount is depreciated over the asset's remaining useful life.

- For a revalued asset, IAS 16 allows (and encourage) a reserve transfer in the statementof changes in equity (from revaluation reserve to retained earnings) of the 'excess'depreciation because of an upward revaluation.

Methods of depreciation:

- Straight line method

- Reducing balance method

- Machine hour method

- Sum-of-the-digits method

Sum of the years of assets expected life = N X (N+1)/2 where N is the assets expected life

Cost of a lorry was $15,000 and expected to last for five years. No scrap value.

Sum of the years of assets expected life = N X (N+1)/2 = 5 X (5+1)/2 = 15 Depreciation in Year

1 $15,000 X 5 /15 = $5,0002 $15,000 X 4 /15 =$4,0003 $15,000 X 3 /15 = $3,000

4 $15,000 X 2 /15 = $2,0005 $15,000 X 1 /15 = $1,000

Derecognition: Property, plant and equipment shall be derecognised (i.e. removed from thestatement of financial position) either:

- On disposal; or

- When no future economic benefits are expected from its use or disposal.

The gain or loss arising from de-recognition is included in profit or loss. - This gain or loss is calculated by comparing the sale proceeds to the asset's carrying

amount.

- The gain or loss is calculated in the same way, regardless of whether the asset is revaluedor not.

- Any gain should not be classified as part of the entity's revenue.

If on disposal of a revalued asset there remains a balance on the revaluation surplus relating to theasset, this balance should be transferred to retained earnings.



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Sal (Salman) Khan, founder of Khan Academy, in MIT 2012

commencement address:

'. . . Many of you will soon enter the outside world and be

somewhat taken aback. It will be far less efficient, far less

fair, far less productive, and far more political than what you

may have imagined it to be. There will be pessimism and

cynicism everywhere. It is easy to succumb to this, to becomecynical or negative yourself. If you do, you with the potential

that you have, it would be a loss for yourself and

for humanity.

To fight these forces of negativity, to increase the net

positivity in the world, to optimize the happiness of

yourself and the people you love, here are some tips and

tools that I like to return to. . .

Start every morning with a smile even a forced one it

will make you happier. Replace the words I have to with

I get toin your vocabulary. Smile with your mouth, your

eyes, your ears, your face, your body at every living thing

you see. Be a source of energy and optimism. Surround

yourself with people that make you better. Realize or even

rationalize that the grass is truly greener on your side of the

fence. Just the belief that it is becomes a self-fulfilling

prophecy . . .

Remember that real success is maximizing your internally

derived happiness. It will not come from external status or

money or praise. It will come from a feeling of contribution.

A feeling that you are using your gifts in the best way

possible. . . '



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IAS 23 Borrowing costs

An entity shall capitalise (i.e. as part of the asset) borrowing costs that are directly attributable to the acquisition, construction or production asset as part of the of that asset.

[IAS 23: 8]Borrowing costs are interest and othercosts that an entity incurs in connectionwith the borrowing of funds. [IAS 23: 5]

A qualifying is an asset that necessarilytakes period of time to get ready

intended use or sale. [IAS 23: 5]

Borrowing costs eligible for capitalisation are those that would have beenavoided otherwise. [IAS 23: 10]

An entity shall cease capitalisation borrowing costs when substantially all the activities necessaryto prepare the qualifying asset for its intended use or sale are complete. [IAS 23: 22]

The commencement date for capitalisation: [IAS 23: 17]When the following three conditions are first met:

- Expenditures for the asset are incurred- Borrowing costs are being and- Activities that are necessary to the asset for its intended use are being undertaken.-

Borrowing cost of 9 Borrowingmonths (i.e. $75,000) cost of 12

Borrowingcost(i.e. to be capitalised as months (i.e.

expense) of 3 months (i.e. part of asset in $100,000) toto be recognised in Income Statement of Financial be recognisedStatement under Finance Costs Position in I/S

28.02.12 31.12.12 31.12.1301.01.12 31.03.- $1m loan - Purchase order - made - Asset is - Loan is@10% for 2 made to buy the buy the asset delivered & matured andyears asset ready to use repaid

All three

conditions aremet at this point.

Capitalisation is suspended if active development is interrupted for extended periods. (Temporary delays or technical/administrative work will not cause suspension).

- Interest income from deposit during this period is not deductible from capitalised borrowingcost since cost from this suspended period is not capitalised. [IAS 23: 21]



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Amount of borrowing costs available for capitalisation is actual borrowing costs incurred less anyinvestment income from temporary investment of those borrowings. [IAS 23: 13]

On 1 January 20X6 Stremans Co borrowed $1.5m 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 andincurred on 1 January 20X6, and was utilised as follows, with the remaining funds invested temporarily.Asset A Asset B$'000 $'000

1January 20X6 250 5001July 20X6 250 500

The loan rate was 9% and Stremans Co can invest surplus funds at 7%.

Required: Ignoring compound interest, calculate the borrowing costs which may be capitalised for eachofthe assets and consequently the cost of each asset as at 31 December 20X6.

Asset A Asset B$ $

Borrowing costs: To 31 December 20X6 ($500,000/$1,000,000 9%) 45,000 90,000Less investment income: To 30 June 20X6 ($250,000/$500,000 7% 6/12) (8,750) (17,500)

36,250 72,500Costs capitalised as part of assets:

Expenditure incurred 500,000 1,000,000Borrowing costs 36,250 72,500

536,250 1,072,500

For borrowings obtained generally, apply the capitalisation rate to the expenditure on the asset(weighted average borrowing cost). [IAS 23: 14]

Acruni Co had the following loans in place at the beginning and end of 20X6.

1 January 31 December20X6 20X6$m $m

10% Bank loan repayable 20X8 120 1209.5% Bank loan repayable 20X9 80 808.9% debenture repayable 20X7 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of miningequipment), construction of which began on 1 July 20X6.

