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STANDARDS

Accounting rules and principles

Introduction
There have been major changes in financial reporting in recent years. Most obvious is the continuing
adoption of IFRS worldwide. Many territories have been using IFRS for some years, and more are planning
to come on stream from 2012.

An important recent development is the extent to which IFRS is affected by politics. The issues with Greek
debt, the problems in the banking sector and the attempts of politicians to resolve these questions have
resulted in pressure on standard-setters to amend their standards, primarily those on financial
instruments. This pressure is unlikely to disappear, at least in the short term. The IASB is working hard to
respond to this; we can therefore expect a continued stream of changes to the standards in the next few
months and years.

Accounting principles and applicability of IFRS


The IASB has the authority to set IFRSs and to approve interpretations of those standards.

IFRSs are intended to be applied by profit-orientated entities. These entities financial statements give
information about performance, position and cash flow that is useful to a range of users in making
financial decisions.

These users include shareholders, creditors, employees and the general public.

A complete set of financial statements includes a:


balance sheet (statement of financial position);
statement of comprehensive income;
statement of cash flows;
a description of accounting policies; and
notes to the financial statements.

About the IASB


The International Accounting Standards Board (IASB) is an independent, private-sector body that
develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the
oversight of the IFRS Foundation. The IASB was formed in 2001 to replace the International Accounting
Standards Committee.

The IASB's Role


Under the IFRS Foundation Constitution, the IASB has complete responsibility for all technical matters of
the IFRS Foundation including:
full discretion in developing and pursuing its technical agenda, subject to certain consultation
requirements with the Trustees and the public
the preparation and issuing of IFRSs (other than Interpretations) and exposure drafts, following the due
process stipulated in the Constitution

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the approval and issuing of Interpretations developed by the IFRS Interpretations Committee.

The International Accounting Standards Board (IASB) is organised under an independent foundation
named the IFRS Foundation. The Foundation is a not-for-profit corporation which was created under the
laws of the State of Delaware, United States of America, on 8 March 2001.

Objectives of the IFRS Foundation


The objectives of the IFRS Foundation are:
To develop, in the public interest, a single set of high quality, understandable, enforceable and globally
accepted financial reporting standards based upon clearly articulated principles.
To promote the use and rigorous application of those standards.

In fulfilling the above objectives, to take account of, as appropriate, the needs of a range of sizes and
types of entities in diverse economic settings.
To promote and facilitate adoption of International Financial Reporting Standards (IFRSs), being the
standards and interpretations issued by the IASB, through the convergence of national accounting
standards and IFRSs.

Conceptual Framework
A conceptual framework of accounting is a coherent system of interrelated objectives and fundamental
principles which prescribes the nature, function and limits of financial accounting and financial
statements.

Objectives The IASBs Conceptual Framework


The purpose of this framework is to
Assist the IASB in the development of future accounting standards and in its review of existing
accounting standards;
Assist the IASB by providing a basis for reducing the number of alternative accounting treatments;

Assist national standard-setting bodies in developing national standards;

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Assist accountants to apply relevant accounting standards in preparing financial statements and in
dealing with topics that do not form the subject of International accounting standards;
Assist auditors in forming an opinion as to whether financial statements conform with relevant
accounting standards;
Assist users of financial statements in interpreting the information contained in financial statements
prepared in conformity with International Accounting Standards;

Main Contents of the IASBs Conceptual Framework for Financial Reporting


The specific topics discussed under the framework are as follows:
The objectives of financial Statements;

User groups

Assumptions underlying financial statement preparation;

Qualitative Characteristics of financial statements;

The elements of financial statements; their recognition and their measurement

The concepts of capital maintenance

Qualitative Characteristics of Financial Reporting


Qualitative characteristics are the attributes that make the information provided in financial statements
useful to users. The four principal qualitative characteristics are understandability, relevance, reliability
and comparability.

a. Understandability
Information is understandable when users might reasonably be expected to comprehend its meaning.
For this purpose, users are assumed to have a reasonable knowledge of the entitys activities and the
environment in which it operates, and to be willing to study the information.

Information about complex matters should not be excluded from the financial statements merely on
the grounds that it may be too difficult for certain users to understand.

b. Relevance
Information is relevant to users if it can be used to assist in evaluating past, present or future events
or in confirming, or correcting, past evaluations. In order to be relevant, information must also be
timely.

Materiality
The relevance of information is affected by its nature and materiality. Information is material if its
omission or misstatement could influence the decisions of users or assessments made on the basis of
the financial statements. Materiality depends on the nature or size of the item or error judged in the
particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or
cut-off point rather than being a primary qualitative characteristic which information must have if it
is to be useful.

c. Reliability
Reliable information is free from material error and bias, and can be depended on by users to represent
faithfully that which it purports to represent or could reasonably be expected to represent.

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Faithful Representation
For information to represent faithfully transactions and other events, it should be presented in
accordance with the substance of the transactions and other events, and not merely their legal form.

Substance over Form


If information is to represent faithfully the transactions and other events that it purports to represent,
it is necessary that they are accounted for and presented in accordance with their substance and
economic reality and not merely their legal form. The substance of transactions or other events is not
always consistent with their legal form.

Neutrality
Information is neutral if it is free from bias. Financial statements are not neutral if the information
they contain has been selected or presented in a manner designed to influence the making of a decision
or judgment in order to achieve a predetermined result or outcome.

Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the
estimates required under conditions of uncertainty, such that assets or revenue are not overstated and
liabilities or expenses are not understated.

However, the exercise of prudence does not allow, for example, the creation of hidden reserves or
excessive provisions, the deliberate understatement of assets or revenue, or the deliberate
overstatement of liabilities or expenses, because the financial statements would not be neutral and,
therefore, not have the quality of reliability.

Completeness
The information in financial statements should be complete within the bounds of materiality and cost.

d. Comparability
Information in financial statements is comparable when users are able to identify similarities and
differences between that information and information in other reports.

Comparability applies to the:


Comparison of financial statements of different entities; and
Comparison of the financial statements of the same entity over periods of time.

An important implication of the characteristic of comparability is that users need to be informed of


the policies employed in the preparation of financial statements, changes to those policies and the
effects of those changes.

Because users wish to compare the performance of an entity over time, it is important that financial
statements show corresponding information for preceding periods.

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Constraints on Relevant and Reliable Information

Timeliness
If there is an undue delay in the reporting of information it may lose its relevance. To provide information
on a timely basis it may often be necessary to report before all aspects of a transaction are known, thus
impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may
be highly reliable but of little use to users who have had to make decisions in the interim. In achieving a
balance between relevance and reliability, the overriding consideration is how best to satisfy the decision-
making needs of users.

Balance Between Benefit and Cost


The balance between benefit and cost is a pervasive constraint. The benefits derived from information
should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a
matter of judgment. Furthermore, the costs do not always fall on those users who enjoy the benefits.
Benefits may also be enjoyed by users other than those for whom the information was prepared. For these
reasons, it is difficult to apply a benefit-cost test in any particular case. Nevertheless, standard-setters, as
well as those responsible for the preparation of financial statements and users of financial statements,
should be aware of this constraint.

Balance Between Qualitative Characteristics


In practice a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the
aim is to achieve an appropriate balance among the characteristics in order to meet the objectives of
financial statements. The relative importance of the characteristics in different cases is a matter of
professional judgment.

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END OF CHAPTER QUESTIONS

1. May 2010 Q5
(c) Outline the role and structure of International Accounting Standards Board (IASB).
(4 marks)
2. Nov, 2011 Q4
(a) Measurement is a key criteria underpinning Financial Reporting Standards. Explain the four (4)
measurement bases proposed by the IASB Conceptual Framework of accounting.
(6 marks)
Solution
a) Measurement of the elements of financial statements
The Framework identifies four possible measurements bases:
Historical cost
Current cost
Realizable value
Present value

Historical cost
Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of acquisition. Liabilities are recorded at the
amount of proceeds received in exchange for the obligation.

Current cost
Assets are carried at the amount of cash or cash equivalents required to acquire them
currently. Liabilities are carried at the discounted amount currently required to settle them.

Realizable value
Assets are carried at the amount which could currently be obtained by an orderly disposal.
Liabilities are carried at their settlement values - the amount to be paid to satisfy them in
the normal course of business.

