Sifrs Class Lides - WS - 2013 - 2014

(L)+(C) International Financial Reporting
Preliminary meeting Setting the scene
Contact I
Alexander Herbst
c/o Alpen-Adria-Universitt Klagenfurt
Faculty of Management and Economics
Department of Financial Management
Finance Taxation Accounting
Universittsstrae 65-67
9020 Klagenfurt am Wrthersee, Austria
++43-463-2700-4026
++43-463-2700-99-4026
Alexander.Herbst@aau.at
www.aau.at/ifm and www.aau.at/im
only upon prior registration by email
E.1.18, main building, south annex, level 1
How to get to my office: http://bit.ly/WayToMyOffice
dewey.81
Alexander Herbst: International Financial Reporting
Contact II
Contact III
E.1.18, main building, south annex, level 1, access via E.1.18a, behind the glass door
Course plan I
Semester
ECTS
Type
Principles of International Business

International Economics
International HRM and Organizational Behaviour
Course
2
2
L
LC
International Marketing
Cases in International Marketing
3
3
L
C
International Entrepreneurship and Innovation Management

International Entrepreneurship
Cases in International Entrepreneurship
3
3
L
C
International Financial Management

International Financial Reporting
Cases in International Financial Reporting
3
3
L
C
Cultural Skills in SEE and CEE

Cultural Skills and Economic Issues in SEE and CEE
Study Excursion to SEE or CEE
3
2
LC
EX
Options
Course plan II
Semester
Course
ECTS
Type
Principles of International Law
International Consumer Behaviour and Communication
International Entrepreneurship and Innovation Management

Innovation Management in International Context
International Financial Management

International Financial Instruments
3?
C?

Short Time Study Abroad in SEE/CEE
2
8
LC
EX
Options
Electives I: Specialisation in International Management (two of three)

Cases in International Consumer Behaviour and Communication (3 ECTS)
Cases in Int. Innovation Management (3 ECTS)
Cases in International Financial Instruments (3 ECTS)
B.S., M.B.A., J.D. Kurt Wagner B.A., M.A.

(International Financial Instruments)
Born and raised in the Midwestern U.S. State of Illinois
Master of business administration degree in finance and a Bachelor of science degree in

marketing
Juris doctor degree, magna cum laude, from Southern Illinois University School of Law
American business lawyer and former U.S. diplomat
External lecturer at the Department of English and American Studies and the Institute of
Financial Management at the Alpen-Adria-Universitt Klagenfurt in the field of corporate
governance, corporate and organizational culture, private equity (entrepreneurial finance)
and business presentation skills
Editor-in-Chief of the Southern Illinois University Law Journal
Author of articles on tax, immigration, law and investment topics in legal and investment
periodicals
International focus is on international business transactions, tax law, cross border M & As,
business immigration and visas, and protection of intellectual property
Course plan III

Semester
Course
Global Cultural Skills
ECTS
Type
SE
Full Semester Abroad (Not Home Country and Not Country of Mother Tongue)
Electives II: Advanced Cultural Skills (Two of Four)

Politics and Economics (4.5 ECTS)
Culture and History (4.5 ECTS)
Language Skills (4.5 ECTS)
Gender Issues in Culture and Business (4.5 ECTS)
Electives III: Advances in International Management (two of three)
International Marketing (4.5 ECTS)
International Entrepreneurship and Innovation Management (4.5 ECTS)
International Financial Management (4.5 ECTS)
4.5
4.5 ?
Course plan IV
Semester
Course
ECTS
Masters Thesis
24 ?
(specific) Research Seminar
6?
Type
SE
Examination Before a Committee (2 subjects)
Masters Thesis out of:

- International Marketing
- International Innovation Management and Entrepreneurship
- International Financial Management
accompanied by a specific (!) research seminar
Options
Light/soft core version:
[Almost] Full version:
Hard core version:
2 Lectures (6 ECTS)
2 Lectures (6 ECTS)
2 Lectures (6 ECTS)
1 Course (3 ECTS)
2 Courses (6 ECTS)
2 Courses (6 ECTS)
[Electives (4.5 ECTS)]
Electives (4.5 ECTS)
NOTE THE WORKLOAD!
Master's Thesis
Research Seminar
in combination
only!
10
Course target
Core considerations:
Necessary background one should have to use international financial statements
Decision-makers perspective (What do the numbers mean? How can one interpret the figures?)
Knowledge about:
Basic principles of international financial accounting
Elements of international financial statements
Recognition and measurement of events in international financial statements
Outside of this scope:

Knowledge only to be used by a preparer of international financial statements
Legal issues as they might only be relevant for tax consultants, auditors, CPA
Comprehensive comparison of international financial accounting regulations
(-> part of specialisation: electives, research seminar, masters thesis)
11
Mission statement II
13
Mission statement III

A book is a mirror: when a
monkey looks in, no apostle
can look out
Never ever learn things by
heart in accounting
14
Thinking of accounting - mental exercise I

Three people are eating at a restaurant. The waiter gives them the bill,
which totals up to $ 30. The three people decide to share the expense
equally ($ 10 each), rather than figure out how much each really owes.
The waiter gives the bill and the $ 30 to the manager, who sees that they
have been overcharged. The real amount should be $ 25.
He gives the waiter five $ 1 bills to return to the customers, with the
restaurant's apologies.
But, the waiter is a dishonest man. He puts $ 2 in his pocket, and returns
$ 3 to the customers.
Now, each of the three customers has paid $ 9, for a total of $ 27. Add the
$ 2 that the waiter has stolen, and you get $ 29. But, the original bill was $
30.
???? What happened to the missing dollar ????
15
Assumed previous knowledge
..:
Expected level of knowledge:
Basic knowledge of at least one conceptual framework for financial reporting
Basic knowledge of the general financial accounting cycle
Being familiar with the basic accounting terminology in English (!):
Debits, credits, accounting equation, double-entry-system,
journalizing, posting, trail balance, adjusting/closing entries,
Literature covering the expected knowledge/terminology:
Pre-reading material (Moodle!)

Further literature available in the library:
Berry, Financial Accounting Demystified, Mc-Graw-Hill, New York 2011.
Wood/Robinson, Frank Wood's book-keeping and accounts, 7/E,

Financial Times Prentice Hall, Harlow 2009.
Cox, Business accounts: for first level accounting and book-keeping,

3/E, Osborne, Worcester 2009.
Smith, Introductory financial accounting and reporting, Open Univ. Press,

Maidenhead 2010.
17
Course calendar I
#
Lecture
08:00 11:00 am
Master
copy
Thu, Oct 03, 2013
Pre-reading
Tue, Oct 22, 2013
1 50
Wed, Oct 23, 2013
51 129
Thu, Oct 24, 2013
130 170
Fri, Oct 25, 2013
171 184
Intangible assets, accounting for leases
Mon, Dec 2, 2013
185 206
Financial assets (cash, recievables, debt investments, equity

investments)
Tue, Dec 3, 2013
207 280
Wed, Dec 4, 2013
281 331
[8]
[Thu, Jan 16, 2014]
Cases
08:00 -11:00 am
Topics
Preliminary information meeting setting the scene
What is financial reporting? Users of financial
individual/consolidated financial statements
information,
Global environment of accounting, causes and examples of

international differences, international harmonization, global
accounting standards (IAS/IFRS vs. US-GAAP), different versions of
IAS/IFRS
Enforcement/endorsement of IAS/IFRS in Europe/CEE/SEE, legal
issue: IFRS-System of rules, components of financial statements,
statement of financial position, property/plant/equipment
Inventories, long-term construction contracts, equity, current and

non-current liabilities, provisions, contingencies
Statement of profit or loss and other comprehensive income,
statement of cash flows, presentation and disclosure in financial
reporting (notes, segment reports, auditing, ), exam revision
Thu, Dec 5, 2013
Fri, Dec 6, 2013
Mon, Jan 13, 2014

Tue, Jan 14, 2014
Wed, Jan 15, 2014
[Alternate date]
18
Course calendar II
19
Study guide I
to be reiterated for each topic
Pre-reading
before classes
Attend the lecture
Reinforce the
learning matter
Revision: Basics of financial accounting QUIZ (!)

In preparation of lecture
Short presentation of particular topic
by checking your knowledge by answering TOF-Questions

by working through the assignments
Attend the
case course
to remove ambiguities that have arisen during reinforcement

to present/compare your answers of the review exercises
Final exam
preparation
Revision of course content [(L)+( C)]
20
Study guide II
bitly.com/IFRSV1
bitly.com/IFRSV2
21
Courseware
Moodle:
(https://moodle.aau.at/course/view.php?id=11500; IFRS)
Course materials:
Pre-reading material + master copy of textbook
PDF of Power Point presentation, cases
Most relevant official annual reports
Glossaries, PwC-Study, videos, doing business
Upload-forum for solutions to assignments
Fellow mailing list & contact details
Stuff to be bookmarked:
Standards: http://ec.europa.eu/internal_market/accounting/
Auditing: http://ec.europa.eu/internal_market/auditing/
TOF-Questions: bitly.com/IFRSV1 and bitly.com/IFRSV2
IFRS around the globe: bitly.com/IFRSbyCOUNTRY
Check @edu.aau.at continuously!

22
10
Further reading I
Kothari/Barone, Advanced Financial Accounting: An International Approach, Financial Times
Prentice Hall, Harlow 2011.
Mackenzie/Coetsee/Njikizana/Chamboko, Wiley Interpretation and
International Financial Reporting Standards 2011, Wiley, Hoboken 2011.
Literature
at AAUK
Application
of
Nobes, International Accounting and Comparative Financial Reporting, Elgar, Cheltenham

1999.
Roberts/Weetman/Gordon, International Corporate Reporting, A Comparative Approach, 4/E,
Financial Times Prentice Hall, Harlow 2010.
Atrill/McLaney, Financial Accounting for Decision Makers, 6/E, Financial Times Prentice Hall,
Harlow 2011.
Glautier, Accounting: Theory and Practice, 8/E, Financial Times Prentice Hall, Harlow 2011.
Pratt, Financial Accounting in an Economic Context: Study Guide, 8/E, International Student
Version, Wiley, Hoboken 2011.
You are NOT encouraged to refer to older versions of textbooks

considering IFRS have gone through tremendous modifications in recent years!
23
Further reading II
Databases,
eJournals at
www.aau.at/ub
Free eBooks
SpringerLink, Web of Science, Science direct (International Journal of

Accounting; Journal of Accounting and Public Policy; Accounting, Organizations
and Society; Advances in Accounting; Journal of Accounting Education, )
Elsevier, Emerald, Business Source Premier, Ebsco Host
WISO (DerBetrieb, Kapitalmarktorientierte Rechnungslegung), Rechtsdatenbank
www.bookboon.com/uk
EU: http://ec.europa.eu/internal_market/accounting/
Websites
IASB: www.iasb.org.uk
FASB: www.fasb.org
EFRAG: www.efrag.org
PWC: www.pwc.com/IFRS
KPMG: www.kpmg.co.uk/ifrs
EY: www.ey.com/ifrs; www.iasplus.com
24
11
Further reading III
Accounting
terminology
Comprehensive English Glossary: Obenaus/Weidacher, New Handbook of