On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for ahydroelectric plant, using existing borrowings. Expenditure drawn down for the construction was: $30m on1 January 20X6, $20m on 1 October 20X6.

Required: Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.

Capitalisation rate = weighted average rate = (10% (120/ (80 + 120))) + (9.5% (80 / (120 + 80))) = 9.8%

Borrowing costs = ($30m 9.8%) + ($20m 9.8% 3/12) = $3.43m



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By failing to prepare, you are preparing to fail. - Benjamin

Franklin (one of the Founding Fathers of the United States,

author, printer, political theorist, politician, postmaster,

scientist, musician, inventor, satirist, civic activist,

statesman, and diplomat)



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IAS 40 Investment property

Investment property is a property (land or a building or part of a buildingor both) held (bythe owner or by the lessee under a finance lease) to earn rentals or for capital appreciation orboth, rather than for:

-

Use in the production or supply of goods or services or for administrative purposes; or- Sale in the ordinary course of business. [IAS 40: 5]

IAS 40 lists the following as examples of investment property: [IAS 40: 8]

- Land held for long-term capital appreciation rather than short-term sale in the ordinarycourse of business

- Land held for a currently undetermined future use

- A building owned by the entity (or held under a finance lease) and leased to a third partyunder operating lease

- A building which is vacant but is held to be leased out under an operating lease

- Property being constructed or developed for future use as an investment property (propertyconstructed for sale is not investment property)

Followings are outside the scope of IAS 40: [IAS 40: 9]

- Property intended for sale in the ordinary course of business: IAS 2 Inventories

- Property being constructed or developed on behalf of third parties: IAS 11 ConstructionContracts

- Owner-occupied property, including property held for future use as owner-occupied: IAS 16

Property, Plant and Equipment

- Property occupied by employees whether or not the employees pay rent at market rates:

IAS 16 PPE

- Property leased to another entity under a finance lease: IAS 17 Leases

Points to note: - If a portion of an asset meets investment property criteria and other portion is not, then an

entity accounts for the portions separately (e.g. one portion under IAS 40 and anotherunder IAS 16) if those portions could be sold separately or leased out separately underfinance lease. [IAS 40: 10]

- Where an entity owns property that is leased to, and occupied by, its parent or another

subsidiary, the property is treated as an investment property in the entity's own accounts.However, the property does not qualify as investment property in the consolidated financialstatements as it is owner-occupied from the group perspective. [IAS 40: 15]

Initial recognition and measurement:

- An investment property should be initially measured at cost (IAS 16s initial recognitionrules applies). [IAS 40: 20]



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Measurement after recognition:After initial measurement at cost, an entity can choose betweentwo models: [IAS 40: 30]

- The IAS 16 cost model

- The fair value model

If the fair value model is adopted, the accounting treatment of investment properties will be asfollows:

- All investment properties should be measured at fair value at the end of each reportingperiod provided fair value can be measured reliably.

- Changes in fair value, whether gains or losses, should be recognised in profit or lossfor the period in which they arise. [IAS 40: 35]

When determining fair value, do not deduct costs to sale fromthe fair value. [IAS 40: 37]

The policy chosen should be applied consistently to all of the entity's investment property IAS 40 encourages the assessment of fair value by independent, appropriately qualified and

experienced professionals but does not require it.



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Laziness is a secret ingredient that goes into failure. But

it's only kept a secret from the person who fails.

Robert Half



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IAS 20 Government grants

An entity should not recognise government grants until it has reasonable assurance that: [IAS 20:7]

- The entity will comply with any conditions attached to the grant- The entity will actually receive the grant

Receiving the grant not necessarily prove that the conditions attached to it have been or will be fulfilled. The treatment will be same whether the grant is received in cash or given as a reduction in a liability to

government. [IAS 20: 10]

Grants relating to assets: IAS 20 allows two alternatives: Option 1:

Present the grant in the statement of financial

position as deferred income and systematically

recognise it in profit or loss over the asset's

useful life. [IAS 20: 26]

Option 2:

Deduct the grant when arriving at the cost of the

asset. The asset is included in SFP at cost minus

the grant. Depreciate the net amount over the

useful life of the asset. [IAS 20: 27]

Example: A company receives a grant from the EU for CU100,000 towards the cost of a new factory.The overall cost of the factory is CU1,000,000. It has a 50 year useful life and NIL residual value. Thecompany's policy is to apply the straight-line method of depreciation.

Option 1

At recognition:Statement of financial positionAssets:Factory 1,000,000Liabilities:Deferred income 100,000

At Year 1 end:Statement of financial positionAssets: NCAFactory 1,000,000

Accumulated depreciation (20,000)

980,000

100,000(2,000)

98,000(Current liabilities 2,000; Non-current liabilities96,000)

Statement of comprehensive incomeOther income 2,000

Depreciation (20,000)

Liabilities:

e erre ncome

Income released in the year


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Option 2

At recognition:Statement of financial positionAssets:Factory (1,000,000 100,000) 900,000

At Year 1 end:Statement of financial position

Assets: NCAFactory 900,000

Accumulated depreciation (18,000)882,000

Statement of comprehensive incomeDepreciation (18,000)



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Government grant recognised as Deferred income (Option 1) needs to be amortised (i.e.recycled in I/S as Income) over the useful life of the asset.

Grants relating to income: Such grants should be recognised in profit or loss as other income ordeducted from the related expense. [IAS 20: 29]

- As with grants related to assets, the benefit of the grant should be recognised in profit or lossover the periods in which the entity recognises as expenses the related costs for which thegrants are intended to compensate.

A non-monetary asset (example: land, building, etc.) may be transferred by government to anentity as a grant.

- The fair value of such an asset is usually assessed and this is used to account for both theasset and the grant.

- Alternatively, both may be valued at a nominal (i.e. insignificant) amount. [IAS 20: 23]

Government grants that cannot reasonably have a value placed on them (for example theprovision of free services by a government department) are excluded from the definition ofgovernment grants.