Present value
Assets are carried at the present discounted value of the future net cash inflows that the
item is expected to generate in the normal course of business, and liabilities at the present
discounted value of the expected outflows necessary to settle them.

3. May, 2013 Q1
(a) A conceptual framework of accounting is a coherent system of interrelated objectives and
fundamental principles which prescribes the nature, function and limits of financial accounting
and financial statements.

Required:
i. Outline five (5) objectives the IASBs conceptual framework of accounting seeks to achieve.
(5 marks)
ii. State the main contents of the IASBs conceptual framework for financial reporting.
(5 marks)

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4. Nov, 2013 Q1
(a)
(i) The IASBs Framework for the Preparation and Presentation of Financial Statements requires
financial statements to be prepared on the basis that they comply with certain accounting
concepts (underlying assumptions) such as:
1. Matching/Accruals
2. Prudence
3. Comparability
4. Materiality
Required:
Briefly explain the meaning of each of the above concepts/assumptions. (4 marks)

Solution

(a) Accounting Concepts

Matching/Accruals
The accruals basis required transactions (or events) to be recognized when they occur (rather than
on a cash flow basis). Revenue is recognized when it is earned (rather than when it is received)
and expenses are recognized when they are incurred (i.e when the entity has received the benefit
from them), rather than when they are paid.

Prudence
Prudence is used where there are elements of uncertainty surrounding transactions or events.
Prudence requires the exercise of a degree of caution when making judgments or estimates under
conditions of uncertainty. Thus when estimating the expected life of a newly acquired asset, if we
have past experience of the use of similar assets and they had had lives of (say) between five and
eight years, it would be prudent to use an estimated life of five years for the new asset.

Comparability
Comparability is fundamental to assessing the performance of an entity by using its financial
statements. Assessing the performance of an entity over time (trend analysis) requires that the
financial statements used have been prepared on a comparable (consistent) basis. Generally this
can be interpreted as using consistent accounting policies (unless a change is required to show a
fairer presentation). A similar principle is relevant to comparing one entity with another; however
it is more difficult to achieve consistent accounting policies across entities.

Materiality
Information is material if its omission or misstatement could influence (economic) decisions of
users based on the reported financial statements. Clearly an important aspect of materiality is the
(monetary) size of a transaction, but in addition the nature of the item can also determine that it
is material. For example the monetary results of a new activity may be small, but reporting them
could be material to any assessment of what it may achieve in the future. Materiality is considered
to be a threshold quality, meaning that information should only be reported if it is considered
material. Too much detailed (and implicitly immaterial) reporting of (small) items may confuse
or distract users.
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5. May, 2014 Q5
(a) The IASB Framework outlines, among other issues, the qualitative characteristics of financial
statements, recognition and measurement of elements of financial statements etc.
Required:
(i) Explain the four (4) main qualitative characteristics of financial information.
(4 marks)
(ii) Explain four (4) bases of measuring assets and liabilities subsequent to their initial
recognition. (4 marks)

Solution

(ii)
Measurement of the elements of financial statements
The Framework identifies four possible measurements bases:
Historical cost
Current cost
Realizable value
Present value.

i. Historical cost
Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of acquisition. Liabilities are recorded at the
amount of proceeds received in exchange for the obligation.

ii. Current cost


Assets are carried at the amount of cash or cash equivalents required to acquire them
currently. Liabilities are carried at the discounted amount currently required to settle them.

iii. Realizable value


Assets are carried at the amount which could currently be obtained by an orderly disposal.
Liabilities are carried at their settlement values-the amount to be paid to satisfy them in the
normal course of business.

iv. Present value


Assets are carried at the present discounted value of the future net cash inflows that the
item is expected to generate in the normal course of business, and liabilities at the present
discounted value of the expected outflows necessary to settle them.

6. Non, 2016 Q5
b) The IASBs conceptual framework for financial reporting states that the qualitative
characteristics of financial statements are the attributes that make financial information useful.
Required:
Explain the fundamental qualitative characteristic Relevance. (2 marks)

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PRESENTATION OF FINANCIAL STATEMENTS - IAS 1
Objectives
To set out the overall framework for presenting general purpose financial statement, including guidelines
for their structure and the minimum content.

Overall Considerations

Fair presentation and compliance with IFRSs


Financial statements are required to be presented fairly as set out in the framework and in accordance
with IFRS and are required to comply with all requirements of IFRSs.

Going concern
Financial statements are required to be prepared on a going concern basis and will continue in operation
for the foreseeable future (unless entity is in liquidation or has ceased trading or there is an indication that
the entity is not a going concern).

Accrual basis of accounting


Entities are required to use accrual basis of accounting except for cash flow information.

Presentation consistency
An entity is required to retain presentation and classification from one period to the next.

Materiality and aggregation


Each material class of similar assets and items of dissimilar nature or function is to be presented separately.

Offsetting
Offsetting of assets and liabilities or income and expenses is not permitted unless required by other IFRSs.

Comparative information
At least 1 year of comparative information is required. The disclosure is require both on the face of the
financial statements and in the notes, unless another Standard requires otherwise.

Components of Financial Statements


A complete set of financial statements comprises:
Statement of financial position
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of cash flows
Notes, comprising a summary of significant accounting policies and other explanatory notes
Comparative information prescribed by the standard.

All statements are required to be presented with equal prominence.

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Structure and Content

Identification of the Financial Statements


Financial statements must be clearly identified and distinguished from other information in the same
published document, and must identify:
Name of the reporting entity
Whether the financial statements cover the individual entity or a group of entities
The statement of financial position date (or the period covered)
The presentation currency
The level of rounding used.

Statement of Profit or Loss and Other Comprehensive Income


Profit or loss is defined as "the total of income less expenses, excluding the components of other
comprehensive income". Other comprehensive income is defined as comprising "items of income and
expense (including reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other IFRSs".
Total comprehensive income is defined as "the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with owners in their
capacity as owners".
Comprehensive income for the period = Profit or loss + other comprehensive income

Statement of Changes in Equity


Information required to be presented:
Total comprehensive income for the period, showing separately attributable to owners or the parent
and non-controlling interest
For each component of equity, the effects of retrospective application/restatement recognised in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Amount of dividends recognised as distributions to owners during the period (can alternatively be
disclosed in the notes)
For each component in equity a reconciliation between the carrying amount at the beginning and end
of the period, separately disclosing each change
- profit or loss
- other comprehensive income
- transactions with owners, showing separately contributions by and distributions to owners and
changes in ownership interests in subsidiaries that do not result in a loss of control

Statement of Financial Position (Balance Sheet)


Present current and non-current items separately; or
Present items in order of liquidity.

Current assets Current liabilities


Expected to be settled in the entitys normal
operating cycle

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Expected to be realised in, or is intended for Held primarily for trading
sale or consumption in the entitys normal Due to be settled within 12 months
operating cycle The entity does not have an unconditional right
Held primarily for trading to defer settlement of the liability for at least 12
Expected to be realised within 12 months months.
Cash or cash equivalents.
All other liabilities are required to be classified as
All other assets are required to be classified as non-current.
non-current.

Notes to the Financial Statements


Statement of compliance with IFRSs
Significant accounting policies, estimates, assumptions, and judgements must be disclosed
Additional information useful to users understanding/ decision making to be presented
Information that enables users to evaluate the entitys objectives, policies and processes for managing
capital.

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END OF CHAPTER QUESTIONS

1. Nov, 2012 Q1
(a) In accordance with IAS 1 Presentation of Financial Statements, explain:
(i) the components of a complete set of Financial Statement, and (2 marks)
(ii) the Elements of Financial Statement (4 marks)

Solution

Elements of Financial Statements


Financial statements portray the financial effect of transactions and other events by grouping them
into broad classes according to their economic characteristics. These broad classes are termed the
Elements of Financial Statements.

The elements directly related to the measurement of Financial Position in the Statement of financial
position are: Assets, Liabilities and Equity. Assets and Liabilities are sub-divided into Non-Current
and Current Assets and Liabilities.

The Elements directly related to the measurement of performance in the statement of comprehensive
income are Expenses and Income.

Expenses is sub-divided into Expenses and Losses while Income is sub-divided into
Sales/Revenue/Turnover and Gains.

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INVENTORIES - IAS 2

Definition
Inventories include
assets held for sale in the ordinary course of business (finished goods),
assets in the production process for sale in the ordinary course of business (work in process), and
materials and supplies that are consumed in production (raw materials).