Business English, Keywords in Context, Linde, Wien 2006.
Comprehensive German Glossary: Grnberger, English for Accountants, 2/E,
Linde, Wien 2006.
bitly.com/DictionaryAccounting (NTSHXN)
Langenscheidt online dictionaries (via www.AAU.at/UB - databases)
www.wiley.com
Publishers
www.mcgraw-hill.com
www.pearsonhighered.com
25
Grading procedure I
Lecture:
Voluntary presence
Interaction is welcome, but wont be graded
Final written exam:
open and/or multiple choice questions
45 minutes, 45 points
1 point equates to 1 minute of working time
50 % pass mode
Performance record (L)

Points
Grade
45 40.5
1
40 35.5
2
35 29.5
3
29 22.5
4
22 0
5
26
12
Grading procedure II
Cases:
Knock-out criteria:
Presence below 100 % Revision course: Repetitorium International Management
Possibility to catch up on missed lessons by answering additional questions in written form
Up to 10 points for active participation:
Willing to present assignments announced in the previous lecture
Voluntary presenters will be selected directly in class
Statements will be graded with up to 10 points
Up to 90 points depending on final written exam performance:
Open questions, (brief) exercises, problems to solve,
90 minutes, 90 points, 1 point equates to 1 minute of working time
Performance record (C)

Points
Grade
100 88.5
1
88 75.5
2
75 62.5
3
62 49.5
4
49 0
5
50 % pass mode in total
27
Final examinations
1st examination:
(L) January 31, 2014, 08:00 am 09:00 am
(C) January 31, 2014, 09:00 am 11:00 am
ZEUS (de)registration until: January 31, 2014, 06:00 am
2nd examination:
(L) February 28, 2014, 08:00 am 09:00 am
(C) February 28, 2014, 09:00 am 11:00 am
ZEUS (de)registration until: February 28, 2014, 06:00 am
!!! You have the right to use legal texts without annotations !!!
28
13
Any questions?
29
Enjoy your first semester!

All the best!
14
(L) International Financial Reporting
Crossword puzzle
32
15
Fundamental terms in accounting
33
Main users of financial information

Competitors
Lenders
Investment
analysts
Owners
Investors
Managers
Enterprise
Public
Government
Employees
Suppliers
Customers
34
16
Umbrella term accounting

Accounting
System to help clients allocating scarce economic resources efficiently by providing information, i. e.:
Identifying and capturing relevant financial information

Measuring and recording the financial information collected in a systematic manner
Analysing and interpreting the financial information collected
Communicating (i.e. reporting) the information about an entity to interested parties
Financial accounting*
Preparation/disclosure of financial statements
Management/managerial/cost accounting
Process of dealing with financial information to
plan/control/evaluate a companys operations
* in the wider sense

35
Financial accounting* vs. cost accounting

Financial accounting
Areas of difference
Cost accounting
Mandatory
Legal requirement
Voluntarily
Follows Generally Accepted Accounting Principles
Regulations
No regulations
Backward looking
Time orientation
Forward looking
Emphasis is on summaries of financial

consequences of past activities
Nature of reports produced
Emphasis is on decisions affecting the future
Objectivity and verifiability of data are emphasized

Mostly based on monetary terms
Range/quality of information
Relevance to decision making is emphasized

Reports contain information of non-financial nature
(volume of inventories, output/employee, ...)
Summarized data for entire entity
Level of detail
Detailed reports about departments, products,
Annual reporting, half-yearly/quarterly reports
Reporting interval
Daily, weekly or monthly basis
Reports to those outside the entity

(tax authorities, regulators, )
Consumers of reports
Reports to the management
* in the wider sense

36
17
From bookkeeping to financial reporting

Bookkeeping
Character:
Accounting basis
Process of recording events
To be done by:
Bookkeepers
Junior accountants
Financial accounting*
Character:
Preparation of individual
financial statements
Statement of financial position
Statement of profit or loss and
other comprehensive income
Statement of cash flows
Statement of changes in equity
Notes
To be done by:
C. management accountants
Senior/chief accountants
Company/head accountants
Financial reporting
Character:
Preparation of group accounts and
disclosure of further information
voluntarily or due to regulatory rule
Presidents letter, chairmans foreword
Chief executives statement, business
strategic review, prospectuses
Managements forecasts, social or
environmental impact statements
To be done by:
Executive/head accountant,
accounting director
Members of supervisory board, chief
financial officer (UK) = vice-president Finance (US), chief executive officer
(UK) = president (US)
C. public accountant, c. tax advisor
* in the narrower sense

37
Purpose of financial reporting

Providing financial information about reporting entity that is useful to users in making decisions
38
18
Expectations gap
What the public thinks

accountants should do
Avoidance of financial catastrophes
Avoidance of fraud and errors:

- Internal control system
- Sarbanes-Oxley-Act
Providing full information:

- Non-financial measurements
- Forward-looking information
- Soft assets
-
What accountants
think they can do
39
Individual versus consolidated

40
19
Inter-company relationship
Situation of control
Type of inter-company
(in the form of amount
relationship
of voting rights)
Qualification of shareholdings
(title of line item within
the balance sheet)
Compulsory group accounts

(if no exemption exists)
(Group) accounting
method
1 Control
> 50 %
Subsidiary
(no specific line item/goodwill)
Yes
Full consolidation,
acquisition method
(IFRS 3, 10, 12)
2 Significant influence
>= 20 %
Associated company
(equity-method investment)
Yes
Equity method
(IAS 28, IFRS 11, 12)
< 20%
Financial investment
(financial asset)
No
Fair value, or at cost

(IAS 39/IFRS 9 (>=2015))
3 No real influence
Out of scope - joint ventures:
Contractual arrangement whereby two or more parties

undertake an economic activity that is subject to joint control
Independent companies
Share of: assets, distribution channels,
c
o
m
p
l
e
x
i
t
y
Relations in individual financial statements:
Recognized as financial assets
Benchmark of carrying amount market value at stock exchange
Dividends are recognized as income in income statement
41
Why groups exist
Tax
advantages
Elimination or
reduction of
competition
and risk
Group
performance
Economies of
scale
42
20
Structures and control
Directly
controlled/influenced
subsidiaries/associated
companies
Indirectly
controlled/influenced
subsidiaries/associated
companies
Parent/holding
company
S1
S2
S3
S4
Amount of voting rights
Power to govern the financial and operating

policies under an agreement
Power to appoint/remove the majority of

the members of the board of directors
Indirect forms of control/influence
S5
Group
accounts
Direct forms of control/influence:
Individual
financial
statements
Exemption from preparing group accounts:
The parent is itself a wholly-owned subsidiary
The ultimate or any intermediate parent of the

parent produces consolidated financial
statements
43
Full consolidation - acquisition method

IFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities
1st step:
Adjust recognition
criteria and
measurements in
individual financial
statements of
subsidiaries to uniform
principles
2nd step:
Full aggregation of
financial statements of
all subsidiaries
3rd step:
First consolidation:
a) Recognition/fair value
adjustments of net-assets
of subsidiary
b) Identify goodwill
c) Identify NCI
d) Remove investment in/
equity of subsidiaries
4th step:
5th step:
Remove intra-group
balances and intra-group
transactions
= Consolidated group
Subsequent consolidation:
- follow-up of recognition/
fair value adjustments
on first consolidation
- Deduct impairment loss
44
21
Acquisition method 1st example I

Balance sheet of H as at December 31, 2X04 (amounts in )
Non-current assets
25,000
Net current assets
23,000
Total assets
48,000
Share capital
16,000
Retained earnings
27,000
Non-current liabilities
Shareholders equity and liabilities
5,000
48,000
On January 1, 2X05, H acquired 100 % of the 10,000 1 ordinary shares in S at 1.60

per share in cash and gained control. The fair value of the net assets of S at that date
was the same as the book value.
45
Acquisition method 1st example II

Balance sheets of H and S on January 1, 2X05 (amounts in )

H
Non-current assets
25,000
12,000
Investment in S
16,000
Net current assets
7,000 (*)
5,000
Net assets
48,000
17,000
Share capital
16,000
10,000
Retained earnings
27,000
5,000
5,000
2,000
Shareholders equity
and liabilities
48,000
17,000
(*) 23,000 before the acquisition of S less 16,000 for the consideration paid in cash to acquire S.
46
22
Acquisition method 1st example III

B/S
B/S
Dr
Cr
EUR
EUR
EUR
EUR
Non-current assets
25,000
12,000
Investment in S
16,000
Goodwill
Net current assets
Adjustments
Consolidated
balance sheet
EUR
37,000
16,000
1,000
1,000
7,000
5,000
12,000
Net assets
48,000
17,000
50,000
Share capital
16,000
10,000
10,000
16,000
Retained earnings
27,000
5,000
5,000
27,000
5,000
2,000
48,000
17,000
7,000
Shareholders equity
and liabilities
16,000
16,000
50,000
47
Acquisition method 1st example IV

48
23
Non-controlling interest
Non-controlling interest:
If parent company does not own all the shares of subsidiary
Minority interest = non-controlling interest
49
Acquisition method 2nd example I

Balance sheet of Halbert SpA (H) as at 31 December 2X09 is shown below:
On 1 January 2X10, Halbert SpA (H)

acquired 80 % of the 10,000 1
ordinary shares in Settimo SpA (S)
for 1.60 per share in cash and
gained control.
Fair value of non-current assets of
Settimo SpA at that date was
12,400.
50
24
Acquisition method 2nd example II

51
Intragroup balances I
Intragroup balances will require adjustments to ensure that the consolidated statements do not
double count assets and/or liabilities and do not contain an intragroup profit or loss!
Example:
- H sells goods to S for 10,000, which cost H 6,000.
- S sells those goods to a third party (T) for 13,000.
- The group has made a total profit of EUR 7,000.
- No adjustments are needed!
Profit = 7,000
H
Group accounts
Profit = 4,000
T
Profit = 3,000
52
25
Intragroup balances II
Example modification:
- Half of the goods are unsold by S by the year end
- Tax burden can be ignored
H
Adjustments
Cr
Consolidated
balance sheet
2,000
3,000
Dr
Inventory
Retained earnings
5,000
4,000
1,500
- 2,000
3,500
Consolidated profit = 3,500 (Cogs: 3,000 -> external revenue: 6,500)
H
Group accounts
Profit = 4,000
T
Profit = 1,500
53
Equity method IAS 28 investments in associates and joint ventures,

IFRS 11 joint arrangements, IFRS 12 disclosure of interest in other entities
A method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the postacquisition change in the investors share of the investee!
First consolidation:
Investment is recorded at cost
Only one line item in consolidated income statement/balance sheet
Goodwill:
Positive: not separately recognized (to be tested for impairment later on)
Negative: recognized as income in the income statement
Subsequent consolidation:
Investors share of the investees profit or loss is