Repayment of government grant: If a grant must be repaid it should be accounted for as arevision of an accounting estimate (IAS 8). [IAS 20: 34]

- Repayment of grant related to income: apply first against any unamortised deferred incomeset up in respect of the grant, any excess should be recognised immediately as an expense.[IAS 20: 32]

- Repayment of a grant related to an asset: increase the carrying amount of the asset or

reduce the deferred income balance by the amount repayable. The cumulative additional

depreciation that would have been recognised to date in the absence of the grant should beimmediately recognised as an expense. [IAS 20: 32]

It is possible that the circumstances surrounding repayment may require a review of the assetvalue and an impairment of the new carrying amount of the asset.

IAS 20 does not cover: [IAS 20: 2]

- Accounting for government grants in financial statements reflecting the effects of changingprices

- Government assistance given in the form of tax breaks

- Government acting as part-owner of the entity



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Everybody is a genius. But, if you judge a fish by its

ability to climb a tree, itll spend its whole life believing

that it is stupid.Albert Einstein



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IAS 38 Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. [IAS 38: 8]

An asset is identifiable if it either: [IAS 38: 12]

(a) is separable, i.e. is capable of being separated or divided fromthe entity and sold, transferred, licensed, rented or exchanged,

either individually or together with a related contract, identifiable

asset or liability, regardless of whether the entity intends to do

so; or

(b) arises from contractual or other legal rights, regardless ofwhether those rights are transferable or separable form theentity or from other rights and obligations.

An asset is a resource

controlled by the entity as a

result of past event(s) andfrom which future

economic benefits are

expected to flow to the

entity. [IAS 38: 8]

IAS 38 states that an intangible asset is to be recognised if, and only if, the following criteria are met:[IAS 38: 21]

- it is probable that future economic benefits from the asset will flow to the entity- the cost of the asset can be reliably measured.

Purchased

At recognition the intangible should be recognised at cost. [IAS 38: 24]

Examples ofexpenditures that are not part of the cost of an intangible asset are: [IAS 38: 29]

- Costs of advertising and promotional activities) [IAS 38: 69(c)]

- Costs of staff training [IAS 38: 67(c), 69(b)]

- Administration and other general overhead costs.

After initial recognition an entity can choose between: [IAS 38: 72]

- the cost model, and

- the revaluation model: if an active market exists for that type of asset [IAS 38: 75]An active market cannot exist for brands, newspaper mastheads, music and film

publishing rights, patents or trademarks, because each such asset is unique andtransactions are relatively infrequent. The price paid for one asset may not providesufficient evidence of the fair value of another. Moreover, prices are often not availableto the public. [IAS 38: 78]

An intangible asset (other than goodwill) acquired as part of business combination should berecognised at fair value. [IAS 38: 33]



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Researc

hp

hase

In

terna

llygenera

ted

p

hase

Deve

lopmen

t

Research is original and planned investigation, undertaken with the prospect of gaining newscientific or technical knowledge and understanding. [IAS 38: 8]

The result of research is unknown and, so, no probable future economic benefit can beexpected

IAS 38 states that all expenditure incurred at the research stage should be written offto the income statement as an expense when incurred [IAS 38: 54], and will never becapitalised as an intangible asset. [IAS 38: 71]

An intangible asset arising from development must be capitalised if an entity candemonstrate all of the following criteria: [IAS 38: 57]

- the technical feasibility of completing the intangible asset (so that it will be available foruse or sale)

- intention to complete and use or sell the asset

- ability to use or sell the asset

-

existence of a market or, if to be used internally, the usefulness of the asset- availability of adequate technical, financial, and other resources to complete the asset

- the cost of the asset can be measured reliably

If any of the recognition criteria are not met then the expenditure must be charged to the incomestatement as incurred.

If an entity cannot distinguish the research phase from the development phase, treat that asin the research phase. [IAs 38: 53]

Each development project must be reviewed at the end of each accounting period to ensurethat the recognition criteria are still met.

Internally generated goodwill should not be recognised as an asset. [IAS 38: 48]

Internally generated brands, mastheads, publishing titles, customer lists and items similar insubstance shall not be recognised as intangible assets. [IAS 38: 63]

An intangible asset with a finite useful life should be amortised over its expected useful life [IAS 38: 89]

An intangible asset with an indefinite life should not be amortised [IAS 38: 89], but should be reviewedfor impairment on an annual basis [IAS 38: 108]

- There must be an annual review of whether the indefinite life assessment is still appropriate. [IAS38: 109]

Residual values should be assumed to be nil, except if anactive marketexists or there is a commitmentby a third party to purchase the asset at the end life [IAS 38: 100]

An active market is a market in which all the following conditions exist:

(a) The items traded in the market are homogeneous (i.e. similar)

(b) Willing buyers and sellers can normally be found at any time; and

(c) Prices are available to the public.



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Throughout life people will make you mad, disrespect you

and treat you bad. Let God deal with the things they do, cause

hate in your heart will consume you too.

- Will Smith



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IAS 36 Impairment of assets

An asset is impaired when its carrying amount is higher than its recoverable amount. [IAS 36: 6]

Impairment loss = Carrying value Recoverable amount [IAS 36: 59]

higher of

Fair value less costs to sell: Value in use:

- Value in a binding sale agreement - Based on cash-flow projectionsless incremental costs directly - Cash flows should include expected disposal proceed.

attributable to the assets disposal. [IAS 36: 31(a)][IAS 36: 25] - Future cash flows shall be estimated for the asset in its

current condition.Estimates of future cash flows shall notinclude estimated future cash inflows or outflows that are

- Otherwise, the assets market priceexpected to arise from improving or enhancing the assets(where there is an active market), or performance. [IAS 36: 44]

amount obtainable in an arms - Cash outflows to maintain the level of economic benefitslength transaction (i.e. fair value), from the asset in its current condition should be includedless costs of disposal. [IAS 36: (e.g. repair and replacement of parts). [IAS 36: 41]26]

Cash flows from financing activities or income tax receipts andpayments should be excluded.