Scope
IAS 2 excludes certain inventories from its scope:
construction contracts (IAS 11 Construction Contracts),
financial instruments (IAS 39 Financial Instruments: Recognition and Measurement), and
biological assets (IAS 41 Agriculture).

Also, IAS 2 does not apply to the measurement of inventories held by:
Producers of agricultural and forest products measured at NRV
Minerals and mineral products measured at NRV
Commodity brokers who measure inventory at fair value less costs to sell.

Fundamental Principle of IAS 2


Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories

Cost
Inventory cost should include all:
costs of purchase (including taxes, transport, and handling)
net of trade discounts received
costs of conversion (including fixed and variable manufacturing overheads) and
other costs incurred in bringing the inventories to their present location and condition.

Inventory cost should not include:


abnormal waste
storage costs
administrative overheads unrelated to production
selling costs
interest cost (where settlement is deferred).

Net Realisable Value


NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion
and the estimated costs to make the sale.

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Stock Valuation

Cost Formulas:
For non-interchangeable items:
- Specific identification.

For interchangeable items, either:


- FIFO
- Weighted average cost.
Use of LIFO is prohibited.

Measurement Techniques:
The standard cost and retail methods may be used for the measurement of cost, provided that the results
approximate actual cost.

Standard cost method


Takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation.
They are regularly reviewed and, if necessary, revised in the light of current conditions.

Retail method
Often used in the retail industry for measuring inventories of large numbers of rapidly changing items
with similar margins for which it is impracticable to use other costing methods. The cost of the inventory
is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.

Write-Down to Net Realisable Value


NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion
and the estimated costs necessary to make the sale. Any write-down to NRV should be recognized as an
expense in the period in which the write-down occurs.

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END OF CHAPTER QUESTIONS

1. May, 2011 Q5
(b) Using relevant principles from relevant accounting standards, explain how the following
transactions and/or economic events should be treated in the 2010 nancial statements of Nuhu
Ltd:

(i) The company has 2000 items in inventory at a total production cost per unit of GH4. The
best estimate of the selling price of the total inventory at the date is GH6,500, and it is
anticipated that GH250 would be incurred in making the sale.
(3 marks)
Solution
(b)
i. According to IAS 2, accounting for inventory, inventories are valued at the lower of cost or net
realizable value (NRV). The cost of stock is GH8,000 and the NRV is GH250 (GH6,500
GH250). The carrying value of the stock is therefore GH6,250. The loss in the value of stock
GH1,750 (GH8,000 GH6,250). The loss in the value of stock of GH1,750 (GH 8,000 GH
6,250) should be written off in the income statement.

2. Nov, 2013 Q1
(a) (i)
The IASBs Framework for the Preparation and Presentation of Financial Statements requires financial
statements to be prepared on the basis that they comply with certain accounting concepts (underlying
assumptions) such as:
1. Matching/Accruals
2. Prudence
3. Comparability
4. Materiality

Required:
Briefly explain the meaning of each of the above concepts/assumptions. (4 marks)

(ii)
For most entities, applying the appropriate concepts/assumptions in Accounting for Inventories is an
important element in preparing their financial statements.

Required:
Illustrate with examples how each of the concepts/assumptions in (i) above, may be applied to
Accounting for Inventories. (6 marks)

Solution

Accounting for Inventory


Accounting for inventory, by adjusting purchases for opening and closing inventories is a classic
example of the application of the accruals principle whereby revenues earned are matched with costs
incurred. Closing inventory is by definition an example of goods that have been purchased, but not

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yet consumed. In other words the entity has not yet had the benefit (i.e. the sales revenue they will
generate) from the closing inventory; therefore the cost of the closing inventory should not be charged
to the current years income statement.

At the year end, the value of an entitys closing inventory is, by its nature, uncertain. In the next
accounting period it may be sold at a profit or loss. Accounting standards require inventory to be
valued at the lower of cost and net realizable value. This is the application of prudence. If the
inventory is expected to sell at a profit, the profit is deferred (by valuing inventory at cost) until it is
actually sold. However, if the goods are expected to sell for a (net) loss, then that loss must be
recognized immediately by valuing the inventory as its net realizable value.

There are many acceptable ways of valuing inventory (e.g. Average Cost or FIFO). In order to meet
the requirement of comparability, an entity should decide on the most appropriate valuation method
for its inventory and then be consistent in the use of that method. Any change in the method of valuing
(or accounting for) inventory world break the principle of comparability.

For most businesses inventories are a material item. An error (omission or misstatement) in the value
or treatment of inventory has the potential to affect decisions users may make in relation to financial
statements. Therefore (correctly) accounting for inventory is material event. Conversely there are
occasions where on the grounds of immateriality certain inventories are not (strictly) accounted for
correctly. For example, at the year-end a company may have an unused supply of stationery.
Technically this is inventory, but in most cases companies would charge this inventory of stationary
to the income statement of the year in which it was purchased rather than show it as an asset.

Note: other suitable examples would be acceptable.

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ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS - IAS 8

ACCOUNTING POLICIES

Definition
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting financial statements.

Selection and application of accounting policies:

If a standard or interpretation deals with a transaction, use that standard or interpretation

If no standard or interpretation deals with a transaction, judgment should be applied. The following
sources should be referred to, to make the judgement:
- Requirements and guidance in other standards/interpretations dealing with similar issues
- Definitions, recognition criteria in the framework

Consistency of accounting policies:


Policies should be consistent for similar transactions, events or conditions.

Only change a policy if:

Standard/interpretation requires it, or

Change will provide more relevant and reliable information.

Principle
If change is due to new standard /interpretation, apply transitional provisions.
If no transitional provisions, apply retrospectively.
If impractical to determine period-specific effects or cumulative effects of the error, then retrospectively
apply to the earliest period that is practicable.

CHANGES IN ACCOUNTING ESTIMATES

Definition
A change in an accounting estimate is an adjustment of the carrying amount of an asset or liability, or
related expense, resulting from reassessing the expected future benefits and obligations associated with
the asset or liability.

Principle
Recognise the change prospectively in profit or loss in:

Period of change, if it only affects that period; or

Period of change and future periods (if applicable).

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ERRORS

Definition
Prior period errors are omissions from, and misstatements in, an entitys financial statements for one or
more prior periods arising from failure to use/misuse of reliable information that:

Was available when the financial statements for that period were issued

Could have been reasonably expected to be taken into account in those financial statements.

Errors include:

Mathematical mistakes

Mistakes in applying accounting policies

Oversights and misinterpretation of facts

Fraud.

Principle
Correct all errors retrospectively

Restate the comparative amounts for prior periods in which error occurred or if the error occurred
before that date restate opening balance of assets, liabilities and equity for earliest period presented.

If impractical to determine period-specific effects of the error (or cumulative effects of the error), restate
opening balances (restate comparative information) for earliest period practicable.

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END OF CHAPTER QUESTIONS

1. May, 2011 Q5
(b) Using relevant principles from relevant accounting standards, explain how the following
transactions and/or economic events should be treated in the 2010 nancial statements of Nuhu
Ltd:

(ii) The management of the company determined that it should increase its provision for
irrecoverable accounts receivable from 3% to 5%. (2 marks)

Solution
(b)
ii. The change in the provision for irrecoverable accounts receivable from 3% - 5% by management
can be described as a change in accounting estimate. The requirements of IAS 8 provides that
the effect of a change in accounting estimate should be included in the income statements in the
period of the change and in subsequent periods should be included in the same income or
expense classification as was used for the original estimate and finally if the effect of the change
is material, its nature and amount must be disclosed. From the above, increase of 2% must be
included in the income statement and subsequently the income statement of financial position
and if material, the change must be disclosed.

2. Nov, 2016 Q2
b) According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity
must select and apply its accounting policies consistently from one period to the next and among
various items in the financial statements. However, an entity may change its accounting policies
under certain conditions.
Required:
Identify the circumstances under which it may be appropriate to change accounting policy in
accordance with the guidance given in IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. (2 marks)

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EVENT AFTER THE REPORTING PERIOD IAS 10

Event after the Reporting Period: Favourable or unfavourable event, that occurs between the reporting
date and the date that the financial statements are authorised for issue.

Adjusting Event
An event after the reporting date that provides further evidence of conditions that existed at the reporting
date.

