Conceptual framework

Reference point for the preparers if there is no standard.

Defines an asset as: a resource controlled by the entity as a result of past events and form
which future economic benefits are expected to flow to the entity

Existing conceptual framework does not define control. ED/2015/3 CON FR define asset as
a present economic resource controlled by the entity as a result of past event.

Control links economic resource to the entity-assesing control helps to identify what
economic resource should account for.

Entity controls economic resource if has present ability to direct the use of economic
resource and obtain the economic benefits which flow from it.

Oci treatment is still haphazard no expilict guidance by principles or standards

Chapter 1 : objective of general purpose financial

reporting
To provide useful information about a reporting entity to its users(existing potential investors,
creditors and lenders in order to make economic decisions /making decisions to provided
economic resources to the entity ( in the financial statements )

1 Users need information of: economic resources of entity (Assets)

2 The claims against the entity (liabilities)

3 Changes in economic resources and claims (changes in equity)

1 and 2 its to see the liquidity of company (A company's liquidity is its ability to meet its
short-term financial obligations.Liquidity ratios attempt to measure a company's ability to
pay off its short-term debt obligations. This is done by comparing a company's most liquid
assets, those that can be easily converted to cash, with its short-term liabilities) solvency
(Solvency is the ability of a company to meet its long-term debts and financial obligations)
and its needs for additional financing

3 enables users to assess the financial performance of the company.

Chapter 2 : reporting entity:

Not yet
Chapter 3 : qualitative characteristics of useful
financial information

Fundamental qualitative characteristics

Relevance and faithful representation are the fundamental qualitative characteristics of

useful financial information.

Relevance

Iasb works hard to reduce disclosures in order to make information more relevant- policies
not same importance- disclosure initiative-towards more detail for word relevance

Information is relevant if it will impact decesions of users

Relevant financial information is capable of making a difference in the decisions made by

users. Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value, or both. The predictive value and confirmatory value of financial
information are interrelated

Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or

both) of the items to which the information relates in the context of an individual entity's
financial report. There is no No quantitative threshold. Qualitatively or quantitatively
material

Any event that is going to change your decision.

· Conceptual framework describes materiality as application by particular entity in the

fundamental qualitative characteristic of relevance

Faithful representation

General purpose financial reports represent economic phenomena in words and numbers.
To be useful, financial information must not only be relevant, it must also represent faithfully
the phenomena it purports to represent. Faithful representation means representation of the
substance of an economic phenomenon instead of representation of its legal form only.

· Complete (transactions)

· Neutral (not overstate profits not underestimate) -> exposure draft introduces
prudence(cautious) concept (losses not understated liabilitis not understated profits not
overstated assets not overstated) try not to window dress

· Free from error (free from material error) (retrospectively if its material or
prospectively )errors quantitativle or qualitatively material

· Substance over form

Enhancing characteristics

Comparability (fs comparable with last year of company and industry) if change accounting
policy -> retrospectively

Verifiability : easily verifiable by the auditor

Timeliness : information to user in timely manner or outdated

Understandability : understanadable to user who has some accounting knowledge

The cost of providing useful information should not exceed the benefit.The benefit to the
user should be more than the cost incurred

Chapter 4: elements of financial statements

Assets : resources controlled by an entity from past event that will lead to probable inflow
economic benefits -however IAS 37 probable inflow should be disclosed – conflict-

Liabilities – obligations arising from past event that will lead to probable outflow of econmi
resources – however ifrs 3 business combination recognises contigent consideration –
conflict

Equity –the residual net assets after deducting liabilities

Income – increase in economic benefits during accounting period

Expenses-decrease in economic benefits during accounting period

main objective of financial statements being to provide information about the reporting entity
which are useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity
IAS 1 PRESENTATION OF FINANCIAL
STATEMENTS
IAS 1 “Presentation of financial statements”, provides guidance on the structure of an entity’s
financial statements so that they meet the main objective of financial statements being to
provide information about the reporting entity which are useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the
entity.

IAS 1 provides minimum line items that have to be presented on face of sofp,tci and cash
flows, additional line items or even amend existing description given by standard provided it
results more fair presentation of financial statements and would enhance reliability relevant
understandability and comparability .