Recognition of impairment losses in financial statements: [IAS 36: 60, 61]

- Asset carried out at historical cost: in profit or loss.

- Revalued assets: first against any revaluation surplus relating to the asset and then (if amount left)in profit or loss.

Ifno impairment loss then do nothing! After impairment review: the depreciation/amortisation should be adjusted for future periods. [IAS 36: 63] If goodwill is valued at fair value (in full) the non-controlling share of impairment will be allocated to non-

controlling goodwill (i.e. will reduce NCI).

Where it is not possible to estimate the recoverable amount of an individual asset, the entity estimatesthe recoverable amount of the cash-generating unit to which it belongs. [IAS 36: 66]

- A cash-generating unit is the smallest identif iable group of assets that generates cash inflows that arelargely independent of the cash inflows from other assets or groups of assets. [IAS 36: 68]

- If an active market exists for the output produced by an asset or a group of assets, this group ofassets

should be identified as a CGU even if some or all of the output is used internally. [IAS 36: 70] - If the

cash inflows are affected by internal transfer pricing, managements best estimate of future price thatcould be achieved in arms length transactions are used in estimating the CGUs value in

use. [IAS 36: 70]

Impairment loss is allocated among the asset/CGU in the following order: [IAS 36: 104]

1. any individual asset that is specifically impaired

2. goodwill allocated to the CGU3. other assets pro rata to their carrying amount in the CGU (subject of the carrying amount of an asset

not being reduced below its individual recoverable amount. [IAS 36: 105]



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Reversal of past impairment:

I/S:

- An impairment loss reversal on property, plant and equipment first reverses the loss recorded in profitor loss (and any remainder is credited to the revaluation surplus, subject to IAS 16 requirements)[IAS 36: 119]

SFP:

- A reversal for a CGU is allocated to the assets of the CGU, except for goodwill, pro rata with thecarrying amounts of those assets [IAS 36: 122]

Once recognised, impairment losses on goodwill are not reversed [IAS 36: 124]

In case of a reversal, the carrying amount of an asset must not increase above the lower of: - Its recoverable amount; and

- Its depreciated carrying amount had no impairment loss originally been recognised. [IAS 36: 123]

Impairment indicators:

The entity should look for evidence at the end of each period and conduct an impairment review on anyasset where there is evidence of impairment. [IAS 36: 9]

External indicators: [IAS 36: 12]

- Significant decline in market value of asset

- Significant change in technological,economic or legal environment

- Increased market interest rate; thusreducing value in use

-

Carrying amount of net assets of the entityexceeds market capitalisation

Internal indicators: [IAS 36: 12]

- Evidence of obsolescence or physicaldamage

- Significant changes with an adverse effecton the entity

- Evidence available that asset performancewill be worse than expected.

- Intangible assets with an indefinite useful life or not yet available for use, and goodwill acquired inbusiness combination are subject to annual impairment test irrespective of whether there areindications of impairment. [IAS 36: 10]



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Being busy does not always mean real work. The object of all

work is production or accomplishment and to either of these

ends there must be forethought, system, planning,

intelligence, and honest purpose, as well as perspiration.

Seeming to do is not doing.

- Thomas A. Edison



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IAS 8 Accounting policies, changes in accounting estimates and errors

Changes in accounting policies

o The same accounting policies are usually adopted from period to period, to allow users to analysetrends over time in profit, cash flows and financial position.

o Examples of accounting policies:

- Alternative presentation of government grant (IAS 20)

- FIFO or Weighted average method of inventory valuation

- Fair value model of cost model for investment properties (IAS 40: 31)

o A change in accounting policy must be applied retrospectively.

- Retrospective application means that the new accounting policy is applied to transactionsand events as if it had always been in use. In other words, at the earliest date suchtransactions or events occurred, the policy is applied from that date.

- This involves restating opening balances of current year and comparative previous year.

From earliest date of same transaction(i.e. retrospective effect)

On future transactions- Unless impractical

Policy change date

o Two types of event which do not constitute changes in accounting policy:

(i) Adopting an accounting policy for a new type of transaction or event not dealt withpreviously by the entity.

(ii) Adopting a new accounting policy for a transaction or event which has not occurred inthe past or which was not material.

o Changes in accounting policy will be very rare and should be made only if:

- The change is required by an IFRS, or

- The change will result in a more appropriate presentation of events or transactions in thefinancial statements of the entity, providing more reliable and relevant information.

Revaluation of non-current assets should not be treated as changes in accounting policy (i.e. no retrospectiveeffect for revaluation).

Changes in accounting estimates

o Management applies judgement based on information available at the timeo Examples of accounting estimates:

- Useful life or residual value of a non-current asset (IAS 16)

- Provision made for future loss or expenses (IAS 37)

o A change in accounting estimate must be applied prospectively.

Changes in accounting estimate



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Errors: o Errors discovered during a current period which relate to a prior period may arise through:

- Mathematical mistakes

- Mistakes in the application of accounting policies

- Misinterpretation of facts

- Omissions

- Fraud

o Prior period errors correct retrospectively.

- Either restating the comparative amounts for the prior period(s) in which the error occurred, or

- when the error occurred before the earliest prior period presented, restating the opening balancesof assets, liabilities and equity for that period

Error/ fraud discovered



37/107


Life is pretty simple: You do some stuff. Most fails. Some

works. You do more of what works. If it works big, others

quickly copy it. Then you do something else. The trick is

the doing something else.

- Leonardo da Vinci



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IAS 17 Leases

Operating lease: Any lease other than a financelease.- Treat this as normal rental agreement.

Finance lease: A lease that transfers substantially all the risks and rewards incidental to ownership of

an asset to the lessee (who took the lease). Title may or may not eventually be transferred.