Recognized in the investors income statement
Added/substracted from the carrying amount of the investment in the balance sheet
Dividends received are substracted from the carrying amount
54
26
Equity method example I

IAS 28, IFRS 11, IFRS 12
Present status:
Gamma plc is the parent of several wholly-owned subsidiaries. On July 1, 2X10, Gamma plc acquired 30 % of the ordinary
shares of Delta Ltd for 140,000. Delta Ltd had retained earnings of 100,000 on that date and all assets and liabilities
were carried at fair value. Delta Ltd has issued no shares since Gamma plc acquired its 30 % holding.
Balance sheets
Income statements
Statements of changes in equity
55
Equity method example II

Consolidation:
Delta Ltd is an associate of Gamma plc. Cost of investment: 140,000
Fair value of 30 % of net assets of Delta Ltd on July 1, 2X08: 30 % 300,000 = 90,000.
Goodwill of 50,000 (not shown separately)
Consolidated balance sheet
Consolidated income statement
Consolidated statement of changes in equity
56
27
Equity method example III

Note:
Associated company is represented by a single line item! ( acquisition method!)
Carrying amount of investment in consolidated financial statement:

differs from carrying amount in individual financial statement
Benchmarks are different: market value of shares versus equity ratio
57
Practical example I
58
28
Practical example II
59
Practical example III
60
29
Check your knowledge
Practice questions
bitly.com/GroupAccounts
(note the capital letters)
ambiguities can be eliminated in the next unit

61
Global environment
of financial accounting
62
30
Link between the location of the company and the

location of the consumer/capital market is loosening
Accounting the language of business

Global markets
Global finance
World markets are becoming increasingly intertwined

Merchandise exports as percentage of gross domestic
product in Germany 38.9 %, in UK 25 %, ...
International equity investment:
- Portfolio diversification internationally
- Higher profit at foreign stock exchanges
Foreign stock market listing:
- Need to raise additional equity finance
- Listing to support reputation of product in overseas markets
- Listing to provide equity for overseas acquisition
- Large foreign ownership may protect company from takeover
International demand/supply of equity is based on accounting information
Global accounting
Group accounts: easier to prepare if individual financial statements are

based on the same laws -> International/unified accounting standards
63
Causes of national accounting differences

The political and economic system:
- Liberal-democratic system/associated with capitalist system -> market-based accounting
- Egalitarian-authoritarian system/centrally planned economic system -> output-related accounting
The legal system:
- Common/case law (UK, US)
- Code law (continental Europe)
The taxation system:
- Tax rules and financial reporting rules are kept entirely independent of each other (UK)
- System with many of the financial reporting rules being used for taxation and vice versa (AT)
The corporate financial system:
- Equity finance accounting rules are more forward-looking
- Debt finance accounting rules are more conservative, to protect creditors
The accounting profession:
- Strength of professional body
- Independence of professional body
Other issues: accidents of history (Sarbanes-Oxley-Act)
64
31
Examples of national accounting differences I

Balance sheet approaches following conservatism or optimism:
- Capitalization versus recognition as expense:
- R&D expenditures, goodwill
- Borrowing costs on construction assets
Effects of transition from HGB (GER)

to IFRS (selected example):
- Recognition of profit:
- Only on final settlement or on the completion of
- Long-term construction contracts
- Usage of nominal values versus (discounted) present values:
- Provisions (possible liability against themselves/third parties)
- Long-term liabilities
- Measurement of assets:
- At amortized cost
- At fair value
- Use/no use of statutory/legal reserves:
- Set up out of declared profits
- Protection of creditors above normal rules on capital maintenance
65
Examples of national accounting differences II

Balance sheet layout:
- Assets displayed in order of decreasing/increasing liquidity
- Arrangements of all debits and credits:
- Two-sided balance sheet
- Report form
- Calculation of net (current) assets (=financial position)
Usage of different English language accounting terms
Layout of income statement:

- By-nature format combines costs as total purchases,
total depreciation, total wages,
- By-function format combines by stage of production,
cost of sales, administrative/distribution costs,
66
32
Practical example
Annual report M & S, p. 58:

- Increasing liquidity
- Report form
- Net assets
- In spit of UK -> IFRS terms!
67
Classification schemes of accounting systems

Reasons for coping with classification schemes of accounting systems:
- Description of main accounting rules/practices
- Possibility to check differences and similarities quickly
- Starting point for further investigations
Classification studies of:
- DArcy, Fitzgerald, Gray, Hatfield, Lewis, Nobes
- Oldham, Ordelheide, Roberts
- -> see references
68
33
International harmonization and

standardization of financial reporting
69
International bodies of harmonization/standardization

B o d i e s
International Accounting
Standards Board (IASB)
Financial Accounting Standards Board (FASB);

Securities and Exchange Commission (SEC)
www.fasb.org
IAS/IFRS
Directives
(4th/7th Directive)
Regulation
(1606/2002)
National standards
IAS/IFRS
Harmonization
Standardization
www.sec.gov
US-GAAP
Standardization
Standardization
European Union
Convergence
70
34
IASB as a part of the IFRS Foundation

22
Private
body
IFRS Foundation:
- Not-for-profit body
- Raises funds to support
operations of IASB
(formerly IAS)
(formerly SIC)
IASB:
- www.iasb.org
- Domicile: London (GB)
- 9 of 14 Board member
votes are needed to issue
a new IFRS
71
Open and transparent due process
Endorsement:
- Private body without law-making power
- Adoption of standards to be done by
legislature of individual country
(-> Endorsement in EU)
Enforcement:
- Verification of compliance
- To be done by federal agencies
of respective country
72
35
Hierarchy of IFRS I
Framework
citation: framework.#
framework.43 or F.43
umbrella term IFRS
Standards (IAS # / IFRS #)

International Accounting Standards
International Financial Reporting Standards
citation: IFRS 6.13 / .13 / IAS 36.A1
compulsoriness
Types of pronouncements
Interpretations (SIC # / IFRIC #)

Standing Interpretations Committee
Int. Financial Reporting Interpretations Committee
citation: SIC 10 / IFRIC 1
accompanying material
BC #
basis of
consultation
IE #
illustrative
example
IFRS #
standard
Level of detail
ED #
exposure
draft
73
Hierarchy of IFRS II
www.iasb.org
74
36
IFRS for Small and Medium-sized Entities I

Nature of IFRS for SMEs:
- Self-contained, globally recognised standard
- Similar to full IFRS, but less complex
- Standard is focused on reporting needs of most SMEs
Full standards versus IFRS for SMEs:
- Standards not relevant to SMEs have been omitted
- IFRS for SMEs only allow the easier option of full standards
Specification of SMEs:
- Any company of any size
- Without public accountability:
- No securities are publicly traded
- Not a financial institution
- Usage of financial statements for external users
Advantages:
- Easier to set up group accounts by parent company
- Improved access to capital, comparability,
- Less complex, real alternative for private companies (US),
75
http://www.ifrs.com/video.html
IFRS for Small and Medium-sized Entities II
76
37
IFRS around the globe I
IFRSs around the world leading standards bitly.com/IFRSbyCOUNTRY

77
IFRS around the globe II
The Institute of Chartered Accountants in England and Wales, 2007.
78
38
Levels of legislation in the EU
Directly binding for all member states

Passes directly into the law of the nation
No need for a member state to incorporate regulation in national law
Example: IAS-Regulation (1606/2002)
Expected to be incorporated in national laws

Options are offered and can be selected by countries
Examples: 4th / 7th Council Directives
Issued for a particular purpose
Only binding for the persons to whom it is addressed
Do not have binding force
Regulations
Directives
Decisions
Recommendations
and opinions
79
Directives for limited liability companies

The 4th Directive regarding individual financial statements:
- Standard formats for:
- Balance sheet (see master copy)
- Profit and loss account (see master copy)
- Setting out accounting principles/options for valuation:
- Going concern principle,
- Potential losses are to be taken into account,
- Fair value option
The 7th Directive regarding group accounts:
- Similar content as 4th Directive
- Has more/less lost its significance due to IAS/IFRS
80
39
Regulation EC 1606/2002 I
IAS/IFRS-Standards endorsed by the EU
must be applied:
By companies governed by
the law of Member State
Regarding their consolidated accounts
If securities are admitted to trading on

a regulated market of any Member
State
Regulated markets are defined in

Council Directive 93/22/EEC
Article 4 - Regulation EC 1606/2002
Obligation
IAS-Regulation allows member states to:
Require or permit non-publicly traded

companies to present consolidated
financial statements based on IAS/IFRS
Require or permit (non-)publicly traded
companies to present legal entity
financial statements based on IAS/IFRS
Article 5 - Regulation EC 1606/2002

Option
81
Regulation EC 1606/2002 II
82
40
Endorsement I
IFRS Foundation
IASB
[www.iasb.org]
2a. Standard issuing
2b. Interpretations issuing
1. Proposal
5. Commission
(prepares a draft endorsement Regulation
based on the advice of EFRAG/SARG)
IFRIC (SIC)
[part of www.iasb.org]
4. SARG
(Standards Advice Review Group checks
EFRAG advice if well-balanced/objective)
6. ARC
(Standards Advice Review Group votes on the Commission proposal)
3. Advice to
Commission (4D/7D)
7. European Parliament + Council of the European Union
(3 months to oppose the adoption of the draft)
EFRAG
(European Financial Reporting
Advisory Group)
[www.efrag.org]
8. Journal
Standard published in the Journal enters into force on the day laid down in the
Regulation itself (http://ec.europa.eu/internal_market/accounting)
83
Endorsement II
84
41
Endorsement III
Time-lags: EU-IFRS <-> IASB-IFRS
85
Enforcement
The European Supervisory Architecture - Transparency Directive (2004/109/EC)
ESMA (European Securities and Markets Authority)

[formerly CESR - Committee of European Securities Regulators]
[Austrian] Review Panel

[privately organised,
examining financial
reporting, active body]
[Austrian] Financial
Market Authority
Auditing
(auditors report;
audit certificate)
(International
Standards on
Auditing (ISA))
[sovereign authority,
report of suspected cases]
Entity with financial statements based von IAS/IFRS

86
42
Global standards I
International Financial Reporting Standards
IAS/IFRS
[Int. Accounting Standards/
Int. Financial Reporting Standards]
US-GAAP
[US-Generally Accepted
Accounting Principles]
Harmonization - no parallel statement
87
Global standards II
SEC:
Nordwalk Agreement of IASB/FASB (2002):
- Agreement of US and European regulators (2008):
- Commitment to the convergence of US-GAAP and IAS/IFRS
- To recognize each others standards for listing
- Elimination of differences between two standards
- To eliminate reconciliation requirements
- Development of common high quality standards
- Policy statement (2010):
- Timeline for potential adoption of IFRS in US (!)
- IAS/IFRS global standard
88
43
http://www.ifrs.com/video.html
Global standards III
89
Self-test quizzes
Chapter 1
Except questions: 1, 2
bitly.com/IFRSV1
Additional
self-test quizzes
bitly.com/IFRSV1
Chapter 1
Except questions:
1, 5, 7, 12, 14, 15, 17