Examples:
Events that indicate that the going concern assumption in relation to the whole or part of the entity is
not appropriate

Settlement after reporting date of court cases that confirm the entity had a present obligation at
reporting date

Bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date
on trade receivables

Sales of inventories after reporting date that give evidence about their net realisable value at reporting
date

Determination after reporting date of cost of assets purchased or proceeds from assets sold, before
reporting date

Discovery of fraud or errors that show the financial statements are incorrect.

Financial statements are adjusted for conditions that existed at reporting date.

Going Concern Issues Arising after end of the Reporting Period


An entity shall not prepare its financial statements on a going concern basis if management determines
after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or
that it has no realistic alternative but to do so.

Non-Adjusting Event
An event after the reporting period that is indicative of a condition that arose after the end of the reporting
period.

Examples:
Major business combinations or disposal of a subsidiary
Major purchase or disposal of assets, classification of assets as held for sale or expropriation of major
assets by government
Destruction of a major production plant by fire after reporting date
Announcing a plan to discontinue operations
Announcing a major restructuring after reporting date
Major ordinary share transactions
Abnormal large changes after the reporting period in assets prices or foreign exchange rates

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Changes in tax rates or tax law
Entering into major commitments such as guarantees
Commencing major litigation arising solely out of events that occurred after the reporting period.

Financial statements are not adjusted for condition that arose after the reporting date.

Dividends
Dividends that are declared after reporting date are non-adjusting events.

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END OF CHAPTER QUESTIONS

1. May, 2011 Q5
(b) Using relevant principles from relevant accounting standards, explain how the following
transactions and/or economic events should be treated in the 2010 nancial statements of Nuhu
Ltd:

(iii) The companys nancial statements for the year ended 31 December 2010 were completed
on 31 March 2011 and were authorized for issue on 9 May 2011. In April 2010, it transpired
that fraud had been committed at one of the divisions and that the gure for revenues was
overstated by 20%. (3 marks)

Solution
(b)
iii. Under IAS 10, an event after the reporting date is an event which occurs between the financial
period end and the date on which the financial statements are approved by the Board of
Directors. The fraud committed at one of the divisions resulting in the overstatement of revenue
by 20% is an adjusting event which requires the financial statements to be adjusted before issue
on 9th May 2011 by restating revenues less 20% and loss arising from the fraud charged against
profit. This is because the condition (revenues) existed at the financial year end of 31st December
2010.

2. Nov, 2013 Q4
(a) Supply Products Ltd. is a large paper manufacturing company. The companys Finance Director
is working on the published accounts for the year ended 31st March 2013. The Chief Accountant
has prepared the following list of problems which will have to be resolved before the statements
can be finalized.

Events after the reporting date (IAS 10)


A fire broke out at the companys Spincity factory on 4th April, 2013. This has destroyed the
factorys administration block. Most of the costs incurred as a result of this fire were uninsured.
A major customer went into liquidation on 27th April, 2013. The customers balance at 31st March
2010 remains unpaid. The receiver has intimated that unsecured payables will receive very little
compensation, if any.

Required:
Explain how each of these matters should be dealt with in the published accounts for the year
ended 31st March, 2013 in the light of the International Financial Reporting Standards referred
to above. You should assume that the amounts involved are material in each case.
(2.5 marks)
Solution
IAS 10 Events after the Reporting Date divides such events into two categories: adjusting events and
non-adjusting events. Adjusting events provide additional evidence of conditions existing at the
reporting date, while non-adjusting events relate to conditions that did not exist at the reporting date.

The fire broke out on 4th April, after the reporting date on 31 March, so this is a non-adjusting event.
There is no evidence of a fire sincerely simmering at the reporting date and exploding into life on 4th

22
April; the evidence is that there was no fire at 31st March. So the details of the fire should be disclosed
in a note to the accounts, so that readers can reach a proper understanding of the companys affairs.

The major customer went into liquidation on 27th April. However the customer owed a material
balance on 31 March and it is now clear that this balance is not recoverable. The liquidation is therefore
an adjusting event, and supper Paper Products should write off the bad debt in its financial statement
prepared to 31st March, 2010.

3. Nov, 2016 Q2
d) Suame Ltd is a listed telecommunication company which prepares its financial statements for the
year ended 31 October, 2015 in accordance with IFRS. The financial statements are due to be
authorised for issue on 15 January 2016.
i) Suame Ltd holds an investment in the shares of a listed company, Asafo Ltd. During
November 2015 there was a material fall in the value of Asafo Ltds shares. Analysts attribute
the fall in value principally to a fraud dating back to December 2014 that was discovered by
Asafo Ltd's management and announced publicly in November 2015.
ii)In December 2015, the directors of Suame Ltd publicly announced a plan to reduce the
workforce by 10% as a result of worsening economic conditions.
Required:
Discuss the effects of each of the above items on the financial statements of Suame Ltd for the
year ended 31 October 2015 in accordance with IAS 10 Events after the Reporting Period.
(4 marks)
Solution
i) The fall in value relates to conditions that arose after the end of the reporting period. Therefore,
the fall in value is a non-adjusting event after the reporting period.
Whilst the effect of the fraud may be an adjusting event in Asafo Ltds own financial statements,
it is not an adjusting event for the value of the company's shares on the stock market as that
market value was based on all information available at that time (for example investors who
purchased shares on 31 December at the market price on that date would not be able to make a
claim against the previous owner when the fraud was discovered).
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the
reporting period, disclosure will be made of:
the nature of the event
the amount of the financial effect, ie fall in value (2 marks)

ii) The announcement of plans to restructure creates a constructive obligation to do a restructuring.


As a result, a restructuring provision will be recognised from that date, providing the IAS 37
criteria are met. However, no legal or constructive obligation existed to restructure at the 31
October 2015 year end and this is therefore a non-adjusting event after the reporting period.
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the
reporting period, disclosure will be made of:
The nature of the event
The amount of the financial effect, ie the expected restructuring costs. (2 marks)

23
PROPERTY, PLANT AND EQUIPMENT IAS 16

Scope
The standard applies to property, plant, and equipment.

IAS 16 does not apply to


assets classified as held for sale in accordance with IFRS 5
exploration and evaluation assets (IFRS 6)
biological assets related to agricultural activity (IAS 41) or
mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources

Recognition
Recognise when it is probable that:
The future economic benefits associated with the asset will flow to the entity; and
The cost of the asset can be reliably measured.

Measurement:
Initially recorded at cost
Subsequent costs are only recognised if costs can be reliably measured and these will lead to additional
economic benefits flowing to the entity.

Cost comprises:
Purchase price plus import duties and taxes
Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in a manner intended by management
The initial estimate of the costs of dismantling and removing the item and restoring the site on which
it is located.

Measurement Subsequent To Initial Recognition


IAS 16 permits two accounting models:

Cost Model:
The asset is carried at cost less accumulated depreciation and impairment.

Depreciation
The depreciable amount is allocated on a systematic basis over the assets useful life

The residual value, the useful life and the depreciation method of an asset are reviewed annually at
reporting date

Changes in residual value, depreciation method and useful life are changes in estimates are accounted
for prospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Depreciation is charged to profit or loss, unless it is included in the carrying amount of another asset

Depreciation commences when the asset is available for use.

24
Revaluation Model:
The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be measured reliably.

Revaluations should be carried out regularly (the carrying amount of an asset should not differ
materially from its fair value at the reporting date either higher or lower)

Revaluation frequency depends upon the changes in fair value of the items measured (annual
revaluation for volatile items or intervals between 3 - 5 years for items with less significant changes)

If an item is revalued, the entire class of assets to which that asset belongs is required to be revalued

Revalued assets are depreciated the same way as under the cost model

Transfer between reserves depreciation on revaluation amount

An increase in value is credited to other comprehensive income under the heading revaluation surplus
unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an
expense, in this case the increase in value is recognised in profit or loss.

Component accounting
Significant parts/components are required to be depreciated over their estimated useful life

Costs of replacing components are required to be capitalised

Continued operation of an item of property, plant and equipment (PPE) may require regular major
inspections for faults regardless of whether parts of the item are replaced. When each major inspection
is performed, its cost is recognised in the carrying amount of the item of PPE as a replacement if the
recognition criteria are satisfied.