IAS 17 identifies five situations which would normally lead to a lease being classified as afinance lease: i. Transfer of ownership of the asset to the lessee at the end of the lease term

ii. The lessee has the option to purchase the asset at a price sufficiently below fair value at theoption exercise date, that it is reasonably certain the option will be exercised

iii. The lease term is for a major part of the assets economic life even if title is not transferred atend of lease term

iv. Present value of minimum lease payment amounts to substantially all of the assets fair value atinception

Present value of minimum lease payments is the payments over the lease term that thelessee is required to make discounted applying implicit interest rate.

v. The leased asset is so specialised that it could only be used by the lessee without majormodifications being made

At commencement of a finance lease, leasee (i.e. user of the asset) recognises a Non-current asset and

a Liability in Statement of financial position.

The amount of non-current asset to be capitalized isLiability component comprises a current lower of: [IAS 17: 20]portion and a non-current portion; and - Present value of minimum lease payment, andamortised over the lease term. - Fair value of the leased asset

In F7 using cash price (fair value) given in the

question should be sufficient.

Non-current asset is subsequently depreciated over shorter of:- Assets useful life, and

- Lease term including any secondary period

use useful life if reasonable certainty exists that the lessee will obtain ownership (IAS 17: 27)

Example: Leasee accounting: Payment quarterly in advance On 1 October 20X3 Evans entered into a non-cancellable agreement whereby Evans would lease a new

rocket booster. The terms of the agreement were that Evans would pay 26 rentals of $3,000 quarterly in

advance commencing on 1 October 20X3, and that after this initial period Evans could continue, at its option,

to use the rocket booster for a nominal rental which is not material. The cash price of this asset would have

been $61,570 and the asset has a useful life of 10 years. Evans has a policy to charge full years

depreciation in the year of purchase of a non-current asset. The rate of interest implicit in the lease is 2% per

quarter.

Required: Identify whether this is a finance lease and show how these transactions would be reflected in the

financial statements for the year ended 31 December 20X3.



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Answer:

Though the lease term is only 6.5 years ((26 quarter X 3)/ 12 months), the lease assumed to be afinance lease because the present value of the minimum lease payment is similar to the fair value of theleased asset.

Present value of the minimum lease payment: $1

stinstalment (in advance, so already at present value) 3,000

Present value 2nd

26th

installment ($3,000 X 19.5234) (25 years annuity at 2%) 58,57061,570

And, fair value of the lease asset at commencement of the lease (Cash price) 61,570

Leaseee accounting:

Income statement for the year ending 31 Dec Statement of financial position as at 31 Dec 20X320X3

Non-current assets: Leased assets

Depreciation (6,157) At lease commencement (@01 Oct 61,57020X3)

Finance cost (1,171) Accumulated depreciation (1s

year) (6,157)Carrying value 55,413

Liabilities:-current liabilities: Finance lease 51,033

liabilities: Finance lease 8,708

Lease schedule:

Y/ending 31 Dec 20X3 31 20X4Quarter 1 2 3 4 5

$ $ $ $ $Opening liability 61,570 59,741 54,033Instalment in

(3,000) (3,000) (3,000) (3,000)advance

56,741 52,974 51,033Interest @ 2%

1,135 1,059 1,020(I/S)Closing liability 59,741

57,876 54,033 52,053(SFP)

Current portion of total closing liability will becalculated as:

(Total instalment payable within next one yearTotal interest expense charge before lastinstalment in the next year) =

($3,000 + $3,000 + $3,000 + $3,000) ($1,135 +$1,098 + $1,059) = $8,708

Non-current portion of total closing liability will becalculated as:

Total closing liability Current portion of theliability = $59,741 - $8,708 = $51,033



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Example: Leasee accounting: Payment annually in arrears Branch acquired an item of plant and equipment on a finance lease on 1 January 20X1. The terms of the agreement were as follows:

Deposit : $1,150 (non-refundable)Instalments : $4,000 per annum for seven years payable in arrearsCash price : $20,000 (Fair value of the lease asset at commencement of the lease)

The asset has useful life of four years and the interest rate implicit in the lease is 11%.

Required: Prepare extracts from the income statement and statement of the financial position of Branchforthe year ending 31 December 20X1.

Answer:

It is assumed that fair value of the leased asset and present value of minimum lease payments are sameat the commencement of the lease.

Income statement for the year ending 31 Dec Statement of financial position as at 31 Dec 20X1

20X1Non-current assets: Leased assets

Depreciation (5,000) At lease commencement (@01 20,000January 20X1)

Finance cost (2,074) Accumulated depreciation (1s

year) (5,000)(20,000/4)Carrying value 15,000

Liabilities:

-current liabilities: Finance lease 14,786liabilities: Finance lease 2,138

Lease amortizationY/ending 31 20X1 31 Dec 20X2

$Opening liability 16,924Initial non-refundable -

Interest @ 11% 2,074 1,862Instalment in (4,000) (4,000)Closing 16,924 14,786


(Total instalment payable within next one yearTotal interest expense charge before lastinstalment in the next year) =($4,000 $1,862) = $2,138





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Example: Leasee accounting: Complex Bowtock has leased an item of plant. Commencement of the lease was 1 January 20X2 and term of the

lease is 5 years. Payments of $12,000 to be made annually in advance. Cash price and fair value of the

asset - $52,000 at 1 January 20X2 equivalent to the present value of the minimum lease payments.

Implicit interest rate within the lease 8% per annum. The companys depreciation policy for this type of plant

is 20% per annum on cost (apportioned on a time basis where relevant).

Required: Prepare extracts of the income statement and statement of financial position for Bowtock fortheyear to 30 September 20X3 for the above lease.

Answer:

Leaseee accounting:

Income statement for the year ending 30 Statement of financial position as at 30 SeptemberSeptember 20X3 20X3

Non-current assets: Leased assets

Depreciation (10,400) At lease commencement (@01 January 52,00020X2)Finance cost (800+1,872) (2,672) Accumulated depreciation: (7,800)

1st

year9 months (52,000X20%)X(9/12)

2n

year full year (52,000X20%) (10,400)Carrying value 33,800

Liabilities:

-current liabilities: Finance lease 21,696liabilities: Finance lease 1,376

Lease schedule:Point to note: runs from 01 Jan to 31 year runs from 01 Oct to 30 Sept.