90
44
International financial
statements based on IAS/IFRS
91
Parts of financial statements
92
45
Parts of financial statements I

IAS 1.10; SIC 15, 29, 32; IFRIC 1
Presentation of financial statements

Net asset position,

financial status
Statement of profit or loss and other

comprehensive income
Earning position
Amendments
Financial status
Notes, segment report
Amendments
93
Parts of financial statements II

IAS 1.10; SIC 15, 29, 32; IFRIC 1
Opening balance of liquid assets

+ Incoming payments
- Outgoing payments
= Closing balance of liquid assets

(= balance sheet)
Non-current
assets
Equity

Opening balance of equity
External
financing
+ Increase of equity (shareholder)

- Decrease of equity (shareholder)
+ Total comprehensive income
= Closing balance of equity
Current assets
(liquid assets)
Non-current
liabilities

(Amendments)
In-house
financing
Current liabilities
Notes
+
=
+/=
Revenues
- Expenses
Net profit or loss
Other comprehensive income
Total comprehensive income
94
46
95
Minimum line items IAS/IFRS balance sheet

IAS 1.54 Presentation of financial statements
Assets
Total
Equity and Liabilities
Total
96
47
Order and format of balance sheet

IAS 1 presentation of financial statements
Assets
Balance sheet
Liquidity
a)
Non-current assets
b)
Current assets
Equity
Liabilities
a)
b)
Current liabilities
Total
Solvency
Assets
Total
Fundamental commitment:
- Distinction between current/non-current assets/liabilities or
- Order line items based on liquidity
Method that provides more relevant information is to be used
97
Practical example
98
48

IAS 1 Presentation of financial statements
Assets
Total
Total
99
Property, Plant, Equipment I

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
PP&E is defined as tangible long-lived assets that are held for use in production or supply of goods
and services, for rentals to others, or for administrative purposes, not for resale; they are
expected to be used during more than one period and possess physical substance.
Examples:
- Property: land
- Plant: building structures (offices, factories, warehouses)
- Equipment: machinery, furniture, tools
- Leases(IAS 17)
- Biological assets (IAS 41)
- Non-current assets held for sale and discontinued operations (IFRS 5)
-
100
49
Property, Plant, Equipment II

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Initial costs - acquisition or manufacturing costs:

(Including borrowing & dismantling and removing costs)
2nd Option revaluation model:
1st Option - cost model:
Cost allocation, no revaluation

Various depreciation methods
Residual value, starting point
Component depreciation
Valuation of assets at fair value

Establishing an unrealized gain
Using revaluation surplus
Option only for asset groups
Trigger event -> impairment test (IAS 36)

(Compulsory recognition of impairment loss, usage of cash generating units)
101
Forms of measurement
Framework.99, IFRS 13
Forms of measurement
Acquisition value = manufacturing cost/expenses
Fair value (IFRS 13 2012)
(= Original cost or historical cost, measuring the

price of obtaining the asset and bringing it to the
location and condition necessary for its intended
use)
(= price that would be received to sell an asset or

paid to transfer a liability in an orderly
transaction between market participants at the
measurement date (i.e., an exit price))
(Depreciated) book value = carrying value
Examples:
Current cost (share price)
Present value
Residual (book) value
102
50
Acquisition/manufacturing costs I
IAS 16, IAS 2
Initial value of acquired assets:
Initial value of self-constructed assets:
+
+
+
+
+
Prime costs:
Direct material costs
Direct labour costs
Production overheads:
Variable (+fixed) indirect material costs
Variable (+fixed) indirect labour costs
Purchase price
Incidental acquisition costs
Trade discounts and rebates
Subsequent acquisition expenses
Borrowing costs
Removal expenses, disposal fees
= Total acquisition costs
= Total manufacturing costs

Including: borrowing costs; excluding:
abnormal amounts, general/administrative
overheads, cost of distribution,
103
Acquisition/manufacturing costs II
IAS 16, IAS 2
Kothari/Barone, Advanced financial accounting, 2011, 180.
104
51
Borrowing costs I
IAS 23; IFRIC 1
IAS 23 requires capitalizing borrowing costs

Qualifying assets:
Require a substantial period of time to get ready for use
Capitalization period:
Begins when:
Expenditures for the asset have been made
Interest costs are being incurred
Ends when the asset is substantially complete and ready for use
Capitalize the lesser of:
Actual interest costs
Avoidable interest
105
Borrowing costs II
IAS 23; IFRIC 1
Example:
Blue Corporation borrowed $ 200,000 at 12 % interest from State Bank on Jan. 1, 2X11, for the
specific purposes of constructing special-purpose equipment to be used in its operations.
Construction on the equipment began on Jan. 1, 2X11, and the following expenditures were made
prior to the projects completion on Dec. 31, 2X11:
Actual expenditures:
Jan. 1, 2X11
$ 100.000
Apr. 30, 2X11
$ 150.000
Nov. 1, 2X11
$ 300.000
Dec. 31, 2X11
$ 100.000
Total expenditures
$ 650.000
Other general debt existing on Jan. 1, 2X11:

$ 500,000, 14 %, 10-year bonds payable
$ 300,000, 10 %, 5-year note payable
Capitalize the borrowing costs according to IAS 23!
106
52
Borrowing costs III

IAS 23; IFRIC 1
Practical example:
At December 31, 2X11, Shalla discloses the amount of interest capitalized either as part of the income
statement or in the notes accompanying the financial statements.
107
Dismantling and removing costs I

IAS 16.16 (c)
A company must recognize an environmental liability (provision) when it has an existing legal
obligation associated with the retirement of a long-lived asset and when it can reasonably estimate
the amount of the liability (provision)
Examples:
Decommissioning nuclear facilities
Dismantling, restoring and reclamation of oil and gas properties
Certain closure, reclamation and removal costs of mining facilities
Recognition and allocation:
Capitalization of present value of estimated future costs on associated asset
Record of a liability equal to the estimated present value of obligation
Depreciation of the carrying amount of the asset including the capitalized dismantling costs
Accrual of interest expense by increasing the environmental liability

108
53
Dismantling and removing costs II

IAS 16.16 (c)
Example:
On January 1, 2X10, Wildcat Oil Company erected an oil platform in
the Gulf of Mexico. Wildcat is legally required to dismantle and
remove the platform at the end of its useful life, estimated to be five
years. Wildcat estimates that dismantling and removal will cost
$1,000,000. A 10 % discount rate is estimated. Wildcat uses the
straight-line method.
Prepare the journal entries to record the environmental liability.
109
Cost model I
IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Usage of depreciation/amortization/depletion as an accounting process of allocating the cost of (in-)tangible

assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the
asset
Computed depreciation/amortization/depletion expenses are reported in the income statement
No revaluation is intended (-> revaluation method)
Important glossary:
Regular allocation of costs:

- Long-lived tangible assets = depreciation expense
- Intangibles = amortization expense
- Extracting industry = depletion expense
Extraordinary depreciation/value adjustment of current assets:

- Write down = decrease carrying value
- Write off = reduce carrying value to zero
110
54
Cost model II
IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Factors involved in the depreciation process:
Depreciation base
Depreciation start
Estimation of useful life
Methods of depreciation/amortization/depletion:
- Straight-line method
- Activity method
- Diminishing/accelerating methods
- IFRS Outlier: component depreciation
111
Cost model III

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Component depreciation:
IFRS requires that each part of an item of property, plant, and equipment that is significant to the total cost of
the asset must be depreciated separately
Example:
EuroAsia Airlines purchases an airplane for 100,000,000 on January 1, 2X11. The airplane has a useful life of 20
years and a residual value of 0. EuroAsia uses the straight-line method of depreciation for all its airplanes.
EuroAsia identifies the following components, amounts, and useful lives.
Compute the depreciation expense for EuroAsia for 2X11.
112
55
Cost model practical example I

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Annual report, Austrian Airlines, 2008, 105.
113
Cost model practical example II

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
114
56
Impairment test recognizing impairments I

IAS 36; SIC 32; IFRIC 1, 10
All assets (besides inventories (IAS 2), assets arising from construction contracts (IAS 11), financial
assets (IAS 32), investment property (IAS 40), biological assets (IAS 41), ) have to be impaired when
a company is not able to recover the assets carrying amount either through using it or by selling it
On an annual basis, companies review the asset for indicators of impairments - a decline in the
assets cash-generating ability through use or sale
Impairment indicators - trigger events:
Market value of asset has declined significantly
Significant changes in the technological, market,

economic or legal environment of entity
Tremendous changes of market interest rates
Impairment shall be recognized immediately in loss

115
Impairment test recognizing impairments II

Case 1:
Assume that Cruz Company
performs an impairment test for its

equipment. The carrying amount of Cruzs
equipment is $ 200,000, its fair value less
costs to sell is $ 180,000, and its value-inuse is $ 205,000.
Case 2: Assume the same information for
Cruz Company except that the value-in-use
of Cruzs equipment is $ 175,000 rather
than $ 205,000.
116
57
Impairment test reversal of impairment loss I

Recoverable amount of the impaired asset is higher than the carrying amount
in a future year
Impairment loss has to be reversed
Increased carrying amount (after reversal of impairment loss) of an asset shall

not exceed the carrying amount that would have been determined if no
impairment loss had been recognized for the asset in prior years ( revaluation
method)
Reversal shall be recognized immediately in profit
117
Impairment test reversal of impairment loss II

Example:
Tan Company purchases equipment on January 1, 2X10, for
$ 300,000, useful life of three years, and no residual value. On
December 31, 2X10, Tan records an impairment loss of $ 20,000. At
the end of 2X11, Tan determines that the recoverable amount of the
equipment is
a) $ 96,000.
b) $ 102,000.
Prepare the journal entries to record the impairment loss in 2X10
and the reversal of the impairment loss in 2X11.
118
58
Impairment test cash generating units

Cash generating unit (CGU): An assets cash generating unit is the smallest group of assets that
includes the asset and generates cash inflows that are largely independent of the cash inflows from
other assets or groups of assets.
Usage if:
A single asset generates cash flows only

in combination with other assets
It is not possible to assess a single

asset for impairment
CGU facility:
(subsidiary)
Goodwill
Assets
119
Impairment test practical example

120
59
Revaluation model I
IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Companies may value groups (Land; land/buildings; machinery; ships; aircraft; motor vehicles;
furniture/fixtures; equipment) of (in-)tangible assets after acquisition at fair value
Recognition of revaluation:
- Assets can be revaluated beyond the carrying amount/historical costs
-
Revaluation beyond amortized cost is recognized as an unrealized gain

Unrealized gain is often referred to as a revaluation surplus
Gains on revaluation do not affect the net income of a given year

Unrealized gain increases other comprehensive income
Other comprehensive income is a part of the statement of profit/loss + other comprehensive income
Gains on revaluation increase equity, but not net income

Under no circumstances can the revaluation surplus have a negative balance
- Revaluation has to be carried out at least every 3 years
-
Cost model is used to balance assets in years between revaluation

Revaluation surplus is transferred to retained earnings based on the remaining useful life
121
Revaluation model II
IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Example revaluation of land:

Assume that Unilever Group purchased land on January 1, 2X10, that cost 400,000. Unilever decides
to report the land at fair value in subsequent periods.
On December 31, 2X10, an appraisal of the land indicates that its fair value is 520,000.
The lands fair value at December 31, 2X11 is 380,000.
On December 31, 2X12, Unilevers land value increases to 415,000.
On January 2, 2X13, Unilever sells the land for 415,000.
Prepare the journal entries.
122
60
Revaluation model III

IAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4
Example revaluation of depreciable assets:

Assume that Nokia purchases equipment for 1,000,000 on January 2, 2X10. The equipment has a
useful life of 5 years, is depreciated using the straight-line method of depreciation, and its residual
value is zero. Nokia chooses to revalue its equipment to fair value over the life of equipment.
Nokia employs an independent appraiser, who determines that the fair value of equipment
at December 31, 2X10 is 950,000.
Prepare the journal entries.