Spare parts, stand-by or servicing equipment


Are classified as PPE when they meet the definition of PPE, and are classified as inventory when definition
is not met.

Disposals
Remove the asset from the statement of financial position on disposal or when withdrawn from use
and no future economic benefits are expected from its disposal
The gain or loss on disposal is the difference between the proceeds and the carrying amount and is
recognised in profit or loss
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings. The transfer to retained earnings is not made through profit or loss.

Recoverability of the Carrying Amount


IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An
item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable
amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim
becomes receivable.

25
Derecognition (Retirements and Disposals)
An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no
future economic benefits are expected from its disposal. The gain or loss on disposal is the difference
between the proceeds and the carrying amount and should be recognized in the income statement.

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories
at their carrying amounts as they become held for sale in the ordinary course of business.

26
ACCOUNTING FOR GOVERNMENT GRANTS IAS 20

Government grants:
Assistance by government

In the form of transfers of resources to an entity

In return for past or future compliance with certain conditions relating to the operating activities of the
entity

Exclude forms of government assistance which cannot reasonably have a value placed on them and
which cannot be distinguished from the normal trading transactions of the entity.

The standard does not deal with:


Government assistance that is provided for an entity in the form of benefits that are available in
determining taxable income or are determined or limited to the basis of income tax liability

Government participation in the ownership of an entity

Government grants covered by IAS 41 Agriculture.

Types of Government Grants

Grants Related To Income


A grant receivable as compensation for costs, either:
Already incurred
For immediate financial support, with no future related costs.

Recognise as income in the period in which it is receivable.

A grant relating to income may be presented in one of two ways:


Separately as other income
Deducted from the related expense.

Grants Related To Assets


A grant relating to assets may be presented in one of two ways:
As deferred income (and released to profit or loss when related expenditure impacts profit or loss)
By deducting the grant from the assets carrying amount.

Recognition of Grants

Grants Related To Income


Grants are recognised when both:
There is reasonable assurance the entity will comply with the conditions attached to the grant
The grant will be received.

Grants Related To Assets


The grant is recognised as income over the period necessary to match it with the related costs, for which
it is intended to compensate on a systematic basis and should not be credited directly to equity.
27
Non-Monetary Grants
Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although
recording both the asset and the grant at a nominal amount is permitted.

28
END OF CHAPTER QUESTIONS

1. Nov, 2012 Q1
(b) A company received two separate grants during the year from the United Kingdom government.
The first grant, an amount of GH500,000 was given to acquire an Electricity Plant, whilst the
second grant of GH50,000 was to support the training of electrical engineers on the Electrical
Plant.

The Plant was estimated to have an economic life of 25 years.


Required:
Detail out the treatment of the above events in accordance with IAS 20 Accounting for
Government Grant and disclosure of Government assistance. (4 marks)

Solution

There are two types of Government Grants

The first is a Government Grant related to Assets, while the second is a grant Related to Income.

Grant Related to Assets: - are government grants whose primary conditions is that an entity
qualifying for them should purchase, construct, or otherwise, acquire long-term assets.

Grant related to Assets, shall be presented in the statement of financial position either
(i) by setting up the grant as deferred income and amortized over the useful life of the Assets
or
(ii) by deducting the grant in arriving at the carrying amount of the asset.

Of the above treatment the first (i) is preferred.

Therefore the Grant of GH500,000 will be amortized at the annual rate GH20,000.

Grant related to Income are Government Grants other than those related to Assets.

Grant related to income are:

(i) sometimes presented as a credit in the statement of Comprehensive Income as other


separately or

(ii) they are deducted in exporting the related expense

Of the two methods of treating grant related to Income the first (i) method is preferred. Thus
the grant GH50,000 will be credited to the statement of comprehensive income as a gain.

29
BORROWING COSTS - IAS 23

Definitions

Borrowing Costs
Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of
funds

Borrowing costs may include:


- Interest on bank overdrafts and short-term and long-term borrowings (including intercompany
borrowings)
- Amortisation of discounts or premiums relating to borrowings
- Amortisation of ancillary costs incurred in connection with the arrangement of borrowings
- Finance charges in respect of finance leases
- Exchange differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs.

Qualifying Asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale

Examples include:
- Inventories (that are not produced over a short period of time)
- Manufacturing plants
- Power generation facilities
- Intangible assets
- Investment properties.

Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are required to be capitalised as part of the cost of that asset
Other borrowing costs are recognised as an expense when incurred
If funds are borrowed specifically, the amount of borrowing costs eligible for capitalisation are the
actual borrowing costs incurred on that borrowing less any investment income on the temporary
investment of any excess borrowings not yet used
If funds are borrowed generally, the amount of borrowing costs eligible for capitalisation are
determined by applying a capitalisation rate (weighted average of borrowing costs applicable to the
general borrowings) to the expenditures on that asset
- The amount of the borrowing costs capitalised during the period cannot exceed the amount of
borrowing costs incurred during the period.

Capitalisation commences when:


Expenditures for the asset are being incurred

30
Borrowing costs are being incurred
Activities that are necessary to prepare the asset for its intended use or sale are in progress.

Capitalisation is suspended during extended periods in which active development is interrupted.

Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete.

When the construction of a qualifying asset is completed in parts and each part is capable of being used
while construction continues on other parts, capitalisation of borrowing costs ceases when substantially
all the activities necessary to prepare that part for its intended use or sale are completed.

31
END OF CHAPTER QUESTIONS

1. Nov, 2011 Q4
(b) IAS 23 Borrowing Costs regulates the extent to which entities are allowed to capitalize
borrowing costs incurred on money borrowed to finance the acquisition of certain assets. Biakoye
Ltd is a retail supermarket chain which constructs its own malls.

On 1 January, 2010, it started the construction of a supermarket. It acquired 50-year leasehold


interest in the site for GH3 million. The construction of the building cost GH9 million and
fixtures and fittings cost GH6 million.

Fixtures and fittings would have an estimated economic useful life of ten years. The construction
was completed on 30th September, 2010 and was put to use immediately. The building is expected
to have a useful life of 50 years. Biakoye Ltd borrowed GH18 million on 1st January, 2010 to
finance the project. The loan carried an interest rate of 10% p.a. and was repaid on 30th June, 2011.

Required:
i. State the conditions to be met for:
(a) Capitalization of borrowing costs to commence. (3 marks)
(b) Capitalization of borrowing costs to cease. (3 marks)

ii. Assuming that borrowing costs are capitalized where appropriate, calculate
(a) the carrying amount to be included in non-current assets in respect of the Shopping mall
at 31st December 2010. (3 marks)
(b) the total amount to be charged to the income statement in respect of the interest expense
and depreciation for the year to 31st December, 2010. (3 marks)

Solution
b)
i. Commencement of Capitalization
The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence
when:
(a) expenditures for the asset are being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.

Cessation of Capitalisation
Capitalisation of borrowing costs shall cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.

An asset is normally ready for its intended use or sale when the physical construction of the
asset is complete even though routine administrative work might still continue. If minor

32
modifications, such as the decoration of a property to the purchasers or users specification,
are all that are outstanding, this indicates that substantially all the activities are complete.

When the construction of a qualifying asset is completed in parts and each part is capable of
being used while construction continues on other parts, capitalisation of borrowing costs shall
cease when substantially all the activities necessary to prepare that part for its intended use or
sale are completed.

ii.
Income of financial position for the year ended 31 December 2010 (extract)
GH000
Depreciation charge 272,500
Interest expenses (10% of GHS18m x 3/12) 450,000

Statement of financial position for the year ended 31 December 2010 (extract)
GH000
Shopping mall 19,350,000
Depreciation 272,550
19,077,450

Workings

Initial recognised cost GH


Cost
Leasehold land 3,000,000
Building 9,000,000
Fixtures and fittings 6,000,000
18,000,000
Capitalised borrowing cost:
10% of GHS18m x 9/12 1,350,000
19,350,000

Depreciation calculation for 2010


Land GHS3,000,000/50 years 60,000
Building (9,810,000/50 years x 3/12)+ 49,050
Fixtures and fittings (6,540,000/10year x 3/12)+ 163,500
272,550

The capitalised borrowing cost is apportioned between the building and the furniture and
fittings for the purpose of determining the depreciation value of the different components of
the complex item of PPE. Land is not qualifying asset.

The interest expense relating to 1 October 2010 to 31 December 2010, which cannot be
capitalised (because the mall was completed and available for use) has to be expensed.