Long term financial liability due to be settled within 12 months classified as current liability

Long term liability payable on demand because entity breached condition then current even
if lender has agreed after year end and before authorise FS not to demand payment

If lender has agreed by year end for grace period of at least 12 months after year end then-
rectify breach –lender can demand repayment-non current available

DEFAULT LOAN-WAIVERS – INDICATION FOR GOING CONCERN ABILITY- IF

UNCERTAINTY then disclose this in Fs under ias 1

If ceases to be a going concern the fs prepare on break up basis

Regarding impairment ias 1 requires to disclose if losses are material. Materiality determined
by using appropriated measure like percentage on profit before tax.

Ias 1 presentation of financial statements requires disclosures for material amounts and the
reasons,accounting policies

Inappropriate accounting policies are not rectified (corrected) either by disclosure of the
accounting policies used or by notes or explanatory material

Ias 1 aknowledges that in extremely rare circumstances entity may elect to depart from ifrs
because the compliance is so misleading that it would conflict with the objective of financial
statements.

IAS 1 requires management to assess an entity's ability to continue as a going concern. If

management has significant concerns about the entity's ability to continue as a going
concern, the uncertainties must be disclosed. If management concludes that the entity is not
a going concern, the financial statements should not be prepared on a going concern basis
(meaning that all assets / liabilities should be classified as current and assets shown at their
net realisable values).

Materiality: relevance:fundamental qualitative characteristic of FS : conceptual framework

2018

Definition of materiality and application of concept: IAS 1 AND IAS 8

· Information is material if omitting it or misstating could influence the decisions which

users make on the basis of financial information about a specific reporting entity.

· This is not a qualitative characteristic of fs however only material information and

disclosures should be show in the financial statements.

· Materiality is an entity-specific aspect of relevance based on nature and magnitude of

the items to which it relates in the context of the entity’s financial report

· Difficult to specify a uniform quantitative threshold or determine what is material in

each situation

· Ensure relevant information is not omitted or misstated and should help filter out
obscure information which is not useful to users.

· Ias 1 states that an entity doenst need to make a disclosure required by ifrs if the
information is not material.

The amendments proposed in ED/2015/1 Classification of Liabilities (Proposed

amendments to IAS 1) aim at:

● clarifying that the classification of liabilities as current or non-current should be based

on rights that are in existence at the end of the reporting period by amending IAS
1.69(d) and IAS 1.73 so that both paragraphs refer to the "right" to defer settlement
and both make explicit that only rights in place "at the end of the reporting period"
should affect the classification of a liability;

● making the link clear between the settlement of a liability and the outflow of
resources from an entity by adding to IAS 1.69 that settlement refers to the "transfer
to the counterparty of cash, equity instruments, other assets or services"; and

● reorganising the guidance in IAS 1 with respect to classification of liabilities as

current or non-current by deleting IAS 1.74–76 and moving their content to the
expanded and renumbered paragraphs IAS 1.72R and IAS 1.73R so that similar
examples are grouped together.
Ethics :
Presentation of Fs- unethical – not faithfully represent financial position

Accca code of ethixs and conduct – fundamental principle of integrity – honest –professional
behaviour

If not aware then threat to fundamental principle of professional competence and duce care
 IFRS 1 First time adoption of
international financial reporting
standards

Entity may elect to measure item of PPE at the date of transition o IFRS at Fair value and
use that fair value as its deemed cost.

Fair value as per ifrs 13 is the price that would be received to transfer an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date.

Entity adopting ifrs for first time MAY elect to use previous GAAP revaluation of PPE or at
date of transition as deemed cost at date of revaluation revaluation under following
conditions :

· The revaluation was broadly comparable to fair value

· The revaluation was broadly comparable to cost in accordance with ifrs

Ifrs 1 doesn’t give detailed rules about determining fv and first time adopters must only
provide limited disclosures.

Unders ias 16 measurment of fair value must be reliable

If entity decides to apply ifrs 3 retrospectivle it must done so in all its business combinations
and not selectively

IAS 2 INVENTORIES
Houses routinely bought and sold in ordinary course of businsess is treated as per ias 2
Inventories

Measured at fv less cost to sell : net realisable value

iFRS 3 BUSINESS COMBINATION
If buy a subsidiary for its only asset then essentially acquisition was for asset therefore ifrs 3
don’t apply.

After goodwill has been impaired any subsequent increase is considered internally
generated goodwill which cannot be recognised. Ias 36 prohibits reversal of impairment of
goodwill.