123
Intermediate Feedback
124
61
Outlier: government grants I

IAS 20; SIC 10
Grants are:
Assistance received from a government in the form of transfers of resources to a company
In return for past or future compliance
With certain conditions relating to the operating activities of the company
IFRS requires grants:
To be recognized in income (income approach) on a systematic basis that matches them
With the related costs that they are intended to compensate
Two options to record grants:

Credit the deferred grant revenue for the subsidy and amortize
the deferred grant revenue over the useful life of the asset
Credit the asset for the subsidy and depreciate the
remaining carrying value over the useful life of the asset
125
Outlier: government grants II

IAS 20; SIC 10
AG
Company
received
a
500,000 subsidy from the
government to purchase lab
equipment on January 2, 2X11.
Option 1
Example:
Government grants are not

recognized
as
equity
as
conditions must be met!
Option 2
The lab equipment cost is

2,000,000, has a useful life of
five years, and is depreciated
on the straight-line basis.
126
62
Outlier: Leases I
IAS 17; SIC 15, 27, 29, 32; IFRIC 4
A lease is a contractual agreement between a lessor and a lessee, that gives the lessee
the right to use specific property, owned by the lessor, for a specified period of time.
Operating lease
Finance lease
A lease that transfers substantially all of the benefits
and risks of property ownership
Leases that do not transfer substantially all the benefits

and risks of ownership
Lessee capitalizes the lease
No asset/liability is recorded
Records an asset and a liability equal to the present

value of the rental payments
Lease payments are rental expenses
Records depreciation on the leased asset

Treats the lease payments as consistent of interest
and principal
127
Outlier: Leases II
IAS 17; SIC 15, 27, 29, 32; IFRIC 4
Criteria for a finance lease:
128
63
Outlier: Leases III

IAS 17; SIC 15, 27, 29, 32; IFRIC 4
Off-balance-sheet financing:
Keeping obligations off the
statement of financial position
New exposure draft:
Right to use approach
129
Outlier: Leases IV
IAS 17; SIC 15, 27, 29, 32; IFRIC 4
Kothari/Barone, Advanced financial accounting, 2011, 254.
130
64

Assets
Total
Total
131
Intangible assets I
IAS 38; SIC 29, 32; IFRIC 4
Characteristics:
- Identifiable (??? goodwill ???)
- Lack of physical substance
- Not monetary assets
- Normally classified as non-current asset
Examples:
- Trademarks
- Computer software, patents
- Copyrights, motion picture films
- Fishing licences, marketing rights
-
- Inventories (IAS 2); construction contracts (IAS 11)
- Leases (IAS 17)
-
132
65
Intangible assets II
Initial costs - acquisition or manufacturing costs:

(Including borrowing costs )
2nd Option revaluation model:
1st Option - cost model:

Cost allocation, no revaluation
Various amortization methods
Residual value, starting point
Valuation of assets at fair value

Establishing an unrealized gain
Using revaluation surplus
Only for whole class of intangible assets
Trigger event -> impairment test (IAS 36)

(Compulsory recognition of impairment loss, usage of cash generating units)
133
Intangible assets III

Development stages of internally created intangible assets

Begin
Feasibility
Research phase
Completion, ready for sale/use, economic viability

Development phase
Research activities: Original

and planned investigation
undertaken with the prospect
of gaining new scientific or
technical knowledge
Development
activities: Application
of
research findings to design new or
substantially improved materials, devices,
products, processes, systems, or services
before the start of commercial production
Examples: Laboratory research aimed at discovery of

new knowledge, searching for
applications of new research
findings, .
Examples: Design of possible

product, construction of
prototypes,
Utilisation phase
Expense
134
66
Intangible assets IV
Other costs similar to R & D costs:

Start-up costs for a new operation
Initial operating losses
Advertising costs
should be expensed as incurred
Companies spend considerable sums on research and development:
135

Assets
Total
Total
136
67
Investment property
IAS 40
137
Self-test quizzes
Chapter 10 except 8-12; 14-15

Chapter 11 except 6; 13-15; 17
bitly.com/IFRSV1
Chapter 12 except 2, 3, 10
Additional
self-test quizzes
Chapter 12 except 4, 5, 7, 11, 21
bitly.com/IFRSV1

138
68

Assets
Total
Total
139
Financial instruments
IAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11
Definition:
Any contract that gives rise to a financial asset of one entity

and a financial liability or equity interest of another entity
Umbrella term for financial assets and financial liabilities
Financial instruments
Categories of financial assets:
Contractual right to receive cash from another party
Equity investment of another company
Cash and cash equivalents
Financial assets
Out of consideration:
Accounting for derivative instruments
Financial instruments that derive their value from values of other assets
Examples: financial forwards, options, swaps
140
69
Financial assets legal position: < 2015
141
Cash and cash equivalents

Definition:
Cash:
Most liquid assets
Examples: coins, bank notes, cashiers checks, bank drafts, saving accounts,
Cash equivalents:
Short-term, highly liquid investments, readily convertible to cash
Examples: commercial papers, money market funds,
Recognition & measurement:
Par value has to be capitalized
(Re)valuation is subject to currency fluctuations
142
70
Trade and other receivables

Definition:
Claims held against customers and others (employees, subsidiaries, ) for goods
and services (trade receivables) or money (non-trade or other receivables)
Current receivables (to be collected within a year); non-current receivables

with a long-term maturity)
Recognition:
Exchange price has to be recognized (price stated in the invoice)
Immediate reductions are not recognized in the accounting records
Measurement:
Receivables are reported at the cash realizable value
Bad debt and uncollectible receivables must be written down/off
Sub-account called allowance for doubtful accounts is used
143
(Other) financial assets

Category
Characteristics
Valuation approach and reporting on the

statement of financial position
Income effects and reporting on the

statement of profit or loss and other
Trading investment
Debt/equity securities
Not held-for-collection
Part of a trading strategy
Investments shown at fair value

Current assets
Interest/dividends are recognized as revenue

Unrealized holding gains/losses are included
in net income
Available-for-sale
investment
Debt/equity securities
Non-trading segment
Catchall element
Investments shown at fair value

Current or long-term assets
Unrealized holding gains/losses are a
separate component of stockholders equity
Interest/dividends are recognized as revenue

Unrealized holding gains and losses are NOT
included in net income, but in
Investments shown at amortized cost

Current or long-term assets
Interest is recognized as revenue

Fair value at closing date is basically irrelevant
Impairment loss is only recorded in
case of a permanent loss of future cash flows
Held-to-maturity
investment
Equity method
and/or
consolidation
Debt securities ONLY

Held-for-collection of
contractual cash flow until
maturity
Equity securities ONLY
Significant influence/control
Holdings greater than 20 %
Full-consolidation or equity-method
(as discussed in chapter 2)
IASB expects transfers between categories to be rare!

144
71
Trading investments
Example:
On November 3, 2X11, Republic Corporation purchased ordinary shares of three companies (of Burberry at 259,700,
of Nestl at 317,500 and of St. Regis Pulp Co. at 141,350), each investment representing less than a 20 % interest.
On December 6, 2X11, Republic receives a cash dividend of 4,200 on its investment in the ordinary shares of Nestl.
At December 31, 2X11, Republics equity investment portfolio has the following fair value: Burberry 275,000, Nestl
304,000 and St. Regis Pulp Co. 104,000. On January 23, 2X12, Republic sold all of its Burberry ordinary shares,
receiving 287,220.
Record the
investments on November 3, 2X11.
receipt of the cash dividend on December 6, 2X11.
revaluation on December 31, 2X11.
sale of the shares on January 23, 2X12.
145
Available-for-sale investments
Example:
On December 10, 2X11, Republic Corporation purchased 1,000 ordinary shares of Hawthorne Company for 20.75 per
share (total cost: 20,750). The investment represents less than a 20 % interest. Hawthorne is a distributor for
Republic products in certain locales, the laws of which require a minimum level of share ownership of a company in
that region. The investment in Hawthorne meets this regulatory requirement.
On December 27, 2X11, Republic receives a cash dividend of 450 on its investment in the ordinary shares of
Hawthorne Company. At December 31, 2X11, Republics investment in Hawthorne has a fair value of 24,000. On
December 20, 2X12, Republic sells all of its Hawthorne Company ordinary shares receiving net proceeds of 22,500.
Record the
investment on December 10, 2X11.
receipt of the cash dividend on December 27, 2X11.
revaluation on December 31, 2X11.
sale of the shares on December 20, 2X12.
146
72
Held-to-maturity investments I
Example I:
Robinson Company purchased $ 100,000 of 8 % bonds of Evermaster Corporation on January 1, 2X11, at a discount,
paying $ 92,278. The bonds mature January 1, 2X16 and yield 10 %; interest is payable each July 1 and January 1. The
schedule of interest revenue and bond discount amortization according to the effective-interest method is as follows:
Assume that Robinson Company sells its investment on November 1, 2X13, at 99.75 plus accrued interest.
Record the
investment and the receipt of the first semi annual interest payment on July 1, 2X11.
accrual of the interest on December 31, 2X11.
147
Held-to-maturity investments II
Example II:
At December 31, 2X10, Mayhew Company has a debt investment in Bellovary Inc., purchased at par for $ 200,000. The
investment has a term of four years, with annual interest payments at 10 %, paid at the end of each year (the
historical effective-interest rate is 10 %). This debt investment is classified as held-for-collection.
Use the following information to record the loss on impairment.
148
73
Financial assets legal position: >= 2015
149
(Other) financial assets