Accounting year 30 Sep 30 Sep 20X3 30 Sep 20X4$ $ $

Opening liability 52,000 42,400 33,072Interest @ 8% (I/S) 3 m of the lease((40 -((31,200X8%)X3/12) 624Instalment in (1 Jan) (12,000) (12,000) (12,000)

40,000 31,200 21,696Interest @ 8% (I/S) 9

((40,000X8%)X9/12) 2,400((31,200X8%)X9/12) 1,872((21,696 1,302Closing liability 42,400 33,072 22,998


(Total instalment payable within next one yearTotal interest expense charge before lastinstalment in the next year) =($12,000 $624) = $11,376





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People who sayit cannot be done should not interrupt those

who are doing it.

- George Bernard Shaw



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IAS 18 Revenue

IncomeIncome is increases in economic benefits during the accounting period in the form of inflows

or enhancements of assets or decreases of liabilities that result in increases in equity, other

than those relating to contributions from equity participants. [Framework: 4.25(a)]

Revenue is income that arises in the course of ordinary activities of an entity. [IAS 18:Revenue

Objectives]

From sale of goods should only be recognisedwhen all of the five criteria are met: [IAS 18: 14]

- It is probable that future economic benefits willflow to the entity.

- The amount of revenue can be measuredreliably.

- The costs incurred in relation to the transactioncan be reliably measured.

- The seller no longer has managementinvolvement or effective control of the goods.

- The seller must have transferred to the buyerall of the significant risks and rewards ofownership.

From rendering of services should only berecognised when all of the four criteria are met: [IAS18: 20]

- It is probable that future economic benefits willflow to the entity.

-

The amount of revenue can be measuredreliably.

- The costs incurred and the costs to complete inrelation to the transaction can be reliablymeasured.

- The stage of completion can be measuredreliably.

Seller transfer significant risks andrewards:

- In most cases the transfer ofsignificant risks and rewards of

ownership coincides with the

transfer of legal title or the

passing of possession to the

buyer.

Where consideration (e.g. money) from sales is received butabove revenue recognition criteria are not met:

DR Asset: CashCR Liability: Deferred income

When revenue recognition criteria are met:DR Liability: Deferred incomeCR I/S: Revenue/Income

Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and valueadded taxes are not part of revenue. [IAS 18: 8]

In an agency relationship, for an agent, revenue is only the amount of his commission. [IAS 18: 8]

In certain circumstances, it is necessary to apply the revenue recognition criteria to the separately

identifiable components of a single transaction in order to reflect the substance of the transaction. For

example, when the selling price of a product includes an identifiable amount for subsequent servicing,

that amount is deferred and recognised as revenue over the period during which the service isperformed. [IAS 18: 13]

In some cases two or more transactions are considered together. For example, an entity may sell goodsand, at the same time, enter into a separate agreement to repurchase the goods at a later date. This

sale and repurchase agreement may constitute a secured loan and recognised as loan liability instead ofsales revenue. [IAS 18: 13]



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It is no use saying, 'We are doing our best.' You have got to

succeed in doing what is necessary.

- Winston Churchill



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IAS 2 Inventories

Inventories are assets:

- held for sale in the ordinary course of business;

- in the process of production for such sale; or

- in the form of materials or supplies to be consumed in the production process or in the renderingof services.

Inventories needs to be valued lower of:

Cost Net RealisableValue (NRV)

Cost of purchase + Cost of conversion

Suppliers gross Costs directly Estimated sellingprice for raw related to the units price in the ordinary

materials of production (e.g. course of business,+ direct materials, when completed

Import duties, etc direct labours) -+ + Estimated costs to

Costs of transporting Fixed and variable completion and thematerials to production estimated costs

business premises overheads incurred necessary to make- in converting the sale.

Trade discounts materials to finishedgoods, allocated ona systematic basis

+Borrowing costs (ifmet IAS 23 criteria)

Costs should not include:

- Abnormal waste, finished goods storage, unrelated administrative overheads

Write-down to NRV:

- If inventories are write-down to their NRV, this will result closing inventory with lower carrying value,which will have automatic effect on cost of sales (i.e. cost of sales will be increased).

IAS 2 does not apply to inventories covered by other standards, such as:

- Work in progress under construction contracts (IAS 11 Construction contracts)



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What is success? I think it is a mixture of having a flair for

the thing that you are doing; knowing that it is not enough,

that you have got to have hard work and a certain sense of

purpose.

- Margaret Thatcher



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IAS 37 Provisions, contingent liabilities and contingent assets

Provision: is a liability where there is uncertainty over its timing or the amount at which it will be settled.A provision should be recognised where: i.e. established past practice

-An entity has a present obligation (legal or constructive) as a result of a past event;

- It is probable (i.e. more likely than not) that there will be an outflow of resources in the form ofcash or other assets; and

- A reliable estimate can be made of the amount [IAS 37: 10]

A provision should not be recognised in respect of future operating losses since there is no present obligationarising from a past event. [IAS 37: 63]

An entity can be required to recognise a provision and capitalise (DR Non-current asset: Property, plant& equipment; CR Liability: Provision) initial estimation of future dismantling and restoration cost if aboveprovision recognition criteria and IAS 16 capitalisation criteria are met. [IAS 16: 16, 18]

-

Gains from the expected disposal of assets shall not be taken into account in measuring aprovision. [IAS 37: 51]

If an entity sells goods with a warranty, a provision recognition (DR I/S: Expense; CR Liability: Provision)can be required based on the best estimate of the expenditure required to settle the present obligation atthe end of the reporting period. [IAS 37: 36]

- When the selling price includes an identifiable (i.e. distinguishable) amount for subsequentservicing, that amount is deferred (DR Asset: Cash/ Receivable; CR Liability: Deferred income)and recognised as revenue over the period during which the service is performed (DR Liability:Deferred income; CR I/S: Revenue). [IAS 18: 13]

Where the provision being measured involves a large population of items, the obligation is estimated byexpected value calculation. [IAS 37: 39]

Restructuring costs: A constructive obligation, requiring a provision, only arises in respect ofrestructuring costs where the following criteria are met:

- A detailed formal plan has been made, identifying the areas of the business and number ofemployees affected with an estimate of likely costs an timescales; and

- An announcement has been made to those who will e affected by the restructuring.