Cancel intragroup transactions (sales /purchases_)

If unrealised loss on sale of inventory not cancelled. Must remain as sale at loss indicates
inventory impairment.no adjustment.

Associate 20% holding – entity retains significant influence

Accounting boundary has been crossed so appropriate to recognise a gain or loss under ifrs
3

For associate equity accounting as :

Fv of consideration received

Fv of % investment retained

Less shaere of consolidated carrying amount when control lost

Net assets

Goodwill (calculated before)

Less controlling interest

When disposing part of subsidiary but not control lost – transaction between owners

Carrying amount must be shown as it was at acquisition date as goodwill is calculated on

that amount. Fair value increase from date of acquisition must be eliminated. credit
investment in subs.

Not result in loss of control- decrease in controlling interest

Shown as movement in parents equity- no gain or loss is recorded in transaction

between owners

If FRS 9 permits an entity to make an irrevocable election to present in other

comprehensive income changes in the fair value of an investment in an equity
instrument that is not held for trading. Then the changes of subsidiary will be shown
in other equity components
Other equity components : changes in revaluation method of ppe , irrevocalble
election of financial assets through fv oci, foreign currency translation.

No change in carrying amount if transaction with owners

Control is retained-no accounting boundary has been crossd

Statement of financial position

Increase in non controlling interest to represent allocation to equity holders of entity.

Goodwill on acquisition is unchanged as it is a historical figure unaffected by change

in ownership.

Non controlling interest calculation:

Non controlling interest at acquisition x

Nci share of post acquisition reserves %*carrying amount of net assets-net assets
at acq.

Less impairment @ % of nci (x)

Find increase in nci by % sold / previous total % Then

Consideration received x

Less increase of nci (x)

Adjustment to equity of parent x

Goodwill calculation

Full goodwill method – incorporating fv of nci in the goodwill calculation

Partial goodwill method- incorporated at its proportionate share of nci of acquiree net
identifiable assets

Impairment of goodwill

Net asset at year end x

Fv adjustments (land buildings ) x

Goodwill calculated(gross up if partial) x

Less

Recoverable amount (x)

Impairment loss recognised if full goodwill ok but if partial only the percentage
IFRS 5 NON CURRENT ASSETS HELD
FOR SALE AND DISCONTINUED
OPERATIONS
Classified as held for sale when carrying amount is expected to be recovered principally
through a sale transaction rather on its carrying use.

Ifrs requires asset or disposal group to be classified as held for sale where it is available for
immediate sale in its present condition subject to usual and customary terms and the sale is
highly probable: to be highly probable:

1Management must be committed to the sale

2Active programme to locate buyer must be initiated

3Market price must be reasonable in relation to asset’s fair value

4The sale must be expected to be complete within one year from date of classification

5 asset is available for immediate sale

6 must be unlikely that plan to sell will be significantly changed

Binding sales agreement is strong indicator but not absolute – also determines the fv IFRS
13 which will be used in impairment to assess the recoverable amount ias 36 impairment of
asset.

Asset held for sale should be measured at lower of carrying amount and fair value less costs
to sell.

Before classification as held for sale entity must update any impairment test carried out.

Subsequent increase recognise in p&l to the extent of any impairment previously recognised

Prudent to class as held for sale when unconditional offers received prior period end
(prudence – neautrality – faithfull representation)

Must be presented separately on the statement of financial position.

The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised.
Ias 8 Accounting Policies, Changes in
Accounting Estimates and Errors
Must check if the change in accounting policy was a correction of error or actually a change
in policy

Changes is when changes in circumstances new information or more experience.

Prior period error -> must be corrected retrospectively-> restating opening balances for that
period so fs presented as if the error never occurred_>

A third statement of financial position is required to be presented if the entity retrospectively

applies an accounting policy, restates items, and those adjustments had a material effect on
the information in the statement of financial position at the beginning of the comparative
period as per ias 1

Occurs from failure to use or misuse of information that 1 was available when financial
information was available for issue 2 could reasonably be expected to have been obtained
and considered in the preparation of financial statements.
IFRS 8 OPERATING SEGMENTS
operating segment is a component of an entity that is a profit center, that has discrete
financial information available, and whose results are reviewed regularly by the entity's chief
operating decision maker for purposes of performance assessment and resource allocation

Purpose: to enhance the usefulness of big companies involved in lot of industries. Achieved
by segmental information to users enabling them to assess the risks and returns of each
segment-understand characteristics and take more informed decisions.