IAS 32; IFRS 7, 9; SIC 12, 27; IFRIC 2, 5, 9, 10, 11
Trading strategy
No
Yes
(held-to-maturtiy)
= equity security
2
3
(available for sale)
150
74
Financial instruments practical example I

IAS 32, 39 (< 2015); IFRS 7, 9 (>=2015); SIC 12, 27; IFRIC 2, 5, 9, 10, 11
Annual report, Wolford, 2010/2011, 88 and 93.
151
Financial instruments practical example II

IAS 32, 39 (< 2015); IFRS 7, 9 (>=2015); SIC 12, 27; IFRIC 2, 5, 9, 10, 11
Annual report, Wolford, 2010/2011, 115.
152
75

Assets
Total
Total
153
Non-current assets held for sale

IFRS 5
Classification:
Non-current assets that are no longer used in the production process
Non-current assets available for immediate sale in the given period
High probability of sale is indicated somehow (management plans, )
Specific regulations:
Presentation: non-current assets must be presented separately in the balance sheet
Measurement:
Initial measurement: former carrying amount is used for reclassification
Subsequent measurement:
No depreciation/amortization is used (similar to the treatment of inventories)
Usage of the lower of (initial) carrying amount and fair value less costs to sell
The value-in-use plays no role ( impairment test!)
Generally write downs and write ups are always recognized in the income statement
154
76
Self-test quizzes
Chapter 17 except 7-11, 14,
bitly.com/IFRSV2
Additional
self-test quizzes
Chapter 17 except 7-11, 16-21
bitly.com/IFRSV2

155

Assets
Total
Total
156
77
Inventories I
IAS 2; SIC 32
Definition:
Items held for sale
Goods to be used in the production of goods to be sold
Balance sheet items:
Inventory cost flow:
Merchandising company:
One inventory account
Purchase goods in form ready for sale
Manufacturing company:
Raw materials
Work in process
Finished goods
Out of consideration:
Construction contracts (IAS 11)
Agricultural produce, biological assets (IAS 41)

157
Inventories II
IAS 2; SIC 32
Initial measurement:
Acquisition costs
Manufacturing costs
First step - physical inventory:
Near the end of the (fiscal) year
Verification of the inventory records
Final result: amount of physical goods on hand
Second step computation of ending inventory at historical cost:
Assumption of inventory cost flow is needed to handle price fluctuations during the period
Cost flow methods: specific identification method, average cost method, FIFO principle
COGS reduce the initial balance of the inventory account to the level of the ending inventory at historical cost
Cost of goods sold (COGS) are charged to expense
158
78
Inventories III
IAS 2; SIC 32
Third step impairment of stocks:
Compulsory usage of lower-of-cost-or-net realizable value (LCNRV)
Net realizable value: estimated selling price less estimated costs to complete and estimated costs to make a sale
Compulsory recovery of inventory loss, reversal is limited to amount of original write-down
Write-downs and write-ups affect the net income
159
Inventories IV
IAS 2; SIC 32
Example 1 - Macarty Corporation:

Macarty Corporation has an unfinished goods inventory with a cost of 50,000. The estimated sales price is 55,000,
estimated cost of completion is 3,500, and estimated cost to sell is 2,500. Compute the amount of inventory writedown.
Example 2 - Ricardo Company:

Use the following inventory data for Ricardo Company to revaluate the inventories on December 31, 2X11.
Ending inventory (at historical cost):
Ending inventory (at NRV):
82,000
70,000
Assume that in the subsequent period, market conditions change, such that the net realizable value increases to a)
74,000 and b) 84,000. Record the entries for the revaluation of the inventories in 2X11 and 2X12.
160
79
Construction contracts I
IAS 11; SIC 27, 32
Definition:
Contract specifically negotiated for the construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use
Construction of a bridge, building, pipeline, road, ship, tunnel,
Specific methods of revenue recognition must be used
Percentage-of-completion method (PoC-method):
To be used, if total contract revenue/costs can be measured reliably as well as both the contract costs to complete
the contract and the stage of contract completion at the end of each period can be measured reliably
A continuous sale occurring as the work progresses is assumed
Revenues are recognized according to progression, i. e. proportional gains are recognized in years of construction
Exemption: a contract loss on an unprofitable contract must immediately be recognized in the current period
161
Construction contracts II
IAS 11; SIC 27, 32
Calculation for revenue to be recognized

using the PoC-method
66 %
100 %
accumulated revenues
Balance reflects the
cumulative (sub-)gain
33 %
accumulated expenses
1.1.20X0
Beginning
31.12.20X0
31.12.20X1
<<<< --------- Degree of completion --------- >>>>
31.12.20X2
End
162
80
Construction contracts III

IAS 11; SIC 27, 32
Cost-recovery (zero-profit) method:
To be used, if conditions for using the percentage-of-completion method cannot be met
Revenues are recognized only to the extent of costs incurred
No gross profit is recognized in years of construction
Total profit is recognized at point of sale/at the date of delivery (=final acceptance)
163
Construction contracts IV
IAS 11; SIC 27, 32
Example:
KC Construction Company has a contract to construct a 4,500,000 bridge at an estimated cost of 4,000,000. The
contract is to start in July 2X10, and the bridge is to be completed in October 2X12. The following data pertain to the
construction period:
2X10
Costs to date:
2X11
2X12
1,000,000
2,916,000
4,050,000
Estimated costs to complete: 3,000,000
1,134,000
Advance payments:
1,750,000
2,000,000
750,000
Conduct the necessary entries to record the construction contract according to the
a) PoC-method
b) Zero-profit-method.
164
81
Construction contracts practical example I

IAS 11; SIC 27, 32
Annual report, STRABAG SE, 2010, 148.
165
Construction contracts practical example II

IAS 11; SIC 27, 32
166
82
Construction contracts practical example III

IAS 11; SIC 27, 32
167

Assets
Total
Total
168
83
Agriculture I
IAS 41
Definitions:
Biological assets: a living animal or plant
Agricultural produce: harvested product of a biological asset
Presentation: assets must be presented separately in the balance sheet
Measurement:
Biological assets:
Initial/subsequent measurement: at fair value less costs to sell
Gain or loss is recorded in income
Agricultural produce:
Initial valuation (at the point of harvest): at fair value less costs to sell
Subsequent valuation (once harvested): equal to IAS 2
169
Agriculture II
IAS 41
Biological assets
Agricultural produce
Products that are the result of processing
(biological assets according to IAS 41)
(agricultural produce according to IAS 41)
(inventories according to IAS 2)
Sheep
Wool
Yarn, carpet
Trees in a plantation forest
Felled trees
Logs, lumber
Plants
Cotton, harvested cane
Thread, clothing, sugar
Diary cattle
Milk
Cheese
Pigs
Carcass
Sausages, cured ham
Bushes
Leaf
Tea, cured tobacco
Vines
Grapes
Wine
Fruit trees
Picked fruit
Processed fruit
170
84
Self-test quizzes
bitly.com/IFRSV1
bitly.com/IFRSV2
Additional
self-test quizzes
bitly.com/IFRSV1
bitly.com/IFRSV2
Only the questions 1, 4, 5, 8 in chapter 8

Only the questions 1, 2, 3, 4, 6 in chapter 9
Only the questions 2, 3, 4, 7 in chapter 18
Only the questions 1, 3, 6, 8, 9, 10, 12 in ch. 8
Only the questions 1, 2, 3, 6, 7, 12 in ch. 9
Only the questions 2, 4, 6, 7, 9, 10, 14, 15 in ch. 18

171

Assets
Total
Total
172
85
Equity I
F.49; IAS 1, 32
Definition:
Not repayable and residual interest in the assets of the enterprise after deducting all its liabilities
The aggregate amount of equity only coincidence corresponds with
The aggregate market value of the shares
The sum that could be raised by disposing off the net assets
Negative amount of equity is cogitable
Balance sheet items:
Vary depending on the:
Legal form of the company
Business incorporation act of each government
Variety of ownership interests
Reasons for the changes in equity
Sub-classifications relevant for decision-making users are compulsory
173
Equity II
F.49; IAS 1, 32
Statement of p/l and OCI
Statement of CiE
Revenues
- Expenses
= G./Loss
Increase of
AFS or
revaluation
surplus
Issuance or
repurchase of
shares; cash
dividends
Conversion of
preferred shares to
ordinary shares
ih. financing
in-house financing
external financing
no financing effect
174
86
Equity III
F.49; IAS 1, 32
Equity (and Liabilities)
Assets
assets
Paid-in capital:
Share capital
Share premium
Earned capital:
Retained earnings
Treasury shares (negative balance)
Non-controlling interest
Total
Total
175
Equity practical example I

F.49; IAS 1, 32
Annual report, Wolford, 2010/2011, 69, 94.
176
87
Equity practical example II

F.49; IAS 1, 32
177

Assets
Sub classification of liabilities:

(Non-)current
financial liabilities
Provisions
Non-contractual
liabilities
Liabilities
in
general
Total
Total
178
88
(Current financial) liabilities

IAS 32, 39 (IFRS 9 2015); IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11
Liabilities in general:
Definition:
Current financial liabilities in particular:
Definition:
Present obligation
Liabilities of almost certain timing and amount
Arising from past events
Based on a contractual obligation
Resulting in an outflow of resources
Expected to be settled within 12 months
Examples: accounts/dividends payable, customer

advances, employee-related liabilities,
Recognition/measurement:
To be recognized in fulfilment of the criteria
Liabilities are reported at their present values
Current financial liabilities are reported

at their maturity value
179
Non-current financial liabilities I

Non-current financial liabilities in particular:
Definition:
Liabilities of almost certain timing and amount
Based on a contractual obligation
Not expected to be settled within 12 months
Examples: bonds payable, mortgages payable,
Initial measurement: at fair value
o
At amortized cost > usage of effective-interest method
Irrelevance of fair value at reporting date
180
89
Non-current financial liabilities II

Example:
Evermaster Corporation issued $ 100,000 (par value, face value) of bonds on January 1,
2X11, due on January 1, 2X16, with interest of $ 8,000 (=coupon of 8 %) payable each
January 1. The issue price is $ 108,424.73.
Conduct the necessary entries in 2X11 and 2X16.
181
Financial liabilities practical example

Annual report, STRABAG SE, 2010, 124; Wolford 2010/2011, 79, 95.
182
90
Outlier: Off-balance-sheet financing

Brilloff: what they show is interesting but what they hide is vital
Definition:
Raise of debt capital
No recognition of the obligation
To be disclosed in the notes only
Examples:
Operating leases
Non-consolidated subsidiary
Susceptible to fraud
Out of sight, out of mind -> Principle not be used by auditors/balance sheet analysts
183
Outlier: Off-balance-sheet financing practical example