33
2. May, 2013 Q1
b.

ii. Adom Ltd had the following loans in place at the beginning and end of 2012

1 January 31 December
2012 2012
GH GH
12.5% Debenture stocks (repayable in 2015) 480,000 480,000
15% Bank loan [repayable in 2014] 320,000 320,000

On 1 January 2012 the company began the construction of a qualifying asset, a piece of machine
for hydroelectric plant at a cost of GH400,000, using existing borrowings (the 12.5% debenture
and the 15% bank loan). Expenditure drawn down for the construction was GH120,000 on 1
January 2012; GH80,000 on 1 May 2012 and GH200,000 on 1 October 2012. The machine was
completed and put to use on 31 December 2012.

Required:
Calculate the borrowing costs to be capitalized for the machine. (5 marks)

Solution

Weighted Average rate = 480,000 0.6 x 12.5% 7.5%


320,000 0.4 x 15% 6%
13.5%

GH
Borrowing Costs = 13.5% x 120,000 16,200
13.5% x 80,000 x 8/12 7,200
13.5% x 200,000 x 3/12 6,750
30,150

34
IMPAIRMENT OF ASSETS IAS 36

Scope
All assets, except: inventories, construction contracts, deferred tax assets, employee benefits, financial
assets, investment property, biological assets, insurance contract assets, and assets held for sale.

Nearly all assets current and non-current are subject to an impairment test to ensure that they are not
overstated on balance sheets.

The basic principle of impairment is that an asset may not be carried on the balance sheet above its
recoverable amount.

Assets to be reviewed
Individual Assets
Cash-Generating Units (CGUs)

CGUs are the smallest identifiable group of assets that generates cash flows that are independent of the
cash inflows from other assets or group of assets.

Recoverable amount is calculated at the individual asset level. However, an asset seldom generates cash
flows independently of other assets, and most assets are tested for impairment in groups of assets
described as cash-generating units (CGUs). Eg. Assembly Line which is made up of identifiable group of
assets.

IMPAIRMENT = Carrying Amount > Recoverable Amount

Recoverable Amount = Higher of fair value less costs of disposal and its value in use.

Fair value less costs of disposal is the amount obtainable in an arms length transaction less costs of
disposal.

Fair value
Binding sale agreement.
Market price in an active market.

Costs of disposal
Incremental costs attributable to the disposal of an asset.

Value in use represents the discounted future net pre-tax cash flows from the continuing use and ultimate
disposal of the asset.

When to Test for Impairment


All assets subject to the impairment guidance are tested for impairment where there is an indication that
the asset may be impaired. Indicators are assessed at each reporting date.

Certain assets (goodwill, indefinite lived intangible assets and intangible assets that are not yet available
for use) are also tested for impairment annually even if there is no impairment indicator.

35
Internal Indicators
Evidence of obsolescence or physical damage
Discontinuance, disposal or restructuring plans
Declining asset performance.

External Indicators
Significant decline in market value
Changes in technological, market, economic or legal environment
Changes in interest rates
Low market capitalisation.

When to Reverse Impairment?

Internal Indicators
Changes in way asset is used or expected to be used
Evidence from internal reporting indicates that economic performance of the asset will be better than
expected.

External Indicators
Significant increase in market value
Changes in technological, market, economic or legal environment
Changes in interest rates
Market interest rates have decreased.

36
END OF CHAPTER QUESTIONS

1. May 2014 Q4
(b) Pramso Ltd has a product line producing processed cocoa beans for export. The carrying amount
of the net assets employed on the line as at 31 December 2012 was GH572,000. There is an
indication that the export market would be adversely affected in 2015 by competition from
producers of synthetic cocoa. The Finance Director estimates the net realizable value of the net
assets as at 31/12/2012 to be only GH350,000.

The board of directors has approved a budget for the years ended 31/12/2013, 31/12/2014 and
31/12/2015.

The assumptions underlying the budgets are:

Unit costs and revenue GH


Selling price 50
Buy in cost (20)
Production cost:
Materials, Labour & Overhead (3.75)
Head office overhead apportioned (1.25)
Cash inflow per unit 25.00

Estimated sales volume 2012 2013 2014 2015


Estimates at 31/12/2012 - 8,000 11,000 4,000

The rate obtained elsewhere for companies in the same industry with similar size and risk profile
(equivalent to discount factor) is 10% per annum.

Required:
Calculate the impairment loss if any for 31/12/2012. (5 marks)

Solution
(b)
Value in use = DCF of future cash flows:
Year Cash Flows DF PV
GH GH
2013 200,000 [25 x 8,000] 0.909 181,800
2014 275,000 [25 x 11,000] 0.826 227,150
2015 100,000 [25 x 4,000] 0.751 75,100
484,050

Net Realisable Value 350,000

Carrying Amount 572,000

Impairment Loss = Carrying Amount - Recoverable Amount


= GH572,000 - GH484,050
= GH87,950
37
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS - IAS 37

Scope
Excludes provisions, contingent liabilities and contingent assets arising from:
Non-onerous executory contracts
Those covered by other IFRSs:
- IAS 11 Construction Contracts
- IAS 12 Income Taxes
- IAS 17 Leases
- IAS 19 Employee Benefits
- IFRS 4 Insurance Contracts.

Key Definitions

Provision: a liability of uncertain timing or amount.

Liability:
present obligation as a result of past events
settlement is expected to result in an outflow of resources (payment)

Contingent Liability:
A possible obligation that arises from past events, whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the
entity; or
A present obligation that arises from past events that is not recognised because it is not probable that
an outflow of resources embodying economic benefits will be required to settle the obligation or the
amount of the obligation cannot be measured reliably.

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

Recognition

Provisions
Provisions are recognised when:
The entity has a present legal or constructive obligation as a result of a past event
It is probable that an outflow or economic benefits will be required to settle the obligation; and
A reliable estimate can be made of the amount of the obligation.

Contingent Liabilities
Contingent liabilities are not recognised.

38
Contingent Assets
Contingent assets are not recognised.

Measurement
Provisions are measured at the best estimate of the expenditure required to settle the present obligation
at reporting date
In determining the best estimate, the related risks and uncertainties are taken into account
Where the effect of the time value of money is material, the amount of the provision is the present value
of the expenditures expected to be required to settle the obligation. The discount rate used is a pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the
liability
- The discount rate does not reflect risks for which future cash flow estimates have been adjusted.
Future events that may affect the amount required to settle the obligation are reflected in the amount
of the provision where there is sufficient objective evidence that they will occur
Gains from the expected disposal of assets are not taken into account in measuring the provision
Reimbursements from third parties for some or all expenditure required to settle a provision are
recognised only when it is virtually certain that the reimbursement will be received. The
reimbursement is treated as a separate asset, which cannot exceed the amount of the provision
Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate
If it is no longer probable that an outflow of economic benefits will be required to settle the obligation,
the provision is released
Provisions are not recognised for future operating losses.

Onerous Contracts
Onerous contract one where the unavoidable costs of meeting the obligations under the contract
exceed the economic benefits expected to be received under it
For onerous contract, the provision is recognised and measured at the lower of:
- The cost of fulfilling the contract
- The costs/penalties incurred in cancelling the contract.
Before a separate provision for an onerous contract is recognised, an entity recognises any impairment
loss (IAS 36 Impairment of Assets) that has occurred on assets dedicated to that contract.

Some Examples of Provisions


Circumstance Recognize a Provision?
Restructuring by sale of an Only when the entity is committed to a sale, i.e. there is a binding sale
operation agreement
Restructuring by closure or Only when a detailed form plan is in place and the entity has started
reorganization to implement the plan, or announced its main features to those
affected. A Board decision is insufficient.
Warranty When an obligating event occurs (sale of product with a warranty and
probable warranty claims will be made).
Land contamination A provision is recognised as contamination occurs for any legal
obligations of clean up, or for constructive obligations if the
company's published policy is to clean up even if there is no legal

39
requirement to do so (past event is the contamination and public
expectation created by the company's policy)
Customer refunds Recognise a provision if the entity's established policy is to give
refunds (past event is the sale of the product together with the
customer's expectation, at time of purchase, that a refund would be
available)
Offshore oil rig must be Recognise a provision for removal costs arising from the construction
removed and sea bed restored of the oil rig as it is constructed, and add to the cost of the asset.
Obligations arising from the production of oil are recognised as the
production occurs.
Abandoned leasehold, four A provision is recognised for the unavoidable lease payments
years to run, no re-letting
possible
CPA firm must staff training No provision is recognised (there is no obligation to provide the
for recent changes in tax law training, recognise a liability if and when the retraining occurs)
Major overhaul or repairs No provision is recognised (no obligation)
Onerous (loss-making) Recognise a provision [IAS 37.66]
contract
Future operating losses No provision is recognised (no liability)

Restructurings
A restructuring is:
sale or termination of a line of business
closure of business locations
changes in management structure
fundamental reorganizations.