Applicable to : public companies ( debt or equity is publicly traded in market) 2.files or in

process to file consolidated fs to security commission to issue instruments in public market.

identification of reportable segments:

step1. Management identify segments that meet ALL 3 qualitative criteria to be reported
separately:

Qualitative criteria:

1Engages in business activities of which it earns revenues and incurs expenditures(profit

center)

2Its operating results are frequently reviewed by entity chief operating decision maker for
assessing performance and decide whether funds should be allocated.

3 has discrete financial information available

Step 2 If above met then management is permitted to aggregate segments into 1 segment
provided they are similar in all following respects(aggregation criteria) :

1 Nature of products / services 2. Nature of production process 3. Type / class of customers

4. Distribution methods 5. Nature of regulatory environment

Step 3 if exceed any Quantitative criteria then obligation to be separately reported:

1. The segment’s combined revenue (internal and external) exceeds the 10% of combined
revenue generated by all segments or

2. The segment’s absolute amount of profit or loss exceeds the 10% of the higher of: (profit
generated by all profitable segments or loss incurred by all loss-making segments) or

3. The segment’s total assets exceed the 10% of total assets of all segments

Requires operating segments to be reported separately if they exceed at least one of certain
qualitative thresholds
IFRS 9 FINANCIAL INSTRUMENTS
Entity transfers all risks and rewards of ownership: unconditional sale of financial asset, sale
of a financial asset with option to repurchase financial asset at fair value and sale of financial
asset that is deeply out of money

Two classification for financial assets : amortised cost and fair value. At amortised cost when
both apply:

1Asset is held within business model whose objective is to hold the assets to collect
contractual cashflow

2The contractual term give rise to specified dates to cashflows that are repayments of
principal and interest on principal outstanding.

All other financial assets are on fair value.

Settled net contracts – own use

Apply IFRS 9 for all contracts to buy or sell a non-financial item that can be settled net in
cash or in another financial instruments.

remeasure the commodity forward to its fair value at each reporting date and recognize the
change in profit or loss.

The exception are contracts that were entered into and continue to be held for the purpose
of the receipt of the non-financial item in accordance with the entity’s expected usage
requirements. = own use contracts

physical delivery of goods are not financial instruments

Settled net means that the entity will receive or pay the difference between the agreed price
of oil (per the forward contact) and the market price of oil at the time of delivery

If own use irrevocably designated as measured at fair value through p&l

Recoginse a contract if eliminated inconsistency

In other words – IFRS 9 does not apply to so-called “own-use” contracts.

settled net also covers instances where the underlying asset is physically delivered but
immediately sold for cash (in substance it is settled net), or the underlying asset is readily
convertible into cash

1. Terms permit either party to settle it with cash

 2. Past practice indicates settle with cash

3. Past practice with similar contracts indicates physical delivery but sold with short
time

4. Non financeial itemi deliver is readily convertible to cash

For derivative to exist:

1. There is no initial investment,

2. The contract is based on an underlying variable
3. It will be settled in the future date.

Financial asset held at amortised cost

Financial asset is classified as amortised cost or fair value at initial recognition and that
cannot be changed except-permitted change in business model

Financial assets are subsequently measured at amortised cost if the both following apply:

The asset is held within a business model with objective to collect to contractual cash flows

The contractual terms of financial asset give rise on specified dates of payments of cash
flows which are solely payments of principal and interest of principal outstanding.

All other assets are measured at fair value.

Credit loss allowance

Loan at stage 2 – credit quality of financial asset has been significantly deteriorated-> life
time expected losses must be recognised on present value of payments.
IAS 10 EVENTS AFTER THE REPORTING
PERIOD

Events after the reporting period are those events favourable or unfavourable that take place
between the end date of the reporting period and the authorization date for issue.

Two types:

Those that provide evidence that conditions existed at the end of the reporting
period(adjusting events)(exception with going concern liquidation of company regardless
conditions existed/pervasive,bonus,fraud,bankruptcy of customer)

Those that relate to conditions that arose after the reporting period (non adjusting events)

Disclosure

Non-adjusting events should be disclosed if they are of such importance that non-disclosure
would affect the ability of users to make proper evaluations and decisions. The required
disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a
statement that a reasonable estimate of the effect cannot be made
Ifrs 11 Joint Arrangements

IFRS 13 FAIR VALUE MEASURMENT

Fair value is the price to receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants.

orderly transaction monetary business event for which there has been a sufficient amount of
time to engage in normal marketing activities to inform the parties adequately about the
transaction. Conversely, it is not a forced transaction.