A restructuring provision does not include costs of retraining or relocating continuing staff, marketing, orinvestment in new systems [IAS 37: 81]



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Discounting to present value: When there is a significant period of time between the end ofreporting period and settlement of the obligation, the amount of provision should be discounted topresent value. [IAS 37: 45]

- Discount factor: (1+r)-n- The discount rate shall be a pre-tax rate that reflects current market assessment of the

time value of money and the risks specific to the liability.

Example: If a provision of $1,000 is required to settle a liability after 2 years; at 10% discount rate theprovision will be recognised at Year-0 is $827 ($1,000 X 0.827).

Unwinding of discount: When a provision is included in the statement of financial position at a discount value (i.e. at present value) the amount of the provision will increase over time, to reflect thepassage of time.

- Unwinding of discount will be included in the finance cost.

- Unwinding of discount (i.e. the amount to be charged in finance cost and by the amount the provision needs to be increased) can be found by applying discount rate on opening balanceof the provision.

At end of Year-1: $83 ($827X10%); DR I/S: Finance cost; CR Liability: Provision (that makes closingprovision liability = $910 ($827+$83)) At end of Year-2: $91 ($910X10%); DR I/S: Finance cost; CR Liability: Provision (that makes closing

provision liability = $1,000 ($910+$91))

Reimbursement:An entity may be entitled to reimbursement from a third party for all or part of theexpenditure required to settle a provision. Such a reimbursement:

- Should only be recognised (DR Assets: Receivable; CR I/S: Other income) where receipt is

virtually certain, and

- Should be treated as a separate asset in the statement of financial position (i.e. not netted offagainst the provision) at an amount no greater than that provision.

-

The provision and the amount recognised for reimbursement may be netted off in the I/S. [IAS

37: 53]

Contingent liability: is a possible obligation that arises from past events and whose existence will be confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly withinthe control of the entity.

- Contingent liability is not recognised in the financial statements because either it is not probable,or the amount cannot be measured with sufficient reliability.

- Contingent liability is only disclosed in the notes of financial statements. [IAS 37: 10, 13]



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Contingent asset: is a possible asset that arises from past events and whose existence will be confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly withinthe control of the entity.

- A contingent asset should not be recognised in the financial statements

- Contingent assets should only be disclosed in the notes of financial statements when theexpected inflow of economic benefits is probable. [IAS 37: 31, 34]

When the realisation of income is virtually certain, then the related receivable is recognised in the financialstatements (DR Asset: Receivable; CR I/S: Other income) [IAS 37: 33]

Asset or income receivable because of past event

Probable No Virtually certain

Yes Do nothing Yes

Reliable estimate No (i.e. do not Recognise inrecognise or financial statements

Yes disclose in the (DR Asset:Disclosure as s.

Receivable; CR I/S:

contingent asset Other income

Disclosure let out: IAS 37 permits reporting entities to avoid disclosure requirements relating toprovisions, contingent liabilities and contingent assets if they would be expected to be seriously prejudicial(i.e. will cause serious disadvantage) to the position of the entity in dispute with other parties.



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I have been impressed with the urgency of doing. Knowing

is not enough; we must apply. Being willing is not enough;

we must do.

- Leonardo da Vinci



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IFRS 5 Non-current assets held for sale and discontinued operations

A group of assets and liabilities that will be disposed of ina single transaction are referred to as disposal group.

Held for sale:

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will

be recovered principally through a sale transaction rather than through continuing use. [IFRS 5: 6]

To be classified as held for sale, the following conditions must

be met:

- Available for immediate sale in present condition [IFRS5: 7].

- Sale is highly probable [IFRS 5: 8].

The asset's current conditionshould be adequate to beeffectively sold as seen.

For a sale to be highly probable, the following must apply:

- Management must be committed to a plan to sell the asset -There must be an active programme to locate a buyer

- The asset must be marketed for sale at a price that is

reasonable in relation to its current fair value

- The sale should be expected to take place within one year from the date of classification [IFRS5: 8].

Once an asset or group of assets and related liabilities is classified as held for sale, the following rules should be followed:

- Carry at lower of itscarrying amount and fair value less cost to sell, which may give rise to an

loss [IFRS 5: 15].

This is an exception to the normal IAS 36 rule. IAS 36impairment of assets requires an entity to recognise

an impairment loss only when an assets recoverable

amount is lower than its carrying amount.

. . . can include transport costs and

costs to advertise that the asset isavailable for sale

- Do not depreciate even if still being used by the entity. [IFRS 5: 1]

- Present separately in the statement of financial position. [IFRS 5: 1]

- Non-current asset held for sale recognise under current asset. [IFRS 5: 3]

Presentation of a non-current asset or a disposal group classified as held for sale: [IFRS 5: 38]

Non-current assets and disposal groups classified as held for sale should be presented separately from

other assets in the statements of financial position. The liabilities of a disposal group should bepresented separately from other liabilities in the statement of financial position.

- Assets and liabilities held for sale should not be offset.

- The major classes of assets and liabilities held for sale should be separately disclosed either onthe face of the statement of financial position or in the notes.

On ultimate disposal of an asset classified as held for sale, any difference between its carrying amount and the disposal proceeds is treated as a loss or gain recognised in income statement.