Restructuring provisions should be recognised as follows:


Sale of operation: recognise a provision only after a binding sale agreement
Closure or reorganization: recognise a provision only after a detailed formal plan is adopted and has
started being implemented, or announced to those affected. A board decision of itself is insufficient.
Future operating losses: provisions are not recognised for future operating losses, even in a
restructuring
Restructuring provision on acquisition: recognise a provision only if there is an obligation at
acquisition date [IFRS 3.11]

Restructuring provisions should include only direct expenditures necessarily entailed by the
restructuring, not costs that associated with the ongoing activities of the entity.

40
END OF CHAPTER QUESTIONS

1. Nov, 2013 Q4
(a) Supply Products Ltd. is a large paper manufacturing company. The companys Finance Director
is working on the published accounts for the year ended 31st March 2013. The Chief Accountant
has prepared the following list of problems which will have to be resolved before the statements
can be finalized.

Possible Contingent Liabilities (IAS 37)


One of the companys employees was injured during the year. He had been operating a piece of
machinery which had been known to have a faulty guard. The companys lawyers have advised
that the employees has a very strong case, but will be unable to estimate the likely financial
damages until further medical evidence becomes available.

One of the companys customers is claiming compensation for the losses sustained as a result of
a delayed delivery. The customer had ordered a batch of cut sheet with the intention of
producing leaflets to promote a special offer. There was a delay in supplying the paper and the
leaflets could not be prepared in time. The companys lawyers have advised that there was no
specific agreement to supply the goods in time for this promotion and furthermore, that it would
be almost impossible to attribute the failure of the special offer to the delay in the supply of the
paper.

Required:
Explain how each of these matters should be dealt with in the published accounts for the year
ended 31st March, 2013 in the light of the International Financial Reporting Standards referred
to above. You should assume that the amounts involved are material in each case.
(2.5 marks)

Solution
IAS 37 Provision, Contingent Liabilities and contingent Assets defines a contingent liability as:
(i) A possible obligation that arises from past events and shoes existence will be confirmed only by
the occurrence of one or more uncertain future evens not wholly within the control of the
enterprise; or
(ii) A present obligation that arises from past events but is not recognized because:
It is not probable that a transfer of economic benefits will be required to settle the obligation:
or
The amount of the obligation cannot be measured with sufficient reliability.

Unless the possibility of any transfer in settlement is remote, an enterprise is required by IAS 37 to
disclose for each class of contingent liability at the reporting date a brief description of the nature of
the contingent liability and where practicable.

(i) An estimate of its financial effect;


(ii) An indication of its uncertainties relating to the amount or timing of any outflow; and
(iii) The possibility of any reimbursement.

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A present obligation of the employee arising from his injuries exits, though we are advised that it is
not possible to quantify the liability. There are two possible course of action in accounting for this
inter. The lawyers could be pressed to make a prudent estimate of the amount of damages, perhaps
form preliminary medical reports, and this estimate should then be provided in the account if the
lawyers still insist that such an estimate is impossible, there no point in guessing on a value to accrue.
Instead the facts should be disclosed as contingent liability in a note to the accounts, stating that no
liability has currently been recognized since a fair estimate is impossible. However, it is important
that this note is worded in such a way that no liability is admitted, for this might prejudice the
companys potion in subsequent legal proceedings.
The second case is clearer cut. Lawyers have advised that there was no specific agreement to supply
the paper in time for the promotion, so any possible liability is remote. IAS 37 does not require the
disclosure of remote contingencies; they should be completely ignored in the account if the probability
of an outflow of economic resources is remote.

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INTANGIBLE ASSETS - IAS 38

Definition
Intangible assets - identifiable, non-monetary assets, without physical substance.

Assets - resources, controlled from past events and with future economic benefits expected.

Identifiable if either:
Capable of being separated and sold, licensed, rented, transferred, exchanged or rented separately
Arise from contractual or other legal rights.

Thus, the three critical attributes of an intangible asset are:


identifiability
control (power to obtain benefits from the asset)
future economic benefits (such as revenues or reduced future costs)

Examples of possible intangible assets include:


computer software
patents
copyrights
motion picture films
customer lists
mortgage servicing rights
licenses
import quotas
franchises
customer and supplier relationships
marketing rights

Scope
IAS 38 applies to all intangible assets other than:
financial assets
exploration and evaluation assets (extractive industries)
expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
intangible assets arising from insurance contracts issued by insurance companies
intangible assets covered by another IFRS, such as intangibles held for sale, deferred tax assets, lease
assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3.

Recognition and Measurement

Separate Acquisition
1. Probable expected future economic benefits will flow to the entity; and

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2. Cost can be reliably measured.
Recognition at cost.

Acquired In Business Combination


2. Probable always met if fair value (FV) can be determined; FV reflects expectation of future economic
benefits.

3. Cost FV at acquisition date.


Acquirer recognises it separately from goodwill
Irrespective of whether the acquiree had recognised it before acquisition.

Internally Generated
Research phase expense costs as incurred.

Development phase Capitalise if all criteria are met:


Technical feasibility of completion of intangible asset
Intention to complete
Ability to use or sell the intangible asset
Adequate technical, financial and other resources to complete
Probable future economic benefits
Expenditure measured reliably.

Exchange of Assets
Measure acquired asset at its fair value
If not possible, at book value of asset given up.

Internally Generated Goodwill


Internally generated goodwill is never recognised as it is not an identifiable resource that can be measured
reliably.

Examples include:
Internally generated brands
Customer lists.

Government Grant
Initially recognised at either:
Fair value
Nominal value plus direct expenses to prepare for use.

Examples include:
License to operate national lottery
Radio station.

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Measurement

Cost model
Determine useful life
Residual value assumed zero unless active market exists or a commitment by third party to purchase
the intangible asset exists
Amortisation method
Review above annually
Amortisation begins when available for use.

Revaluation model
Fair value at revaluation date
Fair value determined by referring to active market
If no active market, use cost model
Revaluation done regularly
Credit to revaluation surplus net of Deferred Tax
Transfer to or from retained earnings on realisation.

Indefinite useful lives


No foreseeable limit to future expected economic benefits
Not amortised
Test for impairment annually or when an indication exists
Review annually if events and circumstances still support indefinite useful life
If no longer indefinite change to finite useful life.

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END OF CHAPTER QUESTIONS

1. Nov, 2013 Q4
(a) Supply Products Ltd. is a large paper manufacturing company. The companys Finance Director
is working on the published accounts for the year ended 31st March 2013. The Chief Accountant
has prepared the following list of problems which will have to be resolved before the statements
can be finalized.

Possible Development Expenditure (IAS 38)


The company paid the Engineering Department at Nasem University a large sum of money to
design a new pulping process which will enable the use of cheaper raw materials. This process
has been successfully tested in the Universitys laboratories and is almost certain to be
introduced as Supper Products Ltd.s pulping plant within the next few months.

The company paid a substantial amount to the Universitys Biology Department to develop a
new tree species of tree which could grow more quickly and therefore enable the companys
forest to produce more wood for paper manufacturing. The project met with some success in
that a new tree was developed. Unfortunately, it was prone to disease and the cost of the
chemical sprays needed to keep the wood healthy rendered the tree uneconomical.

Required:
Explain how each of these matters should be dealt with in the published accounts for the year
ended 31st March, 2013 in the light of the International Financial Reporting Standards referred
to above. You should assume that the amounts involved are material in each case.
(2.5 marks)

Solution
IAS 38 Intangible Assets splits research and development expenditure into two categories: research
expenditure and development expenditure. Research expenditure should be written off as incurred;
development expenditure should be carried forward as an asset if all of the following can be
demonstrated:
(i) The technical feasibility of the project;
(ii) The intention to complete the project and used or sell it;
(iii) The ability to use or sell the item;
(iv) How the project will generate probable future economic benefits;
(v) The availability of adequate technical, financial and other resources to complete the project.
(vi) The ability to measure the expenditure reliably.