Valuation techniques must be appropriate and for which sufficient data exists

Entities should maximise the use of relevant observable inputs and minimise the use of
unobservable inputs

Three level hierarchy for inputs used: lv1 quoted prices in active markets (Market in which
there are frequent and large volumes of transactions). that entity can access at
measurement date lv2 inputs other than quoted prices that are observable identical or
similar to assets in non active markets use of quoted interest for valuation lv3 unobservable
inputs ,entitys assumptions for the exit price-extensive disclosures .

Highest and best use The use of a non-financial asset by market participants that would
maximise the value of the asset.( physically possible, legally permissible, financially feasible)

Principal market The market with the greatest volume and level of activity if not possible
then :

Most advantageous market The market that maximises the amount that would be received

Fair value is determined from the perspective of a market participant

IFRS 15 revenue from contract with
clients
· Definition of IFRS 15 revenue from contract with clients is critical for the application.

· Contract exists when agreement between parties gives enforceable right and
obligations.

· No need to be written to be contract - depends on relevant legal framework of

jurisdiction.

· Performance obligation: promise in contract to transfer to customer distinct

goods/services.

· distinct when: 1 customer can benefit from its own or with readily available
resources-2 separately identifiable in contract. If not distinct then combine with bundle
of goods which is distinct.

· The promise could raise valid expectation from customary business practices event
not law enforceable

· Contract -Five criteria to be met to fall under ifrs 15(step 1- identification of

contract):

1. Contract approved (by parties) and committed to perform

(their)obligations

2. Entity can identify each party’s rights to the goods/services transferred

3. Entity can identify each party’s payments terms-key to transaction price

4. Contract has commercial substance(risk,timing ,amount of future cash

flows change)

5. Probable consideration from entity(ability customer to pay client credit

risk-validity of contract)

· Reassessment-if client not meet criteria company can reassess continually if met.

· Combination: contracts combined if same time same customer if met criteria

· 5 step to recognise revenue:

1. Identify contract with client (see above) if fall under then proceed with
 2. Identify the performance obligations (unbundling=break down to
separate performance obligations)(good/service)

3. Determine the transaction price-amount of consideration entity expects to

receive in exchange for promised goods services.+cost incurred to build-
excluding amounts on third party behalf-variable/contingent
considerations(volume discount incentives- Amounts are only included
in the transaction price if it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur in the
future)-expected value or most likely amount-management use approach
which best estimates amount-applied consistently.-non cash
consideration-payables to customer-time value of money(significant
financing component- Choose incremental borrowing rate over implicit
as it betters the observable inputs. An implicit interest rate is an interest
rate that is not specifically stated in a business transaction.'incremental
borrowing rate' is the rate of interest that customer would have to pay to
borrow over a similar term, and with a similar security, the funds
necessary to obtain an asset of a similar value to the right-of-use asset in
a similar economic environment- right for right to recover returned
products.

4. Allocate the transaction price to performance obligations of contract-

allocation on basis of standalone selling prices at inception-best evidence
observable inputs

5. Recognise revenue when the entity satisfies performance obligation.

Entity satisfies obligation when transfer control of promised distinct goods
services to customer(control is preventing the others to direct the use
and receive the economic benefits of asset) -at a point in time for goods,
over time for services

· Consideration payable to customer(Consideration payable by a company to a

customer is accounted for as a reduction of the transaction price unless the payment
is for a distinct good or service that the customer transfers to the company and the
payment does not exceed fair value of that good or service)

· Purchase pattern of customer for a target to be reached.

· If deposit by client then in transaction price but include in deferred income until meet
recognition

· contract asset. It is an asset corresponding to accrued revenue when the payment

from a customer is conditional not only on the passage of time and hence a typical trade
receivable cannot be recognised

· costs to fulfil contract divided to asset and expense . for asset if expected to be
recovered-explicitly reimbursable or reflected in price.
· Contract modification-update transaction price-measure progress towards
performance obligation

· Standalone Selling Price is the price at which the entity would sell a good or
service separately to a customer
IAS 16 PROPERTY PLAN AND
EQUIPMENT
Property held for use in production or supply of goods or services or for administrative
purposes ,or for sale in the ordinary course of business or in the process of construction of
development for such sale.