184
91
Provisions I
IAS 37; SIC 27, 29; IFRIC 1, 5, 6
Definition:
Present obligation arising from past events resulting in a probable outflow of resources
Liability that is uncertain in its timing, amount or on its merits
Obligation not based on general risks that are inherent to business operations
Liability always involves another party to whom the obligation is owed
Examples: obligations related to litigations, warrantees, product guarantees,
Recognition:
In fulfillment of the criteria
If probable outflow is material and reliable to estimate
Recognition as a (non-)current liability
Measurement:
Amount recognized should be the best estimate of the expenditures to settle the present obligation
Current provisions are measured at full maturity value of estimated short-term obligation
Non-current provisions are measured at present value of estimated long-term obligation at maturity date
185
Provisions II
IAS 37; SIC 27, 29; IFRIC 1, 5, 6
Example:
Scorcese Inc. is involved in a lawsuit at December 31, 2X10.
a. Prepare the December 31 entry in accordance to IAS 37 assuming that there is

a probability of 50 % that Scorcese will be liable for $ 900,000,
a probability of 25 % that Scorcese will be liable for $ 200,000 and
a probability of 25 % that Scorcese will not be liable for any payment
as a result of this suit.
b. Prepare the December 31 entry, if any, assuming that there is a probability of 25 % that Scorcese will be liable for
$ 1,000,000 and a probability of 75 % that Scorcese will not be liable for any payment as a result of this suit.
186
92
Contingent liabilities
IAS 37; SIC 27, 29; IFRIC 1, 5, 6
Definition:
Present possible obligation arising from past events
Unlikely outflow of resources as obligation is not yet confirmed
No reliable estimation of the obligation can be made
Examples: debt guarantee, (non-)binding letter of comfort,
Reporting:
No recognition, no appearance in the financial statements
Disclosure in the notes only
187
Provisions, contingent liabilities - summary

IAS 37; SIC 27, 29; IFRIC 1, 5, 6
Treatment of unsecure liabilities

5 - 50 %
Denotation
Outcome
Probability
Acc. treatment
Provision
Probable, more likely than not
> 50 %
Report as provision
Contingent liability
Possible, but not probable
5 50 %
Disclosure required,
if material
Nothing
Remote
<5%
No disclosure required
<5%
> 50 %
Recognize provision
188
93
Provisions, contingent liabilities practical example

IAS 37; SIC 27, 29; IFRIC 1, 5, 6
Annual report, Wolford, 2010/2011, 79, 100.
189
Outlier: employee benefits

IAS 19; SIC 12
Definition:
Employee benefits provided under formal plans/agreements, legislative requirements or through industry arrangements
between an entity and individual employees, groups of employees or their representatives
Categories:
Short-term employee benefits:
Compensated absences: paid annual leave, paid overtime,
Profit-sharing bonuses,
Long-term employee benefits:
Post-employment benefits: pensions, life insurance, medical care,
Other longer-term employee benefits: jubilee benefits, severance pay,
190
94
Outlier: short-term employee benefits I

IAS 19; SIC 12
Recognition:
Of an expense equal to the amount of the short-term employee benefit payable in future periods
Of a liability (accrued expense) after deducting any amount already paid
Measurement:
Short-term employee benefits are measured on an undiscounted basis
Payments are made within 12 months
191
Outlier: short-term employee benefits II

IAS 19; SIC 12
Example:
An entity has 10,000 employees. Each employee is entitled to 20 days of paid holiday per calendar year. Up to five days
of this entitlement may be carried forward and taken in the following year but cannot be carried forward any further.
Employees are not paid for any holidays they fail to take.
As at 31 December 2X09, 9,130 employees had used in full their holiday entitlement for 2X09. The remaining
employees are carrying forward an average of three days per employee. Based on past experience, it is expected that
these employees will each use an average of two of these three days before the end of 2X10. Each day of paid holiday
costs the entity on average 300.
Calculate the liability which should be stated in the entitys balance sheet as at 31 December 2X09 with regard to
paid holiday entitlement.
192
95
Outlier: long-term employee benefits I

IAS 19; SIC 12
Forms of plans
Defined contribution plans:
Defined benefit plans:
Characteristics:
Employer contributes to a (pension) fund

(separate legal and accounting entity)
Defined amount of contribution, no promise

regarding size of benefits
Employee has requirements against the fund

but not against the company
Employees benefit is determined by

performance of used (pension) fund
Characteristics:
Usually employer constantly invests

financial assets to settle defined benefits
Amount of benefit is defined, promise regarding

size of benefits exists
Employee
employer
has
requirements
against
into
the
the
193
Outlier: long-term employee benefits II

IAS 19; SIC 12
Recognition and measurement of defined contribution plans:
Costs of and contributions to the (pension) fund are reported as expense
No obligation has to be recognized
Recognition and measurement of defined benefit plans:
Determination of present value of future benefits to be paid to employees (DBO)
Actuaries consider mortality rates, interest/earning rates, future salaries,
Recognition of liability equal to the DBO less fair value of plan assets
Decrease/increase of liability is recorded in net income as service/interest costs
Actuarial gains/losses are recorded in other comprehensive income
abolition of the smoothing in 2013
194
96
Outlier: employee benefits practical example I

IAS 19; SIC 12
195
Outlier: employee benefits practical example II

IAS 19; SIC 12
196
97
Self-test quizzes
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Chapter 13 except questions 3, 4, 8, 9, 12-14, 19

Only the questions 4-6, 9, 12-14 in chapter 14
Additional
self-test quizzes
Chapter 13 except questions 2-5, 7, 9-10, 14, 20-21

Chapter 14 except questions 1, 9-12, 17-18, 21
bitly.com/IFRSV1

197

Assets
Total
Total
198
98
Current/deferred taxes I
IAS 12; SIC 25; IFRIC 7
Definition:
Current income taxes:
Income taxes payable based on filed income tax return
Calculation follows specific guidelines of taxing authority
Tax burden is only based on the profit/loss resulting from tax reporting
Deferred income taxes:
Additional income tax expenses/benefits reported in the financial statements based on IAS/IFRS
Calculation is based on the difference between the profit/loss resulting from tax and IAS/IFRS reporting
Current + deferred income taxes reflect the owed/claimed tax burden/credit if IAS/IFRS were the tax base
Recognition:
Statement of financial position: current/deferred income tax liabilities/assets
Statement of profit or loss and other comprehensive income: current/deferred income tax expenses/benefits
Measurement of deferred taxes:
Multiplication of cumulative temporary profit difference by expected tax rate
Adjustment of recognized deferred income tax liabilities/assets

199
Current/deferred taxes II
Temporary differences:
Future taxable/deductible amounts
Represent an increase in taxes payable/refundable in future years
Examples:
Deferred tax liabilities: revenues taxable after recognition in financial income (construction contracts)
Deferred tax assets: expenses deductible after recognition in financial income (holding losses of financial assets)
Permanent differences:
Result from items that enter into pretax financial income but never into taxable income (or vice versa)
Affect only the period in which they occur and do not give rise to future taxable/deductible amounts
Never ever lead to deferred taxes
Examples:
Fines and expenses resulting from a violation of law that are non deductible for tax purposes
Certain amount of charitable donations recognized as expense but not deductible for tax purposes
200
99
Current/deferred taxes III

Example:
Under IFRS Chelsea, Inc. reported revenues of $ 130,000 and expenses of $ 60,000 in each of its first three years of
operations. For tax purposes, Chelsea reported the same expenses to the tax authority in each of the years. Due to a
construction contract Chelsea reported taxable revenues of $ 100,000 in 2X11, $ 150,000 in 2X12, and $ 140,000 in
2X13. The tax rate is 40 %.
What is the effect on the accounts of reporting different amounts of revenue for IFRS versus tax? Conduct the
necessary entries for all periods and draft both, the statement of financial position and the statement of profit or
loss and other comprehensive income of 2X11.
201
Deferred taxes practical example

Annual report, AUA, 2008, 128.
202
100
Self-test quizzes
Chapter 19 except questions 7-11; 13-16
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Additional
self-test quizzes
Only the questions 2, 3, 5, 13-15 in chapter 19
bitly.com/IFRSV2

203

204
101
Statement of profit/loss and other comprehensive income I

IAS 1.81; SIC 15, 29, 32; IFRIC 1

+ Incoming payments
- Outgoing payments

(= balance sheet)
Equity
Non-current
assets

External
financing

Non-current
liabilities
Current assets
(liquid assets)

(Amendments)
In-house
financing
Current liabilities
Notes
+
=
+/=
Revenues
- Expenses
Net profit or loss
205
Statement of profit/loss and other comprehensive income II

IAS 1.81; SIC 15, 29, 32; IFRIC 1
Usefulness:
Information about an entitys performance during the reporting period
Evaluate past performance, predict future performance
Indicator of the quality of the earnings helps to assess the risk of achieving future profits:
Sell off the family silver of the entity -> one-off effect
Profit due to operating activities -> sustainability
Basic principles:
No special formal regulations, only minimum line items
Additional headings/subtotals/line items must be used if they are relevant
No extraordinary items; expenses are analysed:
By nature (combines costs as total purchases, total depreciation, total wages, )
By function (combines costs by stage of production, costs of sales, administrative/distribution costs, )
Two-statement or single-statement format
206
102
Statement of profit/loss and other comprehensive income III

IAS 1.81; SIC 15, 29, 32; IFRIC 1
Statement of profit or loss (=income statement):
Items of income and expense affecting net income:
Income:
Revenues:
Term used for ordinary activities
Revenue accounts: sales, fee revenue,
Gains:
May not raise from ordinary/operating activities
Gain accounts: gain on the sale of long-term assets,
Expense:
Expenses:
Term used for ordinary activities
Expense accounts: depreciation, salary,
Losses:
May not raise from ordinary/operating activities
Loss accounts: losses on the sale of long-term assets,
Total = net income/loss = net profit/loss = net result
Statement of other comprehensive income:

Items of income and expense not affecting net income:
All gains and losses that bypass the net income but
affect the equity (in-house financing)
Except all changes in equity resulting from investments

by owners and distributions to owners (external
financing)
Examples:
Unrealized gains and losses on available-for-sale
securities (AFS-reserves)
Unrealized gains and losses on non-current assets
measured at the fair value (revaluation surplus)
Total = other comprehensive income
Statement of profit or loss and other comprehensive income (total = total comprehensive income)
207
Statement of profit/loss and other comprehensive income IV

IAS 1.81; SIC 15, 29, 32; IFRIC 1
Finance costs
+/-
Share of profit or loss of associates
Tax expense
+/-
Post-tax profit/loss of discontinued operations
Net income/loss = net profit/loss = net result

a) Attributable to equity holder of the parent company
b) Attributable to minority interest
+/-
Other comprehensive income (OCI)

a) Items that will not be reclassified to profit or loss *
b) Items that may be reclassified subsequently to profit or loss **

a) Attributable to equity holder of the parent company
b) Attributable to minority interest
Two approaches to reporting

comprehensive income:
Statement of p/l and other

Revenue
Statement of p/l
Two-statement format:
1. Statement of p/l
2. Statement of p/l
and OCI
Single-statement format
* Revaluation surplus (PP&E),
actuarial gains, IFRS 9 surplus
** AFS-surplus (<2015)
208
103
Statement of profit/loss and other comprehensive income V