A non-current asset or disposal group that is no longer classified as held for sale (for example,because the sale has not taken place within one year) is measured at the lower of: [IFRS 5: 27]

- Its carrying amount before it was classified as held for sale, adjusted for any depreciation thatwould have been charged had the asset not been held for sale.

- Its recoverable amount at the date of the decision not to sell.


a r va ue ess cost to se s equ va ent to net rea sa e va ue


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An asset that is to be abandoned should not be classified as held for sale. [IFRS 5: 13]

Discounted operation:- operations and cash flows that can be clearly distinguished, operationally

and for financial reporting purposes, from the rest of the entity. [IFRS 5: 31]

Discontinued operation is a component of an entity that has either 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 geographicalarea of operations, or

- is a subsidiary acquired exclusively with a view to resale. [IFRS 5: 32]

For discontinued operations, an entity should disclose a single amount in the statement ofcomprehensive income comprising the total of: [IFRS 5: 33]

- The post-tax profit or loss from discontinued operations; and

- The post-tax gain or loss on the re-measurement to fair value less costs to sell or on the disposal ofthe discontinued operation.

An entity should also disclose an analysis of the above single amount either on the face of the statement ofcomprehensive income or in the notes.

An entity shall disclose the amount of income from continuing operations and from discontinuing operationsattributable to owners of the parent.

An entity should also disclose the net cash flows attributable to the operating, investing andfinancing activities of discontinued operations. These disclosures may be presented either on theface of the statement of cash flows or in the notes.

Gains and losses on the re-measurement of a non-current asset or disposal group that is not adiscontinued operation but is held for sale should be included in profit or loss from continuing operations.[IFRS 5: 37]

XYZ plc - Consolidated statement of comprehensive income for the year ended 31 December 20X9

$000Revenue XCost of sales (X)

Gross profit XOther income XDistribution costs (X)

Administrative expenses (X)Other expenses (X)Profit/ (loss) from operations X/(X)Finance costs (X)Share of profit/(loss) of associates X/(X)

Profit/ (loss) before tax XIncome tax expense (X)

PROFIT/ (LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS X/(X)PROFIT/ (LOSS) FOR THE YEAR FORM DISCONTINUED OPERATIONS (SINGLE AMOUNT) X/(X)Profit/ (loss) for the year X/(X)



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I don't pity any man who does hard work worth doing. I

admire him. I pity the creature who does not work, at

whichever end of the social scale he may regard himself as

being.

- Theodore Roosevelt



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IAS 11 Construction contracts

Revenue and cost: should be recognised according to thestage of completionof the contract at the endof the reporting period, but only when the activity can be estimated reliably.

- Either, proportion of total contract costs incurredfor work carried out to date

- Or, physical proportion of the contract workcompleted

- Probable that economic benefit of thecontract will flow to the entity.

- Costs and revenue can be identifiedclearly and be reliably measured.

When outcome of the contract cannot be reliably estimated:

- Revenue: Only recognise revenue to the extent of contract costs incurred which are expected to be recoverable

- Cost: Recognise contract costs as an expense in the period they are incurred

Contract costs which cannot be recovered should be recognised as an expense straight away.

If a loss is predicted (i.e. the contract value < total contract cost) on a contract then it should be

recognised immediately in I/S. Costs incurred to date + costs will be incurred

Costs that should be EXCLUDED from construction contract costs:

- General administration costs (unless reimbursement is specified to the contract)

- Selling costs

- Research and development (unless reimbursement is specified to the contract)

- Depreciation of idle plant and equipment not used on in the contract

Penalty charged by client (may be for delay) will reduce the revenue; will not increase the cost. Finance costs should be included in contract costs under IAS 23 Borrowing Costs.

Accounting treatments: Income Statement:

Revenue X((Total contract value X % completed) Revenue recognised in previous periods )

Cost of sales (X)((Total contract costs X % completed) Costs and losses charged in previous periods)

Foreseeable loss not previously recognised (ALWAYS test for foreseeable loss ) (X)(((Total contract value Total contract cost) X % yet to complete)

Any of this loss previously recognised)

Profit/(loss) (before non-reimbursable abnormal cost) X/(X)Abnormal cost (e.g. rectification cost which is not reimbursed by client) (X)

Net profit/(loss) X/(X)

(Any rectification cost which will be reimbursed by client will increase both total contract value andtotal contract costs)

Statement of financial position:Contract costs incurred to date XProfits/(losses) recognised to date (before deducting non-reimbursable abnormal cost) X/(X)

XProgress billing to date (X)Receivables / (payables) (current asset/liability) X/(X)



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Moral excellence comes about as a result of habit. We

become just by doing just acts, temperate by doing temperate

acts, brave by doing brave acts.

- Aristotle



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IAS 12 Income taxes

Sales tax

Tax

Income tax Deferred tax

Also known as VAT (value added tax).

Seller collect sales tax at the point of sale and thepurchaser pays sales tax at the point of purchase.

If 15% sales tax applicable on sales made byCompany T; the accounting for $100 sales will be:

DR SFP: Cash 115CR I/S: Revenue 100CR SFP: Current liability: Sales tax payable 15

(Because as per IAS 18, revenue cannot be

recognised for the amount ($15) collected on behalfof others (i.e. sales tax collected on behalf of

government).

If 15% sales tax applicable on purchases made by

Company T and if the sales taxes paid byCompany T is recoverable; the accounting for $80purchase will be:

DR Purchase 80DR SFP: Current asset: Sales tax recoverable 12(or, DR SFP: Current liability: Sales tax payable,

if there is already a sales tax payable balance) CR SFP: Cash 92

If sales tax paid by Company T on purchase is NOT recoverable; the accounting for $80purchase will be:

DR Purchase 92CR SFP: Cash 92

Also known as current tax.

This is the tax on taxable profit (NOT onaccounting profit).

Companies prepare profit or loss accountbased on accounting standards; but taxableprofit is calculated based on tax rules.

If taxable profit for the year is $100 (accounting

profit can be different) and applicable tax rate

f7 course note by mezbah uddin

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