If not for capital appreciation and rent below market rate then the ancillary costs are
significant and as per example of owner manage hotel this should be classified as PPE .

Also if its rented to employees its like owner occupied .

Depreciated replacement cost :

Old value less accumulated depr x

New value less same years depr (x)

Impairment x
IFRS 16 LEASES
Check whether arrangement with lessee contains a lease even if it doesn’t take the legal
form of a lease. The substance of arrangement should be considered in connection with ifrs
16.

Factors to think for substance over form:

· Identifiable asset

· Customer has right to obtain substantially all of economic benefits from use of asset
thought out the period of use

· Customer has the right to direct the use of the asset

· Customer has the right of operate asset throughout period of use

If it’s a lease then right of use asset should be recorded , lease liability equal to present
value of future lease payments.

Service element relating to waste collection must be considered separate component and
charge to profit or loss
Ias 20 government grants
Principle with matching or accruals: grant received must be matched with the related costs
on systematic basis.

Grants receivable for costs already incurred should be recognised as income in period which
are receivable.

Grants are assistance by government in the form of transfers of resources to an entity in

return for past or future compliance with conditions relating to operating activities of
company

Two main types of grants :

Grants related to assets: primary condition to buy construct an asset

Grants related to income: other than those related to asset.

Capital based grant has two possible approaches :

1.Match against depreciation of the asset using deferred income approach

2. Deduct from carrying amount resulting in reduced depreciation charge

Recorded as asset and in p&l when virtually certain the company will receive the grant if it
settles the obligation

When impairment occurs for a revalued asset, the impairment loss first charged to other
comprehensive income -> revaluation surplus decrease, any excess then to p&l

IAS 23 BORROWING COSTS

Ias 23 requires borrowing cost incurred on asset to capitalised If asset takes substantial
period of time to be prepared for intended use.

Should be capitalised during construction and include the costs of borrowing which could be
avoided if expenditure on assed had not incurred.

Weighted average = total of each month / month x interest rate x year proportion
Ias 24 related party disclousres
requires that entities should disclose key management personel not only in total but for each
of the following : short term employee benefits – post employment benefits –other long term
benefits – termination benefits – share based payments

Directors remuneration – short term benefits –salarys and bonus and share based payments
(share options) and should be disclosed - > only totals of each category

If public then local legislation may need more disclosure

Key management personel: persons having authority and responsibility for planning directing
controlling activites of entity directly indirectly

Transactions with directors are material by nature

Disclosures : necessary to draw attention to possibility that fs have ben affected by related
parties and by transactions and outstanding balances with such parts.

Director remuneration disclosures are like to cause an argument – controversial

Public concern exists with director remuneration

Investors need to know how much money is spend on directors and whether a good value
for money

Criteria for two entites to be treated as related parties include being member of same group

If one director or key manager in common then no related partis. If more then related. Due to
judgment subjective
IAS 32 FINANCIAL INSTRUMENTS
PRESENTATION:
A put option is an option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a specified time frame.

Financial liability a contractual obligation to deliver cash or another financial asset to

another entity.

Under standard financial instrument should be recognised as financial liability or equity

instrument on its substance of contract and not legal form and their definition.

When obligation to buy back its own shares financial liability instead of equity at the present
value of its redemption amount even if conditional on the counterparty to exercise the right to
redeem the option.

IAS 37 PROVISIONS, CONTIGENT

LIABILITIES AND CONTIGENT ASSETS
SCOPE: IN ALL PROVISIONS,CONTINGENT LIABILITILS CONTIGENT ASSETS
EXCEPET NON ONEROUS EXECUTIONARY CONTRACTS

Legal or constructive obligation is one created by an obligating event.

RECOGNITION-3 CONDITIONS MET

1.PRESENT OBLIGATION (LEGAL OR CONSTRUCTIVE: A constructive obligation is an

obligation to pay that arises out of conduct and intent rather than a contract) for transfer of
economic resources as a result of past event

2.transfer of economic resources is probable to settle the obligation

3.amount of obligation can be measured reliably

Obligating event gives rise to present obligation

Entity must have no realistic alternative but to settle the obligation

Difference with accurals : uncertainty surrounding the timing and amount of the future
expenditure. Provision is more uncertain.
Warranty provision

Provided by seller to purchaser under which it promises customers to repair or replace

certain types of damage to its products within a certain number of days following the sale
date- not on customer basis but on the entire population of products.