The new puling process does seem to satisfy the conditions listed above, so the cost to date should be
carried forward in the statement of financial position as an intangible non-current asset.

The attempt to develop a new species of tree definitely fails to satisfy the conditions listed above. It is
not commercially viable and may not overall recover its costs, so expenditures on the project should
be written off as incurred. There is no option to defer any of the related costs to future accounting
periods.

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INVESTMENT PROPERTY IAS 40

Definition
Property (land or a building or part of a building or both) held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital appreciation or both.

They include:
Land held for long-term capital appreciation
Land held for indeterminate future use
Building leased out under an operating lease
Vacant building held to be leased out under an operating lease
Property being constructed/developed for future use as investment property.

They Exclude:
Property held for use in the production or supply of goods or services or for administrative purposes
(IAS 16 Property, Plant and Equipment applies)
Property held for sale in the ordinary course of business or in the process of construction or
development for such sale (IAS 2 Inventories applies)
Property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts
applies)
Owner-occupied property (IAS 16 applies)
Property leased to another entity under a finance lease (IAS 17 applies).

Recognition
Investment property is recognised as an asset when it is probable that the future economic benefits that
are associated with the property will flow to the enterprise, and the cost of the property can be reliably
measured.

Measurement

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

Cost does not include start-up costs, abnormal waste, or initial operating losses incurred before the
investment property achieves the planned level of occupancy.

Subsequent Measurement
An entity can choose between the fair value and the cost model. The accounting policy choice must be
applied to all investment property.

Fair value model


Investment properties are measured at fair value, which is the price that would be received to sell the
investment property in an orderly transaction between market participants at the measurement date
(see IFRS 13 Fair Value Measurement)

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Gains or losses arising from changes in the fair value of investment property must be included in profit
or loss for the period in which it arises
In rare exceptional circumstances if fair value cannot be determined, the cost model in IAS 16 is used
to measure the investment property.

Cost model
Investment property is measured in accordance with requirements set out for that model in IAS 16.

Classification

Property held under an operating lease


A property interest that is held by a lessee under an operating lease may be classified and accounted for
as investment property provided that:
The rest of the definition of investment property is met
The operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases
The lessee uses the fair value model set out in IAS 40 for all investment properties.

Partial own use


If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation,
and the portions can be sold or leased out separately, they are accounted for separately. The part that
is rented out is investment property
If the portions cannot be sold or leased out separately, the property is investment property only if the
owner-occupied (property, plant and equipment) portion is insignificant.

Provision of ancillary services to occupants


If those services (e.g. security or maintenance services) are a relatively insignificant component of the
arrangement as a whole, then the entity may treat the property as investment property.

Where the services provided are more significant (such as in the case of an owner-managed hotel), the
property should be classified as owner-occupied property, plant and equipment.

Inter-company rentals
Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated
financial statements that include both the lessor and the lessee, because the property is owner-occupied
from the perspective of the group.

Such property will be investment property in the separate financial statements of the lessor, if the
definition of investment property is otherwise met.

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END OF CHAPTER QUESTIONS

1. May, 2012 Q5
b.
i. Define an Investment Property (in reference to. IAS 40) (2 marks)

ii. An entity purchased an office building with a useful life of 50 years for GH5.5 million on 1
January 2006. (The amount attributable to land was negligible). The entity used the building as
its head office for five years until 31 December 2010, when the entity moved its business into
larger premises. The building was reclassified on that date as an investment property and leased
under a 40 year lease. The fair value of the head office at 31 December 2010 was GH6 million.

Explain the treatment of the office building on the assumption that the entity uses the fair value
model for investment properties. (3 marks)
Solution

Investment property

i) Land or building, or part of a building, or both, held by the owner or the lessee under a
finance lease to earn rentals and/or for capital appreciation, rather than for use in production
or supply of goods and services or for administrative purposes or for sale in the ordinary
course of business.

ii) At 31 December 2010, the building has a carrying value of GH4.95 million in accordance
with IAS 16. On 31 December 2010, the property should be recognized as an investment
property. The property should be fair valued at 31 December 2010 and any change in value
should be recognized in accordance with IAS 16.

The property should therefore be recognized at a carrying amount of GHS6 million and the
difference of GHC1.05 million [GH6 million GH4.95 million] should be recognized in
other comprehensive income as a revaluation surplus.

In subsequent period (unless there is further change in use) the building should be measured
at fair value with any gain or loss recognized directly in profit or loss.

2. May, 2013 Q1
(b) You are the Financial Accountant of Adom Ltd. The assistant accountant responsible for
preparing the 2012 annual financial statements is considering the accounting treatment of the
following non-current assets and has approached you for guidance.

i. Adom Ltd acquired a property on 1 January 2007 at a cost of GH400,000 and immediately
occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years.
Subsequent to its acquisition, the asset was measured at depreciated cost until 1 July 2012
when management of Adom Ltd decided to convert the building into an investment property
(mainly for rentals). Following this decision, the property was fair valued at GH373,800.
Adom Ltd adopted the fair value model for subsequent measurement of the investment
property. At 31 December 2012, it was fair valued at GH380,000.

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Required:
Account for the treatment of this property in the 2012 financial statements of Adom Ltd.
(5 marks)

Solution

(i) Income Statement for the year ended 31 December 2012

Expenses GH
Depreciation charge (400,000/50 years x 6/12) 4,000

Other income
Fair valuation surplus-Investment Property (380,000-373,800) 6,200

Statement of Financial Position as at 31 December 2012

Non-Current Assets GH
Investment Property 380,000

Equity
Revaluation Surplus (373,800 356,000) 17,800

3. Nov, 2013 Q4
(a) Supply Products Ltd. is a large paper manufacturing company. The companys Finance Director
is working on the published accounts for the year ended 31st March 2013. The Chief Accountant
has prepared the following list of problems which will have to be resolved before the statements
can be finalized.

Possible Investment Property (IAS 40)


The company decided to take advantage of the down turn in property prices and purchased a
new office building at East Legon. This was purchased with the intention of the building being
resold at a profit within five years. In the meantime, the company is using the property to house
the administrative staff from the Spincity factory until such time as their own offices can be
repaired. It is anticipated that this will take at least nine months. The Managing Director has
suggested that the building should not be depreciated.

Required:
Explain how each of these matters should be dealt with in the published accounts for the year
ended 31st March, 2013 in the light of the International Financial Reporting Standards referred
to above. You should assume that the amounts involved are material in each case.
(2.5 marks)
Solution

IAS 40 Investment Property states that properties which are held for their investments potential
should not be depreciated. However, IAS 40 defines an investment property quire precisely,
and specifically excludes a property owned and occupied by a company for its own purposes.

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The new office building is owned by Super Paper products and it occupied by the staff of
Spintex factory, so it cannot be an IAS 40 investments property. The managing directors
suggestion is therefore unacceptable, and the building must be depreciated according to the
companys normal depreciation policy for buildings.

4. Nov, 2016 Q2
c) Tanoso owns the following properties as at 31 December 2015:
Property: Fair value
(GHmillion)
Land with future use undetermined 3.2
Factory rented to Tanoso's subsidiary under an operating lease 2.4
10 floor office building (fair value is equal per floor) with 3 floors used as the
subsidiary's head office and 7 floors rented to third parties under an
operating lease. 15.0
Empty building held for capital appreciation, but not leased out. 4.1

Tanoso's accounting policy is to hold its investment properties under the fair value model and its
land and buildings under the revaluation model.
Required:
In accordance with IAS 40 Investment Property calculate the carrying amount to be recognised
as investment property in Tanoso's consolidated financial statements as at 31 December 2015.
(3 marks)
Solution
GHS'm
Land with future use undetermined
capital appreciation by default (IAS 40 para 8(b)) 3.2
Factory rented to Tanoso's subsidiary under an operating lease
treated as owner occupied in the consolidated financial statements
10 floor office building proportional approach is valid (10 x 7/10 x 1.5m) 10.5
Empty building held for capital appreciation, but not let
investment property is for capital appreciation and/or rental income 4.1
17.8

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