IAS 1.81; SIC 15, 29, 32; IFRIC 1
Two-statement format:
209
Practical example I
IAS 1.81; SIC 15, 29, 32; IFRIC 1
210
104
Practical example II
IAS 1.81; SIC 15, 29, 32; IFRIC 1
211
212
105
Statement of changes in equity I

IAS 1.106; SIC 15, 29, 32; IFRIC 1

+ Incoming payments
- Outgoing payments

(= balance sheet)
Non-current
assets
Equity

External
financing

Current assets
(liquid assets)
Non-current
liabilities

In-house
financing
Current liabilities
Notes
(Amendments)
+
=
+/=
Revenues
- Expenses
Net profit or loss
213
Statement of changes in equity II

IAS 1.106; SIC 15, 29, 32; IFRIC 1
Definition:
Additional, compulsory part of financial statements based on IAS/IFRS
Reports the change in each equity account and in total equity for the period
Reconciliation of the carrying amount of each component of equity from the beginning to the end of the period
Structure:
Net profit or loss
(All revenues and expenses of a given period)

(Items of income and expense for the period that
do not affect net income)
Equity accounts (share capital, )

(Contributions (issuances of shares) and
distributions (dividends) to owners)

In-house financing
(Equity changes not resulting from capital
transactions with equity holders)
Balance sheet
External financing
(Equity changes resulting from capital
transactions with equity holders)
214
106
Statement of changes in equity practical example

IAS 1.106; SIC 15, 29, 32; IFRIC 1
External financing
In-house financing
215
Self-test quizzes
Chapter 4 except questions 5, 7, 9, 10, 11, 12, 13
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Additional
self-test quizzes
Chapter 4 except questions 3, 8-13, 15, 16, 19, 21 - 24
bitly.com/IFRSV1

216
107
217
Statement of cash flows I

IAS 7

+ Incoming payments
- Outgoing payments

(= balance sheet)
Non-current
assets
Equity

External
financing

Current assets
(liquid assets)
Non-current
liabilities

(Amendments)
In-house
financing
Current liabilities
Notes
+
=
+/=
Revenues
- Expenses
Net profit or loss
218
108
Statement of cash flows II

IAS 7
Would you invest in this company?
Cash is reality, profit is a matter of opinion
Net income indicates a consistent profitability

Cash flow from operations indicates
219
Statement of cash flows III

IAS 7
Purpose of cash flow statements:
Evaluation of the liquidity, solvency and financial flexibility of the company
Information about the companys cash receipts/payments during a period to assess:
Reasons for differences between net income and net CF from operating activities
Cash and noncash investing and financing transactions
Entitys ability to generate future cash flows
Entitys ability to pay dividends and obligations
Classification of cash flows:
Cash flow from operating activities -> income statement transactions, changes in short-term asset/liability items
Cash flow from investing activities -> changes in investments and long-term asset items
Cash flow from financing activities -> changes in long-term liabilities and stockholders equity (besides income)
220
109
Statement of cash flows IV

IAS 7
221
Statement of cash flows V

IAS 7
222
110
Statement of cash flows VI

IAS 7
Major steps in preparation of cash flow statements:
1st step:
2nd step:
3rd step:
4th step:
5th step:
Determine change
in cash
Determine the net cash

flow from operating
activities
Determine cash flow from

investing activities
Determine cash flow

from financing activities
Sum of all cash flows

should be equal to result
of 1st step
Sources of information: Comparative statements of financial position, income statement, selected transaction data
223
Statement of cash flows VII

IAS 7
Usage of net income as a starting point to determine balance of revenues/expenses on a cash basis
Elimination of transactions that do not result in an increase/decrease in cash or are a part of the
cash flow of investing/financing activities:
Adjustments of the NI that lead to the CF from profits:
Depreciation, amortization and depletion expense
Write-downs/write-ups that have no effect on cash
Gain/loss on disposition of long-term assets
CF from profits
Changes in working capital:
Increase/decrease of current assets
Increase/decrease of current liabilities
Cash flow from profits + working capital

= Cash flow from operating activities
2nd step determination of the cash flow from operating activities:
224
111
Statement of cash flows VIII

IAS 7
Example:
225
Statement of cash flows IX

IAS 7
Solution:
226
112
Statement of cash flows practical example

IAS 7
227
Self-test quizzes
bitly.com/IFRSV1
bitly.com/IFRSV2
Chapter 5 except questions 11, 12, 14, 15

Additional
self-test quizzes
bitly.com/IFRSV1
bitly.com/IFRSV2

Chapter 23 except questions 5, 7-11, 14, 15, 17, 20

228
113
Notes to the financial statements, segment report
229
Notes I
IAS 1.112; SIC 15, 29, 32; IFRIC 1

+ Incoming payments
- Outgoing payments

(= balance sheet)
Non-current
assets
Equity

External
financing

Current assets
(liquid assets)
Non-current
liabilities

(Amendments)
In-house
financing
Current liabilities
Notes
+
=
+/=
Revenues
- Expenses
Net profit or loss
230
114
Notes II
IAS 1.112; SIC 15, 29, 32; IFRIC 1
Objective of the notes:
Presentation of information about the basis of preparation of the financial statements and the accounting policies
Disclosure of information required by IAS/IFRS that is not presented within the other elements of financial statements
Structure:
Statement of compliance with IAS/IFRS
Summary of significant accounting policies applied and supporting information for items presented within the other
elements of financial statements:
Measurement methods, useful lives
Subsidiaries & associates
Maturity dates of liabilities
Off-balance sheet obligations
Segment report (-> IFRS 8)
231
Operating segments I
IFRS 8
Segment report:
Disaggregated financial information about the different types of business activities
Information about the details behind conglomerate financial statement of diversified businesses
Segmentation is based on:
The type or class of customer (retail or wholesale segment, )
The sales area (Europe, US, )
Objectives:
To provide additional detailed information about the types of business activities
To help users:
Better understand the enterprises performance
Better assess its prospects for future net cash flows
Make more informed judgments about the enterprise as a whole
232
115
Operating segments II
IFRS 8
Segmented information reported:
General information about operating segments
Segment profit and loss and related information
Segment assets and liabilities
Reconciliations
Information about products and services and geographic areas
Major customers
233
Operating segments practical example I

IFRS 8
234
116
Operating segments practical example II

IFRS 8
235
Parts of financial statements

IAS 1.10; SIC 15, 29, 32; IFRIC 1
Presentation of financial statements

Notes, segment report
236
117
Auditors/managements reports
237
Auditors report
ISA - International standards on auditing
Auditing:
Done by auditors > accounting professionals conducting an independent examination of a companys accounting data
Based on ISA -> International standards on auditing issued by the IFAC ->International federation of accountants (NY)
Nature of auditing:
Investigation if financial statements present the financial position in accordance with IAS/IFRS
Not a financial or profitability analysis
Auditors report:
Unmodified opinion: financial statements present the financial position fairly in accordance with IAS/IFRS
Qualified opinion: financial statements present the financial position almost fairly in accordance with IAS/IFRS
Exception to the standard opinion exists but is not sufficient to invalidate the statements as a whole
E. g.: lack of conformity with GAAPs in one minor subarea
Adverse opinion: exceptions exist and are so material that an qualified opinion can not be justified
Disclaim opinion: if no opinion can be expressed due to a lack of information
238
118
Auditors report practical example I

239
Auditors report practical example II

240
119
Managements report
Objectives:
Help in the interpretation of the financial position, financial performance and cash flows of a company
Review of:
Main factors and influences determining financial performance
Companys sources of funding and its targeted ratio of liabilities to equity
Companys resources not recognized in the statement of financial position
Note:
Important element of communication with capital markets
No formal IFRS requirements for management commentaries
241
Annual report practical example
Annual report, Wolford, 2010/2011.
242
120
Self-test quizzes
Chapter 24 except questions 3, 5, 8, 12, 13, 14, 16
bitly.com/IFRSV2
Additional
self-test quizzes
Only the questions 1, 2, 15, 17, 18 in chapter 24
bitly.com/IFRSV2

243
Keep yourself updated
http://www.efrag.org/files/Endorsement%20status%20report/EFRAG_Endorsement_Status_Report__22_July_2013.pdf
244
121
Thank you for your attention!
122

Sifrs Class Lides - WS - 2013 - 2014

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(L)+(C) International Financial Reporting

Preliminary meeting Setting the scene

Alexander Herbst: International Financial Reporting

Principles of International Business

International Entrepreneurship and Innovation Management

International Financial Management

Cultural Skills in SEE and CEE

Alexander Herbst: International Financial Reporting

Principles of International Law

International Entrepreneurship and Innovation Management

International Financial Management

Cultural Skills in SEE and CEE

Electives I: Specialisation in International Management (two of three)

Alexander Herbst: International Financial Reporting

B.S., M.B.A., J.D. Kurt Wagner B.A., M.A.

Born and raised in the Midwestern U.S. State of Illinois

Master of business administration degree in finance and a Bachelor of science degree in

American business lawyer and former U.S. diplomat

Editor-in-Chief of the Southern Illinois University Law Journal

Alexander Herbst: International Financial Reporting

Course plan III

Electives II: Advanced Cultural Skills (Two of Four)

Alexander Herbst: International Financial Reporting

(specific) Research Seminar

Examination Before a Committee (2 subjects)

Masters Thesis out of:

Alexander Herbst: International Financial Reporting

Light/soft core version:

[Almost] Full version:

Hard core version:

[Electives (4.5 ECTS)]

Electives (4.5 ECTS)

NOTE THE WORKLOAD!

Alexander Herbst: International Financial Reporting

Outside of this scope:

Alexander Herbst: International Financial Reporting

Alexander Herbst: International Financial Reporting

Mission statement III

Alexander Herbst: International Financial Reporting

Thinking of accounting - mental exercise I

Alexander Herbst: International Financial Reporting

Assumed previous knowledge

Expected level of knowledge:

Basic knowledge of at least one conceptual framework for financial reporting

Basic knowledge of the general financial accounting cycle

Being familiar with the basic accounting terminology in English (!):

Debits, credits, accounting equation, double-entry-system,

journalizing, posting, trail balance, adjusting/closing entries,

Literature covering the expected knowledge/terminology:

Pre-reading material (Moodle!)

Berry, Financial Accounting Demystified, Mc-Graw-Hill, New York 2011.

Wood/Robinson, Frank Wood's book-keeping and accounts, 7/E,

Cox, Business accounts: for first level accounting and book-keeping,

Smith, Introductory financial accounting and reporting, Open Univ. Press,

Alexander Herbst: International Financial Reporting

Thu, Oct 03, 2013

Tue, Oct 22, 2013

Wed, Oct 23, 2013

Thu, Oct 24, 2013

Fri, Oct 25, 2013

Intangible assets, accounting for leases

Mon, Dec 2, 2013

Financial assets (cash, recievables, debt investments, equity