Measurement: on entity’s best estimate about expenditure to occur. Different scenarios:

assign probability measured at expected value

Long term provision over 12 months then discount (present value unwind discount through
p&l with interest-time value of money is important

Provision for asset must be virtually certain

Provision are reviewed each year for 2 things : they remain probable,(if not if are remote, or
possible ) 2. If the need to be revised at better estimate 3. Any material changes

If onerous contract: provision at the lower of cost of fulfilling contract –penalties from not
fulfilling contract.

Restructuring provision: business closure -> gives rise to expenditure (directly attributable
costs) for entity ->provided if constructive obligation if : detailed formal plan and plan started
implementation before year end or main features were communicated with those affected
raising a valid expectation that implementation as soon as possible

Costs to recognise: retraining staff, marketing expenditure, investment in new systems

Contingent liability: possible obligation from a past event depends on occurrence of future
event or present obligation but not probable outflow of economic resources amounts not
reliably measured.

Contigent asset the same

Both assessed each year end if are capable of recognition in FS

If covered by insurance or by third party : recognise if virtually certain will be given:separate

asset not greater than provision,only netted in P&l so separately in balance sheet.

Restructuring provisions:

1)Provision should be recognised when entity has constructive(obligation to pay that

arises out of conduct and intent rather than a contract) obligation to carry out restructuring.
Constructive obligation rises from:

1. Detailed formal plan (business or part of business restructured, principal locations

affected,number of employees that will be compensated from restructuring,date of
implementing the plan,expenditure to be undertaken )

2. Plan must Rise of valid expectation to those affected that entity will carry out
restructuring (implementation must take place asap and changes are unlikely to happen)
IAS 40 Investment Property
comprises its purchase price and any directly attributable cost such as professional legal
fees

applies to the accounting of property held to earn rentals or for capital appreciation or both

land held for long term capital appreciation undetermined future use or long term
appreciation.(if not purpose then deemed for capital appreciation)

Owner occupied property , property being constructed on behalf of third parties and property
leased to third party under finance lease is also eluded from ias 40

if ancillary services provided to the tenants, then you classify the property based on the
extent of these services: If they are insignificant to the contract as a whole, then the
property is an investment property under IAS 40 (maintenance of building owned by
entity)

investment protperyt should be recognised as an asset when probable future

economic benefis will flow to entity and cost can be mearued reliably.

Ias 40 permits entity to choose between cost model and fair value model. When fiar
value model applies property is value accodrding with ifrs 13 fair value measurement
(level1-3) probably level2 .

Gains or losses from changes in fair value are recorder through P&l
IAS 36 IMPAIRMENT OF ASSETS

Basic principle : asset should be carried at no more than its recoverable amount ( higher of
fair value less cost to sell and value in use )

If carrying amount exceeds the recoverable amount, then impairment loss has incurred.
Impairment loss should be written of in p&l

Value in use :present value of estimated future cash flows generated by asset including net
disposal value at the end of its useful economic life – most important factor value of mone

Calculation : cashflows x discount factors and compare them

Requires annual assessment whether impairment loss has decreased

The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognised.

Information (cash flows used) to test impairment : ias 36 requires assumptions to be

reasonable and supported by evidence.

Ias 36 requires expected cash flows projections to relate to asset in its current condition (no
expenses to improve it)

Cash flows used must be specific to the entity. Discount rate should appropriately reflect the
current market assessment of the time value of money and risks specific to asset or cash
generating unit.

If not available from market rate, then estimated discount rate used instead. Estimate is from
pre tax rate that reflects current market assessment of the time value of money and risks
specific to the asset that have not been adjusted for estimate of future cash flows.

Rates that should be used : weighted average cost of capital, entity incremental
borrowing(similar assets to borrow) and other market rates. Objective to obtain rate which is
sensible and justifiable.

Disclosures :ias 36 requires : no defence that information was common knowledge in market
:

Amount of loss

Events that led to loss

Description of loss by class of asset

Entitles must determine at each reporting date whether indication for impairment
Internal or external

Changes in circumstances in reporting period

Internal factors (physical damg ,adverse chganes to methods of use of asset,estimations

External factors (adverse changes in markets or business adverse changes to technologia

economi environment.

If indications, then more than one impairment test may be required in accounting period

Test for impairment on goodwill and some intangible assets at any during year but same
time every year

If indicators arise after interim test, then test again at year end

Volatility in the market possible indicator

Market capitalization(Market capitalization is equal to the share price multiplied by the number
of shares outstanding.) Strong indicator: carrying amounts exceeds entity capitalisation.

Allocating goodwill to cash generating units (pizza oven no -pizzeria yes )

CGU: is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.

If cgus revised or dispose, goodwill must be reallocated based on relative values to units
affected.

However, standard no guidance on relative values. Fair value less cost to sell -value in use
problems

Valuation issues

Recoverable amount: amount to be recovered through sales of asset.

Measuring fv less cost to sell and recoverable amount might be problematic

Fair value : ias 36 evidence : price in binding sale is approved but must held for sale.in
absence of active market( An active market is a market in which transactions for the asset or
liability take place with sufficient frequency and volume to provide pricing information on an
ongoing basis)then discounted cash flows but not reliable

Value in use : net present value of future cash flows : present because ias 36 say on present
condition

Cashflows forecast :must be based on reasonable and supportable assumptions max 5

years rebutable.managment’s best estimate of the range of economic conditions expected to
obtain over the remaining useful life of asset
Assumptions that form basis for current cash flow projections must be consistent with past
actual outcomes.

Forecast cash outflows needed to maintain the lev of economic benefits expected to be
generated by asset in is current condition.

Discount rate : must appropriately reflect current market assessment of the time value of
money and risks associated to asset or cgu – pre tax rate and unadjusted risks –
incremental rate -weighted average cost of capital (bad because takes tax into account)and
other market rates.sensible and justifiable.1 discount rate for all cash gen units. Currency in
which they will be generated. Spot rate.

Need of consistency.

Future cash flow must include

Projection of cash inflow from use of asset

Projection of cash outflow incurred to generate cash inflows

Net cash flows to be received at end of economic life of asset

After goodwill has been impaired any subsequent increase is considered internally
generated goodwill which cannot be recognised. Ias 46 prohibits reversal of impairment of
goodwill.
IAS 38 INTANGIBLE ASSETS
Definition -Characteristics :

1. Identifiable be separable or arise from contractual or legal rights

2. Non monetary asset

3. Without physical substance

4. Control (direct its use and restrict access to toher to the benefits of asset )

Recognise an intangible asset when

1 future economic benefit will flow into the entity

2 The cost of the asset can be measured reliably

If it controlled by the company : power to benefit from asset

Meets the identifiability criteria: must be separable or arise from contractual or legal rights

Intangible assets are measured initially at cost however Cost can be capitalised at fair
value of consideration payable if active market(market that routinely experiences high
transaction volumes) available to reference.

Cost associated with acquisition of asset are capitalised

Also any attributable costs

Cost include the fair value of any contingent consideration when it becomes probable and
recognise a financial liability.

Estimate of fair value of contingent consideration payable requires management assess the
likelihood of triggering the consideration

Subsequent reassessments of contingent consideration should be capitalised in cost

Subsequent measurement allows at cost model or at revaluation

Amounts capitalised fully amortised

Fair value is the best estimate of management.

Provided certain Criteria for internally developed(development phase) assets to be
capitalised:

· Techonlogic feasible

· Probable future benefits

· Intent and ability to use or sell the software

· Resources to complete the software

· Ability to measure cost

Maintenance cost should be expensed as they do not enhance the value of asset over and
above its original benefits

May have finite or indefinite useful life:when having regard all factors there is no
foreseeable limit in period of future economic benefits (change in competition )

Must assess each year if this conditions still exists as indefinite-useful life review each
period- if not change in accounting policy

Tested for impairment annually and whether there is indication for impairment ias 36
impairment of assets

If ifrs 3 business combination and intangible assets cannot be recognised then subsumed
within goodwill

Disclosure regarding the reasons for indefinite life

Current issues

1. the revision of the Conceptual Framework

2. The IASB’s Principles of Disclosure Initiative

3. Materiality in the context of financial reporting

4. Primary Financial Statements

5. Management commentary

6. Developments in sustainability reporting